No. 93-039

IN THE SUPREME COURT OF THE STATE OF MONTANA

1993

CHARLES W. OWEN,

Plaintiff and Respondent,

-vs- i

,.,

RICHARD M. OSTRUM,

:" j.,,.. -.y ', ,,.,,.' ,, L,r;>:,‘:, ,<_. ~:,'.~.'

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;

Tolliver & Guthals, Billings, Montana

Wright,

Filed:

Submitted on Briefs: May 20, 1993

Decided: June 29, 1993
Justice John Conway Harrison delivered the Opinion of the Court.

Richard M. Ostrum (O&rum) appeals from judgment, decree of

foreclosure, and deficiency judgment entered by the Thirteenth

Judicial District Court, Stillwater County. @strum's former

partner, 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. We affirm.

In 1958, Ostrum purchased a cattle ranch near Fishtail,

Montana, 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, Owen and Ostrum formed a partnership called Gold

Block Angus. 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, excluding accrued interest.

The partnership owed approximately $3.7 million to Owen and

entities owned by Owen. 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 six-percent share of the capitalized liability was

$144,000. 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, a partnership, to Gold Block, Inc., a Montana

corporation, 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 security agreement described

the loan as "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. Judge Fillner

denied this motion, 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, then presiding over the District Court in

Stillwater County, granted partial summary judgment in favor of

Owen. 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. In his

order, Judge Speare stated that he assumed the promissory note

never existed.

In September 1991, Owen moved for approval of the sale of

collateral, 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 buyers. The District Court declined to rule on this

motion, 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 interest in a closely held

corporation, Ostrum argued, full value for his stock could not be

obtained through a public sale.

Ostrum also pointed out that Owen's proposed financial

5
disclosure statement undervalued Gold Block, Inc.'s assets and did

not include the proceeds of recent land and cattle sales. The

statement showed a negative net worth for the corporation.

According to O&rum, 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. No other

buyers appeared. 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. O n

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. Judge Baugh issued findings of fact, conclusions of law,

and an order on September 8, 1992. He concluded that he was not

authorized to act as an appellate court with regard to Judge

Speare's grant of summary judgment; that the discovery of the

promissory note changed nothing, as the judgment was based on a

debt owed, not on the lost note: and that the parties' conflicting

testimony on the value of Gold Block, Inc. assets and liabilities,

market trends, and possible corporate mismanagement had revealed

nothing to support a determination that the bid price of $15,000

was unreasonable.

Concluding that the method, manner, time, place, and terms of

the stock sale were commercially reasonable, Judge Baugh issued a

deficiency judgment in the amount of $194,032.80, pursuant to the

August 1991 decree of foreclosure, less $15,000--the proceeds of

the sale--plus attorney's fees in the sum of $11,709.92, costs in

the sum of $175.55, expenses of the sale of the collateral in the

sum of $3,114.53, and interest from August 29, 1991to September 8,

1992, in the sum of $18,841.74, for a total 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.

2. Whether the District Court erred in concluding that the

sale of the collateral was commercially reasonable and that

Owen therefore was entitled to a deficiency judgment.

Did the District Court err in granting summary judgment on a

7
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, and the repayment terms were to be found only in the

promissory 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 a security agreement that acknowledged his debt to Owen

and that Ostrum stated in his deposition that he owed Owen

$144,000; therefore, Judge Speare concluded, "there is no genuine

issue of material fact that O&rum owes Owen $144,000.~t

Finally, Judge Bauqh reiterated his predecessors' conclusion

that Owen had sued on a debt, not on a promissory note, and refused

to reconsider summary judgment when Ostrum asked the court to do so

in 1992.

Part of Ostrum's rationale for asking the court to reconsider

summary judgment was his alleged need for indemnification pursuant

to 5 30-3-804, MCA (1989). This need did not arise until February

1992, when the parties' lawyers found the photocopy of the signed

note. Until then, Ostrum had maintained that no note existed.

Section 30-3-804, MCA (repealed in 1991) authorized but did

not compel the court to require security indemnifying an obliqor

against loss by reason of further claims on a lost, destroyed, or

stolen instrument. Owen testified that he had not indorsed the

note. As the note was payable only to Owen, it could not be

negotiated without a forged indorsement. We conclude that Judge

Baugh did not abuse his discretion in refusing to order Owen to

post security.

Summary judgment is appropriate when there is no genuine issue

of material fact and the moving party is entitled to judgment as a

matter of law. Rule 56(c), M.R.Civ.P. The initial burden of

demonstrating the absence of a genuine issue of material fact lies

with the moving party. Ravalli County Bank v. Gasvoda (1992), 253

9
Mont. 399, 401, 833 P.2d 1042, 1043. Once the moving party has met

that burden, the party opposing summary judgment must establish

that a genuine issue of material fact exists. Peschel v. Jones

(1988), 232 Mont. 516, 521, 760 P.2d 51, 54. Any inference that

can reasonably be drawn from the offered proof must be evaluated in

favor of the party opposing summary judgment. First National Bank

in Eureka v. Giles (1987), 225 Mont. 467, 733 P.2d 357.

Whether an issue of fact is material depends on the applicable

statutes. Giles, 733 P.2d at 358. In Giles, we reversed the

district court's summary judgment because the court had applied §

30-3-304, MCA, without resolving the threshold issue of whether the

defendant in fact had authority to indorse her husband's Veterans'

Administration disability checks. Here, the District Court applied

§ 30-3-804, MCA (1989), which refers to missing negotiable

instruments; no threshold factual issue existed because both

parties agreed that the original promissory note was missing.

Section 30-3-804, MCA (1989), provides that the owner of a

missing instrument may recover upon proof of (1) ownership, (2) the

facts that prevent production of the instrument, and (3) the terms

of the instrument. Here, proof of ownership and of the terms of

the note was supplied in the parties' security agreement, which was

attached to Owen's complaint. Owen testified that the original

note was lost, and provided a photocopy. We hold that Owen met his

burden of proof as to the validity of Ostrum's debt, and that he

was entitled to judgment as a matter of law.

1 0
II

Did the District Court err in concluding that the sale of the

collateral was commercially reasonable and that Owen therefore was

entitled to a deficiency judgment?

Ostrum argues that a public auction is not a commercially

reasonable sale of a minority interest in a closely held

corporation, because there is no market for a minority interest in

a closely held corporation. He points out that Judge Baugh reached

the same conclusion, during the February 1992 hearing, but

nevertheless concluded that Owen had met his burden of establishing

that the method, manner, time, place and terms of the stock sale

were commercially reasonable.

Section 30-9-504(3)(a), MCA, sets forth the requirements for

disposition of collateral after 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 that a public auction is not an appropriate method

of disposing of a minority interest in a closely held corporation,

as the stock is unlikely to be valuable to anyone other than the

majority shareholder. Judge Baugh said much the same thing in his

order, but he concluded, nevertheless, that the 'sale was not

commercially unreasonable.

Ostrum objected to the sale but did not suggest an alternative

method, manner, time, or place. He complained that the corporation

had been undervalued for purposes of the sale, but he did not

11
attempt to establish an alternative value, nor did he demonstrate

to the court's satisfaction that the $15,000 price paid by Owen for

O&rum's shares was not "fair market value." On appeal, Ostrum

argues that $15,000 was not a fair price for the shares and that

the value of his stock in January 1988, allegedly $144,000, was the

best measure of its value in November 1991.

We addressed sale price as a factor in assessing the

commercially reasonable disposition of collateral in a 1983 case

that bears some resemblance to this one. Dulan v. Montana National

Bank of Roundup (1983), 203 Mont. 177, 661 P.2d 28. The appellant,

Dulan, pledged the stock of his incorporated photography business

as collateral for a loan from the bank. Before renewing the

promissory note a year later, he sold the corporation to a third

party and placed the stock in escrow. The renewal note was secured

by assignment of the buyer's note to Dulan. When the buyer

defaulted, the bank demanded payment of the balance due on Dulan's

original loan. Dulan did not make the payment, and the bank sold

the stock, after notice to Dulan, to the buyer for the balance due

on Dulan's note. This was only $1,500, a fraction of the $8,500

still due under Dulan's contract with the buyer.

Dulan challenged the sale of the stock on the grounds that the

price was not commercially reasonable. He claimed that the

corporation's assets had been valued at $22,280 the year before the

sale, though testimony also was offered to show that the value had

declined after the buyer took over the business. The district

court concluded, and we affirmed, that Dulan did not meet his

12
burden of establishing that the stock was worth more than $1,500.

Here, Ostrum offered numerous estimates of the value of Gold

Block, Inc. assets, particularly its land and registered cattle,

but he did not provide an estimate of fair market value of the

stock or bid on it himself. The District Court decided that in

view of the negative net worth shown on the financial disclosure

statement and the fact that only six percent of the shares were

being offered, $15,000 was a reasonable price.

We hold that the District Court did not abuse its discretion

in accepting the bid price in the absence of evidence as to the

fair market value of the shares. See Carpenters-Employers

Retirement Trust Fund v. Galleria Partnership (1991), 250 Mont.

175, 819 P.2d 158 (district court did not abuse its discretion in

disregarding an estimated value of the defendant's real property

which was not an appraisal, but merely a "probable approach" based

on data submitted by a certified appraiser).

This Court has limited or barred recovery of a deficiency

judgment in cases where the secured party did not meet the notice

requirement of 5 30-g-504(3), MCA. See Ottersen v. Rubick (1990),

246 Mont. 93, 803 P.2d 1066, and the cases cited therein. Here, in

contrast, the secured party--Owen--mailed notice of the time,

place, and manner of sale to Ostrum ten days before the date of the

sale, and in addition published notices in the Stillwater County

News and the Billinqs Gazette. Notice of public sale was posted in

four locations in Stillwater County seven days prior to sale.

We hold that the District Court did not err in concluding that

13
the sale of O&rum's 1,200 shares of Gold Block, Inc. stock was

commercially reasonable, and that Owen therefore was entitled to a

deficiency judgment.

Affirmed.

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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