K & T, Inc. v. Koroulis

• Decision Date: 16 December 1994
• Docket Number: A-C,No. 930506,930506
• Citation: 888 P.2d 623
• Court: Utah Supreme Court
• Parties: 26 UCC Rep.Serv.2d 224 K & T, INC., a Utah corporation dba Budget Rent-ar of Salt Lake; Paul Taylor, individually; and Michael Taylor, individually, Plaintiffs and Appellants, v. George B. KOROULIS, and Montana Brand Produce Co., Inc., a Utah corporation, Defendants and Appellees.

Page 623

888 P.2d 623

26 UCC Rep.Serv.2d 224

K & T, INC., a Utah corporation dba Budget Rent-A-Car of Salt Lake; Paul Taylor, individually; and Michael Taylor, individually, Plaintiffs and Appellants, v. George B. KOROULIS, and Montana Brand Produce Co., Inc., a Utah corporation, Defendants and Appellees.

No. 930506.

Supreme Court of Utah.

Dec. 16, 1994.

Rehearing Denied Feb. 8, 1995.

Donald J. Winder, Kathy A.F. Davis, Robert D. Tingey, Salt Lake City, for plaintiffs.

Kirk W. Bennett, John C. Green, Kim M. Luhn, Salt Lake City, for Koroulis.

John W. Call, Craig T. Vincent, Curtis C. Nesset, Salt Lake City, for Montana Brand Produce Co.

ZIMMERMAN, Chief Justice:

Plaintiffs K & T, Inc., and Paul and Michael Taylor appeal from the district court's grant of summary judgment in favor of defendant Montana Brand Produce Co. We reverse and remand.

"Before we recite the facts, we note that in reviewing a grant of summary judgment, we view the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party." Higgins v. Salt Lake County, 855 P.2d 231, 233 (Utah 1993). "We state the facts in this case accordingly." Id.

K & T is a closely held Utah corporation which owns and operates a rental-car franchise along the Wasatch Front. On June 30, 1981, K & T, the Taylors, and George Koroulis ¹ entered into an agreement ("Stockholders' Agreement") governing any transfer or encumbrance of K & T stock. To prevent outsiders from gaining a right to share in the management of K & T, the stockholders agreed to restrict the transfer or encumbrance of K & T stock. This restriction took the form of a preemptive right on the part of K & T and its stockholders to purchase any K & T stock that a stockholder intended to transfer or encumber. ² The Stockholders' Agreement specifically provided that all stock certificates were to be surrendered to K & T and endorsed with a restrictive endorsement. ³ Nevertheless, no such endorsement was ever placed upon Koroulis' stock certificates.

On August 31, 1990, Bountiful Motor Sales, Inc. ("BMS"), a corporation owned by Koroulis, entered into a financing agreement ("the Dealership Loan") with First Security Bank ("FSB"). At approximately the same time, FSB made a number of personal loans to Koroulis. BMS eventually defaulted on the Dealership Loan, and Koroulis defaulted on his personal obligations. After the defaults, Koroulis, BMS, and FSB entered into a series of forbearance, cross-collateralization, and loan agreements ("the Forbearance Agreements"). ⁴ Pursuant to these agreements, Koroulis and BMS provided FSB with additional collateral for the Dealership Loan, FSB extended additional credit to BMS and Koroulis, all of the loans were cross-defaulted and cross-collateralized, and certain other terms and conditions were imposed on the loans.

As part of the additional collateral provided by Koroulis and BMS to FSB under the Forbearance Agreements, Koroulis executed an agreement under which he pledged to FSB his shares of K & T stock ("Pledge Agreement"). Richard H. Pope, a vice president of FSB, reviewed the Stockholders' Agreement and determined that the consent of the K & T stockholders was necessary for a valid pledge of Koroulis' stock. ⁵ Pope directed attorneys for FSB to prepare a consent agreement for review and execution by Paul Taylor, then vice president of K & T. After the execution of the Pledge Agreement by Koroulis, Pope met with Paul Taylor on several occasions in an attempt to obtain his consent to the pledge. Paul Taylor refused to sign the first consent agreement, a five-page document prepared by FSB's attorneys. Pope then directed attorneys for FSB to draft a "simpler" consent agreement, which Paul Taylor also refused to sign. Neither K & T nor the Taylors ever consented to the pledge of K & T stock by Koroulis to FSB.

BMS and Koroulis eventually defaulted on their obligations to FSB under the Forbearance Agreements. Sometime after the default, Koroulis and BMS contacted Montana Brand to request that Montana Brand purchase FSB's interest in the Koroulis and BMS loans. After Montana Brand tentatively agreed to such an arrangement, FSB drafted an agreement by which FSB would sell its interest in the Koroulis and BMS loans, along with the collateral securing those loans, to Montana Brand ("Loan Sale Agreement").

At the time the Loan Sale Agreement was executed, Robert G. Maxfield, secretary of Montana Brand, reviewed FSB's loan file. Although the file did contain a copy of the Pledge Agreement, Maxfield asserted in an affidavit that the file did not contain a copy of either the proposed consent agreements or the Stockholders' Agreement. Discovery conducted after the trial court dismissed FSB from the case reveals, however, that the Stockholders' Agreement and the proposed consent agreements were in the file. Maxfield also asserted via affidavit that "[n]either [he] nor, to the best of [his] knowledge, anyone at Montana Brand was informed of the existence of the Consent Agreement or the Stockholders' Agreement by personnel from First Security [Bank]."

Sometime around May 28, 1992, Montana Brand sent Paul Taylor a letter claiming that Koroulis and BMS had defaulted on their loan obligations and that Montana Brand was therefore the owner of Koroulis' stock under the terms of the Pledge Agreement. In his affidavit, Paul Taylor averred that this letter was the "first information [he received] that the Pledge Agreement had been executed, or that Montana Brand claimed an interest in [Koroulis'] shares." In response to the letter, Paul Taylor informed Montana Brand that K & T and the Taylors were entitled to purchase the stock for an amount set forth in the Stockholders' Agreement. When Montana Brand declined the request, K & T and the Taylors brought this action against Koroulis and Montana Brand in Utah's Third Judicial District Court. ⁶

On April 30, 1992, K & T and the Taylors moved for summary judgment, asking the district court to declare that Koroulis had breached the Stockholders' Agreement and that K & T and the Taylors were entitled to purchase Koroulis' stock as set forth in the Stockholders' Agreement. In response, Montana Brand filed a cross-motion for summary judgment. In its cross-motion, Montana Brand asserted that (i) section 70A-8-204 of the Code ⁷ rendered the restriction on transfer contained in the Stockholders' Agreement ineffective because the restriction was never endorsed on the stock certificates and Montana Brand took the stock without actual knowledge of the restriction; and (ii) the Taylors and K & T waived the right to enforce the restriction. In response to Montana Brand's cross-motion for summary judgment, K & T and the Taylors argued that section 70A-8-204 applied only to restrictions "imposed by the issuer" of the securities. Because the restriction at issue here was agreed to by all of the stockholders rather than imposed by K & T, the effectiveness of the restriction should be measured by reference to section 70A-8-302 of the Code ⁸ rather than to section 70A-8-204.

At a hearing on June 21, 1993, the district court granted Montana Brand's cross-motion for summary judgment. In so doing, it concluded as a matter of law that section 70A-8-204 was applicable "[b]ecause the Stockholders['] Agreement is actually between K & T and the three stockholders of K & T, [and] the restriction on transfer ... was imposed by the issuer of the stock." Furthermore, relying on the Maxfield affidavit, the district court concluded that Montana Brand took the stock without actual knowledge of any restriction on the transfer of the stock. K & T and the Taylors appeal, claiming that (i) the trial court erred when it relied on section 70A-8-204 rather than on section 70A-8-302 to measure the effect of the restriction on transfer contained in the Stockholders' Agreement, and (ii) even if section 70A-8-204 is applicable, genuine issues of material fact exist which preclude summary judgment.

We first state the applicable standard of review. Summary judgment is appropriate only when no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. Utah R.Civ.P. 56(c); Higgins, 855 P.2d at 235. Because entitlement to summary judgment is a question of law, we accord no deference to the trial court's resolution of the legal issues presented. Higgins, 855 P.2d at 235; Ferree v. State, 784 P.2d 149, 151 (Utah 1989). "We determine only whether the trial court erred in applying the governing law and whether the trial court correctly held that there were no disputed issues of material fact." Ferree, 784 P.2d at 151 (citing Bushnell Real Estate, Inc. v. Nielson, 672 P.2d 746, 749 (Utah 1983); Bowen v. Riverton City, 656 P.2d 434, 436 (Utah 1982)).

The first question is whether the district court erred when it held that the transfer restriction contained in the Stockholders' Agreement is an issuer-imposed restriction. This is critical because section 70A-8-204 provides that only "[a] restriction on transfer of a security imposed by the issuer " is ineffective against any person without actual knowledge unless the restriction is conspicuously noted on the security. (Emphasis added.) If the restriction at issue was not "imposed" by K & T but by the stockholders, section 70A-8-204 does not apply.

When faced with a question of statutory construction, we look first to the plain language of the statute. State v. Larsen, 865 P.2d 1355, 1357 (Utah 1993); Schurtz v. BMW of N. Am., Inc., 814 P.2d 1108, 1112 (Utah 1991); Brinkerhoff v. Forsyth, 779 P.2d 685, 686 (Utah 1989); see also Bonham v. Morgan, 788 P.2d 497, 500 (Utah 1989) (per curiam) ("Unambiguous language in [a] statute may not be interpreted to contradict its plain meaning."). In construing a statute, we assume that "each term in the statute was used advisedly; thus the statutory words are read literally, unless such a reading is...