No. 84-296 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1985 

MIGUEL A. PEREZ-LIZATJO, 

Plaintiff and Respondent, 

-vsMILAN 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-icial District 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 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 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 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.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 ~.2d 

"The principle is well-established and of 

general application, subject to certain 

exceptions, that - when - a contract has - - been 

reduced -Ato writina the contents -- of such writina -- - 

cannot be added to, contradicted, altered, or 

varied Eparol 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 ~.2d 782, 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 even 

if his assertions are true, the extrinsic evidence would be 

inadmissi-ble under the par01 evidence rule. 

A£ firmed. /----. 

// 

i Justice 

We Concur: