Perez-Lizano v. Ayers

No. 84-296
IN THE SUPREME COURT OF THE STATE OF MONTANA
1985

MIGUEL A. PEREZ-LIZATJO,
Plaintiff and Respondent,
-vs-
MILAN R. AYERS,
Defendant and Appellant.

APPEAL FROM: District Court of the Ninth Judicial District,
In and for the County of Toole,
The Honorable R. D. McPhillips, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Dzivi, Conklin & Nybo; William Conklin argued,
Great Falls, Montana
For Respondent:
Alexander & Baucus; John Paul argued, Great Falls,
Montana

Submitted: January 23, 1985
Decided: February 15, 1985

Q
Filed: --_
,
I,,

Clerk
Mr. Justice John C. Sheehy delivered the Opinion of the
Court.

Milan I?. Ayers appeals the May 24, 1984 order of the
Ninth Jud-icialDistrict Court, Toole County, granting Miquel
A. Perez-Lizano partial summary judgment in an action against
Ayers to collect a $40,000 promissory note. The trial court
judgment is affirmed.
Perez-Lizano and Ayers were in the business of
developing oil and gas property. Sunlite International,
Jnc., of Houston, Texas, had acreage in Pondera and Teton
Counties, Montana available for development. Ayers told
Perez-Lizano he was interest.ed in purchasing an option on
that acreage. Subsequently, a promissory note for $40,000
was signed by Ayers in favor of Perez-1,izano. A writinu from
Ayers to Perez-Lizano captioned "Letter Agreement" set forth
information intended to supplement and clarify the note.
Both instruments are dated December 15, 1980.
The promissory note provided for repayment to
Perez-Lizano of the $40,000 one year from its date and stated
that 10 percent per annum interest accrued from June 15, 1981
until repayment. The note also stated it was be secured by
Ayers' 124 percent working interest in the "Aakre lease."
The "Letter Agreement" stated the purpose of the loan
and Ayers' collateral. It also stated that:
"As compensation for the use of these funds, I will
assign a 2% working interest, carried 100% on all
costs through the four initial wells to be drilled
on the acreage included under the Sunlite option.
The funds w . . . be repaid prior to any drilling
j13
activity on these properties. If use of the funds
is required beyond seven months, a 10% annual
interest rate will be added starting from June 15,
1981. I
'
Perez-Lizano transferred $40,000 to Ayers--$20,000 by
wire-transfer on January 23, 1.981, and $20,000 by check
deposited in Ayers' account at the First State Rank of
Shelby, Montana on Janusry 29, 1981. On Ayers' deposit slip
for the January 29, 1981 bank transaction there is a
handwritten notation "Miguel Perez-Lizano (loan)."
There was no compliance with the terms of either the
note or the "Letter Agreement." Ayers did not secure the
loan with the proposed 12+ percent working interest in the
"Azkre lease," he did not assign a 2 percent working

interest as compensation to Perez-Lizano for his use of the
funds, and he paid no interest to Perez-Lizano. No part of
the $40,000 has been repaid.
Ayers alleges that the letter agreement and promissory
note do not set forth the real agreement between the parties.
He claims the $40,000 Perez-Lizano advanced to him was
Perez-Lizano's investment in the Sunlite option property and
it was never either party's intention that Ayers would repay
Perez-Lizano. Ayers claims the note and the letter agreement
were a sham to help Perez-Lizano obtain investment funds from
third parties. The trial judge, relying on the par01
evidence rule, refused to admit Ayers' evidence concerning
these allegations.
Perez-Lizano sued Ayers on December 22, 1981, seeking
collection of the promissory note and damages for fraudulent
misrepresentation. In his December 29, 1981 answer, Ayers
admitted executing the promissory note but denied that the
note and letter agreement represented the entire agreement
between the parties. He dic! not plead fraud in his answer.
On February 21, 1984, following discovery and a pretrial
conference, Perez-Lizano filed a motion for partial summary
iudgment for the amount of the promissory note and attorney's
fees. On March 1, 1984, Ayers filed a motion for leave to
file an amended answer and counterclaim. The amended answer
pleaded fraud in another matter as a counterclaim but did not
plead the defense of fraud to the note here. A hearing on
those motions was held on March 8, 1984.
Ayers offered Exhihit D in support of his contentions
which exhibit contains the following language:
"The $40,000 in the Sunlite option--to be returned
when the deal was financed. For sure J want to
return Terrial's $20,000. The remaining $20,000, I
will return to fund the Alstead. I hope this takes
place within 30 days."
On March 27, 1984, the trial. judge granted
Perez-Lizano's motion for partial summary judgment. On May
24, 1984, the trial judge denied Ayers' motion to amend his
answer and assert his counterclaims. The trial judge entered
findings of fact, conclusions of law, and judgment for
Perez-Lizano in the amount of the promissory note, interest,
and attorney's fees. The judgment was certified as final for
appeal purposes, pursuant to Rule 54(b), M.R.Civ.P.
The issue before us is whether the District Court
correctly granted. Perez-Lizano's motion for partial summary
iudgment. In granting that motion, the trial judge concluded
that Ayers could not introduce parol evidence heca.use the
promissory note was c1ea.r and unambiguous on its face. Ayers
appeals this, arguing he sought to prove with parol evidence
that he had a defense against payment pursuant to §

30-3-306 (b) and ( c ) , MCA.
The defense Ayers claims is delivery for a special
purpose. He argues oral evidence should have been admitted
to establish that special. purpose. As discussed below, Ayers
asserts that Perez-Lizano was subject to the defenses
available in S 30-3-306, MCA.
Two issues, both raised by appellant., are considered:
1. Was Perez-Lizano subject to the defenses listed. in S
30-3-306, MCA?
 2. Should the District Court have allowed par01

evidence to establish a defense of delivery for a special
purpose?

Ayers argues that Perez-Lizano was not a holder in due
course, and as such was subject to the defenses listed in S
30-3-306, MCA.
Section 30-3-302(2), MCA, provides that a payee may he a
holder in due course. Such instances must indeed be rare
because in S 30-3-305, MCA it is provided that a holder in
due course takes the instrument free from all defenses of any
party to the instrument - whom the holder - - dealt.
with - - has not
To paraphrase, even if one is a holder in due course of an
instrument, he is still subject to the defenses aga.inst the
instrument of any party if he has dealt with that party.
Thus in this case, Perez-Lizano, having dealt with Ayers in
the issuance of and delivery of the instrument, takes the
instrument subject to Ayers' defenses. The situation of this
case is th?.t if Ayers is not a holder in due course, under S
30-3-306, MCA, he takes the instrument subject to all
defenses which Ayers would have in an action on a simple
contract. On the other hand, if Ayers as payee is the holder
of due course, he is still subject to those defenses because
he d.ealt with Ayers, a party to the instrument, under the
provisions of S 30-3-305, E1CA.
Therefore, whether Ayers is a hold-er of the instrument,
or a holder in due course, the issue is not dispositive. The
single point on which this case turns is whether the court
should have allowed parol evidence offered by Ayers to show
that the real agreement between the parties was other than
the one expressed in the note and in the letter of agreement.
 11.

Ayers contends that by his offer of parol evidence he
would establish the defense against the instrument of
delivery for a special purpose. Under S 30-3-306 (c), PCA,
delivery of an instrument for a special purpose is s defense
against the instrument against one not a holder in due
course.
There are two principal reasons why Ayers cannot prevail
on his contention that he should be allowed to present
evidence of special purpose in this case. First, the special
purpose defense under the UCC against instruments has been
construed to apply only to those instruments which wou1.d be
enforceable except for the occurrence of a condition.
Secondly, under Montana's ordinary contract law, parol
evidence is not admissible to show that a written instrument
between parties is based on a sham or fraud.
Ayers contends that the letter agreement and promissory
note do not set forth the entire transaction between the
parties. In his third defense contained in his proposed
amended answer, Ayers sought to elaborate his earlier
allegations that the $40,000 advanced by Perez-Itizano to
Ayers was Perez-Lizano's personal investment in the Sunlite
option property and was never intended to be a loan or to be
repaid by Ayers. He further contends that the note and
letter of agreement were executed as a sham and for the sole
purpose of accommodating Perez-Lizano in his relatjonship to
third parties from whom he had obtained investment funds.
Ayers' contentions do not embody the "special purpose"
envisioned as a defense against an instrument under §

30-3-306(c), MCA. That provision is construed by courts as
applying to instruments which except for the occurrence of a
condition, would be enforceable. Some examples of delivery
for a special purpose are:
1) Labar v. Cox (CA Tex. 1982), 035 S.W.2d 801. A note

was executed on the condition that it was enforceable only if
the payee received a bank loan because the note was to be
col lateral. The bank refused to make the 1-oan. The court
allowed par01 evidence of delivery for a special purpose;
2) Ventures, Inc. v. Jones (Idaho 1981), 623 P.2d 145.
Notes were conditionally executed to be enforceable until a
second mortgage was obtained. This, of course, is slightly
different from a note becoming enforceable upon a condition
but illustrates that delivery for a special purpose requires
the parties to intend that the notes would be enforceable if
a condition occurs; and
3) Schranz v. I. L. Grossman (111. 1980), 412 EI.E.2d
1378. An instrument was placed in escrow with a third party.
The escrow agreement provided that the instrument could only
be retrieved if default occurred on a different note. The
Illinois Court held that placing the note in escrow was
conditional delivery. Similarly, Johnson v. Bond (Tex.
1976), 540 S.W.2d 516.
In the present case Ayers' evidence does not relate to
delivery for a special purpose. He is not trying to
establish that enforceability of the negotjated instrument is
predicated on the occurrence of some act or event. He wants
to prove that the instrument is a sham, never intended to be
enforceable. This is not delivery for a special purpose
because under Ayers' contentions, the note and letter would
never be an enforceable contract, but were a sham.
The modern trend of law is to allow evidence in civil
cases based on the theory that justice is best served by
resolving controversies on their merits, not by form or
procedural technicalities. Nonet.he1-ess the the par01
evidence rule remains a viable rule of law and is applicable
in this case.
This Court stated in West River Equipment Co. v.
Hol-zworth Const. Co. (1959), 134 Mont. 582, 588, 335 ~ . 2 d

"The principle is well-established and of
general application, subject to certain
exceptions, that - - contract - -
when a has been
reduced - A - - -
to writina the contents of such writina- - -

cannot be added to, contradicted, altered, or
varied E p a r o l or extrinsic evidence, and that
such writing supersedes all oral negotiations
concerning its matter which preceded,
accompanied, or led up to its execution. This
was the rule at common law, and has been
embodied in the statute law of this state."
(Emphasis in original.)
Section 28-2-905, MCA, provides that when the terms of
an agreement have been reduced to writing by the parties, it
is to be considered as containing all the terms, and there
can he no evidence of the terms of the agreement other than
the cont.ents of the writing except when a mistake or an
imperfection of the writing, is at issue, or when the
validity of the agreement is the fact in dispute.
The application of the parol evidence rule was
considered by this Court in Higby v. Hooper (1950), 124 Mont.
331, 221 P.2d 1043 and again in a later case of Kin-jerski v.
Lamey (1979), 185 Mont. 111, 116, 604 ~ . 2 d782, 785. In
Higby, we said:
"Under certain circumstances, none of which is here
present, a person may show that the document in
question was intended to serve the purpose of a
mere jest, joke or sham. 'But a just policy would
seem to concede this only when the pretense is a
morally justifiable one (as, to calm a lunatic or
to console a dying person). When it is morally
beyond sanction, or aims at an evasion - - -
of the law
or a deception of other persons, by intention of
the parties, that intention will not be given
effect.' 9 Wigmore on Evidence, 3d Ed., sec. 2406,
subd. (1), pp. 16, 17. " (Emphasis in original. )
The District Court correctly excluded extrinsic evidence of a
sham or fraudulent scheme offered to vary the terms of an
unambiguous written contract.
Summary iudgment in this case was proper. Ayers'
assertion that there is a material question of fact about the
fraudulent purpose of the contract is immaterial because e v e n
if his assertions are true, the extrinsic evidence would be
inadmissi-bleunder the par01 evidence rule.
A£ firmed. /----.
i
// Justice

We Concur: