National Lumber Co. v. Advance Development Corp., 86-202

• Decision Date: 13 July 1987
• Docket Number: No. 86-202,86-202
• Citation: 293 Ark. 1,732 S.W.2d 840
• Parties: NATIONAL LUMBER COMPANY, Appellant, v. ADVANCE DEVELOPMENT CORP., Vermont Place Properties, et al., Appellees.
• Court: Arkansas Supreme Court

Page 840

732 S.W.2d 840

293 Ark. 1

NATIONAL LUMBER COMPANY, Appellant, v. ADVANCE DEVELOPMENT CORP., Vermont Place Properties, et al Appellees.

No. 86-202.

Supreme Court of Arkansas.

July 13, 1987.

Thompson, Paddock & Llewellyn by: Richard L. Spearman, Fort Smith, for appellant.

Harper, Young, Smith & Maurras by; Robert Y. Cohen, II, Phillip Taylor, Jones, Gilbreath, Jackson & Moll by: Charles R. Garner, Jr., Fort Smith, Morril Harriman, Van Buren, Gean, Gean & Gean by: Lawrence W. Fitting, Fort Smith, for appellees.

HOLT, Chief Justice.

This appeal concerns a real estate development in Fort Smith known as Vermont Place Properties, the liability of general partners in a limited partnership, and priorities among mortgagees, mechanics and materialmen involved in the project.

Pat McGowan, Val Somers, and Brent Roberson were general partners in Vermont Place, a limited partnership, formed on January 20, 1984, for the purpose of developing a tract of land in Fort Smith by constructing duplexes on it to be either sold or rented. The partnership mortgaged the property for construction purposes. McGowan's separate company, Advance Development Corp., (Advance) was in charge of developing the project, including contracting with the materialmen and mechanics, hereinafter referred to as "suppliers." On September 3, 1984, Somers and Roberson discovered that McGowan had not been paying the suppliers nor making interest payments on the mortgages. Five

separate lawsuits, filed by the banks holding the mortgages and by the suppliers, were consolidated for trial. On February 14, 1986, the trial court found that McGowan, Advance, and the partnership had so merged their affairs that they were one and the same person. Therefore, appellant, National Lumber Company (National), and various other suppliers, were found to have valid liens because notice was not required pursuant to Ark.Stat.Ann. § 51-608.5. These liens, however, were held inferior to the bank's construction mortgages. Furthermore, the court held McGowan and his wife were individually liable for the debts but that Somers and Roberson were only liable to the extent of their original capital contributions. It is from that order that National brings this appeal. In addition, a cross-appeal was filed by Vermont Place and by some of the suppliers. We reverse the trial court's holding limiting the liability of Somers and Roberson and dissolve two of the supplier's liens. We affirm the remaining issues raised in both the appeal and the cross-appeal. The appeal will be discussed separately from the cross-appeal.

DIRECT APPEAL

1. LIABILITY OF SOMERS & ROBERSON.

The chancellor held in pertinent part as follows:

1. That Pat McGowan, Advance Development Corporation and Vermont Place Properties Partnership so merged their affairs to the extent that they were one and the same person or entity when dealing with the lien holders in this action ...

....

10. That the lien holders are entitled to personal judgments against Advance Realty Corporation and Pat McGowan and his wife for any deficiency owing after the property is sold and the proceeds distributed....

11. That it would be inequitable and unfair to hold Brent Roberson, Val Somers and their wives personally liable for all the deficiency, if any, after the property is sold and the proceeds divided. However, they will be personally liable apart from the partnership jointly and severally for the amount of their purported capital contributions to the partnership in the amount of $33,333.34. The lenders and lien holders had a right to rely on the partnership agreement to the extent of this purported contribution by these two partners. Under the circumstances of this case and the facts developed at trial, they should be personally liable for no more than that amount but should not escape liability altogether because they should have kept more control over the affairs of the partnership.

National argues that the trial court's holding limiting the personal liability of Somers and Roberson is contrary to Arkansas law which makes partners individually liable for partnership debts. We agree.

The following provisions under the Uniform Partnership Act apply to this situation:

65-113. Partnership bound by partner's wrongful act. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his copartners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or ommitting [omitting] to act.

65-115. Nature of partner's liability. All partners are liable,

(a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14 [§§ 65-113, 65-114].

(b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.

Applying the provisions of the Uniform Partnership Act to the case at bar, when the partners of Vermont Place charged McGowan and his company, Advance, with the responsibility of developing Vermont Place, they effectively made McGowan and Advance agents of the partnership. A partnership is bound by the acts of a partner when he acts within the scope or apparent scope of his authority. Smith v. Dixon, 238 Ark. 1018, 386 S.W.2d 244 (1965). The power of one partner to bind another by his acts is limited to transactions within the scope of the partnership business. May v. Ewan, 169 Ark. 512, 275 S.W. 754 (1925). Here, the partnership agreement provided in part that the purpose of the partnership was to acquire real estate and construct apartment buildings and duplexes for lease or sale. In furtherance of this purpose, the partners agreed that McGowan and Advance would see to the construction of the duplexes. When McGowan acquired labor and materials and then failed to pay for them, he was acting within his apparent authority as a partner and his acts bound the other two partners. That the partners intended to be so bound is exemplified by their actions once they discovered that McGowan had not paid the suppliers. They removed him from the partnership and took over the construction of the duplexes. In doing so, they not only profited from the labor and materials already furnished, but assumed responsibility for the debts attached to the property. McGowan's failure to pay the suppliers was an omission within the meaning of § 65-113, supra, rendering the partnership liable and the individual partners jointly and severally liable pursuant to § 65-115, supra. The chancellor, in his ruling, acknowledged that the affairs of Advance and Vermont Place were so merged that they had become one entity. Applying this finding consistently necessitates a holding that all three partners were jointly and severally liable, rather than finding only McGowan to be fully liable. Accordingly, the holding of the chancery court that Somers and Roberson were liable only to the extent of their original capital contributions is reversed.

2. CONSTRUCTION MORTGAGE LIENS.

On July 9, 1984, the partners mortgaged tracts 7 and 8 of Vermont Properties to Citizens Bank and Trust Co., of Van Buren. The trial court held that Citizens Bank had a valid construction mortgage in the total amount of $290,868 plus contract interest and that the construction mortgage liens were prior to the labor and material liens of the suppliers because the mortgages were recorded prior to the commencement of the construction of the improvements on each project site; the mortgages contained a purpose clause expressing that the funds were to be used for construction purposes only; and the lenders were unequivocally obligated to make future advances to the borrower for construction purposes.

Arkansas Stat.Ann. § 51-605 (Repl.1971) provides:

The lien for the things aforesaid, or work shall attach to the buildings, erections or other improvements, for which they were furnished or work was done, in preference to any prior lien or encumbrance or mortgage existing upon said land before said buildings, erections, improvements or machinery were erected or put thereon, and any person enforcing such lien may have such building, erection or improvement sold under execution, and the purchaser may remove the same within a reasonable time thereafter; Provided, however, That in all cases where said prior lien or encumbrance or mortgage was given or executed for the purpose of raising money or funds with which to make such erections, improvements or buildings, then said lien shall be prior to the lien given by this act (emphasis added).

This court has explained that in order to establish the priority of a construction mortgage over a materialman's lien, "(a) the construction mortgage must be executed before the commencement of the building ...; (b) the mortgagee must be bound to advance the money for the construction ...; and (c) that fact must be stated in the mortgage...." Planters Lumber Co. v. Jack Collier East Co., 234 Ark. 1091, 356 S.W.2d 631 (1962).

National and the other suppliers claim that the mortgages given by Citizens Bank did not meet the requirements of a construction mortgage, in that the obligation of the bank to advance the money is not stated in the mortgage.

The mortgages, in pertinent part, provide:

It is expressly understood and agreed that the aforesaid note is given for borrowed money obtained for the purpose of constructing erections, improvements or buildings upon the real estate above described, and that the lien of this mortgage shall extend to such erections, improvements, or buildings as well as to the real estate above described.

....

The sale is on the condition, that whereas, Grantor is justly indebted unto said Bank in the sum of $70,014 [$77,054 on the other mortgage] evidenced by one promissory note dated 6/29/84...