No. 89-204

INTHE SUPREME COURTOF THE STATEOF MONTANA
1989

FIRSTMONTANA TITLE COMPANYOF BILLINGS, a corporation, Plaintiffand Respondent,-vsNORTH POINT SQUAREASSOCIATION, a Utah Limited partnership,AMERICAN 

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# .. GUARANTYLIFE INSURANCECOMPANY,an o w Z CD Oregon corporation;et al., Z Defendantsand Appellants. 

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# ; C- -I 73 -1: rn APPEAL FROM: DistrictCourt of the Thirteenth Judicial~st&icS o In and for theCounty of Yellowstone, zr w TheHonorableG. Todd Baugh, Judgepresiding: F 0 P COUNSELOF RECORD: C 0 ;O ForAppellant: -4

JoeGerbase argued;Anderson, Brown, Gerbase,Cebull, Fulton,Harman & Ross,P.C., Billings, Montana

For Respondent: Rodney T. Hartman argued;Herndon,Hartman, Sweeney & Halverson, (FirstInterstateRank ofBillings), Billings,Montana Donald MacDonald IV,(First InterstateBank of

### iss sou la), Missoula,Montana JoMickelson argued; Dorsey & Whitney; and Charles

### W. Hingle, (InterstateProd. CreditAssoc.) Billings, Montana David Hoefer, DeputyCountyAttorney, Billings, Montana

Submitted: September 13, 1989 Decided: November 21, 1989
Filed:Justice John C. Sheehy delivered the Opinion of the Court.

We determine in this case, principally as a mat.terof contract law, that itwas the duty of the escrowholder here to clear title to the parcel of land involved, and then to distribute thebalance of the funds accruing from the sale of the land to the holders of the two underlyingmortgages. In doing so, we affirm the judgment of the District Court, Thirteenth ~udicialDistrict, Yellowstone County, though on somewhat different grounds, holding in favor of First Interstate Bank of ~illings,First Interstate Bank of Missoula, and Interstate Production Credit ~ssociation. The parties against whom such judgment is effective areAmerican Guaranty Life Insurance Company and Commerce Mortgage Company. The issue posed by appellants in this case is whether judgment liens, which come into effect between the time a landowner executes and records an option for the sale of his lands and the time the optionee exercises the option, take priority over the recorded option. However, we find the controlling issue to be the legal effect of the escrow agreement executed by theparties. Loyd Kimble was the owner of a parcel of land in Yellowstone County. He borrowed $3,000,000 from Commerce Mortgage Company for which he executed to Commerce Mortgage Company a note and mortgage of the land parcel on May 12, 1980. The note and mortgage were assigned by Commerce Mortgage Company to American Guaranty Life Insurance Company and the assignmentwas recorded on June 

### 4, 1981. Loyd Kimble also borrowed an additional $150,000, using the same land parcel as security, and executed a note and mortgage toCommerceMortgage Companywhichmortgage was recorded on July 1, 1981. Loyd ~imbledefaulted on his loan payments, and the mortgages went into default. American Guaranty and Commerce Mortgage Company obtained judgment against Kimble on the mortgage loans on July 3, 1986,which judgmentwas subject to appeal. No sheriff's sale of the landparcel occurred. On July 21, 1986, Kimble entered into an option agreement for purchase of the parcel of land by North Point Square~ssociates and G. Walter Gasser, the latter as trustee for Walter Gasser Associates, Inc., the option being exercisable on or before January 24, 1987. An abstract of the option was recorded on July 24, 1986 in the records of Yellowstone County. An escrow agreement was entered into between Loyd Kimble, North Point Square Associates, G. Walter Gasser, First Montana Title Company as escrow agent, and American Guaranty Life Insurance Company and Commerce Mortgage Company. The escrow agreement provided among other things that the escrow agent would hold a partial release of lis pendens filed in the prior foreclosure action, a release of the judgment lien obtained in the prior foreclosureaction, a release of American Guaranty ~ifeInsurance Company's mortgage and a release of the mortgage of CommerceMortgage Company, all in order to clear their respective interests in the parcel of land if the option was exercised. In consideration therefor,both ~merican Guaranty ~ife Insurance Company and Commerce Mortgage Company were to receive the proceeds of the saleupon exercise of the option as provided in paragraph 6 of the escrow agreement, hereinafter set forth. Before the option was exercised, however,

### on August 22, 1986, ~irst Interstate Bank of ~illings obtained a judgmentwhich was a lien upon the parcel of land in the sum of $77,041.01. First Interstate Bank of Missoula obtained a judgment lien upon the parcel of land for $27,000 on September 30, 1986. Interstate production Credit ~ssociation obtained a third judgment lien against the parcel of land on January 1, 1987,as stipulatedby theparties. On January 21, 1987, North Point Square Associates and G. Walter Gasser, timely exercised the optionby delivery of $336,674.05 to FirstMontana Title Company, the escrow agent. All parties stipulated to allow the transfer of title to the parcel of land to the optionee free and clear of all liens and encumbrances so that the optionee could proceed with the development of the land. This was done with the understanding that there would be nowaiver of the respective claims by the parties, and that the ultimate resolution of their claims would be against the $336,674.05 held in

escrow. The money was placed in an interest-bearing account pending the outcome of this lawsuit. Paragraph 

### 6 of the escrow agreement executed by the partiesprovided as follows: Escrow agent ishereby authorized to use said funds to clear title to the property and to then distribute the balance of the funds to the two underlyingmortgagees as follows:

(a) To American Guaranty Life Insurance Company-- 97% (b) To Commerce MortgageCompany--3% When the option agreement had been exercised and the money received, the escrow holder, First Montana Title Company of Billings, took the position thatunder paragraph 6 it must pay off the judgment liens before distributing the balance of the funds to ~mericanGuaranty ~ife Insurance Company and to Commerce Mortgage Company. The latter twocompanies disagreed with this interpretation of the escrow agreement. Thereupon First Montana Title Company of Billings, as escrow holder, interpleaded the funds in the District Court, naming all of the interested parties as defendants in the cause,and requesting the District Court to determine which parties were entitled to the funds and in what amounts. First Montana Title Company of Billings has since thenbeen dismissed from the lawsuit. Theposition ofAmerican Guaranty Life InsuranceCompany and Commerce Mortgage Company is that an option which is recorded prior to the establishment of judgment liens on the

same property gives the holder of the option 

### a priority over such subsequent judgment liens. They contend that the escrow agreement had the effect of an assignment for consideration prior to the entry of the judgments and that therefore under the escrow agreement the funds should pass to American Guaranty and Commerce Mortgage Company free of said judgment liens. They further contend that the District Court improperly applied mechanic's lien law to judgment liens in order tohold against them. The District Court granted amotion for summary judgment in favor of the judgment lienholders and against the mortgagees. Judgment was entered thereon and this appeal by the mortgagees resulted. The mechanic's lien argument of American Federal arid Commerce Mortgage Company stems from the use by the District Court of Leigland v. ~cGaffick(1959), 135 Mont. 188, 338 P.2d 1037, a mechanic's lien case, as authority for the proposition that amere right to acquire an interestdoes not constitute an encumbrance or a transfer of title. The District Courtdid determine that an option does not transfer legal or equitable title until it is exercised, but the District Court also found that the intervening judgment liens

### attached to the landowner's realproperty interest,and that these lienshave remained a cloud on the title. The mortgagees also rely on Ide v. ~eiser(1890), 10 Mont. 5, 11, 24 P. 

### 695, 696, to the effect that the optionee does receive something of value by obtaining an option, that is the right to call for and receive lands ifhe elects under the option. In reaching its conclusion nonetheless, the District Court did rely on contract law. It determined that the option contract and the escrow agreement were executed contemporaneously and referred to the same subject matter, and therefore should be construed together as one instrument. Section 28-3-203, MCA. 

### The District Court noted that there

was a condition precedent to the payment of the sale of proceeds: The mortgagees, through the escrow agent,had to deliver to the optioneegood andmarketable title. The controlling issue in this case is the contractual effect of the language in the escrow agreement. If the

escrow holder was required to "clear title" before the mortgagees could receive the balance of the funds, the relative priorities between a recorded option and judgment liens become irrelevant. We hold itwas the escrowholder's duty to clear title for the optionee under the escrow agreement. It is clear to us that the decision in this case should turn on the language of the escrow agreement,as amatter of contract. Under paragraph 6 above quoted, the escrow agent

was authorized by all of the parties to the agreement to "use said funds to clear title to the property," and then to distribute theproceeds to themortgagees. InOggv. Herman,et al. (1924),71Mont. 10, 15-16, 227 P. 476, 477,this Court said:While provision is made that plaintiff shall furnish an abstract showing clear title, good title, and a marketable title, it is apparent that these terms were used interchangeably, and that they are in fact synonymous. 

### A clear title means that the land is free from encumbrances. (citing authority.) A good title is one free from litigation, palpable defects and grave doubts, comprising both legal and equitable titles, and fairlydeducibleof record. (citingauthority.) A clear title means a good title (citing authority) and a good title means amarketable ormerchantable title. (Citingauthority.) A contract to convey in fee simple,clear of all encumbrances, impliesa marketable title (citing authority), and a marketable title is one of such character as assures to the purchaser the quiet and peaceable enjoyment of the property and one which is free from encumbrances. (Citingauthority.) This Court further noted in Gantt v. Harper (19281,82 Mont. 393, 405, 267 

### P. 296, 298, the following: Webster's definition of the word "clear" as here employed is "free from encumbrance, obstruction, burden, limitation," etc., and theword "title," in the sensehere used, "theunion of all the elements which constitutes ownership,at common law,divided into possession, right of possession, and right of property, the last two now, however, being considered essentially the same."

In our opinion, the words, "clear title" as employed in the plaintiff's letter, denied admission in evidence,means title to the property free from any encumbrance, burden or limitation, uniting all the elements constituting ownership, including right of possession and right of property--i.e., fee-simple title. Such was in effect the contractuponwhich the defendantagreed to pay a brokerage commission on the sale of the property, and a tender of the performance was complete and in accordance with the defendant's terms.
The contractual duty of the escrow agent in this case, agreed to by all the parties, was that the escrow holder should distribute the funds so as to deliver clear title tothe optionee upon the exercise of the option. The judgment liens were indeed clouds on the title, and clear title could not be delivered until those judgment liens were satisfied and removed. Therefore, we affirm the judgment of the ~istrict Court.

/ Justice F

Judge, sitting f& the