Reynolds v. E & C Associates

• Court: Rhode Island Supreme Court
• Writing for the Court: Before WEISBERGER; WEISBERGER; LEDERBERG
• Citation: Reynolds v. E & C Associates, 693 A.2d 278 (R.I. 1997)
• Decision Date: 14 April 1997
• Docket Number: No. 95-76-A,95-76-A
• Parties: Lillian REYNOLDS and Michael F. Reynolds v. E & C ASSOCIATES, a Rhode Island Limited Partnership, and Lillian Reynolds and Michael Reynolds, the general partners in Sarah J. Salisbury Nursing Centre, A Rhode Island General Partnership. ppeal.

Page 278

693 A.2d 278

Lillian REYNOLDS and Michael F. Reynolds v. E & C ASSOCIATES, a Rhode Island Limited Partnership, and Lillian Reynolds and Michael Reynolds, the general partners in Sarah J. Salisbury Nursing Centre, A Rhode Island General Partnership.

No. 95-76-Appeal.

Supreme Court of Rhode Island.

April 14, 1997.

Herbert F. DeSimone, Allan M. Shine, Melissa M. Horne, and Diane Finkle, Providence, for Plaintiff.

David M. Campbell, Providence, Philip G. Parsons, Warwick, Roger N. LeBoeuf, Thomas A. Lynch, Providence, for Defendant.

Before WEISBERGER, C.J., and BOURCIER, and FLANDERS, JJ.

OPINION

WEISBERGER, Chief Justice.

This case comes before the court on an appeal by mechanics' lienholders (lienholders) from a judgment of a justice of the Superior Court which confirmed a closing settlement relative to the sale of the receivership assets and disbursement of sale proceeds. The lienholders are J & D Drywall, Inc.; D.F. Pray, Inc.; R. Moran Associates, Inc.; Ruggieri Bros., Inc.; Acme Tile & Terrazzo Co.; Eagle Cornice Co., Inc.; and Mass. Electric Construction Co., Inc., all of whom were subcontractors that provided services and/or materials in the construction of a nursing-care facility located at 407-455 Douglas Avenue, Providence, Rhode Island (the facility). The Rhode Island Hospital Trust National Bank (the bank) provided construction financing to the Sarah J. Salisbury Nursing Centre (Salisbury). Salisbury was organized as a Rhode Island general partnership consisting of E & C Associates, a limited partnership, Lillian Reynolds, and Michael F. Reynolds, all of whom had varying shares of ownership in the entity. ¹ The bank was given a first mortgage on the real estate that would be developed into the facility as well as the pledge of a certificate of deposit owned by Salisbury in the amount of $600,000. We affirm the judgment of the Superior Court in confirming the final settlement. The facts of the case insofar as pertinent to this appeal are as follows.

On October 4, 1990, Lillian and Michael Reynolds, in their capacity as general partners, filed a petition in Providence Superior Court seeking the appointment of a receiver to liquidate the assets of Salisbury and to dissolve Salisbury as a general partnership pursuant to G.L.1956 §§ 7-12-43 and 7-12-48. Pursuant to the petition a justice of that court appointed temporary coreceivers and later, on November 2, 1990, appointed Herbert F. DeSimone, Esquire, and Allan M. Shine, Esquire, as permanent receivers.

The principal asset of the receivership estate was a partially completed nursing home that had been constructed for the benefit of Salisbury. It was apparent to all interested parties that the facility in its uncompleted state was of minimal value. The coreceivers entered upon a vigorous effort to find a purchaser who would complete the facility and pay to the receivers an amount upon completion that would reflect the value of the partially completed facility. Meanwhile the lienholders had filed the necessary petitions to enforce mechanics' liens and had entered appearances in the receivership proceedings.

After receiving bids from four parties who were interested in purchasing the facility, the receivers recommended, and a justice of the Superior Court approved, a petition to sell the assets of the receivership (the facility) free and clear of liens to Angelo S. Rotella (Rotella). Under the terms of the order entered April 24, 1992, Rotella was to complete construction of the facility with the aid of financing from Continental Wingate Associates, Inc. and mortgage insurance from the United States Department of Housing and Urban Development (HUD). ² Indeed, the purchase price of the facility was to be the maximum loan amount HUD would guarantee less the cost to complete construction of the facility and the purchaser's legal, financing, and filing fees incurred in consummating the sale. Prior to granting the petition to sell, the coreceivers expressed optimism that if an appropriate mortgage guarantee could be obtained from HUD and the sale consummated, the net proceeds of the sale might be sufficient to satisfy all claims, secured and unsecured. Unfortunately the application to HUD for mortgage insurance was substantially delayed. ³ Meanwhile Rotella applied for a certificate of need (CON) from the Rhode Island Department of Health.

During the interim the bank had provided to the receivers funds to defray the administrative expenses of the receivership since the uncompleted facility provided no source of cash with which to pay for insurance, utilities, and security for the building. As of April 14, 1992, the bank had advanced approximately $100,000 for these purposes. As a result of the delay in the granting of a mortgage guarantee from HUD, the receivers sought permission to extend and modify the purchase-and-sale agreement approved by the court order of April 24, 1992. The court heard this petition and on February 28, 1994, entered an order extending the closing date for the purchase-and-sale agreement to October 17, 1994. This order contained the following language in paragraph 4 thereof: "the Receivers shall pay HT's [the bank's] claim in full at the closing or within the next two business days thereafter." Notice of the hearing had been given to all interested parties.

Subsequent to the order of February 28, 1994, Rotella obtained a commitment from HUD to guarantee a mortgage in the amount of $11,160,000. This sum was less than the $11,400,000 loan guarantee Rotella had requested and utilized in making his original offer to the coreceivers. A closing was scheduled for September 27, 1994, but was delayed by motions made by certain of the lienholders who sought to enjoin the receivers from disbursing the proceeds of the sale. After a hearing on September 26, 1994, a Superior Court justice (other than the justice who had entered the earlier orders), denied the lienholders' motions. He further denied a motion for reconsideration following a hearing on September 28, 1994.

The closing was held on September 30, 1994. It is undisputed that the gross proceeds of the sale after deduction of construction costs approved by HUD was the sum of $5,868,952. At that time the total claim of the bank for principal and interest exceeded $6,000,000. The bank agreed to pay the receivers the sum of $350,000 for administrative expenses from the amount due under its secured claim. The receivers were also committed to pay to Rotella fees incurred in obtaining the CON from the Department of Health in the amount of $33,400, Rotella's legal fees in the amount of $185,000, additional construction costs necessary to complete the facility as a result of theft and vandalism incurred subsequent to HUD's approval of Rotella's estimate of construction costs in the amount of $237,000, real estate taxes in the amount of $157,617.05, and documentary stamps in the amount of $l5,680. The bank agreed that the coreceivers should pay these sums from the proceeds of the sale and further agreed to accept the total sum of $4,800,000 in full satisfaction of its claim. The bank's claim at that point amounted to $5,900,154.96 in principal and interest plus an additional $105,940 in other expenses for which the bank was entitled to reimbursement pursuant to the terms of the promissory note. The settlement with the bank left the sum of $82,000 to apply to the claims of the lienholders and other creditors.

In support of their appeal the lienholders raise a number of issues in separate briefs. These issues may be consolidated for purposes of this opinion into three questions of law and fact.

I Was the Bank's First Mortgage Senior to That of the Lienholders?

There is little question that under G.L.1956 § 34-28-25(a)(2) a mechanics' lien "shall be junior to any prior recorded * * * mortgage." Consequently the claims of the lienholders were junior to the mortgage held by the bank. There is also no question that the bank could have foreclosed on the security, cutting off the claims of all other creditors including the...