A.C.I. v. Elevated Property ( 2021 )

09/28/2021
DA 20-0482
Case Number: DA 20-0482
IN THE SUPREME COURT OF THE STATE OF MONTANA
2021 MT 246A.C.I. CONSTRUCTION, LLC,
Plaintiff and Appellant,
FILE
v. SEP 2 8 2021
Bowen Greenwood
Clerk of Supreme Court
State of Montana
ELEVATED PROPERTY INVESTMENTS, LLC,
LEASE OPTION SOLUTIONS, LLC, WESTERN
BUILDING CENTER, JUSTIN NORBERG, NORBERG
ELECTRIC, LLC, and MONTANA DIRT WORKS,
Defendants and Appellees.
APPEAL FROM: District Court of the Eleventh Judicial District,
In and For the County of Flathead, Cause No. DV-2019-104
Honorable Robert B. Allison, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
Donald C. St. Peter, Michael O'Brien, St. Peter Law Office, P.C., Missoula,
Montana
For Appellee Lease Option Solutions, LLC:
Sean Morris, Worden Thane, P.C., Missoula, Montana
Submitted on Briefs: July 14, 2021
Decided: September 28, 2021
Filed:
Clerk
Justice Jim Rice delivered the Opinion of the Court.
¶1 A.C.I. Construction, LLC (ACI) appeals the March 13, 2020, Order and Rationale
on Motions for Summary Judgment (Order) entered by the Eleventh Judicial District Court,
Flathead County, granting Lease Option Solutions, LLC's (LOS) motion for summary
judgment on lien priority. LOS cross-appeals the District Court's September 21, 2020,
Findings of Fact, Conclusions of Law, and Order entering judgment in favor of ACI on its
unjust enrichment claim. We affirm.
¶2 There are two issues on appeal:
I. Did the District Court err in its determination of lien priority?
2. Did the District Court err by determining ACI was entitled to recover under the
theory LOS was unjustly enriched?
FACTUAL AND PROCEDURAL BACKGROUND
Pursuant to a Trust Indenture and Promissory Note, both dated September 15, 2017,
LOS loaned $252,000 to Elevated Property Investments, LLC (EPI), for the purchase of a
house in Kalispell (the Property). While most of the loan was for purchase of the Property,
$88,860 was designated for construction improvements of the Property. This construction
loan amount, which is undisputed, was designated based upon a construction budget EPI
had submitted to LOS, which amount the District Court later found to be "deficient in that
it failed to include a number of ordinary and typical construction costs."
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¶4 In January 2018, ACI and EPI entered a real estate improvement contract,1 under
which ACI would act as a general contractor to cornplete real estate improvements on the
Property. The parties' contract followed EPI' s termination of its previous contractor, who
the District Court found had comrnitted construction errors, including "framing over
existing windows, pouring a garage slab over the top of the existing septic tank, paving
over the existing drain field, and mis-locating the stairs to the upper floor," which required
corrective work and associated costs beyond the construction budget approved by LOS.
Further, with EPI' s approval, ACI contracted for other professional services not included
within the construction loan, including an engineer tasked with assessing the structural
integrity of the house, and an architect who drafted alteration plans after the engineer found
the structure was unsound.
EPI' s payrnents to contractors on the ballooning project stopped and, in July 2018,
ACI recorded a construction lien on the Property. ACI recorded an amended lien to correct
the amount of claimed interest, and, in October 2018, filed a second lien for additional
services and materials. Three other construction liens were filed by Western Building
Center, Justin Norberg/Norberg Electric, LLC, and Montana Dirt Works.
Section 71-3-522(6)(a), MCA, defines a "real estate improvement contract" as "an agreement to
perform services, including labor, or to furnish materials for the purpose of producing a change in
the physical condition of the real estate"; including "construction or installation on, above, or
below the surface of land"; "demolition, repair, remodeling, or removal of a structure previously
constructed or installed"; "preparation of plans, surveys, or architectural or engineering plans";
and other improvements. It is not contested that the subject contract was a real estate improvement
contract under the statute.
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¶6 Though issuing payments from the construction loan, LOS did not deal directly with
any of the project's contractors or subcontractors. Incorporated in the loan agreement
between LOS and EPI was a "Rehabilitation/Construction Loan Rider," which outlined the
process for release of construction loan proceeds, and provided that "[t]o the extent the
Note calls for installment advances and/or disbursements, no such advances and/or
disbursements shall be made unless and until the Work for which the advance and/or
disbursements is to be made have been approved by Lender in Lender's sole and absolute
discretion." Appended was a document titled "Renovation/Construction Holdback Draw
Requests," which detailed a specific process to be followed prior to release of funds by
LOS to EPI. Among the prerequisites for receiving payments were the submission of
detailed progress reports, including pictures evidencing completed work for which the
funds were requested, signed receipts of payments made to suppliers and laborers, copies
of applicable permits and government inspections, and procurement of lien waivers from
contractors and subcontractors. Upon approval, LOS would make payments directly to
EPI, upon whom it relied to pay contractors and subcontractors. EPI submitted three draw
requests to LOS. After receiving each of the three draw requests, LOS reviewed progress
reports and inspected the Property prior to releasing any construction funds. LOS dispersed
$82,181.80 in response to the requested draws against the construction loan, while initially
withholding $6,678.20. Included were two payments to ACI, the first in January 2018 for
$6,200, and the second in February 2018 for $9,197, a total of $15,397. ACI signed
unconditional lien releases for both payments.
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¶7 Receiving no further payrnents for services and rnaterials it rendered, ACI filed this
action for lien foreclosure in February 2019, naming as defendants all parties with liens or
interest in the Property. Inter alia, ACI alleged breach of contract against EPI and unjust
enrichment against LOS. Western Building Center subsequently settled its claims and was
disrnissed from the litigation. Justin Norberg/Norberg Electric, LLC, and Montana Dirt
Works were served but did not appear.
¶8 EPI, with no other known assets, defaulted on the LOS loan and, after initially
appearing, defaulted in the action as well. LOS conducted a nonjudicial trustee's
foreclosure sale on July 1, 2019. LOS was the only bidder and submitted a credit bid in
the arnount EPI then owed, $309,914.02. Thereafter, LOS maintained the Property,
including paying for utilities, insurance, and other property-related costs in an amount later
found by the District Court to be $24,425.23 in its Findings of Fact, Conclusions of Law,
and Order.2
¶9 LOS sought summary judgment regarding priority of the liens on the Property, and
filed a second summary judgment motion challenging ACI's unjust enrichment claim. The
District Court granted summary judgrnent to LOS on the issue of lien priority, reasoning
that:
In this situation LOS could not know that the owners EPI would contract for
work with ACI that was outside the projects/work listed in the loan
agreement. However, ACI could find the recorded trust indenture, know that
that encumbrance existed and know that what it was being hired to do was
2 The District Court concluded in its post-trial findings of fact and conclusions of law that LOS's
trustee's sale "foreclosed all liens or interests," including the construction liens filed by ACI and
the other contractors, as well as EPI's interest in the Property.
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not part of the work specified to be paid for by the construction portion of
the loan. LOS took appropriate action to protect the construction portion of
the loan and i[n] doing so took specific and affirmative action to secure and
protect its lien position. LOS in disbursing construction funds, required lien
releases and receipts prior to making any payment.
The District Court thus concluded ACI's construction lien had priority over LOS's
mortgage, but only up to $88,860, the portion of LOS's loan that had been allocated for
construction work, and granted summary judgment to LOS. However, the District Court
denied LOS' s motion for surnmary judgrnent on ACI' s unjust enrichment claim, reasoning
ACI' s legal remedy, as such, was against EPI, who no longer owned the property that held
the benefit of ACI's labor, while ACI had no legal remedy against LOS, who owned the
Property and retained the benefits of ACI's improvements in a potential windfall should
the Property be sold for a value exceeding the loan cost.
