The need for careful drafting of participation agreements between banks was brought home by the Utah Supreme Court’s ruling in Holladay Bank & Trust v. Gunnison Valley Bank, 2014 UT App 17, 2014 WL 266289 (Utah App. 2014). In Holladay Bank, Gunnison Valley Bank and Holladay Bank entered into a participation agreement relating to a substantial loan extended by Gunnison for the construction of a luxury home. The participation agreement provided that Gunnison fund its portion of the loan first, and Holladay fund its portion last. Gunnison foreclosed following the borrower’s default, and a dispute arose between the banks over the allocation of the sales proceeds which were insufficient to cover the loan. Litigation between the banks ensued. The participation agreement provided in one section that, “as the Borrower repays the loan,” Holladay would receive all principal payments pursuant to the “last in, first out” provisions of the agreement, until its principal was paid in full, with Gunnison to receive principal payments thereafter. Another section of the agreement provided that, after payment of collection costs to Gunnison, all amounts received were to be divided between the banks in accordance with their respective percentages of ownership interest in the loan.
Both banks argued in connection with Gunnison’s motion for summary judgment that the language of the participation agreement was unambiguous and they were entitled to judgment. Gunnison asserted an alternative argument that the language was, in fact, ambiguous and provided the trial court with two affidavits from Gunnison’s vice president and Holladay’s former president and CEO, both of whom were involved in the transaction. Both affidavits supported Gunnison’s position that the proceeds from a foreclosure sale were to be divided pro rata based on the amounts owed to the banks and not pursuant to the last in, first out method asserted by Holladay. The trial court held the participation agreement was unambiguous, refused to consider the two affidavits, and ruled in Holladay Bank’s favor.
The Utah Court of Appeals reversed and remanded. In explaining its analysis, the court started with the ruling that a contract is ambiguous if its pertinent terms are “capable of more than one reasonable interpretation.” Of course, the court noted that an appellate court looks to the writing itself to ascertain the parties’ intentions. A party’s attempts to endow a contract’s language with an interpretation according to his or her own interests will not render the language ambiguous; rather, the court said a contract is ambiguous when “competing interpretations are reasonably based on the natural and ordinary meaning of the terms of the contract and generally consistent with interpretive canons.” In other words, “to be ambiguous, both interpretations must be plausible in the context of the contract as a whole.”
In the present case, the appellate court determined that the participation agreement could, using the natural and ordinary meaning of the language in light of interpretive canons as entitling Holladay to be paid first or requiring the sale proceeds to be divided pro rata. Therefore, the court ruled the contract was ambiguous and remanded the matter to the trial court.