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
dirt@umkc.edu
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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