¶10 The unjust enrichment clairn proceeded to bench trial. The District Court found that
LOS's construction loan budget included demolition, electrical wiring, flooring, windows
and doors, two bathrooms, cabinets, drywall, plumbing, siding, painting, HVAC, and
framing. ACI, either itself, through its subcontractors, or through supervising another
contractor, oversaw each of these projects. ACI rendered additional services not within the
budget, including installing a third bathroom and insulation. The District Court found that
additional costs were incurred in consulting a structural engineer, an architect, and
correcting the previous general contractor's mistakes, increasing ACI' s bill far beyond the
arnount of the construction loan agreed between EPI and LOS. Testimony on behalf of
LOS indicated that, while the budget did not include certain irnprovements, it was the
expectation the Property would be insulated, structurally sound, have proper electric,
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HVAC, and plumbing systems, have proper flooring, windows, drywall, and doors, and
have fresh interior and exterior paint. Upon unjust enrichment, the District Court entered
a judgment in favor of ACI against LOS in the amount of $93,650, to be paid upon the sale
of the Property, which was then valued at $475,000, reasoning the property would not be
worth this amount "[w]ithout [ACI]'s labor and materials," and that LOS has "passively
received and accepted the benefit of [ACI]'s unpaid labor and materials." The judgment
amount was derived from the District Court's finding that ACI had performed $141,000 of
work, inclusive of labor and materials, and was paid $47,350, leaving a total owed of
$93,650. The District Court also entered judgment in favor of ACI against EPI for
$137,519.10, though by this time EPI had dissolved and been proven judgment proof. LOS
listed the Property for $499,000, and received a purchase offer for $475,000.
STANDARD OF REVIEW
¶11 We review a district court's grant of summary judgment de novo, applying the same
M. R. Civ. P. 56 criteria as the lower court. Dubiel v. Mont. DOT, 2012 MT 35, ¶ 10, 364
Mont. 175, 272 P.3d 66. The standard of review governing proceedings ground in equity
is codified in § 3-2-204(5), MCA, and directs that we review all questions of fact and law.
Mont. Digital, LLC v. Trinity Lutheran Church, 2020 MT 250, ¶ 9, 401 Mont. 482, 473
P.3d 1009 (citing § 3-2-204(5), MCA; Volk v. Goeser, 2016 MT 61, ¶ 19, 382 Mont. 382,
367 P.3d 378). We review a trial court's legal conclusions for correctness and its findings
of fact to determine whether they are clearly erroneous. Mont. Digital, ¶ 9. Statutory
interpretation is a question of law and the trial court's interpretation is reviewed for
correctness. State v. Howard, 2020 MT 279, ¶ 8, 402 Mont. 54, 475 P.3d 392 (citing State
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v. Oropeza, 2020 MT 16, ¶ 14, 398 Mont. 379, 456 P.3d 1023). Mixed questions of fact
and law garner de novo review, meaning that while factual conclusions are reviewed for
clear error, whether factual circumstances satisfy the applicable legal standard is reviewed
de novo. Mont. Digital, ¶ 9 (citing Mlekush v. Farmers Ins. Exch., 2015 MT 302, ¶ 8, 381
Mont. 292, 358 P.3d 913).
DISCUSSION
¶12 I. Did the District Court err in its determination of lien priority?
¶13 We are faced with an issue of priority between an earlier filed trust indenture, or
mortgage, and a construction lien, with the prospect of partial priority. We previously held
the statutes prioritize a construction lien over a trust indenture given to secure advances for
the construction. Signal Perfection, Ltd. v. Rocky Mt. Bank - Billings, 2009 MT 365, ¶ 18,
353 Mont. 237, 224 P.3d 604. In Signal Perfection, the bank also argued the portion of its
loan that went to non-construction purposes should retain priority over the construction
liens to that extent, but we did not reach the partial priority issue because it was not raised
in the district court. Signal Perfection, ¶¶ 12-14. Here, the issue was raised and decided
in the District Court, and is properly before us.
¶14 "Except as otherwise provided by law, a mortgage given for the price of real
property at the time of its conveyance has priority over all other liens created against the
purchaser. . ." Section 71-3-114, MCA. The construction lien statutes provide exceptions
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to the general rule of rnortgage priority for certain situations, one of which is at issue here.3
Section 71-3-542(4), MCA, provides:
A construction lien has priority over any interest, lien, mortgage, or
encumbrance that is filed before the construction lien attaches if that interest,
lien, mortgage, or encumbrance was taken to secure advances made for the
purpose of paying for the particular real estate improvement to which the
lien was attached.
(Emphasis added.) Thus, an earlier filed mortgage will be subordinated to a later-filed
construction lien if the mortgage "was taken to secure advances made for the purpose of
paying for the particular real estate improvement" to which the lien attached.
¶15 ACI challenges the District Court's interpretation of this statute, arguing the court
construed the provision, particularly the term "particular," too narrowly by holding that the
statute's prioritization of the construction lien was limited "to the specific items listed in
the loan agreement." The District Court reasoned that the trust indenture explicitly limited
its purpose regarding advances for construction to designated improvements and to the
amount of $88,860, was noticed by its recording and, therefore, the construction lien's
priority under the statute was limited to this particular purpose and amount. ACI argues
that because lien statutes are to be "liberally construed" to give effect to their remedial
character, Tri-County Plumbing & Heating v. Levee Restorations, Inc., 221 Mont. 403,
3 A construction lien is a lien that arises from the performance of services and production of
materials in relation to the improvement of the physical condition of real estate. See § 71-3-522(2),
(6), MCA. A person "who has furnished services or materials pursuant to a real estate
improvement contract is entitled to a lien for the unpaid part of the person's contract price."
Section 71-3-526(1), MCA. It is not here disputed that ACI was entitled to file and properly filed
a construction lien against the Property.
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415-16, 720 P.2d 247, 255 (1986), it was entitled to prioritization of its entire lien and
foreclosure in the arnount of $141,000, as well as related attorney fees and costs.
¶16 However, as LOS argues, ACI's position is problematic. It would extend the
statute's prioritization of ACI's later-filed construction lien over the portion of LOS's
mortgage that "was taken to secure advances made for the purpose of" purchase of the
property. Section 71-3-542(4), MCA. This would not only extend the prioritizing effect
of § 71-3-542(4), MCA, beyond its plain terms, but also defeat the general purpose of
§ 71-3-114, MCA ("a mortgage given for the price of real property at the time of its
conveyance has priority over all other liens"). This goes far beyond "liberally construing"
the statute and improperly extends its text.
¶17 The potential for bifurcating a mortgage and giving priority to the construction
portion thereof is implicit in the wording of § 71-3-542(4), MCA. A before-filed mortgage
is subordinated to a construction lien "if" the mortgage was taken "to secure advances made
for the purpose" of paying for "the particular real estate improvement" to which a
construction lien later attaches. Other possible purposes served by a mortgage, such as
securing funding for the property's purchase or securing funding for other purchases or
even other construction, do not corne within the prioritizing reach of the statute.
¶18 The District Court found that LOS's careful financial and procedural
publicly-noticed protocols clearly dernonstrated the portion of its mortgage that secured
advances for construction work on the Property, which also served to protect LOS from
losing priority on the rest of its mortgage to the construction lien. This is the action we
contemplated in Tri-County, 221 Mont. at 418, 720 P.2d at 256: "[T]his result does not
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spell irnminent disaster for the holder of a prior recorded trust indenture; it merely requires
the holder of a trust indenture to exercise ordinary business prudence where construction
is contemplated."
¶19 ACI argues the District Court "contradicted itself' between its summary judgment
order and post-trial findings regarding which property improvements were subject to the
LOS-EPI loan agreement, and which were not. However, even assuming arguendo there
was a contradiction, it does not alter the outcome, as the advances secured by the mortgage
for construction were also limited by amount, $88,860, which was fully paid. In any event,
we conclude the factual record sufficiently demonstrates that ACI's bill was based heavily
on items beyond the construction loan budget, such as an additional bathroom, structural
corrections, professional consultations, and repair of the previous contractor's errors.
¶20 We conclude the District Court did not err in its determination of priority under
§ 71-3-542(4), MCA, and, pursuant thereto, did not err by failing to halt LOS' non-judicial
trustee's foreclosure sale of the Property.4
¶21 2. Did the District Court err by determining ACI was entitled to recover under the
theory LOS was unjustly enriched?
¶22 LOS candidly acknowledges that ACI "performed a total of $141,000 in work" on
the property and that "[t]he District Court's award of $93,650 to ACI was equitable and
4 Of course, our ruling here addresses priority of a construction lien, not its validity, and would not
have extinguished the lien. Had EPI retained ownership of the Property, the portion of the lien not
granted priority under § 71-3-542(4), MCA, would also have been potentially subject to
foreclosure in a second position. Here, however, the Property had already been foreclosed upon,
extinguishing EPI' s and ACI' s respective interests.
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within its wide discretion because that amount restores ACI with the benefit it conferred
on the property." However, LOS cross-appeals that portion of the judgment, believing ACI
was not entitled to the remedy of unjust enrichment as a matter of law. LOS argues that
ACI could not seek equitable relief because it had legal remedies, including a contract
remedy against EPI, against whom it obtained a judgment, and the opportunity to bid on
the Property at the foreclosure sale, which ACI failed to avail itself of. Given its contract
rernedy against EPI, LOS argues that ACI has been allowed to "double recover."
¶23 Unjust enrichment is an equitable remedy which is generally not available unless it
is shown that "an adequate legal remedy does not exist." Mont. Digital, ¶ 11 (citing
N. Cheyenne Tribe v. Roman Catholic Church, 2013 MT 24, ¶ 39, 368 Mont. 330, 296 P.3d
450) (ernphasis added); see also Mt. Water Co. v. Mont. Dep't of Revenue, 2020 MT 194,
¶ 17, 400 Mont. 484, 469 P.3d 136 (noting that equitable remedies are "often available to
ameliorate the harsh effects of law and to provide a remedy where a legal rernedy is
non-existent or inadequate"); Ryan v. Spieth, 18 Mont. 45, 48, 44 P. 403, 404-05 (1896)
(stating that the rule that equity may not be invoked absent a showing of all legal remedies
being exhausted "though general, is not without many exceptions"); Raymond v.
Blancgrass, 36 Mont. 449, 466, 93 P. 648, 654 (1908) (noting that "[t]he want of an
adequate legal rernedy at law constitutes the very cradle of equity") (internal quotation
ornitted); accord Associated Mgmt. Servs. v. Ruff, 2018 MT 182, ¶ 67, 392 Mont. 139, 424
P.3d 571 (quoting Restatement (Third) of Restitution and Unjust Enrichment § 2(2) (Am.
Law Inst. 2011), for the proposition that "a valid contract defines the obligations of the
parties as to matters within its scope, displacing to that extent any inquiry into unjust
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enrichment"). Though uncommon, an unjust enrichment claim may be available despite
the presence of a contract if "a party renders a valuable performance or confers a benefit
upon another under a contract that is invalid, voidable, or otherwise ineffective to regulate
the parties' obligations." Mont. Digital, ¶ 11 (citing Ruff ¶ 67) (internal quotations
omitted); see also N. Cheyenne Tribe, ¶ 36 (quoting Rawlings v. Rawlings, 240 P.3d 754,
763) ("unjust enrichment law developed to remedy injustice when other areas of the law
could not,' and, therefore, 'must remain a flexible and workable doctrine").
¶24 Here, the failure of ACI's contract rernedy against EPI, though properly pursued, is
certain. The District Court found EPI had defaulted on its loan obligations, defaulted in
the lawsuit, and had no other known assets other than the Property, which interest had been
extinguished. It has been proven judgment proof. Nor do we believe that entering the
bidding as a cash buyer in LOS's foreclosure sale, at which LOS prevailed with a credit
bid for $309,914, presented a viable remedy. This speculative option presented ACI no
guarantee of prevailing in the bidding, and would have required the expenditure of
substantial sums beyond what was owed to it. In these circumstances, ACI' s legal remedies
cannot be considered adequate. Further, while "a valid contract defines the obligations of
the parties as to matters within its scope, displacing to that extent any inquiry into unjust
enrichment," Ruff ¶ 67, here there was no contract between ACI and LOS to be pursued.
Yet, it was LOS, as found by the District Court, that "received the benefit of the labor and
materials provided by ACI."
¶25 To prevail on a claim of unjust enrichment, the aggrieved party rnust
establish that (1) a benefit was conferred upon the recipient by the claimant;
(2) the recipient knew about or appreciated the benefit; and (3) the recipient
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accepted or retained the benefit under circumstances rendering it inequitable
for the recipient to do so.
Mont. Digital, ¶ 10 (citing Ruff, ¶ 64). We agree with the District Court that ACI satisfied
the elements of the remedy. LOS argues that permitting the unjust enrichment claim would
"completely negate the purpose of the construction lien priority statutes, rendering them
futile," but we disagree. The priority statutes preserve the lender's critical first position for
purposes other than the particular construction lien, protecting its secured loan, and
entitling it to collection of attorney fees and costs in foreclosure. And, in the circumstances
here, where the lender has foreclosed on the property owner's interest, terminating the
construction liens, received full payment for its loan, attorney fees, and costs, and then
reaped a substantial unmerited financial benefit from the property's equity, arising from
the work of the contractor whose remedies have been lost or are inadequate, it is the lender
who has "double recovered." We conclude the District Court did not err in granting an
unjust enrichment award to ACI, and further conclude that the award was appropriate.
¶26 Affirmed.
Justice
We concur:
Chief Justice
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Justices
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