First Trust Co. v. City of Great Falls

No. 92-433
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
FIRST TRUST COMPANY OF
MONTANA, as Trustee,
Plaintiff and Respondent,
v.
CITY OF GREAT FALLS, MONTANA,
Defendant and Appellant.
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable Joel G. Roth, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
David V. Gliko, City Attorney, Great Falls, Montana
For Respondent:
Noman L. Newhall, Alexander, Baucus & Linnell,
Great Falls, Montana
Submitted on Briefs: December 11, 1992
.' Filed:
Decided: January 21, 1993
Chief Justice J. A. Turnage delivered the Opinion of the Court.
The City of Great Falls appeals a ruling of the District Court
for the Eighth Judicial District, Cascade County, granting summary
judgment to First Trust Company of Montana. We affirm.
The issue is whether the District Court erred in ruling that
a prior recorded mortgage lien securing IDR municipal bonds is
superior to a subsequent lien securing delinquent SID municipal
bonds.
In February of 1975, the City of Great Falls adopted a
resolution declaring its intention to create an industrial park.
The following January, the City held a public hearing on its
proposal to issue Industrial Development Revenue Bonds (IDR bonds)
to acquire property for such purposes. After the public hearing,
the City resolved that it was "in the best interests of the public
to issue $500,000 industrial revenue bonds to acquire and develop
land northeast of the City as an industrial park."
In June of 1976, the City passed a resolution authorizing the
issuance and sale of IDR bonds for the purchase of the property
which later became known as North Park. The amount of the bond
issue was later amended to $540,000.
Proceeds from the sale of the bonds were deposited in escrow
until they totalled $540,000, at which time they were disbursed to
the Economic Development Corporation, the owner of the North Park
property. On November 8, 1976, the Economic Development Corpora-
tion, in consideration of the payment of the bond proceeds,
conveyed the North Park property to the City of Great Falls by
warranty deed. Also on November 8, 1976, and as security for the
repayment of the IDR bonds, the City of Great Falls granted a
mortgage and indenture of trust to First Trust Company. The deed
to the City from the Economic Development Corporation was recorded
in the records of Cascade County on November 9, 1976, as was the
mortgage from the City to First Trust.
The City leased the North Park property to a corporation known
as Northeast Industrial Park, Inc., until each lot was sold. It
then passed title to the third-party purchasers of the lots.
In December of 1976, the City annexed the North Park property
into the City of Great Falls as the North Park Addition. Two
months later, the City authorized the issuance and sale of Special
Improvement District Coupon Bonds (SID bonds) to defray the cost of
construction of streets and utilities in North Park Addition. In
March 1977, the City created a Special Improvement District for the
construction of streets and utilities in North Park Addition.
Sometime after March 1, 1977, the SID bonds were sold and the
improvements were constructed and installed.
Repayment of the IDR bonds is in default. A principal balance
of $235,000, together with accrued interest, was due on July 1,
1986. As of April 1, 1992, $111,055.44 in interest had accrued and
was due on the outstanding principal. Repayment of the SID bonds
is also delinquent, in the sum of $186,915.09 as of April 1, 1992.
The estimated fair market value of the property remaining in North
Park is insufficient to secure repayment of both the IDR bonds and
the SID bonds.
First Trust Company, as the holder of the mortgage securing
repayment of the IDR bonds, brought this action seeking declaratory
judgment that its mortgage has a higher priority than the City's
lien securing the SID bonds. The District Court ruled that it
does, and the City appeals.
Did the District Court err in ruling that a prior recorded
mortgage lien securing IDR municipal bonds is superior to a
subsequent lien securing delinquent SID municipal bonds?
Section 71-3-113, MCA, provides that "[olther things being
equal, different liens upon the same property have priority accor-
ding to the time of their creation." The City argues that this
statute does not apply because of the statement in 5 7-12-4191,
MCA, that an SID lien "can only be extinguished by payment."
This, according to the City, establishes the superiority of SID
liens over all other liens.
However, this Court's interpretation of § 7-12-4191, MCA, in
Hartman v. Mimmack (1944), 116 Mont. 392, 154 P.2d 279, refutes the
City's argument. In Mimmack, the Court rejected the argument that
SID liens had priority over general tax liens due to the statutory
provision that SID1s can only be extinguished by payment. The
Court held that general tax liens and SfD's are not of equal rank.
Mimmack, 154 P.2d at 280. In a broad statement, the Court further
ruled:
On petition for rehearing appellant contends that
this Court's decision is in conflict with an express
statute, namely [what is now 5 7-12-4191, MCA].
The objection might be tenable if that were the only
statute to be considered. However, applicable
statutes must be taken into consideration.
The district was created on August 13, 1938, and its
obligations were thereafter issued. The latter, and the
liens for the assessments to Day them, were subiect
all existinq statutes .... [Emphasis supplied.]
Mimmack, 154 P.2d at 282.
In this case, both liens arise from municipal bonds issued for
public purposes. The City expressly determined that the purpose of
the IDR bond issue was "to create new jobs and an expanded tax base
by ... [clreating an industrial park on land to be controlled by
the City." The improvements funded by the SID bonds benefit the
real property in North Park. We hold that the liens are equal for
purposes of application of 5 71-3-113, MCA, and that application of
that statute is not precluded by 5 7-12-4191, MCA.
The City asserts that the intent to expressly except special
assessments and taxes from the lien of the IDR mortgage appears in
key documents of the IDR bond issue. It maintains that this
contractual intent of the parties overrides the general rules of
priority of liens. Specifically, the City cites the official
Statement used in connection with the sale of the IDR bonds, the
lease between the City and Northeast Industrial Park, Inc., and the
indenture on the mortgage.
The Official Statement provided:
The lien of the Indenture will be subject to Permitted
Encumbrances which will include the Lease, liens for
special assessments (including special assessmentsto pay
the SID Bonds) and taxes and encumbrances which in NIPC9s
opinion do not adversely affect the Project.
As First Trust points out, however, the Official Statement is
extraneous to the transaction whereby First Trust was granted a
lien to secure repayment of the IDR bonds. It is merely a document
prepared by or for the underwrites. It does not define the nature
and extent of the lien granted to First Trust.
The lease between the City and Northeast Industrial Park,
Tnc., states:
Permitted Encumbrances: this Lease, the Indenture, and,
as of any particular time, (A) liens for taxes and spe-
cial assessments not then delinquent, or delinquent but
being contested by the Tenant in accordance with Section
4.06 hereof. [Emphasis supplied.]
"Not then delinquentN does not apply to the SID1s here, which are
now delinquent. We conclude this lease provision has no effect in
this instance.
The indenture on the mortgage provides:
There is, however, expressly excepted and excluded from
the lien and operation of this Indenture the following
described property, now owned or hereafter acquired
(herein sometimes called Excepted Property): ...
B. Any
special assessments, taxes or payments in lieu of taxes
that may be received by the Municipality in respect of
the Project.
This provision relates to the disposition of payments for special
assessments or taxes received by the City, not to the relative
priority of the IDR mortgage lien and the SID lien.
The City also cites 5 7-12-4183(2)(b), MCA, which provides:
Delinquent special assessments shall be certified to the
county clerk of the county in which the city or town is
situated. The county treasurer must collect the delin-
quent special assessment and taxes in the same manner and
at the same time as taxes for general, municipal, and
administrative purposes are collected by him. In case
they are not paid, the entire property shall be sold in
the same manner as property is sold for taxes. ...
The City argues that the collection procedure for delinquent SID
assessments finally resulting in the issuance of a tax deed conclu-
sively sets up the ultimate priority of the SID lien and reduces
the IDR bond mortgage to a subordinate position. This is similar
to the City's argument concerning 5 7-12-4191, MCA. This Court's
holding in Mimmack refutes this argument.
The City contends that § 90-5-105(5), MCA, will be violated if
the IDR bond mortgage has priority over the SID lien. That section
provides:
No breach of any such agreement [mortgage made by a muni-
cipality] shall impose any pecuniary liability upon a
municipality or county or any charge upon their general
credit or against their taxing powers.
Imposition of liability will occur in this case if the SID's are
not paid and the liability to pay them reverts to the City as a
whole. This imposition of liability will be a direct result of
nonpayment of the SIDtsand only indirectly, at best, a result of
the IDR mortgage.
Finally, the City contends that the mortgage lien securing the
IDR bonds is not a purchase money mortgage and is otherwise not
entitled to priority under 5 71-3-114, MCA, because of the leasing
arrangement with Northeast Industrial Park, Inc. We need not rule
on this argument because we do not apply that statute.
We hold that under the facts of this case the IDR lien has
priority under 1 71-3-113, MCA, because it was created prior in
time to the SID lien. Our holding is limited to factual events
such as occurred here, where a governmental body creates a Special
Improvement District and issues SID bonds that are a lien on the
property of the District which is also subject to a prior IDR lien
created by a governmental body. We affirm the decision of the
District Court granting summary declaratory judgment to First Trust
Company of Montana.
Chief Justice
8
We concur:
Justices -
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the
following named:
David V. Gliko
City Attorney
P.O. Box 5021
Great Falls, MT 59403
Norman L. Newhall
Alexander, Baucus & Linnell
P.O. Box 2629
Great Falls, MT 59403
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA