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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA
|
In re QUIGLEY ENTERPRISES, INCORPORATED, dba Quigley Quality
Homes, Debtor |
Case No. A94-00602-HAR In Chapter 7 ADV PROC NO A94-00602-001-HAR (BANCAP No. 95-3008) Consolidated Adversary Proceedings ADV PROC NO A94-00602-003-HAR (BANCAP No. 95-3019) MEMORANDUM DECISION FOR NBA ON CR0SS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT [NBA v Kennedy and Columbia Investments] |
| NATIONAL BANK OF ALASKA, Plaintiff v. WILLIAM M. BARSTOW, III, RICHARD D. KENNEDY, MARGARET L. KENNEDY, and COLUMBIA INVESTMENTS, INC., Defendants |
|
| COLUMBIA INVESTMENTS, INC., Plaintiff v. NATIONAL BANK OF ALASKA, Defendant |
1.
OVERVIEW - This dispute involves a 2,100± square foot
single family residence in Anchorage worth in the neighborhood of
$165,000 to $210,000. It has generated litigation well beyond the bounds
of practicality.
The parties have filed cross-motions for summary judgment, and related motions to dismiss. Excerpts from the docket sheet identifying the numerous pertinent pleadings are set out in Part 3 of this memorandum, beginning at page 12.
Subject to ruling on the issues of punitive damages raised by Columbia Investments, Inc. (Columbia), my proposed resolution is to require Columbia, if it elects within 10 days of a final judgment to purchase the property, to do so at a price of $183,990 (see, calculation at page 32 of the memorandum). This is less than the amount demanded by National Bank of Alaska (NBA) due to a reduction of the "profit and overhead" requested by NBA. I have also used the amount of which NBA has documented as being billed by subcontractors and materialmen on the construction project (about $146,000), rather than the amount of its disbursements to the debtor (about $166,000, plus interest from September 1994).
If and when a final judgment can be entered, Columbia will be given 30 days to close, with the ability to ask for an extension if a prompt closing is in prospect.
NBA (as the trustee's successor) is entitled to rental from September 9, 1994, against Columbia and Richard and Margaret Kennedy (the Kennedys). The pre-bankruptcy move-in agreement provided for rental at $1 per day. The Kennedys and the bankruptcy trustee, however, modified this to $750 per month. NBA will be entitled to rent at $750 per month from the date of the agreement between the Kennedys and the trustee until closing or vacation of the premises. See, section 4.6 of this memorandum.
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If Columbia or the Kennedys do not elect to purchase (or if they fail to close), they shall forfeit any rights they have in the property without the need for NBA to conduct a foreclosure of its deed of trust on the property. If Columbia does not elect to purchase, or complete the purchase, they shall vacate within 5 days. They shall, however, have a vendee's lien in the amount to be determined. See, section 4.7 of this memorandum.
At a hearing on May 17, 1996, the court indicated that the present memorandum decision would probably negate Columbia's claim for punitive damages. The court will give the parties an opportunity to brief this conclusion.
The bankruptcy court will address costs and attorney fees which may be requested by NBA in a further proceeding.
When the matter is ripe for a final adjudication (if one can be entered on dispositive motions), the court will address whether this is a related matter that must be sent to the U.S. District Court after a report and recommendation under FRBP 9033.
2. FACTUAL BACKGROUND - Quigley Enterprises Incorporated
(Quigley) was a relatively large residential home builder in Anchorage
prior to its chapter 7 bankruptcy, which was filed on September 14, 1994.
Quigley negotiated with the Kennedys to construct a home for them on a cost-plus basis. The home was constructed on a lot in the Sampson Subdivision, Lot 15, Block 4, Sampson Estates, Anchorage Recording District, Alaska (the lot and home are referred to as the "Sampson Property").
The Kennedys owned the lot, which they had purchased for $23,000. Quigley was to build a home on that lot for them on a cost-plus basis. The target price was $208,000, part of which was a $16,000 profit and overhead figure over and above the cost of labor and materials. An earnest money agreement spelling out the terms was entered into on February 3, 1994, (Exhibit A to Reply Memorandum Of The National Bank Of Alaska Regarding Damages, Docket Entry 122, filed January 5, 1996).
To finance the construction, the Kennedys were to convey title
to Quigley, which would obtain construction financing for the project.
A construction loan was closed with NBA for $166,400 on about April 14,
1994. From the proceeds, $29,000 was paid to the Kennedys to purchase
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the lot from them.
Quigley entered into the construction project. The labor and materials were largely, if not entirely, supplied by third parties. Quigley's records indicate that his labor and materials for the job were $145,990.05. Of this, $85,244 was paid, and $60,745 was not paid at the time of the bankruptcy filing. This is off by $1.05, and in its motion for summary judgment, NBA requests the court to set the labor and materials amount at $145,880.15. The discrepancy is not material.
The amount claimed does not include the $29,000 paid to Kennedys for the lot, or the $16,000 for the profit and overhead feature of the earnest money agreement. See, Affidavit Of Russell E. Minkemann, Docket Entry 95 at page 4, ¶5, filed September 8, 1995, relating to damages.
Matthew Edwards, an assistant vice president of NBA, who was the loan officer approving the loan, indicated that the estimated cost of construction (including the purchase of the lot) was $188,544. Based on that, a construction loan of $166,400, 80% of a finished value of $208,000, was granted. A percentage of completion schedule was developed and, based on that, five advances were made between April 18, 1994, and August 11, 1994, in a total amount of $165,813.66. This was the amount disbursed as of September 1, 1994.
Quigley had financed other homes with NBA. It had completed 17 homes without significant problem in 1991, 66 homes in 1992, and 98 homes in 1993. In 1994, the year that Quigley filed bankruptcy, a total of 40 homes were constructed, 19 of which were not completed prior to the filing of the chapter 7.
To make a draw, Quigley would make a request of NBA for funds. The information would be compared with the open payable report, and a physical inspection at the sight would be made by the officer or some representative of the bank to verify the percentage of completion. Following the inspection, if things were in line, a disbursement was authorized. See, Affidavit Of Matthew Fitzgerald Submitted In Support Of Motion For Partial Summary Judgement And, In The Alternative, To Establish The Law Of The Case, Docket Entry 96, filed September 8, 1995.
The Sampson lot was substantially completed in early September
1994. The Kennedys and NBA signed an Occupancy Agreement on September
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8 and 9, 1995, and the Kennedys moved in under an Occupancy Agreement on
September 9, 1994. (Exhibit C, Page 2 of 3 to Reply Memorandum Of The
National Bank Of Alaska Regarding Damages, Docket Entry 122, filed
January 5, 1996). The Occupancy Agreement provides that the Kennedys
would "accept the premises in their present condition except as follows:
driveway to be installed."
Richard Kennedy apparently noted some additional work which he felt needed to be done to get a certificate of occupancy from the Municipality. It is uncertain as to whether Quigley agreed to these, but in any event, they are relatively minor items:
| 1. | Floor covering (tile) in family room (225 sq
ft) - no materials yet purchased |
| 2. | Construction and installation of front door
steps (5 steps) and associated retaining wall
- materials: majority of block is on-site,
but requires additional approximately 40 more
block, D-1 and gravel fill at approx $700 |
| 3. | Bathroom mirrors (3) |
| 4. | Install remaining one HRV boost switch -
materials on site |
| 5. | Painting of remaining interior doors (11 doors, mostly on first floor) - materials estimate: 1 gallon of paint/roller |
There were some other items, which he indicated were planned but not completed, and some items that were recommended by "Eagle River Muni." See, Exhibit C, Page 3 of 3 to Reply Memorandum Of The National Bank Of Alaska Regarding Damages, Docket Entry 122, filed January 5, 1996).
There is no genuine issue of material fact that the house was substantially completed (the parties have generally used at least 95% in colloquy with the court), except for the driveway. Even if the additional minor items noted above were additional items to complete, they are so minor that the construction appears to have been substantially completed.
Quigley, however, did not complete the contract. Instead, it
filed a chapter 7 bankruptcy petition on September 14, 1994. William
Barstow was appointed trustee. For the benefit of the creditors of the
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bankruptcy estate, the trustee attempted to salvage as many of the
properties which Quigley had either completed, or partially completed, as
he could. One of those properties was the Sampson Property.
The trustee negotiated to sell the Sampson Property directly to the Kennedys for about $183,000. This figure was apparently arrived at by reducing the target figure shown in the earnest money agreement of $208,000 by amounts the Kennedys indicated that they had put into the property themselves. The deal never materialized.
The trustee moved to reject executory contracts in connection with the sale of various lots, including the Sampson Property. Docket Entry 117 in the main case, filed November 10, 1994, Trustee's Application To Reject Pre-Petition Earnest Money Agreements, Sell Property Free And Clear Of Liens, And To Distribute Sale Proceeds. On November 18, 1994, an order was entered authorizing a sale of the Sampson Property to the Kennedys. Main case Docket Entry 136. This was entered in response to main case Docket Entry 138, filed November 18, 1994, Trustee's Supplemental Memorandum Regarding Pending Applications To Sell, (see, Exhibit J regarding the Sampson Property payoff.) The sale was to be according to the following terms:
| Gross Sale Price | $208,000 |
| Pre-petition Earnest Money | 2,000 |
| Completion Cost Credit | 23,301 |
| Cash To The Estate | 182,969 |
| Closing Costs | 3,000 |
| NBA (est to 11/18/94) [owed $172,270] | 170,869 |
| Carve-out for bankruptcy estate | 9,100 |
| Balance to junior liens | 0 |
The sale to the trustee never materialized. Rather, on January 10, 1995, NBA and the trustee negotiated a deal to sell 7 lots (including the Sampson Property) free and clear of the construction liens and encumbrances on them. (See, Motion For Order Approving Compromise Agreement, filed January 12, 1995, in the main Quigley Case No. A94-00602-HAR, main case Docket Entry 157).
Hearings were held on January 20, 1995, denominated: (a) a
hearing regarding a compromise between the trustee and NBA, and (b) a
preliminary relief from stay hearing on a motion by NBA. These resulted
in NBA's purchase of some of the lots on which it had construction loans
from the trustee. The Sampson property was one of the properties sold
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to NBA. At the January 20, 1995, hearing, J.L. McCarrey, attorney for
the Kennedys, indicated he was not in touch with his clients and would
object. NBA, as an accommodation, agreed to interlineation to the order
approving the compromise, which read as follows:
NBA did this with the understanding that the Kennedys wanted to be assured that they would be able to close the sale for approximately $183,000 as had been discussed with the trustee. See, Affidavit Of James Brinker, Docket Entry 13, filed March 8, 1995, and Affidavit Of James Brinker, Docket Entry 37, filed May 24, 1995.IT IS HEREBY ORDERED that the Trustee may sell the property to NBA on the terms set forth in the parties' agreement. Such transfer shall be free and clear of liens and interests of all persons who received notice of the application, except for property tax claims of the Municipality of Anchorage, and with regard to L. 15, B. 4, Sampson, any legal or equitable liens or claims of Richard and Margaret Kennedy. [italicized portion represents the hand written insertion at the request of the Kennedys]
The trustee prepared a quitclaim deed for the properties, including the Sampson property, and gave it to NBA. The trustee has been paid for the 7 lots by NBA. NBA has not recorded the quitclaim deed for the Sampson property.
James Brinker of NBA requested a meeting with the Kennedys so that an earnest money agreement could be executed between NBA and the Kennedys. The meeting was postponed until January 30, 1995, at the request of Mr. McCarrey. When the meeting was held, the Kennedys did not appear, but Mr. McCarrey appeared representing Columbia whom he indicated had acquired the property.
There is a dispute as to whether, at the meeting, Columbia said it would purchase the property for only $29,000 or, Columbia was willing to offer at a minimum $105,000, subject to verification of other bills. Mr. Brinker's affidavit indicates he understood that they were trying to "steal" the property for $29,000.
It appears that Columbia felt then, and feels now, that it is entitled to purchase the property at some reduced figure because of its "Fikes" rights. See, Fikes v. First Federal Savings and Loan Association Of Anchorage, 533 P2d 251 (Alaska 1975).
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The bankruptcy court has interpreted its order of January 20, 1995, and Columbia and the Kennedys have agreed, that the sale free and clear of liens was intended to be free and clear of mechanics' and materialmen's liens and other junior liens, but not NBA's own deed of trust for its construction loan on the Sampson property.
3. PROCEDURAL STATUS - When the meeting on January 30, 1995,
between Columbia and NBA broke down, each party filed a litigation. NBA
sued in bankruptcy court in an adversary proceeding, which is part of the
consolidated caption of this case. Columbia sued in state court, in
effect to be allowed to purchase the property at the reduced price it
felt it was entitled to under its interpretation of Fikes. In the state
court proceeding Columbia requested a jury trial.
NBA filed a motion for partial summary judgment on three issues: (a) whether it had accepted title to the property from the trustee (contending that it had not and that title was still in the estate); (b) that the rights of Columbia and the Kennedys were defined by 11 USC §§ 365(i), (j) (defining the rights of a purchaser under a real estate contract where the trustee has rejected the contract); and (c) to require the Kennedys and Columbia to pay rent calculated based on interest at 10½% on the proposed purchase price in monthly installments.
Columbia moved for summary judgment as well as moving to dismiss on jurisdictional grounds.
The summary judgment hearings have extended over a period of months and expanded to include establishing the amount of damages, if any. Columbia has requested numerous extensions of time to obtain discovery and facts necessary to oppose NBA's motion for summary judgment.
For everyone's benefit, I have listed a number of the pertinent docket entries in this process, which brought us to the hearing on February 7, 1996, which basically concerned damages that Columbia alleges it suffered as an alleged offset to any purchase price that NBA (or the trustee) might claim due to it:
4.1. This Is At Least A Related Matter And The Court Has
Subject Matter Jurisdiction - Columbia challenged the jurisdiction of the
bankruptcy court to hear the matter. The dispute appears to be at least
a "related matter" -- one which the bankruptcy court may hear but which,
absent consent of all the parties must be referred to the district court
for determination. See, 28 USC § 157(c)(1):
A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
Columbia characterizes this as a dispute between two parties, it and NBA, neither of which is in bankruptcy. Columbia concludes there is thus no jurisdiction in the bankruptcy court.
However, NBA claims the transfer from the trustee was never accepted by NBA because the Kennedys reneged on the purchase, and, in any event, if Columbia prevails, NBA's claim against the bankruptcy estate will be increased. Though the argument that the transfer never occurred is a thin one, NBA's argument that its bankruptcy claim against the estate will be increased if Columbia prevails is sufficient to give this court subject matter jurisdiction. In re Fietz, 852 F2d 455, 457 (9th Cir 1988) (the bankruptcy court has subject matter jurisdiction if the outcome could conceivably have an effect on the administration of the bankruptcy estate).
The court will determine, before presuming to enter a final judgment, whether this matter must be referred to the U.S. District Court with a report and recommendation pursuant to 28 USC § 157(c)(1) and FRBP 9033.
If there are matters which cannot be resolved by summary
judgment or dispositive motion, this adversary will probably have to go
to the district court anyway. Columbia has requested a jury trial, and
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will probably not consent to the bankruptcy court conducting such a
trial. 28 USC § 157(e).
4.2. Summary Judgment Is Ripe; Columbia Had Adequate Time to
Prepare and Notice of the Scope of the Summary Judgment Sought -
This is an appropriate case for summary judgment. Initially, NBA requested only partial summary judgement in its initial motion. It sought to establish that: (1) a transfer of the Sampson Property from the bankruptcy estate had not occurred; (2) that damages which the Kennedys or Columbia might be entitled to were limited by 11 USC §§ 365(i), (j); and, (3) it or the bankruptcy estate was entitled to rent from the Kennedys or Columbia.
The issues were expanded over the series of hearings to require Columbia to specify what damage it claimed by non-completion or breach of the construction contract. The court indicated that Columbia could give its preliminary analysis of damages it had suffered directly or was entitled to claim by virtue of being able to recover for damages incurred by the Kennedys.
A discovery hearing was held on November 9, 1995, and the court entered an order allowing NBA to submit supplemental declarations and documentary evidence regarding damages. Defendants were to respond with any further opposition to NBA's motion for summary judgment and material regarding damages by Friday, December 22, 1995. A hearing was scheduled early January, 1996.
Columbia requested an extension of time to further prepare, and the court rescheduled the matter for February 7, 1996. The court indicated through its law clerk that all issues should be fully briefed and evidence submitted to forestall any further sesolution of the summary judgment. On about February 2, 1996, Columbia sought yet another postponement, arguing a conflicting court appearance (which did not materialize). NBA was not served, and the court denied the motion and heard further oral argument on damages.
NBA fully briefed its position on damages. Even if not raised
by a party, a court can enter summary judgment, even sua sponte. A party
against whom such a motion is granted should first have adequate notice
so that it can oppose. United States of America, for the use and benefit
of Hawaiian Rock Corp v A.E. Lopez Enterprises, Ltd.,74 F3d 972, 975-76
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(9th Cir 1996) (no abuse of discretion where movant failed to show how
additional discovery would preclude summary judgment; decision to deny a
continuance of summary judgment to allow further discovery will be
overturned only for an abuse of discretion).
Columbia has had ample notice that the issue of damages was incorporated into the summary judgment process, and that it faced summary judgment on any damages it might have suffered unless it provided the court with genuine issues of material fact regarding those damages.
4.3.The Parties Agree That Damages Are Analyzed In A Similar
Manner Either Under 11 USC §§ 365(i),(j) Or State Law -
NBA insists in its opening brief that the rights of the Kennedys and, therefore, the rights of Columbia are defined by 11 USC § 365(i), (j).
The trustee treated the earnest money agreement between the Kennedys and Quigley as an executory contract and rejected it. The effect of rejection is to treat the contract as breached, and generally, any damages to the nondebtor party are treated as pre-petition damages. 11 USC § 365(g)(1); Collier on Bankruptcy, (15th ed), ¶ 365.08.
Special treatment is given to vendees of real estate where the seller is the debtor under §§ 365(i), (j) which provide:
(i)
(1) If the trustee rejects an executory contract of the debtor for the sale of real property or for the sale of a timeshare interest under a timeshare plan, under which the purchaser is in possession, such purchaser may treat such contract as terminated, or, in the alternative, may remain in possession of such real property or timeshare interest.
(2) If such purchaser remains in possession
(A) such purchaser shall continue to make all payments due under such contract, but may offset against such payments any damages occurring after the date of the rejection of such contract caused by the non-performance of any obligation of the debtor after such date, but such purchaser does not have any rights against the estate on account of any damages arising after such date from such rejection, other than such offset; and
(B) the trustee shall deliver title to such purchaser in accordance with the provisions of such contract, but is relieved of all other obligations to perform under such contract.
(j) A purchaser that treats an executory contract as terminated under subsection (I) of this section, or a party whose executory contract to purchase real property from the debtor is rejected and under which such party is not in possession, has a lien on the interest of the debtor in such property for the recovery of any portion of the purchase price that such purchaser or party has paid.
See, In re Lemons & Assoc., 67 BR 198, 215 (Bankr D Nev 1986).
NBA argues that Columbia either has to elect to go forward, and pay the contract price less any legitimate offsets, or, alternatively, give up possession and recover any damages as a repetition claim. See, NBA's Memorandum of Law in Support of Motion for Partial Summary Judgment, or in the Alternative to Establish the Law of the Case. (Docket Entry 38 at page 23).
Columbia disputes the applicability of bankruptcy law since, it claims, title did pass from the trustee to NBA in January, 1996, and the trustee is no longer involved. See, Columbia and Kennedys' Opposition to Motion for Summary Judgment (Docket Entry 54).
The parties, in the end, agree that whether the damages are determined under §§ 365(i), (j) or Alaska law, the results will be similar because the court in either case starts with the earnest money contract and determines the rights of the parties which flow from it. Columbia cites a laundry list of damages, none of which are legitimate (see Part 4.4 of this memorandum), and Fikes damages to which it is not entitled (see, Part 4.5 of this memorandum).
4.4. The Damages Alleged by Columbia Do Not Raise Genuine
Material Issues of Material Fact Sufficient to Prevent a Motion for
Summary Judgment -
Columbia argues that NBA's position that it has not accepted
title is strained to say the least, and that the court is presented with
a private dispute between two parties not in bankruptcy. It claims that
the resolution of this dispute will have no bearing on the bankruptcy
estate and the court, therefore it does not have subject matter jurisdiction. NBA argues on the other hand, that it did not accept title, and
the Sampson property is still property of the estate. In addition, it
argues that if Columbia's theory of the case prevails, the amount of
NBA's unsecured claim against the bankruptcy estate will be increased,
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and thus, the resolution effects the bankruptcy estate. In re Feitz,
supra.
I agree with Columbia that NBA's position that it has not accepted title from the trustee is strained. In fact, I have treated this matter as if title had passed to NBA for the purpose of ruling on this motion for summary judgment.
In its December 26, 1995, memorandum regarding damages, Columbia alleged the following damages:
| Increased Loan Costs | $86,079 |
| Lost Warranty | $15,000 |
| Reduced Size of House | $18,396 |
| Completion Costs | $15,000 |
| Lost Earnest Money | $2,000 |
| Lot Equity | $14,000 |
| Kennedy Material & Labor | $17,000 |
| Property Management & Repair | $9,443 |
| Attorney Fees (est) | $45,000 |
| Personal Property | $4,500 |
| Construction Cost Credit | $???? |
| TOTAL (est) | $226,418 |
None of these items raise genuine issues of material fact for the following reasons:
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a present value analysis or the effect of an income tax
deduction under the current income tax laws. This
damage is wholly speculative. Anheuser-Busch,Inc.v
Natural Beverage Distributors, 60 F3d 337, 345 (9th Cir
1995); Thornhill Publ. Co., Inc. v General Telephone &
Electronics Corp., 594 F2d 730,739 (9th Cir 1979)
(b) Lost Warranty $15,000- NBA counters that the earnest money agreement does not provide for a warranty. The court cannot find one in the agreement between the Kennedys and NBA.
(c) Reduced Size Of House $18,396- In Kreiter's affidavit, he indicates that the earnest money agreement was for a home of 2,400± feet, but he measured the house to be only 2,187 feet. The quick answer is that the Kennedys accepted the home, and were apparently satisfied with the home at whatever size it was. See, Occupancy Agreement, Exhibit C, Page 2 of 3 to Reply Memorandum Of The National Bank Of Alaska Regarding Damages, Docket Entry 122, filed January 5, 1996.
(d) Completion Costs $15,000- Columbia argues that it will
be required to expend about $15,000 to complete the construction, and that this should be reduced from the
price as an element of damage. NBA counters that this
was a cost-plus contract and, if this cost was incurred
by Quigley, it would be recoverable. Since it was not
incurred, Columbia is not damaged. To support its
theory on this issue, Columbia cites Whitney v. McKay,
344 P2d 497, 499-500 (Wash 1959) and Hazelton & Son,
Inc. v. Teel, 211 NE2d 352, 356 (Mass 1965), for the
proposition that it is "clear that a purchaser under a
cost-plus contract is not entitled to damages for the
builder's failure to complete a structure." Neither of
these cases support that proposition. A more sensible
and equitable treatment is described in Sage Street
Associates v. Northday Construction Company, 863 SW2d
438, 443 (Tex 1993, reh overruled 1993). In Sage the
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court held that "where the owner is responsible for the
contractor's incomplete performance under a cost-plus
contract, proof that the cost ceiling would have been
met is not part of the contractor's prima facie case.
Since this is in the nature of a claimed credit to which
the owner must prove his entitlement, Northdale's failure to offer evidence of completion cost does not bar
recovery." One of the two footnotes to that statement,
FN7, indicates:
7By contrast, it has been held that when a contractor seeks to recover on a theory of substantial performance, the contractor bears the burden of proving the appropriate credit due to the owner for defects and omissions. See Atkinson v. Jackson Bros., 270 S.W. 848, 851 (Tex.Comm'n App. 1925, holding approved); Graham Constr. Co. V. Robert H. Pyle, Inc., 422 S.W.2d 485, 487 (Tex.Civ.App.--Corpus Christi 1967, writ ref'd n.r.e.); Pacific Coast Eng'g Co. v. Trinity Constr. Co., 410 S.W.2d 797, 800 (Tex.Civ.App.--Waco 1967, writ ref'd n.r.e.).
Notwithstanding my disagreement with NBA regarding the law, Columbia has offered no credible facts to show that it has been damaged.
(e) Lost Earnest Money $2,000- NBA acknowledges that Columbia should get credit for the $2,000 if it closes.
(f) Lot Equity $14,000- Columbia alleges that when the Kennedys sold the lot to Quigley in February 1994, for $29,000, it really had an equity above that. It alleged that the lot was worth $43,000 and thus claims damages of $14,000. NBA counters that the lot was purchased by the Kennedys for $23,000 and that they had received a $6,000 profit on their purchase.
Columbia cites no case law or relevant facts to show why the Kennedys should not be bound by their contract to sell the lot in February 1994, for $29,000.
(g) Kennedy Material & Labor $17,000- This was the amount
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Columbia alleges that the Kennedys put in as sweat
equity. NBA counters that, if the Kennedys put this
amount of sweat equity in, it is not an element of the
cost-plus contract and they have not been damaged. If
Columbia completes the purchase, it should recover no
damages. If it does not, NBA indicates that damages
should be limited to those for which NBA might claim an
equitable lien, which are:
| S&S Engineering (12/14/93 and 01/17/94) | $2,085 |
| M&M Contracting (01/18/94) | 360 |
| M&J Trucking (03/17/94 and 03/24/95) | 2,000 |
| Lot Clearing (before 04/14/94) | 1,200 |
| $5,645 |
(h) Property Management And Repair $9,443- This is based on a claim in Mr. Kreiter's affidavit that a Mr. Musgrove was retained to maintain the house. NBA counters that Musgrove is actually occupying the home and a $500 per month cost should be offset by a reasonable rental, which Columbia should be getting from the home, of about $1,500 to $2,000.
This does not raise a genuine issue of fact, since the home was substantially complete and ready to close in January 1995. The Kennedys moved into the house in September 1994, and it has been occupied by the Kennedys or Columbia since then. If Columbia closes, it will have had the benefit of occupancy through the entire period. If it does not close, the delay in closing will be substantially at its own choosing, and it should not recover for this period.
(I) Attorney Fees (est) $45,000- The court believes that NBA substantially prevailed in this case, and attorney fees, if anything, might be recoverable against Columbia and/or the Kennedys.
(j) Personal Property $4,500- NBA says that it is not
certain what property is claimed, but if there is a
closing, the Kennedys will recover this property. If it
is not a fixture or appliance then, apparently, NBA
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makes no claim to it.
(k) Construction Cost Credit $????- This item will be discussed below in section 4.5 of this memorandum.
4.5. Columbia Suffered No Fikes Damages - The Fikes case
should not create a windfall for Columbia. When this case came to my
court I was somewhat bemused as to why Columbia was arguing that a house
that is probably worth $200,000 (Columbia admits that it is worth at
least $165,000; NBA claims an appraisal of over $200,000) should not
close for about $183,000 without all this litigation. Nonetheless,
Columbia says is has accrued $45,000 of attorney fees on this matter.
How can this be?
The answer lies in Columbia's interpretation of Fikes v. First Federal Savings & Loan Association Of Anchorage, 533 P2d 251 (Alaska 1975). In that case, a construction lender did not monitor a builder and some of his construction loan proceeds were diverted to other jobs or, in any event, not applied to the construction project for which the loan was granted.
There was a cost-plus contract. The owner, Fikes, eventually settled with his builder and acquired the builder's rights.
The court held that First Federal had knowledge of the owner's (Fikes) contract with the builder to repurchase a lot sold by Fikes to the builder after the construction. The lender had suggested or required that the lot be put in the builder's name for the purposes of the construction loan.
First Federal sought to foreclose, and Fikes argued that the amount claimed was substantially more than was justified in view of the diversion. The supreme court agreed. It said, at 262:
In order to ascertain the amount of First Federal's security interest, the matter must be remanded for a determination of the precise amount spent for construction on Fikes' property.15
Footnote 15 provides:
15On remand, First Federal will have the burden of going forward by providing detailed accounts of the charges against the trust deed. Fikes must bear the burden of proving which of the charges, in fact, represent amounts diverted to other properties....
4 ABR 355
Columbia reads Fikes to limit the security interest only to those amounts from the precise construction loan on the property, which were dedicated to that property. At oral argument, I posed a hypothetical to Columbia's attorney. Suppose that a solvent and reputable contractor had a construction loan like the one in our case, and diverted the entire $166,400 to other purposes, but, paid the costs of the project from other sources. I asked Mr. McCarrey in that case, would it not be proper for a bank to be able to recover its construction loan since the owners (and for that matter, any of the subcontractors) were not out a dime. Columbia takes a hard line and says that Fikes requires that the bank could not recover in that situation.
I believe that Columbia has read Fikes too broadly in the facts of this case. It is important to note that NBA wears two hats in the present situation. One, it is the construction lender similar to First Federal Savings in the Fikes case. Secondly, NBA has primarily been pursuing its rights in this adversary proceeding as the "owner" of the property, similar to the builder in the Fikes case. Fikes does not address the second situation; the rights vis à vis the builder and the party for whom the property is being constructed.
It is not logical to equate the nonpayment of subs and material suppliers on a cost-plus contract, where the work was done and there are not liens, with a right to avoid payment by the purchaser. It is the subs and material suppliers who have been hurt, not the purchaser. Why should the purchaser inherit this windfall?
Columbia reads Fikes to say that the builder should be "punished" for failing to pay his subs. In many cases, the builder will pay the subs from other sources, and it is none of the purchaser's business as long as he gets the product he or she contracted for.
The bankruptcy court authorized the sale of this property free and clear of liens of the subcontractors. To the extent that there will be proceeds left over from this and other sales, the court will marshall the proceeds to pay those subcontractors to the extent possible. If the vendee of a debtor-vendor of real property (like Columbia) were able to steal the equity in a home on a "Fikes theory," money would be diverted from the bankruptcy estate and, the purchaser would be provided with a windfall.
4 ABR 356
In the bankruptcy context, a sale free and clear cleansed the Sampson Property of unpaid liens and Columbia is entitled to no further protection other than to see that it is not paying for construction that was not actually done, as opposed to not being paid for.
In Fikes, the exact amount of damages was left to the superior court. There is an indication that there might have been potential liens against the property and that, in any event, First Federal was attempting to collect on a deed of trust covering costs which were not actually used on the project. The facts are not specific enough to understand the full background of Fikes, but it seems like the supreme court was trying to prevent Fikes from having to pay for the costs of worker labor that were never performed on the Fikes property by anyone, but were drawn down from the construction loan and completely diverted to another project.
I do not believe that Fikes requires that the court deny a construction lender the ability to foreclose on property so long as an equivalent amount of labor and materials was actually applied to the property, even though not paid for out of the construction loan, so long as there is no lien against the property to lesson the value of the constructed project.
Fikes will be applied to this case to the following extent. Minkemann's declaration showed only $145,990.05 in bills (excluding the $29,000 lot purchase and $16,000 claim for overhead). NBA paid out the entire $166,400 construction loan. NBA will only be able to recover for the lesser amount.
In addition, I have arbitrarily reduced the profit and overhead recovery from $16,000 to $8,000. While the construction was substantially complete, I have made a deeper cut, so that Columbia cannot complain. NBA could complain, however, I anticipate it is more interested in ending this dispute than getting the bottom dollar.
The price for the purchase will, therefore, be:
| Costs of subs, labor and materials | $148,990 |
| Cost of lot | 29,000 |
| Profit and overhead | 8,000 |
| Less: Earnest money deposit | -2,000 |
| TOTAL | $183,990 |
4 ABR 357
4.6. Rent - The Kennedys entered into a contract with the
trustee to continue possession at $750 per month. NBA acquired the
trustee's rights under that contract when it bought the property.
4.7. Vendee's Lien - If Columbia elects not to proceed, it
will be entitled to an equitable lien for the amount of materials and
perhaps labor which was expended on the Sampson Property by the Kennedys.
11 USC § 365(i) provides for such a lien in bankruptcy and NBA agrees a
similar analysis prevails under common law.
The exact amount of the lien is not yet resolved. NBA wants to limit it to $5,645, whereas Columbia claims $17,000 (see, page 27 of this memorandum). If NBA is willing to settle for $17,000 as the correct amount of the vendee's lien, this matter can be resolved by summary judgment and judgment can be entered on this aspect also.
5. CONCLUSIONS - An appropriate order will be filed.
The major conclusion is that Fikes will not entitle Columbia to a windfall. It will have to pay equivalent value for the Sampson Property, if it wants it, of about $183,990.
If Columbia does not want to purchase, it is entitled to a vendee's lien of between $5,645 and $17,000. The exact amount is not determined.
NBA is entitled to rent of $750 per month from the date the deal was made with the trustee, at the end of 1994. This is the obligation of both the Kennedys up until late January 1995, when the Kennedys assigned their rights to Columbia, and the Kennedys and Columbia thereafter.
Punitive damages claimed by Columbia are not recoverable, given the conclusions made in this memorandum, but in an order I will give Columbia and the Kennedys time to dispute this proposed conclusion.
Attorney fees and costs will be considered when there is a final judgment.
I am presuming that with this result, the trustee and NBA can stipulate to a dismissal.