Mooney v. GR and Associates

• Decision Date: 10 December 1987
• Docket Number: No. 860067-CA,860067-CA
• Citation: 746 P.2d 1174
• Court: Utah Court of Appeals
• Parties: 5 UCC Rep.Serv.2d 1419 Jerome H. MOONEY, Plaintiff and Respondent, v. GR AND ASSOCIATES, a Utah corporation, Grant H. Roylance, an individual, Consolidated Mining and Milling, a Utah corporation, C & H Investments, a Utah partnership, Courtney Wrathall, an individual, and Charles I. Hagan, an individual, Defendants and Appellants.

Page 1174

746 P.2d 1174

5 UCC Rep.Serv.2d 1419

Jerome H. MOONEY, Plaintiff and Respondent, v. GR AND ASSOCIATES, a Utah corporation, Grant H. Roylance, an individual, Consolidated Mining and Milling, a Utah corporation, C & H Investments, a Utah partnership, Courtney Wrathall, an individual, and Charles I. Hagan, an individual, Defendants and Appellants.

No. 860067-CA.

Court of Appeals of Utah.

Dec. 10, 1987.

Brad L. Swaner, Salt Lake City, for defendants and appellants.

Stephen R. Smith, Jr., Mooney & Smith, Salt Lake City, for plaintiff and respondent.

Douglas P. Simpson, Salt Lake City, for GR & Associates, Roylance and Consolidated.

Before DAVIDSON, GARFF and ORME, JJ.

OPINION

GARFF, Judge:

Defendant/appellant Charles I. Hagan appeals from a summary judgment in favor of plaintiff/respondent Jerome H. Mooney, in which Hagan was found liable for a $457,819.95 judgment on a note; 15% interest on the judgment from July 27, 1984; costs of $201.50; and attorney fees of $11,400.00. We affirm.

In October 1976, Mooney sold real estate located in Salt Lake County to defendant C & H Investments (C & H), a partnership, by means of a uniform real estate contract. Hagan was president and defendant Courtney Wrathall was vice-president of C & H. Hagan executed a personal guaranty on the contract.

During August 1978, Mooney, C & H, Hagan and Wrathall agreed to convey the real property to defendant GR and Associates (GR). On August 17, 1978, Mooney, in exchange for his interest in the property, received a promissory note for $295,756.42. This note was executed by Hagan and Wrathall as partners in C & H and by defendant Grant H. Roylance as president of GR and of Consolidated Mining Corporation (Consolidated) and in his individual capacity. The note was to be secured by milling equipment owned by Consolidated.

To enable Roylance and his corporate entities to buy out C & H's interest in the real property, Roylance, on behalf of GR and Consolidated, simultaneously executed a promissory note for $468,709.00 to C & H and its partners, Hagan and Wrathall. Any payments which GR or Consolidated made on Mooney's note were to be credited as payments on C & H's note.

This transaction released Hagan from his personal guaranty on the October 15, 1976 real estate contract.

Guardian Title Company (Guardian) acted as the escrow agent for the August 17, 1978 transaction. Guardian, as an escrow agent, was acting on behalf of both parties and was not just Mooney's agent. ¹ All parties understood that Guardian was to immediately file the security interest in Consolidated's mining equipment. The parties stipulated that they intended the security interest to be in first place on the full $500,000.00 market value of the unencumbered equipment, and so instructed Guardian. Guardian, however, did not file the security interest until August 22, 1978, five days after the transaction closed.

On August 21, 1978, GR entered into a security agreement with Penguin Investments (Penguin), a non-party to this action, using the same milling equipment as collateral for a $1,500,000.00 debt. Penguin perfected its security interest in the equipment on August 21, 1978, the day before Guardian filed the parties' security interest.

Mooney received payments on the August 17, 1978 note for the months of September and October 1978. Around November 17, 1978, however, Mooney discovered that his security interest in the milling equipment was subordinate to that of Penguin, deemed his security impaired, and proceeded under the default provisions of the August 17, 1978 note to declare the entire principal sum due and payable. Mooney received one more payment on the note after the suit was initiated, receiving, in total, $12,000.00 on the note.

After this action was instituted, the parties discovered that Sandy State Bank had a prior perfected security interest in the milling equipment for $40,727.60, which had been filed on July 10, 1978.

The parties stipulated that C & H, Wrathall and Hagan reasonably relied upon the existence of a perfected, first-place security interest in executing the promissory note, that they never consented to Guardian's failure to properly perfect their security interest, and that they were acting under a mistake of fact in that they believed that the promissory note would be secured by the milling equipment and that the equipment would have a value equal to or greater than the amount of the note.

Mooney immediately attached Consolidated's assets, but took nothing because the security was insufficient to satisfy the prior security interests. Penguin eventually sold the secured property for $330,000.00 on April 9, 1980.

The parties agreed to enter judgment against Roylance, GR and Consolidated for $310,642.00 on March 30, 1979. Wrathall and Hagan stipulated to this entry of judgment against the other defendants on April 2, 1979.

Both parties filed cross motions for summary judgment, Mooney claiming to be entitled to judgment based on the terms of the August 17 note, and defendants seeking to dismiss the complaint. The trial court awarded Mooney judgment on the note in the sum of $456,819.95 plus fifteen percent interest, costs of $201.50, and attorney fees of $11,400.00.

Hagan raises two issues on appeal: (1) Was he an accommodation party to the promissory note, and, therefore, able to claim discharge under Utah Code Ann. § 70A-3-606 (1986) in that Mooney unjustifiably impaired the collateral for the note? (2) Was he entitled to avoid the promissory note on grounds that there was a mutual mistake of material fact?

I.

Utah Code Ann. § 70A-3-606 (1986), under which Hagan claims discharge, provides in pertinent part that:

(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder

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(b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.

The Utah Supreme Court, in interpreting this section, stated that:

[a] division of authority exists concerning the scope of the reference to "any party" in subsection 3-606(1) (footnote omitted). We believe that the defense of discharge found in that provision is properly characterized as a "suretyship defense" (footnote omitted). Thus, it would appear that subsection 3-606(1), while including accommodation parties and other parties to an instrument in the position of sureties, does not apply to makers binding themselves only as principals.

Utah Farm Prod. Credit Ass'n v. Watts, 737 P.2d 154, 160 (Utah 1987) (emphasis added). Thus, while accommodation parties have defenses available under section 70A-3-606, principal makers do not. ²

Hagan argues that he should be characterized as an accommodation maker, and, therefore, discharged from his liability on the note under section 70A-3-606 because of unjustifiable impairment of collateral for the note. "A maker on a note proclaiming that he is an accommodation party and ... therefore entitled to the privileges accorded accommodation parties under the law has the burden of proving his accommodation character when it is at issue." Watts, 737 P.2d at 158-59. Therefore, Hagan has the burden of proving that he is an accommodation maker.

In Utah Farm Prod. Credit Ass'n v. Watts, the Utah Supreme Court outlined the following considerations to aid in determining whether a party is an accommodation maker. First, a particular party may be found to be an accommodation party if the note itself reflects that he signed as an accommodation party. Watts, 737 P.2d at 158. Second, when "an alleged accommodation party's status cannot be gleaned from the note itself, ... the only other method available to establish the status is through parol evidence." Id. at 159.

We first examine the relevant note, the August 17, 1978 note in favor of Mooney, to determine whether it reflects that Hagan signed as an accommodation party. This note specified that "[a]ny monies paid on this note by Consolidated Mining and Milling, Inc., shall be deducted from that Note dated August 17, 1978 in favor of C &amp H Investment." This specification is an arrangement by which Roylance, GR, and Consolidated could buy out C & H's interest in the property by making the payments due on Mooney's note. It does not define, in any respect, C & H's, and, thus, Hagan's relationship to Mooney as an accommodation party. There is no other indication on the face of the note that Hagan signed as an accommodation party.

We next examine parol evidence to determine if, in fact, Hagan signed as an accommodation party. Whether a person is an accommodation party is ultimately a question of intent, e.g., the intent of the person claiming to be an accommodation party, the intent of the person who would be the accommodated party, and the intent of the person who was the holder of the paper when the alleged accommodation party signed. Id. at 158. Thus, the following factors are relevant in determining accommodation status: (1) whether or not a party to an instrument receives a benefit directly or indirectly, and if so, to what extent; (2) whether the signature of the person claiming to be an accommodation party was necessary for the other party to receive the consideration given in exchange for the note; and (3) whether the party claiming accommodation status is a maker on a note given for his or her own debt. "[A] party cannot be an accommodation maker on a note given for his or her own debt." Id. at 159.

We find first that Hagan received both direct and indirect benefits from the transaction, observing, like the trial court, that "Hagan benefited from the transaction by being released from his personal guarantee on the real estate contract," and that "his partnership was the recipient of a substantial promissory note from other participants in the transaction."

We next find that the parties intended that Hagan's signature was necessary on the note in favor...