Court Opinion

ID: 880663
Source: CourtListenerOpinion
Date Created: 2013-06-05 00:19:59.893896+00
Date Added: 2024-06-11T09:07:38.405398
License: Public Domain

No.    90-114
           IN THE SUPREME COURT OF THE STATE OF
                                                                 FA?-,
                                                                 .       .
                                                                         .J   y

                                   1990                             ,           iicib'

                                                                              $ 6        1;E

DANIEL J. FELSKA and ADOLPH L. SOLVIE,
     Plaintiffs and Respondents,
                                          .
WORLD REALTY LTD. , KADON MANAGEMENT co , LTD ., YORK VENTURES, L?D . ,
HELUND FOREST CONSULTANTS, RONALD EDWARD LITTLE, DONALD JOHN HENRY
WILLIAMSON, RONALD DOUGLAS VOIGHT, HUGH RADFORD, RAYMOND JOHN
MARCH, ERWIN ROMANUS LETWIN, IAN GRAHAM, NEIL BRUCE MACLEAN, LESLIE
WILLIAM MCKAY YELLAND, and RICHARD STANLEY RUSSELL,
     Intervenors and Appellants,

BRIAN GEORGE GOULDING, and all other persons, unknown, claiming or
who might claim any right, title, estate, or interest in or lien
or encumbrance upon the real property described in the complaint,
adverse to the plaintiffs' title thereto, whether such claim or
possible claim be present or contingent,
     Defendants and Respondents.

APPEAL FROM:    District Court of the Eighteenth Judicial District,
                In and for the County of alla at in,
                The Honorable Larry W. Moran, Judge presiding.
COUNSEL OF RECORD:
           For Appellant:
                Ben Berg, Jr., Berg, Lilly, Stokes, Andriolo,
                Tollefsen & Schraudner, Bozeman, Montana
          For Respondent:
                J. Robert Planalp, Bozeman, Montana

                                              Submitted:   May 30, 1990
                                               Decided:    October 25, 1990
Filed:
Justice John C. Sheehy delivered the opinion of the Court.

     This is the second appeal in this Court centered around the
Inn of Bozeman. The first appeal is reported as Felska v. Goulding
(1989), 238 Mont. 224, 776 P.2d 530 (Felska I).        In Felska I, we
affirmed the Eighteenth Judicial District Court's order of quiet
title of the Inn of Bozeman to the plaintiffs.         Previously, the
property had been owned by a group of investors from British
Columbia, Canada, each of whom held their interests as tenants in
common. We remanded a portion of the first appeal to the District
Court to determine if a reasonable rate of interest could be
applied to post-1983 loans and to determine the legality of
retroactive designation of pre-December 1983 advancements as loans.
     The District Court on remand concluded that "the retroactive
designation of the pre-December 1983 contributions of Co-Owners as
'loans'   accruing   interest   is   unlawful   and   void   under   the
circumstance^.^ Furthermore, the District Court found that it was
inappropriate, under the Co-Owner's agreement, to apply a rate of
interest to post-1983 loans.    The appellants appeal the District
Court's order.   We modify and affirm.
     The following issues are raised on appeal:
     1.   Whether the District Court correctly concluded that no
interest should be charged on post-1983 contributions.
     2.   Whether the District Court properly concluded that the
retroactive designation of pre-1983 contributions of Co-Owners as
loans accruing interest is unlawful and void.
     A detailed description of the events surrounding this case can
be found in Felska I. In this case, we will only review the facts
pertinent to the issues on appeal.       his case primarily focuses
upon the minutes of the December 8, 1983, Co-Ownerst meeting, and
the loan provisions of the 1977 Co-Ownerst agreement. The minutes
of the December 8, 1983, meeting state in pertinent part:

D. Williamson   - MOTION: All funds contributed after the
                            initial investment accrue interest
                            at U.S. Prime rate plus 6%/9% and
                            that this interest should be paid
                            out monthly.*
                            All monies advanced since that time
                            should be secured, if possible, and
                            be treated as loans from partners.
                            Interest accrued on funds contributed
                            before December 31, 1983, be treated
                            as a portion of the partners loans.
                SECONDED: R. March.
                MOTION CARRIED.
D. Williamson   -   MOTION: That a legal opinion be obtained as
                            to whether the above stated plan is
                            enforceable.
                SECONDED: R. Little
                MOTION CARRIED.
D. Williamson   -   MOTION: Interest of 25% should be paid monthly
                            to those partners advancing further
                            funds. Interest is to be calculated
                            on: principal and interest to
                            December 31, 1983, plus any additional
                            funds advanced.
                SECONDED: V. Nordman
                MOTION CARRIED.
*NOTE: The motion was originally given as "interest at prime plus
        4 % / 6 % " but because these interest rates were changed at a
        prior meeting, the appropriate rates are now being
        reflected.
     The 1977 Co-Owners' agreement set forth the
following pertinent provisions:
                        BORROWING PROVISIONS:
     21.   The Co-Owners shall borrow from time to time
           all the sums of money required in connection
           with the carrying on of the Inn, upon the
           security of the assets of the Inn to the extent
           possible. The approval of all Co-Owners shall
           be required when establishing lines of credit
           or financing with any banks or other financial
           institutions or private lenders.
                         LOANS BY CO-OWNERS
           If at any time a Co-owner shall properly
           determine that, in order to protect or preserve
           any of the properties or other assets of the
           Inn, additional funds are required to meet the
           current cash requirements of the Inn and the
           same are not available from sources already
           available to the Co-Owners, then any such Co-
           Owner may, but shall not be obligated to,
           advance such funds to the Inn or pay such funds
           to third parties for the benefit of the Inn.
           Prior to making any such advances, except in
           cases of real emergency, such Co-owner shall
           provide ten (10) days' written notice to the
           Manager of his intention to so advance funds.
           Any such advances or payments shall during
           their existence bear interest at a rate
           determined by the manager.

    Whether    the   District   Court   correctly   concluded   that   no
interest should be charged on post-December 1983 contributions.
     The appellants contend the District Court failed to carry-
out properly our remand instructions in Felska I.      In Felska I, we
asked the District Court to determine if a reasonable rate of
interest could be charged to post-December 1983 contributions.
      However, it is not clear what rate of interest the
      parties contemplated: (25%, 6%/9% over U.S. prime; or the
      "highest legal rateN). Nor is it clear what reasonable
      rate could be applied. We leave these specific questions
      to the District Court upon remand.
Felska I, 776 P.2d at 536.
      Contrary to the appellantsv assertions, the District Court
properly followed our instructions.     The District Court concluded
that interest as it was attempted to be charged was inappropriate,
and we agree.
      The District Court first determined that specific provisions
of    the   Co-Ownersv Agreement,   i.e.,   paragraphs   21   and   22,
established conditions precedent which must be satisfied before
interest could be affixed to either post or pre-December 1983
advances.    A review of paragraphs 21 and 22 will reveal that the
District Courtvsfindings are correct. Paragraph 21 provides that
all   Co-Owners must    approve any   loans with   private    lenders.
Furthermore, paragraph 22 requires 10 day notice when Co-Owners
make loans.      As the District Court properly notes, vvUnanimous
concurrence of       Co-Owners regarding either pre or post-December
1983 loans did not occur as required by Paragraph 21; written
notice was not given as required by Paragraph 22."            Neither
Goulding nor his representative was present at the December 3, 1983
meeting; consequently, the vote on the motion to grant interest on
post-December 1983 loans was not unanimous as required by paragraph
21.    To compound matters, the Co-Owners failed to abide by the
notice provisions under paragraph 22.
      The minutes of the December 8, 1983 Co-Ownersv meeting also
       1   3
                                                                  .       I

support the District Court's conclusion not to allow interest on
post-December 1983 loans.     The minutes of the December 8, 1983
meeting reflect a great deal of ambiguity as to what interest to
apply to post-December 1983 loans.    If.   ..   [I]t is not clear what
rate of interest the parties contemplated:        (25%, 6%/9% over U.S.
prime; or the highest legal rate)."     Felska I, 776 P.2d 536.
      An attempt under Montana law to charge a usurious interest
rate makes the object of the contract unlawful, and thus void under
1 28-2-603, MCA.   Section 31-1-107(1), MCA, provides for interest
rates allowed by agreement of the parties:

      Parties may agree in writing for the payment of any rate
      of interest not more than 6 percentage points per annum
      above the prime rate of major New York banks as published
      in the Wall Street Journal edition dated 3 business days
      prior to the execution of the agreement, and such
      interest shall be allowed according to the terms of the
      agreement.
      The designation of any interest rate more than 6% above the
prime rate is usurious and, consequently, illegal.       In this case,
the Co-Owners designated the interest as "6 to 9% above prime1! or
1125%, both which clearly violate 5 31-1-107 (1), MCA. Furthermore,
§   31-1-107(1), MCA, requires that a writinq exist if the parties
agree for the payment of any interest rate no more than six
percentage points above the prime rate. The statutory requirement
of a writing was not met in this case regarding post-December 1983
interest since the only written document showing any discussion of
interest by the parties are the minutes of December 8, 1983
meeting.   As the District Court properly notes, lllMinutesl not
                                                          are
synonymous with a required writing establishing an interest rate
applicable in a financial transaction, and will not satisfy such
requirement.I'         Moreover,       the minutes    do    not     constitute an
agreement.     Consequently, even if we found the interest rate was
not usurious, the appellants still failed to meet the writing
requirement under 5 31-1-107(1), MCA.
     Appellants argue that         !
                                   j   31-1-107 (1), MCA,   'I.   . . is permissive
and employs the word 'may' in regard to a writing."                    We disagree
with appellants, and adopt the District Court's findings that 5 31-
1-107(1), MCA, is not permissive, and that a writing is necessary
for the parties to agree to a rate of interest.
     The District Court properly concluded that the post-December
1983 loans could not accrue interest because the rates that
appellants     sought     to    enforce        were   usurious      and    illegal.
Furthermore, the District Court found that the Co-Owners violated
paragraphs 21 and 22 of their own agreement in attempting to charge
a rate of interest on the loans, making the charging of interest
inappropriate.     Thus, the District Court did exactly what it was
directed to do; i.e.,          decide what rate of interest should be
applied.   The District Court properly concluded no interest rate
could be applied to post-December 1983 loans as any interest rate
proposed was illegal under 1 31-1-107(1), MCA, and in violation of
paragraphs 21 and 22 of the Co-Ownerst agreement.

     Whether     the    District       Court   properly    concluded      that   the
retroactive designation of pre-1983 contributions of Co-Owners as
loans accruing interest is unlawful and void.
        Our   task   to   determine   if    the   District    Court    properly
disallowed interest on pre-December 1983 contributions is an easy
one, since the same reasoning for disallowing interest on post-
December 1983 loans also applies to pre-1983 contributions. Again,
the District Court properly found that appellants failed to follow
paragraphs 21 and 22 of the Co-Ownerst agreement.                     Unanimous
concurrence of all the Co-Owners regarding the charging of interest
on pre-December 1983 contribution did not occur as mandated by
paragraph 21; written notification was not given as mandated by
paragraph 22.
        Furthermore, the      various      interest   rates   the     Co-Owners
attempted to charge on the pre-December 1983 loan violated the
usury statute 5 31-1-107(1), MCA.          The minutes of December 8, 1983
meeting show the parties never agreed as to the exact interest
rate.    Under 5 31-1-107 (1), MCA, the designation of any interest
rate more than six percentage points above prime rate was usurious
and illegal under the statute.
     Finally, the District Court in its conclusion              of law no. 4
realized the drastic effect of interest on the pre-December 1983
contributions would have on Goulding:

    The retroactive designation of pre-1983 contributions has
    the potential of wiping out the equity of original
    investors due to the fact that loans with accrued
    interest would be paid out of the escrow account prior
    to any other distribution; with such a drastic result
    occurring as earlier noted, without consent of and notice
    to all Co-Owners. The seriousness and forfeiture effect
    of this result triggers equitable principles of law.
    Equitably speaking, the freedom to contract retroactively
    cannot run rampant over the property interests and due
    process rights of one of the original contracting parties
     who was unaware of the meeting. Principles of equity,
     under the specific circumstances of this case, prohibit
     any retroactive designation.     Therefore, the Court
     concludesthe retroactive designation of the pre-December
     1983 contributions of Co-Owners as "loansw accruing
     interest is unlawful and void under the circumstances.
     We agree with the District Court's conclusion that the effect
of granting interest on the pre-December 1983 contribution unjustly
deprived Goulding, the largest investor, of recouping any portion
of his original investment.
     The District Court's conclusion is supported by a letter from
Dr. March, a Co-owner, who attended the December 8, 1983 meeting.
In the letter, introduced at trial, Dr. March         stated that,
". . . escrow money   should be divided in relation to the original
equity payments made.   On contacting several members of the group,
they agreed with my assessment.     Dr. March, in the letter, goes
on to refute the claims of the Co-Owners on the issue of interest.
Dr. March wrote, "Monies related to excessive interest charged,
were not raised in a proper fashion, in that according to the
agreement for the group, resolutions were not properly ~irculated.~~
This obvious admission against the appellants1 position was
considered by the court in its holding.
     In its conclusion of law no. 6, the District Court stated:
"Financial advances or contributions by Co-Owners made after the
December 8, 1983 meeting of the partners should be added to each
Co-Owners' capital account. The monies remaining in escrow at this
time should be paid out pro-rata, on all such capital accounts.I1
     In Felska I (776 P.2d at 536) the majority of this Court
determined that the "evidence supported a loan designation for the
post-December, 1983, advancement^.^^   Thus, conclusion of law no.
6 runs counter to what this Court decided in Felska I, and beyond

the purpose of the remand from this Court. We modify the District
Court's conclusion of law no. 6 to state:
     6. Financial advances or contributions by Co-owners made
     after the December 8, 1983 meeting of the partners shall
     be construed as loans. The monies remaining in escrow
     at this time should be paid out accordingly as to loans
     and capital accounts.
     We leave it to the District Court to determine if the
percentage of Gouldinglsshare of escrowed funds should be changed
by reason of this modification.
     As so modified, we affirm the District Court.

                                                  Justice
We Concur: