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

MIGUEL A. PEREZ-LIZATJO, Plaintiffand Respondent,

-vsMILAN R. AYERS, Defendantand Appellant.

APPEAL FROM: District Court of the Ninth JudicialDistrict, Inand for the County of Toole, The HonorableR. D. McPhillips,Judgepresiding.

COUNSELOF RECORD:

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

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

Q Filed: 

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ClerkMr. 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, grantingMiquel A. Perez-Lizanopartial summary judgment in an action against Ayers to collect a $40,000promissory 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 signedby Ayers in favor of Perez-1,izano. A writinu from Ayers to Perez-Lizano captioned "LetterAgreement" set forth information intended to supplement and clarify the note. Both instruments aredated December 15, 1980. The promissory note provided for repayment to Perez-Lizano of the $40,000one year from itsdate and stated that 10percentper annum interest accrued fromJune 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 andAyers' collateral. It also stated that: "As compensation for the use of these funds, Iwill assign a 2% working interest, carried 100% on all costs through the four initialwells to be drilled on the acreage included under the Sunlite option. The funds wj.1.3.be repaid prior to any drilling 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 checkdeposited 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 handwrittennotation "MiguelPerez-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 donot set forth the real agreementbetween theparties. He claims the $40,000 Perez-Lizano advanced to him was Perez-Lizano'sinvestment in the Sunlite option property and it was never either party's intention thatAyers 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 thepromissorynote and attorney's fees. On March 1, 1984,Ayers filed a motion for leave to file an amended answer and counterclaim. The amended answerpleaded fraud in anothermatter as a counterclaimbut did not plead the defense 

### of fraud to the note here. A hearing on those motionswasheld onMarch 8, 1984. Ayers offered Exhihit D in support of his contentions which exhibit contains the following language: "The $40,000 in the Sunlite option--tobe returned when the deal was financed. For sure J want to returnTerrial's $20,000. The remaining $20,000,I will return to fund theAlstead. Ihope this takes place within 30 days." On March 27, 1984, the trial. judge granted Perez-Lizano'smotion for partial summary judgment. On May 24, 1984, the trial judge denied Ayers' motion to amend his

answer and assert his counterclaims. The trial judgeentered findings of fact, conclusions of law, and judgment for Perez-Lizano in the amount of thepromissory note, interest, and attorney's fees. The judgmentwas certified as final for appeal purposes, pursuant toRule 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. Ingranting thatmotion, the trial judge concluded that Ayers could not introduce parol evidence heca.use the promissory notewas c1ea.rand 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 thedefenses 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 apayeemay 

### 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 alldefenses of any party to the instrument with whom the holder has not dealt. 

## --- -- To paraphrase, even if one is a holder in due course of an instrument, he is still subject to the defenses aga.instthe 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 situationof this

case is th?.t ifAyers 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 otherhand, ifAyers aspayee is the holder of due course,he is still subject to those defenses because he d.ealtwith Ayers, a party to the instrument, under the provisionsof S 30-3-305,E1CA. Therefore,whether Ayers is a hold-erof the instrument,

or a holder in due course,the issue isnotdispositive. 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 thenote 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 specialpurpose is s defense against the instrument against one not a holder in due

course. Thereare twoprincipal reasonswhy Ayers cannotprevail

on his contention that he should be allowed to present evidence of specialpurpose in this case. First, the special purpose defense under the UCC against instruments has been construed to apply only to those instruments which wou1.dbe 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 betweenparties is based on a shamor 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-Itizanoto Ayers was Perez-Lizano's personal investment in the Sunlite optionproperty and was never intended to be a loan or tobe repaid by Ayers. He further contends that the note and letter of agreementwere 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 "specialpurpose" envisioned as a defense against an instrument under § 30-3-306(c), MCA. That provision is construed by courts as applying to instrumentswhich except for the occurrence of acondition, would be enforceable. Some examples of delivery for a specialpurpose are: 1) Labar

### v. Cox (CATex. 1982), 035 S.W.2d 801. A note

was executed on the condition that it was enforceableonly if the payee received a bank loan because the note was to be collateral. The bank refused to make the 1-oan. The court allowed par01 evidence of delivery for a special purpose; 2) Ventures, Inc. v. Jones (Idaho1981), 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 instrumentwasplaced in escrow with a thirdparty. The escrow agreementprovided 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 thenegotjated 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 enforceablecontract,butwere 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 orprocedural 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-zworthConst. Co. (1959), 134 Mont. 582, 588, 335 ~.2d

"The principle is well-established and of general application, subject to certain exceptions, that 

### - when 

### - a contract has been 

### - - reduced to writina the contents of suchwritina-A

### -- -- - cannot be added to, contradicted, altered, or varied Eparolor 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."

(Emphasisin original.) Section 28-2-905, MCA, provides that when the terms of an agreement have been reduced towriting 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 indispute. The application of the parol evidence rule was consideredby this Court inHigby v. Hooper (1950),124Mont. 331, 221 P.2d 1043 and again in a later case of Kin-jerski v. Lamey (1979), 185 Mont. 111, 116, 604 ~.2d 782, 785. In Higby,we said: "Under certain circumstances, none ofwhich ishere present, a person may show that the document in question was intended to serve the purpose of a mere jest, joke or sham. 'Buta justpolicy 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.' 9Wigmore on Evidence, 3d Ed., sec. 2406, subd. (1)

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### " (Emphasis in original.)The DistrictCourt correctlyexcluded 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 amaterial question of factabout the fraudulent purpose of the contract is immaterialbecause even if his assertions are true, the extrinsic evidence would be inadmissi-ble under thepar01 evidence rule. A£firmed. 

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// i Justice

We Concur: