Case No. A94-00602-HAR In Chapter 7, ADV PROC NO A94-00602-001-HAR (BANCAP No. 95-3008), ADV PROC NO A94-00602-003-HAR (BANCAP No. 95-3019)United States Bankruptcy Court, D. Alaska
April 23, 1998
MEMORANDUM DECISION WITH REPORT AND RECOMMENDATION TO U.S. DISTRICT COURT
HERBERT A. ROSS, U.S. Bankruptcy Judge.
TO: THE U.S. DISTRICT COURT
This is a report and recommendation to the U.S. District Court pursuant to Alaska LBR 9033-1. This local bankruptcy rule provides that the court will report and recommend to the U.S. District Court the resolution of a non-core proceeding as provided by FRBP 9033 with respect to dispositive summary judgment motions. FRBP 9033 is a federal rule providing for a bankruptcy court to make recommendations to the district court in non-core matters. The report and recommendation in this matter are contained in Part 2 of this Memorandum Decision. The recommendation is based on the facts set forth in Part 3 and the analysis in Part 4.
1.PROCEDURAL OVERVIEW[1] — This proceeding involves a residence in Anchorage with an estimated worth between $165,000 and $200,000.The court approved a sale *of this residence from the trustee to the National Bank of Alaska (NBA), a secured creditor with a lien on the residential property approaching its fair market value. NBA in turn negotiated to sell the property to Richard D. and Margaret L. Kennedy (the Kennedys), parties who were having the residence built by the debtor before it filed bankruptcy.
The Kennedys never closed with NBA, but assigned their interest to Columbia Investments, Inc. (Columbia). Columbia is in possession.
This adversary proceeding is between NBA, Columbia and the Kennedys.The bankruptcy estate has an interest in the outcome, but has not actively participated. NBA wants to get paid or to get the property back. Columbia wants to acquire the property for a pittance. The Kennedys want to be free of the litigation since they have left the state and claim to have no further interest in the residence.
NBA and Columbia first filed cross-motions for summary judgment.By memorandum decision on May 23, 1996, I granted partial summary judgment in favor of NBA on its cross-motion for partial summary judgment (Docket Entry 137, Appendix C-8). In that ruling, I concluded that the purchase price of the residential property and lot involved (the “Sampson House” named after the subdivision where it is located) should be $180,990[2] , and Columbia or the Kennedys should have an election to purchase at that price. Subsequently there was a motion for reconsideration and clarification of the order in favor of NBA, filed by Columbia (Docket Entry 139, filed June 3, 1996).At a hearing on July 17, 1996, the court denied Columbia’s motion for reconsideration.
A second round of briefing began with NBA’s Motion For Summary Judgment Pursuant To Bankruptcy Rule 7056 And FRCivP 56 And In The Alternative, For Issuance Of Order Establishing The Law Of The Case (Docket Entry 145, filed June 17, 1996), an Memorandum (Docket Entry 146, filed June 17, 1996). In this second motion, NBA sought to dismiss the balance of Columbia’s claims. Columbia also filed an opposition to the partial summary judgment (Docket Entry 161, filed August 16, 1996).
NBA requested attorney fees and costs (Docket Entries 156-159, filed July 25, 1996), which was opposed by Columbia (Docket Entry 162, filed August 16, 1996). NBA seeks $85,747 in attorney fees and $7,335.83 in costs.
Oral argument was held on September 25, 1996.NBA filed a supplemental motion for attorney fees and costs (Docket Entry 170, filed October 11, 1996), which was opposed by Columbia (Docket Entry 173, filed October 21, 1996).
NBA has proposed findings of fact and conclusions of law, some of which have been adopted in this Memorandum Decision.
This Memorandum Decision with Report and Recommendation to U.S. District Court is to wrap up these proceedings, which I find to be non-core, and transmit a report and recommendation to the district court pursuant to FRBP 9033.
2.REPORT AND RECOMMENDATION [FRBP 9033]— I have determined that this is a non-core proceeding pursuant to 28 U.S.C. § 157(c) [see, Part 4.1 of thi Memorandum Decision] and hence, the following report and recommendation in Part 2 is submitted to the district court for review.
I recommend, pursuant to LBR 9033-1(b) and FRBP 9033, that the district court order the following relief:
2.1. Earnest Money Agreement Terms— The district court should find that the terms of the Sampson House Earnest Money Agreement dated February 3, 1994, and its amendments, between the Kennedys as the purchasers, and Quigley Enterprises, Inc., dba Quigley Quality Homes (Quigley) as seller, remains enforceable, as modified by ¶ 2.4 of this Memorandum Decision, and that all that remains to finalize the transaction is closing the sale if the Kennedys or Columbia elect to do so, or return of the Sampson House if they do not.The Sampson House construction should be deemed complete and in conformity with the requirements of the Sampson House Earnest Money Agreement and the construction plans for the purposes of ¶ 2.4. (See, Part 4.3 of this Memorandum Decision.)
2.2. Deed of Trust and Related Documents are Still inExistence and Enforceable—The district court should find that the Commercial and Multi-Family Deed of Trust, Assignment of Rents and Security Agreement dated April 15, 1994, between Quigley as trustor, and NBA as beneficiary, and Land Title Company of Alaska, Inc. as trustee, recorded on April 18, 1994, in Book 2634 at Page 375 in the Records of the Anchorage Recording District, Third Judicial District, State of Alaska, remains a valid and enforceable encumbrance against the Sampson House.(See, Appendix A-17, “Limited Liability Report.”) The district court should find that NBA is entitled to foreclose if the Kennedys or Columbia do not close the sale of the Samson House within a reasonable time.
2.3. Reaffirmation of Order of Sale—The bankruptcy court’s Order of January 23, 1995, authorizing the trustee to transfer title to the Sampson House to NBA free and clear of liens is reaffirmed by the bankruptcy court.The final judgment entered by the district court should remove all liens and claims against the property as they existed as of January 23, 1995, including, without limitation, all claims of the Kennedys or Columbia, but excluding the lien of the NBA deed of trust, municipal taxes and/or assessment liens, and prepetition easements, restrictions and covenants of record. (See, Appendix C-5, Docket Entry 171 in the main case.)
2.4. Election to Complete Sale or Return of Property;Vendee’s Lien—Within 15 days after entry of the district court’s final judgment, the Kennedys or Columbia should be required to advise NBA (by notifying Joseph Moran, Esq., NBA’s attorney) and the bankruptcy court in writing (by a paper filed in the adversary proceeding) whether or not they will elect to complete the purchase of the Sampson House. Failure to make such an election within the time allowed should be deemed an election not to close.
Closing will take place at NBA, unless the buyers chose to have closing at a reputable title company, real estate escrow service or another bank in Anchorage. The court should retain jurisdiction to establish any reasonable terms or modifications to the closing procedure.
In addition, to the $180,990 purchase price, the buyer should be required to pay rent and court-approved attorney fees and costs recommended in ¶¶ 2.5 and 2.6. NBA, in turn, should tender title to the Sampson House free and clear of all liens except covenants and restrictions of record.
If the Kennedys or Columbia elect not to complete the purchase of the Sampson House, they should not be entitled to a lien or other right of recovery other than for the return of the $2,000 earnest money deposit paid to Quigley and the vendor’s lien described in the following paragraph, both of which shall be applied against the rents, fees and costs due NBA.
If the Kennedys or Columbia do not elect to close, they are entitled to a vendee’s lien in an amount between $5,645 and $17,000.The exact amount will be set by a hearing before the bankruptcy court, which should report to the district court pursuant to LBR 9033-1 and FRBP 9033. (See, Part 4.4 of this Memorandum Decision at pages 34-35 and Order in Favor of NBA on Cross-motions for Partial Summary Judgment [NBA v. Kennedy and Columbia Investments], Docket Entry 136, filed May 23, 1996.)
If the Kennedys or Columbia elect not to complete the purchase of the Sampson House, they should within fifteen days after the deadline for making their purchase decision:
(a) arrange to have the occupants of the Sampson House, if any, vacate the premises within thirty days;
(b) remove all personal property owned by the Kennedys or Columbia or their occupants, other than the appliances and fixtures in the Sampson House;
(c) repair any damage to the Sampson House and return it to its original new condition.
(d) make orderly arrangements for transfer of all utilities associated with the Sampson House to NBA; and
(e) turn over possession of the Sampson House to NBA in broom-clean condition along with all keys.
If the Kennedys or Columbia timely elect to purchase the Sampson House, they should advise NBA and the court in writing. They should then have 30 days following their written election to close the purchase of the Sampson House. All payments due by the Kennedys and/or Columbia should be made to NBA in the form of a cashier’s check. An extension of the deadline to complete the closing should be granted on a showing by the Kennedys or Columbia of good faith efforts to close the purchase of the Sampson House.
If the Kennedys or Columbia elect to purchase the Sampson House, but the purchase does not close through no fault of NBA, the Kennedys and Columbia and their tenants, if any, should vacate the property as stated above, and pay NBA all rents, fees and costs due, within 5 days after the closing date.
2.5. Rent— A judgment for rent should be entered against the Kennedys to pay rent at the rate of $750 per month for occupancy of the Sampson House for the period commencing September 9, 1994, and ending on January 31, 1995. The rent shall be prorated for the partial month of September.The amount due is $3,525. Each rental installment should bear interest at the federal judgment rate from the date it was due until the date it is paid to NBA.
A judgment for rent should be entered requiring Columbia to pay rent at the rate of $750 per month for its occupancy of the Sampson House from February 1, 1995, through the date it either completes the purchase or properly vacates the premises.Each rental installment should bear interest at the federal judgment rate from its due date until the date it is paid to NBA. (See, Part 4.6 of this Memorandum Decision.)
2.6. Attorney Fees and Costs—NBA is the prevailing party as to all issues raised in Adversary Proceeding -001 (Adv-001). Columbia’s actions have been vexatious and in bad faith. Attorney fees in the amount of $85,747 plus any costs which are taxed should be awarded to NBA against Columbia.(See, Part 4.7 of this Memorandum Decision.)
2.7. Dismissal of Adversary 003 — Except to the extent expressly provided above, all claims asserted by Columbia against NBA in Adversary Proceeding -003 (Adv-003) should be dismissed with prejudice. (See, Part 4.9 of this Memorandum Decision.)
3. PROPOSED FINDINGS OF FACT — I propose the following facts be found by the district court:
3.1. The Parties — The following are the players in this matter:
— NBA is a national banking association. It is represented in this consolidated proceeding by DeLisio Moran Geraghty
Zobel, P.C.
— Columbia is an Alaska corporation. It was represented in this consolidated proceeding by the Law Offices of McCarrey McCarrey and is now represented by the Law Offices of Koval
Featherly.
— The Kennedys were Alaska residents. They are represented in this consolidated proceeding by the Law Offices of McCarrey McCarrey.
— William M. Barstow, III is the duly appointed trustee in the main bankruptcy proceeding. (See, Main Case Docket Entry 2.)
— Cabot Christianson is the attorney for the trustee. (See, Main Case Docket Entry 10.)
— Russell E. Minkemann is the accountant for the trustee. (See, Main Case Docket Entry 7.)
3.2. The Case and the Adversary Proceedings — The following are the case and adversary numbers of the matters involved:
— The main case is captioned In re Quigley Enterprises, Incorporated, dba Quigley Quality Homes. A voluntary chapter 7 petition was filed on September 19, 1994.
— NBA filed the adversary proceeding captioned National Bank of Alaska v. William M. Barstow, III, Richard D. Kennedy, Margaret L. Kennedy, and Columbia Investments, Inc., Adv-001, on January 31, 1995.
— Columbia filed a complaint captioned Columbia Investments, Inc., an Alaska corporation, Plaintiff, v. National Bank of Alaska, Defendant, Case No. 3AN-95-937-Civil in the Superior Court for the State of Alaska sitting in the Third Judicial District, on or about January 31, 1995.
— NBA timely removed the civil action filed by Columbia in the Superior Court to the Bankruptcy Court on February 22, 1995, designated as Adversary Case No. A95-00602-003-HAR (Adv-003).
— Upon motion by NBA, an Order was entered on June 16, 1995, consolidating Adv-003, the Columbia state court proceeding, with Adv-001, the NBA adversary proceeding.(See, Docket Entry 49, Appendix C-1.)
3.3.The Deal Between Quigley and the Kennedys-Quigley was a relatively large residential home builder in Anchorage prior to its chapter 7 bankruptcy, which was filed on September 19, 1994.
Prior to the bankruptcy, Quigley negotiated with the Kennedys to construct a home, the “Sampson House”, for them on a cost-plus basis.The legal description of the lot is:
Lot 15, Block 4, SAMPSON ESTATES SUBDIVISION, according to Plat No. 84-10 filed in the records of the Anchorage Recording District, State of Alaska.
The Kennedys owned the lot, which they had purchased for $22,500.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.(See, Answers to First Set of Interrogatories, Appendix B-1, Docket Entry 94 See also, Appendix A-1, “Earnest Money Receipt and Agreement to Purchase.”)
On February 3, 1994, the Kennedys entered into an agreement for the sale of the Sampson lot to Quigley for the sum of $29,000, payable in cash.This agreement is referred to in thi Memorandum as the Sampson House Earnest Money Agreement.(See, Answers to First Set of Interrogatories Appendix B-1, Docket Entry 94 See also, Appendix A-2, “Quigley Enterprises, Inc. Earnest Money Receipt and Agreement to Purchase.”)
Under the terms of the Sampson House Earnest Money Agreement, Quigley agreed to build a new single family home of approximately 2,400 square feet for a price equal to the cost of the lot, $29,000, the builder’s cost of materials, and a fixed fee of $16,000, representing the builder’s profit and overhead.(See, Answers to First Set of Interrogatories Appendix B-1, Docket Entry 94 See also, Appendix A-2, “Quigley Enterprises, Inc. Earnest Money Receipt and Agreement to Purchase.”)
The Kennedys understood they were entering into a cost-plus contract for the construction of the Sampson House.(See,
Answers to First Set of Interrogatories, Appendix B-1,
Docket Entry 94 See also, Appendix A-3, “Sales Price Analysis.”)
