No. 86-231
IN THE SUPREME COURT OF THE STATE OF MONTANA
1987
DANIEL NOONAN and LEO NOONAN,
d/b/a EXCELSIOR MEATS,
Plaintiffs and Respondents,
-vs-
FIRST BANK BUTTE, a Corporation,
Defendant and Appellant.
APPEAL FROM: District Court of the Second Judicial District,
In and for the County of Silver Bow,
The Honorable Mark P. Sullivan, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
James A. Robischon argued, Kalispell Montana
For Respondent:
John Doubek argued ; Small, Hatch, Doubek & Pyfer,
Helena, Montana
Submitted: April 3 , 1987
Decided: J u l y 1 1 1987
Filed :
JUL 1 - 1987
Clerk
Mr. Justice Fred J. Weber delivered the Opinion of the Court.
This is an appeal from a jury verdict and judgment
entered by the District Court of the Second Judicial Dis-
trict, Silver Bow County, in favor of the Noonans and against
First Bank Butte (FBB) . The jury awarded the Noonans
$800,000 for loss of profits, wages, business opportunities,
and credit, and $700,000 for emotional distress. We reverse
and remand for a new trial.
FBB raises nine issues on appeal. The case requires a
new trial based on two of the issues raised. First, the jury
was improperly instructed on the tort of bad faith, and
second, the jury was improperly instructed on emotional
distress. For the guidance of court and counsel on remand,
we also discuss the issues of whether the jury should have
been instructed on both the implied and statutory duties of
good faith, the propriety of excluding certain testimony of
an attorney for the Noonans, and whether the jury should have
been instructed on negligence. Because we remand the case
for new trial, we will not address the issues raised by FBB
on sufficiency of the evidence.
Excelsior Meats was a partnership in Butte, Montana,
operated by brothers Leo and Dan Noonan. Leo and Dan both
have limited educational backgrounds and began working in the
family business at a young age. Leo took care of the busi-
ness aspect of the partnership and Dan worked in the store.
Leo also operated a cattle feedlot. The cattle from the
feedlot were sold to Excelsior Meats. Dan began his own
feedlot operation in May 1981, and also sold cattle to the
partnership.
Larry Dwyer was a loan officer at FBB. He had known Leo
and Dan Noonan for a long time. There is a conflict in the
testimony as to whether Mr. Dwyer first approached Leo Noonan
or vice versa, but in 1973, FBB began loaning money to Leo
Noonan. The initial loan was for $7,000 to purchase cattle.
The Noonans maintained a large checking account balance at
FBB and promised to transfer $12,000 in certificates of
deposit to FBB. No security was required for the loan.
Leo Noonan continued to borrow from FBB and by April
1975 had over $77,000 on loan. In 1975, FBB also loaned the
Noonans $100,000 to expand their meat market building. This
loan was secured by a real estate lien on their property.
In November 1980, John Johnson took over the Noonan
loans at FBB. At that time, the loans to Leo Noonan and the
partnership totaled almost $200,000, excluding the real
estate loan. The loans were secured by feedlot cattle,
inventory, accounts receivable, furniture, and fixtures of
the meat market. When he took over the loans, Mr. Johnson
requested financial statements and tax returns. Bob Prigge,
a CPA and the Noonans' accountant, prepared the financial
statements.
Mr. Johnson testified that at the time he believed the
Excelsior Meats' financial statements supported FBB's loans
to the Noonans. However, because the statements reflected
only the Excelsior Meats' partnership income, they did not
accurately show the profitability or debt of the total Noonan
operations. Leo Noonan's feedlot business, which lost money
in every year between 1977 and 1981, was not reflected in the
financial statements. Mr. Prigge testified that he offered
to provide tax returns for the feedlot operation but that Mr.
Johnson refused. Mr. Johnson testified that he was not
informed that the financial statements given to him were
incomplete.
The financial statements did not disclose that between
1978 and 1981 the Noonans borrowed $125,000 from K.B. Wil-
liams, or that they borrowed $45,000 in 1980 from the
McLaughlins. Of even greater significance, the Noonans did
not disclose to anyone in FBB and the financial statements
did not disclose $220,000 owed by Leo Noonan to Miners Bank
at the end of 1980, and $93,000 owed by Dan Noonan to Montana
Bank in August 1981.
Based on the financial statements, Mr. Johnson renewed a
$70,000 loan to Leo Noonan and the partnership in November
1981, and a $250,000 loan in December of the same year. The
$70,000 loan was due on demand and was secured by certifi-
cates of deposit on account with FBB. The $250,000 loan was
due in November 1982 and was secured by 220 head of steers at
the feedlot, and by the inventory, accounts receivable,
furniture, and fixtures at Excelsior Meats.
In March 1982, Leo Noonan received a letter from Miners
Bank requiring payment of one of his delinquent loans. He
contacted his attorney, who arranged a meeting with Miners
Bank and FBB. At that meeting the Noonans disclosed debts of
$980,156.54. Their assets, as of their most recent financial
statement, for fiscal year 1980, were $509,800. This infor-
mation is contained in defendants' Exhibit 10, introduced at
trial.
On learning of the financial position of the Noonans,
FBB contacted its attorneys. On their advice, and acting
under the default provision of its security agreement, FBB
froze the assets in the Noonans' partnership checking account
and cashed in their certificates of deposit. The Noonans'
counsel presented a workout plan to all three banks, but FBB
refused to go along with the plan. In April 1982, FBB took
control of and liquidated Excelsior Meats pursuant to an
authorization for peaceful repossession of collateral signed
by Leo and Dan Noonan.
Leo and Dan Noonan filed for bankruptcy individually and
on behalf of the partnership in June 1982. They received
discharges in bankruptcy in October 1982. After the dis-
charges, they paid $9,432 to bring current their mortgage
payments to FBB and $8,100 to bring current other obligations
on the market, including repair bills caused by FBB's repos-
session of the building. FBB returned the building to them,
and Dan Noonan reopened the business.
In March 1984, the Noonans sued FBB. Dan Noonan testi-
fied his sales are approximately one-half their 1981 level,
he has a hard time getting credit, and because of the bank-
ruptcy he lost his USDA license, which enabled him to sell
wholesale. The jury returned a verdict in favor of the
Noonans for $800,000 in lost profits and $700,000 in emotion-
al distress. FBB appeals.
I
Was the jury improperly instructed on the implied cove-
nant of good faith and fair dealing?
FBB argues that the implied covenant of good faith and
fair dealing cannot apply where a statutory duty of good
faith exists. Here, a statutory duty of good faith is
present under the Uniform Commercial Code, 5 30-1-203, MCA:
Every contract or duty within this code imposes an
obligation of good faith in its performance or
enforcement.
FBB also contends that, even if an instruction on the com-
mon-law duty of good faith is allowed in this case, the one
given was inadequate.
This Court has not prohibited application of an implied
covenant of good faith and fair dealing where there is a
statutory duty of good faith present. In the past, the Court
has extended the implied duty of good faith and fair dealing
to cases involving banks dealing with their customers. In
Tribby v. Northwestern Bank of Great Falls (Mont. 1985), 704
P.2d 409, 419, 42 St.Rep. 1133, 1142, we extended the implied
covenant of good faith and fair dealing to the commercial
area of bank-customer relations. In Nicholson v. United
Pacific Ins. Co. (Mont. 1985), 710 P.2d 1342, 1347, 42
St.Rep. 1822, 1828, we noted the extension of the tort theory
to banks dealing with customers and cited Tribby and First
National Bank of Libby v. Twombly (Mont. 1984), 689 P.2d
1226, 41 St.Rep. 1948. In Northwestern Nat. Bank v.
Weaver-Maxwell (Mont. 19861, 729 P.2d 1258, 43 St.Rep. 1995,
we allowed a case of a bank-customer dispute to be remanded
for retrial on a bad faith theory. In Central Bank of Mon-
tana v. Eystad (Mont. 1985), 710 P.2d 710, 42 St.Rep. 1850,
we declined to determine whether the jury could be instructed
on both the implied duty of good faith and fair dealing and
the statutory duty of good faith imposed by 5 30-1-203, MCA,
as part of the Uniform Commercial Code. Instead, we found
that there was sufficient evidence as a matter of law to
support the trial court's denial of the tortious bad faith
counterclaim. We hold that both an instruction on the im-
plied covenant and an instruction on the UCC duty of good
faith may be proper in this case. Whether such instructions
are proper will depend upon the evidence submitted on
retrial.
The instruction given on the implied covenant of good
faith and fair dealing, instruction no. 24, was:
You are instructed that First Bank Butte and its
agents owed plaintiffs an implied-in-law duty of
good faith and fair dealing in the banking rela-
tionship, that it should do nothing to unnecessari-
ly deprive the plaintiffs of the benefits
associated with the banking relationship between
the parties. The duties or obligations arising
from the banking relationship between the parties
imposed an obligation of good faith in both the
performance and enforcement of those duties and
obligations. Good faith is defined as honest (sic)
in fact in the conduct or relationship concerned.
If you find that First Bank or its agents violated
this obligation imposed by law, the plaintiffs are
entitled to be compensated for all of the detriment
or injury proximately caused thereby whether that
detriment or injury could be anticipated or not.
This instruction is virtually identical to an instruction
given in McGregor v. M o m e r (Mont. 1986), 714 P.2d 536, 546,
43 St.Rep. 206, 218. It defines good faith as "honesty in
fact", which is the definition given in the Uniform Comer-
cia1 Code, (5 30-1-201(19), MCA. We held in McGregor that
breach of the UCC standard of honesty in fact is not enough
to constitute a tort. The minimal requirement for the tor-
tious breach of the covenant of good faith and fair dealing
is action by the defendant which was arbitrary, capricious or
unreasonable, and exceeded plaintiffs' justifiable expecta-
tion. McGregor, 714 P.2d at 543. The instruction given in
this case inadequately defined the tort. We hold, as in
McGregor, that giving of this instruction is reversible
error.
I1
Did the lower court erroneously instruct the jury on
damages for emotional distress and mental anguish?
Instruction no. 20 on emotional distress read:
You are instructed that the law does not prescribe
any definite standard by which to compensate an
injured person for emotional distress or mental
anguish. This case does not require that any
witness should have expressed an opinion as to the
amount of damages that would compensate for such
injury. The law does require, however, that when
making an award for emotional distress or mental
anguish, the jury shall exercise calm and reason-
able judgment. If you find for plaintiffs, you
must award them damages for all emotional distress
and mental anguish suffered as a result of the
defendant's conduct. The damages must be just and
reasonable.
Notwithstanding the substantial amount of damages award-
ed for emotional distress, the record is devoid of signifi-
cant evidence on this point. There was no medical testimony
indicating emotional distress. The only testimony on this
issue was the testimony of the Noonans themselves, and they
made only general statements of mental strain and stress,
inability to sleep, and stiffness. As a result, the state-
ment in the above jury instruction that damages "must" be
awarded may have misled the jury, especially in view of their
$700,000 damage award for emotional distress.
The instruction given is, in relevant part, identical to
an instruction given in McGregor. There, we held the jury
instruction in effect directed a verdict on emotional dis-
tress because it stated the jury must award damages for all
emotional distress suffered. We cited Johnson v. Supersave
Markets, Inc. (Mont. 1984), 686 P.2d 209, 41 St.Rep. 1495, as
authority for the proposition that we do not yet live in an
eggshell society where every harm to a property interest
gives rise to a right of action for mental distress. We said
that mental distress is compensable absent a showing of
physical or mental injury only if the tortious conduct re-
sults in a substantial invasion of a legally protected inter-
est and causes a significant impact on the person of the
plaintiff. McGregor, 714 P.2d at 544-45. Another instruc-
tion given in this case improperly required the jury to award
damages for emotional distress without a finding of a sub-
stantial invasion of a legally protected interest and a
significant impact on the person of the plaintiffs. We hold
that the trial court erred in giving this instruction.
I11
Did the trial court err in excluding testimony of Wil-
liam Kebe, the Noonans' attorney during some of the time at
issue in this action?
Attorney William Kebe represented the Noonans prior to
and during the foreclosure of Excelsior Meats. At trial, FBB
attempted to elicit testimony from Mr. Kebe about his impres-
sions and observations as to whether FBB's conduct consti-
tuted bad faith, and about certain discussions he had with
attorneys for FBB and Miners Bank. The District Court ap-
plied the attorney-client privilege and ruled the testimony
inadmissible.
In Kuiper v. Dist. Court of Eighth Judicial Dist. (Mont.
1981), 632 P.2d 694, 38 St.Rep. 1288, we held that the
attorney-client privilege applies to communications made by a
client to his attorney and legal advice given in response in
the course of professional employment. Section 26-1-803,
MCA. The District Court correctly excluded testimony by Mr.
Kebe on his evaluation of the Noonans' legal position because
it was covered by the attorney-client privilege. Conversa-
tions occurring in the presence of third parties are not
privileged. Jones v. Jones (Mont. 1980), 620 P.2d 850, 852,
37 St.Rep. 1973, 1976. In this case, the District Court
correctly allowed FBB to elicit testimony from Mr. Kebe as to
the conversations that took place at the meeting between bank
officials, attorneys, and the Noonans. However, the District
Court excluded Mr. Kebe's testimony about his conversations
with third parties when the Noonans were not present. These
conversations are not protected by the attorney-client privi-
lege. On retrial, the District Court shall allow Mr. Kebe to
testify about his conversations with third parties, whether
or not the Noonans were present.
IV
Did the trial court err in submitting the negligence
theory to the jury?
FBB asserts that the jury should not have been separate-
ly instructed on negligence. We discuss the instruction
because the case is returned for retrial. We have approved
an instruction on a separate negligence theory in the
employer-employee context of an action alleging breach of the
implied covenant of good faith and fair dealing. Flanigan v.
Prudential Federal Sav. & Loan (Mont. 1986), 720 P.2d 257,
263, 43 St.Rep. 941, 948; Crenshaw v. Bozeman Deaconess Hosp.
(Mont. 1984), 693 P.2d 487, 493, 41 St.Rep. 2251, 2259.
However, such an instruction must be supported by the plead-
ings and the evidence. We conclude that, on retrial, a
negligence instruction may properly be given if the court
concludes that the allegation of negligence is established in
the pleadings and if the proof establishes a claim for the
elements of negligence, including unreasonable conduct on the
part of the bank.
Reversed and remanded for new trial.
Justices
Mr. Justice John C. Sheehy, dissenting:
I dissent. The majority opinion leaves the Noonans
bereft and gelded of their just verdict which arose from the
unjust actions of the Bank.
The evidence heard by the jury was not cast in the form
reported by the majority opinion. Instead the jury heard of
business perfidy which the Bank could not deny and on which
the jury based a necessarily substantial verdict.
The Noonan's were a respected business family in Butte.
They had limited education, they were not country club folk,
but they were hard working and industrious. The Bank's
representative, Dwyer, saw their potential, and sought to
obtain all of their banking business. It was through the
Bank's agent that loans were originally made, without the
requirement of financial statements or other financial data,
and against the Bank's own protocol. Expansions of buildings
and operations were counseled by the Bank and the promise was
both expressed and implied that the money needed for their
expanding operations would be supplied by the Bank.
When the Noonan's obtained loans, they signed whatever
security agreements were required by the Bank and it is
undisputed in this case that for the loans given, the Bank
had a first position with respect to the assets and
collateral which the Bank had required in making the loans.
The president of the Bank became furious when he learned
that the Noonans had been borrowing money from other banks.
On March 31, 1982, the Bank gave notice of default to the
Noonans, based on the opinion of the Bank that the financial
conditions and affairs of the borrower impaired the Rank's
security, increased its risk, and that the Bank deemed itself
insecure. When the notice was given, the Noonans had
faithfully made the payments which were due to Bank. They
were not in default as to any payment and the Bank had a
first position with respect to the collateral which it had
demanded. Nonetheless the Bank after March 31, 1982, stopped
all payments out of Noonans' checking account with the Bank,
seized $70,000 in certificates of deposit which the Noonans
had put up for collateral, and obdurately refused to
cooperate to keep the Noonans in business. The Noonans were
forced into bankruptcy. Thus did the Noonans lose the
business which had been operated by their family for over 40
years.
That in brief was the factual background which led this
jury, acting responsibly, to award the Noonans $800,000 for
loss of profits, wages, business opportunities, and credit,
and $700,000 for emotional distress.
The reversal of the judgment in this case on the ground
of Instruction No. 24 is terribly unfair. The majority have
disregarded the fact that this case was tried under the
standards of good faith enunciated in the Uniform Commercial
Code. Here the majority strikes Instruction No. 24 because
"the minimum requirement for the tortious breach of the
covenant of good faith and fair dealing is actions by the
defendant which are arbitrarily, capricious, or unreasonable,
and exceeded plaintiff's justifiable expectation." That
statement finds its origin in Nicholson v. United Pacific
Insurance Company (Mont. 1985), 710 P.2d 1342, 42 St-Rep.
1822.
Instructions based on Nicholson would be out of place in
a trial of this case. The ~oonans'transactionswith the Bank
were evidenced by commercial paper. As such, the instruments
were covered by the Uniform Commercial Code. Section
30-3-101, et. seq. MCA. Under the Uniform Commercial Code,
there is a statutory, as distinguished from a common law
obligation of good faith. Section 30-1-203, MCA, provides
that:
Every contract or duty within this code imposes an
obligation of good faith in its performance or
enforcement.
Furthermore, under the Uniform Commercial Code, good
faith is defined as "honesty in fact in the conduct or
transaction concerned." Section 30-1-201(19), MCA.
The District Court in this case regarded the provisions
of the Uniform Commercial Code, and instructed the jury
accordingly.
This theory of recovery was acceded - by - -
to the Bank,
because the instructions offered by the Bank and given by the
court parallel Instruction No. 24. Those instructions
offered by the Bank were court instructions No. 19 and 26.
We set them out as follows:
INSTRUCTION NO. 19
You are instructed that both parties in a
commercial relationship, such as existed between
plaintiffs and defendant in this case, have the
duty to deal fairly and in good faith with each
other. Good faith is defined as meaning honesty in
fact and observance of reasonable standards of fair
dealing in the trade.
Therefore in this case, if you find that defendant
did some dishonest act that harmed the plaintiffs;
or that Defendant failed to observe reasonable
standards of fair dealing in the transactions with
plaintiff, then defendant acted in bad faith and is
liable to the plaintiffs for any damages
proximately caused thereby.
Conversely, if you find that defendant did not act
in a dishonest manner or fail to observe reasonable
standards of fair dealing in its transactions with
plaintiffs, then defendant did not act in bad faith
and is not liable to the plaintiffs for any losses
or damages claimed.
INSTRUCTION NO. 26
You are instructed that a term in a promissory note
or security agreement providing that the lender may
accelerate payment or performance "at will" or
"when he deems himself insecure", or in words of
similar import, mean that he shall have power to do
so only if he in good faith believes that the
prospect of payment or performance is impaired.
The burden of establishing lack of good faith is on
the party against whom the power has been
exercised, the plaintiffs, in this case.
There is not a dime's worth of difference between the
instructions offered in this case by the Bank, and
Instruction No. 24 which this Court uses to reverse the
plaintiffs' verdict.
The majority has failed to distinguish that McGregor v.
Mommer (Mont. 1986), 714 P.2d 536, 43 St.Rep. 206 was a
common law implied covenant of good faith action to which the
Nicholson definition applied from this action based on
commercial paper, to which the Uniform Commercial Code
applies. The instructions in this case were proper.
Finally, the majority have misinterpreted McGregor - v.
Mommer, supra, as to the impact of Instruction No. 20 on
emotional distress.
In McGregor, the use of the word "must" in the
instruction was held improper because damages for emotional
distress are a tort remedy, and the jury in McGregor may have
misinterpreted the instruction as applying to recovery on a
contract claim. 714 P.2d at 544. The language of
Instruction No. 24 is not improper in this tort claim,
because the language is conditioned first, on finding for the
plaintiff on tort and secondly, that the emotional distress
is a result of the defendant's conduct. The decision of the
majority to reverse the emotional distress award seems to be
based on insufficiency of the evidence to support the award
which of course we should leave to the jury. It can be
charitably said that the majority see no adverse emotional
impact on the Noonans who saw their family business that had
been 40 years abuilding crumble and disappear through the
unfair conduct of the Bank.
I join in the foregoing dissent of Mr. ~ u s w e
John C Sheehy.
.