CONSTRUCTION LIEN: Rehearing of opinion that lien challenge was mooted by sale of property to 3rd parties denied… order. [Read more…]

CONSTRUCTION LIEN/CONDOS: Lien challenge rendered moot by sale of property to 3rd parties… contractor’s estate properly awarded $76,278 rather than claimed $3.3 million related to condo project… developers entitled to fees for litigation of lien… Honzel/Seeley affirmed.

Mountain West Bank made 3 loans totaling $1,616,136 to Cherrad LLC secured by condos at Lakeside Village on Hauser Lake and guaranteed by Cherrad owners Conrad & Cheryl Hale. Cherrad and CK Design & Const. entered into an AIA contract that provided that CK would build 2 condo buildings for $650,000 each plus a 10% management fee, to be substantially completed within 180 days, and another for infrastructure and marina for $1,323,600 plus a 10% management fee and substantial completion within 365 days. CK was to submit bi-weekly invoices and Cherrad would make progress payments and CK would submit a partial release of liens, but in practice CK was paid as the units were sold. CK suffered delays and several subcontractors and suppliers began filing liens. MWB refused to further finance the project unless CK and Cherrad agreed to shield MWB’s 1st position from the liens. On 5/18/07 CK agreed to subordinate its interest in the project to MWB, including the right to file a lien. Prior to completion of building 2, CK began construction of building 3 with units 5 & 6, not covered by a contract. Conrad Hale told CK owner Craig Kinnaman in 7/07 that it could no longer proceed on the project, and CK left. The parties entered an “Agreement Regarding Outstanding Debts” in 9/07 which provided that any liens on unit 2 would be paid in full before closing of the sale of unit 2 or paid from the proceeds of the sale before any funds were disbursed to CK or Cherrad. Kinnaman provided a list of all debts on the project and warranted that the total owed to subcontractors and suppliers was $180,731. Unit 2 was sold in 9/07 for $700,000. All unpaid subcontractors, suppliers, and creditors were paid first, with the balance of $57,360 to Kinnaman’s estate. Unit 5 and 6 were sold “as is” in 10/08 for $225,635 and $212,132. Unit 3 was sold in 2/10 for $325,000. CK never completed these units and received nothing from the sales. Kinnaman committed suicide in 9/07. The Estate recorded a $3.3 million lien in 11/07 through Kinnaman’s widow/PR Nancy, supported by a summary of invoices that alleged unpaid labor and materials due to CK. The amount of the lien made it impossible for Cherrad to borrow to continue the project. MWB sued Hales and the Estate in 1/08 seeking foreclosure of its secured loans to Cherrad. Although Cherrad was not in arrears, MWB alleged that it was insecure because of the Estate’s lien. It also asked the Court to declare the Estate’s lien inferior to its secured interests. Hales cross-claimed against the Estate for slander of title and intentional interference with contract. The Estate counter-claimed and cross-claimed against Hales alleging breach of contract and unjust enrichment. MWB and Hales moved for summary judgment against the Estate, arguing that its lien was invalid because it failed to comply with §71-3-535 and was not based on Kinnaman’s personal knowledge. Judge Honzel granted the summary judgment motions in 9/08 and declared the lien invalid due to failure to comply with 71-3-535. The Estate’s counterclaim against MWB was subsequently dismissed, and the cross-claims between Hales and the Estate proceeded to bench trial in 11/11. Judge Seeley determined that multiple provisions of the AIA contracts were disregarded and that the practice for paying CK was that it was to be paid $350,000 from the sale of each unit as the unit closed and CK was to pay all subcontractors and suppliers from its share of the proceeds. She ordered Cherrad to compensate the Estate in the amount of $76,278 rather than the $3.3 million it claimed. The Estate appeals.

Hales contend that the issue of validity of the Estate’s lien is moot because the properties have been purchased for value by 3rd parties and in good faith. The Estate argues that since MWB failed to raise mootness below, the issue should be dismissed. However, this Court has an independent obligation to determine whether jurisdiction exists and thus whether justiciability requirements have been met. Plan Helena (Mont. 2010). (Additionally, at the time of Honzel’s order the properties were not yet sold and mootness was not an issue). Honzel invalidated the Estate’s lien in 9/08, and the Estate failed to seek a stay or injunction to prevent sale of the property. Each unit named in the lien has been sold to 3rd party purchasers in good faith. Each took title free of any encumbrances placed on them by the Estate. Even if we were to agree with the Estate that Honzel incorrectly determined that the lien was invalid, there is no effective relief we can grant at this point without implicating validity of the sales.

Seeley correctly calculated the amount Cherrad owed the Estate for costs related to the condo project. Contrary to the Estate’s assertion, she did not determine that CK’s inaccurate reporting of debts was why it was not awarded $3.3 million. She found that while the invoices generally supported the amount of the lien, other evidence undermined their credibility, including the contract price originally agreed to in the AIA contracts, the parties’ practice as to payment to CK, CK’s failure to finish the project, and the amount CK warranted to owing subcontractors and suppliers in 9/07. There was substantial evidence to support her findings that a proper amount to award CK for its work on units 3, 5, and 6 was 10% of the sale prices, not the $3.3 million supported by the invoices. Although she looked at the AIA contracts to get an idea of the expected contract price, she determined that since many of the provisions were ignored they were not the best evidence of the parties’ agreement. Because the amount in the invoices was “astronomically higher” than the amount in the agreement, Seeley found the invoices difficult to credit and that the parties’ conduct was the best evidence of their agreement. That conduct did not involve Cherrad paying CK for each invoice from every subcontractor CK owed money. It was for Cherrad to pay CK $350,000 from the sale of each unit as it closed, and CK was to pay all subcontractors from its share. However, CK quickly fell behind and did not timely, or ever, complete the units or infrastructure.

Hales request attorney fees in the appellate litigation of the lien pursuant to §71-3-124(1). They are entitled to reasonable fees incurred below and in this Court.

Wheat, McGrath, Cotter, Baker, Rice.

Mountain West Bank v. Hale and Estate of Kinnaman, DA 12-281, 4/16/13.

Amy Randall (Mountain West Bank), Helena; Candace Payne & Mark Lancaster (Luxan & Murfitt), Helena, for Hales; James Kommers (Kommers Law Firm), Bozeman, for Kinnaman Estate.