No. 89-204
IN THE SUPREME COURT OF THE STATE OF MONTANA
1989
FIRST MONTANA TITLE COMPANY OF
BILLINGS, a corporation,
Plaintiff and Respondent,
-vs-
NORTH POINT SQUARE ASSOCIATION, a
Utah Limited partnership, AMERICAN
GUARANTY LIFE INSURANCE COMPANY, an n
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Oregon corporation; et al., Z
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Defendants and Appellants. Zm
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APPEAL FROM: District Court of the Thirteenth Judicial ~ s t & i c S o
In and for the County of Yellowstone, z r w
The Honorable G. Todd Baugh, Judge presiding: F
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COUNSEL OF RECORD: ;
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For Appellant: -4
Joe Gerbase argued; Anderson, Brown, Gerbase, Cebull,
Fulton, Harman & Ross, P.C., Billings, Montana
For Respondent :
Rodney T. Hartman argued; Herndon, Hartman, Sweeney &
Halverson, (First Interstate Rank of Billings),
Billings, Montana
Donald MacDonald IV,(First Interstate Bank of iss sou la),
Missoula, Montana
Jo Mickelson argued; Dorsey & Whitney; and Charles W.
Hingle, (Interstate Prod. Credit Assoc.) Billings,
Montana
David Hoefer, Deputy County Attorney, Billings,
Montana
Submitted: September 13, 1989
Decided: November 21, 1989
Filed:
Justice John C. Sheehy delivered the Opinion of the Court.
We determine in this case, principally as a mat.ter of
contract law, that it was the duty of the escrow holder here
to clear title to the parcel of land involved, and then to
distribute the balance of the funds accruing from the sale of
the land to the holders of the two underlying mortgages. In
doing so, we affirm the judgment of the District Court,
Thirteenth ~udicial District, Yellowstone County, though on
somewhat different grounds, holding in favor of First
Interstate Bank of ~illings, First Interstate Bank of
Missoula, and Interstate Production Credit ~ssociation. The
parties against whom such judgment is effective are American
Guaranty Life Insurance Company and Commerce Mortgage
Company.
The issue posed by appellants in this case is whether
judgment liens, which come into effect between the time a
landowner executes and records an option for the sale of his
lands and the time the optionee exercises the option, take
priority over the recorded option. However, we find the
controlling issue to be the legal effect of the escrow
agreement executed by the parties.
Loyd Kimble was the owner of a parcel of land in
Yellowstone County. He borrowed $3,000,000 from Commerce
Mortgage Company for which he executed to Commerce Mortgage
Company a note and mortgage of the land parcel on May 12,
1980. The note and mortgage were assigned by Commerce
Mortgage Company to American Guaranty Life Insurance Company
and the assignment was recorded on June 4, 1981. Loyd Kimble
also borrowed an additional $150,000, using the same land
parcel as security, and executed a note and mortgage to
Commerce Mortgage Company which mortgage was recorded on July
1, 1981.
Loyd ~ i m b l e defaulted on his loan payments, and the
mortgages went into default. American Guaranty and Commerce
Mortgage Company obtained judgment against Kimble on the
mortgage loans on July 3, 1986, which judgment was subject to
appeal. No sheriff's sale of the land parcel occurred.
On July 21, 1986, Kimble entered into an option
agreement for purchase of the parcel of land by North Point
Square ~ssociatesand G. Walter Gasser, the latter as trustee
for Walter Gasser Associates, Inc., the option being
exercisable on or before January 24, 1987. An abstract of
the option was recorded on July 24, 1986 in the records of
Yellowstone County.
An escrow agreement was entered into between Loyd
Kimble, North Point Square Associates, G. Walter Gasser,
First Montana Title Company as escrow agent, and American
Guaranty Life Insurance Company and Commerce Mortgage
Company. The escrow agreement provided among other things
that the escrow agent would hold a partial release of lis
pendens filed in the prior foreclosure action, a release of
the judgment lien obtained in the prior foreclosure action, a
release of American Guaranty ~ i f e Insurance Company's
mortgage and a release of the mortgage of Commerce Mortgage
Company, all in order to clear their respective interests in
the parcel of land if the option was exercised. In
consideration therefor, both ~mericanGuaranty ~ i f e
Insurance
Company and Commerce Mortgage Company were to receive the
proceeds of the sale upon exercise of the option as provided
in paragraph 6 of the escrow agreement, hereinafter set
forth.
Before the option was exercised, however, on August 22,
1986, ~ i r s tInterstate Bank of ~illingsobtained a judgment
which was a lien upon the parcel of land in the sum of
$77,041.01. First Interstate Bank of Missoula obtained a
judgment lien upon the parcel of land for $27,000 on
September 30, 1986. Interstate production Credit ~ssociation
obtained a third judgment lien against the parcel of land on
January 1, 1987, as stipulated by the parties.
On January 21, 1987, North Point Square Associates and
G. Walter Gasser, timely exercised the option by delivery of
$336,674.05 to First Montana Title Company, the escrow agent.
All parties stipulated to allow the transfer of title to the
parcel of land to the optionee free and clear of all liens
and encumbrances so that the optionee could proceed with the
development of the land. This was done with the
understanding that there would be no waiver of the respective
claims by the parties, and that the ultimate resolution of
their claims would be against the $336,674.05 held in
escrow. The money was placed in an interest-bearing account
pending the outcome of this lawsuit.
Paragraph 6 of the escrow agreement executed by the
parties provided as follows:
Escrow agent is hereby authorized to use said funds
to clear title to the property and to then
distribute the balance of the funds to the two
underlying mortgagees as follows:
(a) To American Guaranty Life Insurance Company--
97%
(b) To Commerce Mortgage Company--3%
When the option agreement had been exercised and the
money received, the escrow holder, First Montana Title
Company of Billings, took the position that under paragraph 6
it must pay off the judgment liens before distributing the
balance of the funds to ~merican Guaranty ~ i f eInsurance
Company and to Commerce Mortgage Company. The latter two
companies disagreed with this interpretation of the escrow
agreement. Thereupon First Montana Title Company of
Billings, as escrow holder, interpleaded the funds in the
District Court, naming all of the interested parties as
defendants in the cause, and requesting the District Court to
determine which parties were entitled to the funds and in
what amounts. First Montana Title Company of Billings has
since then been dismissed from the lawsuit.
The position of American Guaranty Life Insurance Company
and Commerce Mortgage Company is that an option which is
recorded prior to the establishment of judgment liens on the
same property gives the holder of the option a priority over
such subsequent judgment liens. They contend that the escrow
agreement had the effect of an assignment for consideration
prior to the entry of the judgments and that therefore under
the escrow agreement the funds should pass to American
Guaranty and Commerce Mortgage Company free of said judgment
liens. They further contend that the District Court
improperly applied mechanic's lien law to judgment liens in
order to hold against them.
The District Court granted a motion for summary judgment
in favor of the judgment lienholders and against the
mortgagees. Judgment was entered thereon and this appeal by
the mortgagees resulted.
The mechanic's lien argument of American Federal a i rd
Commerce Mortgage Company stems from the use by the District
Court of Leigland v. ~cGaffick (1959), 135 Mont. 188, 338
P.2d 1037, a mechanic's lien case, as authority for the
proposition that a mere right to acquire an interest does not
constitute an encumbrance or a transfer of title. The
District Court did determine that an option does not transfer
legal or equitable title until it is exercised, but the
District Court also found that the intervening judgment liens
attached to the landowner's real property interest, and that
these liens have remained a cloud on the title.
The mortgagees also rely on Ide v. ~ e i s e r (1890), 10
Mont. 5, 11, 24 P. 695, 696, to the effect that the optionee
does receive something of value by obtaining an option, that
is the right to call for and receive lands if he elects under
the option.
In reaching its conclusion nonetheless, the District
Court did rely on contract law. It determined that the
option contract and the escrow agreement were executed
contemporaneously and referred to the same subject matter,
and therefore should be construed together as one instrument.
Section 28-3-203, MCA. The District Court noted that there
was a condition precedent to the payment of the sale of
proceeds: The mortgagees, through the escrow agent, had to
deliver to the optionee good and marketable title.
The controlling issue in this case is the contractual
effect of the language in the escrow agreement. If the
escrow holder was required to "clear title" before the
mortgagees could receive the balance of the funds, the
relative priorities between a recorded option and judgment
liens become irrelevant. We hold it was the escrow holder's
duty to clear title for the optionee under the escrow
agreement.
It is clear to us that the decision in this case should
turn on the language of the escrow agreement, as a matter of
contract. Under paragraph 6 above quoted, the escrow agent
was authorized by all of the parties to the agreement to "use
said funds to clear title to the property," and then to
distribute the proceeds to the mortgagees.
In Ogg v. Herman, et al. (1924), 71 Mont. 10, 15-16, 227
P. 476, 477, this Court said:
While provision is made that plaintiff shall
furnish an abstract showing clear title, good
title, and a marketable title, it is apparent that
these terms were used interchangeably, and that
they are in fact synonymous. A clear title means
that the land is free from encumbrances. (citing
authority.) A good title is one free from
litigation, palpable defects and grave doubts,
comprising both legal and equitable titles, and
fairly deducible of record. (citing authority.) A
clear title means a good title (citing authority)
and a good title means a marketable or merchantable
title. (Citing authority.) A contract to convey
in fee simple, clear of all encumbrances, implies a
marketable title (citing authority), and a
marketable title is one of such character as
assures to the purchaser the quiet and peaceable
enjoyment of the property and one which is free
from encumbrances. (Citing authority.)
This Court further noted in Gantt v. Harper (19281, 82
Mont. 393, 405, 267 P. 296, 298, the following:
Webster's definition of the word "clear" as here
employed is "free from encumbrance, obstruction,
burden, limitation," etc., and the word "title," in
the sense here used, "the union of all the elements
which constitutes ownership, at common law, divided
into possession, right of possession, and right of
property, the last two now, however, being
considered essentially the same."
In our opinion, the words, "clear title" as
employed in the plaintiff's letter, denied
admission in evidence, means title to the property
free from any encumbrance, burden or limitation,
uniting all the elements constituting ownership,
including right of possession and right of
property--i.e., fee-simple title. Such was in
effect the contract upon which the defendant agreed
to pay a brokerage commission on the sale of the
property, and a tender of the performance was
complete and in accordance with the defendant's
terms.
The contractual duty of the escrow agent in this case,
agreed to by all the parties, was that the escrow holder
should distribute the funds so as to deliver clear title to
the optionee upon the exercise of the option. The judgment
liens were indeed clouds on the title, and clear title could
not be delivered until those judgment liens were satisfied
and removed.
Therefore, we affirm the judgment of the ~ i s t r i c tCourt.
/
F
Justice
Judge, sitting f& the