No. 92-208
IN THE SUPREME COURT O F THE STATE O F MONTANA
1993
D. BARRY SCHRAMMECK
Plaintiff, Counter-Defendant
and Appellant,
-v-
FEDERAL SAVINGS & LOAN INSURANCE C O R P .
et. al.
Defendants, Counter-Claimants
and Respondents.
A P P E A L FROM: District Court of the Twentieth Judicial District,
In and for the County of Lake,
The Honorable C. B. ~ c N e i l ,Judge presiding.
COUNSEL O F RECORD:
For Appellant:
Alan J. Lerner (argued), Law o f f ices of Alan J.
Lerner, Kalispell, Montana
For Respondent:
Mark L. Stermitz (argued for ~idelityNatrl Title
Ins. Co), Warden, Christiansen, Johnson & Berg,
Kalispell, Montana; Colleen E. Ambrose (argued for
FSLIC), Sullivan & Tabaracci, Missoula, Montana
submitted: January 12, 1993
Decided: May 19, 1993
Filed:
Justice R. C. McDonough Delivered the Opinion of the Court.
Schrammeck appeals two summary judgment orders of the
Twentieth Judicial District Court, Lake County, certified as final
pursuant to Rule 54(b), M.R.Civ.P. Reversed and remanded.
This case originated with a partnership dispute concerning the
ownership of Woods Bay Marina on Flathead Lake and loans made using
the property as collateral. Alton and Lee Ann Bowers (the Bowers)
and Clark and Roxann Post (the Posts) were the record title owners
of property consisting of Woods Bay Marina. In the original cause,
filed in June of 1982, Schrammeck contended that he was a partner
with Alton W. Bowers (Bowers) and Clark G. Post: (Post), that the
Marina was partnership property, and that his former partners
excluded him from the partnership. A prior judgment by Judge
Henson in the Fourth Judicial District Court, described below,
settled this controversy among the partners. The dispute now
centers on a loan transaction that the Bowers and the Posts made
using Woods Bay Marina as collateral.
The pertinent issues on appeal are:
1. Whether the District Court erred by concluding that the Woods
Bay Marina property did not belong to a partnership consisting
of Schrammeck, Bowers and Post.
2. Whether the District Court erred by concluding that the Bowers
and the Posts could encumber any portion of Woods Bay Marina
without Schrammeck's consent.
3. Whether the District Court abused its discretion by denying
Schrammeck leave to file a second amended complaint and
supplemental pleading.
4. Whether the District Court erred by declining to award
attorney fees to Schrammeck for successfully defending against
the foreclosure of the trust indenture.
In Schrammeckls June 1982 complaint, he alleged that he
entered an oral agreement with Bowers and Post in July 1980 to
purchase, restore, and operate Woods Bay Marina as a partnership.
Schrammeck further alleged that he worked at and managed the Marina
from July 1980 until he was excluded from the partnership in late
October 1980. Schrammeck filed and recorded a lis pendens in
connection with that suit on June 17, 1982.
About a year after Schrammeck recorded the lis ~endens,
Bowers
approached the Montana Savings & Loan Association of Kalispell (the
S & L) for a loan, using the Woods Bay Marina as collateral.
Representatives of the S & L knew about the lis ~endens,and loan
officer John Prather recommended disapproval of the loan because
ownership of the property was in dispute.
Prather informed Bowers that the loan request had not been
approved because of the lis end ens. Bowers then told Prather that
Schrammeck was not a partner or owner of Woods Bay Marina. Bowers
insisted that Schrammeck's suit was a nuisance suit, and that
Bowers and his wife owned the property along with the Posts.
Prather replied that the S & L still would not make the loan
because of the lis pendens.
Bowers then went to Fidelity National Title Insurance Company
(Fidelity) and convinced it to insure the loan on the condition
that the Bowers and the Posts hold Fidelity harmless and indemnify
it for any losses it might incur due to Schrammeck's claim
underlying the lis vendens.
Based on Fidelity's insurance policy, the S & L agreed to loan
the Bowers and the Posts $295,000 with the Marina as collateral.
On June 15, 1983, the Bowers and the Posts executed a financing
statement, evidencing S & L's security interest in the personal
property of Woods Bay Marina. They signed a promissory note for
$295,000 at the same time. They also executed and recorded a "deed
of trust" purporting to assign the Woods Bay Marina real property
to the S & L as security for the loan.
We have examined this "deed of trust" and determined that it
is a trust indenture as defined in § 71-1-303(4), MCA: therefore,
this opinion will refer to it as a trust indenture. This opinion
will refer to the financing statement, the note, and the trust
indenture collectively as the loan documents.
On November 21, 1983, Judge Henson, in the Fourth Judicial
District, entered an order and judgment (hereafter Judge Henson's
order) on the merits of Schrammeck's cause against Bowers and Post.
Judge Hensonrs order declared Schrammeck the owner of an undivided
one-third interest in the business, personal property and real
property known as Woods Bay Marina.
Judge Henson1s order also gave Bowers and Post the right to
discharge and void Schrammeck's interest by making payments before
specified dates. If the payments were not made, the order
judicially recognized Schrammeck's one-third partnership interest
4
in the property and business. Schrammeck did not receive any
payments and Judge Henson's order is not on appeal.
On June 14, 1984, Schrammeck filed suit against Bowers, Post,
and the S & L. Among other things, Schrammeck alleged several
torts and sought to dissolve and wind-up the partnership.
The Bowers and the Posts quitclaimed their interests in the
Woods Bay Marina real property to Schrammeck on July 25, 1984, and
also signed all of the Marina's personal property over to
Schrammeck. Two days later, pursuant to a motion by Schrammeck,
the court dismissed Bowers and Post from the suit.
In October 1984, Schrammeck filed an amended complaint against
Fidelity and the S & L, seeking a court order declaring the trust
indenture and the S & Ls
' security interest in the personal
property invalid. The complaint also alleged that the S & L and
Fidelity committed several torts against him.
In August of 1985, the Federal Home Loan Bank Board declared
the S & L insolvent and appointed Federal Savings & Loan Insurance
Corporation (FSLIC) as receiver. The defendants in this case are,
therefore, FSLIC and Fidelity.
FSLIC and Fidelity filed third-party complaints and counter-
claimed against Schrammeck, the Woods Bay Marina Partnership, and
its individual partners, Schrammeck, Bowers and Post to foreclose
on the trust indenture.
The parties filed several motions for summary judgment and the
District Court entered two separate orders on the motions. The
court certified these orders as final and they are before this
Court on appeal.
In the summary judgment order dated August 30, 1991, the
District Court acknowledged that Bowers, Post, and Schrammeck were
partners in Woods Bay Marina. The court determined that each of
the partners had the authority to bind the Woods Bay Marina
Partnership in the usual course of business. The court ruled that
the Bowers and the Posts did not exercise their authority as
partners, and thus did not bind the partnership to the promissory
note. The court also ruled that neither Schrammeck nor the
partnership were debtors under the security agreement or grantors
under the trust indenture.
In the summary judgment order dated January 7, 1992, the
District Court ruled that Woods Bay Marina was not partnership
property, but rather, Bowers, Post, and Schrammeck had individual
interests in the property. The court also acknowledged its
previous determination that the Bowers and the Posts had authority
to bind the Woods Bay Marina Partnership, but determined they had
not exercised their authority.
This opinion will refer to more detailed facts as they are
pertinent to the discussion.
Our review of the District Court's conclusions of law is
plenary: we determine whether the court's conclusions are correct.
Steer Inc. v. Dept. of Revenue (1990), 245 Mont. 470, 474-75, 803
P.2d 601, 603.
Did the District Court err by concluding that the Woods Bay
Marina property did not belong to a partnership consisting of
Schrammeck, Bowers and Post?
Judge Henson's order disposes of this issue. In November of
1983, Judge Henson ruled that:
2. The Plaintiff [Schrammeck] is the owner of an undivided
one-third interest in the business and property known as Woods
Bay Marina, Woods Bay, Lake County, Montana.
3. Defendants [Bowers and Post] may discharge and void
Plaintiff's ownership interest and claims ...
the Plaintiff [certain sums by certain dates].
by paying to
In the event the Defendants fail to perform in the above-
described fashion in a timely manner ... paragraph 4 of this
Order and Judgment shall become effective and controlling.
4. In the event the Defendants fail to make vavment as
stated in warasrawh 3 in a timely fashion, in addition to his
one-third ownership interest as stated in paragraph 2 of this
Order and Judgment, the Plaintiff shall be deemed a one-third
partner in the wrowertv and business described in varasravh 2.
The partnership shall be deemed dissolved as of November 21,
1983: the Plaintiff shall be deemed to have been excluded from
the partnership and enjoyment of the partnership property ..
.and, the Defendants and warties actina in vrivitv with them
shall be deemed to have had exclusive control. enioyment and
possession of the entire vartnershiw vrowertv and have
continued the business without windins the same up or
liauidatins the same, to the exclusion of the Plaintiff since
October 16, 1980. In the event this paragraph becomes
effective, the Plaintiff shall have all rights, causes of
action and remedies regarding dissolution, accounting,
liquidation and duties owed him as a partner pursuant to the
laws of the State of Montana. In the event this varasravh
comes into effect. the Plaintiff's one-third partnership
interest in the vrowertv and business identified herein is
herebv iudiciallv declared. (emphasis added).
Bowers and Post did not make the required payments to
Schrammeck, therefore paragraph 4 of Judge Henson's order and
judgment became effective. The effect of the order was to
judicially declare Schrammecktspartnership interest in the Woods
Bay Marina, including both the realty and personalty. The order
also declared that he had been excluded from the partnership since
October 16, 1980 and alluded to his right to wind up the
partnership after the dissolution. See 5 35-10-601, MCA, et seq.
(explaining the rights and duties associated with dissolution and
winding up of a partnership). Thus, according to Judge Henson1s
order, the Woods Bay Marina real and personal property belonged to
a partnership consisting of Bowers, Post, and Schrammeck. Judge
Hensonls order was not appealed; therefore, we conclude that the
District Court erred by determining that the Woods Bay Marina was
not partnership property.
11.
Did the District Court err by concluding that the Bowers and
the Posts could encumber any portion of the Woods Bay Marina
property without Schrammeckls consent?
As stated above, the Bowers and the Posts were the record
owners of the Woods Bay Marina which was partnership property.
They executed a trust indenture purporting to assign the property
to the S & L as security for a loan. The District Court ruled that
the Bowers and the Posts had authority to bind the partnership, but
they did not exercise it when encumbering the Woods Bay Marina
property. The court determined that the Bowers and the Posts,
respectively, encumbered their individual one-third interests in
the property.
Because the Woods Bay Marina was partnership property,
however, the Bowers and the Posts could not assign any individual
interests in the property. "A partner is co-owner with the other
partners of specific partnership property holding as a tenant in
partnership." Section 35-10-502 (1), MCA. "The incidents of
tenancy in partnership are such that a partner's right in specific
partnership property is not assignable except in connection with
the assignment of rights of all the partners in the same property."
Section 35-10-502(2)(b), MCA. This rule applies regardless of the
formal legal manner in which the property is held. See Matter of
Estate of Palmer (1985), 218 Mont. 285, 290-93, 708 P.2d 242, 245-
47.
Woods Bay Marina, including both the realty and the
personalty, was partnership property. Therefore, even though the
Bowers and the Posts were the record title holders, they could not
assign their individual interests in it, except in connection with
the assignment of all of the partners1 rights in the property.
Thus, the District Court erred in determining that the Bowers and
the Posts had authority to bind the partnership but encumbered only
their individual one-third interests.
FSLIC and Fidelity argue that even if the Bowers and the Posts
did not encumber their individual interests, they encumbered the
partnership's interest in the property. Schrammeck argues that the
Bowers and the Posts did not have authority to encumber the
partnership's property without consent of all the partners, and
therefore, the purported encumbrances had no effect. The District
Court ruled in its August 1991 summary judgment order that the loan
documents did not bind either Schrammeck or the Woods Bay Marina
Partnership consisting of Bowers, Post, and Schrammeck.
The first step in analyzing whether the loan documents bound
the partnership is to determine whether on their face they purport
to bind the partnership. FSLIC argues that the language of the
loan documents is ambiguous and gives rise to a reasonable
inference that the obligation was a partnership debt. FSLIC
contends that the ambiguities should have been clarified by parol
evidence. We conclude that parol evidence was unnecessary for that
purpose, however, because the loan documents are not ambiguous and
on their face purport to finance the Woods Bay Marina project and
bind the Woods Bay Marina Partnership.
The trust indenture incorporates by reference the note and the
financing statement. The note names the debtors as follows:
81Alton Bowers, Lee Ann Bowers, husband and wife ( 5 0 % ) ; and Clark
W.
G. Post, Roxann Post, husband and wife ( 5 0 % ) ; Partners hereinafter
referred to as obligors.~~The financing statement identifies the
debtors as "Alton W. Bowers and Lee Ann Bowers, his wife and Clark
G. Post and Roxann Post, his wife, dba: Woods Bay Marina."
The trust indenture identifies the grantors as follows:
"Alton W. Bowers & Lee Ann Bowers, husband and wife, and Clark G.
Post & Roxann Post, husband and wife, jointly and individually, of
Woods Bay Marina, Bigfork, Montana. The trust indenture also
states: "The indebtedness evidenced by the Note is intended to
finance the project known as Woods Bay Marina." Thus the loan
documents, read as a whole, purport to bind the Woods Bay Marina
Partnership, which Bowers represented to the Bank as consisting of
only the Bowers and the Posts.
We note that the Bowers executed the promissory note, the
financing statement, and the trust indenture granting the Woods Bay
Marina real property to the S & L. Alton Bowers signed these loan
documents as attorney in fact for Clark and Roxann Post.
The next step in analyzing whether the loan documents bound
the partnership is to determine whether Bowers had authority under
9 35-10-301(1), MCA, to enter the loan transactions.
Although the Bowers and the Posts were the record title
holders of the Woods Bay Marina, it was partnership property of the
Woods Bay Marina Partnership, which consisted of the three
partners--Bowers, Post, and Schrammeck.
Where title to real property is in the name of one or more or
all the partners ... a conveyance executed by a partner in
the partnership name or in his own name passes the equitable
interest of the partnership, provided the act is one within
the authoritv of the ~artner under the wrovisions of 35-10-
301(1).
Section 35-10-302(4), MCA. Therefore, the trust indenture is a
valid assignment of the partnership's interest in the property only
if it was executed within Bowers1 authority under the provisions of
5 35-10-301(1), MCA. That statute states:
Every partner is an agent of the partnership for the purposes
of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for
apparently carrying on in the usual way the business of the
partnership of which he is a member binds the partnership
unless the partner so actins has in fact no authoritv to act
for the DartnershiD in the particular matter and the werson
with whom he is dealins has knowledse of the fact that he has
no such authoritv.
Section 35-10-301(1), MCA (emphasis added).
The first step in analyzing whether Bowers acted within the
authority of that statute is to determine whether he was apparently
carrying on partnership business in the usual way when he executed
the loan documents to obtain a loan to pay partnership debts. We
need not determine whether using partnership property as collateral
without the permission of all of the alleged owners of the property
is appropriate when the ownership of the property is in dispute and
a notice of lis vendens has been recorded. Because, as discussed
below, Bowers had no authority to enter the loan transactions on
the partnership's behalf and the S & L knew it.
The second step is to determine whether Bowers in fact had no
authority to execute the loan documents on behalf of the
partnership. Bowers signed as attorney in fact for the Posts.
However, he did not have Schrammeckls permission to execute the
loan documents.
Indeed, Bowers represented to the S & L that Schrammeck was
not a partner and Schrammeck therefore, was not included as a party
to the loan transaction documents. Schrammeck by then had filed
suit alleging that Bowers and Post had excluded him from the
partnership and disputing the ownership of Woods Bay Marina.
Schrammeck had also recorded a lis vendens providing notice of the
pending suit. Under these circumstances, Bowers had no
authority to execute documents to obtain a loan, for a partnership
including Schrammeck, using the disputed property as collateral.
Thus, the execution of the loan documents was unauthorized.
A partner can still bind the partnership to an unauthorized
transaction if all of the other partners ratified the loan either
explicitly or by knowingly receiving or retaining the benefits of
the unauthorized loan transaction. See Restatement of Agency
(Second) §§ 98-99. However, the respondents did not argue that
Schrammeck ratified the loan transaction. Furthermore, although
the record shows the purposes for which the S & L disbursed the
loan, it does not indicate what actually became of the money, and
there is insufficient evidence in the record to determine whether
Schrammeck knowingly retained the benefits of the loan.
The third step is to determine whether the S & L knew that
Bowers did not have authority to enter the loan transactions when
it issued the loan. See § 35-10-3Ol(l), MCA. As the following
discussion reveals, the S & L did know that Bowers acted without
authority when it executed the loan documents and issued the loan.
Schrammeck's lis end ens gave notice that he had filed an
action against Bowers and Post to dissolve and wind up a
partnership dealing with the Woods Bay Marina real property, to
enforce certain contract rights, and to secure a judgment on the
dissolution and contract. Schrammeck prevailed in the suit
underlying the lis vendens; therefore, the parties are bound by
Judge Henson's order declaring Schrammeck's partnership rights.
See Fox v. Clarys (1987), 227 Mont. 194, 196, 738 P.2d 104, 105.
In Fox we stated: "The doctrine of lis end ens was created to
hold the subject matter of litigation within the jurisdiction and
control of the court during the pendency of an action so that any
final relief granted by the court would be at once binding and
effective. [citation omitted] This doctrine generally renders
third persons who subsequently purchase or encumber an interest in
the subject property bound by the final disposition of the action."
Fox, 738 P.2d at 105. Thus FSLIC, as the S & Lfs successor in
interest, is bound by Judge Henson's declaration that Woods Bay
Marina was partnership property and that Schrammeck was a partner
who was excluded from the partnership in October of 1980.
In addition, the S & Ls loan officer who handled the loan in
'
question, John Prather, acknowledged that the S & L actually knew
Bowers did not have authority to execute the loan documents.
Prather stated that "[i]f D. Barry Schrammeck was a partner, his
express consent to this particular transaction would have been
required and his signature would have been required on the loan
papers, trust deed and, note." After Prather denied Bower's loan
request, Bowers represented that Schrammeck had filed a nuisance
suit. Prather responded that the S & L "still would not make the
loan because of the lis uendens." Thus, the S & L knew that Bowers
did not have authority to execute the loan documents on behalf of
the partnership.
Because the S & L knew that Bowers did not have authority to
execute the loan documents, the trust indenture did not pass any
interest in the Woods Bay Marina realty to the S & L. See 5 35-10-
302(4), MCA. In addition, neither the financing statement nor the
note bound the partnership, because Bowers did not have authority
to act for the partnership in executing them and the S & L knew
that he lacked such authority. See 5 35-10-301(1), MCA. The trust
indenture, financing statement, and note were invalid as to the
Woods Bay Marina Partnership and the ~istrict Court erred in
concluding that these loan documents had any effect.
Schrammeck alleged that Fidelity and FSLIC committed several
tortious acts against him. He alleged slander of title,
negligence, conspiracy, and constructive fraud. The District Court
dismissed these counts on summary judgment partly based on its
erroneous conclusion that the loan documents bound the Bowersf and
the Postsf individual interests. We conclude that the court should
reconsider these issues if Schrammeck presents them on remand.
Did the District Court abuse its discretion by denying
Schrammeck leave to file a second amended complaint and
supplemental pleading?
The District Court certified two specific partial summary
judgment orders for appeal as allowed by Rule 54(b), M.R.Civ.P.
Neitherthese orders nor Schrammeckfsnotice of appeal mentions the
District Court's order denying Schrammeckls motion for leave to
file supplemental pleadings or a second amended complaint.
Therefore, the issue is not properly before this Court and we
decline to rule on it.
IV.
Did the District Court err by declining to award attorney fees
to Schrammeck for successfully defending against the foreclosure on
the trust indenture?
The District Court denied Schrammeck's motion for summary
judgment on the issue of attorney fees, reasoning that Shrammeck
was "not a party to any of the written instruments which contain
provisions for the payment of attorney fees, and there exists no
statutory authority for the payment of attorney fees to either
party." We note that in the answer to Schrammeckrs October 1984
amended complaint, the S & L and Fidelity counterclaimed against
the Bowers, the Posts, and Schrammeck as a partnership to
judicially foreclose on the trust indenture. We direct the court
on remand to follow § 71-1-233, MCA, which requires the court to
allow attorney fees in an action to foreclose a mortgage of real
property, and to the case law interpreting that statute as
reciprocal. See Bermes v Sylling (1978), 179 Mont. 448, 464, 587
.
P.2d 377, 387.
In summary, the loan transaction documents were invalid. We
reverse and remand for further proceedings.
We Concur: k
Y
Chief Justice
\
Justices
16
Justice Fred J. Weber concurs and dissents as follows:
I agree with the analysis of the majority up to the point of
its application of 5 35-10-301(1), MCA, which provides in pertinent
part:
Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner,
including the execution in the partnership name of any
instrument ...binds the partnership unless the partner
so acting has in fact no authority to act ...
and the
person with whom he is dealins has knowledse of the fact
that he has no such authority. (Emphasis supplied.)
While I agree with the District Court determination that Bowers in
fact had no authority to enter the loan transaction on the
partnership's behalf, I do not find a factual basis to conclude
that the S & L knew of that lack of authority. Even though Bowers
did not have authority to execute the documents, his action could
bind the partnership if the S & L did not know of his lack of
authority. As stated in the majority opinion:
A partner can still bind the partnership to an
unauthorized transaction if all of the other partners
ratified the loan either explicitly or by knowingly
receiving or retaining benefits of the unauthorized loan
transaction. . . .
There are no facts in the summary judgment record before us to
demonstrate whether or not Schrammeck knowingly received and
retained the benefits of this unauthorized loan transaction.
The majority points out that the record does not indicate what
became of the money and concludes there is not sufficient evidence
to determine whether Schrammeck did knowingly retain the benefits
of the loan. This appeal is from a summary judgment determination
by the District Court. I conclude there is an issue of material
fact on whether or not Schrammeck knowingly received or retained
the benefits of the unauthorized loan transaction. I therefore
conclude that summary judgment is inappropriate and that this
matter should be remanded for determination of that issue of
material fact.
The majority points out that Schrammeck became the successor
in interest of both the other partners by reason of their
conveyance to him of all of their interest. As a result,
Schrammeck became the record owner of the property subject to the
loan transaction. It then becomes essential to determine if
Schsammeck knowingly retained the benefits of the loan transaction.
The next issue of fact is whether or not the S & L actually
knew that Bowers did not have authority to enter into the loan
transaction. This issue is raised by the last sentence of 5 35-10-
301(1), MCA, as above quoted. The majority points out that
Schrammeckls&
j pendens gave notice that he had filed an action to
dissolve and wind up the partnership, and points out that he
subsequently prevailed in that action. While all parties are bound
by the ultimate determination in the action in which the &
pendens was given, that determination does not establish that the
S & L had knowledge of any lack of authority at the time the
instruments were executed.
The majority concludes that the S & L actually "knew Bowers
did not have authority to execute the loan document^,^^ This
conclusion is based upon Pratherls statements that if Schrammeck
was a partner, his express consent would have been required and his
signature on the various loan documents would have been required,
as well as the further statement by Prather that the S & L would
not make the loan because of the l s pendens.
i However, those
statements by Prather are not an adequate basis for the following
conclusion of the majority :
Thus, the S & L knew that Bowers did not have authority
to execute the loan documents on behalf of the
partnership.
The statements by loan officer Prather only demonstrate that as a
matter of loan policy, Schrammeck would have been required to
execute the documents if, in fact, he were a partner.
The majority next concludes the S & L knew that Bowers did not
have authority to execute the loan documents, and as a result, the
trust indenture failed to pass any interest in the described
property. There is no evidence in the summary judgment record
which demonstrates the S & L actually knew Bowers did not have
authority at the time of the execution of the loan documents. As
a result, there is no factual basis from which a court may conclude
whether or not Bowers could bind the partnership to the
unauthorized transaction because other partners ratified by
knowingly receiving or retaining benefits of the loan transaction.
For the foregoing reasons, I conclude it was improper to
affirm the summary judgment decision. Justice requires a remand
for determination of the material facts. Upon remand, after a
factual determination as to whether Schrammeck knowingly received
and retained the benefits of the entire loan transaction, the
District Court could properly decide if Schrammeck is bound by the
provisions of 5 35-10-301(1), MCA.
I would remand for determination by the District Court of the
issues of material fact.
vust!ice