No. 90-404
IN THE SUPREME COURT OF THE STATE OF MONTANA
THE TRUSTEES OF THE WASHINGTON-IDAHO-MONTANA
CARPENTERS-EMPLOYERS RETIREMENT TRUST FUND
AND THE TRUSTEES OF THE LABORERS - A.G.C.
PENSION TRUST OF MONTANA,
Plaintiffs and Appellants,
-vs-
THE GALLERIA PARTNERSHIP, a Montana general 4 (Jk; -;
,
partnership, et al., and MARBLE'S MOVING,
STORAGE & TRANSFER, a Montana corporation;
, , - 1991
and A.T. KLEMENS & SONS, a Montana cor~orationt
Defendants, Appellants and ~espondents.
THE GALLERIA PARTNERSHIP, et al.,
a Montana general partnership,
Csunterclaimants, and Third-party Plaintiffs,
THE TRUSTEES OF THE WASHINGTON-IDAHO-MONTANA
CARPENTERS-EMPLOYERS RETIREMENT TRUST FUND
and THE TRUSTEES OF THE LABORERS A.G.C.
PENSION TRUST OF MONTANA,
Counter-defendants, and
COMPASS GROUP, INC., a Washington corporation,
and OLD NATIONAL BANCORPORATION, a Delaware corporation,
Third-party Defendants.
MARBLE'S MOVING, STORAGE & TRANSFER, INC.,
a Montana corporation,
Cross-claimants and Third-party Plaintiff,
THE GALLERIA PARTNERSHIP,
a Montana general partnership, et al.,
Cross-Defendants, and
DANIEL W. COOK, KENT BRAY, MARVIN HESSLER,
DELVIN TROST, JAMES McKEAGUE, DONALD FISHER,
ROBERT C. PATTERSON, ARTHUR C. WEST,
JAMES W. McDERMAND and JAMES D. MILLER,
Third-party Defendants.
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable Leonard H. Langen, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
K. Dale Schwanke; Jardine, Stephenson, Blewett &
Weaver, Great Falls, Montana.
For Respondent:
William VanCanagan; Datsopoulos, MacDonald & Lind,
Missoula, Montana.
Submitted on Briefs: June 13, 1991
Decided: August 2, 1991
Filed:
Justice John Conway Harrison delivered the Opinion of the Court.
The parties appeal from a June 15, 1990, judgment of the
District Court of the Eighth Judicial District, Cascade County,
Montana, valuing certain foreclosed property at $1,100,000 and
awarding no interest on appellants1 loan accrued from the date of
the sheriff's sale to the date the new judgment was entered. We
affirm.
The parties present the following issues:
1. Did the District Court abuse its discretion in determining
the value of the Galleria property?
2. Was it appropriate for the Montana Supreme Court to
suspend the accrual of interest on appellants1 loan from the date
of the sheriff's sale until date of entry of the new judgment?
In the first appeal, Trustees of Washington-Idaho-Montana
Carpenters-Employers Retirement Trust Fund v. Galleria Partnership
(1989), 239 Mont. 250, 780 P.2d 608, this Court affirmed the grant
of deficiency judgment to the Trustees of Washington-Idaho-Montana
Carpenters-Employers Retirement Trust Fund (Trustees) and remanded
this case to the District Court for determination of the proper
amount of deficiency judgment based upon the fair market value of
the Galleria property. This Court held that the Galleria
Partnership members were jointly and severally liable on the
promissory note that they had signed individually and were liable
for the deficiency judgment. In addition, if the fair market value
of the Galleria property were determined to be greater than
$565,000, the price the Trustees bid on the Galleria property at
the sheriff's sale, this Court instructed the District Court not
to allow interest from the date of the sheriff's sale to the date
the new judgment was entered. Galleria Partnershiw, 239 Mont. at
269, 680 P.2d at 619.
In 1982, sixteen individuals executed a promissory note for
$1,200,000 payable to the Trustees. Under the terms of the
promissory note, the individuals undertook jointly and severally
to pay the principal sum of the note and accrued interest.
