Fibro Trust, Inc. v. Brahman Financial, Inc.

• Decision Date: 12 February 1999
• Docket Number: No. 970422,970422
• Citation: 974 P.2d 288
• Parties: 362 Utah Adv. Rep. 15, 1999 UT 13 FIBRO TRUST, INC., Plaintiff and Appellant, v. BRAHMAN FINANCIAL, INC., a Nevada corporation; American Pacific Securities, Ltd., a Hong Kong corporation; Mark E. Eames; et al., Defendants and Appellees.
• Court: Utah Supreme Court

Page 288

974 P.2d 288

362 Utah Adv. Rep. 15, 1999 UT 13

FIBRO TRUST, INC., Plaintiff and Appellant, v. BRAHMAN FINANCIAL, INC., a Nevada corporation; American Pacific Securities, Ltd., a Hong Kong corporation Mark E. Eames; et al., Defendants and Appellees.

No. 970422.

Supreme Court of Utah.

Feb. 12, 1999.

Mitchell R. Barker, Thomas E. Stamos, West Valley City, for plaintiff.

Brian Steffenson, James McConkie, Salt Lake City, for defendants.

ZIMMERMAN, Justice:

¶1 Plaintiff Fibro Trust, Inc. ("Fibro"), brought breach of contract and conversion claims against defendants Brahman Financial, Inc. ("Brahman"), American Pacific Securities, Ltd. ("APS"), and Mark Eames. The trial court granted a directed verdict for defendants. Fibro argues on appeal that the trial court erred in concluding that the contract was illegal. We agree and reverse and remand.

¶2 Fibro owns millions of shares in a publicly held company, Leasing Technology, Inc. ("LTI"). Fibro orally agreed to authorize Tranco, a stock transfer company, to register but not deliver 5.5 million restricted LTI shares to Brahman. In return, Brahman agreed to undertake marketing efforts to expose LTI's stock to domestic and foreign broker dealers.

¶3 On June 1, 1990, pursuant to the oral agreement, Fibro delivered the 5.5 million restricted shares to Tranco and instructed it to prepare a certificate for the shares in Brahman's name but to return the new certificate to Fibro to be held until Brahman performed under the agreement. Instead of returning the certificate to Fibro, Tranco forwarded it directly to Brahman. Thereafter, Brahman retained 60,000 shares but issued 4 million of the shares in APS's name and the remainder in the name of various other entities and individuals.

¶4 After Fibro realized that Brahman had physical possession of the certificate for the 5.5 million shares and had transferred the shares, Fibro and Brahman signed a written agreement. Brahman agreed to use its best efforts to sell 15 million shares of LTI common stock outside of the United States. Specifically, Brahman agreed to use its best efforts to sell at least 1 million shares each calender quarter, beginning with the second quarter of 1991, until it sold 15 million shares. It also agreed to use its best efforts to sell the shares at a bid price of "not less than $1.00 per share." Brahman agreed that it would purchase at least $10,000 in LTI shares each month, commencing April 1, 1991. Brahman also acknowledged that it possessed 479,610 shares of LTI common stock and agreed that it would pay Fibro at least $537,163 for the shares by April 1, 1994. In exchange, Fibro agreed that once Brahman sold the 15 million shares and paid Fibro $537,163 for the additional 479,610 shares, Brahman would be entitled to the 5.5 million shares of restricted LTI stock. The agreement also released Fibro from its obligations under the agreement if any government agency imposed sanctions on Brahman for securities violations.

¶5 On April 22, 1991, Fibro informed Brahman that it believed Brahman had breached the December 26, 1990, contract and requested return of the 5.5 million restricted LTI shares and payment of $537,163 for the other LTI common shares. Brahman never returned any shares or made any payment to Fibro. Fibro filed an action against Brahman, Eames, and APS, alleging breach of contract, conversion, breach of fiduciary duty, fraud, and conspiracy. A nonjury trial on these claims began on September 26, 1995. After Fibro presented its case, Brahman, Eames, and APS moved for a directed verdict, arguing that because the contract at issue was illegal, Fibro could not prevail on any of its causes of action. The trial court granted the joint motion for directed verdict, concluding that the agreement "was an illegal contract" and "[a]s an illegal contract, the Court will take no action to assist plaintiff in its attempt to try and enforce the terms of said illegal contract." Fibro appealed.

¶6 On appeal, Fibro argues that the trial court erred in granting Brahman, Eames, and APS's directed verdict motion. We first address the motion as it pertains to Brahman. Fibro contends that the trial court erred in relying on illegality of contract to dismiss Fibro's claim because Brahman failed to plead illegality as an affirmative defense. Fibro also argues that the trial court erred in concluding that the contract was illegal and in barring Fibro's conversion claim. We address each argument in turn.

¶7 Fibro argues that Brahman waived its illegality defense by failing to raise it as an affirmative defense in its answer. Rule 8(c) of the Utah Rules of Civil Procedure requires that "[i]n pleading to a preceding pleading, a party shall set forth affirmatively ... illegality." Utah R. Civ. P. 8(c). Brahman acknowledges that it did not raise the illegality defense in its answer, but argues that the court properly considered its defense because the parties tried the issue by implied consent. Brahman also claims that it did not waive the defense because APS raised illegality in its answer.

¶8 Rule 15(b) of the Utah Rules of Civil Procedure governs amendments when parties have tried issues by express or implied consent. Rule 15(b) provides:

When issues not raised by the pleading are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendments of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court shall grant a continuance, if necessary, to enable the objecting party to meet such evidence.

Utah R. Civ. P. 15. Rule 15(b) provides two situations in which a court can rule on issues not raised by the pleadings. The first situation--the mandatory 15(b) amendment to conform--requires the trial court to consider issues not raised in the pleadings if the parties tried the issues by express or implied consent. See Keller v. Southwood North Medical Pavilion, Inc., 959 P.2d 102, 105 (Utah 1998). The court must first determine whether the parties tried the issue by express or implied consent. See id. A party may try an issue by implied consent by failing to object to the introduction of evidence related to the unpleaded issue. See id. at 106. A court's conclusion that parties tried an issue by express or implied consent is a legal question, which we review for correctness. See id. at 105. However, "because the trial court's determination of whether the issues were tried with all parties' 'implied consent' is highly fact intensive, we grant the trial court a fairly broad measure of discretion in making that determination under a given set of facts." Id.

¶9 Once a party objects to evidence at trial on the ground that it is outside the issues raised in the pleadings, however, the second rule 15(b) provision--the permissive 15(b) amendment--applies. After this objection, the court may allow a party to amend its pleadings to include the issue if (i) "the presentation of the merits of the action will be subserved thereby" and (ii) "the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits." Utah R. Civ. P. 15(b). We review a court's decision to permit amendment under this rule 15(b) provision under a "conditional discretionary review." England v. Horbach, 944 P.2d 340, 345 (Utah 1997). We have described the trial court's discretion in allowing such amendments as follows:

The trial court's discretion to grant amendment of the pleadings is conditioned on the satisfaction of two preliminary requirements: a finding that the presentation of the merits of the action will be subserved by amendment and a finding that the admission of such evidence would not prejudice the adverse party in maintaining his action or defense on the merits. The trial court has only limited discretion in making these preliminary findings, but once these prerequisites are met, the trial court has full discretion to allow an amendment of the pleadings; that is, it may grant or deny a party's motion for amendment upon any reasonable basis, and the court's decision can be reversed only if abuse of discretion appears.

Id.

¶10 In this case, Brahman argues that the parties raised the illegality issue by implied consent because Fibro argued in its trial brief that the contract was not illegal. However, Fibro also objected to the court's consideration of Brahman's illegality defense in that same trial brief, arguing that Eames and Fibro waived the defense by not raising it in the answer. Fibro again objected during trial to the court's consideration of the illegality defense in response to Brahman's motion for a directed verdict, arguing that the court should not consider the illegality defense because Brahman failed to allege it as an affirmative defense in its answer. Finally, Fibro objected to the court's consideration of the illegality defense in a post-trial motion to set aside the court's directed verdict.

¶11 Because Fibro objected to the illegality issue at trial, the second rule 15(b) provision relating to permissive amendment applies, not the mandatory amendment to conform as Brahman suggests. Ordinarily, after a party objects to evidence related to issues outside of the pleadings, the trial court would decide whether to allow the other party to amend its...