Mountain West Bank v. Cherrad, LLC

Mountain West Bank v. Cherrad, LLC, 2013 MT 99 (April 16, 2013) (5-0) (Wheat, J.)

Issue: (1) Whether the estate’s appeal of the order finding its construction lien invalid is moot due to sale of the property to bona fide purchasers; (2) whether the district court erred in calculating the amount of money Cherrad owed the estate for costs related to the condo construction project.

Short Answer: (1) Yes, and (2) no.

Affirmed, and remanded for attorneys’ fees incurred on appeal

Facts: The parties developed condominiums at Lakeside Village on Hauser Lake. Several of the parties are LLCs owned by the Hales; Kinnaman was sole proprietor of CK Design. Kinnaman died in September 2007; his estate is a party. The Hales and Kinnaman discussed building a condo project, with Cherrad as the developer and Mountain West Bank as Cherrad’s banker. The bank made three loans to Cherrad for the project. The first was in April 2006 for $1.38 million; the second in July 2006 for $78,602, and the third in May 2007 for $152,319. All three loans were secured by the Hauser Lake property and guaranteed by two of the Hale LLCs and the Hales (hereinafter Hales).

The bank required Cherrad and CK Design to execute construction contracts. The contracts included provisions the parties did not follow, including biweekly invoices from CK to Cherrad that were to be accompanied by a partial release of liens, and progress payments to CK from Cherrad. Instead, the parties paid CK as the units sold.

CK fell behind on the project, and several subcontractors and suppliers filed liens. The bank refused to further finance the project unless CK and Cherrad shielded the bank from those liens. In May 2007, the parties executed a agreement in which CK agreed to subordinate its interest to the bank’s.

In July 2007, CK left the project, and in September 2007, the parties entered an agreement regarding outstanding debts on the entire project, totaling $180,731. The agreement provided that these debts would be paid before CK or Cherrad. Kinnaman committed suicide in September 2007. In November 2007, his estate recorded a $3.3 million construction lien on the Lakeside Village Condominiums. As a result Cherrad could no longer borrow money to complete the project.

Unit 2 sold for $700,000 in September 2007, and payments to subcontractors, suppliers and creditors totaled $223,898. Cherrad was paid $63,739 and the estate was paid $57,360. In October 2008, Unit 5 sold “as is” for $225,635, Unit 6 for $212,132, and Unit 3 for $325,000. CK received nothing from these sales. The bank filed suit against the Hales and the Kinnaman estate in January 2008, seeking foreclosure if its three loans made to Cherrad. Although Cherrad was not behind on any of its payments, the bank alleged it was insecure because of the estate’s lien. The bank asked the court to declare the estate’s lien inferior to the bank’s interests.

The bank and Hale moved for summary judgment against the estate, arguing the construction lien was invalid for failure to comply with § 71-3-535, MCA. The court granted the motions and declared the lien invalid.

Procedural Posture & Holding: After a bench trial, the court held that CK Designs was entitled to some payment for units 3, 5, and 6, and that based on the course of conduct of the parties, a fair amount was 10% of the sale price for those units, or $76,278. The court found that CK’s invoices supported the lien amount of $3.3 million, but that the invoices were “difficult to credit,” and the lien was not supportable given Kinnaman’s warrant that $180,731 was owed, and the practice of the parties regarding payment to CK.

The estate appeals the order granting summary judgment and the final judgment awarding the estate $76,278. The Supreme Court affirms.