Owen v. Ostrum

• Decision Date: 29 June 1993
• Docket Number: No. 93-039,93-039
• Parties: , 23 UCC Rep.Serv.2d 614 Charles W. OWEN, Plaintiff and Respondent, v. Richard M. OSTRUM, Defendant and Appellant.
• Court: Montana Supreme Court

Page 1015

855 P.2d 1015

259 Mont. 249, 23 UCC Rep.Serv.2d 614

Charles W. OWEN, Plaintiff and Respondent, v. Richard M. OSTRUM, Defendant and Appellant.

No. 93-039.

Supreme Court of Montana.

Submitted on Briefs May 20, 1993.

Decided June 29, 1993.

T. Thomas Singer, Moulton, Bellingham, Longo & Mather, Billings, for defendant and appellant.

Kenneth D. Tolliver, Jeffrey Hunnes, Wright, Tolliver & Guthals, Billings, for plaintiff and respondent.

HARRISON, Justice.

Richard M. Ostrum (Ostrum) appeals from judgment, decree of foreclosure, and deficiency judgment entered by the Thirteenth Judicial District Court, Stillwater County. Ostrum's former partner, Charles W. Owen (Owen) brought the action to collect a debt and foreclose a security interest in shares of stock pledged as security for the debt. We affirm.

In 1958, Ostrum purchased a cattle ranch near Fishtail, Montana, in Stillwater County. He operated this ranch with his wife as a family corporation until 1977, when Owen invested in it, receiving shares equal to 49 percent of the corporate stock. During the next ten years, the ranch expanded, purchasing land or leasing other land owned by Owen, and the corporation began breeding and selling purebred Angus cattle. Owen paid the costs of expansion through loans and capital investments, in exchange for which he received corporate stock. Ostrum lived on the ranch and managed it until June 1989.

In 1979, Owen and Ostrum formed a partnership called Gold Block Angus. By 1987, Owen owned a 94 percent interest in the partnership, and Ostrum, a six percent interest. In December 1987, Gold Block Angus had assets valued for tax purposes at $2,601,091 and total liabilities of $4,751,072, excluding accrued interest. The partnership owed approximately $3.7 million to Owen and entities owned by Owen. Owen and Ostrum decided to recapitalize Gold Block Angus by writing off approximately $2.4 million of the partnership's debt to Owen and incorporating as Gold Block, Inc. Ostrum's six-percent share of the capitalized liability was $144,000. As he had no funds for this capital contribution, Owen loaned him $144,000.

In exchange for the $144,000 loan, Ostrum signed a promissory note and a security agreement. The security agreement stated that Ostrum and Owen had agreed to transfer their interests in Gold Block Angus, a partnership, to Gold Block, Inc., a Montana corporation, in exchange for shares in the corporation. "In connection with [that] agreement," the document says, Owen loaned Ostrum $144,000 and Ostrum granted Owen a security interest in 1,200 shares of Gold Block, Inc. The security agreement described the loan as "evidenced by that certain Promissory Note dated December 31, 1987, which is payable on demand and which bears interest at the rate of 9.5 percent per annum."

In June 1989, Owen announced that he intended to liquidate Gold Block, Inc., and that Ostrum's employment as manager was terminated to facilitate the liquidation. Ostrum left the ranch, but Owen completed only a partial liquidation and continued to operate the ranch.

A year later, on June 14, 1990, Owen sent Ostrum a demand letter, stating that if Ostrum did not pay the $144,000 debt or negotiate a repayment plan in fifteen days, action might be taken to realize on the security by public or private sale of Ostrum's 1,200 shares. Ostrum made no payment, and Owen filed a complaint on August 9, 1990, seeking judgment in the amount of $179,306 and foreclosure of the security interest.

Ostrum moved to dismiss the complaint for failure to state a claim upon which relief can be granted, on the grounds that Owen had not alleged execution or delivery of the promissory note and had not attached a copy of it to his complaint. Judge Fillner denied this motion, having determined that Ostrum owed a debt pursuant to the security agreement, and that the promissory note therefore was irrelevant, but Ostrum continued to deny that he had signed a note. In his answer to the complaint, Ostrum asserted that Owen could not prove that a note was executed or that he was the holder of a note, and that Owen had given no consideration for the alleged debt.

Owen moved for partial summary judgment in August 1991, asking the court to determine that Ostrum owed a valid debt and that Owen had an enforceable security interest, and to determine the amount of the debt. Ostrum argued in response that summary judgment was improper because there were factual issues as to the existence of the promissory note and as to whether Owen was the holder of the note. He also contended that the only consideration he received for his loan was his stock in Gold Block, Inc., and that by tendering this stock he had satisfied the debt. If his 1,200 shares were not worth $144,000, Ostrum argued, then their actual value should be determined at trial.

Judge Speare, then presiding over the District Court in Stillwater County, granted partial summary judgment in favor of Owen. He determined that no genuine issue of material fact existed as to whether Ostrum owed Owen $144,000 or as to whether Owen had a valid security interest in Ostrum's 1,200 shares of Gold Block, Inc. stock, and that Ostrum had received consideration for the loan in the form of reduction of the partnership's debt.

The court entered judgment and issued a decree of foreclosure, dated August 29, 1991, ordering that Owen recover $194,032.80; that his security interest in Ostrum's 1,200 shares of Gold Block, Inc. stock be foreclosed; that the shares be sold at public sale; and that Ostrum pay any deficiency remaining after the sale. In his order, Judge Speare stated that he assumed the promissory note never existed.

In September 1991, Owen moved for approval of the sale of collateral, proposing to sell it by first publishing a notice in the Stillwater County News and the Billings Gazette for ten days prior to the sale, and then holding a public auction on the front steps of the Stillwater County courthouse, probably on November 8, 1991. A financial disclosure statement would be furnished to prospective buyers. The District Court declined to rule on this motion, stating that it already had ordered a public sale of the collateral and that Owen could proceed.

Ostrum filed a memorandum and affidavit opposing the proposed sale on the grounds that it was not commercially reasonable. As there is no market for a minority interest in a closely held corporation, Ostrum argued, full value for his stock could not be obtained through a public sale.

Ostrum also pointed out that Owen's proposed financial disclosure statement undervalued Gold Block, Inc.'s assets and did not include the proceeds of recent land and cattle sales. The statement showed a negative net worth for the corporation. According to Ostrum, it had a positive net worth when he was managing it, but under Owen's management the net worth declined by $1 million.

A public sale was held on December 18, 1991, according to plan, and Owen bought the 1,200 shares for $15,000. No other buyers appeared. Owen then moved for award of attorney's fees and determination of deficiency judgment. Ostrum, opposing the motion, again argued that the sale was not commercially reasonable and that Owen therefore was not entitled to a deficiency judgment.

After a hearing on February 3, 1992, at which counsel reviewed the history of the case for Judge Baugh, the proceedings were delayed to allow further briefing on the issue of commercial reasonableness. Counsel then reviewed corporate financial records at the offices of Gold Block, Inc., and its accountant. On February 13, 1992, they found among the Gold Block, Inc. files a photocopy of the original promissory note, signed by Ostrum on December 31, 1987. This discovery was reported to the court, prompting a motion from Ostrum, who pointed out that the original note was still missing and requested indemnification to protect him from additional claims on the same note. Ostrum also asked the court to reconsider summary judgment and to require Owen to "meet his burden of proof" regarding ownership of the original note.

The hearing that began on February 3 was completed on August 25, 1992. Judge Baugh issued findings of fact, conclusions of law, and an order on September 8, 1992. He concluded that he was not authorized to act as an appellate court with regard to Judge Speare's grant of summary judgment; that the discovery of the promissory note changed nothing, as the judgment was based on a debt owed, not on the lost note; and that the parties' conflicting testimony on the value of Gold Block, Inc. assets and liabilities, market trends, and possible corporate mismanagement had revealed nothing to support a determination that the bid price of $15,000 was unreasonable.

Concluding that the method, manner, time, place, and terms of the stock sale were commercially reasonable, Judge Baugh issued a deficiency judgment in the amount of $194,032.80, pursuant to the August 1991 decree of foreclosure, less $15,000--the proceeds of the sale--plus attorney's fees in the sum of $11,709.92, costs in the sum of $175.55, expenses of the sale of the collateral in the sum of $3,114.53, and interest from August 29, 1991 to September 8, 1992, in the sum of $18,841.74, for a total judgment of $212,874.54.

Two issues are raised on appeal:

1. Whether the District Court erred in granting summary judgment on a debt memorialized in a promissory note, in the absence of the original promissory note and without requiring the creditor to post security.

2. Whether the District Court erred in concluding that the sale of the collateral was commercially reasonable and that Owen therefore was entitled to a deficiency judgment.

I

Did the District Court err in granting summary judgment on a debt memorialized in a promissory note, in the absence of the original promissory note and without requiring the creditor to post security?

All three of the judges who were responsible for ...