At about the same time, Galleria Partnership, composed of ten
of the individuals who signed the promissory note and three
additional persons, the Great Falls Investors, executed to Safeco
Title Insurance Company as trustee, a trust indenture and security
agreement to secure the principal sum of $1,200,000 and interest
according to the terms of the promissory note.
The real property secured by the trust indenture was a
warehouse, the Galleria building, which had been remodeled for
leasing to various business tenants. The building had been
purchased and remodeled in 1982 by Galleria Associates, managed by
Dan Cook.
Cook had obtained a $1,950,000 appraisal of the Galleria
property in its remodeled state to get a long-term loan to pay off
Galleria Associate's interim construction loan. Cook sought to
borrow the money from Compass, a wholly owned subsidiary of Old
National Bancorporation, specializing in handling loans of union
pension trust funds. Because Cook was advised by Compass that
Galleria Associates could not borrow from Trustees under the
provisions of the Federal Employee Retirement Income Security Act
(ERISA), he formed Galleria partnership, to which Galleria
Associates would eventually sell the property. Galleria
partnership qualified as a borrower under ERISA. Cook lined up the
thirteen individuals and the Great Falls Investors that held
varying fractions of interest in the partnership and eventually
signed the trust agreement.
Cook owned an interest in several businesses owned by the
tenants of the Galleria building. When Cook's economic situation
deteriorated, many of the tenants could not pay their rents on a
timely basis, making it difficult for Galleria Partnership to meet
the $14,916 loan payments each month. Compass was aware of the
reason for the late payments from Galleria Partnership and
continued to accept the payments and late charges.
By early December, 1984, the November 1984 loan payment had
not been paid. On December 11, 1984, Compass sent a default
notice, accelerating the entire loan balance of $1,225,668.81 and
demanding its payment within nine days. The default notice crossed
in the mail with the November payment. Compass returned the
payment with a letter reiterating its demand for the entire
balance.
The parties were unable to reach a settlement on the
deficiency, and on April 12, 1985, the Trustees filed an action to
foreclose on the trust indenture. The District Court, on October
29, 1987, granted summary judgment to the Trustees, determining
that the trust indenture constituted a first lien upon the real
property of Galleria Partnership, and issued a decree of
foreclosure, ordering the Cascade County Sheriff to sell the real
estate at public auction. The order of foreclosure reserved
specifically the question of any deficiency judgment.
The sole bid received was $565,000 from the Trustees.
Galleria Partnership appealed the validity of the deficiency
judgment. As noted above, this Court affirmed the District Court I s
judgment, and remanded this case to determine the fair market value
of the property at the time of the sheriff's sale, December 8,
1987. "Fair market valuegg
was defined as the 8fintrinsicgt
value of
the property at the time of sale without consideration of the
effect of foreclosure proceedings on the fair market value.
Galleria partners hi^, 239 Mont. at 265, 780 P.2d at 617.
On remand, at a hearing held March 2, 1990, the District Court
heard testimony from witnesses and received into evidence reports
prepared by various appraisers and an order of the State Tax Appeal
Board.
William Ferro, a certified Member of the American Institute
(MAI) Real Estate Appraisers from Great Falls, Montana, was the
sole witness for the Trustees. Ferro defined "fair market value"
as the "most probable price . . . for which the appraised property
will sell in a competitive market under all conditions requisite
to a fair sale with the buyer and seller each acting prudently,
knowledgeably and for self-interest, and assuming that neither is
under undue stress."
According to Ferro, three methods are used for valuation of
property. The first, the llincomen
approach, is an analysis of the
income-producing capabilities of a building, Itofprimary importance
to income producing property since investors and purchasers . . .
are buying that property based on how much income the property can
produce and what return they can get on their investment." The
other two methods of valuation are the "cost" approach, analyzed
by replacement cost less weconomic, functional, or physical
depreciation," and the l1marketWapproach, analyzed by comparisons
of the property with recent sales of other commercial properties.
Ferro said that a full narrative appraisal of fair market value
would include all three methods of valuing the property.
Ferrots 1987 and 1988 Appraisals
Ferro, on behalf of the Trustees, had made two appraisals of
the Galleria property. Ferro described the first appraisal as an
"e~aluation,~~
using a market approach, and the January 1988
appraisal as a fair market analysis using an income approach.
The first appraisal, dated November 9, 1987, set the value of
the Galleria property between $256,000 and $325,000, based on sales
of other commercial property in Great Falls. Ferro categorized
Great Falls office space as Itgoodquality,lt "average qualityt1lor
"lower quality,I' identifying the Galleria building as having "lower
quality8I office space. In calculating the appraisal figures, he
deducted the costs of clean-up, maintenance, and renovation,
ranging from $100,000 for general clean-up and maintenance to
$400,000 for major remodeling.
On January 1, 1988, Ferro updated his first appraisal for the
purpose of an appeal before the State Tax Appeal Board concerning
the Galleria property, arriving at a fair market value of $266,500.
Ferro used the income approach as the "most applicable approach
for investment proper tie^.'^
According to a September 22, 1989, order of the State Tax
Appeal Board, the parties stipulated to an appraised value of
$562,736 for the Galleria property.
Steven Hall, MA1 appraiser testifying for Galleria
Partnership, rated Ferro's $256,000 to $325,000 evaluation of the
Galleria property as very low for 1145,000square feet of gross
building areag1in 'Ithe heart of the central business district of
Great Fa1ls.l' He pointed out that Ferrots valuations were lower
than the $565,000 bid at the sheriff's sale, a value normally less
than fair market value; that the basement area was not non-
rentable, but previously had been rented for a substantial amount;
and that problems with water in the basement required only minor
repairs. In Hall's opinion, comparisons with the sales of other
commercial properties were invalid because of the few number of
sales and the uniqueness of the Galleria property.
Hall's 1990 Appraisal
Steven Hall, MA1 real estate appraiser from Missoula hired by
Galleria Partnership, testified that the 'tintrinsicnvalue of the
Galleria property as of December 1987 was $1,595,000. Hall said
that his appraisal was not a nvaluation,ll
requiring an analysis of
the property's market value, but an llevaluation,ndefining the
market under special guidelines. The special guidelines used by
Hall to find the tlintrinsiclt
value involved a t'considerationof the
replacement cost new of a property and then allowing for the
property's depreciation in the form of physical deterioration, its
functional obsolescence, if any, its anticipated serviceable life
and the general usefulness of the item involved."
The Trustees again called Ferro as a witness to critique
Hall's appraisal. Ferro questioned Hall's attributing all of the
above-average short-term depreciation of the ~alleriaproperty to
the foreclosure situation without taking into account poor
maintenance and the deteriorating Great Falls economy. Ferro said
that Hall's definition of Itintrinsicwvalue was "very narrow1'and
could not Itberelated to fair market value in any way.@'
Ferro testified that "intrinsic" value, as defined by the
American Institute of Real Estate Appraisers, is the amount of
money equivalent to the worth inherent in the thing itself; for
example, the intrinsic value of a bronze medal is the worth of the
tangible assets separated from the intangible assets. According
to the MA1 manual, "intrinsic value" is "[sltrictly a misuse of the
word value, since value depends upon extrinsic things; that is, the
attitude of persons toward the thing val~able.~~
Stevens1 1985 Ap~raisal
Allen Bloomgren, one of the partners of Great Falls Investors
and a member of the executive committee of Galleria Partnership,
testified for Galleria Partnership about events surrounding the
acceleration of the loan and foreclosure action. Bloomgren also
commented on an August, 1985, appraisal of the Galleria property
by Thomas Stevens, submitted into evidence by Galleria Partnership.
Stevens, an MA1 appraiser from Missoula, Montana, had
estimated the value of the property to be $925,000 according to the
income approach, $1,050,000 according to the cost approach, and
$925,000 according to the market value approach. The Iffinal
indication of valuen was $1,100,000. Bloomgren said that he had
expected the appraisal to be about $1,500,000 and opined that the
Stevens1 appraisal figures were too low, alleging various errors
in Stevens1 analysis.
Stanton1s 1985 Estimation Based on Stevens1 Appraisal
Galleria Partnership also submitted into evidence a November
11, 1985, critique of Stevens1 appraisal by Ben E. Stanton, an MA1
appraiser from Bozeman, Montana. Although Stanton felt that
Stevens accurately described the physical shortcomings of the
Galleria building and correctly analyzed the current economic
situation in Great Falls, he disagreed with Stevens1 optimistic
view of future economic growth in Great Falls. Consequently, he
could give vvnocredencevtto the values derived by Stevens in
analyzing the cost approach. Stanton noted that the Galleria
building was in a vvverysecondary location in the city with
surroundings tending more towards old industrial structures than
those desirable around an office building.Iv
These factors meant lower rental rates than estimated by
Stevens, resulting in a lower value using the income approach than
Stevens had estimated. Stantonvs own analysis of the income
approach set the value of the Galleria property at $565,000.
Stanton emphasized that this figure was not an appraisal of the
Galleria property, but only a "probable approach by this reviewer
based on the data in Mr. Stevensv report."
Other Testimony
Mick Miller, a Great Falls insurance agent for the company
carrying casualty insurance on the Galleria property, testified
that the amount of insurance carried on the Galleria building was
$1,950,000, an amount that Miller derived by calculating the
replacement cost, according to a manual provided by his company,
minus depreciation. On cross-examination Miller admitted that he
was not an MA1 appraiser.
Darryl Meyer, manager of the Galleria building until July,
1986, testified about the reluctance of prospective tenants to rent
space in the building after the foreclosure proceeding was
initiated. Meyer also described the general condition of the
building while he was manager.
At the conclusion of testimony, the District Court determined
the value of the Galleria property to be $1,100,000. From this
judgment, both parties appeal.
I
Did the District Court abuse its discretion in determining the
value of the Galleria property?
The Trustees maintain that the District Court's $1,100,000
valuation of the Galleria property has no reasonable relation to
its "fair value1' at the time of sale and that the District Court
should have sustained the $565,000 bid by the Trustees at the
sheriff's sale.
Galleria Partnership argues that the District Court erred by
failing to determine on remand the "intrinsic" value of the
Galleria property as of December 1987 and alleges that the District
Court failed to exercise its equitable powers to arrive at a fair
valuation. Specifically, ~alleriaPartnership maintains that the
Trustees had the burden of proof and failed to meet their burden
of producing evidence demonstrating the vintrinsicll
value of the
property. According to Galleria Partnership, the appraisal by Mr.
Hall, who testified that the value was $1,595,000, was the only
evidence of the intrinsic value of the Galleria property.
Generally, I1[t]he party who has the burden of proof shall
first produce his evidence; the adverse party will then produce his
evidence. I' Section 25-7-301(3) , MCA. I' [A] party has the burden
of persuasion as to each fact the existence or nonexistence of
which is essential to the claim for relief or defense he is
asserting." Section 26-1-402, MCA.
The District Court directed the Trustees to present their case
first, but did not determine which party had the burden of proof.
Galleria Partnership was the party upon which it was incumbent to
show that the fair market value was more than the price bid by the
Trustees. That the mortgagor has the burden of proof in showing
the fair market value in relation to the amount bid on real
property at a judicial sale is implied by our decision in Federal
Savings and Loan Insurance Corp. v. Hamilton (1990), 241 Mont. 367,
786 P.2d 1190. We concluded that a mortgagor could not invoke this
Court's equity jurisdiction to remand the case for determination
of fair market value of the property at the time of the sheriff's
sale when the mortgagors failed to produce evidence showing fair
market value. Hamilton, 241 Mont. at 371, 786 P.2d at 1193.
Whichever party had the burden of proof, the District Court,
in rejecting one witness estimation of intrinsic value, was not
bound to adopt the other party's appraisal. We remanded this case
in the first place because the determination of property valuation
is a factual issue which is within the province of the trial court
to decide. When reviewing findings of fact, this Court is
precluded from substituting its judgment for that of the trier of
fact, and cannot set aside the findings of a court sitting without
a jury unless the findings are "clearly erroneous." Rule 52(a),
M.R.Civ.P. Findings of fact are not clearly erroneous when based
upon substantial credible evidence. Downing v. Grover (1989), 237
Mont. 172, 178, 772 P.2d 850, 853.
Generally, a district court is vested with broad discretion
in valuation of real property and can adopt any reasonable
valuation supported by the record. In re Marriage of Becker (Mont.
1990), 798 P.2d 124, 128, 47 St.Rep. 1729, 1733; Lee v. Verex
Assurance, Inc. (Nev. 1987), 746 P.2d 140, 142. A district court
may average the values given by experts to arrive at an equitable
solution. In re ~arriageof Goodmundson (1982), 201 Mont. 535,
539, 655 P.2d 509, 511.
Galleria Partnership argues that the District Court cannot
average the values in this instance, when one party presented an
llintrinsicll
valuation of the ~alleriaproperty at the time of the
sheriff's sale and the other failed to introduce an llintrinsicll
value, but instead gave an llinherentll
value of the property.
The Trustees advocate using a definition of llintrinsicll
value
similar to the definition of llfairll "real1' value used by
or
isc cons in courts in determining whether the bid at a judicial sale,
when the only bidder is the mortgagee, is substantially inadequate.
The "fairw value is the ''price which a person willing and able to
buy the property would reasonably pay for it, not for purposes of
speculation, but for that use to which it has been or reasonably
may be put.'' First Wisconsin National Bank of Oshkosh v. KSW
Investments, Inc. (Wis. 1976), 238 N.W.2d 123, 128. As our
discussion will demonstrate, the definition of fair market value
in Galleria partners hi^ is adequate.
In Galleria Partnership, we defined It fair market valuew as
Ittheintrinsic value of the real property with its improvements at
the time of sale under judicial foreclosure, without consideration
of the impact of the foreclosure proceedings on the fair market
value.It Galleria Partnership, 239 Mont. at 265, 780 P.2d at 617.
Most importantly, we left the method of determining fair market
value to the District Court. Id.
The source of the definition of Itfairmarket valuettused in
Galleria Partnership was our decision in First State Bank of
Forsyth v. Chunkapura (1987), 226 Mont. 54, 734 P.2d 1203. In
Chunkapura, we discussed the provisions of California law relating
to sales under judicial foreclosure and the opinion of a California
court defining Itfair valueN as the term was used in the Code of
Civil Procedure. Chunka~ura,226 Mont. at 61, 734 P.2d at 1207
(citing Rainer Mortgage v. Silverwood Ltd. (Cal. App. 3 Dist.
1985), 209 Cal. Rptr. 294).
As noted in the ~alifornia decision, because foreclosure
sometimes depresses the value of property, even to the extent that
it becomes ttvalueless,n the mortgagor should receive the
Itunderlyingtt ttintrinsictt
or value of the property. Rainer, 209
Cal. Rptr. at 298. Under normal conditions the Itfairvalue,It or
ItintrinsicvaluetW of property will often coincide with its fair
market value, the value a willing purchaser will pay to a willing
seller in an open market. Id. The court explained:
This correlation is not fixed, however, and market value
is only one factor the court should consider when
determining "fair value.I1 ... l1[F]air valuew is to be
determined by all of the circumstances affectins the
intrinsic value of the property at the time of the sale.
This necessarily excludes the circumstances of the
foreclosure sale.
Rainer, 209 Cal. Rptr. at 298 (emphasis added).
The appraisers whose testimony or reports were received into
evidence described several different methods of valuing the
Galleria property and recounted in detail the many factors
affecting their valuations. Few of them relied purely on a fair
market value analysis.
Mr. Ferrols first evaluation was based primarily on a market
approach, comparing the Galleria property with other commercial
properties which had been sold recently in Great Falls. To arrive
at the final valuations of $256,000 to $325,000, Ferro deducted
amounts ranging from $100,000 to $400,000 for renovations. He
testified that his second appraisal used an income approach
analyzing the income-producing capabilities of the property.
Mr. Hall Is $1,595,000 evaluation was based on a cost approach,
estimating the replacement cost of the Galleria property less the
varying types of depreciation.
Mr. Stevens, who did not testify but whose 1985 appraisal was
submitted into evidence, had analyzed the worth of the Galleria
property using all three approaches and had arrived at a final fair
market value of $1,100,000. Based on his analysis of economic
factors affecting the income approach, Mr. Stanton set a value of
$565,000.
The experts assessed the weaknesses of the other appraisers'
methods and bases of valuations. In addition, Galleria Partnership
presented witnesses who testified that the repairs or renovations
necessary to the Galleria building at the time of the foreclosure
sale were not nearly as extensive as envisioned by Ferro.
Our review of the record convinces us that the District Court
had heard all of the circumstances affecting the valuation of the
Galleria property. With such disparate figures, the District Court
was entitled to discount the appraisals of the Trustees' expert,
Mr. Ferro, and Galleria Partnership's expert, Mr. Hall. Since the
method of valuation was left to the District Court, we find no
abuse of discretion in its rejection of both values as unfair
estimations of the intrinsic value of the Galleria property.
The District Court states in its judgment that it did not rely
on Stevens1 appraisal in setting the value of the property at
$1,100,000, the same final figure for which Stevens had appraised
the property in 1985. Nonetheless, the Stevens1 appraisal, as a
thorough analysis of all three approaches to valuation, comprises
substantial evidence supporting the ~istrict Court's decision.
Having been completed after the Trustees foreclosure action was
filed, but two years before the foreclosure sale while the Galleria
building was still occupied and maintained, the Stevens' appraisal
may approximate most closely the value of the Galleria property at
the time of the sheriff's sale, without taking into account the
impact of the foreclosure proceedings.
In addition, the $565,000 figure which the Trustees claim
represents "a fair determination of intrinsic value," is based upon
a critique of Stevens' appraisal by Mr. Stanton, rather than an
appraisal. Stanton emphasized in his report that the $565,000
estimate of value according to the income approach was not an
appraisal, but merely a "probable approach" based on data from
Stevens' report. The District Court did not abuse its discretion
in disregarding the $565,000 value since it was the only
approximation of the value of the Galleria property which was not
based on an appraisal.
We hold that the District Court relied on substantial,
credible evidence in determining the fair market value of the
Galleria property, without taking into consideration the effect of
judicial foreclosure proceedings on the property's value.
I1
Was it appropriate for the Montana Supreme Court to suspend
the accrual of interest on appellants' loan from the date of the
sheriff's sale until date of entry of the new judgment?
The Trustees attack this Court's directive in Galleria
Partnership to suspend the interest accruing on the loan from the
date of the sheriff Is sale to the date of entry of the new judgment
as contrary to prevailing law. See Galleria Partnership, 239 Mont.
at 269, 780 P.2d at 619.
In relation to interest on judgments the Rules of Appellate
Procedure provide:
If a judgment for money in a civil case is affirmed,
whatever interest is allowed by law shall be payable from
the date the judgment was rendered or made in the
district court. If a judgment is modified or reversed
with a direction that a judgment for money be entered in
the district court, the mandate shall contain
instructions with respect to allowance of interest.
Rule 31, M.R.App.P. Although the Trustees are correct in asserting
that the District Court's judgment was not reversed, the judgment
was modified in respect to the amount allowed for the deficiency.
since 'tinstructionswith respect to allowance of interest," as
mandated by Rule 31, were provided, the directive to suspend
interest until entry of the new judgment if the fair market value
were determined to exceed $565,000 was appropriate and in
accordance with the Rules of Appellate Procedure.
Af firmed .
We concur: