Opinion ID: 884321
Heading Depth: 1
Heading Rank: 5

Heading: Can a claim for impairment of security be asserted by one who succeeds to the mortgagee's security interest after the point in time when the damage to the security is alleged to have occurred?

Text: In the case at hand, Turner purchased the mortgages in question in 1991 and 1993,some five to seven years after Kerin had performed the work in question. Thus a question arises as to whether Turner can assert a claim against Kerin since Turner did not hold the security interests in the property at the time Kerin was performing its work on the property. We first note that, although Turner did not acquire the mortgages until 1991 and 1993, the mortgages themselves were in existence in 1986 when Kerin performed the work in question. Turner acquired the mortgages by foreclosing against the predecessor mortgagee, Sterling Trading, Ltd. Our decision in Dutro is instructive on this point. In Dutro v. Kennedy (1889), 9 Mont. 101, 22 P. 763, Branch, the original mortgagee, filed suit against the mortgagors Kennedy and Scheurman, but, during the pendency of the litigation, Branch transferred his interests in the mortgage to Dutro who prosecuted the suit to a final judgment. Thus Dutro, who successfully prosecuted the claim, had no interest in the property at the time the mortgagor damaged the property. Rather, he acquired his interests from Branch, after the fact. Dutro, 22 P. at 764. In a similar vein, we hold that in acquiring these mortgages at foreclosure sale in 1991 and 1993, Turner stands in the shoes of a transferee of the mortgages and has the same rights to pursue a claim for impairment of security that Dutro acquired from Branch. That is, he acquired all the rights and liabilities of the predecessor mortgagee Sterling Trading, Ltd. Like his predecessor Sterling Trading, Ltd., Turner can pursue a claim against a third party who has impaired the ability of the holder of the mortgage to collect the debt secured thereby. The District Court, relying on our holding in Jim's Excavating Service v. HKM Assoc. (1994), 265 Mont. 494, 878 P.2d 248, held that Turner could not state a claim for impairment of security because he had not alleged nor could he prove that Kerin should have foreseen that the particular plaintiff, or an identifiable class of plaintiffs were at risk in relying on the information supplied. Jim's Excavating involved a claim by a third party contractor against a project engineer, HKM, for economic damages. HKM argued that there could be no tort liability to HKM because there was no privity between HKM and the contractor JES; particularly since the negligence complained of (preparation of plans and specifications) occurred before HKM actually knew JES would be part of the project. Jim's Excavating, 878 P.2d at 251. We rejected the contention that HKM could escape liability simply because it did not know JES would receive the bid when it knew that some contractor would be relying on its plans and specifications. Jim's Excavating, 878 P.2d at 254. We relied upon an example given in William L. Prosser, The Law of Torts, § 93 (4th ed.1971), which bears repeating: [B]y entering into a contract with A, the defendant may place himself in such a relation toward B that the law will impose upon him an obligation, sounding in tort and not in contract, to act in such a way that B will not be injured. The incidental fact of the existence of the contract with A does not negative the responsibility of the actor when he enters upon a course of affirmative conduct which may be expected to affect the interests of another person.. . . .... [T]here are situations in which the making of the contract creates a relation between the defendant and the promisee, which is sufficient to impose a tort duty of reasonable care. By the same token, there are situations in which the making of a contract with A may create a relation between the defendant and B, which will create a similar duty toward B, and may result in liability for failure to act.... In applying the above reasoning to the facts before us, we concluded that, although HKM did not actually know JES would receive the bid, it knew that some contractor would be relying on its plans and specifications. Thus, we hold that a third party contractor may successfully recover for purely economic loss against a project engineer or architect when the design professional knew or should have foreseen that the particular plaintiff for an identifiable class of plaintiffs were at risk in relying on the information supplied. Jim's Excavating, 878 P.2d at 255. In the present case, by contracting with the owners to perform engineering work on the property, Kerin placed itself in a relation toward any party who held a security interest in the property that the law imposed upon him an obligation, sounding in tort and not in contract, to act in such a way that the security interest would not be injured. Kerin knew or should have foreseen that if, contrary to his representations, he relaid with pipe not meeting requisite pipe standards, he would diminish the value of the property and thereby impair the value of the property as security. It was foreseeable that failure to lay the proper pipe would damage an identifiable class of plaintiffs; i.e. those who held an interest in the property, both mortgagors and mortgagees. The fact that Kerin could not specifically foresee Turner's entry into the picture does not change the fact that Turner is a member of an identifiable class of plaintiffs, that is, he is a mortgagee by virtue of having purchased mortgages which were in existence at the time of Kerin's work and which, allegedly, have not been satisfied. In keeping with the reasoning of Jim's Excavating, we hold that a person who, subsequent to the damage to the property, acquires a pre-existing security interest in the property can maintain a cause of action for impairment of that security interest to the extent of the outstanding debt.
The District Court dismissed Turner's breach of contract claim holding that there was no privity of contract between Turner and Kerin and that Turner, at best, could only be considered as a type (or class) of incidental beneficiary to the contract between Defendants and previous owners. The court relied upon our decision in Harman v. MIA Service Contracts (1993), 260 Mont. 67, 72, 858 P.2d 19, 22-23. Turner contends that the District Court misconstrued his second cause of action. He contends that he is not seeking to enforce the contractual obligation as a third party beneficiary, either incidental or intended. Rather, he, as a creditor of Ameritrust, seeks to execute upon Ameritrust's assets, which include any claims (choses in action) that Ameritrust has against Kerin for breach of contract. He relies on our decision in State ex rel. Coffey v. District Court (1925), 74 Mont. 355, 240 P. 667, wherein we held that claims for breach of contractor for tort connected with contract are choses in action, which are personal property subject to execution. Coffey, 240 P. at 669. That proposition is still good law. However, when put in its proper context, it only has application to a judgment creditor. Mr. Coffey had filed a cost bill which had the effect of the entry of a judgment for $94 in favor of Herman and Coffey and against Albert W. Ogg upon which execution might issue. Coffey, 240 P. at 668-69. The statutory law pertaining to writs of execution, now, as then, provides: Execution against property of judgment debtor. If the writ be against the property of the judgment debtor, it shall require the sheriff or levying officer to satisfy the judgment, with interest, out of the personal property of such debtor and, if sufficient personal property cannot be found, out of his real property as provided in XX-XX-XXX. Section 25-13-304, MCA (emphasis added). Thus, in order to come within the ambit of Coffey and § 25-13-305, MCA, Turner must be a judgment creditor asserting a claim against a judgment debtor. In reviewing Count II of his complaint (Breach of Contract) it is apparent that Turner has not alleged that he has a judgment against Ameritrust. Rather, he alleges that he is a direct creditor of Ameritrust and is entitled to execute on any asset of Ameritrust. This allegation is not sufficient to state a cause of action. A creditor who has not yet reduced his claim to judgment is not in a position to execute. Although the District Court dismissed Count II for the wrong reasons, the dismissal was correct and is therefore affirmed. See Clark v. Eagle Systems, Inc. (Mont.1996), ___ Mont. ___, 927 P.2d 995, 1000, 53 St.Rep. 1150, 1152.
In Count III, Turner contends that he is entitled to execute upon Ameritrust's claim that Kerin breached its professional duty to exercise due care as a civil engineer. Applying the same reasoning it used in rejecting the impairment of security claim, the District Court dismissed the claim for lack of foreseeability under the principles enunciated in Jim's Excavating. As with Count II, the District Court has misconstrued the nature of Turner's claim in which he seeks to execute upon a chose in action rather than assert the claim in his own right. However, since Count III, like Count II, does not allege that Turner is a judgment creditor entitled to execute, the same reasoning we set forth with regard to the breach of contract claim pertains. We affirm the District Court's ruling that Count III fails to state a claim upon which relief can be granted. Accordingly, we affirm the dismissal of Counts II and III and reverse the order dismissing Count I (Impairment of Security) and remand for further proceedings consistent with this opinion. TURNAGE, C.J., and HUNT, NELSON, REGNIER, GRAY and TRIEWEILER, JJ., concur.