No. 13026

I N THE SUIJKEME SOUKT O THE STA,TE OF MONTANA F

1975

TAUTE A. KOVHSH eT a l . ,

P l a i n t i f f s and Xespondent,

-vs - KENNETH K. KNIGHT,

Defendant and A p p e l l a n t .

Appeal fr-orn: District Court of t h e S i x t h J u d i c i a l D i s t r i c t , Honorable Nat A l l e n , Judge p r e s i d i n g .

Courisel of Record :

For A p p e l l a n t :

D z i v i , C o n k l i n , Johnson and Nybo, G r e a t F a l l s , Montana W i l l i a m C o n k l i n a r g u e d , G r e a t F a l l s , Montana

F o r Respondent:

Huppert and S w i n d l e h u r s t , L i v i n g s t o n , Montana Arnold Huppert, Jr. a r g u e d , L i v i n g s t o n , Montana J o s e p h T. S w i n d l e h u r s t a p p e a r e d , L i v i n g s t o n , Montana

Submitted: December 8, 1975

Filed: kB ; 19ib M r . J u s t i c e John Conway Harrison d e l i v e r e d t h e Opinion of t h e Court . T h i s i s an a p p e a l from a judgment e n t e r e d i n t h e d i s t r i c t c o u r t , Park County, i n f a v o r of p l a i n t i f f s Louie A. Kovash and O t t i l i a C. Kovash, i n an a c t i o n t o c o l l e c t a promissory n o t e . T r i a l was h e l d b e f o r e t h e Hon. Nat A l l e n , s i t t i n g without a j u r y . The Kovashes sometime p r i o r t o t h e f a l l of 1972, under- took t o b u i l d a motel/convention c e n t e r i n L i v i n g s t o n , Montana. T h e i r t r i a l s and t r i b u l a t i o n s i n developing t h e p r o j e c t p r i o r t o r e t a i n i n g a r c h i t e c t Kenneth K. Knight, defendant h e r e i n , a r e of no import t o t h i s opinion o t h e r than t o n o t e t h a t Kovashes had c o n s i d e r a b l e d i f f i c u l t y i n g e t t i n g n e c e s s a r y f i n a n c i a l backing t o promote t h e p r o j e c t . A f t e r working w i t h s e v e r a l a r c h i t e c t s they c o n t a c t e d Knight, an a r c h i t e c t i n Great F a l l s , and asked i f he could design t h e p r o j e c t a t a given f i g u r e . When Knight agreed t h a t he c o u l d , he was h i r e d a s t h e a r c h i t e c t i n t h e f a l l o f 1972. A f t e r per- forming about $10,000 i n a r c h i t e c t u r a l s e r v i c e s on t h e p r e l i m i n a r y p l a n s , i t became c l e a r t o t h e p a r t i e s t h a t Kovashes lacked t h e f i n a n c i a l r e s o u r c e s t o go ahead. A proposal was made t o Knight by Kovashes t h a t he n o t only a c t a s a r c h i t e c t , b u t t h a t he go ahead and b u i l d t h e p r o j e c t u s i n g h i s c r e d i t t o f i n a n c e i t and then l e a s e i t back t o Kovashes. Knight agreed t o go ahead, sub- j e c t t o Kovashes o b t a i n i n g c e r t a i n f i n a n c i n g . O October 9 , 1973, n an agreement was e n t e r e d i n t o between Kovashes and one John Munn, a f i s c a l a g e n t , t o g e t them f i s c a l a s s i s t a n c e . T h i s agreement was t o run f o r 60 days. Knight continued t o prepare p l a n s f o r t h e p r o j e c t t o a p o i n t where he had i n v e s t e d i n work time a t l e a s t $50,000. At t h a t time Kovashes' proposed f i n a n c i n g r a n i n t o d i f f i c u l t y . It was f i n a l l y decided by t h e p a r t i e s t o f i n a n c e t h e p r o j e c t w i t h an i n d u s t r i a l revenue bond s a l e by t h e c i t y o f Livingston. The October 9 agreement was followed on October 1 8 , 1973, by an o p t i o n between Kovashes and Knight wherein Kovashes gave Knight a w r i t t e n o p t i o n t o purchase t h e land f o r $153,000. The o p t i o n provided t h a t Knight could e x e r c i s e same a t any time w i t h i n 130 days by d e l i v e r y of a w r i t t e n n o t i c e . I n t h a t e v e n t , Kovashes had 30 days t o f u r n i s h t i t l e i n s u r a n c e and Knight would then have an a d d i t i o n a l 90 days t o pay t h e purchase p r i c e , a t which t i m e Kovashes would have t o d e l i v e r a warranty deed. According t o Knight, a t t h e time o f t h e October 9 agreement between Kovashes and John Munn, t h e i r f i s c a l a g e n t , Kovashes wanted t o be t h e l e s s e e s , and i n t h e months ahead t h e y worked a t t h e problem of f i n a n c i n g t h e p r o j e c t by means o f t h e i n d u s t r i a l revenue bond method. The people who were t o u n d e r w r i t e t h e bonds t o l d t h e p a r t i e s t h a t i n t h e bond o f f e r i n g t h e y would have t o r e v e a l t o t h e p u b l i c n o t o n l y t h e f i s c a l c o n d i t i o n o f Knight, who was t o be t h e owner, b u t a l s o t h a t of t h e l e s s e e s , Kovashes. They were given 60 days t o come up w i t h a c o s i g n e r of s u f f i c i e n t f i n a n c i a l s t a t u r e , o r t h e y would l o s e t h e o p p o r t u n i t y t o b e t h e lessees. Kovashes f a i l e d i n t h e i r a t t e m p t . O January 19, 1974, a t t h e i n s i s t e n c e of Kovashes, a l l n p a r t i e s , w i t h counsel, met i n Livingston where they e n t e r e d i n t o a new agreement e n t i t l e d "Contract f o r Purchase". Under t h i s c o n t r a c t f o r purchase t h e Kovashes agreed t o s e l l t o Knight f o r a t o t a l p r i c e of $194,00O,by s e l l i n g i n a d d i t i o n t o t h e r e a l p r o p e r t y , t h e l i q u o r l i c e n s e , a Best Western Motel f r a n c h i s e , a l l r i g h t s td t h e f e a s i b i l i t y s t u d i e s , s o i l t e s t s , s i t e surveys and o t h e r i n -

formation, along w i t h t h e i r goodwill. A t t h a t same time, Knight paid $5,000 e a r n e s t money and

agreed t o pay $148,000 w i t h i n 90 days f o r t h e r e a l e s t a t e . In a d d i t i o n , he executed a n o t e i n t h e amount of $41,000 which was d e l i v e r e d t o t h e F i r s t S e c u r i t y Bank of L i v i n g s t o n , Montana, a s escrow a g e n t , t o g e t h e r w i t h t h e a s s i g n m e n t o f t h e l i q u o r license. Upon payment of t h i s n o t e , t h e escrow a g e n t was t o de-

l i v e r t o Knight t h e assignment of t h e l i q u o r l i c e n s e , b u t was t o r e t a i n $27,000 u n t i l t h e Montana L i q u o r C o n t r o l Board approved the transfer. When t h e t r a n s a c t i o n was c l o s e d , Knight p a i d $153,000 i n c a s h , r e c e i v e d t h e deed f o r t h e p r o p e r t y and b u i l t h i s m o t e l . However, he d i d n o t pay t h e $41,000 p r o m i s s o r y n o t e and Kovashes brought t h i s a c t i o n t o c o l l e c t it. These i s s u e s a r e r a i s e d f o r t h i s c o u r t ' s c o n s i d e r a t i o n on a p p e a l . Did t h e t r i a l c o u r t e r r : 1. I n f i n d i n g t h a t t h e p r o m i s s o r y n o t e was n o t s i g n e d under d u r e s s ? 2. I n f i n d i n g t h a t t h e 15 day w r i t t e n n o t i c e o f d e f a u l t c o n d i t i o n d i d n o t a p p l y t o t h e promissory n o t e 3 3. I n f i n d i n g t h a t Kovashes d i d n o t f a i l t o prove d e l i v e r y o r ownership o f t h e n o t e ? 4. I n f i n d i n g t h a t t h e F i r s t S e c u r i t y Bank was n o t a n indispensable party? 5. I n e n t e r i n g judgment a l l o w i n g Kovashes t o r e t a i n t h e l i q u o r l i c e n s e i n r e t u r n f o r a c r e d i t o f $27,000 a g a i n s t t h e amount due on t h e p r o m i s s o r y n o t e , o r i n t h e a l t e r n a t i v e i n computing i n t e r e s t and a t t o r n e y f e e s on t h e f u l l b a l a n c e o f $41,000, r a t h e r than on t h e r e d u c e d b a l a n c e of $14,000 a f t e r a l l o w i n g t h e c r e d i t o f

$27 ,OOO? W e f i n d no e r r o r i n t h e c o u r t ' s n o t f i n d i n g d u r e s s . Knight a r g u e s t h a t he had a d e a l , by t h e O c t o b e r 18 a g r e e m e n t , t o p u r c h a s e t h e l a n d f o r $153,000; t h a t he f a c e d " c l o s i n g " t h e bond d e a l and t h a t he had t o have t h e p r o p e r t y b e f o r e d o i n g s o ; t h a t Kovashes t h r e a t e n e d n o t t o honor t h e o p t i o n , t h e r e b y p u t t i n g t h e bond s a l e i n q u e s t i o n u n l e s s he purchased t h e l i q u o r l i c e n s e and t h e o t h e r 11 i n t e r e s t s ; and t h a t f o r c i n g t h e s e e x t r a e x p e n s e s p u t him over a b a r r e l " i n such a manner a s t o c o n s t i t u t e a s i g n i n g under d u r e s s . Knight s u p p o r t s h i s argument by c i t i n g Pecos Construction Co. v. Mortgage Investment Co., 80 N.M. 680, 459 P.2d 842 and 25 AmCJur,2d, Duress and Undue I n f l u e n c e , 5 19. Assuming arguendo t h a t night's a l l e g a t i o n s a r e t r u e , a l l t h a t Kovashes d i d was t o t h r e a t e n n o t t o honor t h e o p t i o n , and a mere t h r e a t t o breach does n o t c o n s t i t u t e d u r e s s . 25 Am,Jur,2d, Duress and Undue I n f l u e n c e , 19. Here t h e r e i s no evidence t h a t Knight e v e r t r i e d t o e x e r c i s e t h e o p t i o n and was r e f u s e d . This d i s t i n g u i s h e s t h i s c a s e from t h e a u t h o r i t y c i t e d by Knight. Here, Kovashes d i d nothing. Here we n o t e t h a t throughout a l l of t h e e a r l y n e g o t i a t i o n s between t h e p a r t i e s i t i s c l e a r t h a t Kovashes expected t o o p e r a t e t h e motel f a c i l i t y . The October 9 , 1973 agreement w i t h John Munn i n d i c a t e d Kovashes were t o o p e r a t e t h e f a c i l i t y b u t provided t h a t i f they could n o t g e t a l e a s e g u a r a n t o r i n 60 days, Munn could

s e l l t h e e n t i r e package, l i q u o r l i c e n s e and a l l f o r $194,000. W f i n d no reason why a f t e r t h i s agreement, t h a t t h e y would e n t e r e i n t o an agreement a week l a t e r t o s e l l t o Knight f o r $153,000, u n l e s s i t was t h a t they expected t o o p e r a t e t h e motel and u s e t h e i r l i q u o r

License. Knight admits he needed a l i q u o r l i c e n s e and t h a t he intended t o s e l l i t t o t h e u l t i m a t e o p e r a t o r s a t . a hoped f o r p r i c e of $41,000. This i n d i c a t e s Knight e n t e r e d i n t o t h e January 1 9 , 1974, n e g o t i a t i o n s w i t h h i s eyes open and w i t h b e n e f i t of counsel. We f i n d no m e r i t t o h i s c l a i m of d u r e s s . I s s u e 2, t h e t r i a l c o u r t ' s f i n d i n g t h a t t h e 15 day w r i t t e n n o t i c e of d e f a u l t d i d n o t apply t o t h e promissory n o t e . W e find

no m e r i t t o Knight's argument nor were we c i t e d any c a s e a u t h o r i t y

t o support i t . Here, we a r e faced w i t h two agreements, t h e con- t r a c t f o r purchase, which contained t h e n o t i c e i n w r i t i n g p r o v i s i o n , and t h e s e p a r a t e promissory n o t e which f e l l due on A p r i l 18, 1974. Knight f u l f i l l e d t h e c o n t r a c t u a l o b l i g a t i o n by paying t h e $153,00, b u t t h e r e a f t e r f a i l e d t o pay o f f t h e n o t e when i t be- came due A p r i l 18, 1974. The testimony c l e a r l y i n d i c a t e s t h a t t h e "notice" p r o v i s i o n was intended t o apply only t o t h e contract

f o r purchase and n o t t o t h e promissory n o t e . Further, the testimony c l e a r l y i n d i c a t e d he knew t h e n o t e was due A p r i l 18. I t had been c a l l e d t o h i s a t t o r n e y ' s a t t e n t i o n more than 15 days

b e f o r e t h e due d a t e and he r e f u s e d on cross-examination t o s a y he would have paid i t . I s s u e 3 q u e s t i o n s t h e c o u r t ' s f i n d i n g t h a t Kovashes d i d n o t f a i l t o prove d e l i v e r y o r ownership of t h e n o t e . Knight argues t h e n o t e i s unenforceable by Kovashes because i t was d e l i v e r e d t o t h e escrow agent ( t h e bank) and n o t d i r e c t l y t o Kovashes. He c a l l s t h i s a " c o n d i t i o n a l d e l i v e r y " and i n e f f e c t u a l . I f t h i s ingenious argument were t o p r e v a i l , t h e n o t e was n o t e n f o r c e a b l e by anyone. The bank could n o t e n f o r c e i t because i t i s n o t a 'holcbr" a s d e f i n e d under t h e Uniform Commercial Code

because i t i s n o t a payee o r endorsee. 12 Am J u r 2d, B i l l s and Notes, 51070. Here, Kovashes d e p o s i t e d t h e deed i n escrow and !(night d e p o s i t e d a n o t e and mortgage. Even though t h e n o t e was n o t d e l i v e r e d t o payee d i r e c t l y , we hold t h e r e was a s u f f i c i e n t d e l i v e r y under t h e s e f a c t s . The f a c t t h e bank held t h e escrow d i d n o t make t h e bank an i n d i s p e n s a b l e p a r t y t o t h e a c t i o n . Stewart v. 5anta Rosa Mining, 62 C.A.2d 201, 144 P.2d 31. Therefore, w e f i n d no m e r i t t o I s s u e 3 o r I s s u e 4.

F i n a l l y , t h e t r i a l c o u r t ' s judgment allowing i n t e r e s t and a t t o r n e y f e e s on the $41,000 was e r r o r . The c o u r t ' s conclu- s i o n of law No. I V a u t h o r i z e s t h e c a n c e l l a t i o n of t h e assignment of t h e l i q u o r l i c e n s e i n r e t u r n f o r a $27,000 c r e d i t on t h e $41,000

p r i n c i p a l and paragraph 111 of t h e judgment c a n c e l s t h e assignment. Kovashes used t h e l i q u o r l i c e n s e a t a b a r operated by them i n Livingston d u r i n g t h e f u l l p e r i o d of t h e l i t i g a t i o n . A t trial they t e s t i f i e d t h a t they were w i l l i n g ro keep t h e l i c e n s e and c r e d i t Knight w i t h $27,000, b u t t h e t r i a l c o u r t r e f u s e d on

t h e ground such testimony concerned a m a t t e r of s e t t l e m e n t . T h e r e a f t e r , t h e t r i a l c o u r t e n t e r e d judgment accomplishing t h e very s e t t l e m e n t o f f e r e d by Kovashes. The e r r o r made by t h e c o u r t was i n i t s f a i l u r e t o c r e d i t Knight w i t h t h e $27,000 b e f o r e computing i n t e r e s t and a t t o r n e y f e e s . The a t t o r n e y f e e s should be reduced from $4,000 t o $1,410; t h e i n t e r e s t from $3,780.06 t o $1,303.28. This reduces t h e t o t a l judgment from $21,880.06 t o S16,813.28. The cause i s remanded t o t h e d i s t r i c t c o u r t t o comply with t h i s decision.