No. 13429 IN THE SUPREME COURT OF THE STATE OF MONTANA 1977

ROBERT J. HOSTETTER and ELDON H. LEEP, d/b/a DUTCH TOUCH, Plaintiffs and Appellants,

INLAND DEVELOPMENT CORPORATION OF MONTANA, a corporation, and BIG SKY OF MONTANA, INC., a corporation, Defendants and Respondents.

Appeal from: District Court of the Eighteenth Judicial District Honorable W. W. Lessley, Judge presiding. Counsel of Record: For Appellant: Berg, Angel, Andriolo and Morgan, Bozeman, Montana Ben E. Berg argued and Richard J. Andriolo argued,

Bozeman, Montana For Respondents: Thomas I. Sabo, Bozeman, Montana Brown, Pepper and Kommers, Bozeman, Montana Gene I. Brown argued, Bozeman, Montana For Amicus Curiae: J. David Penwell argued, Bozeman, Montana Kolter, Heath and Kirwan, Bozeman, Montana

Submitted: January 11, 1977 Decided:

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Filed: iMr. Chief Justice Paul G. Hatfield delivered the Opinion of the Court. This is an appeal from the districtcourt, Gallatin County, denying appellants' forclosure on a mechanic's lien. On April 22, 1974, appellants, doing business asDutch Touch, entered into a contract with Inland Development Corporation of Montana, a subsidiary of Inland Construction Corporation of Minnesota. Inland Development was theprimary contractor responsible toBig Sky of Montana, Inc. for the Glacier Condominium Project located inMeadow Village atBig Sky, Montana. The project consisted of 

### 14buildings which housed 64 condominium units. The Dutch Touch contract involved the construction of ceramic bathtub enclosures ineach individual unit, with no work on the common areas tobe performed. This

was a singlecontract, thebasis of payment tobe the total number ofquare feetof 

### tile laid. Dutch Touch commenced work

on thiscontract during April 1974. On August 20, 1974, Big Sky filed and recorded a declaration of unit ownership covering the Glacier Condominiums. During September, October, and November, 1974, Big Sky sold 18 of the 64 condominium units tothird parties. Dutch Touch completed the tilework on March 24, 1975, claiming the amount due for labor, material, and supplies to be $14,554.60. As of June 18, 1975, Dutch Touch had received $13,038.12, leaving $1,516.48 unpaid. On June 18, 1975, Dutch Touch fileda singlemechanic's lien for theunpaid balance upon the realproperty and premises encompassing the 14buildings and 64 units of the Glacier Condominiums. On August 19, 1975, Dutch Touch initiated a forclosure action indistrict court seeking a personal judgment against Inland Development on the contract and enforcement of 

### its lien against the interest of Big Sky in the Glacier Condominiums. Alis pendens was also filed atthis time. A third party action was filed by Big Sky against Inland Construction on the primary contract. The trialon thisthird party complaint was suspended until the determination of the lien foreclosure. The districtcourt, sittingwithout a jury, entered judgment against Dutch Touch upon the following conclusions of law: 1)That the Glacier Condominium Project became subject totheprovisions of theMontana Unit Ownership Act, sections R.C.M. 67-2301 

### et seq.,/1947, by reason of the filing of thedeclaration by Big Sky on August 20, 1974; 2) that a liencovering the entireproject was invalid under section 67-2324, R.C.M. 1947; and 3) that Dutch Touch failed toestablisha lien against any individual unit inthe Glacier Condominium Project. Two issues arepresented forreview: 1)Was Dutch Touch's single lienrendered invalid when Big Sky filed the declaration? 2) Was Dutch Touch entitled toforeclose against only those units owned by Big Sky for the entireamount of the lien? This is a case of firstimpression, the interpretation of section 67-2324, R.C.M. 1947, as it relates to a subcontractor's lienarising from work performed and materials supplied during the initialconstruction of a condominium project. The interest inunit ownership legislationwas generated by federal legislationmaking Federal Housing Administration insurance available for condominiums, provided that statelaw concerning unit ownership existed. 12 USCS § 1715y(a). FHA then provided a Model Act which many states, including Montana, followed. The primary purpose of thiscondominium legislation is toinsure thecompatability of such housing projectswith preexisting law. 77 Harvard L. Rev. 777 (1964).Under the pre-existing lien law of Montana, Dutch Touch would be entitled toa blanket lien effective against the entire condominium project. This 

### is so since thework was performed under one contract, and not a series of separate contracts for each unit. Caird Eng. Works v. Seven-Up Min. Co., 111Mont. 471, 111 P.2d 267 (1941). Wemust now determine what effect subjecting the property to theMontana Unit Ownership Act has upon the lien of Dutch Touch. Section 67-2324, 

### R.C.M. 1947, states: "(1)Subsequent torecording a declaration and while theproperty remains subject to sections 67- 2302 to 67-2342, no lien shall ariseorbe effective against theproperty. During such period liens or encumbrances shall ariseorbe created only against each unit and theundivided interest inthe common elements appertaining thereto, inthe 

### same manner and under the 

### sameconditions as liensor encumbrances may arise or be created upon oragainst any other separate parcel of real property subject to individual ownership. "(2)No labor performed ormaterials furnished with the consent or atthe request of a unit owner, his agent, contractor or subcontractor, shall be the basis for the filingof a mechanic's ormaterialman's lien against the unit of any other unit owner not consenting toorrequesting the labor tobe performed orthematerials tobe furnished, except that consent shall be considered given by the owner of any unit in the case of emergency repairs thereto performed or furnished with the consent or atthe request of the manager. "(3)If a lienbecomes effectiveagainst two ormore units, the owner of eachunit subject to such a lien shall have the right tohave hisunit released from the lienby payment of the amount of the lien attributable tohisunit. The amount of the lien attributable toa unit and the payment required to satisfy such a lien, inthe absence of agreement, shallbe determined by applicationof the percentage established inthe declaration. Such partial payment, satisfaction or discharge shall not prevent the lienor from proceeding toenforce hisrights against any unit and theundivided interest inthe common element appertaining thereto not released by payment, satisfaction ordischarge." This isone section of the entireUnit Ownership Act and it 

### is the duty of thisCourt tointerpret it in such a manner

astoinsure coordination with the other sections of the Act,

### and fulfill legislative intent. Doull v. Wohlschlager, 141 Mont. 354, 377 P.2d 758 (1963); Aleksich v. IndustrialAcc. Fund, 116 Mont. 127, 151 P.2d 1016 (1944). Reading the Act in its entirety, it becomes apparent that there are safeguards to insure that builders, mechanics, and materialmen involved in the initial construction of a project are to be fully compensated before individual units

are sold. Furthermore,Big Sky failed to comply with these safeguards. Section 67-2303.1 allows the sale of units prior to the completion of construction of the "building",which the Act defines as a multiple unit building. However, the money from such salesmust be placed in escrow. Disbursements cannot be made from this escrow fund until completion of the building and

common elements or compliance with section 67-2303.2 through 2303.6, whichever occurs first. In any event, such disbursements

are to be only for cost of construction, legal,architectural and financial feestandother incidental costs of the project. Section 67-2303.1(4) then specifically states: 

### " 

## * * * The balance of the moneys remaining in the fund shall be disbursed only upon completion of the building,.fYeeand clear of all mechanic's and materialmen's liens. 

## * * * " (Emphasisadded.) Big Sky did sell 18 units prior to completion of construction,however it failed to deposit themoneys from these sales in an escrow account as required, and failed to pay this lien. Section 67-2323 states: "Blanketmortqaqes and other blanket liens affecting unit at time of first conveyance or lease. At the time of the first conveyance or lease of each unit following the recording of the declaration, every mortgage and other lien affecting such unit including the undivided interest of the unit in the common elements, shall be paid and satisfied of record, or the unit being conveyed or leased and its interest in the common elements shall be released therefrom by partial release duly recorded.

### " (Emphasisadded.)Again Big Sky failed tocomply with thisprovision. Atthe time of its first 

### sale Big Sky had not satisfied this liennor did it obtain a partial release asrequired. The lien of Dutch Touch arose, attached and became effective against the property when work was commenced, the filingmerely perfects the lien. Continental Supply Co. v. White, 92 Mont. 254, 266, 12P.2d 569 (1932) states: 

### " 

## * 

# * * The lienconstitutes an interest inthe property; 'the filing extends 

### its lifeand preserves it. "'The lienattaches tothe structure as the labor 

### isperformed or thematerial 

### is furnished and existswith allof 

### its force atall

### timesbetween the beginning of the performance of labor or the furnishing of material until the expiration of the 

### timewithin which notices of lienmay be filed.' (Citationomitted.) "The true function of the lien is toprevent subsequent alienations and encumbrances, except in subordination to itself." See alsoBlose v. Havre Oil & Gas Co., 96 Mont. 450, 461, 31 P.2d 738 (1934). Furthermore, this lienwas originally effective as a blanket lienagainst the entireproject under the Caird case. Wedisagree that this lienwas rendered invalid by the filingof the declaration, as held by the districtcourt. Instead, 

### we adhere totherationale of theWisconsin Supreme Court when they faced the issue in Stevens Const. Corp. v. Draper Hall, Inc., 73 Wis.2d 104, 242 N.W.2d 893, 898 (1976). The Wisconsin court was alsoconfronted with a mechanic's lien based upon work performed during initialconstruction and a Unit Ownership Act with a provision the same asour section 67-2324, R.C.M. 1947. The Wisconsin statute, 

### S 703.09 W.S.A., is identical toour section 67-2324, with their § 703.09(2) the

same asour section 67-2324 (3). Their decision in Stevens states: "Stevens and The Bruce Company argue that their liens arose and became effectivewhen the excavations began in September of 1971. They contend

### that no distinction should be made between when a lien arises and when a lien becomes effective. We agree with this proposition but itmakes no difference in terms of the rights of the claimantappellants in this case. The word 'effective', in the context of construction liens, should be interpreted to mean 'capableof bringing about an effect.' A 

### construction lien is capable of bringing about an effect at the time it arises, that is, when 'substantial excavation for the foundations' of the new project begin, as provided in sec. 289.01(4), Stats. The later events of giving notice and filing, as required by sec. 289.06, merely preserve and perfect a lien which is already effective in the sense of being capable of having an effect upon the liened land. "Acceptanceof this position of appellants does not mean that sec. 703.09 (2)

# . Stats., is inapplicable to the facts of this case. On the contrary,we conclude that this subsection still governs, even though the cliamants' liens were first 'effective' in September of 1971, before the condominium declaration was recorded. "Subsection (2) provides that a proportional lien occurswhenever 'a lien becomes effective against 2 

### or more units.' Obviously themost frequently occurring situation in which a lien will become effective against two ormore units is when repairs aremade to the common areas of the condominium unit, and left unpaid. But we conclude that a lien, originally effective as a blanket lien against the whole property, becomes effective against two or more units within the meaning of sec. 703.09(2), Stats., when the property ismade subject to the provisions of ch. 703 by the filing of a condominium declaration before the initiation of foreclosure proceedings against the property as a whole. "Thus it is not critical that the filing of the lien claims came after the condominium declaration was filed, as the trial court decided. Even if the claims were filed before the condominium declaration was recorded, only proportional liens would attach to the individualunits. On the other hand, if foreclosure proceedings are begun before the condominium declaration is recorded, and a lis pendens filed, the situation is frozen so that the subsequentrecording of a declaration does not transform the blanket lien into a proportional lien on individual units." Likewise, the mechanic's lien filed by Dutch Touch was not rendered inaalid when Big Sky filed its declaration,but remained a valid single lien,which was proportionately effective against each unit, pursuant to section 67-2324(3), R.C.M. 

### 1947. The second issue presented involves the enforcement of

### the lien once it is established. The foreclosure of a mechanic's lien is governed by the rules of equity. Cole 

### v. Hunt, 123 Mont. 256, 211 P.2d 417 (1949). The general rule is that a blanket construction lien against an entire property consisting of several parcels cannotbe enforced in toto against less than all of such parcels. Annot. 68A.L.R.3d 1300. The reason is that it would be inequitable to burden some lesser portion of the liened premises with charges for labor and materials which were not actually furnished to that particular parcel. Consequently, this single lien, proportionately effective against each unit, would only be enforceable against each unit proportionately. It is the duty of those purchasing, or taking liens on, property under construction or on which improvements

are being made, to make inquiry to ascertain whether or not the property is encumbered by mechanics' or materialmen's liens, and such parties, having knowledge of the fact that the work is going on, are charged with constructive, if not actual,notice of any such lien as has attached to the premises. Continental Supply Co. v. White, supra. However, any unit owners, other than Big Sky,whose property is subject to Dutch Touch'smechanic's lien,were put into that position by Big Sky's total disregard of the provisions of the Unit Ownership Act concerning mechanics' liens and precompletion sales. Big Sky failed to place the proceeds of these sales, made prior to completion of construction, into an escrow account,

as required by section 67-2303.1, R.C.M. 1947. Therefore, the mechanics' liens, effective against each unit so sold,were not satisfied from the escrow fund as contemplated by section 67-2303.1. 1947, Big Sky further ignored section 67-2323, R.C.M./whereby every blanket lien or blanket mortgage must be satisfied before the first conveyance or lease of a unit, or a partial release forsuch unit obtained and recorded. Equity 

### willgrant the relief sought when inview of all circumstances todeny 

### it would permit one of theparties to suffer a grosswrong atthe hands of the other party who brought about the condition. Thisted v. Country Club Tower Corp., 146 Mont. 87, 405 P.2d 432 (1965); Dutton v. Rocky Mountain Phosphates, 151Mont. 54, 438 P.2d 674 (1968). This Court cannot ignore the fact that this situationwould never have occurred, had Big Sky fullycomplied with the Unit Ownership Act. Equity demands thatDutch Touch be allowed to satisfy the entire amount of 

### its lien first from those units retained by Big Sky. Thereafter, should any amount of the lienremain unsatisfied, Dutch Touch may seek proportionate enforcement of such balance against the 18 units previously sold by Big Sky after the owners of theseunits aremade parties tothe action. In the record there 

### is a motion by Big Sky tojoin these unit

owners asparties defendant pursuant toRule 19, M.R.Civ.P. This motion was never ruled upon by the districtcourt. The Committee Note toRule 19 states that 

### it 

### isclear that whenever feasible the persons materially interested inthe subject of

an action should be joined asparties so that they may be heard and a complete disposition made. Such 

### is the case of these unit

owners should Dutch Touch have to enforce any portion of the 

### lien against their units inthe event theunits retained by Big Sky do not satisfythe lien. For this reason themotion of Big Sky should have been granted. This judgment of the districtcourt isvacated and thiscause remanded torehear the forclosure action incompliance with thisdecision.

Chief Justice 

# I)

### We concur: