Two competing interpretations of a “LIFO” clause can both be reasonable, and, even if one interpretation is more reasonable than the other, it does not mean the contract is unambiguous and that summary judgment is appropriate.

In Holladay Bank & Trust v. Gunnison Valley Bank, 752 Utah Adv. Rep. 21, 2014 UT App 17, the Court of Appeals of Utah (the “Court”) held that a district court erred in granting summary judgment to one party in a dispute over the terms of a contract, which included a “last in, first out” (“LIFO”) clause, without considering extrinsic evidence proffered by the other party because the contract terms were capable of more than one reasonable interpretation, and thus were ambiguous.

In April 2007, Gunnison Valley Bank (“Gunnison”) agreed to finance the construction of a $1.6 million residence in Utah. Soon after issuing the loan, Gunnison entered into a loan participation agreement (the “Contract”) with Holladay Bank & Trust (“Holladay”) under which Holladay purchased a 31.25% participation in the loan for $500,000. Per the terms of the Contract, Holladay would only fund its portion of the loan after Gunnison had disbursed its committed amount. After both parties had funded the loan, the borrower defaulted in 2008. Gunnison bought the property at a foreclosure sale. However, the value of the property was insufficient to pay off the balance on the loan, and Gunnison and Holladay could not reach agreement on the allocations of proceeds from a sale of the property.

In 2011, Holladay filed a declaratory judgment action in the district court, and both parties filed cross-motions for summary judgment. Holladay argued that the Contract contained a LIFO repayment mechanic that also applied to the distribution of collateral proceeds. First, Holladay pointed to the fact that it funded its portion of the loan after Gunnison. Next, it pointed to paragraph 6 of the Contract (which contained the LIFO clause) which stated, in part, that as the borrower repaid the loan, principal payments would first be applied to Holladay’s balance until Holladay’s disbursed principal and interest had been fully satisfied.

Gunnison, in turn, pointed to paragraph 12 of the Contract (the “Application of Payments” paragraph) which stated that, after reimbursing Gunnison for costs incurred enforcing and administering the loan, “[a]ll 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”. Gunnison also pointed to paragraph 13C of the Contract (the only paragraph dealing with collateral proceeds), which stated that the proceeds of collateral securing the loan were to be applied “first to the payment of the Loan in-full as provided in paragraph 12 above”. With paragraphs 12 and 13C in mind, Gunnison argued that the LIFO mechanic only controlled while the loan was current and that the qualifier in paragraph 12 (stating that the section was subject to the provisions of paragraph 6) was pertinent only to the extent the Borrower was actually making payments on the loan. Holladay conversely argued that the qualifying language in paragraph 12 demonstrated that principal was to be paid on a LIFO basis whatever its source.

Gunnison argued in the alternative that the Contract was ambiguous and that extrinsic evidence--specifically affidavits from relevant officials at each bank stating that the parties intended to distribute proceeds from the sale of collateral in proportion to their respective ownership interests in the loan (and not based on the LIFO mechanic) --supported its position. Declining to review the affidavits, the district court granted summary judgment in favor of Holladay holding that the Contract was unambiguous and that the LIFO mechanic applied to sales of collateral upon default.

On appeal, the Court of Appeals first noted that summary judgment is only appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Then, citing Daines v. Vincent, 2008 UT 51, ¶ 25, 190 P.3d 1269, the Court held that the pertinent terms of the Contract were ambiguous because they were “capable of more than one reasonable interpretation”. Although the Court held that the district court’s finding that the LIFO mechanic applied to the division of collateral was reasonable, it further held that the district court’s interpretation was not the only reasonable interpretation of the three pertinent paragraphs. Specifically, the Court reasoned that that it could be just as reasonable, if not more so, to read the paragraphs as establishing a general rule of proportional allocation for all loan proceeds, including proceeds of collateral, with an exception for the borrower’s repayments prior to a default. However, the Court cautioned that, even if one party’s interpretation is arguably more reasonable than the other’s, it does not mean the contract is unambiguous. Assuming the parties’ competing interpretations were reasonably based on the natural and ordinary meaning of the terms of the contract and generally consistent with interpretive canons, the Court, citing Saleh v. Farmers Ins. Exch., 2006 UT 20, ¶ 17, 133 P.3d 428, held that both could fall on the reasonability spectrum courts use to determine ambiguity.

Given the Contract’s ambiguity, the Court held that the district court should have considered the extrinsic evidence to determine the parties’ intent prior to any entry of summary judgment and remanded the case for such further review.