The Kennedys selected Quigley to build the Sampson House partially because a previous home had been satisfactorily built for them by Quigley and partially because Quigley was on an approved builder’s list maintained by their long-term loan lender, Norwest Mortgage, Inc.(See, Answer to Interrogatory No. 2, First Set of Interrogatories, Appendix B-1, Docket Entry 94.)
The Sampson House Earnest Money Agreement provided by its terms that it represented the entire agreement of the parties.The Sampson House Earnest Money Agreement contains no provision pertaining to a builder’s warranty.(See, Answers to First Set of Interrogatories, Appendix B-1, Docket Entry 94 See also, Appendix A-2, “Quigley Enterprises, Inc. Earnest Money Receipt and Agreement to Purchase.”)
3.4.Relationship Between the Kennedys andNBA—NBA had nothing to do with the Kennedys’ selection of Quigley as their home builder.The Kennedys had no contact with NBA prior to negotiating the Sampson House Earnest Money Agreement and did not expect to have any contact with NBA during the construction of the Sampson House.(See, Answers to Interrogatories 1 and 2, First Set of Interrogatories Appendix B-1, Docket Entry 94.)
3.5.The Kennedys’ Sweat Equity and Expenses—NBA did not know or have reason to believe that the Kennedys intended to provide a sweat equity contribution towards the construction of the Sampson House.The Kennedys had no contact with NBA either before the closing of the NBA Sampson House construction loan or before the filing of the Quigley chapter 7 bankruptcy petition.(See, Answers 1 and 2 to First Set of Interrogatories, Appendix B-1, Docket Entry 94.)
The Sampson House Earnest Money Agreement does not indicate that the Kennedys would be providing sweat equity through the provision of either labor or materials necessary to complete the Sampson House.(See, Answers to First Set of Interrogatories, Appendix B-1, Docket Entry 94 See also, Appendix A-2, “Quigley Enterprises, Inc. Earnest Money Receipt and Agreement to Purchase.”)
The Kennedys incurred expenses in improving the Sampson lot both before and after the sale of the Sampson lot to Quigley on April 15, 1994.Pre-sale lot expenses included the following:
Subcontractor/Materials Cost Dates
SS Engineering $2,085 12/4/93, 1/17/94 MM contracting $360 1/18/94
Post-sale lot expenses included the following:
Subcontractor/Materials Cost Dates
MJ Trucking $2,000 3/17, 3/24/97 Fasteners Fire Equipment Co. $10 6/21/94 Payless $24 7/04/94 Costco $343 7/15/94 MOA $25 7/20/94 Spenard Builders Supply $3 7/22/94 Eagle Hardware $69 8/05/94 Valley Home Center $2 8/14/94 Alaska Home Center $1,186 8/15/94 Brown’s Electric $34 8/15/94 David W. Allen $350 8/18/94 SS Engineering $2,010 8/19/94 SS Engineering $380 8/19/94 SS Engineering $530 8/19/94 Peter’s Creek Excavating $272 8/30/94 Heat Loss Analysis $100 8/31/94 Frontier Paving $4,050 9/94, 10/94 MJ Trucking $450 9/94 Peter’s Creek Excavating $512 9/3/94 Spenard Builders Supply $14 9/10/94 Eagle River Locksmith $82 9/17/94 SS Engineering $175 9/21/94 Energy Efficiency $65 early ’94 Associates
(See, Answers to First Set of Interrogatories, Appendix B-1, Docket Entry 94 See also, Appendix A-4, “Items Paid by Buyer, Normally Paid by Builder.”)
The Kennedys also provided labor related to the construction of the Sampson House which they valued at $7,900.With the possible exception of $1,200 for lot clearing efforts, all labor was put in after the sale of the Sampson lot to Quigley on April 15, 1994.(See, Answers to First Set of Interrogatories Appendix B-1, Docket Entry 94 See also, Appendix A-5, “Labor Provided by Buyer.”)
3.6.Quigley’s Construction Loan at NBA-On April 15, 1994, an NBA residential construction loan to Quigley in the amount of $166,400 was closed.The loan was memorialized by a promissory note in the original amount of $166,400 and a Commercial and Multi-Family Deed of Trust, Assignment of Rents and Security Agreement recorded on April 18, 1994, in Book 2634 at Page 675 in the records of the Anchorage Recording District, Third Judicial District, State of Alaska.(See, Affidavit of James Brinker, Appendix B-3, Docket Entry 37.)
As part of the construction loan closing on April 15, 1994, the sum of $28,824.99 was advanced by NBA to the Kennedys from the construction loan proceeds to satisfy Quigley’s lot purchase obligation under the Sampson Earnest Money Agreement.(See, Answers to First Set of Interrogatories Appendix B-1, Docket Entry 94 See also, Appendix A-6,
“Joint Escrow Instructions.”)
The Kennedys had knowledge of NBA’s construction loan and related deed of trust against the Sampson lot and the home to be constructed on it as of April 14, 1994. (See, Answer to Interrogatory No. 1, First Set of Interrogatories, Appendix B-1, Docket Entry 94 See also, Appendix A-6, “Joint Escrow Instructions.”)
3.7.Construction Draws on NBA by Quigley-Matthew Fitzgerald was an assistant vice president of NBA.He was the loan officer who initially approved the Sampson House construction loan and each subsequent advance of construction loan proceeds.(See, Affidavit of Matthew Fitzgerald Appendix B-2, Docket Entry 96.)
The Sampson House Earnest Money Agreement, along with a detailed construction cost estimate totaling $188,544, was presented by Quigley to NBA along with a request for a home construction loan.(See, Affidavit of Matthew Fitzgerald Appendix B-2, Docket Entry 96.)
Matthew Fitzgerald reviewed the Sampson House Earnest Money Agreement and the detailed construction cost estimate and prepared a construction cost budget.Based on these efforts, he approved the construction loan in the amount of $166,400 for Quigley.(See, Affidavit of Matthew Fitzgerald Appendix B-2, Docket Entry 96.)
Upon closing of the Sampson House construction loan, Matthew Fitzgerald opened a Progress of Construction and Data Report, which outlined the sequence of events and related percentages of completion that would occur during the course of construction of the Sampson House. (See, Affidavit of Matthew Fitzgerald, Appendix B-2, Docket Entry 96.)
In order to secure construction loan advances, Quigley was required to submit a request for construction loan draws identifying the contractors to be paid, the related payment amounts and the percentage of completion of the home.Each construction loan advance request was also accompanied by an open payables report setting forth, in line item format, the contractor or vendor, the estimated cost, actual cost and open payables listing for each step in the home construction process.(See, Affidavit of Matthew Fitzgerald Appendix B-2, Docket Entry 96.)
As a general rule, upon receipt of a construction loan draw request, Matthew Fitzgerald would review the construction draw information with the open payables report and undertake, or arrange for another representative of the bank to undertake, a physical inspection of the Sampson House to verify the percentage of completion.Matthew Fitzgerald would then approve a construction loan advance consistent with the percentage of completion revealed by the physical inspection.(See, Affidavit of Matthew Fitzgerald, Appendix B-2, Docket Entry 96.)
From April 18, 1994, through August 11, 1994, five construction loan advances were approved by Matthew Fitzgerald on the Sampson House construction loan.As of September 1, 1994, NBA had advanced to Quigley a total of $165,813.66 on the Sampson House construction loan for the acquisition of the lot and the payment of construction related expenses.(See, Affidavit of Matthew Fitzgerald, Appendix B-2, Docket Entry 96.)
3.8.Amendments to Earnest Money Agreement-On September 7, 1994, the Kennedys entered into an amendment of the Sampson House Earnest Money Agreement in which the date for closing the purchase of the home was extended to October 31, 1994.(See, Appendix A-7, “Amendment to Earnest Money Agreement,” dated February 3, 1994.)
On September 8, 1994, the Kennedys entered into a second amendment to the Sampson House Earnest Money Agreement entitled “Occupancy Agreement.”Under the terms of the Occupancy Agreement, the Kennedys were allowed to take possession of the Sampson House on September 9, 1994.Also, under the terms of the Occupancy Agreement, the Kennedys accepted the Sampson House as then constructed, subject only to completion of paving of the driveway, an event which subsequently; occurred.As rent, the Kennedys agreed to pay $1.00 per day until the closing of their long-term loan for the construction of the Sampson House. (See, Answers to First Set of Interrogatories Appendix B-1, Docket Entry 94. See also, Appendix A-8, “Occupancy Agreement.”)
3.9.Quigley Files Chapter 7 and Work Ceases—On September 19, 1994, Quigley filed its chapter 7 bankruptcy petition in the Main Case.(See, Main Case Docket Entry 1.)
No work was done on the Sampson House by Quigley after the filing of the chapter 7 petition.
3.10.Kennedys Agree Sampson House Was SubstantiallyCompleted—As of September 27, 1994, the Kennedys agree that the Sampson House was approximately 95% complete and assert that the following work needed to be undertaken to secure a certificate of occupancy:
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 approximately 40 more blocks, D-1 and gravel fill at approx $700;
3. Bathroom mirrors (3);
4. Install one remaining HRV boost switch — materials on site; and,
5. Painting of remaining interior doors (11 doors, mostly on first floor) — materials estimate: 1 gallon of paint/roller.
This remaining work was nominal, and not sufficient to constitute a material breach of the construction contract.(See, Answer to Interrogatory No. 8, First Set of Interrogatories, Appendix B-1, Docket Entry 94 See also, Appendix A-9, “Items Required For Certificate of Occupancy.”)
3.11.Trustee’s Accountant’s Analysis of QuigleyRecords—At the request of NBA, trustee’s accountant, Russell E. Minkemann, reviewed the records of Quigley to determine the cost incurred by Quigley in constructing the Sampson House.Initially, Mr. Minkemann printed a report captioned “Vendor History by Job” for the Sampson House from Quigley’s computer records.The report sets forth a listing of the costs incurred by Quigley in the construction of the Sampson House by reference to vendors and contractors.This report revealed that Quigley incurred costs totaling $145,990.05, exclusive of the cost of the lot or Quigley’s profit and overhead in building the Sampson House.(See, Affidavit of Russell E. Minkemann Appendix B-4, Docket Entry 95.)
Minkemann confirmed the accuracy of the Vendor History by Job Report for the cost of constructing the Sampson House by reviewing the cost records and pulling copies of supporting invoices for nearly all the entries on the Vendor History by Job Report.(See, Affidavit of Russell E. Minkemann Appendix B-4, Docket Entry 95.)The Minkemann report is reliable.
In the view of Minkemann, it appeared that Quigley’s record-keeping practices became sloppy prior to the filing of its chapter 7 petition on September 19, 1994.In the opinion of Minkemann, there were likely additional costs incurred by Quigley in constructing the Sampson House for which no records were kept by Quigley.(See, Affidavit of Russell E. Minkemann Appendix B-4, Docket Entry 95.)
As of September 19, 1994, the amount due Quigley by the Kennedys, according to the terms of the Sampson House Earnest Money Agreement, for the construction of the Sampson House was as follows:
Cost of Lot $29,000.00
Documented Cost of Construction $145,990.05
Sub-total Before Builder’s Fee $174,990.05
Builder’s Fee $16,000.00
TOTAL $190,990.05
3.12.Kennedys’ Negotiations with theTrustee—By letter dated October 14, 1994, theKennedys, through the law offices of McCarrey McCarrey, offeredto purchase the Sampson House from the estate for the reduced sumof $182,969.(See, Appendix A-10, Letter of Attorney McCarrey, dated October 14, 1994.)
In subsequent discussions with the trustee, the Kennedys, through their attorney, agreed to pay rent in an amount equal to $25 per day or $750 per month.The rental was to commence September 8, 1994.(See, Trustee’s Application toReject Pre-Petition Earnest Money Agreement, Sell Property Freeand Clear of Liens and to Distribute Sales Proceeds [Trustee’sApplication], Main Case Docket Entry 117,Appendix C-2, with attached “Sale Agreement.”)
Trustee Barstow prepared an Earnest Money Agreement memorializing the agreement negotiated by the Kennedys’ attorney.(See, Sale Agreement” attachedto Trustee’s Application, Main Case DocketEntry 117, Appendix C-2.)
3.13.Trustee Sought Authority to Sell theSampson House—Prior to securing execution of theEarnest Money Agreement, the trustee filed an application toreject the prepetition Sampson House Earnest Money Agreement asamended by the Occupancy Agreement and the Closing Date ExtensionAgreement.(See, Trustee’s Application, Main Case Docket Entry 117, Appendix C-2.)
On November 18, 1994, the court entered an order rejecting the Sampson House Earnest Money Agreement, as amended, and approving the sale of the Sampson House pursuant to the terms of the Earnest Money Agreement negotiated by the trustee.The sale was subject, however, to the approval of NBA and the approval of Spenard Builders Supply.(See, Order Authorizing Sale of Lot 15, Block 4, Sampson to Kennedys Free and Clear of Liens and Authorizing Disbursal of Proceeds, Main Case Docket Entry 136, Appendix C-3.)
3.14.Global Settlement Between the Trustee andNBA—While efforts to conclude the Sampson House sale according to the Earnest Money Agreement negotiated by the trustee were underway, the trustee entered into a global settlement of all remaining open issues between NBA and the estate.Under the terms of the settlement agreement, NBA would take title to five partially completed homes against which NBA held construction loan deeds of trust in exchange for a payment of $15,000.In addition, the trustee agreed to convey the Varner Home and the Sampson House to NBA in exchange for NBA’s promise to pay over to the estate any sales proceeds remaining after deduction of the balance due on NBA’s construction loan and closing costs.(See, Order Approving Agreement filed January 23, 1995, Main Case Docket Entry 170, Appendix C-4.)
Both NBA and the trustee contemplated that NBA would retain the lien of its construction loan deed of trust against each home governed by the global settlement and that NBA would have the right to assert an unsecured claim for any deficiency after NBA liquidated the property. (See, Appendix A-11, “Deposition of Trustee William Barstow, III,” pages 94 and 95.)
3.15.Hearing on Global Settlement Addressed the SampsonHouse—A hearing was held on January 20, 1995, on the trustee’s motion to approve the global settlement.Just prior to the commencement of the hearing, NBA representative James Brinker and NBA’s attorney, Jan Ostrovsky, had a discussion with attorney J. L. McCarrey regarding the Kennedys’ intention to purchase the Sampson House.Based on the conversation with McCarrey, Brinker understood that the Kennedys intended to purchase the home according to the terms of the deal negotiated with the trustee.(See, Affidavit of James Brinker, Appendix B-6, Docket Entry 13.)
Based on Brinker’s assumption that the Kennedys intended to purchase the Sampson House according to the terms of the agreement negotiated with the trustee, Mr. Brinker consented to a hand-written interlineation on the order approving the transfer of the Sampson House.The relevant portion of the Order
then read as follows:
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. Aside from any claims of NBA, all claimed interests in the respective properties shall attach to the respective proceeds received by the Trustee to the same extent and in the same order of priority as existed in the property. [The interlineation is italicized and in bold].
Mr. Brinker would not have agreed to the interlineation had he understood that the Kennedys did not intend to purchase the Sampson House according to the terms of the post petition Earnest Money Agreement the Kennedys had negotiated with the trustee.(See, Affidavit of James Brinker, Appendix B-6, Docket Entry 13.)
NBA had no intention of merging its existing construction loan deed of trust into its ownership of the Sampson House under the January 23, 1995, Order transferring title to the Sampson House to NBA free and clear of liens.
The trustee understood NBA would retain the lien of its construction loan deed of trust against the Sampson House following the transfer of title to the Sampson House to NBA pursuant to the Order of January 23, 1995.(See Appendix A-11, “Deposition of Trustee William Barstow, III” pages 94 and 95.)
3.16.Kennedys’ Undisclosed Intention Was Not to CompleteSale— In late November or early December of 1994, the Kennedys commenced negotiations with a representative of Columbia which culminated in the transfer of their interest in the Sampson House to Columbia on January 27, 1995.(See, Second Set of Discovery, Appendix B-5, Docket Entry 113.)Neither the trustee nor NBA knew of the proposed transfer to Columbia at the time of the global settlement hearing described in ¶¶ 3.14 and 3.15.
By the end of December 1994, the Kennedys had reached a decision, in consultation with their attorney, not to go through with the purchase of the Sampson House.(See, Response to Interrogatory No. 3, Second Set of Discovery Appendix B-5, Docket Entry 113.)
On January 27, 1995, the Kennedys entered into an agreement with Columbia under which they conveyed all their interest in the Sampson House to Columbia in exchange for the amount of $4,500 in cash, the right to occupy the Sampson House rent free for sixty days, Columbia’s agreement to pay attorney fees due; the Law Offices of McCarrey McCarrey incurred during the month of January 1995, and Columbia’s agreement to indemnify the Kennedys from any claims made by NBA.(See, Second Set of Discovery, Appendix B-5, Docket Entry 113 See also, Appendix A-12, “Agreement.”)
On January 27, 1995, trustee Barstow executed quitclaim deeds to NBA, conveying the estate’s interest in the seven properties governed by the global settlement agreement approved by the court.
3.17.NBA Attempts to Close with Kennedys—NBA scheduled a meeting with the Kennedys’ attorney to close the sale of the Sampson House to the Kennedys.The meeting was postponed until January 31, 1995, at the request of the Kennedys’ attorney.On January 31, 1995, NBA was ready, willing and able to close the sale of the Sampson House to the Kennedys according to the terms of the post petition Earnest Money Agreement negotiated with the trustee. An earnest money agreement incorporating the terms of the post petition earnest money agreement which the Kennedys negotiated with the trustee was brought to the meeting.(See, Affidavit of James Brinker, Affidavit B-6 See also, Appendix A-13, NBA’s draft “Real Estate Purchase and Sale Agreement.”)
3.18.NBA Was Prepared to Close, But Columbia RefusedWithout Substantial Justification—Attorney McCarrey appeared at the January 30, 1995, meeting with Columbia representative Kreiter.Columbia refused to purchase the Sampson House according to the terms of the post petition Earnest Money Agreement that the Kennedys had negotiated with the trustee.This refusal was without substantial justification.Shortly after the meeting, Mr. Brinker obtained possession of the trustee’s deed to the Sampson House from the title company, which he subsequently returned to the trustee.(See, Affidavit of James Brinker, Appendix B-6, Docket Entry 13.)
As of January 31, 1995, NBA was ready, willing and able to close the sale of the Sampson House to the Kennedys according to the terms of the post petition Earnest Money Agreement negotiated by the Kennedys and the trustee.The sale had been approved by the court by order dated November 18, 1995 (Main Case Docket Entry 136), and NBA had secured an order transferring title to the Sampson House free and clear of liens dated January 23, 1995 (Main Case Docket Entry 171). Finally, NBA had prepared an appropriate Earnest Money Agreement.(See, Affidavit of James Brinker, Appendix B-3, Docket Entry 37 See also, Appendix A-13, “Real Estate Purchase and Sale Agreement.”)
3.19.The Kennedys Had Financing to Close, Despite AnyDelays—As of September 19, 1994, the Kennedys’ long-term lender, Norwest Mortgage, Inc., had issued a commitment to provide a long-term loan under the Alaska Housing Finance Corporation’s (AHFC) Tax Exempt Qualified Veterans Mortgage Loan Program.Under the terms of this loan program, the borrower must be a qualified veteran and must own and occupy the home securing the loan.The loan may not be assumed by a non-qualified veteran.(See, Appendix A-14, “Commitment Contract.”)
On or about October 24, 1994, the Kennedys’ AHFC long-term loan commitment was extended to March 31, 1995.(See, Appendix A-15, Letter dated October 24, 1994.)
The Norwest/AHFC loan commitment was terminated by Norwest on March 9, 1995, after Norwest was unable to locate the Kennedys to schedule a closing.(See, Appendix A-16, “Statement of Credit Denial, Termination or Change.”)
3.20.Status of Title—As far as the court is aware, record title for the Sampson House remains in the estate.The trustee is in possession of the original quitclaim deed for the Sampson House.(See, Appendix A-17, “Limited Liability Report” of Stewart Title, dated March 20, 1997.)
3.21.Potential Claim of NBA Against Estate— NBA has advised the trustee that it retains the right to a claim against the estate if it does not receive what it bargained for in the global settlement with the trustee.
4.LEGAL ANALYSIS—
4.1.This Is a Related Matter; Court Has Subject MatterJurisdiction— Although the dispute is principally between nondebtors, NBA, the Kennedys, and Columbia, the resolution may effect the distribution.NBA alleges, and the trustee has not disputed, that if Columbia prevails, its claim against the bankruptcy estate will increase.In reFietz, 852 F.2d 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 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 U.S.C. § 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.
This is a sufficient effect to give the court subject matter jurisdiction.
Some of the other reasons for determining that this is at least a related proceeding are that they involve:
(a)the interpretation of this Court’s Orders of January 23, 1995 (Main Case Docket Entries 170 and 171), under which title to the Sampson House was to be conveyed by the bankruptcy estate to NBA;
(b)a determination as to whether the Sampson House remains an asset of the bankruptcy estate;
(c)a determination of whether 11 U.S.C. § 365 applies to the rights of the Kennedys and their assignee, Columbia, under the facts of this case;
(d)a determination of the amount due by the Kennedys and their assignee, Columbia, for the purchase of the Sampson House under the Sampson House Earnest Money Agreement, which in turn will determine the amount of NBA’s unsecured claim against the bankruptcy estate; and,
(e)a determination of the validity, amount and priority of NBA’s claim against the Sampson House, a possible asset of the bankruptcy estate.
(See, Appendix D-1.)
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 the bankruptcy court does not have subject matter jurisdiction.
NBA argues on the other hand, that it did not accept title, and the Sampson House 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, 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 the first motion for summary judgment.
After a review of the facts, I decided on March 23, 1995, not to abstain from exercising jurisdiction over the issues in this combined proceeding. I believed then and now that the bankruptcy court has subject matter jurisdiction.NBA’s potential claim or increased claim against the bankruptcy estate gives the court subject matter jurisdiction, but this dispute effects the bankruptcy estate. That decision is reaffirmed in thi Memorandum Decision.
4.2.Summary Judgment Is Appropriate In ThisCase— I have previously entered a partial summary judgment on May 23, 1996, providing that Columbia and the Kennedys did not suffer damages that were compensable underFikes (See, Memorandum Decision for NBA on Cross-Motions for Summary Judgment [NBA v. Kennedy and Columbia Investments], Docket Entry 140, and Appendix C-8.)
FRCivP 56(c), incorporated by FRBP 7056, provides that summary judgment shall be entered when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.The purpose of summary judgment is to identify and dispose of factually unsupported claims and defenses See, Wolsifer v. Atlanta Submarines,Inc., 848 F. Supp. 1489, 1493 (D Hawaii 1994).
NBA, as the moving party, bears the initial burden of showing the absence of a genuine issue of material fact See,Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).
Once NBA has met its initial burden of showing the absence of a genuine issue of material fact, the burden shifts to the Kennedys and Columbia to set forth specific facts showing there is a genuine issue for trial See, FRCivP 56(e).
When the non-moving party, here the Kennedys and Columbia, bears the burden of proof at trial, such party must establish each element of its claim with significant probative evidence tending to support its claims See, Barnett v.Centoni, 31 F.3d 813, 815 (9th Cir 1994).When there is a failure of proof concerning an essential element of the non-moving party’s case, other facts become immaterial and the moving party, here NBA, is entitled to judgment as a matter of law See, Travers v. Sullivan, 791 F. Supp. 1471
(ED Wash 1992).
In determining if there is a genuine issue of fact, this court may draw inferences in favor of the Kennedys and Columbia if they are rational, reasonable and otherwise permissible in light of the governing substantive law and substantive burden See, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 253-54 (1986) See also, T.W.Electrical Service, Inc. v. Pacific Electrical ContractorsAssociation, 809 F.2d 626, 631 and fn 3 (9th Cir 1987).Mere allegations or conjecture unsupported in the record are insufficient to raise a genuine issue of material fact See, August v. Offices Unlimited, Inc., 981 F.2d 576, 580 (1st Cir 1992).
As discussed in Parts 4.3 — 4.6 of this Memorandum Decision, NBA has established the absence of genuine issues of material fact as to the findings of fact set forth above.The Kennedys and Columbia have failed to establish the elements of their various claims and defenses with significant probative evidence tendered to support such claims or defenses.
4.3.NBA and Columbia Agree That Damages are Analyzed In aSimilar Manner Either Under 11 U.S.C. § 365(i),(j) or StateLaw -NBA insisted in its opening brief in its first motion for summary judgment that the rights of the Kennedys and, therefore, the rights of Columbia are defined by 11 U.S.C. § 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 prepetition damages. 11 U.S.C. § 365(g)(1); Collier onBankruptcy, (15th ed), ¶ 365.08.
Nonetheless, the trustee in the exercise of his business judgment sought to close the sale of the Sampson House to the Kennedys on close to the same terms as the original and amended Sampson House Earnest Money Agreement.
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.
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 B.R. 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 receive a lien for any payments under 11 U.S.C. § 365(j).(See, NBA’ 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, seem to agree that whether the damages are determined under §§ 365(i), (j) or Alaska law, the results will be the same or similar because the court in either case starts with the earnest money contract and determines the rights of the parties which flow from it.
4.4. Damages Alleged by Columbia Do Not Raise GenuineIssues of Material Fact Sufficient to Prevent a Motion forSummary Judgment—Columbia cites a laundry list of damages, most of which are not legitimate (discussed in Part 4.4 of this Memorandum Decision), and “Fikes” damages to which it is not entitled.(See, Part 4.5 of thi Memorandum Decision.)The Kennedys agreed that the Sampson House was 95% or more complete and that only minor efforts were needed to secure a certificate of occupancy as of September 27, 1994.These items included the following:
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 approximately 40 additional blocks are required along with D-1 and gravel to provide fill at an approximate cost of $700;
3. Bathroom mirrors (3);
4. Install one remaining HRV boost switch — materials on site; and,
5. Painting of remaining interior doors (11 doors, mostly on first floor) — materials estimate: 1 gallon of paint plus roller.
Given the minimal nature of this punch list, the court finds that Quigley had substantially performed its obligations under the Sampson House Earnest Money Agreement prior to the bankruptcy.
Under Alaska Law, once a contractor establishes substantial performance, the burden shifts to the buyer to establish deficiencies in performance entitling the buyer to recoupment or setoff. See, Alaska State Housing Authority v.Walsh Co., Inc., 625 P.2d 831, 835 (Alaska 1980); See also, Hopkins Construction Company v. RelianceInsurance Co., 475 P.2d 223, 224-226 (Alaska 1970). (See, Appendix D-16, D-17.)Although Columbia says the Kennedys, whose rights Columbia succeeded to, were damaged by Quigley’s defaults, no concrete evidence of this has been shown.
In its December 26, 1995, memorandum regarding damages, Columbia alleged the following damages caused by Quigley:
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 (Fikes Damages) undetermined
TOTAL (est) $226,418
None of these items raise genuine issues of material fact for the following reasons:
(a)Increased Loan Costs ($86,079)—The sale of the completed house was scheduled to close in October 1994.Because of the bankruptcy, it did not, but could have closed in January 1995.There is no credible evidence to indicate that there would have been substantially increased loan costs, interest rate, or fees.Columbia has argued that the favorable rate for a VA loan was lost by the Kennedys.Columbia, itself, apparently could not qualify for a VA rate, and there is no evidence that there was such an increase, let alone in the amount alleged by Columbia.(See, Affidavit Of Arthur J. Kreiter, Docket Entry 120, filed December 26, 1995.)Mr. Kreiter is a representative of Columbia and alleges that the Kennedys could have had a 5.625% loan, but today Columbia would have to pay at least 7 % conservatively on a 30-year loan for $180,000.He equates this to an interest increase of $86,079.He does not supply the court with 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 F.3d 337, 345 (9th Cir 1995); Thornhill Publ. Co., Inc. v. General TelephoneElectronics Corp., 594 F.2d 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 square feet, but he measured the house to be only 2,187 square 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 citesWhitney v. McKay, 344 P.2d 497, 499-500 (Wash 1959) andHazelton Son, Inc. v. Teel, 211 N.E.2d 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 Associatesv. Northdale Construction Company, 863 S.W.2d 438, 443 (Tex 1993, reh overruled 1993).In Sage, the 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 footnotes to that statement, FN7, indicates:
[7] By 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 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:
SS Engineering (12/14/93 and 01/17/94) $2,085
MM Contracting (01/18/94) 360
MJ Trucking (03/17/94 and 03/24/95) 2,000
Lot Clearing (before 04/14/94) 1,200
$5,645
The court does not ultimately determine the correct amount.Rather, if the sale does not close, the amount of the vendor’s lien is bracketed between $5,645 and $17,000, plus the $2,000 earnest money deposit.That amount can be decided later.It will, however, only be an offset to the rent and attorney fees and costs for which Columbia is responsible.(See, Parts 4.6 and 4.7 of this Memorandum Decision.)
(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 ($45,000 estimated)— 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 makes no claim to it.
(k)Construction Cost Credit (UndeterminedFikes_Damages)— This item will be discussed below in Part 4.5 of this Memorandum Decision.
4.5.Columbia Suffered NoFikes_Damages —Much of Columbia’s case hinged on its interpretation of Fikes v. First FederalSavings Loan Assoc. of Anchorage, 533 P.2d 251 (Alaska 1975).The Fikes case, however, does not create a windfall for Columbia.
When the present adversary proceeding first came to my attention, 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 in attorney fees on this matter.How can this be?
The answer lies in Columbia’s strained interpretation ofFikes v. First Federal Savings Loan.In that case, First Federal, 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.
The builder had a cost-plus contract with the original owner of the lot.Like the present matter, in Fikes the owner transferred the lot to the builder to arrange construction financing.The owner, Fikes, eventually settled with his builder and acquired the builder’s rights.
The court held that First Federal had knowledge of the 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 in Fikes provided:
[15] EMOn 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 . . .
Columbia reads Fikes to limit the amount recoverable on the construction lender’s security interest only to those amounts from the actual construction loan on the property which were used on that property, and not elsewhere.
At oral argument, I posed a hypothetical question 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 Columbia’s counsel if the bank would be able to enforce its construction loan since the owners (and for that matter, any of the subcontractors) were not out a dime and got what they bargained for. Columbia takes a hard line and says that Fikes requires that the bank could not enforce its construction loan deed of trust in that situation.It argues that since the funds had not come from the construction loan in question, the construction loan deed of trust does not cover the amount.
I believe that Columbia reads Fikes
incorrectly.First, 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-á-vis the builder and the party for whom the property is being constructed.NBA has also acquired the rights of the builder, Quigley.While its rights as lender protect its investment in the property, its rights as “owner” give it the right to sell the property for what its worth, or reap the benefit of Quigley’s substantially completed construction effort on the Sampson House.
Secondly, it is not logical for Columbia to equate the nonpayment of subs and material suppliers on a cost-plus contract, when the work was done and there are no liens, with a right to avoid payment for the Sampson House 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.Fikes was to protect an owner from damage, not a general police action against lenders who do not require a construction draw go into the property involved even if there are no owner damages.
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.
In the bankruptcy context, a sale free and clear cleansed the Sampson House 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 the Alaska Supreme Court was apparently trying to save Fikes from having to pay for the costs of work that was never performed on his property by anyone, where funds for the work had been drawn down from the construction loan and completely diverted to another project.
In our situation, the work was performed, and the Kennedys and/or Columbia are not being asked to pay for something they did not receive.I do not believe thatFikes requires that a 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.That is, provided also that there are no liens against the property to encumber the property.
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 $145,990 Cost of lot 29,000 Profit and overhead 8,000 Less: Earnest money deposit -2,000 TOTAL $180,990
4.6.Rent Due From Columbia-The Kennedys, upon taking possession of the Sampson House on September 9, 1994, had an initial obligation to pay rent at the rate of $1.00 a day under the terms of the Oc3cupancy Agreement amending the Sampson House Earnest Money Agreement.The Court finds that Quigley’s agreement to allow occupancy of the Sampson House for the sum of $1.00 a day was in Quigley’s reasonable anticipation that the sale of the home would close on or before October 31, 1994, the due date under the amendment to the Sampson House Earnest Money Agreement.
Even under general equitable principles, the Kennedys and Columbia are obligated to pay a fair rental value for the Sampson House while they occupy it See, Sidney FederalSavings and Loan Association v. Jones, 337 N.W.2d 779, 781
(Neb 1983).In Alaska, the fair rental value due by a purchaser in possession of a home is interest on the unpaid purchase price.Where there is no express agreement for the payment of interest, the statutory interest rate is 10 1/2% per annum under state law See, Dillingham Commercial Co. v.Spears, 641 P.2d 1, 10 (Alaska 1982), and AS § 45.45.010(a).(See, Appendix D5 — D7.)Under federal law, the federal judgment rate should be used. 28 U.S.C. § 1961.
The evidence reflects that the Kennedys, through the assistance of their counsel, the Law Offices of McCarrey McCarrey, entered into an agreement with the trustee to pay rent in the amount $750 per month.Under the terms of the agreement, the Kennedys agreed to pay $750 per month effective September 8, 1994.The Kennedys are obligated to pay rent at the rate described above for the period from September 8, 1994, through January 31, 1995.Thereafter, Columbia is obligated to pay rent in the amount of $750 per month until such time as it either closes the purchase of the Sampson House or turns over possession of the home.$750 is a very fair rental value to the tenant for a property like the Sampson House.
4.7.NBA Entitled to Attorney Fees and Costs—NBA has also moved for an award of $85,747 attorney’s fees, plus costs of $7,335.83 (Docket Entries 156-159 filed July 25, 1996).It seeks to recover full attorney’s fees and costs on the grounds that the claims asserted by Columbia were frivolous, vexatious, oppressive, and in bad faith.
In support of its request for full attorney’s fees and costs, NBA asserts that it has prevailed on all procedural motions filed by the Kennedys and Columbia and has prevailed on two of the three procedural motions filed by the bank.In addition, NBA asserts the court has found that it is the prevailing party on all material issues raised in the first and second motions for summary judgment filed by NBA.For these reasons, NBA is clearly the prevailing party and is entitled to an award of attorney’s fees and costs.
NBA asserts that it is entitled to such an award for the following five reasons:
(1) The Kennedys’ and Columbia’s ongoing stubborn refusal to properly provide discovery as required under the Bankruptcy Rules and modern discovery practice;
(2) The extensive efforts by the Kennedys and Columbia to frustrate the resolution of key issues in this case by summary judgment through their assertion, on five separate occasions, of a right to extend the time for dealing with the issues raised in the summary judgment motions;
(3)The Kennedys’ and Columbia’s stubborn and unwarranted refusal to disclose the basis for their alleged damage claims followed by their assertion of a laundry list of 11 different damage theories, each of which was ultimately determined by the court to be baseless; and,
(4)The Kennedy’s and Columbia’s opportunistic, stubborn and unwarranted reliance on the opinion in the Fikes case.
In the context of this case, NBA should be awarded the full attorney fees requested and its costs against Columbia.I will not award attorney fees against the Kennedys since their role was minimal.On the other hand, Columbia’s approach to this litigation appears to have been in bad faith.
Although Columbia has denied trying to “steal” the Sampson House (worth $165,000 to $200,000) for a fraction of its worth, that appears to be what it tried to do. In the context of this case, the behavior was vexatious, oppressive, in bad faith, and justifies an award of full attorney fees of $86,757, and costs which may be taxed.In re Harvey, 172 B.R. 314, 318 (9th Cir BAP 1994); In re East Coral, Inc., 54 B.R. 1009, 1022
(Bankr CD Cal 1985).
The attorney fee award is high, but Columbia’s counsel indicated somewhat earlier in the case that his attorney fee meter was at the $45,000 level already.(See, ¶ 4.4.)It is apparent that Columbia got into this situation for a nominal payment on the misconception that it had NBA over a barrel because of Fikes.In the beginning of this litigation, I asked Columbia’s counsel why it was entitled to a $165,000 — $200,000 property for some small fraction of it.While Columbia piously indicated it did not want to “steal” the property, but only needed proof of what was owed, its actions belie that claim.In my opinion, they were out to steal the property over an over-technical interpretation of the law, and should be sanctioned by an award of full attorney fees to NBA.
4.8.Summary of Purchase Price and Other Costs Necessary toClose—To summarize, should the Kennedys or Columbia choose to complete the purchase of the Sampson House, they should be required to pay NBA the following:
Cost of the lot $29,000 Cost of construction 145,990 One-half of the builder’s profit and overhead 8,000 Less Earnest Money Agreement -2,000 TOTAL: $180,990
In addition to the above, the Kennedys are obligated to pay rent under the terms of the post petition Earnest Money Agreement from September 9, 1994, through January 31, 1995, at the rate of $750 per month, or portion thereof.Columbia is obligated to pay rent in the amount of $750 per month from February 1, 1995, through the date that Columbia either completes the purchase of the Sampson House, or relinquishes possession of the Sampson House to NBA broom clean and in proper condition.
In addition, Columbia should be required to pay the attorney fees and costs as a condition of closing.The Kennedys, while not personally responsible, must see that the Columbia attorney fees are paid in order to close.It is a condition of the NBA deed of trust that its legal costs are covered.
I realize that the sum of these figures makes it unlikely that Columbia will close.
Should the Kennedys or Columbia elect not to complete the purchase of the Sampson House, they should nevertheless remain liable for payment of rent in the respective amounts set forth above, until such time as Columbia properly tenders possession of the Sampson House to NBA.
In order to properly tender possession of the Sampson House to NBA, Columbia should remove its personal property, other than fixtures and appliances, repair any damage to the home done by its tenants or other occupants necessary to return the Sampson House to its original new condition, reasonable wear and tear excepted, and ensure that the home is in broom clean condition.
4.9.Resolution of the Remaining Claims For Relief of BothParties—The findings of fact and preceding analysis address the claims asserted by NBA in Adv-001 and in Count I of Columbia’s claim against NBA in Adv-003.
4.9.1.Dismissal of Columbia’s Second Claim for Relief(Breach of Fiduciary Duty)— NBA has moved for summary judgment dismissing Columbia’s second claim for relief with prejudice. In its second claim for relief, Columbia asserts that NBA had a fiduciary duty to the Kennedys as a result of the bank’s awareness of the Sampson House Earnest Money Agreement and the Kennedys’ subsequent conveyance of the Sampson lot to Quigley.Columbia asserts that NBA breached its fiduciary duty to the Kennedys by failing to ensure that Quigley paid for all improvements made on the Sampson lot in the course of constructing the Sampson House.Columbia has failed to provide admissible evidence to support this claim for relief and hence judgment should be entered in favor of NBA dismissing the second count in Columbia’s complaint with prejudice for the following reasons:
(a)Under Alaska law, a fiduciary duty only arises in a situation where one party imposes a special confidence in another party, such that the other party, in equity and good conscience, is bound to act in good faith and with due regard for the interests of the party imposing the confidence See,Twelve Hundred L Street Corp._ v. Inlet Co., 438 P.2d 708, 709-10 (Alaska 1968). (Appendix D-22).
(b)As a general rule, however, the relationship between a bank and its customer is that of a debtor and creditor, and not that of a fiduciary.As a further general proposition, for a fiduciary duty to arise between a bank and its customer, there must be the establishment of admissible facts demonstrating that the lender went beyond simply being a creditor and assumed the role of an advisor. See, Dennison State Bank v. Madeira, 640 P.2d 1235, 1243 (Kan 1982) and Tokarz v. FrontierFederal Savings and Loan Association, 656 P.2d 1089 (Wash 1982).(Appendix D-23, D-24).
(c) The Kennedys and Columbia have failed to provide this court with evidence showing a fiduciary relationship between the Kennedys or Columbia and NBA.The Kennedys have testified in their answers to NBA’s First Set of Interrogatories that NBA had nothing to do with their selection of Quigley as their contractor.They have also testified that they had no contact with NBA before the construction loan was closed and did not anticipate having any contact with NBA thereafter. Finally, they have testified that their initial direct contact with NBA occurred after Quigley’s filing of its chapter 7 petition on September 19, 1994.On this basis, no claim for breach of fiduciary duty is stated by Columbia.
4.9.2.Dismissal of Columbia’s Third Claim for Relief(Breach of Duty of Due Care in Disbursing NBALoan)—NBA has also moved for summary judgment dismissing Columbia’s third claim for relief with prejudice.In Columbia’s third claim for relief, it asserts that NBA had a duty to the Kennedys to exercise due care in evaluating Quigley’s financial resources before committing to make the Sampson House construction loan. In the alternative, Columbia asserts that NBA had a duty to disburse the construction loan proceeds with due care.The Kennedys and Columbia have stated no compensable claim under the Fikes opinion, and because the Kennedys and Columbia have provided the court with no admissible evidence to support this claim, summary judgment is granted in favor of NBA, and Columbia’s third claim for relief should be dismissed with prejudice.
4.9.3.Dismissal of Columbia’s Fourth Claim for Relief(Misrepresentation)—NBA has also moved for summary judgment dismissing Columbia’s fourth claim for relief.In its fourth claim for relief, Columbia asserts that NBA deliberately misrepresented the nature and extent of its lien and the lien of its Sampson House construction loan deed of trust with the intent to deceive the Kennedys and Columbia.Columbia also asserts that NBA’s representations were of such a nature as to support the imposition of punitive damages.Columbia has presented no admissible evidence to support this claim for relief.For this reason, summary judgment should be granted in favor of NBA, and Columbia’s third claim for relief should be dismissed with prejudice.
4.9.4.Dismissal of Columbia’s Fifth Claim for Relief(Injunction)—In its fifth claim for relief, Columbia requests an injunction precluding NBA from destroying records relevant to this dispute prior to resolution of the dispute.As NBA has agreed through counsel not to destroy its records pending final resolution of this dispute, Count Five of Columbia’s Complaint is dismissed without prejudice.Columbia may refile this count of its complaint if it subsequently can establish that NBA is either about to or has destroyed records in violation of its promise to maintain them.
5.CONCLUSION— I recommend that the district court adopt the recommendations set out in Part 2 of thi Memorandum Decision and, with the parties’ input, enter an appropriate judgment for the plaintiff.
APPENDICES A — E: TABLE OF EXHIBITS
The documents referred to in the five appendices shown on the following table are attached to the Proposed Findings Of Fact And Conclusions Of Law Of National Bank Of Alaska (Docket Entry 184, filed September 12, 1997).
Appendix F is a table outlining the extensive pleadings.