No. 85-123

I N THE SUPREME COURT OF THE STATE OF MONTANA

1985

CITIZENS BANK OF MONTANA,

P l a n t i f f and Respondent,

ROBERT L. BROWN, FLORENCE K . BROWN, h u s b a n d and w i f e , a n d HOWARD T . BROWN, I N C . ,

Defendants, Counterclaimants and A p p e l l a n t s .

APPEAL FROM: D i s t r i c t C o u r t of t h e T w e l f t h J u d i c i a l D i s t r i c t , I n a n d f o r t h e C o u n t y of H i l l , T h e H o n o r a b l e C h a n E t t i e n , Judge p r e s i d i n g .

COUNSEL O F RECORD:

For Appellant:

J o h n K e i t h , G r e a t F a l l s , Montana

F o r Respondent:

A l e x a n d e r & B a u c u s ; Ward T a l e f f , G r e a t F a l l s , M o n t a n a

--

S u b m i t t e d on B r i e f s : June 2 8 , 1 9 8 5

~ e c i d e d : September 27, 1 9 8 5

Filed : Mr. J u s t i c e L. C. Gulbrandson d e l i v e r e d t h e O p i n i o n o f the Court.

Browns a p p e a l t h e H i l l County D i s t r i c t C o u r t ' s d e n i a l o f

t h e i r motion f o r r e l i e f from judgment. The i s s u e on a p p e a l

i s w h e t h e r t h e r e was a v a l i d judgment u n d e r which r e s p o n d e n t

C i t i z e n s Bank o f Montana c o u l d o b t a i n a w r i t o f e x e c u t i o n and

a sheriff's sale. W e hold t h a t t h e r e was s u c h a judgment

and, accordingly, we affirm the decision of the District

Court.

In March 1980, Robert L. Brown and F l o r e n c e K. Brown

(Browns) , f o r c o n s i d e r a t i o n , e x e c u t e d a p r o m i s s o r y n o t e and

delivered it to Citizens Bank. Browns a l s o executed two

t r u s t i n d e n t u r e s i n f a v o r o f C i t i z e n s Bank t o s e c u r e payment

of t h e note. One t r u s t i n d e n t u r e c o v e r e d r e a l p r o p e r t y known

a s t h e Warehouse p r o p e r t y . The o t h e r c o v e r e d r e a l p r o p e r t y

known a s t h e Gambles p r o p e r t y . Browns l a t e r t r a n s f e r r e d t h e

Warehouse and Gambles p r o p e r t i e s t o a c o r p o r a t i o n , Howard T.

Brown, I n c .

C i t i z e n s Bank f i l e d a c o m p l a i n t i n F e b r u a r y 1 9 8 2 , and an

amended c o m p l a i n t i n March 1 9 8 2 , a g a i n s t Browns and Howard T .

Brown, Inc., a l l e g i n g t h a t Browns w e r e i n d e f a u l t on b o t h

trust indentures. C i t i z e n s Bank sought f o r e c l o s u r e o f the

trust indentures. The defendants responded with a

c o u n t e r c l a i m and a t h i r d - p a r t y c o m p l a i n t .

I n November 1982, t h e District Court granted C i t i z e n s

B a n k ' s motion for partial summary judgment on t h e i s s u e o f

Browns' default on the trust indentures. In July 1983,

C i t i z e n s Bank and Browns s i g n e d a "Covenant Not t o E x e c u t e , "

whereby the Bank agreed not to execute on the judgment.

Shortly thereafter, Browns signed an agreement entitled

" C o n s e n t t o E n t r y o f Judgment." The a g r e e m e n t r e q u e s t e d t h e

D i s t r i c t C o u r t t o e n t e r judgment i n C i t i z e n s Bank" favor i n its suit on the trust indentures. The agreement further requested the court to dismiss with prejudice a l l of the Browns' remaining counterclaims and third-party claims. Pursuant to this document, the District Court entered judg- ment on July 13, 1983, in Citizens Bank's favor against Browns. The judgment specifically created judgment liens in Citizens Bank's favor on the property which had been subject to the trust indentures; the Warehouse property and the Gambles property. Subsequently, Browns and Howard T. Brown, Inc., signed an agreement entitled "Consent to Entry of Judgment Nunc Pro Tunc." Among other things, the agreement requested the District Court to dismiss Howard T. Brown, Lnc. 's, counter- claims and third-party claims. The agreement acknowledged that Howard T. Brown, Inc. Is, interest in the Warehouse and Gambles properties was subject to Citizens Bank's interest. Shortly after these agreements were entered into, the Browns filed a voluntary Chapter 11 Bankruptcy petition in the United States Bankruptcy Court for the District of Montana, Great Falls Division. On April 9, 1984, the Bank- ruptcy Court entered an order regarding the Browns' bankrupt- cy petition. With reference to Citizens Bank's suit against Browns, this order stated: The execution of the COVENANT NOT TO EXECUTE and the filing of the subsequent judgments and judgments nunc pro tunc in favor of the Citizens Bank and against the Browns, creating judgment liens against the real property of the Browns and releasing and dismissing with preju- dice all of the claims which the Browns might have against the Citizens Bank, constituted preferential transfers under 11 U.S.C. Section 547 of the Bankruptcy Code. The Bankruptcy Court further ordered: ... that the Covenant not to Execute and all resulting judgments in favor of C i t i z e n s Bank and a g a i n s t t h e Browns which, amongst other things, created additional l i e n s against property of the Browns and r e l e a s e d and d i s m i s s e d w i t h p r e j u d i c e c l a i m s which t h e Browns may h a v e had a g a i n s t t h e C i t i z e n s Bank a r e s e t a s i d e p u r s u a n t t o 11 U.S.C. 547 a s p r e f e r e n c e s and s p e c i f i c a l l y t h a t t h e Browns may p u r s u e any and a l l c l a i m s which t h e y h a v e o r had a g a i n s t t h e C i t i - z e n s Bank and f u r t h e r t h a t t h e l i e n s and encumbrances which t h e C i t i z e n s Bank had a g a i n s t t h e Gambles and Warehouse p r o p e r - t y a r e s p e c i f i c a l l y preserved.

Pursuant to Citizens Bank's motion, the Bankruptcy Court

l a t e r amended i t s o r d e r s o t h a t t h e l a s t l i n e quoted above

would read, ". .. are specifically preserved - as judgment

liens." (Emphasis s u p p l i e d . )

I n November 1 9 8 4 , t h e B a n k r u p t c y C o u r t l i f t e d t h e a u t o -

matic stay in bankruptcy as to the Gambles and Warehouse

properties. I n December 1984, C i t i z e n s Bank o b t a i n e d a w r i t

o f e x e c u t i o n from t h e C l e r k o f t h e D i s t r i c t C o u r t . Pursuant

t o t h e w r i t o f e x e c u t i o n , a s h e r i f f ' s s a l e o f t h e Gambles and

Warehouse p r o p e r t i e s was s c h e d u l e d f o r J a n u a r y 9 , 1985. On

J a n u a r y 8 , 1985, Browns f i l e d a m o t i o n f o r r e l i e f from judg-

ment i n an a t t e m p t t o h a l t t h e s h e r i f f ' s s a l e . The b a s i s o f

Browns' motion was that the Bankruptcy Court order dated

A p r i l 9 , 1984, a l l e g e d l y i n v a l i d a t e d C i t i z e n s B a n k ' s judgment

l i e n s on t h e Gambles and Warehouse p r o p e r t i e s . Therefore,

Browns c o n t e n d , t h e r e was no judgment upon which t h e w r i t o f

e x e c u t i o n and s h e r i f f ' s s a l e could be based. The D i s t r i c t

C o u r t r e j e c t e d t h e i r argument and a l l o w e d t h e s h e r i f f ' s s a l e

o f t h e Warehouse and Gambles p r o p e r t i e s .

A p p e l l a n t s a d v a n c e o n e main c o n t e n t i o n on a p p e a l . They

contend that the Bankruptcy Court o r d e r o f A p r i l 9, 1984,

completely s e t a s i d e C i t i z e n s Bank's judgment liens against

the Gambles and Warehouse properties and, therefore, the District Court should have granted appellants' motion for

r e l i e f from judgment.

The b a n k r u p t c y j u d g e , i n h i s o r d e r of A p r i l 9, 1984, s e t

aside:

[ T J h e Covenant Not t o E x e c u t e and a l l r e s u l t i n g judgments i n f a v o r o f C i t i z e n s Bank and against the Browns which, amongst o t h e r t h i n g s , c r e a t e d a d d i t i o n a 1 l i e n s a g a i n s t p r o p e r t y o f t h e Browns and r e l e a s e d and d i s m i s s e d w i t h p r e j u d i c e c l a i m s which t h e Browns may h a v e had a g a i n s t t h e C i t i z e n s Bank . .. On i t s face, t h i s portion of the order set a s i d e C i t i z e n s

Bank's judgment liens resulting from the July 13, 1983

judgment. However, the order goes on to specifically

p r e s e r v e " t h e l i e n s and encumbrances which t h e C i t i z e n s Bank

had against the Gambles and Warehouse property . . ." A p p e l l a n t s a r g u e t h a t t h i s l a s t p h r a s e was meant t o p r e s e r v e

a n y l i e n s which P l a i n t i f f had b e f o r e t h e e n t r y o f t h e J u l y

13, 1983, D i s t r i c t Court o r d e r . W e disagree with appellants'

strained interpretation. If the Bankruptcy Court had

i n t e n d e d t h i s meaning, it c o u l d h a v e e a s i l y s a i d s o .

W e n o t e t h a t "when t h e r e i s no t e s t i m o n y and t h i s C o u r t

i s l i m i t e d t o t h e r e c o r d , it i s f r e e t o make i t s own examina-

t i o n o f t h e e n t i r e c a s e and t o make a d e t e r m i n a t i o n i n a c c o r -

dance w i t h i t s findings.'' Steadman v . Halland (Mont. 1 9 8 2 ) ,

641 P.2d 448, 452, 39 St.Rep. 343, 347. This r u l e applies t o

t h e i n s t a n t case. F u r t h e r , t h i s Court has s t a t e d t h a t , " [a] judgment should be s o construed a s t o give e f f e c t t o every

word and p a r t o f i t , i n c l u d i n g s u c h e f f e c t s and c o n s e q u e n c e s

as follow by necessary legal implication from its terms,

although not expressed." State ex rel. Foot v. ~istrict

Court et al. (1925), 72 Mont. 374, 379, 233 P . 957, 959.

A perfunctory review of bankruptcy law reveals the

necessary legal i m p l i c a t i o n s t o b e drawn from t h e d i s p u t e d order. The Bankruptcy Court had authority to set aside

"preferential transfers" made by Browns. The Banlcruptcy

C o u r t ' s a u t h o r i t y i s u n d e r 11 U.S.C. § 547 o f t h e B a n k r u p t c y

Code. The J u l y 1 3 , 1 9 8 3 , judgment, entered pursuant t o t h e

consent to entry of judgment agreement, created a

preferential t r a n s f e r f o r t h e purposes of § 547. The e n t r y

o f judgment g r a n t e d t o C i t i z e n s Bank a judgment l i e n on - all

real property Browns owned in H i l l County. Thus, the

p r e f e r e n t i a l t r a n s f e r was t h a t C i t i z e n s Bank r e c e i v e d a l i e n

interest against real property which was - not previously

collateral for Browns' debt to the Bank. The B a n k r u p t c y

Court o r d e r set t h i s p r e f e r e n t i a l transfer aside. This did

n o t a f f e c t C i t i z e n s Rank's l i e n on t h e o r i g i n a l c o l l a t e r a l ;

S e c t i o n 547, however, i s c o n c e r n e d p r i - m a r i l y w i t h judgments o r j u d i c i a l p r o - ceedings t h a t c r e a t e l i e n s within t h e 90-day period t o secure claims t h a t previousle - - p r e f e r e n t i a l standinq. had no A c c o r d i n g l y , a judgment e n t e r e d on o r w i t h i n 90 d a y s b e f o r e t h e p e t i t i o n i s f i l e d and a r i s i n q o u t o f t h e e n f o r c e m e n t o f a v a l i d and s u b s i s t i n g l i e n , which h a s priority over t h e claims of general c r e d i t o r s and a g a i n s t which t h e t r u s t e e c a n n o t a s s e r t a paramount r i g h t , --tdoes no constitute a voidable preference. Thus, the confession of a judgment on a non-preferential and otherwise valid s e c u r i t y i n t e r e s t i n persona 1 p r o p e r t y and a c o n s e q u e n t s a l e o f t h e p r o p e r t y does not give rise t o a preference. (Emphasis s u p p l i e d . )

4 C o l l i e r on B a n k r u p t c y , ch. 547, 4[ 547.12, a t 48-49 (15th

ed. 1979).

C i t i z e n s Bank had a valid and s u b s i s t i n g l i e n on t h e

Gambles and Warehouse properties long before Browns

p e t i t i o n e d f o r bankruptcy. The judgment a r i s i n g o u t o f t h a t

v a l i d l i e n was n o t a p r e f e r e n t i a l t r a n s f e r . W e hold t h a t t h e

July 13, 1983, judgment lien was a valid lien as to the

Gambles and Warehouse p r o p e r t i e s . This i n t e r p r e t a t i o n i s i n accord with a straightforward

r e a d i n g o f t h e Bankruptcy Court o r d e r . The o r d e r s p e c i f i c a l -

l y p r e s e r v e d " t h e l i e n s and encumbrances which t h e C i t i z e n s

Bank had a g a i n s t t h e Gambles and Warehouse p r o p e r t y " a s judg-

ment liens. The District Court properly denied Browns1

motion f o r r e l i e f from judgment.

Having r e a c h e d a d e c i s i o n o n t h e m e r i t s o f t h e c a s e , w e

h a v e no need t o a d d r e s s t h e q u e s t i o n s o f w h e t h e r a p p e l l a n t s '

counsel properly filed the notice of appeal, or whether

appellants m o t i o n f o r r e l i e f from judgment was t i m e l y made,

o r whether r e s j u d i c a t a o r c o l l a t p r a l e s t o p p e l apply.

Affirmed.

W e concur: