Opinion ID: 895688
Heading Depth: 1
Heading Rank: 1

Heading: Capital or Debt?

Text: In its cross-appeal, Associates argues the purported `Promissory Note' was never intended to be a promissory note; rather it was intended to document the partners' capital contributions. Associates asserts the trial court should have considered evidence of the circumstances under which the [note] instrument was drawn, executed, and delivered in order to determine its true nature as capital. Associates relies upon similar affidavits by general partner Hoye and by J. Hugh Shelnutt, Associates's principal CPA. Both asserted the factual circumstances surrounding the execution of the purported Promissory Note ... are complex and involved technical interpretations of the Internal Revenue Code, but neither identified relevant tax statutes, regulations, or rulings. To finance the motel, Hoye said Associates was required by the lending bank to make a minimum $1,160,000.00 in improvements to the motel with only $375,000 of that to come from mortgage proceeds and the remainder from the partners. This consisted of $353,000.00 capital and a capital contribution of $500,000.00. Hoye said he contributed $250,000 and Charles Pear did too, but $100,000.00 of Charles's capital contribution was allocated to David Pear. Hoye swore that he was personally aware that the $250,000.00 contributed by Charles Pear was money ... borrowed from a financial institution and upon which [Charles] was required to pay interest. It was Mr. Pear's required interest payments that led to the partner's capital contributions being documented in the purported Promissory Notes. Shelnutt asserted, because the federal tax law allows a person to deduct `investment interest expense' ... only if there is corresponding investment income, Charles Pear could not contribute borrowed money to the Limited Partnership as a capital contribution and deduct the interest which he was paying on that money. In order to deduct the interest expense, he had to receive investment income. Since Charles Pear was primarily responsible for business decisions and operation of the hotel in 1983 and until his death in 1986, Shelnutt said Charles Pear decided that Promissory Notes would be issued for the capital contributions so that he would generate `investment income' by receiving interest on the purported Promissory Note and, in turn, created a partnership interest expense. Before issuing the demand notes, according to Shelnutt, Charles Pear explained the rationale for his decision to issue the purported notes and assured all concerned that he would never make a demand for payment on the notes. The reason he gave those assurances is that everyone involved knew that the monies referenced in the purported Promissory Notes were actually capital contributions and that the lender required to make the improvements to the building owned by the Limited Partnership, and that the Limited Partnership would not be in a position to answer any demand for payment of the principal. Subsequently, Charles Pear prepared and issued the Notes ... [while he] was responsible for the operation of the business at the time. Hoye added that [t]he Limited Partnership was not the[n], nor now, able to pay the princip[al] amount on demand. Upon Charles Pear's specific assurances that demand for payment would not be made on the Promissory Notes, they were issued. The Limited Partnership has made very large financial commitments in reliance upon these assurances, including over four million dollars in debt, Hoye claimed. Hoye asserted payment of the notes would cause very serious and, perhaps, irreparable, financial consequences to the business. Hoye added: In reliance upon Mr. [Charles] Pear's representations, I have committed substantial personal assets as collateral for partnership debt that, [h]ad I understood that a demand [for payment] would be made on the purported `Promissory Notes' I would not have made those commitments. Shelnutt asserted a Reissued Audit Report  December 31, 1986 and 1985 for Associates demonstrated the demand notes were merely intended to document the partners' capital contributions because they were not treated as demand Promissory Notes; rather, they were treated as capital contributions. The audit's schedule of Notes & Mortgages Payable showed this, he said, because the list of Notes to the partners indicate[d] that the Current Portion Payable is -0-. This clearly illustrates that the Notes were not considered demand Promissory Notes. If the Notes had been considered demand notes, the Current Portion referenced in the Schedule of Notes & Mortgages Payable would have been the full amount of the notes. The trial court concluded these affidavits should not be considered because they portrayed an oral agreement inconsistent with the written content of the partnership agreement and the demand note. In his appeal, David Pear likewise relies on the parol evidence rule. The parol evidence rule declares a written contract supersedes accompanying oral negotiations. The execution of a contract in writing, whether the law requires it to be written or not, supersedes all the oral negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument. NDCC 9-06-07. We agree with the trial court that the written agreements, the demand notes and partnership agreement, are so clear and unambiguous on the subjects of capital and debt that they preclude evidence about related oral negotiations inconsistent with the written documents. The construction of a written contract to determine its legal effect is generally a question of law. Pamida, Inc. v. Meide, 526 N.W.2d 487, 490 (N.D.1995). A court must interpret the contract to give effect to the mutual intention of the parties as it existed at the time of contracting. NDCC 9-07-03; see Pamida, 526 N.W.2d at 490. In a written contract, the intention of the parties is to be ascertained from the writing alone if possible. NDCC 9-07-04; see Pamida, 526 N.W.2d at 490; Matter of Diocese of Bismarck Trust, 500 N.W.2d 203, 205 (N.D. 1993). A written agreement super[s]edes any prior oral agreements or negotiations between the parties in the absence of any ambiguities. Norwest Bank v. Christianson, 494 N.W.2d 165, 168 (N.D.1992); see also NDCC 9-06-07; Graber v. Engstrom, 384 N.W.2d 307, 309 (N.D.1986) (Oral negotiations or agreements which preceded or accompanied the execution of a written contract may be employed to explain its uncertain expressions but not to contradict or nullify its express terms.). Only if the written contract is ambiguous, or if it does not reflect the parties' intent because of fraud, mistake, or accident, can a court employ parol evidence to clarify the terms of the contract, or to find the intent of the parties. Diocese of Bismarck Trust, 500 N.W.2d at 205; see Pamida, 526 N.W.2d at 490; Christianson, 494 N.W.2d at 168; Jorgensen v. Crow, 466 N.W.2d 120, 123 (N.D.1991); First Nat'l Bank & Trust Co. of Williston v. Scherr, 435 N.W.2d 704, 706 (N.D.1989). But, if the written contract is clear and unambiguous, as here, the reviewing court should go no further. Pamida, 526 N.W.2d at 490. As we explained in Jorgensen, 466 N.W.2d at 123, a trial court's decision to admit or exclude parol evidence to interpret a contract is one of law that is fully reviewable on appeal. A limited partner may lend money to the partnership unless otherwise agreed in the partnership agreement, and has the same rights in the loan as a person who is not a partner. NDCC 45-10.1-07. The Associates's agreement does not prohibit a loan by a limited partner, nor does it classify a partner's loan as a capital contribution. [2] Indeed, a limited partner's promise to contribute capital to the partnership is not enforceable unless it is in a writing signed by the limited partner. NDCC 45-10.1-31(1). Associates does not argue that David Pear agreed in writing to contribute his $100,000 loan to the partnership's capital. Rather, Associates argues David Pear should be estopped from asserting his claim based upon the twin doctrines of estoppel and laches because the note was executed and delivered upon specific representations that it would not be enforced as such and, indeed, that no demand for payment ... would be made  representations by David's father who was, as a matter of fact, [David's] privy. Associates urges that David Pear himself did not seek to enforce the alleged `Note' for almost ten years after it was delivered, while Associates relied upon the representations ... when it made very significant business decisions which cannot now be undone. We conclude that Associates's affidavits do not show the kind of fraudulent representations that would require a trial of issues of fact on estoppel. See Lohse v. Atlantic Richfield Co., 389 N.W.2d 352 (N.D. 1986) (affirming summary judgment that estoppel inapplicable when facts and circumstances did not establish sufficient promise or agreement); Cooke v. Blood Systems, Inc., 320 N.W.2d 124 (N.D.1982) (holding estoppel inapplicable when facts did not establish sufficient promise); see also Matter of Helling, 510 N.W.2d 595, 596 n. 1 (N.D.1994) (equitable estoppel applies to representations of present and past facts while promissory estoppel applies to representations of future events). Only when a written contract was prevented by fraud can an oral contract be enforceable. When a contract which is required by law to be in writing is prevented from being put into writing by the fraud of a party thereto, any other party who by such fraud is led to believe that it is in writing and acts upon such belief to his prejudice may enforce it against the fraudulent party. NDCC 9-06-03. Associates has not claimed that fraud by either Charles Pear or David Pear led anyone to believe the partnership agreement, or a written amendment to it, classified David Pear's demand loan as capital. We affirm the summary judgment that the $100,000 demand note to David Pear was not partnership capital, but rather was a partnership debt.