Lacey v. Herndon, 82-517

• Decision Date: 24 August 1983
• Docket Number: No. 82-517,82-517
• Parties: Russell LACEY and Roberta Lacey, Plaintiffs and Appellants, v. John C. HERNDON and Blaine County, Defendants and Cross-Plaintiffs and Respondents, v. Leo KRAFT, Cross-Defendant.
• Court: Montana Supreme Court

Page 251

668 P.2d 251

205 Mont. 379

Russell LACEY and Roberta Lacey, Plaintiffs and Appellants, v. John C. HERNDON and Blaine County, Defendants and Cross-Plaintiffs and Respondents, v. Leo KRAFT, Cross-Defendant.

No. 82-517.

Supreme Court of Montana.

Submitted on Briefs April 8, 1983.

Decided Aug. 24, 1983.

Moses Law Firm; Michael G. Moses, Billings, for plaintiffs and appellants.

Smith, Baillie & Walsh, Dennis P. Clarke, Great Falls, J. Chan Ettien, Havre, for defendants and cross-plaintiffs and respondents.

WEBER, Justice.

This is an appeal from a judgment of the District Court of the Twelfth Judicial District, Blaine County, against plaintiffs, Russell Lacey and Roberta Lacey, and in favor of defendants, Blaine County and John C. Herndon, Blaine County Sanitarian. We affirm the judgment.

The Plainsman Bar is located in Chinook, Montana. Defendant Leo Kraft was the owner of the property, which consisted of a building, personal property located in it, a tract of land, and a Montana liquor license authorizing operation of a 50-seat bar.

Les Stevenson, who contemplated purchasing the Plainsman Bar from Leo Kraft, began operating the business in November, 1978. The Blaine County Sanitarian, John C. Herndon, inspected the bar. He told Stevenson that engineering plans to expand the sewer system would have to be submitted before expansion of the business would be approved. Stevenson experienced sewer backup in the bar and problems with the water pressure from the well.

On November 30, 1978, Herndon reported by letter to the Chief of the Department of Revenue, Liquor Control Board and the Chief of the State Board of Health that the Plainsman Bar water supply was inadequate and that the liquor license transfer should not be granted. Herndon noted that Stevenson's proposed addition of a kitchen and steakhouse in the same building would completely deplete the existing water supply. He reported that the sewage treatment system consisted of a 1,500-gallon septic tank and a surface drainfield of 800 square feet, capable of disposing of sewage from the bar and one trailer house. Herndon concluded that an engineering study should be conducted and an additional disposal system installed before a restaurant could be licensed on the premises.

Copies of the Herndon letter were mailed to Les Stevenson, his attorney, and Leo Kraft's attorney. Acting on behalf of Stevenson, attorney Ted Thompson obtained a release from the sales agreement between Stevenson and Kraft. During the period that Stevenson operated the Plainsman Bar, Stevenson did not tell John Herndon about the sewer and water problems he experienced.

On March 7, 1979, Leo Kraft listed the Plainsman Bar for sale with Flynn Realty. Appellant Russell Lacey, a retired ironworker from Anchorage, Alaska, had been looking for a bar and restaurant business in the western United States. Lacey inquired at Flynn Realty and was told about the Plainsman Bar.

Relying on telephone conversations about the bar, Mr. Lacey traveled from Anchorage to Havre to view the Plainsman property. Two agents of Flynn Realty represented to Lacey that the building itself was suitable for conversion to a 250-person restaurant and that the septic tank was large enough to handle such a restaurant. The listing agreement with Flynn Realty contained no information regarding the actual capacity of the septic tank, nor mention of the fact that the liquor license authorized only a 50-person bar. Based upon identical representations made in a long-distance telephone conversation with Flynn Realty agents, Roberta Lacey and her son-in-law traveled from Anchorage to Havre to inspect the Plainsman property.

Plaintiffs became interested in the Plainsman property because they thought they could operate it as both a bar and a restaurant. The floor space of the Plainsman would accommodate 200 bar patrons. A partially equipped kitchen had been operated as a sandwich and buffet facility. Plaintiffs knew they would have to purchase additional equipment to operate a full-service restaurant. The Flynn Realty agents were aware of plaintiffs' plan to expand the existing facilities. Kenneth R. Flynn confirmed his agents' representations that the Plainsman had a 4,000 gallon septic tank sufficient to handle a 250-person bar and restaurant.

During one of plaintiffs' visits to the Plainsman Bar, plaintiffs and Flynn Realty agents observed a plumber's snake and debris lying near a drain. The Flynn Realty agents assured plaintiffs that the sewer problem would be corrected and added a provision to the buy-sell agreement that the plugged drain would be opened and the sewer would be in "good, workable condition."

On April 9, 1979, plaintiffs executed a "Receipt and Agreement to Sell and Purchase" in which they agreed to purchase the Plainsman Bar from Leo Kraft. On May 9, 1979, agents of Flynn Realty escorted Russell Lacey to attorney Thompson's office. They explained that the buy-sell agreement had been signed, that the terms and conditions of the sale were already set, and that they would like Thompson to review the contract for sale, which Leo Kraft's attorney had prepared. Thompson agreed to represent the Laceys and advised them of the existence of John Herndon's November 30, 1978 letter, regarding sewer and water problems at the Plainsman Bar.

Testimony regarding the extent to which Thompson explained the contents of Herndon's letter to the Laceys is contradictory. Thompson testified that he went over the letter sentence by sentence. Roberta Lacey testified that Thompson did not tell them about Herndon's reference to the 1,500-gallon septic tank or the need for an engineering study and expanded sewer system. Russell Lacey could not recall specifically what Thompson discussed relative to the letter, but testified that Thompson "checked with John Herndon to see if this had been corrected." Roberta Lacey also testified that Thompson called Herndon to make sure the sewer problems had been corrected before they signed the contract for sale.

Some time after his May 9, 1979 meeting with the Laceys and the Flynn agents, Thompson telephoned Herndon to find out whether the conditions outlined in Herndon's November 30, 1978 letter still existed. Thompson testified that Herndon assured him that the water supply was adequate for a restaurant and bar with an occupancy load of 250 people; that the sewer system problems had been corrected; and that Herndon would check again to make certain there were no sewer problems more serious than the minor blockage, evidenced by the sewer snake the Laceys had seen. Herndon told Thompson "he would check his file to see if there were any problems other than a minor stoppage." Thompson admitted that he did not discuss the size of the septic tank with Herndon or whether the sewer system had been enhanced since 1978.

Herndon testified that he was unable to contact Les Stevenson, but that he talked to the Plainsman Bar manager and plumbers, who reported that the problems had been corrected. Herndon relayed this information to Thompson on May 18, 1979.

Thompson testified he advised plaintiffs to wait until the food purveyor's license was issued before signing the contract for sale. Contrary to Thompson's advice, plaintiffs executed the contract for sale of the Plainsman property with Leo Kraft on May 18, 1979. Plaintiffs made a $35,000 downpayment and contracted to pay $135,000 in monthly payments. The contract for sale was contingent upon transferability of the Montana Retail Beer and Liquor License, but no conditions regarding capacities of the water or sewer systems were expressed. The agreement also provided that plaintiffs had entered into the agreement in full reliance on their independent investigation.

On June 20, 1979, the State Department of Health & Environmental Sciences issued a food purveyor's license to plaintiffs. Herndon testified that the license was issued so that plaintiffs could sell "knick knack foods" from the bar as Kraft had. According to Russell Lacey's testimony, the bar was opened in July, kitchen equipment was installed, and the restaurant opened in August. Roberta Lacey testified the restaurant opened in October. The Laceys did not seek formal approval from the State before installing the kitchen equipment. Herndon conducted a fire inspection of the new kitchen equipment.

Plaintiffs experienced a serious backup problem the first day the restaurant opened and requested that Herndon inspect their sewage system. Herndon did so and several meetings between Herndon, Kraft and plaintiffs took place. Plaintiffs continued to report sewer problems to Herndon.

Herndon informed plaintiffs by letter dated January 22, 1980 that the sewage system was "a complete failure." Copies of this letter were forwarded to attorney Thompson, the State Food & Consumer Safety Bureau, the State Liquor Control Board, and the engineering firm whose construction plans had not been adhered to when the Plainsman Bar was built. Herndon recommended that in order for the Plainsman Bar "to comply with the Montana State Health Codes for a Bar and Steakhouse, it will be necessary to revamp the entire sewage system." He noted that review of engineering plans and specifications for design, as well as approval of the facility had to be completed before a license would be granted for an eating establishment.

By letter dated January 29, 1980, the Liquor License Bureau informed plaintiffs that their health permit was in jeopardy of being revoked unless they corrected the sewage system deficiency. On February 8, 1980, John Herndon wrote the Liquor License Bureau Chief that the sewage disposal system of the Plainsman Bar did not comply with the minimum standards of the State Department of Health & Environmental Sciences. On February 14, 1980, James Peterson of the Food & Consumer Safety Bureau of the Department of Health and Environmental Sciences informed Russell Lacey by letter that the...