Corrected Title Page
NO. 91-432
IN THE SUPREME COURT OF THE STATE OF MONTANA
1995
WELDEN DAINES and GREAT FALLS LIMITED,
Plaintiffs and Appellants,
KENNETH KNIGHT, GEORGE BUZZAS, and
NORTHWEST MOTOR INNS,
Defendants and Respondents.
GRACIE OIL COMPANY, INC., a corporation,
Plaintiff,
WELDEN DAINES and GREAT FALLS LIMLTED,
a Utah limited partnership,
Defendants.
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable John M. McCarvel, Judge presiding
COUNSEL OF RECORD:
For Appellant:
Ward E. Taleff and Kevin C. Meek, Alexander,
Baucus & Linnell, Great Falls, Montana
For Respondent:
Turner Graybill, Graybill, Ostrem,
Warner & Crotty, Great Falls, Montana
r Submitted on Briefs: October 28, 1994
JAN l S 1995 Decided: J a n u a r y 18, 1995
Filed:
L:/ 2;:
CLERK OF ~ i j ~ i l
STATE OF I , ! ; , , :I..
Justice William E. Hunt, Sr., delivered the opinion of the Court.
Appellants Welden L. Daines and Great Falls Limited appeal
from the findings of fact, conclusions of law, and final judgment
of the Eighth Judicial District Court, Cascade County, denying the
claims of appellants and granting judgment in favor of respondents
Kenneth Knight, George Buzzas, and Northwest Motor Inns.
Af firmed.
Appellants raise the following issues on appeal:
1. Did the District Court err when it concluded that the
September 16, 1981, option agreement between the parties was a
sales contract rather an option contract?
2. Did the District Court err when it concluded that capital
contributions were not required from respondents?
3. Did the District Court err when it concluded that
respondents were entitled to recover damages under their
counterclaim?
4. Did the District Court err when it awarded attorney fees
and costs to respondents?
Northwest Motor Inns is a Montana limited partnership formed
on June 3, 1976, for the purpose of acquiring, developing, and
operating a Sheraton franchise in Great Falls. The original
general partners were Welden Daines, George Buzzas, Kenneth Knight,
and Harlan Nelson. Buzzas and Knight each held a one-third
interest, while Nelson held a 16-2/3 interest, and Daines held a
15-2/3 interest.
Pursuant to the June 3, 1976, partnership agreement, Buzzas
was the owner of the real property upon which the hotel was to be
situated. Knight acted as the architect for the project. Daines
performed the accounting services for the hotel, and Nelson managed
the hotel jointly with Daines.
Following the May 4, 1981, death of Nelson, Knight and Buzzas
terminated the partnership agreement against the wishes of Daines.
The Eighth Judicial District Court held that Nelson's death was
grounds for termination, but stayed execution of its order to allow
Daines to appeal to this Court. Pending appeal, the parties
resolved their differences on September 16, 1981, by executing the
following five agreements:
1. Aqreement Reconstitutinq Partnership: The parties agreed
that Northwest Motor Inns would be reconstituted with Buzzas,
Gracie Oil Company, and Welden L. Daines/Great Falls, Ltd. as
general partners.
2. Aqreement Reallocatinq Income and Losses: Gracie Oil
Company and Buzzas agreed to transfer their shares of income to
Daines, and Daines agreed to bear the losses attributable to Gracie
Oil Company and Buzzas with the exception of any depreciation or
investment credits. Northwest Motor Inns agreed to pay Gracie Oil
Company and Buzzas $7875 per month as partners' salaries from
September 1981, through January 1985. Default on any payment to
either Gracie Oil Company or Buzzas was a default of the entire
agreement. Any default unremedied for 30 days, after notice,
resulted in termination of the agreement, and each party would then
return to its original partnership interest in income and losses.
3. Option Aqreement: Buzzas and Gracie Oil Company granted
Daines an option to purchase their two-thirds interest in the
partnership in December 1985. Daines agreed to pay Buzzas and
Gracie Oil Company $100,000 with the balance of $1,400,000 due in
1986 or to be financed as stipulated. Under the financing option,
any uncured default would have resulted in the return of the
two-thirds partnership interest to Gracie Oil Company and Buzzas.
4. Letter Aqreement Surrenderinq Manaqement Control To
Daines: Gracie Oil Company and Buzzas agreed not to participate in
or interfere with Daines' management of the hotel. Buzzas and
Gracie Oil Company agreed to remove the names of Buzzas, Gracie Oil
Company, and Knight from the signature cards of all hotel bank
accounts.
5. Indemnity Aqreement: Daines agreed to indemnify former
partner Knight from liability or loss arising out of potential
claims against Northwest Motor Inns.
In connection with the above agreements, the partnership
interest of Knight in Northwest Motor Inns was transferred to
Gracie Oil Company, Inc., and the partnership interest of Daines in
Northwest Motor Inns was transferred to Great Falls Limited.
Beginning in the late fall of 1984, the $7875 payments to each
respondent were not made as required under the terms of the
agreement allocating income and losses. Respondents notified
appellants of the defaults on April 4, 1985, May 3 , 1985, and
May 16, 1985. In an effort to keep the partnership solvent,
appellants requested additional capital contributions of $230,375
from respondents. Respondents did not comply with appellants'
request. Daines contributed $150,000 to the partnership through
personal loans to pay for operating expenses.
On August 2, 1985, as a result of the uncured defaults,
respondents assumed control of the partnership and the day-to-day
operations of the hotel. In December 1985, appellants attempted,
unsuccessfully, to complete the purchase of respondents' two-thirds
partnership interest in Northwest Motor Inns.
Appellants brought this action against Northwest Motor Inns,
Gracie Oil Company, Inc., Buzzas, and Knight. Appellants sought a
judicial determination that they had properly exercised their
option to purchase the partnership interests of respondents in
Northwest Motor Inns. In addition, appellants asked the court to
determine the purchase price, and appellants sought to recover
management and accounting fees. On motion of appellants, claims
against Knight, and a claim to pierce the corporate veil of Gracie
Oil, were withdrawn.
The court entered its final order and judgment ordering that
all claims of appellants were dismissed with prejudice. In
addition, the court entered judgment in favor of Buzzas in the
amount of $203,477, and in favor of Gracie Oil in the amount of
$203,477. The court awarded respondents $102,522.50 in attorney
fees and $3686.90 in costs.
5
Appellants appeal from the court's findings of fact,
conclusions of law, and final order and judgment.
ISSUE 1
Did the District Court err when it concluded that the
September 16, 1981, option agreement between the parties was a
sales contract rather than an option contract?
The standard of review of a district court's findings of fact
is whether the findings are clearly erroneous. Columbia Grain
International v. Cereck (1993), 258 Mont. 414, 417, 852 P.2d 676,
678. In Interstate Production Credit Ass'n v. DeSaye (1991), 250
Mont. 320, 322, 820 P.2d 1285, 1287, we adopted a three-part test
to determine whether a finding of fact is clearly erroneous. The
test provides that:
1. We will determine if the findings are supported by
substantial evidence;
2. If the findings are supported by substantial evidence, we
will determine if the district court misapprehended the evidence;
and
3. If the findings are supported by substantial evidence and
that evidence has not been misapprehended, this Court may still
determine whether that " ' a finding is 'clearly erroneous' when
. . . a review of the record leaves the court with the definite and
firm conviction that a mistake has been committed.'" DeSaye, 820
P.2d 1287 (quoting United States v. U.S. Gypsum Co. (1948), 333
U.S. 364, 68 S. Ct. 525, 92 L. Ed. 746). We review conclusions of
law to determine whether the district court's conclusions were
correct. In re Marriage of Barnard (1994), 264 Mont . 103, 106, 870
P.2d 91, 93 (citing In re Marriage of Burris (1993), 258 Mont. 265,
269, 852 P.2d 616, 619). We will apply the same standard of review
to Issues 2 and 3.
The District Court found that Knight and Buzzas intended to
sell their partnership interests to Daines following the death of
Nelson. Buzzas and Knight determined that an immediate sale would
deprive them of their share of depreciation of the partnership and
would result in unfavorable tax consequences. On September 16,
1981, the parties executed five agreements, including an option
agreement, which purported to grant appellants a purchase option
which could only be exercised between December 1, 1985, and
December 31, 1985. However, the District Court found that instead
of executing an option contract, the parties executed a sales
contract on September 16, 1981, subject to conditions precedent
which were to be performed by December 31, 1985.
Under the option agreement, respondents each received $50,000
from Daines/Northwest Motor Inns upon execution. Under the terms
of the agreement reallocating income and losses, Northwest Motor
Inns agreed to pay respondents each a monthly salary of $7875 from
September 1981 through December 31, 1985. The monthly salary was
determined by calculating the monthly interest on the unpaid
purchase price. We note the inconsistency between the agreement
which allocated $7875 per month salary to each of the two parties,
and the agreement surrendering management control to Daines under
which the same two parties agreed not to participate in the
management of the hotel. As a result, there were no described
services for which salary properly was due.
The District Court concluded that taken as a whole, the option
agreement and the agreement reallocating income and losses
constituted a conditional sale of respondents' interests in
Northwest Motor Inns to appellants.
Appellants argue that the District Court erroneously concluded
that the five documents executed on September 6, 1981, constituted
an integrated agreement to sell respondents' partnership interests
subject to conditions precedent.
The language of a contract governs its interpretation if the
language is clear and explicit. Section 28-3-401,MCA. A contract
may be explained by reference to the circumstances under which it
was made, and the matter to which it relates. Section 28-3-402,
MCA. A contract must be interpreted to give effect to the mutual
intention of the parties as it existed at the time of contracting.
Section 28-3-301, MCA. The name given to a contract, in this case
"Option Agreement," is not conclusive as to its intent. It is the
intention of the parties which is controlling, and that intention
is to be determined by the applicable facts. Transcontinental
Refrigeration Co. v. Figgins (1978), 179 Mont. 12, 18, 585 P.2d
1301, 1305.
Substantial testimony was offered at trial to support the
District Court's conclusion that taken as a whole, the five
agreements of September 16, 1981, reflect the parties' intention to
execute a condition sale subject to conditions precedent.
Daines testified that the negotiations which resulted in the
five agreements began with the premise that Daines would purchase
the partnership interests of Buzzas and Knight in Northwest Motor
Inns. Daines testified further that the original intent of the
parties was that Daines would purchase the partnership interests of
respondents through a long-term contract.
Knight, as a representative of Gracie Oil, and Buzzas
testified that Daines offered to purchase their partnership
interests for $700,000 each. Knight and Buzzas were advised that
if they sold their interests to Daines in 1981, the depreciation
recapture provisions of the Internal Revenue Code would reduce the
$700,000 selling price to a $500,000 gain. To avoid this result,
the parties negotiated a sale subject to conditions precedent to be
performed by December 31, 1985. Knight testified that the option
agreement and the agreement reallocating income and losses were
negotiated together and operated in tandem to produce the desired
result. The documents were drafted so that profits and losses
belonged to Daines. In exchange, respondents would each receive
$50,000 in September 1981; a monthly salary of $7875; and $700,000
in December 1985.
The parties agreed that respondents would not interfere on any
level with Daines' management of the hotel. Also, the names of
Buzzas and Knight were removed from the signature cards of all
partnership bank accounts. From September 16, 1981, through
August 1985, appellants had complete control over partnership funds
and the operation of the hotel.
A sale is a contract by which one transfers to another an
interest in property for a price. Section 30-11-101, MCA. By
contrast, "an option contract confers a privilege and a right to
elect to buy, but it does not impose any obligation to buy."
Pollard v. City of Bozeman (l987), 228 Mont. 176, 180, 741 P.2d
776, 778. We are not persuaded by appellant's argument that the
option agreement should be read in isolation and interpreted as an
option conferring a privilege but imposing no obligation. A sales
contract may be a single document or " [sleveral contracts relating
to the same matters, between the same parties, and made as part of
substantially one transaction . . . ." Section 28-3-203, MCA. The
September 16, 1981, agreements were related to the same matters,
were between the same parties, and were part of the same
transaction. Reading the five agreements as an integrated
document, it is clear that respondents transferred to appellants
their interests in property for a price.
Performance of the transfer was subject to conditions
precedent. "A condition precedent is one which is to be performed
before some right dependent thereon accrues or some act dependent
thereon is performed." Section 28-1-403, MCA. Before appellants'
right to the partnership shares of respondents accrued, appellants
were required to pay respondents $100,000 on September 16, 1981,
and $1,400,000 by December 31, 1985. Northwest Motor Inns was
required to pay respondents each $7875 per month until December 31,
1985.
The court's finding that the five September 16, 1981,
agreements constituted an integrated sales agreement subject to
conditions precedent is supported by substantial evidence.
We hold that the District Court did not err when it concluded
that the September 16, 1981, option agreement between the parties
was a sales contract rather than an option contract.
ISSUE 2
Did the District Court err when it concluded that capital
contributions were not required from respondents?
On June 10, 1985, appellants requested additional capital
contributions of $230,375 from respondents. The District Court
concluded that in view of its finding that a sale took place in
September 1981, appellants were not entitled to require capital
contributions from respondents.
Appellants argue that the District Court's finding that a
sale, rather an option agreement, was executed on September 16,
1981, lead to the illogical conclusion that respondents were not
required to make capital contributions. Appellants argue further
that because the September 16, 1981, agreements do not constitute
a sale, the 1976 management and partnership agreements of Northwest
Motor Inns requiring general partners to provide capital
contributions to prevent insolvency were still in effect.
We disagree. In our discussion of Issue 1, we pointed out
that the five September 16, 1981, agreements constituted an
integrated sales agreement rather than an option to purchase.
Consequently, the 1976 management and partnership agreements no
11
longer applied to the reconstituted partnership. In addition, the
reallocation agreement provided that appellants would bear the
losses and receive the income previously attributable to
respondents with the exception of any depreciation or interest
credits. As a result, the losses that threatened the solvency of
the Northwest Motors Inns were the responsibility of appellants, as
were any capital contributions needed to prevent insolvency.
We hold that the District Court did not err when it concluded
that capital contributions were not required from respondents.
ISSUE 3
Did the District Court err when it concluded that respondents
were entitled to recover damages under their counterclaim?
Pursuant to the reallocation agreement, respondents agreed to
transfer their shares of income from the partnership to appellants.
Appellants agreed to bear any losses attributable to respondents.
In consideration, appellants agreed to pay through Northwest Motor
Inns, $7875 per month to each respondent until December 31, 1985.
Appellants began to default on their payments to respondents in the
late fall of 1984. The reallocation agreement provided that in the
case of an uncured default, it would be automatically terminated
and the parties would return to their original partnership
positions.
On August 2, 1985, respondents resumed control of the
partnership and the day-to-day operations of the hotel. As of that
date, the District Court found that the partnership showed losses
totalling $666,678, minus credits due appellants in the amount of
12
$56,245, for a net loss to the partnership of $610,432. Upon
resuming control of the partnership and the day-to-day operations
of the hotel, respondents guaranteed a $500,000 line of credit, of
which the partnership borrowed approximately $250,000. The
District Court found that respondents paid all past due accounts
totalling $628,547. The District Court held that appellants were
responsible to pay each respondent $203,477, one-third of the net
losses suffered by the partnership between September 16, 1981, and
August 2, 1985.
The court's findings are supported by substantial evidence
provided by certified public accountant, Jack Stevens, who
determined the partnership's losses by listing invoices unpaid by
appellants between September 16, 1981, and August 2, 1985, and the
subsequent payment of those invoices by respondents, less credits
due appellants.
The measure of damages for a breach of contract is the amount
which will compensate the aggrieved party for all detriment
proximately caused by the breach. Section 27-1-311, MCA. In all
cases, damages must be reasonable. Section, 27-1-302, MCA. The
record shows that the District Court's award of damages was
reasonable and compensated respondents for damages caused by
appellants' breach of the agreement reallocating income and losses.
We hold that the District Court did not err when it concluded
that respondents were entitled to recover damages under their
counterclaim.
ISSUE 4
Did the District Court err when it awarded attorney fees and
costs to respondents?
Awarding attorney fees is largely within the discretion of the
district court and will not be disturbed absent a clear abuse of
discretion. In re Marriage of Wackler (19931, 258 Mont 12, 17, 850
P.2d 963, 967; Smith v. Johnson (lggO), 245 Mont. 137, 145, 798
P.2d 106, 111; Talmage v. Gruss (l983), 202 Mont. 410, 413, 658
P.2d 419, 421.
The reallocation agreement contains a default provision which
provides that any default under the reallocation agreement is a
default of the option agreement. The option agreement provides
that " [ilf either party shall breach this option agreement, the
defaulting party shall pay a reasonable attorney's fee and costs to
the prevailing party for the enforcement of this option agreement,
whether or nor legal process is instituted."
As previously mentioned, the District Court found that the
five agreements constituted an integrated sales agreement subject
to conditions precedent. As a result, we conclude that it is
appropriate to apply the attorney fee provision contained in the
option agreement to the default under the integrated sales
agreement. Notice was given to appellants under that default
provision, and appellants failed to remedy the default. As a
result, we affirm the District Court's conclusion that respondents
were entitled to attorney fees. A review of the record shows that
the District Court acted within its discretion in fixing
14
respondents' attorney fees at $102,522.50. The District Court
carefully reviewed the billing records of respondents' attorneys,
and concluded that $102,522.50properly compensated respondents for
the expense of litigating the claims brought by appellants.
The District Court awarded respondents $3686.90 in costs for
depositions taken in connection with this action brought by
appellants. As the prevailing party, respondents are entitled to
recover the cost of depositions used at trial. Section 25-10-201,
MCA; Cash v. Otis Elevator Co. (1984), 210 Mont. 319, 333, 684 P.2d
1041, 1048.
We hold that the District Court did not err when it awarded
attorney fees and costs to respondents.
Af firmed .
- Justice
We concur: I
Chief Justice
January 18, 1995
CERTIFICATE OF SERVICE
I hereby certify that the following certified order was sent by United States mail, prepaid, to the
following named:
Ward E. Taleff
ALEXANDER, BAUCUS & LINNELL, P.C.
P.O. Box 2629
Great Falls, MT 59403
Turner Graybill
GRAYBILL, OSTREM, WARNER & C R O W
# 18 Sixth St. No., Suite 200
Great Falls, MT 59403
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA