BooCo Construction, Inc. v. Klahowya Condominium, LLC (In re Horebank Pac. Corp.)

• Decision Date: 07 November 2012
• Docket Number: CV07120131,CV07100715,A140946 (Control); A142185.
• Citation: 290 P.3d 881,253 Or.App. 348
• Parties: Shorebank Pacific Corporation, dba Shorebank Pacific, a Delaware corporation, Defendant–Respondent Cross–Appellant, and Carl Gatzke, and dba Klahowya, LLC; Susan Mikolasy, individually, and dba Klahowya, LLC; and BooCo Construction, Inc., an Oregon corporation, Defendants. BooCo Construction, Inc., an Oregon corporation, Plaintiff, v. Klahowya Condominium, LLC, dba Klahowya, LLC, an Oregon limited liability company; and Shorebank Pacific, Defendants. Sera Architects, Inc., an Oregon corporation, Plaintiff–Appellant, v. Klahowya Condominium, LLC, dba Klahowya, LLC, an Oregon limited liability company; Shorebank Pacific Corporation, dba Shorebank Pacific, a Delaware corporation, Defendants–Respondents, and Carl Gatzke, individually, and dba Klahowya, LLC; Susan Mikolasy, individually, and dba Klahowya, LLC; and BooCo Construction, Inc., an Oregon corporation, Defendants. BooCo Construction, Inc., an Oregon corporation, Plaintiff, v. Klahowya Condominium, LLC, dba Klahowya, LLC, an Oregon limited liability company; and Shorebank Pacific, Defendants.
• Court: Oregon Court of Appeals

253 Or.App. 348

290 P.3d 881

Shorebank Pacific Corporation, dba Shorebank Pacific, a Delaware corporation, Defendant–Respondent Cross–Appellant,

and

Carl Gatzke, and dba Klahowya, LLC; Susan Mikolasy, individually, and dba Klahowya, LLC; and BooCo Construction, Inc., an Oregon corporation, Defendants.

BooCo Construction, Inc., an Oregon corporation, Plaintiff,

v.Klahowya Condominium, LLC, dba Klahowya, LLC, an Oregon limited liability company; and Shorebank Pacific, Defendants.

Sera Architects, Inc., an Oregon corporation, Plaintiff–Appellant,

v.Klahowya Condominium, LLC, dba Klahowya, LLC, an Oregon limited liability company; Shorebank Pacific Corporation, dba Shorebank Pacific, a Delaware corporation, Defendants–Respondents,andCarl Gatzke, individually, and dba Klahowya, LLC; Susan Mikolasy, individually, and dba Klahowya, LLC; and BooCo Construction, Inc., an Oregon corporation, Defendants.

BooCo Construction, Inc., an Oregon corporation, Plaintiff,

v.Klahowya Condominium, LLC, dba Klahowya, LLC, an Oregon limited liability company; and Shorebank Pacific, Defendants.

CV07100715, CV07120131; A140946 (Control); A142185.

Court of Appeals of Oregon.

Argued and Submitted May 4, 2011.

Decided Nov. 7, 2012.

James N. Westwood argued the cause for appellant-cross-respondent SERA Architects, Inc. With him on the briefs were Christine A. Kosydar and Stoel Rives LLP.

Daniel L. Steinberg argued the cause for respondent-cross-appellant Shorebank Pacific Corporation. With him on the briefs were M. Elizabeth Duncan and Greene & Markley, P.C.

No appearance for respondent Klahowya Condominium, LLC.

Before ORTEGA, Presiding Judge, and BREWER, Judge, and SERCOMBE, Judge.^*

ORTEGA, P.J.

This appeal involves a dispute over priority by two creditors of Klahowya Condominium, LLC, (Klahowya), the developer of a failed property development. The trial court concluded that trust deeds held by defendant Shorebank Pacific Corporation (Shorebank) had priority over an architect's lien filed by plaintiff SERA Architects, Inc. (SERA) and entered a limited judgment to that effect. The trial court's decision had two aspects: first, that Shorebank's trust deed had priority under the Construction Lien Law, ORS 87.005–87.060, and second, that, under the doctrine of equitable subrogation, Shorebank's trust deed was substituted to the first position of a prior mortgagee whose loan had been paid off from the proceeds of Shorebank's loan. SERA appeals the limited judgment, assigning error to the trial court's determination of priority. Shorebank cross-appeals the limited judgment, challenging trial court rulings related to the validity of SERA's lien. Shorebank also cross-appeals the supplemental judgment that awarded attorney fees to SERA from Klahowya, arguing that SERA was not entitled to the full amount of fees awarded because a large percentage of those fees were incurred in SERA's failed attempt to establish priority over Shorebank.

Ultimately, we conclude that SERA's lien had priority over Shorebank's trust deed under the Construction Lien Law and that the trial court erred by subrogating Shorebank's trust deed to first position. Accordingly, we reverse and remand the limited judgment on appeal. Given our resolution of SERA's appeal, we also affirm the supplemental judgment, which Shorebank cross-appeals.

The following facts are undisputed. In January 2006, Klahowya ¹ purchased property in Government Camp (the development property) with a loan of $1,300,000 from Triangle Holdings II, LLC (Triangle) to build a mixed-use development. The Triangle loan was secured by a trust deed on the development property from Klahowya, which Triangle recorded on January 30, 2006. On March 28, 2006, SERA and Klahowya entered into a contract for SERA to provide architectural services for the development; SERA commenced work on the plans that March and held a workshop for consultants, owners, and other interested parties early in April. Shorebank's representatives attended the workshop. In July 2006, the contractor, BooCo Construction, Inc. (BooCo), began preparing the property for construction by demolishing existing cabins and clearing trees. BooCo stopped work at the site in October 2006 without commencing construction.

In November 2006, Shorebank provided Klahowya with a line of credit, secured by a trust deed on the development property, in the amount of $1,462,000, from which Klahowya paid off the $1,425,000 balance of the Triangle loan.² Shorebank recorded the trust deed on the development property on November 15, 2006. Shorebank also extended an additional line of credit for $250,000 to Klahowya, which was secured by a trust deed on land abutting Blossom Trail (the Blossom Trail property). Shorebank recorded that trust deed on February 9, 2007.³ Finally, Shorebank extended an additional $250,000 under its original line of credit, and Shorebank and Klahowya executed a modification of the trust deed on the development property to reflect a new principal balance of $1,712,000 and an increase in the interest rate on the original note. Shorebank recorded the modification of the trust deed on May 29, 2007.

Klahowya paid SERA for services rendered until sometime in early 2007, at which point it stopped making payments. SERA recorded a claim of lien on the property on June 29, 2007, asserting a lien for $375,598, plus interest.

In October 2007, SERA sued Klahowya and Shorebank for foreclosure of its construction lien, alleging that Klahowya owed it a balance of $375,598, together with fees and interest, for work performed under the contract. ⁴SERA also alleged that any “right, title or interest in the [development p]roperty” claimed by Shorebank “is junior and subordinate to SERA's.” Two months later, BooCo filed suit against Klahowya and Shorebank for breach of contract and foreclosure of a construction lien filed by BooCo. Eventually, the trial court consolidated the cases.

Shorebank answered SERA's complaint and raised several affirmative defenses, including that Shorebank's trust deed had priority over SERA's lien by virtue of the Construction Lien Law and that, regardless, Shorebank was equitably subrogated to the first lien position of Triangle's trust deed to the extent that Shorebank's loan proceeds were used to pay off the Triangle loan. Shorebank also brought a counterclaim against Klahowya to foreclose Shorebank's trust deed.

After the parties engaged in extensive pretrial motion practice, the trial court conducted a bench trial on SERA's lien claims as to the amount due SERA by Klahowya and the priority issue between SERA and Shorebank. At the close of trial, the court ruled that Shorebank's trust deed on the development property had priority over SERA's lien. The court later entered a limited judgment in favor of SERA against Klahowya for the amount of the lien, but establishing the priority of Shorebank's trust deed over SERA's lien.⁵

After trial, SERA petitioned for attorney fees from Klahowya pursuant to ORS 87.060 and its contract with Klahowya. Shorebank opposed the petition, contending that, to the extent that SERA sought attorney fees related to its “claim of foreclosure against Shorebank,” such fees were improper because SERA did not prevail on that claim. Accordingly, Shorebank argued that $74,745 of the fees sought were unavailable because they pertained to SERA's unsuccessful litigation with Shorebank over priority. The trial court entered a supplemental judgment awarding SERA the full amount of fees it had sought.

SERA appeals from the limited judgment. Shorebank cross-appeals from the limited judgment and the supplemental judgment awarding attorney fees. We begin with Shorebank's cross-appeal of the limited judgmentbecause of its potential to be dispositive and conclude that it does not provide a basis for reversal.

Exhaustive detail of the proceedings and legal arguments that underlie Shorebank's cross-appeal would not benefit the bench, bar, or public, but we briefly describe the context for our decision to affirm the trial court's ruling that Shorebank challenges. Shorebank made a motion at the close of SERA's case that has been alternatively characterized as a motion for reconsideration of an earlier summary judgment order or a motion for directed verdict. Shorebank sought a ruling that SERA's lien-which the trial court had already ruled was valid in the context of earlier proceedings in which Shorebank chose not to participate-was untimely under ORS 87.035⁶ and was therefore invalid. The trial court, without reaching the merits, declined to reconsider its prior summary judgment order as to the validity of SERA's lien and denied Shorebank's motion based on the stage of the proceedings at which Shorebank raised it and the circumstances that preceded it. We conclude that the trial court did not err in so ruling. We also reject Shorebank's second assignment of error on cross-appeal without further discussion.

We proceed to address SERA's appeal from the limited judgment, challenging the trial court's ruling that Shorebank's trust deed had priority over SERA's lien. At trial, SERA argued that, under the Construction Lien Law, its lien had priority over Shorebank's trust deed. Shorebank countered that the lien law supported Shorebank's claim of priority and, alternatively, that the doctrine of equitable subrogation placed Shorebank's trust deed in the same position as Triangle's trust deed, thus giving Shorebank priority.

The trial court concluded that Shorebank's trust deed on the development property would hold the same priority position as Triangle's trust deed by equitable subrogation—at least as to the amount of the Shorebank loan that was used to pay off the Triangle loan. Because there remained a question of priority of the additional Shorebank loans ($250,000 related to the modification of the trust deed on the development property and $250,000 related to the separate note secured by the trust deed on the Blossom...