Holladay v. Gunnison

2014 UT App 17
_________________________________________________________
THE UTAH COURT OF APPEALS
HOLLADAY BANK & TRUST,
Plaintiff and Appellee,
v.
GUNNISON VALLEY BANK,
Defendant and Appellant.
Opinion
No. 20120400-CA
Filed January 24, 2014
Third District Court, Salt Lake Department
The Honorable Sandra N. Peuler
No. 110909828
V. Lowry Snow, Curtis M. Jensen, and
Jonathan P. Wentz, Attorneys for Appellant
Gerald H. Suniville and Alex B. Leeman,
Attorneys for Appellee
JUDGE STEPHEN L. ROTH authored this Opinion, in which
JUDGES JAMES Z. DAVIS and CAROLYN B. MCHUGH concurred.
ROTH, Judge:
¶1 This case involves a contract dispute between two banks.
Defendant Gunnison Valley Bank (Gunnison) financed a
substantial home loan, secured by a deed of trust, and Holladay
Bank & Trust (Holladay) acquired a participation interest in the
loan soon thereafter. When the borrower defaulted, Gunnison
purchased the secured property at a foreclosure sale. The
property proved to be worth less than the amount of the loan,
however, and the banks disagreed about how their contract
allocated the risk of insufficient collateral proceeds. Gunnison
argued that their contract allocated the proceeds of collateral

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proportionally according to the banks’ respective ownership
interests in the loan. Holladay argued that their contract
provided that Holladay was entitled to all principal payments
from whatever source—including collateral proceeds—until its
initial investment had been recouped. The district court agreed
with Holladay and granted its motion for summary judgment.
We reverse and remand.
BACKGROUND
¶2 In April 2007, Gunnison agreed to finance the
construction of a $1.6 million residence in Utah County. The loan
was secured by a trust deed on the property. Soon after issuing
the loan, Gunnison entered into a loan participation agreement
(the contract) with Holladay, which purchased a 31.25% interest
in the loan for $500,000. The contract required Gunnison to
‚fund its portion of the Loan first,‛ and only after Gunnison had
‚disbursed its full commitment to the Borrower‛ would
Holladay ‚begin disbursing its portion of the Loan.‛ Holladay
wired its portion of the loan to Gunnison in January 2008, and
the borrower defaulted later that year. Gunnison purchased the
borrower’s property at a foreclosure sale in October 2009.
¶3 The value of the property was insufficient to cover the
balance on the loan, however, and the banks were unable to
reach an agreement about the allocation of any proceeds
Gunnison might receive from selling the property. Holladay
claimed that the contract provided for principal repayment on a
‚last-in, first-out‛ basis, meaning that Holladay, which had
funded its portion of the construction loan last, was entitled to
all collateral proceeds until its $500,000 investment was repaid,
with Gunnison to receive the remainder. Gunnison asserted that
the contract provided for Holladay to have first call on the
borrower’s principal payments while the loan remained current
but that on default the proceeds of collateral were to be
distributed according to each bank’s proportional interest in the
loan. Holladay filed a declaratory judgment action in April 2011,

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asking the court to resolve the issue. The parties then filed cross-
motions for summary judgment. At issue were the following
three clauses in the contract, with our emphasis on the most
pertinent language:
6. SERVICING FEE: [Gunnison] shall not charge a
servicing fee. Instead, the Loan will be participated on
a “last in, first out” basis, by [Holladay].
For purposes of this agreement, “last in, first out”
basis, means that [Gunnison] will fund its portion of the
Loan first. Once [Gunnison] has disbursed its full
commitment to the Borrower, [Holladay] will then begin
disbursing its portion of the Loan up to and until the
full amount of [Holladay’s] commitment has been
disbursed, as long as the necessary loan to value and
percentage of construction that has been completed
are maintained.
As the Borrower repays the Loan, [Gunnison] and
[Holladay] will receive interest in proportion to
their respective balances and percentage
ownership interests in the loan. Principal payments
will be applied first to the balance of [Holladay] until
[Holladay’s] disbursed principal and interest have been
fully paid and satisfied. Once *Holladay’s+
disbursements of principal have been fully paid,
together with all interest and any and all
reasonable costs duly satisfied, [Gunnison] will
receive the balance of the loan proceeds. Loan fees,
extension fees and expenses, if any, shall be paid
promptly upon receipt thereof from the Borrower
to [Gunnison] and [Holladay] in accordance with
paragraph 4, above or elsewhere in this agreement,
or, if not specified in this agreement, then in
proportion to their respective percentage
ownership interests in the Loan.

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. . . .
12. APPLICATION OF PAYMENTS: All loan
payments received shall be applied, first, to
reimburse [Gunnison] for reasonable costs and
expenses (including reasonable attorney’s fees)
incurred by [Gunnison] in enforcing the terms of
the Loan, collecting the amounts owed thereunder,
and protecting the interests of [Gunnison] and
[Holladay] in the Loan and in the collateral given
as security for the Loan. All other amounts received
under the Loan shall be divided between [Gunnison] and
[Holladay] (as late fees, principal or interest as provided
in the Loan documents) in accordance with their
respective percentages of ownership interest in the Loan,
but specifically subject to the provisions of paragraph 6,
above.
. . . .
13C. [Gunnison], however, agrees that the proceeds
of all collateral directly securing repayment of the loan,
shall be applied first to the payment of the Loan in-full
as provided in paragraph 12 above. Any excess
proceeds may be applied by [Gunnison] to the
payment of any other or additional loans then
owing to [Gunnison], that may be indirectly
secured by such collateral as a result of the
inclusion of ‚cross-collateralization‛ in the security
agreement executed in connection with Loan in
favor of [Gunnison].
¶4 Each party argued that the contractual language
unambiguously supported its position. Holladay asserted that
paragraph 6—the ‚last in, first out‛ (LIFO) provision—applied
to any and all principal repayments, including payments from
collateral proceeds. By contrast, Gunnison claimed that
paragraph 6 applied only to payments received from the

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borrower while the loan was current and not to repayment of
principal out of the proceeds of collateral after default, which
was governed (through application of paragraph 13C) by
paragraph 12’s language providing for proportional allocation of
‚*a+ll . . . amounts received under the Loan . . . as late fees,
principal or interest.‛ Gunnison argued that paragraph 12’s
qualifier that it was ‚specifically subject to the provisions of
paragraph 6‛ had to be read in the context of paragraph 6’s
reference to ‚Borrower‛ repayment. Holladay contended that
the provision meant that principal was to be paid on a last-in,
first-out basis, whatever its source.
¶5 Gunnison also argued in the alternative that the contract
was ambiguous and that extrinsic evidence of the parties’ intent
regarding the allocation of collateral proceeds supported its
interpretation. In support of this position, Gunnison submitted
affidavits from Gunnison’s vice president at the time of the
agreement and from the president and CEO of Holladay during
the same period. Both affidavits stated that the parties intended
to distribute proceeds from the sale of collateral in proportion to
their respective ownership interests in the loan.
¶6 The district court ruled that the contract was
unambiguous and declined to consider the affidavits Gunnison
submitted with its motion. It then ruled that ‚giving effect to all
of the provisions of the contract, it is clear that the ‘last in first
out’ repayment scheme applies to proceeds received whether
through repayment by the borrower or by default and sale of
collateral.‛ Gunnison appeals.
ISSUE AND STANDARD OF REVIEW
¶7 Gunnison argues that the district court erred when it
granted Holladay’s motion for summary judgment because the
contract’s language unambiguously supports Gunnison’s
interpretation. Summary judgment is appropriate where there
are no genuine issues of material fact and the moving party is

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entitled to judgment as a matter of law. Utah R. Civ. P. 56(c).
‚We review the district court’s decision to grant summary
judgment for correctness.‛ Gudmundson v. Del Ozone, 2010 UT 33,
¶ 10, 232 P.3d 1059. The interpretation of an unambiguous
contract is a question of law that we also review for correctness.
Hillcrest Inv. v. Sandy City, 2010 UT App 201, ¶ 7, 238 P.3d 1067.
¶8 In the alternative, Gunnison argues that the contract is
ambiguous and the district court should have considered the
affidavits it submitted with its motion for summary judgment.
‚Determining whether a contract is ambiguous presents a
threshold question of law,‛ which is reviewed for correctness.
Interwest Constr. v. Palmer, 923 P.2d 1350, 1358 (Utah 1996).
ANALYSIS
¶9 We conclude that the contract is ambiguous regarding the
distribution of collateral proceeds because its pertinent terms are
‚capable of more than one reasonable interpretation.‛ See Daines
v. Vincent, 2008 UT 51, ¶ 25, 190 P.3d 1269 (citation and internal
quotation marks omitted). For that reason, we also conclude that
the district court should have considered extrinsic evidence to
determine the parties’ intent.
¶10 The central dispute in this case is how the contract
controls the distribution of collateral proceeds. Paragraph 13C
provides that ‚the proceeds of all collateral directly securing
repayment of the loan, shall be applied first to the payment of
the Loan in-full as provided in paragraph 12 above.‛ Paragraph
12 allows Gunnison to collect reasonable expenses and
enforcement costs from each loan payment received but
distributes all other loan proceeds proportionally, subject to
paragraph 6. Paragraph 12 states,
All loan payments received shall be applied, first,
to reimburse [Gunnison] for reasonable costs and
expenses . . . incurred by [Gunnison] in enforcing

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the terms of the Loan . . . . All other amounts received
under the Loan shall be divided between [Gunnison]
and [Holladay] (as late fees, principal or interest as
provided in the Loan documents) in accordance
with their respective percentages of ownership
interest in the Loan, but specifically subject to the
provisions of paragraph 6 above.
(Emphasis added.) And paragraph 6 requires that Holladay
receive all principal payments until its investment is fully repaid:
As the borrower repays the Loan, [Gunnison] and
[Holladay] will receive interest in proportion to
their respective balances and percentage
ownership interests in the loan. Principal payments
will be applied first to the balance of [Holladay] until
[Holladay’s] disbursements of principal have been fully
paid and satisfied. Once *Holladay’s+ disbursements
of principal have been fully paid, together with all
interest and any and all reasonable costs duly
satisfied, [Gunnison] will receive the balance of the
loan proceeds.
(Emphasis added.)
¶11 The parties disagree about how paragraph 12’s reference
to paragraph 6 affects the allocation of collateral proceeds.
Holladay argues that because paragraph 6’s LIFO language
refers directly to ‚[p]rincipal payments,‛ any amounts collected
that repay principal—including proceeds of collateral—are
allocated between the parties on a LIFO basis. Gunnison argues
that Holladay’s interpretation ignores paragraph 12’s specific
reference to ‚principal‛ (along with late fees and interest) as
‚amounts received under the loan‛ that are to be allocated
proportionally among the parties. Under Gunnison’s reading,
paragraph 12’s reference to paragraph 6 does not subject the
distribution of collateral proceeds to the LIFO provision. Rather,
the paragraph 6 reference ‚denote*s+ an exception‛ to paragraph

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12’s general rule of proportional allocation—an exception that
applies exclusively to principal payments made by the borrower
while the loan is current, not to collateral proceeds generated
after default.
¶12 In interpreting a contract, appellate courts ‚look to the
writing itself to ascertain the parties’ intentions.‛ Jones v. ERA
Brokers Consol., 2000 UT 61, ¶ 12, 6 P.3d 1129. A contract is
ambiguous ‚if it is capable of more than one reasonable
interpretation because of uncertain meanings of terms, missing
terms, or other facial deficiencies.‛ Daines, 2008 UT 51, ¶ 25
(citations and internal quotation marks omitted). But terms are
not ambiguous ‚simply because one party seeks to endow them
with a different interpretation according to his or her own
interests.‛ Saleh v. Farmers Ins. Exch., 2006 UT 20, ¶ 17, 133 P.3d
428. Rather, ‚the proffered alternate interpretation . . . must be
based upon the usual and natural meaning of the language used
and may not be the result of a forced or strained construction.‛
Id. (citation and internal quotation marks omitted). ‚When an
ambiguity exists [in a contract], the intent of the parties becomes
a question of fact,‛ WebBank v. American Gen. Annuity Serv. Corp.,
2002 UT 88, ¶ 22, 54 P.3d 1139 (citation and internal quotation
marks omitted), and courts ‚may consider extrinsic evidence to
determine‛ the contract’s meaning, Interwest Constr. v. Palmer,
923 P.2d 1350, 1359 (Utah 1996).
¶13 Here, the pertinent contractual provisions that govern the
distribution of principal payments and collateral proceeds are
‚capable of more than one reasonable interpretation.‛ See Daines,
2008 UT 51, ¶ 25 (citation and internal quotation marks omitted).
The district court agreed with Holladay and determined that the
LIFO provision in paragraph 6 applies to collateral proceeds,
reasoning that ‚*p+aragraphs 12 and 13 clearly apply in default
circumstances, and paragraph 12 refers back to the [LIFO]
payment provisions specified by paragraph 6.‛ The court
concluded that the only way to give ‚effect to all of the
provisions of the contract‛ was therefore to hold that the LIFO
‚repayment scheme applies to proceeds received whether

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through repayment by the borrower or by default and sale of
collateral.‛
¶14 The district court’s interpretation of the contract is not
‚the result of a forced or strained construction‛ of its pertinent
provisions. See Saleh, 2006 UT 20, ¶ 17 (citation and internal
quotation marks omitted). Rather, the contract contains language
that seems to characterize the entire scope of Holladay’s
relationship with Gunnison as ‚last in, first out,‛ rather than
establishing only a limited exception for borrower principal
repayments. For example, paragraph 6 indicates that ‚the Loan
will be participated on a ‘last in, first out’ basis, by *Holladay+‛
and that ‚*p+rincipal payments will be applied first to the
balance of *Holladay+ until *Holladay’s+ disbursed principal and
interest have been fully paid and satisfied.‛ And paragraph 12’s
provisions regarding the application of ‚amounts received under
the loan . . . as late fees, principal or interest‛ can be read as
‚specifically subject to‛ paragraph 6. Considering each provision
‚in relation to all of the others,‛ see Cafe Rio, Inc. v. Larkin–
Gifford–Overton, LLC, 2009 UT 27, ¶ 25, 207 P.3d 1235 (citation
and internal quotation marks omitted), paragraph 13C’s
direction that ‚the proceeds of all collateral . . . shall be
applied . . . to the payment of the Loan in-full as provided in
paragraph 12‛ could reasonably be read to include collateral
proceeds as one type of principal payment to which paragraph
6’s LIFO provision applies. See Central Fla. Invs., Inc. v. Parkwest
Assocs., 2002 UT 3, ¶ 12, 40 P.3d 599 (‚In evaluating whether the
plain language [of a contract] is ambiguous, we attempt to
harmonize all of the contract’s provisions and all of its terms.‛).
After all, one way a borrower might ultimately repay a loan is
through the sale of collateral the borrower pledged to secure
payment of the underlying debt.
¶15 But the district court’s approach, while reasonable, is not
the only way to interpret the agreement. In fact, it may be just as
reasonable to read paragraphs 6, 12, and 13C as establishing a
general rule of proportional allocation for all loan proceeds—
including proceeds of collateral—with an exception for borrower

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repayments made before default. Paragraph 13C, the only
provision that expressly mentions collateral proceeds, states that
the proceeds of collateral ‚shall be applied . . . as provided in
paragraph 12.‛ Paragraph 12 allows Gunnison to deduct the
costs and expenses of enforcing the contract from all loan
payments and then provides that ‚*a+ll other amounts received
under the Loan shall be divided‛ between the parties ‚as late
fees, principal or interest . . . in accordance with their respective
percentages of ownership interest in the Loan,‛ subject only to
paragraph 6. This language can support an inference that the
parties anticipated that during the course of the loan,
circumstances could arise in which principal would be allocated
proportionally among the parties. If the proviso that follows—
‚but specifically subject to the provisions of paragraph 6,
above‛—is read to subject all principal recoveries to LIFO, as
Holladay argues, it arguably defeats the proportional allocation
of principal that was set up as an apparently general rule in the
preceding clause. See Encon Utah, LLC v. Fluor Ames Kraemer,
LLC, 2009 UT 7, ¶ 28, 210 P.3d 263 (declining to interpret a
contract in a way that rendered ‚any provision meaningless‛).
¶16 While paragraph 6 does provide that Gunnison will not
receive any principal payments until ‚*Holladay’s+
disbursements of principal have been fully paid,‛ that language
can be read to fall within the constraints of the introductory
clause, ‚As the Borrower repays the loan.‛ And paragraph 6’s
direction that ‚*l+oan fees, extension fees and expenses, if any,
shall be paid promptly upon receipt thereof from the Borrower‛
suggests that paragraph 6 applies only in the context of ongoing
borrower repayments. The concept of borrower repayment
contemplated by paragraph 6 seems to fit the context of a
performing loan where the borrower is making regular
payments but may not fit nearly as well the circumstances where
the repayment of principal results from the forced disposition of
collateral after the borrower’s own payments have stopped.
Therefore, in light of paragraph 12’s proportional allocation of
principal and paragraph 13C’s directive that collateral proceeds
‚shall be applied . . . as provided in paragraph 12‛—not

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20120400-CA 11 2014 UT App 17
paragraph 6—that phrase arguably limits paragraph 6’s
application to borrower payments made before default rather
than subjects all principal payments to LIFO. Read this way,
paragraphs 6, 12, and 13C could arguably establish a general
rule of proportional allocation, with a LIFO exception that
applies only to borrower repayments while the loan is
performing and not to collateral proceeds realized only after the
borrower’s default.
¶17 Additionally, the contract can arguably be read as a whole
to establish a general rule of proportional allocation to which
LIFO is a specific exception. Paragraph 4 divides $20,000 in loan
fees proportionally, allocating $13,750 (68.75%) to Gunnison and
$6,250 (31.25%) to Holladay. It further provides that extension
fees ‚shall be shared by *Gunnison+ and *Holladay+ in
proportion to their respective percentage ownership interests in
the Loan.‛ Paragraph 12 allocates ‚[a]ll other amounts received
under the Loan . . . as late fees, principal or interest‛
proportionally, and paragraph 13D entitles Holladay to ‚share‛
proceeds from the sale of other collateral that Gunnison decides
to apply to the loan. Even paragraph 6, which contains the LIFO
provision, directs that ‚*l+oan fees, extension fees and expenses,
if any, shall be paid . . . in accordance with paragraph 4, above or
elsewhere in the agreement, or, if not specified in this agreement,
then in proportion to their respective percentage ownership interests in
the Loan.‛ (Emphasis added.) Indeed, other than paragraph 6’s
provision that Holladay will receive all principal payments on a
LIFO basis ‚*a+s the Borrower repays the Loan,‛ all other loan
payments and proceeds are allocated proportionally.
¶18 Even if Gunnison’s interpretation is arguably more
reasonable than Holladay’s and the district court’s, that does not
mean the contract is unambiguous. So long as competing
interpretations are reasonably based on the natural and ordinary
meaning of the terms of the contract and generally consistent
with interpretive canons, both fall within the permissible
spectrum of reasonability that courts use to determine
ambiguity. Saleh v. Farmers Ins. Exch., 2006 UT 20, ¶ 17, 133 P.3d

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428; see also Merrick Young Inc. v. Wal-Mart Real Estate Bus. Trust,
2011 UT App 164, ¶ 18, 257 P.3d 1031 (‚To be ambiguous, both
interpretations must be plausible in the context of the contract as
a whole.‛). Despite evidence in the contract’s structure and
pertinent terms supporting Gunnison’s position, paragraph 6
still contains language that cuts the other way, appearing to
characterize the parties’ entire relationship as LIFO, not just the
allocation of principal payments while the loan is current,
particularly paragraph 6’s introductory language, which states
that ‚the Loan will be participated on a ‘last in, first out’ basis,
by [Holladay+.‛ Gunnison’s reading of the contract does not
account for this rather comprehensive characterization of the
nature of Holladay’s participation, and interpreting the
contract’s pertinent provisions with this in mind supports a
reasonable conclusion that collateral proceeds are subject to
LIFO. At the same time, Holladay cannot fully explain why, if
the parties intended to allocate proceeds of collateral on a LIFO
basis, they decided to include a reference in the contract’s only
default provision to a paragraph that allocates loan proceeds
proportionally.
¶19 Under Holladay’s interpretation, drafting paragraph 12 to
include a proviso making it subject to paragraph 6 may simply
have been an inartful way for the parties to not only provide
Holladay with an accelerated payout of its investment in the
loan, but also to reduce Holladay’s risk on default. Under
Gunnison’s reading, it may have been a way to maximize
Holladay’s return on investment by giving it the benefit of ‚last
in, first out‛ so long as the loan was current, but requiring it to
share the risk with Gunnison if the borrower defaulted. Both
approaches are arguably commercially reasonable and find
support in the language and structure of the contract. But
without more evidence of the parties’ actual intent, it is
impossible to conclusively rule out either possibility; even if one
approach seems more likely than another, neither is
unreasonable. Consequently, the natural meaning of the
language in the contract is ‚capable of more than one reasonable
interpretation,‛ see Daines v. Vincent, 2008 UT 51, ¶ 25, 190 P.3d

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1269 (citation and internal quotation marks omitted), and the
contract is therefore ambiguous.
¶20 Where a contract is ambiguous, summary judgment is
appropriate only if extrinsic evidence of the parties’ intent,
‚viewed in the light most favorable to the nonmoving party,
leaves no genuine issues of fact to be resolved.‛ Peterson v.
Sunrider Corp., 2002 UT 43, ¶ 24, 48 P.3d 918. The only extrinsic
evidence in the record regarding the parties’ intent is the
affidavit testimony Gunnison submitted to the district court, and
both affidavits indicate that the parties intended to share
collateral proceeds according to their respective ownership
interests and not on a LIFO basis. Holladay provided no
contrary evidence, nor did it file a formal rule 56(f) motion to
conduct additional discovery.
¶21 For the following reasons, however, we conclude that
remand is appropriate rather than a final ruling in Gunnison’s
favor. First, Holladay requested ‚the opportunity, pursuant to
Utah R. Civ. P. 56(f), to conduct discovery on the parties’ intent‛
in its memorandum opposing Gunnison’s motion for summary
judgment. At a subsequent hearing on the motion, Holladay’s
counsel acknowledged that this request was insufficient, but he
pointed out that Gunnison submitted the affidavits after the
close of discovery and asked for leave to file a rule 56(f) motion
if the court ruled that the contract was ambiguous. The court
ruled that the contract was unambiguous, mooting Holladay’s
request. It is therefore unclear whether the court would have
allowed Holladay to offer extrinsic evidence if it had
determined, as we do, that the contract is ambiguous.
¶22 Second, Holladay raised some credibility concerns about
Gunnison’s affiants that were also left unresolved due to the
nature of the court’s ruling. It has become something of an
appellate truism that appellate courts leave credibility
determinations to the district courts because they ‚are in the best
position to assess the credibility of the witnesses and to gain a
sense of the proceeding as a whole.‛ Valcarce v. Fitzgerald, 961

Holladay v. Gunnison
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P.2d 305, 314 (Utah 1998). Finally, on appeal Gunnison has not
asked this court to resolve ambiguities in the contract and order
entry of summary judgment in its favor. Rather, in both its
opening brief and reply brief, it requests that the summary
judgment ruling ‚be vacated and the case remanded for
consideration of extrinsic evidence offered as to the intent of the
parties.‛ We see no compelling reason to go beyond the
requested relief and therefore remand the matter to the district
court to consider appropriate evidence as to the parties’ intent
with regard to the distribution of the proceeds of collateral
under their agreement. How the district court approaches this
task is left to its best judgment under all the circumstances.
CONCLUSION
¶23 We conclude that the contract is ambiguous regarding the
allocation of collateral proceeds between the parties. We
therefore vacate the district court’s order awarding summary
judgment to Holladay and remand for consideration of extrinsic
evidence regarding the parties’ intent.