Opinion ID: 2589246
Heading Depth: 2
Heading Rank: 2

Heading: Issues as to Thomas

Text: M & D appeals the district court's award of summary judgment to Thomas on the issues of breach of contractual obligation to a third party beneficiary, breach of fiduciary duty, common law fraud and fraudulent transfer, arguing there are disputed issues of material fact. M & D also appeals the district court's decision regarding equitable subordination, quasi estoppel, and subordination of liens, arguing that the district court's analysis of the effect of Thomas' agreement to subordinate his interests to U.S. Bank was in error.
M & D argues on appeal that M & D was a third party beneficiary of the Thomas/Clegg agreement and specifically agreed to obtain financing to timely pay off M & D's interest in Calderwood. The portion of the Thomas/Clegg agreement which Blickenstaff alleges designates M & D as a third party beneficiary states: FUTURE OBLIGATIONS: Clegg and Thomas shall jointly sign such personal guarantees as deemed necessary by lenders for all future loans to Calderwood including the funds to pay off M & D Trust for the purchase of it's twenty seven (27%) percent interest for Seven Hundred Fifty Thousand ($750,000.00) Dollars. The district court found that M & D did not establish that the Thomas/Clegg agreement was made for M & D's benefit and that the agreement did not impose on Thomas or Clegg any duty to cause Calderwood to seek funds necessary for Calderwood to pay M & D in a timely manner. We agree with the district court. We have held that a contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it. Lewis v. CEDU Educational Services, Inc., 135 Idaho 139, 142, 15 P.3d 1147, 1150 (2000). However, before recovery can be had by a third party beneficiary, it must be shown that the contract was made for his direct benefit ... and that it is not sufficient that he be a mere incidental beneficiary. Dawson v. Eldredge, 84 Idaho 331, 337, 372 P.2d 414, 418 (1962). The language in the Thomas/Clegg agreement simply states that Thomas and Clegg were obligated to sign whatever documents may have been required by a lender in order to obtain financing to buy out M & D's interest in Calderwood. The language is clear that all Thomas and Clegg were stating in the agreement was that they would do what a lender may require, but it does not specifically guarantee they would obtain financing to pay off M & D. Accordingly, under the clear terms of the agreement M & D was not an intended beneficiary of any promise on the part of Thomas and Clegg. M & D argues the Thomas/Clegg agreement is ambiguous and that our precedent in such cases allows the court to consider the surrounding circumstances in addition to the document itself. We do not find the agreement to be ambiguous and accordingly decline to consider M & D's related arguments.
The next issue we consider is the effect of Thomas' Subordination Agreement with U.S. Bank that subordinated Thomas' deed of trust to the second loan obtained by Calderwood from U.S. Bank. On appeal, M & D argues that because Thomas, whose deed of trust was recorded ahead of M & D's, subordinated his deed of trust to the second U.S. Bank loan which was behind M & D in order of payment, M & D is now entitled to payment before both Thomas and U.S. Bank. This is referred to as a complete subordination. The district court disagreed, finding that this was a case of partial subordination where Thomas and U.S. Bank essentially exchanged positions of priority to the extent that U.S. Bank's loan is smaller or equal to Thomas's interest. Or, in other words, if Thomas' claim was for $100 and the second U.S. Bank loan was for $75, the first $100 to be paid from Calderwood would go $75 to U.S. Bank, and $25 to Thomas. M & D would then be paid in full, and any remaining payment would go towards Thomas' remaining $75 interest. The district court found that because M & D was not a party to Thomas' Subordination Agreement and because M & D's interest was neither harmed or helped by the Subordination Agreement in terms of its priority in line, M & D is not entitled to benefit by Thomas' agreement to subordinate his interest to U.S. Bank. The relevant portion of the Subordination Agreement reads as follows: SUBORDINATION. The Subordinated Deed of Trust and the Subordinated Indebtedness [the $1.7 million note and deed of trust owed by Calderwood to Thomas] secured thereby is hereby subordinated in all respects to Lender's Lien [the security interest of U.S. Bank securing the further extension of credit] and the Superior Indebtedness [U.S. Bank's extension of credit], and it is hereby agreed that the Lender's Lien shall be and remain, at all times, prior and superior to the lien of the Subordinated Deed of Trust. Beneficiary [Thomas] also subordinates to Lender's Lien all other Security Interests in the Real Property held by Beneficiary [Thomas], whether now existing or hereafter acquired. The words Security Interest mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Though Thomas provides authority from California and Arizona supporting the district court's utilization of a partial subordination theory, that rule has never been adopted in Idaho. The district court correctly noted that the theory of partial subordination does not affect M & D's interest in the Calderwood property in any way and essentially leaves M & D's priority of payment the same as it was before the Subordination Agreement between Thomas and U.S. Bank was entered into. However, there are basic rules of priority and recording which are violated by such an application of the law. We find the Alabama Supreme Court case cited by M & D instructive on this issue. In it that court defined a subordination agreement as: An agreement by which one holding an otherwise senior lien or other real estate interest consents to a reduction in priority vis-a-vis another person holding an interest in the same real estate. An agreement by which the subordinating party agrees that its interest in real property should have a lower priority than the interest to which it is being subordinated. Black's Law Dictionary (6th ed.1990). By definition, subordination contemplates a reduction in priority. Nothing in the definition contemplates raising a lower priority lienholder up to the position of the subordinating party. AmSouth Bank. N.A. v. J & D Financial Corporation, 679 So.2d 695, 698 (Ala.1996). As the Georgia Supreme Court noted in Old Stone Mortg. Realty Trust v. New Georgia Plumbing, Inc., 239 Ga. 345, 236 S.E.2d 592 (1977), it is the rule in other jurisdictions that `one who subordinates a first lien to a third lien makes his lien inferior to both the second and the third liens.' 51 AmJur2d, Liens, s 55. 236 S.E.2d at 593. Though Thomas has every right to release his claim on his position of priority over M & D and place himself behind the second U.S. Bank loan, he does not have the right or ability to elevate U.S. Bank's priority to a position ahead of M & D. Because M & D's deed of trust was recorded before the second U.S. Bank lien, M & D has the right to be paid by Calderwood before U.S. Bank receives any payment on its second loan. Certainly U.S. Bank could not obtain a priority ahead of Thomas without Thomas' permission; and likewise, it cannot obtain a priority ahead of M & D without M & D's permission. Because Thomas relinquished his right to receive payment until after U.S. Bank received payment in full on its second loan to Calderwood, M & D is entitled to be paid in full before U.S. Bank is paid on its second loan and consequently before Thomas receives payment as well. In Culp v. Tri-County Tractor, Inc., 112 Idaho 894, 897, 736 P.2d 1348, 1351 (Ct.App.1987) the Court of Appeals held: We begin by noting the general thrust of a subordination agreement: It is the subordination of the right to receive payment of certain indebtedness (the `subordinated debt') to the prior payment of certain other indebtedness (the `senior debt') of the same debtor.... [A] complete subordination permits no payment to be made on the subordinated debt at any time while the senior debt remains outstanding. We agree that when one debt is senior to another debt in priority of payment, the inferior debt may not be paid ahead of any senior debt without the agreement of the senior creditor, regardless of any subordination agreement between another senior creditor and the inferior creditor. We therefore vacate the findings of the district court declining to place M & D's interest above Thomas' by virtue of the subordination agreement entered into between Thomas and U.S. Bank.
Because of our resolution of the subordination issue, it is not necessary to address the remaining rulings of the district court on summary judgment relating to the fiduciary duties alleged between members of a limited liability company.