Daily Development for Thursday, August 23, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
CONTRACTS; CONSTRUCTION; INTEGRATION: Although note is unambiguous on its face and contains an integration clause, borrowers can introduce additional evidence of mortgage broker fraud to show that the parties did not intend an integrated agreement, that their consent was fraudulently induced, and even that the document was ambiguous on the basis of evidence outside the four corners of the document.
The Cantamar, L.L.C. v. Champagne, 142 P. 3d 140 (Utah App. 2006)
Another aspect of this case is reported under the heading: Mortgages; Interest; Default Interest. (The DD for 8/21/07)
For several years, Champagne and his colleagues (Champagne) had been working with a financial consultant/loan broker (Thuett) to find a $15 million investor for their proposed business. Apparently the consultant had done a reasonably good job of convincing them that financing was right around the corner, as they executed two consecutive notes arranged by the consultant with a principal amount of around $260,000, with principal payable only when the equity investment arrived. These notes carried ruinous interest rates - in one case 72% and in the second 60%, but with a 120% default rate. (Utah has no usury laws affecting commercial loans).
When the ship carrying the $15 million did not materialize on the horizon, these loans had to be refinanced, and the consultant brokered a third loan taking out the second of the two earlier notes. This loan had an interest rate of 8%, payable monthly, but with principal deferred until the Due Date three months thereafter. Unlike the notes it replaced, this note, to a new lender, Cantamar, did not state that principal would not be payable until the capital infusion arrived.
Champagne paid the interest during the stated term of the note, but, (surprise!) when the note fell due three months later there still was no $15 million on the table. Champagne believed that there was no obligation to pay the principal, as before, but the lender (crazy as it sounds) expected to be paid as provided in the note. Champagne argued that Thuett had informed them orally that this note was subject to the same condition on payment as the earlier notes. When the dispute was joined, Champagne stopped making the interest payments also.
In the predictable lawsuit, the trial court found, following depositions of principals on both sides of the deal, found on summary judgment that the note, which contained an integration clause, was a complete statement of the understanding of the parties, and contained no condition on payment relating to the proposed search for capital for the business. The court further rejected Champagne’s arguments that the note was fraudulently induced or that it was ambiguous (on the basis of evidence outside the four corners of the instrument). Both of these latter issues also depended upon the same critical allegation - that Thuett had represented that no principal was payable until an investor had been found.
The appeals court reversed and remanded all of the above determiinations. Champagne will be able to defend on the basis of the alleged representations by Thuett that the production of the $15 million investor was a condition to payment.
Interestingly, there is not one word in the opinion about any representations made by Cantamar. Similarly, there is nothing in the opinion to show that Thuett was Cantamar’s agent. In fact, everything stated in the opinion appears to indicate that Thuett was Champagne’s agent. Further, there is nothing in the appeals court opinion to indicate that Cantamar was aware of Thuett’s alleged fraudulent statements. A chat with counsel, however (the case has settled) indicates that there was some evidence that raised a colorable claim of agency and, of course, denials by Cantamar’s principles that they knew anything about Thuett’s activities had to be believed. No one had been able to get process served on Thuett himself and he had not been deposed.
In sum, then, indulging in the presumption that there was a factual dispute about whether in fact Cantamar was aware of or, through its agent, had actually made, representations that the principle was subject to a contingency relating to the funding, was the borrower able to present evidence on that claim when there was a final executed note containing a due date, payment schedule, and integration clause? The trial court said no, but the appeals court said yes, yes, yes.
The appeals court, in fact, identified three separate bases upon which extraneous evidence could be introduced.
The first analysis had to do with the question of whether the note, which stated a specific due date and nothing about a payment contingency, was an integrated document - the final and complete expression of the parties. The note contained an integration clause that said exactly that. But the court said that this only raises a presumption of integration, and that a party is free to introduce “all relevant evidence” to rebut the presumption. Although Champagne raised no evidence that the interest obligation was not an integrated agreement, he did allege that the principal obligation was subject to a condition not expressed in the note. The appeals court reversed the trial court and found that the issue of integration could not be resolved on summary judgment.
Next, the court turned to the Champagne’s allegation that it had been fraudulently induced to execute the note. The court indicates that it would have been able to reach this argument even if the instrument was deemed integrated as a matter of law, since fraudulent inducement raises quite separate issues. The court really had little trouble here. It concluded that Champagne had alleged adequately that Thuett had induced them to sign the note by telling them, fraudulently, that it would not be enforced absent the $15 million in funding arriving.
To the editor, perhaps the most interesting discussion was that on ambiguity. Champagne argued that the note was ambiguous and that therefore evidence extraneous to the note should be admissible to interpret it. Presumably, even if the court found the note to be integrated and not fraudulently induced, this argument would permit consideration of further evidence to demonstrate that the parties didn’t intend to sign what they signed. The editor suspects that this defense would be useful if it was found that Thuett was not Cantamar’s agent and that Cantamar was ignorant of the condition. If the document was ambiguous, evidence of an intent other than that set forth on the face of the note might be useful to Champagne. In most jurisdictions, it would be very difficult to construe a plan promissory note as ambiguous, because the ambiguity must be shown to arise with the “four corners” of the instrument in question. But apparently not in Utah. The law in Utah on ambiguity is tha
t “when determining whether a contract is ambiguous, any relevant evidence must be considered . . . [-] by requiring at least a preliminary consideration of all credible evidence offered to prove the intention of the parties . . . the court can place itself in the same situation in which the parties found themselves at the time of contracting.”
Comment: This last is obviously not the “four corners” doctrine. Far from it. In Utah, it appears, there is very little point in reducing an agreement to paper. One is free to argue later to a court later whatever one wants to convince the court that some other deal, or no deal at all, was in fact intended. Pretty scary for real estate deals, at least - and possibly for most deals. The editor understands that a similar rule might exist in New Mexico.
Comment 2: Compare: Carrow v. Arnold, 2006 WL 3289582 (Del. Ch. Oct. 31, 2006). (The DIRT DD for 1/ 22/07) (A buyer may obtain specific performance of a written agreement of sale, notwithstanding parol evidence suggesting different terms, where the court concludes that the contract was integral, despite the absence of an integration clause, and there is no evidence of fraud or misrepresentation.)
Comment 3: After chatting with some people knowledgeable about the case, the editor has reason to believe that the court smelled a rat here and did rough justice to protect the borrowers. The problem is that the case is precedent and doesn't indicate the court's concerns. If the court doesn't mean what it says, that's bad law making. If it does, in this case, well . . . .
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