Case Title: Lewis v. Platt

Citation: 

Docket Number: 91-69

State: wyoming

Court: Wyoming Supreme Court

Date: 1992-09-04T00:00:00Z

Document:
Lewis v. Platt1992 WY 112837 P.2d 91Case Number: 91-69Decided: 09/04/1992Supreme Court of Wyoming
Scott LEWIS, 

Appellant, 
(Defendant),

v.

Joann PLATT, Sharon L. 
Egan and Lisa Egan, a/k/a the Egan Heirs,

 Appellees, (Plaintiffs).

Appeal from District 
Court of Laramie County, Nicholas G. Kalokathis, J.

Billie Ruth 
Edwards, Edwards & Johnson, Cheyenne, for appellant.

Mitchell E. 
Osborn, Grant & Osborn, Cheyenne, for appellees.

Before MACY, 
C.J., and THOMAS, CARDINE, URBIGKIT,* and GOLDEN, 
JJ.

* Chief Justice at time of 
oral argument.

THOMAS, Justice.

[¶1]      In this case, we 
must resolve a problem involving the propriety of the entry of a summary 
judgment in a case involving a claimed contractual novation. The trial court 
concluded there was no genuine issue of any material fact and, as a matter of 
law, there had been no novation. The court then entered a summary judgment in 
favor of creditors against a defendant who had presented as his theory of 
defense the effectuation of a novation that released him from liability. We hold 
that, while the operative facts are clear, reasonable minds could differ as to 
their legal effect, and the summary judgment must be reversed.

[¶2]      Scott Lewis 
(Lewis) advances this statement of the issue in his Brief of 
Appellant:

1. Whether the lower 
court erred in granting summary judgment against Appellant where there were 
material issues of fact regarding novation, estoppel, and release due to 
impairment of collateral.

In the Brief of 
Appellees (whom we shall refer to collectively as the Egan heirs), there is no 
statement of the issue as such. The Egan heirs content themselves with asserting 
there is no issue with respect to the facts and, as a matter of law, they do not 
support the defenses asserted by Lewis of novation, estoppel, or release due to 
the impairment of collateral.

[¶3]      A chronological 
review of the transactions involved is helpful to an understanding of this case. 
In March and April of 1980, Lewis and Jay Palm agreed to buy a majority of the 
stock in Sky Harbor Air Service, Inc. (Sky Harbor) from Dan Egan for $250,000. 
The consideration included a down payment of $50,000 (one-half paid by Lewis and 
one-half paid by Palm) and a promissory note in favor of Dan Egan in the amount 
of $200,000. Edwin Palm, Jay Palm's father, served as a guarantor of the note to 
Egan. After the stock purchase, Lewis and Jay Palm obtained a Small Business 
Administration (SBA) loan and, in connection with the granting of that loan, all 
parties entered into a standby agreement, subordinating Egan's note to the SBA 
loan. This record does not encompass the authorization for the initial loan 
commitment, but we recognize that, if the original agreements had been 
fulfilled, the note to Egan would have been paid prior to the time this 
litigation was commenced.

[¶4]      After the 
execution of the stock purchase agreement, Dan Egan was killed in an automobile 
accident. The Egan heirs succeeded to his interest in the business and to his 
interest in the promissory note earlier executed by Lewis and Jay Palm. In 
November of 1982, Lewis sold his interest in Sky Harbor to Jerry Palm, Jay 
Palm's brother, and Lewis asserts that he was promised that he would be 
indemnified for any claims made against him, including any claims of the Egan 
heirs. The consideration for Lewis' interest in Sky Harbor was $25,000 paid by 
Jerry Palm (the same amount that Lewis had invested).

[¶5]      The following 
April, the parties involved, except for Lewis, made a new agreement with the 
SBA. The authorization for the new loan indicates that it was to be used to 
refund the original SBA loan, which then had been paid down to about $120,000; 
to consolidate other indebtedness of Sky Harbor; and to provide Sky Harbor with 
about $50,000 of working capital. At the same time, the Egan heirs made an 
agreement with the two Palm brothers, which relieved the Egan heirs of any 
liability for federal taxes owed by Dan Egan for the period preceding his sale 
of shares in Sky Harbor and, in exchange, the Egan heirs compromised amounts due 
under the original promissory note. They also agreed to execute a new standby 
agreement subordinating the debt owed them to the SBA loan.

[¶6]      There is no 
disagreement among the parties that Lewis was not involved in any of the 
transactions that occurred after 1982, because he no longer held any interest in 
Sky Harbor. Yet, the Egan heirs brought this action asserting that Lewis is 
liable for the sums due under the original promissory note. At the time of 
action, the amount due was well over $300,000 including interest, because no 
interest had been paid on the note since early in 1986. Lewis defended, 
maintaining, among other things, that the events which have been described above 
resulted in a novation that relieved him of his obligations under the original 
promissory note.

[¶7]      We have 
identified the four features of a novation as: (1) a previous valid obligation; 
(2) an agreement of all parties to a new contract; (3) extinguishment of the 
prior contract; and (4) validity of the new contract. Tri-State Oil Tool 
Industries, Inc. v. EMC Energies, Inc., 561 P.2d 714, 716 (Wyo. 1977). 
Refinements to that general rule are pertinent in this instance:

     A situation can arise 
where there are two contracts and under certain conditions the second contract 
will operate as a novation of the first contract only when the parties to both 
contracts intend and agree that the obligations of the second shall be 
substituted for and operate as a discharge of the obligations of the 
first.

     In keeping with this 
general rule, it is held that to effect a novation by the substitution of one 
debtor for another, thereby releasing the first, there must be agreement to that 
effect between all three parties. But a presumption of an intention to release 
the first debtor will not arise from a mere taking of the second.

     It is not necessary 
that a novation be in writing or that it be evidenced by express words. Like any 
other fact it may be proved as an inference from the acts and conduct of the 
parties.

     Whether a new debtor 
is intended to operate as a release of the liability of the old in the absence 
of an express agreement to that effect, is usually a question of fact and can 
only become a question of law when the state of the evidence is such that 
reasonable minds cannot differ as to its effect.

15 SAMUEL WILLISTON, A 
TREATISE ON THE LAW OF CONTRACTS § 1869, at 615-16 (3rd ed. 1972) (footnotes 
omitted).

See Jones v. 
Wettlin, 39 Wyo. 331, 271 P. 217, 69 A.L.R. 840 (1928); Tore, Ltd. v. M.L. 
Rothschild Management Corp., 793 P.2d 1316, reh'g denied (Nev. 
1990).

[¶8]      We have noted 
Lewis was not involved in the transaction relating to the second SBA loan, and 
the question that arises is how the second feature could be satisfied since he 
was not a party to the new agreement. The law provides that novation can occur 
at the time of the novation or when a party acquires knowledge of it. WILLISTON 
§ 1870 at 617. In an instance in which the novation is beneficial to a debtor, 
it properly may be assumed that he consents to his discharge, though he still 
has a right of disclaimer with respect to being bound by novation. WILLISTON § 
1870 at 619. Under the circumstances presented in this case, the finder of fact 
could conclude that Lewis became a party to the novation when he acquired 
knowledge of it even though it was executed in his absence. In this regard, it 
is pertinent to note that the original standby agreement identified Scott Lewis 
and Jay Palm as the "borrowers" who owed Dan Egan $200,000. In the second 
standby agreement, Jerry and Jay Palm are identified as the "borrowers" who owed 
the Egan heirs $189,000. (At that time, Jay Palm was in bankruptcy, and the Egan 
heirs' claim against Edwin Palm as the guarantor of Jay Palm was settled during 
the course of this litigation.)

[¶9]      When the 
applicable refinements relating to the law of novation are invoked in this 
instance, we are satisfied reasonable minds could differ as to the effect of 
these circumstances, even in the absence of an express agreement leading to the 
release of Lewis. The finder of fact could infer that the borrowing of 
additional money by Sky Harbor of more than $200,000, when coupled with the 
agreement of the Egan heirs to subordinate the new promissory note to the new 
loan, and their conduct in entering into the side agreement, all in the absence 
of the knowledge or participation of Lewis, manifest their assumption and their 
intention that Lewis was no longer liable on the original promissory note. Under 
the circumstances, we are impressed with the wisdom of the rule articulated in 
WILLISTON § 1870 at 617, 619, that the question of whether a new debtor is 
intended to operate as a release of liability of the old, in the absence of an 
express agreement, is usually a question of fact.

[¶10]   In our analysis, we find it 
significant that, in reaching a decision to enter summary judgment, the district 
court relied, in part, on an analysis of the credibility of Lewis as a witness, 
as well as the admissibility of certain evidence. In its decision letter, the 
court noted that Lewis claimed not to have had any contact with Sky Harbor after 
he sold his interest to Jerry Palm. The court points out that, later in his 
affidavit, he claims knowledge of many things relating to Sky Harbor based upon 
"information and belief." The trial court concluded these allegations were, 
therefore, likely based upon hearsay or, in the alternative, that Lewis was not 
being "forthright." Those are classic issues that evolve in a trial, 
particularly the question of credibility. In this regard, it would appear many 
of Lewis' allegations of fact are supported by other documentation in the record 
and he might well have had firsthand knowledge of that documentation without 
having "any contact with" Sky Harbor or its principals.

[¶11]   Satisfied, as we are, that 
reasonable minds could differ as to the factual conclusion with respect to a 
novation, we reverse the district court's order granting summary judgment. The 
case is remanded for further proceedings consistent with this opinion.