Jackson County Federal Sav. and Loan Ass'n v. Urban Planning, Inc.

• Decision Date: 12 May 1989
• Docket Number: 85-3719-NJ-1,NJ-1
• Parties: JACKSON COUNTY FEDERAL SAVINGS AND LOAN ASSOCIATION, a corporation, Respondent, v. URBAN PLANNING, INC., an Oregon corporation, Alvin Zelver, and C.M. Oregon Corporation, an Oregon corporation, Appellants, and J. Frank Spierings, Calvin A. Lanfear, Sr., doing business as Lanfear Construction, and Batzer Construction, Inc., Defendants, and Rogue Aggregates, Inc., an Oregon corporation, and Gary Settell, doing business as Gary's Painting and Decorating, Darrell Crookston, dba Crookston Ceramic Tile Company, and Indcon Inc., an Oregon corporation, Edaw, Inc., Intervenors, and Ekerson Quality Roofing Co., an Oregon partnership composed of Dale Richards and James Acord, Plaintiff. 85-2216-; CA A44429.
• Court: Oregon Court of Appeals

Page 629

771 P.2d 629

95 Or.App. 598

JACKSON COUNTY FEDERAL SAVINGS AND LOAN ASSOCIATION, a corporation, Respondent, v. URBAN PLANNING, INC., an Oregon corporation, Alvin Zelver and C.M. Oregon Corporation, an Oregon corporation, Appellants and J. Frank Spierings, Calvin A. Lanfear, Sr., doing business as Lanfear Construction, and Batzer Construction Inc., Defendants and Rogue Aggregates, Inc., an Oregon corporation, and Gary Settell, doing business as Gary's Painting and Decorating, Darrell Crookston, dba Crookston Ceramic Tile Company, and Indcon Inc., an Oregon corporation, Edaw, Inc., Intervenors, and Ekerson Quality Roofing Co., an Oregon partnership composed of Dale Richards and James Acord, Plaintiff.

85-2216-NJ-1, 85-3719-NJ-1; CA A44429.

Court of Appeals of Oregon.

Argued and Submitted Oct. 19, 1988.

Decided March 22, 1989.

Reconsideration Denied May 12, 1989.

Robert H. Grant, Medford, argued the cause for appellants Urban Planning, Inc., and Alvin Zelver. With him on the briefs were Sandra Sawyer and Grant, Ferguson, Carter, P.C., Medford.

Frank R. Alley, III, Medford, argued the cause for appellant C.M. Oregon Corp. With him on the briefs was Heffernan, Fowler, Alley & McNair, Medford.

Douglas J. Richmond, Medford, argued the cause for respondent. With him on the brief were John Blackhurst and Kellington, Krack, Richmond & Blackhurst, Medford.

Before BUTTLER, P.J., and WARREN and ROSSMAN, JJ.

BUTTLER, Presiding Judge.

This action was brought by Jackson County Federal Savings and Loan Association (JCF) to foreclose judicially two trust deeds on real property and a security interest in personal property executed by defendants Urban Planning, Inc. (UPI), Alvin Zelver and C.M. Oregon Corporation (CM) to secure a real property development loan. UPI and Zelver alleged as affirmative defenses and counterclaims that JCF breached the loan agreement by failing to disburse funds as required, that it tortiously breached an implied agreement to act in good faith in carrying out its obligation to pay out the proceeds of the loan and that it interfered with UPI's prospective economic relations. CM alleged that it was merely a surety and not a principal obligor with respect to the loan and that it was discharged by the misconduct of JCF that resulted in a material increase in CM's risk and impairment of its right to be indemnified by UPI and Zelver.

This case arises out of an effort by Zelver to design, construct and market Alder Creek, a residential retirement development in Medford. He acquired an option to purchase 196 acres for the development. He later assigned the option to UPI, the corporation that he formed to carry out the project. He then began to develop plans for the project, which was to include 935 residential units and 55 acres of common area. The project was to be marketed primarily in California.

CM agreed to invest in the project. UPI assigned to it the option to purchase the land. CM, in turn, was to purchase the land over a five-year period. UPI would then buy the land from CM as the lots were developed, at a price that was higher than what CM had paid and sufficient to provide CM with a percentage of any profit that UPI earned by developing and selling the property. The agreement was conditioned on UPI's finding an institutional lender to provide the bulk of the financing for the development of the project. CM agreed that it would pledge, as security for the development loan, portions of the land that it had acquired but not yet sold to UPI. CM also loaned UPI working capital of $1,056,000 to begin the project, to be repaid by UPI from revenues of sales of developed lots.

UPI contacted JCF for financing. On September 20, 1982, JCF agreed to loan UPI $1,125,000 to develop the first 18 lots, model homes and the entrance to the project. CM executed a trust deed to a portion of the property that it had acquired as security for that loan. JCF informally agreed that it would lend additional money when CM had acquired enough land to provide security for the increased loan. On September 30, 1983, JCF committed to make a second loan of $5,500,000 to UPI, to pay off the first loan and to finance the completion of Phases One, Two and Three of the project, which included the development of 131 lots, the common area and amenities to the point where the lots could be marketed. As security for the loan, CM executed another trust deed covering portions of its property that were to be developed. By that time, UPI had acquired 30 acres of the land from CM, and it also pledged that land as security. There is evidence from which it could be found that CM, UPI and JCF had an informal understanding that, if necessary, CM would later subject additional land to the deed of trust in order to secure additional funding.

Before the signing of the second loan agreement with JCF, UPI had paid "soft" costs, such as administrative and marketing expenses, out of the proceeds of the first loan from CM. At the time the second loan was made, UPI and Zelver estimated, and JCF believed, that the proceeds of the loan would exceed actual "hard" costs to complete construction. JCF agreed that it would fund soft costs out of that excess. The parties agree that the second loan contemplated the payment of soft costs out of the loan proceeds and that soft costs were part of the cost to complete construction.

The second loan agreement, which superseded the first, provides:

"7.4 Preconditions to construction disbursements: In advance of any construction disbursement on the project to be financed, in whole or in part, with proceeds of this loan, Borrower shall have delivered to Lender the following:

" * * * * *

"(c) A construction budget, approved by Lender. Included in such approval may be an allocation of the construction costs and soft costs between the proceeds of this loan which are available to Borrower and the funds, if any, that Borrower must supply from other sources, it being acknowledged that this loan may not be sufficient to provide the funds Borrower will require for the construction."

It also provides:

"7.5.1(e) It is acknowledged by Borrower that the loan proceeds available to Borrower hereunder may not be sufficient to pay the total costs of the construction which will be outlined in the construction budget, and if so, the Borrower must supply the difference. Borrower must submit proof satisfactory to Lender that it has paid the difference, if any, between the construction payment then due and the loan proceeds then available for disbursement to Borrower."

Early in the project, Zelver associated Art Pufford, a CPA, as UPI's chief financial officer, to project expenditures and to develop accounting procedures. Pufford also established cash flow procedures for the administration of the loan and gave JCF and CM regular and frequent reports on the progress of the development. At the beginning of 1984, Pufford projected that, exclusive of sales revenues, UPI could complete all three phases of the project and still have $750,000 in the loan-in-process account to apply toward soft costs.

The development projections were based on the assumption that UPI would sell 50 homes in 1984 and 75 homes in 1985. The winter of 1983-84 was wet, and construction did not begin on the project until June, 1984. The amenities that were required to be completed in order to market the project in California were delayed. Zelver became aware of a possible cash shortage as a result of the delayed construction, which had led him to conclude that there would be few, if any, sales in 1984. He notified JCF that UPI had no additional funds to invest in the project and suggested that additional funding or an adjustment in the plans might be necessary. UPI called a meeting with JCF in July, 1984, at which time they discussed several options, including the loan of additional funds to be secured by additional land owned by CM and the construction of 10 foundations to be funded by a separate loan so that construction could continue during the fall rainy season of 1984. JCF rejected both ideas. It requested that UPI submit a new budget, marketing plan and cash flow analysis. In response, Pufford submitted documents projecting that, exclusive of sales revenues, UPI would need $1,900,000 in excess of the loan balance to pay costs related to the first three phases of the project. He also submitted a cash flow analysis based on a projection of 60 sales in 1985, which, he testified, indicated that $1,900,000 would be made up in sales revenues.

JCF had paid to itself all previous interest payments from the loan-in-process account. It did so again in September, 1984. At or about the same time, JCF began meeting with CM in an effort to persuade it to provide additional funds for the project.

In early January, 1985, UPI and JCF met for a day and a half to discuss the problems with the project. The focus of the discussion concerned the treatment of "set asides," that is, funds that JCF had agreed with the city that it would disburse only for specific improvements or hold for cost overruns on specific items. By agreement with the city, the overrun allowances, which totalled approximately $291,000, could not be released until the particular phase of the project to which the allowances related had been completed and JCF had provided the city with a maintenance bond in the amount of the budgeted allowance. Pufford insisted, in any event, that the overrun allowances not be viewed in cost projections as part of the actual cost to complete the project, because they were set aside merely as a cushion and did not reflect estimates of actual costs. JCF rejected that suggestion and insisted that the overrun allowances continue to be considered as a part of the cost to complete the project.

On January 14, 1985, JCF wrote to Zelver that it would no longer pay cost overruns, interest, salaries and general administrative expenses out of the loan...