OWEN v OSTRUM
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No. 93-039 IN THE SUPREME COURT OF THE STATE OF MONTANA 1993 CHARLES W. OWEN, Plaintiff and Respondent, -vs- i :" ,., j.,,.. -.y ', ~:,'.~.' ,,.,,.' , L,r;>:, :, ,<_. RICHARD M. OSTRUM, Defendant and Appellant. APPEAL FROM: District Court of the Thirteenth Judicial District, In and for the County of Stillwater, The Honorable G. Todd Baugh, Judge presiding. COUNSEL OF RECORD: For Appellant: T. Thomas Singer; Moulton, Bellingham, Longo & Mather, Billings, Montana For Respondent: Kenneth D. Tolliver, Jeffrey Hunnes; Wright, Tolliver & Guthals, Billings, Montana Submitted on Briefs: Decided: Filed: May 20, 1993 June 29, 1993 Justice John Conway Harrison delivered the Opinion of the Court. Richard M. Ostrum foreclosure, (O&rum) and deficiency judgment entered by the Thirteenth Judicial District Court, partner, appeals from judgment, decree of Stillwater County. @strum's former Charles W. Owen (Owen) brought the action to collect a debt and foreclose a security interest in shares of stock pledged as security for the debt. In 1958, Montana, We affirm. Ostrum purchased a cattle ranch near Fishtail, in Stillwater County. He operated this ranch with his wife as a family corporation until 1977, when Owen invested in it, receiving shares equal to 49 percent of the corporate stock. During the next ten years, the ranch expanded, purchasing land or leasing other land owned by Owen, and the corporation began breeding and selling purebred Angus cattle. Owen paid the costs of expansion through loans and capital investments, in exchange for which he received corporate stock. Ostrum lived on the ranch and managed it until June 1989. In 1979, Block Angus. Owen and Ostrum formed a partnership called Gold By 1987, Owen owned a 94 percent interest in the partnership, and Ostrum, a six percent interest. In December 1987, Gold Block Angus had assets valued for tax purposes at $2,601,091 and total liabilities of $4,751,072, The partnership owed entities owned by Owen. excluding accrued interest. approximately $3.7 million to Owen and Owen and Ostrum decided to recapitalize Gold Block Angus by writing off approximately $2.4 million of the 2 partnership's debt to Owen and incorporating as Gold Block, Inc. Ostrum's $144,000. six-percent share of the capitalized liability was As he had no funds for this capital contribution, Owen loaned him $144,000. In exchange for the $144,000 loan, Ostrum signed a promissory note and a security agreement. The security agreement stated that Ostrum and Owen had agreed to transfer their interests in Gold Block Angus, corporation, a partnership, to Gold Block, Inc., a Montana in exchange for shares in the corporation. "In connection with [that] agreement," the document says, Owen loaned Ostrum $144,000 and Ostrum granted Owen a security interest in 1,200 shares of Gold Block, Inc. the loan as The security agreement described "evidenced by that certain Promissory Note dated December 31, 1987, which is payable on demand and which bears interest at the rate of 9.5 percent per annum." In June 1989, Owen announced that he intended to liquidate Gold Block, Inc., and that Ostrum's employment as manager was terminated to facilitate the liquidation. Ostrum left the ranch, but Owen completed only a partial liquidation and continued to operate the ranch. A year later, on June 14, 1990, Owen sent Ostrum a demand letter, stating that if Ostrum did not pay the $144,000 debt or negotiate a repayment plan in fifteen days, action might be taken to realize on the security by public or private sale of Ostrum's 1,200 shares. Ostrum made no payment, and Owen filed a complaint on August 9, 1990, seeking judgment in the amount of $179,306 and 3 foreclosure of the security interest. Ostrum moved to dismiss the complaint for failure to state a claim upon which relief can be granted, on the grounds that Owen had not alleged execution or delivery of the promissory note and had not attached a copy of it to his complaint. denied this motion, Judge Fillner having determined that Ostrum owed a debt pursuant to the security agreement, and that the promissory note therefore was irrelevant, but Ostrum continued to deny that he had signed a note. In his answer to the complaint, Ostrum asserted that Owen could not prove that a note was executed or that he was the holder of a note, and that Owen had given no consideration for the alleged debt. Owen moved for partial summary judgment in August 1991, asking the court to determine that Ostrum owed a valid debt and that Owen had an enforceable security interest, and to determine the amount of the debt. Ostrum argued in response that summary judgment was improper because there were factual issues as to the existence of the promissory note and as to whether Owen was the holder of the note. He also contended that the only consideration he received for his loan was his stock in Gold Block, Inc., and that by tendering this stock he had satisfied the debt. If his 1,200 shares were not worth $144,000, Ostrum argued, then their actual value should be determined at trial. Judge Speare, Stillwater County, Owen. then presiding over the District Court in granted partial summary judgment in favor of He determined that no genuine issue of material fact existed 4 as to whether Ostrum owed Owen $144,000 or as to whether Owen had a valid security interest in Ostrum's 1,200 shares of Gold Block, Inc. stock, and that @strum had received consideration for the loan in the form of reduction of the partnership's debt. The court entered judgment and issued a decree of foreclosure, dated August 29, 1991, ordering that Owen recover $194,032.80; that his security interest in Ostrum's 1,200 shares of Gold Block, Inc. stock be foreclosed; that the shares be sold at public sale; and that Ostrum pay any deficiency remaining after the sale. order, In his Judge Speare stated that he assumed the promissory note never existed. In September 1991, collateral, Owen moved for approval of the sale of proposing to sell it by first publishing a notice in the Stillwater Countv News and the Billings Gazette for ten days prior to the sale, and then holding a public auction on the front steps of the Stillwater County courthouse, probably on November 8, 1991. A financial disclosure statement would be furnished to prospective motion, buyers. The District Court declined to rule on this stating that it already had ordered a public sale of the collateral and that Owen could proceed. Ostrum filed a memorandum and affidavit opposing the proposed sale on the grounds that it was not commercially reasonable. As there is no market for a minority corporation, interest in a closely held Ostrum argued, full value for his stock could not be obtained through a public sale. Ostrum also pointed out that Owen's proposed 5 financial disclosure statement undervalued Gold Block, Inc.'s assets and did not include the proceeds of recent land and cattle sales. statement showed a negative According to O&rum, net The worth for the corporation. it had a positive net worth when he was managing it, but under Owen's management the net worth declined by $1 million. A public sale was held on December 18, 1991, according to plan, and Owen bought the 1,200 shares for $15,000. buyers appeared. No other Owen then moved for award of attorney's fees and determination of deficiency judgment. Ostrum, opposing the motion, again argued that the sale was not commercially reasonable and that Owen therefore was not entitled to a deficiency judgment. After a hearing on February 3, 1992, at which counsel reviewed the history of the case for Judge Baugh, the proceedings were delayed to allow further briefing on the issue of commercial reasonableness. Counsel then reviewed corporate financial records at the offices of Gold Block, Inc., and its accountant. On February 13, 1992, they found among the Gold Block, Inc. files a photocopy of the original promissory note, signed by Ostrum on December 31, 1987. This discovery was reported to the court, prompting a motion from Ostrum, who pointed out that the original note was still missing and requested indemnification to protect him from additional claims on the same note. Ostrum also asked the court to reconsider summary judgment and to require Owen to "meet his burden of proof" regarding ownership of the original note. The hearing that began on February 3 was completed on August 6 25, 1992. and an Judge order authorized Speare's on to market to summary of Gold possible support a the and the that Block, determination the was assets the to and bid not Judge of based parties' law, was discovery mismanagement that of he regard judgment Inc. corporate that with that as note: conclusions concluded court judgment; lost fact, He 1992. nothing, the and of appellate value the trends, nothing was on findings 8, an changed owed, not on as of note testimony issued September act grant promissory debt Baugh the on a conflicting liabilities, had price revealed of $15,000 unreasonable. Concluding the stock deficiency August that sale were judgment 1991 the the sale--plus the sum the of sum of $3,114.53, and 1992, in the fees in of interest sum of foreclosure, attorney's of time, reasonable, amount $175.55, expenses of manner, commercially in decree method, Judge less and Baugh $194,032.80, the $15,000--the of $11,709.92, of the $18,841.74, for 29, a of issued a to proceeds sum August terms pursuant sale the from place, costs collateral 1991to total the of in in the September 8, judgment of $212,874.54. Two issues are raised on appeal: 1. Whether the District Court erred in granting summary judgment on a debt memorialized in a promissory note, in the absence of the original promissory note and without requiring the creditor to post security. Whether the District Court erred in concluding that the 2. sale of the collateral was commercially reasonable and that Owen therefore was entitled to a deficiency judgment. Did the District Court err in 7 granting summary judgment on a debt memorialized in a promissory note, in the absence of the original promissory note and without requiring the creditor to post security? All three of the judges who were responsible for this case in District Court concluded that Ostrum's debt to Owen was established by the security agreement and that the promissory note, if it existed at all, was irrelevant. Ostrum contends that on the contrary, the debt was created by the note. Before he signed the note, he argues, he might have had an obligation to make a capital contribution to Gold Block, Inc., but the amount due, the rate of interest, promissory and the repayment terms were to be found only in the note. He asks this Court to reverse the District Court's rulings on this point because the District Court relied on the terms of the note in determining the amount of the judgment. The first ruling on this point was made in 1990 by Judge Fillner, who denied O&rum's motion to dismiss Owen's complaint for failure to state a claim upon which relief can be granted. A motion to dismiss a complaint under Rule 12(b)(6), M.R.Civ.P., may be granted only if it appears beyond any doubt that the plaintiff can prove no set of facts that would entitle him to relief. Contway v. Camp (1989), 236 Mont. 169, 173, 768 P.2d 1377, 1380. Taking Owen's allegations to be true, which meant accepting the parties' security agreement as evidence of Ostrum's debt, Judge Fillner properly denied the motion. Judge Speare ruled on this issue in 1991, in his order granting Owen's motion for summary judgment. He found that Ostrum 8 had signed and a that Ostrum $144,000; issue of security agreement stated in Finally, fact Judge his debt to Owen Owen deposition that he owed concluded, "there is no O&rum owes $144,000.~t that Bauqh his acknowledged Speare therefore, Judge material that reiterated Owen his predecessors' genuine conclusion that Owen had sued on a debt, not on a promissory note, and refused to reconsider in 1992. Part summary to 5 summary of Ostrum's judgment 30-3-804, 1992, when note. Until compel Ostrum for his alleged (1989). MCA This parties' then, Ostrum asking need the the for court the photocopy of that (repealed in no 1991) security of further claims on a that he had stolen instrument. note. As the Owen note negotiated without Baugh did not post was payable of material matter of the judgment fact law. demonstrating with abuse the moving and forged only to the indemnifying lost, his is absence party. discretion appropriate the Rule indorsement. moving 56(c), of a Ravalli We it signed existed. but an did obliqor destroyed, or indorsed the not Owen, February could in refusing when there party is genuine County to that be order Judge Owen to is no genuine issue entitled to judgment as M.R.Civ.P. 9 conclude not security. Summary a testified until authorized require so pursuant note maintained arise do reconsider not reason by to did to loss to indemnification court against court found had MCA asked need lawyers 30-3-804, the when rationale was the Section not judgment issue Bank The initial burden of material fact v. Gasvoda (1992), a of lies 253 Mont. 399, 401, that a the burden, that genuine 232 (1988), can in of issue Eureka Whether drawn court's MCA, defendant in the offered (1987), 733 fact no agreed missing facts of the the note that Owen's note lost, was of proof entitled to and original upon of in the complaint. provided as to judgment the as a the of of We law. negotiable owner (3) of both that of (2) the the agreement, hold applied missing. the and and Ostrum's Veterans' ownership, testified photocopy. 10 (1) security Owen matter of § the because was that ownership parties' whether Court existed the applied missing note Bank reversed District to in applicable husband's instrument, of validity a her provides proof we of issue (1989), the issue promissory MCA on had the refers factual Here, proof supplied burden which production to Here, National court indorse checks. evaluated the to recover may attached because that 357. Giles, authority the was In threshold 30-3-804, prevent 358. Jones be P.2d depends the threshold instrument. was at v. First 733 material judgment (1989), instrument that P.2d disability instruments; is must 467, met inference Any proof has establish Peschel judgment. Mont. must 54. resolving had MCA Section 225 fact summary 30-3-804, parties of without Administration § from party judgment 51, summary moving exists. P.2d Giles, 30-3-304, fact 760 issue district material opposing the summary 521, Giles an statutes. of party v. opposing Once 516, be the 1042, 1043. party Mont. reasonably favor 833 P.2d a the terms terms which of was the original that Owen met his debt, and that he II Did the collateral entitled District was to argues that sale corporation, because closely the of held same there that the method, were commercially Section disposition is no corporation. concluded and that is He market the the sale of the therefore Owen not in was had time, place a minority Judge his and commercially closely that out met a a February Owen manner, for points during that interest 1992 interest Baugh of of in reached hearing, burden terms held but establishing the stock sale reasonable. 30-9-504(3)(a), MCA, of that auction public minority conclusion, nevertheless concluding judgment? a a in reasonable deficiency reasonable a err commercially a Ostrum Court collateral sets after forth the requirements for default: Disposition of the collateral may be by public or private proceedings . . . . Sale or other disposition may be as a unit or in parcels and at any time and place and on any terms, but every aspect of the disposition including the method, manner, time, place, and terms must be commercially reasonable. Ostrum contends of disposing as the order, of stock majority a public minority unlikely shareholder. but Ostrum had a is he commercially method, that interest to Judge concluded, be is in not a valuable Baugh said an appropriate closely to held anyone much the nevertheless, that sale not corporation, other same method than thing the in his was not the 'sale suggest an alternative the corporation unreasonable. objected manner, been auction time, undervalued to the or for place. but He purposes 11 did complained of the that sale, but he did not attempt to to court's the O&rum's argues the that his measure We bears Bank of its some party placed assignment the original the on due price demanded notice sale, testimony though declined court after the concluded, had the the the $1,500, also we reasonable. at was offered took over affirmed, 12 and that was a the the that National to the fraction on the third secured the due the a was When for business renewing note and case appellant, corporation balance the 1983 The Before buyer Dulan's bank sold balance due of the $8,500 buyer. on He $22,280 to a photography buyer stock valued Ostrum Montana 28. payment, the buyer and of sale been v. Dulan. the of for assessing in renewal with commercially assets The to Dulan, to only the contract the corporation's sold make Owen shares in P.2d bank. note by $144,000, Dulan 661 escrow. not was Dulan's not he demonstrate appeal, the incorporated payment to This challenged was did 177, the buyer's for collateral one. his in paid On factor of from stock Dulan note. of he 1991. a this later, the bank under Dulan year of stock, after still 203 loan the loan. Dulan's as Mont. a price price stock value." November disposition a price in sale did 1988, allegedly to for $15,000 fair January value the note defaulted, in nor market (1983), promissory and "fair a value, the resemblance pledged collateral that not reasonable Roundup Dulan, by was addressed that alternative not stock of commercially as was $15,000 of an satisfaction shares value best establish show the grounds claimed the year that that the that the before the value had the business. The district Dulan not meet did his burden of establishing Here, Block, but Inc. he stock Ostrum or view offered, We in Retirement 175, which was an in requirement Mont. has cases of 5 the value P.2d secured not the MCA. and abuse the that in disclosure shares its evidence were a discretion as to the Carpenters-Employers (1991), abuse its defendant's barred secured 1066, of 250 discretion real "probable Mont. in property approach" based appraiser). or 30-g-504(3), value the Gold cattle, decided of of See merely of financial not absence did certified the Court the did of but market Partnership court value $1,500. price. shares. limited where 93, 803 contrast, a the Galleria (district by Court judgment the v. Court than registered percent reasonable in appraisal, submitted This of fair on six the and District only price of more of land shown District estimated an its The a worth estimates worth was Fund 158 not data 246 bid was estimate that the value P.2d disregarding on the Trust 819 net fact that market an himself. $15,000 hold accepting fair it the stock particularly negative and the numerous provide on the statement being not bid of offered assets, did that recovery party See the did not Ottersen cases cited party--Owen--mailed of a meet deficiency the notice v. Rubick (1990), therein. notice of Here, in time, the place, and manner of sale to Ostrum ten days before the date of the sale, and in addition News and the Billinqs four locations We hold in that published Gazette. Stillwater the District notices Notice County Court 13 of seven did in the Stillwater County public sale was posted days prior to sale. not err in concluding in that the sale of commercially deficiency O&rum's 1,200 reasonable, and shares of that Owen judgment. Affirmed. 14 Gold Block, therefore was Inc. stock entitled was to a June 29, 1993 CERTIFICATE OF SERVICE I hereby certify that the following order was sent by United States mail, prepaid, to the following named: T. Thomas Singer MOULTON, BELLINGHAM, LONG0 & MATHER, P.C. P.O. Box 2559 Billings, MT 59103 Kenneth D. Tolliver Jeffery A. Hunnes WRIGHT, TOLLIVER & GUTHALS P.O. BOX 1977 Billings, MT 59103 ED SMITH CLERK OF THE SUPREME COURT STATE $)F MONTANA
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