96-002
No. 96-002
IN THE SUPREME COURT OF THE STATE OF MONTANA
1997
JOHN P. TURNER,
Plaintiff and Appellant,
v.
KERIN & ASSOCIATES and
RICHARD T. KERIN,
Defendants and Respondents.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Larry W. Moran, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
James A. McLean; Drysdale, McLean & Nellen, Bozeman, Montana
George A. Guynes (argued), Attorney at Law, Santa Fe, New Mexico
For Respondents:
Jon M. Hesse (argued), Attorney at Law, Livingston, Montana
Argued: January 30,1997
Submitted: March 20, 1997
Decided: June 11, 1997
Filed:
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__________________________________________
Clerk
Justice W. William Leaphart delivered the Opinion of the Court.
John P. Turner (Turner) appeals from the Eighteenth Judicial District Court's
order
dismissing his complaint against the engineering firm of Kerin & Associates and
against
civil engineer Richard Kerin (jointly referred to as Kerin) for failure to state a
claim upon
which relief can be granted pursuant to Rule 12(b)(6), M.R.Civ.P. We affirm in part,
reverse in part and remand.
We restate the issues on appeal as follows:
1. Did the District Court err in holding that there is no cause of action for
impairment
of a security interest?
2. Did the District Court err in dismissing Turner's claim for breach of contract?
3. Did the District Court err in dismissing Turner's claim for breach of
professional
duty?
BACKGROUND
A motion to dismiss under Rule 12(b)(6), M.R.Civ.P., has the effect of admitting
all well-pleaded allegations in the complaint. In considering the motion, the
complaint
is construed in the light most favorable to the plaintiff, and all allegations of
fact
contained therein are taken as true. Common Cause of Montana v. Argenbright (1996),
276 Mont. 382, 386, 917 P.2d 425, 427. The allegations in the complaint indicate
that
Turner holds three mortgages secured by real property (the Property) which was owned
by Ameritrust. The three mortgages were held by Sterling Trading, Ltd. Turner, who
had a judgment against Sterling Trading, Ltd., executed on two of the mortgages in
1991
and on the third in 1993. In June of 1995, Turner foreclosed his three mortgages on
the
Property after the Eighteenth Judicial District Court ordered a foreclosure sale.
At the
foreclosure sale, Turner submitted the highest bid for the property; however, the
debt
secured by the three mortgages remained unsatisfied as the price bid for the
Property was
less than the unpaid principal and accrued interest.
Before Turner acquired his security interests in the Property in 1991 and 1993,
Ameritrust had, in 1986, contracted with Kerin to perform engineering and supervisory
services on the Property for purposes of preparing the Property for subdivision use,
including installation of sewer collection and water distribution systems. Kerin
completed
its work under the 1986 contract well before Turner acquired the mortgages in 1991
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and
1993. Kerinþs contract with Ameritrust required it to bring the existing approved
plans
into compliance with standards of the State Department of Health Water Quality Bureau
and to take any and all steps which were necessary to certify the installed
utilities. A
water main had previously been installed on the property. The water main did not
meet
the AWWA C900 Class Pipe standards and had not been buried at the proper depth.
Turner alleged that Kerin knew that the water main pipe was not in compliance and
needed to be replaced. Turner alleged that Kerin, nonetheless, replaced the main
with
new pipe which also failed to comply with AWWA C900 Class Pipe standards. Turner
alleged that Kerin, in deviating from the approved plans without having received
prior
approval of the State of Montana Department of Health, damaged the real property and
thereby impaired the value of the property as collateral securing the three mortgages
which were subsequently acquired by Turner through foreclosure.
Turner filed this action in District Court raising three claims against Kerin;
a claim
for impairment of security, a claim for breach of contract, and a claim for breach of
professional duty. First, Turner claimed that the water pipe installed by Kerin did
not
comply with required standards and thus impaired the security interest he
subsequently
acquired in the Property. Second, Turner claimed that Kerin breached its contract
with
Ameritrust by failing to bring the modifications into compliance with standards and
to
obtain certification of the installed utilities. Finally, he alleged that Kerin
breached its
duty to Ameritrust to exercise due and reasonable care in performing services as a
professional engineer. Turner claimed that Ameritrust's claims against Kerin for
breach
of contract and breach of duty were assets of Ameritrust upon which Turner, as a
creditor
of Ameritrust, could execute. In response to Turner's complaint, Kerin filed a
motion
to dismiss claiming that it did not owe a duty to Turner and that since Turner was
not an
intended beneficiary of the contract, Kerin could not pursue a claim for breach of
the
contract. The District Court granted Kerin's motion to dismiss for failure to state
claims
upon which relief could be granted. Turner appeals from the District Courtþs order.
DISCUSSION
Under Rule 12(b)(6), M.R.Civ.P., a defendant, by motion, may raise the defense
that the plaintiff has failed to state a claim upon which relief can be granted.
Irving v.
Valley Co. Sch. Dist. No. 1-1A (1991), 248 Mont. 460, 464, 813 P.2d 417, 418. Under
Rule 12(b), M.R.Civ.P., a complaint shall not be dismissed unless it appears that the
plaintiff can not prove a set of facts in support of his or her claim that entitles
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her to
relief. Proto v. Missoula County (1988), 230 Mont. 351, 353, 749 P.2d 1094, 1095-
96.
In the instant case, the question is whether Turner can prove a set of facts which
would
entitle him to relief under any of the claims he asserts in his complaint.
Therefore, we
will address each of Turner's claims separately.
A. Impairment of Security
In dismissing the complaint, the District Court was unwilling to accept Turner's
"impairment of security" theory holding that the relationship between Turner and
Kerin
was too remote to impose liability for the damage, if any, that Kerin may have
inflicted
on the Property in 1986 before Turner acquired the three mortgages. The District
Court
held, "[n]either party has cited authority whereby either the Montana Supreme Court
or
the Montana legislature has adopted the 'impairment of security' theory. Only
California
has applied the 'impairment of security' theory to the acts of construction
professionals."
In order to resolve the issues presented in this case, we need to engage in a
three-
step analysis: First, we must determine whether Montana recognizes a mortgagee's
right
to state a claim for impairment of security. Secondly, assuming we do recognize a
claim
for impairment of security, may such a claim be asserted by a mortgagee against a
third
party not in possession of the property? Finally, may such a claim be asserted by a
mortgagee who purchases mortgages at a foreclosure sale subsequent to the time at
which
the damage was inflicted on the security?
Does Montana recognize a claim for impairment of security?
Over 100 years ago, this Court first recognized a mortgagee's right to sue a
mortgagor for impairment to a security interest in Dutro v. Kennedy (1889), 9 Mont.
101, 22 P. 763. Kennedy, a mortgagor, attached fixtures and caused improvements to
be made to the subject property after execution of the mortgage. After the mortgage
had
been foreclosed and the property sold at a sheriff's sale, the mortgagor attempted to
remove the fixtures and improvements. Dutro, 22 P. at 763-64. The mortgagee,
Branch,
instituted suit against the mortgagors. During the pendency of the litigation,
Branch
transferred his interests in the suit to Dutro who successfully prosecuted the suit
to a final
judgment. The Dutro Court held:
Whenever the mortgagor endeavors to remove the fixtures or improvements
upon mortgaged property, he may be enjoined, or the creditor may have his
choice of an action for damages, or one of claim and delivery, after he has
become the purchaser of the property at sheriff's sale, as in the present
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instance.
Dutro, 22 P. at 764.
In a similar vein, we have held that, on redemption, a mortgagee is accountable
to the mortgagor for waste committed by him on the premises while in his possession,
including the permanent depreciation in the property caused by failure to make
necessary
repairs or depreciation resulting from reckless or improvident management of the
property. Toole v. Weirick (1909), 39 Mont. 359, 364, 102 P. 590, 593.
Although the Dutro and Weirick decisions do not explicitly draw a distinction
between damage to the property as opposed to damage to the security interest, we
conclude that these decisions are consistent with the rule that a mortgagee can,
before a
foreclosure sale, or afterwards if the debt has not been satisfied, bring suit
alleging that
his security (as distinct from the property itself) has been diminished through the
actions
(or inactions) of the mortgagor. As the Supreme Court of California recognized in
Cornelison v. Kornbluth (Cal. 1986), 542 P.2d 981, 986, the cause of action for waste
evolved in the common law so as to afford protection to concurrent holders of
interests
in land who were out of possession, e.g. mortgagees, from harm committed by persons
who were in possession, e.g. mortgagors. The California court cited the New York
decision of Van Pelt v. McGraw (1850), 4 N.Y. 110, 112, for the proposition that a
holder of a mortgage on lands has a cause of action on the case against the
mortgagor for
acts of waste committed by the latter with knowledge that the value of the security
would
thereby be injured. Van Pelt set forth the measure of damages:
Now this action is not based upon the assumption that the plaintiff's
[mortgagee's] land has been injured, but that his mortgage as security has
been impaired. His damages, therefore, would be limited to the amount of
injury to the mortgage, however great the injury to the land might be.
Van Pelt, 4 N.Y. at 112.
In W. & R. Inv. Co. v. Edwards Supply Co. (Mass. 1939), 24 N.E.2d 518, 519,
the Massachusetts court held that a mortgagee of real estate, at least before
foreclosure,
has a right of action against the mortgagor or any other person who, without license,
removes any part of the mortgaged property.
"Whether the mortgagee is in possession of the mortgaged premises or not,
or whether his right to possession begins only with the breach of condition
and there has been no breach, nevertheless he has such an interest in the
property and its preservation as enables him to maintain an action in his
own name for injury to it. Such right of action is founded not upon the
right to present possession, but on title to the estate. He may maintain such
an action, . . . although the security remains ample for his protection. He
has a right to his security unimpaired."
W. & R. Inv., 24 N.E.2d at 519 (quoting Delano v. Smith (1910), 92 N.E. 500, 501).
The Massachusetts court held that this right of action is not personal to the
mortgagee,
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"but arises out of and pertains to the estate, and whatever may be recovered is to be
applied in payment, pro tanto, of the mortgage debt and thus is ultimately for the
benefit
of the mortgagor, if he redeems." W. & R. Inv., 24 N.E.2d at 520.
We agree that a mortgagee may state a cause of action against a mortgagor for
actions or inactions which damage the collateral and thereby impair the mortgagee's
ability to satisfy the secured debt.
Does a mortgagee have a cause of action for impairment of security as against a third
party not in possession?
This Court's decisions in Dutro and Weirick recognize a cause of action against
the party in possession for damage or waste to the collateral. We have not, however,
addressed whether a mortgagee may bring a cause of action against a third party not
in
possession for impairment of the security.
Although this Court has not addressed a mortgagee's right to bring an action
against a third party for damage to the security interest, other jurisdictions have
recognized such a cause of action. The California Supreme Court has held that when a
third person tortiously damages the property, both the mortgagor and mortgagee may
sue
the third party tortfeasor. Cornelison v. Kornbluth (Cal. 1975), 542 P.2d 981, 987
n.3;
American Savings and Loan Ass'n v. Leeds (Cal. 1968), 440 P.2d 933, 936.
In Mathews v. Silsby Bros. (Iowa 1924), 201 N.W. 94, 94-95, the Iowa Supreme
Court recognized that in a "lien state" such as Iowa, although a mortgagee cannot
maintain a cause of action for trespass quare clausum fregit, he may maintain a
cause of
action against the mortgagor or a third party for damages to his security. Montana,
like
Iowa, is a lien state, State ex rel. Highway Comm. v. District Court (1972), 160
Mont.
35; 499 P.2d 1228; Miller v. Federal Land Bank of Spokane (9th Cir. 1978), 587 F.2d
415, cert. denied, 441 U.S. 962 (1979).
In Sloss-Shefield Steel & Iron Co. v. Wilkes (Ala. 1936), 165 So. 764, 767, the
Alabama Supreme Court, citing Mathews, held that, where the mortgage is foreclosed
after the damage occurred (as herein), the mortgagee has a right of action against a
third
party for damages to the real property which impairs his security.
When damage occurs before foreclosure, the right of action by the
mortgagee whatever it may be, or the nature of the action, is only for the
recovery of an amount not exceeding the mortgage debt. The right of
action is collateral to the debt, and as security for it. The mortgagee may
pursue any course he pleases to collect the debt, whether it be a suit for a
personal judgment against the debtor, or for damages against one who has
wrongfully converted the mortgaged property, or otherwise destroyed his
rights in it, or for a foreclosure. And he may do them all at the same time.
But when he once collects his debt, by any one of those proceedings, or by
a voluntary payment of it, he cannot pursue any other remedy. They are
all but means to accomplish one purpose, and when that is accomplished,
all the remedies, not used in so doing, are terminated.
Sloss-Sheffield, 165 So. at 767.
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The Fifth Circuit has also held that the damages in a claim against a third
party
for impairment of security are limited to damages to the ability to collect the debt
as
opposed to diminution in the value of the property itself. Allstate Finance Corp. v.
Zimmerman (5th. Cir. 1959), 272 F.2d 323, 325. In Allstate, the plaintiff-mortgagee
purchased the property at a foreclosure sale and, since he bid the full amount of
the debt,
the debt was satisfied and the court held that he could not state a cause of action.
Allstate, 272 F.2d at 325-26. Similarly, in the present case, Turner purchased the
property at foreclosure. However, he alleged that since the price bid was less than
the
outstanding debt, the debt remained unsatisfied. Thus, he has stated a cause of
action.
In accordance with the above authorities, we hold that a mortgagee can state a
cause of action against a third party for damages to real property which impair his
or her
security interest in that property. A third party who contracts to work on property
has
a duty to perform his work in such a manner that he does not damage the property or
impair the value of the property as collateral for a then-existing security
interest.
Can a claim for impairment of security be asserted by one who succeeds to the
mortgagee's security interest after the point in time when the damage to the
security is
alleged to have occurred?
In the case at hand, Turner purchased the mortgages in question in 1991 and
1993,
some five to seven years after Kerin had performed the work in question. Thus a
question arises as to whether Turner can assert a claim against Kerin since Turner
did not
hold the security interests in the property at the time Kerin was performing its
work on
the property. We first note that, although Turner did not acquire the mortgages
until
1991 and 1993, the mortgages themselves were in existence in 1986 when Kerin
performed the work in question. Turner acquired the mortgages by foreclosing against
the predecessor mortgagee, Sterling Trading, Ltd. Our decision in Dutro is
instructive
on this point. In Dutro v. Kennedy (1889), 9 Mont. 101, 22 P. 763, Branch, the
original
mortgagee, filed suit against the mortgagors Kennedy and Scheurman, but, during the
pendency of the litigation, Branch transferred his interests in the mortgage to
Dutro who
prosecuted the suit to a final judgment. Thus Dutro, who successfully prosecuted the
claim, had no interest in the property at the time the mortgagor damaged the
property.
Rather, he acquired his interests from Branch, after the fact. Dutro, 22 P. at
764. In
a similar vein, we hold that in acquiring these mortgages at foreclosure sale in
1991 and
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1993, Turner stands in the shoes of a transferee of the mortgages and has the same
rights
to pursue a claim for impairment of security that Dutro acquired from Branch. That
is,
he acquired all the rights and liabilities of the predecessor mortgagee Sterling
Trading,
Ltd. Like his predecessor Sterling Trading, Ltd., Turner can pursue a claim against
a
third party who has impaired the ability of the holder of the mortgage to collect
the debt
secured thereby.
The District Court, relying on our holding in Jim's Excavating Service v. HKM
Assoc. (1994), 265 Mont. 494, 878 P.2d 248, held that Turner could not state a claim
for impairment of security because he had not alleged nor could he prove that Kerin
"should have foreseen that the particular plaintiff, or an identifiable class of
plaintiffs
were at risk in relying on the information supplied." Jim's Excavating involved a
claim
by a third party contractor against a project engineer, HKM, for economic damages.
HKM argued that there could be no tort liability to HKM because there was no privity
between HKM and the contractor JES; particularly since the negligence complained of
(preparation of plans and specifications) occurred before HKM actually knew JES would
be part of the project. Jim's Excavating, 878 P.2d at 251. We rejected the
contention
that HKM could escape liability simply because it did not know JES would receive the
bid "when it knew that some contractor would be relying on its plans and
specifications."
Jim's Excavating, 878 P.2d at 254. We relied upon an example given in William L.
Prosser, The Law of Torts, 93 (4th ed. 1971), which bears repeating:
[B]y entering into a contract with A, the defendant may place himself in
such a relation toward B that the law will impose upon him an obligation,
sounding in tort and not in contract, to act in such a way that B will not be
injured. The incidental fact of the existence of the contract with A does not
negative the responsibility of the actor when he enters upon a course of
affirmative conduct which may be expected to affect the interests of another
person. . . .
. . . .
[T]here are situations in which the making of the contract creates a relation
between the defendant and the promisee, which is sufficient to impose a tort
duty of reasonable care. By the same token, there are situations in which
the making of a contract with A may create a relation between the
defendant and B, which will create a similar duty toward B, and may result
in liability for failure to act. . . .
In applying the above reasoning to the facts before us, we concluded that, although
HKM
did not actually know JES would receive the bid, it knew that some contractor would
be
relying on its plans and specifications.
Thus, we hold that a third party contractor may successfully recover
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for purely economic loss against a project engineer or architect when the
design professional knew or should have foreseen that the particular plaintiff
or an identifiable class of plaintiffs were at risk in relying on the
information supplied.
Jim's Excavating, 878 P.2d at 255.
In the present case, by contracting with the owners to perform engineering work
on the property, Kerin placed itself in a relation toward any party who held a
security
interest in the property that the law imposed upon him an obligation, sounding in
tort and
not in contract, to act in such a way that the security interest would not be
injured. Kerin
knew or should have foreseen that if, contrary to his representations, he relaid
with pipe
not meeting requisite pipe standards, he would diminish the value of the property and
thereby impair the value of the property as security. It was foreseeable that
failure to lay
the proper pipe would damage an identifiable class of plaintiffs; i.e. those who
held an
interest in the property, both mortgagors and mortgagees. The fact that Kerin could
not
specifically foresee Turner's entry into the picture does not change the fact that
Turner
is a member of an identifiable class of plaintiffs, that is, he is a mortgagee by
virtue of
having purchased mortgages which were in existence at the time of Kerin's work and
which, allegedly, have not been satisfied.
In keeping with the reasoning of Jim's Excavating, we hold that a person who,
subsequent to the damage to the property, acquires a pre-existing security interest
in the
property can maintain a cause of action for impairment of that security interest to
the
extent of the outstanding debt.
B. Breach of Contract
The District Court dismissed Turner's breach of contract claim holding that
there
was no privity of contract between Turner and Kerin and that Turner, "at best, could
only
be considered as a type (or class) of incidental beneficiary to the contract between
Defendants and previous owners." The court relied upon our decision in Harman v. MIA
Service Contracts (1993), 260 Mont. 67, 72, 858 P.2d 19, 22-23. Turner contends that
the District Court misconstrued his second cause of action. He contends that he is
not
seeking to enforce the contractual obligation as a third party beneficiary, either
incidental
or intended. Rather, he, as a creditor of Ameritrust, seeks to execute upon
Ameritrust's
assets, which include any claims (choses in action) that Ameritrust has against
Kerin for
breach of contract. He relies on our decision in State ex rel. Coffey v. District
Court
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(1925), 74 Mont. 355, 240 P. 667, wherein we held that claims for breach of contract
or for tort connected with contract are choses in action, which are personal property
subject to execution. Coffey, 240 P. at 669. That proposition is still good law.
However, when put in its proper context, it only has application to a judgment
creditor.
Mr. Coffey had filed a cost bill which "had the effect of the entry of a judgment
for $94
in favor of Herman and Coffey and against Albert W. Ogg upon which execution might
issue." Coffey, 240 P. at 668-69. The statutory law pertaining to writs of
execution,
now, as then, provides:
Execution against property of judgment debtor. If the writ be against
the property of the judgment debtor, it shall require the sheriff or levying
officer to satisfy the judgment, with interest, out of the personal property
of such debtor and, if sufficient personal property cannot be found, out of
his real property as provided in 25-13-305.
Section 25-13-304, MCA (emphasis added).
Thus, in order to come within the ambit of Coffey and 25-13-305, MCA, Turner
must be a judgment creditor asserting a claim against a judgment debtor. In
reviewing
Count II of his complaint (Breach of Contract) it is apparent that Turner has not
alleged
that he has a judgment against Ameritrust. Rather, he alleges that he is "a direct
creditor
of Ameritrust and is entitled to execute on any asset of Ameritrust." This
allegation is
not sufficient to state a cause of action. A creditor who has not yet reduced his
claim to
judgment is not in a position to execute. Although the District Court dismissed
Count
II for the wrong reasons, the dismissal was correct and is therefore affirmed. See
Clark
v. Eagle Systems, Inc. (Mont. 1996), 927 P.2d 995, 1000, 53 St.Rep. 1150, 1152.
C. Breach of Professional Duty
In Count III, Turner contends that he is entitled to execute upon Ameritrust's
claim
that Kerin breached its professional duty to exercise due care as a civil engineer.
Applying the same reasoning it used in rejecting the impairment of security claim,
the
District Court dismissed the claim for lack of foreseeability under the principles
enunciated in Jim's Excavating. As with Count II, the District Court has
misconstrued
the nature of Turner's claim in which he seeks to execute upon a chose in action
rather
than assert the claim in his own right. However, since Count III, like Count II,
does not
allege that Turner is a judgment creditor entitled to execute, the same reasoning we
set
forth with regard to the breach of contract claim pertains. We affirm the District
Court's
ruling that Count III fails to state a claim upon which relief can be granted.
Accordingly, we affirm the dismissal of Counts II and III and reverse the order
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dismissing Count I (Impairment of Security) and remand for further proceedings
consistent with this opinion.
/S/ W. WILLIAM LEAPHART
We concur:
/S/ J. A. TURNAGE
/S/ WILLIAM E. HUNT, SR.
/S/ JAMES C. NELSON
/S/ JIM REGNIER
/S/ KARLA M. GRAY
/S/ TERRY N. TRIEWEILER
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