Trustees of Washington-Idaho-Montana Carpenters- Employers Retirement Trust Fund v. Galleria Partnership, WASHINGTON-IDAHO-MONTANA

CourtUnited States State Supreme Court of Montana
Citation780 P.2d 608,46 St.Rep. 1661,239 Mont. 250
Decision Date31 October 1989
PartiesThe TRUSTEES OF THERETIREMENT TRUST FUND and the Trustees of the Laborers-A.G.C. Pension Trust of Montana, Plaintiffs/Respondents and Appellants, v. GALLERIA PARTNERSHIP, et al., Marble Moving, Storage & Transfer, et al., Defendants/Appellants and Respondents. GALLERIA PARTNERSHIP, et al., Third-Party Plaintiffs and Appellants, v. The TRUSTEES OF THERETIREMENT TRUST FUND, et al., Third-Party Defendants and Respondents.

Page 608

780 P.2d 608
239 Mont. 250
Trustees of the Laborers-A.G.C. Pension
Trust of Montana,
GALLERIA PARTNERSHIP, et al., Marble Moving, Storage &
Transfer, et al., Defendants/Appellants and
GALLERIA PARTNERSHIP, et al., Third-Party Plaintiffs and
al., Third-Party Defendants and
No. 89-29.
Supreme Court of Montana.
Submitted on Briefs June 1, 1989.
Decided Sept. 20, 1989.
Rehearing Denied Oct. 31, 1989.

Page 609

[239 Mont. 252] William K. Van Canagan and Christopher B. Swartley, Datsopoulos, MacDonald & Lind, Missoula, for plaintiffs/appellants Trustees.

Jardine, Stephenson, Blewett & Weaver; K. Dale Schwanke, Great Falls for Galleria.

Cure, Borer & Davis, Gregory J. Hatley, Great Falls, for Estate of Tice.

Gough, Shanahan, Johnson & Waterman, Jock O. Anderson, Helena for Compass Group, etc.

Linnell, Newhall & Martin, Great Falls for Dees.

Howard Strause, Great Falls for Marbles.

Graybill, Ostrem, Warner & Crotty, Great Falls, for Patterson.

Elizabeth Best, Great Falls, Mary Van Buskirk, Bosch, Kuhr, et al., Havre, for Estate of Lund.

SHEEHY, Justice.

Galleria Partnership and the individual members of the partnership appeal from a final judgment entered against them in the District Court, Eighth Judicial District, Cascade County, and in favor of the Trustees of the Washington-Idaho-Montana Carpenters-Employers Retirement Trust Fund and the Trustees of the Laborers AGC Pension Trust of Montana (hereafter Trustees). The judgment is for $1,505,368.35 of which the sum of $1,308,193.35 is for deficiency judgment after mortgage foreclosure, with the rest being recoverable costs and attorneys fees.

The Trustees appeal from a final summary judgment entered against them in the same court and in favor of the Estate of Gordon P. Tice.

It appears that other issues remain for decision by the District [239 Mont. 253] Court arising out of the original action, but this Court has jurisdiction by reason of direct appeal and a proper rule 54(b) certification from the District Court.


In this portion of the opinion we uphold the judgment of the District Court that the Trustees are entitled to deficiency judgment against Galleria Partnership, and costs and attorneys fees, but remand the amount of the deficiency judgment to the District Court for reexamination on the issue of the fair market value of the property given as security for the indebtedness at the time of the foreclosure sale.

A. Propriety of a Deficiency Judgment

On March 17, 1982, in Great Falls, Montana, 16 individuals made, executed and delivered a promissory note for $1,200,000.00 payable to the Trustees on terms set out in the written note. The note was signed by the individuals not as partners of

Page 610

the Galleria Partnership, but in their individual capacity, except that three of the individuals also signed as partners in Great Falls Investors. Under the terms of the promissory note, the individuals undertook jointly and severally to pay the principal sum of the note and the interest accruing thereon.

At or about the same time, but effective March 17, 1982, Galleria Partnership, composed of 10 of the individuals who signed the promissory note, and three additional persons comprising the Great Falls Investors made, executed and delivered to Safeco Title Insurance Company as trustee, a trust indenture and security agreement, wherein the trustees were named as beneficiaries, to secure the principal sum of $1,200,000.00 with interest thereon according to the terms of the promissory note above referred to.

The real property which was the subject of the trust indenture was the location of a warehouse which had been remodeled for the purpose of leasing to various business tenants. The building had been purchased and remodeled beginning in 1982 by a prior partnership, Galleria Associates, managed by one Dan Cook.

Cook had obtained a $1,950,000.00 appraisal of the building in its remodeled state so he could get a long-term loan to pay off Galleria Associate's interim construction loan. For this purpose Cook approached third party defendant, Compass, which specializes in handling[239 Mont. 254] loans of union pension trust funds and then servicing those loans. Compass is a wholly owned organization of third party defendant, Old National Bancorporation. Cook was advised by Compass that Galleria Associates could not borrow from the Trustees because Cook was disqualified under the provisions of the Federal Employee Retirement Income Security Act (ERISA) statutes. 29 U.S.C., sections 1001 et seq. Thereupon, Cook set about the formation of Galleria Partnership, to which Galleria Associates would eventually sell the building, and the Galleria Partnership would qualify as a borrower under ERISA. Cook developed a prospectus on the project, and lined up the 13 individuals and Great Falls Investors that eventually signed the trust agreement. The individuals who became partners in the Galleria Partnership held varying fractions of interest in the partnership. Compass knew that Cook was procuring such interest; the agents of Compass had no idea what representations Cook was making to the prospective investors in Galleria Partnership, and did not ask.

It seems clear that Cook, himself, or through others that were acting on his information, represented to each of the persons who ultimately signed the loan documents that the loan was to be nonrecourse. At least three lawyers were among the investors, each of whom was of the view that a deficiency judgment could not be recovered on the foreclosure of a trust indenture.

Cook hand-carried the loan documents, including a commitment from Compass as to the terms of the loan, which stated that security for repayment was to be a first lien on the building and thus he secured the signatures of the borrowers. Each of the borrowers was told that the loan was nonrecourse. Only one attorney read the note or trust indenture, and he found nothing in them that was contrary to his view that the loan was nonrecourse.

In capsule, then, after the loan was closed, it turned out that the bulk of the tenants in the Galleria building were businesses Cook had an interest in, which had been known to Compass when the loan commitment was made. Cook's economic situation deteriorated, which ultimately resulted in the failure of various tenants to pay their rents in a timely basis. The Galleria Partners were using those rents to cover operating expenses and to make the monthly loan payments which were $14,916.00 each. As the tenants' rents fell into arrears, the monthly payments on the loan were made progressively later. Compass was aware of the reason for the late payments from [239 Mont. 255] the partnership and continued to accept the payments together with late charges.

Page 611

The November, 1984 loan payment had not been paid by early December of that year. There is a dispute in the evidence as to whether Compass advised appellant Bloomgren, a CPA, who was keeping the Partnership books and paying its bills, that Compass required both the November and December payments to be made together. Bloomgren denies any contact from Compass at the time. Nevertheless, on December 11, 1984, Compass sent a default notice to Bloomgren, accelerating the entire loan balance of $1,225,668.81 and demanding its payment in nine days. The default notice crossed in the mail the November, 1984 payment which Bloomgren had forwarded to Compass. When the November payment was received, Compass returned it with a letter reiterating the demand for the entire balance.

Thereafter there were proposals for settlement which never reached fruition. In that period of time, Compass had the building appraised in the summer of 1985 and the appraisal came in at $1,100,000.00. The Trustees were unwilling to accept that sum as an appraisal and no settlement for deficiency was arrived at by the parties.

On April 12, 1985, the Trustees filed an action in the District Court for the purpose of foreclosing on the trust indenture. After lengthy discovery and complex proceedings, the District Court on October 29, 1987, determined in a summary judgment that the trust indenture constituted a first lien upon the real property of Galleria Partnership, and issued its order for decree of foreclosure. The order directed the Sheriff of Cascade County, Montana, to sell the real estate in one parcel at public auction under the laws governing the sale of real estate under execution upon proper notice being given; and to deliver a deed to the purchaser. The order of foreclosure reserves specifically the question of any deficiency judgment.

No return of the sale by the Sheriff under the foreclosure sale can be found in the District Court file which has been forwarded to us. Under the mortgage foreclosure statutes, "if it appears from the sheriff's return that the proceeds are insufficient and a balance still remains due, judgment can then be docketed for such balance against" the defendants liable for the debt. No party before us raises any contention as to the lack of sheriff's return in the District Court file, and in view of our decision relating to the deficiency judgment it is unimportant here. It is reflected in the order of the District[239 Mont. 256] Court, dated October 7, 1988, when the deficiency judgment was rendered against the Galleria Partnership, that the Sheriff's sale took place on December 8, 1987, and that the bid price obtained there at was $565,000.00. The briefs of all parties assume that the sole bid at the Sheriff's sale was that of the Trustees.

So much for the background leading up to the deficiency judgment. The Galleria Partnership raised several issues contesting the validity of...

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