No. 89-239
IN THE SUPREME COURT OF THE STATE OF MONTANA
COLES DEPARTMENT STORE,
plaintiff and Appellant,
-vs-
FIRST BANK (N.A.)-BILLINGS and
FIRST BANK SYSTEM, INC.,
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial ~istrict,
In and for the County of Yellowstone,
The Honorable Robert Holmstrom, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
A. Clifford Edwards; Anderson, Edwards & Molloy,
Billings, Montana
For Respondent :
Gerald B. Murphy and T. Thomas Singer; Moulton,
el ling ham, Longo & Mather, Billings, Montana
Submitted on Briefs: Sept. 27, 1989
Decided: December 1 2 , 1989
Chief Justice J. A. Turnage delivered the Opinion of the Court.
Coles Department Store (Coles) appeals from summary judgment
granted to defendants First Bank (N.A.)-Billings and First Bank
System, Inc. The District Court for the Thirteenth Judicial
District, Yellowstone County, ruled that Coles had failed to make
a case that the defendants1 actions, which Coles claimed led to the
closing of the store, were wrongful under any theory pled. We
affirm.
The issues are:
1. Did the District Court err in granting judgment to
defendants on Colest claim that defendants breached a fiduciary
duty they owed to Coles?
2. Did the District Court err when it found that defendants'
actions did not amount to actual or constructive fraud?
3. Did the District Court err in entering judgment in favor
of defendants on Colesl claim of breach of the statutory obligation
of good faith and fair dealing?
4. Did the District Court err in granting judgment in favor
of defendants on Colesl claim of breach of the implied covenant of
good faith and fair dealing?
Plaintiff Coles was a corporation owned by two brothers, Ron
and Bruce Simon, and, before that, by their father. The corpora-
tion operated a retail clothing store in downtown Billings for
approximately fifty years. During all that time, Coles banked with
defendants or their predecessor.
For a number of years, Colesl account at defendant bank was
handled by Tom Chakos, an old fraternity brother of Ron Simon.
Colesl practice for some time had been to execute a separate
ninety-day note each time it needed to finance operating expenses.
Thus, it would often have several notes outstanding with defend-
ants. In the fall of 1984, Chakos suggested that, instead, one
master note establishing a line of credit be used. Ron and Bruce
Simon executed a $450,000 line of credit note with a due date of
March 31, 1985. At the same time, the Simons had discussions with
Chakos about the need to reduce the expenses of Coles. The store
had lost money in six of the last eight years, losing in excess of
$53,000 in fiscal year 1983 and $81,000 in fiscal year 1984.
In March or early April 1985, Ron Simon, who was on the Board
of Directors of the defendant bank, learned that Chakos was being
transferred to another bank and would no longer be handling Colesl
credit. Ron Simon requested that Greg Lovell, a commercial loan
officer, be assigned to the account.
Colesl financial report for the fiscal year ending January
1985 became available in March. It showed losses for that year in
excess of $152,000, which reduced the shareholders' equity to
$131,000. On April 9, 1985, Greg Lovell and Ron Simon met to
discuss Coles' credit. The meeting lasted for several hours.
Lovell advised Ron Simon that he did not feel that the bank would
continue financing Coles beyond September of 1985 unless additional
capital was invested in the corporation or additional collateral,
including mortgages on Ron and Bruce Simon's homes, was provided.
In spite of Ron Simon's insistence that the bank's valuation of the
store's assets was too low and that the Simons were implementing
steps to strengthen the store's financial position, Lovell also
suggested that the best thing might be to liquidate Coles.
The day after the meeting, which he stated in a deposition
left him Ndevastated,ll Ron Simon went on a scheduled buying trip
to California. When he returned, Coles entered into a promissory
note with defendants on a $360,000 line of credit due September 10,
1985. Coles also began liquidating its assets. By August, the
defendants had been paid off and Coles' name, fixtures, inventory,
and accounts had been sold.
This action was filed in July 1987. During discovery, the
Simons learned of the existence of an "Action Plan," dated February
1985 and prepared by Tom Chakos. The l1ActionPlan" set out a time
frame for the liquidation of Coles by September 1985. Coles has
alleged breach of the implied covenant of good faith and fair
dealing, breach of fiduciary duty, negligence, breach of the
obligation of good faith under the Uniform Commercial Code, fraud
and constructive fraud. Defendants each moved separately for
summary judgment. After a hearing, the District Court granted both
motions with an order and extensive memorandum.
Did the District Court err in granting judgment to defendants
on Coles' claim that defendants breached a fiduciary duty they owed
to Coles?
This Court has set forth the following standard which
determines whether a fiduciary duty may be said to exist between
a bank and its debtor:
A fiduciary relationship exists between a bank
and its debtor only if special circumstances
indicate exclusive and repeated dealings with
the Bank. Pulse v. North American Land Title
Co. of Montana (1985), 218 Mont. 275, 707 P.2d
1105, 42 St.Rep. 1578. This Court has recent-
ly interpreted the Pulse case as requiring a
bank to act as a financial advisor in some
capacity, other than that common in the usual
arms-length debtor/creditor relationship, in
addition to requiring a long history of deal-
ings with the bank, to establish a fiduciary
relationship. Simmons v. Jenkins (Mont. 1988),
750 P.2d 1067, 1070, 45 St.Rep. 328, 331.
First Bank (N.A.) Billings v. Clark (Mont. 1989), 771 P.2d 84, 92,
In the present case, the District Court conceded that there
existed a long-term relationship between Coles and defendants. But
it found no evidence that the bank acted as a financial advisor lvin
some capacity other than that common to a usual arms-length
debtor/creditor relationship." Coles argues on appeal that Tom
Chakos acted as a financial advisor to the Simons when he suggested
that Coles use one master note for its borrowing rather than a
series of notes. Coles also points out that it was not represented
by attorneys during Ron Simon's discussion with defendant bank
regarding the operation of the store.
The depositions on file reveal that both Ron and Bruce Simon
possess advanced degrees in management and business. The brothers
had managed Coles well in excess of ten years. The depositions
also indicate that, during that entire time, decisions about the
financial management of Coles were theirs with nominal, if any,
input from bank representatives. The only time the bank could be
said to have stepped in on financial management of Coles is when
it stated its intent to cut off Coles' credit. Even then, though,
the timing and manner of liquidation of the store was controlled
by the Simons, not by the bank. We conclude that the District
Court did not err in granting judgment to defendants on the claim
of breach of a fiduciary duty.
I1
Did the District Court err when it found that defendants1
actions did not amount to actual or constructive fraud?
The nine elements of fraud are:
1. a representation;
its falsity;
3. its materiality;
4. the speaker's knowledge of its falsity or
ignorance of its truth;
5. the speaker's intent that it should be relied
upon ;
6. the hearer's ignorance of the falsity of the
representation;
7. the hearer's reliance upon the representation;
8. the hearerts right to rely upon the represen-
tation; and
9. consequent and proximate injury caused by
reliance upon the representation.
McGregor v. Mommer (1986), 220 Mont. 98, 105, 714 P.2d 536, 540.
Coles claims that defendantst failure to disclose the llAction
Planw was fraudulent. But as defendants point out, the Simons were
aware that their store was losing money and had talked to Tom
Chakos about the need to cut costs. It would be poor banking
practice if the bank had been concerned about Coles' losses.
As a member of the bank's Board of Directors, Ron Simon was aware
of proper banking practice. The essential element of the "Action
Plann--that the bank no longer wished to extend credit to Coles
without additional security--was disclosed to Ron Simon in the
April 9, 1985, meeting with Greg Lovell. We conclude that there
is no evidence of a false material representation relating to the
alleged failure to disclose the "Action Plan."
Coles claims that Greg Lovell's statements at the April 9,
1985, meeting with Ron Simon were fraudulent. There were certainly
representations made at that time, but Coles has produced nothing
to indicate that Greg Lovell's representations about the bank's
reluctance to continue financing Coles were false. Because the
element "falsity of the representation" has not been shown, Coles
has failed to show that Lovell's statements at that meeting were
fraudulent.
Coles also asserts that defendantst failure to disclose the
"Action Plan" to the Simon brothers constituted constructive fraud
because of the special and fiduciary relationship between the
parties. As discussed under Issue I, Coles did not present
adequate evidence to show a fiduciary relationship. We conclude
that Coles has not shown a special relationship between the parties
which would have required earlier disclosure of defendants'
internal memorandum (the "Action Plan"). We hold that the bank had
no duty to disclose to Coles any more any sooner than it did.
In sum, we conclude that the District Court did not err when
it found that defendant's actions did not amount to actual or
constructive fraud.
I11
Did the District Court err in entering judgment in favor of
defendants on Colest claim of breach of the statutory obligation
of good faith and fair dealing?
The claim of breach of a statutory duty of good faith and fair
dealing is made under 5 30-1-203, MCA, which is part of the Uniform
Commercial Code (UCC). That statute provides:
Obligation of good faith. Every contract or
duty within this code imposes an obligation of
good faith in its performance or enforcement.
It is undisputed that Colest promissory notes to defendants are
controlled by the UCC.
The UCC defines good faith as "honesty in fact." Section 30-
1-201 (19), MCA. This Court has defined the obligation of good
faith under the UCC as faithfully carrying out the terms of the
agreement. Shiplet v. First Sec. Bank of Livingston (Mont. 1988),
762 P.2d 242, 246, 45 St.Rep. 1816, 1820.
Coles argues that defendantst failure to disclose the "Action
Planttbreached the terms of defendants' agreements with Coles.
However, the agreements between the parties which are covered by
the UCC are the written promissory notes. There has been no
allegation that defendants have failed to faithfully carry out the
terms of those notes. That was the obligation of good faith under
the UCC. We conclude that the District Court did not err in
entering judgment for defendants on Colesl claim of breach of the
statutory obligation of good faith and fair dealing.
IV
Did the District Court err in granting judgment in favor of
defendants on Colesv claim of breach of the implied covenant of
good faith and fair dealing?
The District Court held that "the tort of breach of the
implied covenant of good faith and fair dealing is related to an
underlying breach of contract without which, it does not exist.
... Here, the Court has determined that the covenant did not
exist because there was no breach of an underlying contract.Ir This
Court has held that where the relationship between the parties is
entirely contractual, there must be an initial finding of breach
of contract before a claim of breach of the covenant of good faith
and fair dealing may be considered. Montana Bank of Circle v.
Meyers & Son (Mont. 1989), 769 P.2d 1208, 1214, 46 St.Rep. 324,
330-31; Nordlund v. School Dist. No. 14 (1987), 227 Mont. 402, 406,
738 P.2d 1299, 1302. Coles, however, argues that in this case the
existence of the tort is an independent factual question which does
not require an initial claim of breach of contract, so that summary
judgment on this issue was improper.
A breach of the implied covenant of good faith and fair
dealing requires the breaching party to arbitrarily or capriciously
engage in an impermissible activity. Blome v. First Nat. Bank of
Miles City (Mont. 1989), 776 P.2d 525, 529, 46 St.Rep. 1186, 1191.
The nature and extent of the covenant is "measured in a particular
contract by the justifiable expectations of the parties." Nichol-
son v. United Pacific Ins. Co. (1985), 219 Mont. 32, 41-42, 710
P.2d 1342, 1348.
The Simon brothers were well aware of the declining financial
position of Coles, and in fact had discussed the need to make
changes with Tom Chakos prior to February of 1985. We conclude
that they had no justifiable expectation that defendants would
continue to loan money to Coles indefinitely. Nor has Coles shown
that defendants acted arbitrarily or capriciously. The development
of the "Action Planvt was nothing less than prudent banking policy
in light of the accelerating financial deterioration of the
borrower over a period of several years. Moreover, defendants gave
notice to Coles almost six months in advance of the date they
intended to stop extending credit to the store. In the absence of
a claim of breach of contract we conclude that no claim of breach
of the implied covenant of good faith and fair dealing lies.
The closing of Coles was undoubtedly a blow to the Simons and
to downtown Billings. However, we agree with the District Court
that Coles has not presented a case under which defendants may be
held responsible for that event. We therefore affirm the summary
judgment for defendants.
We concur:
n A
Justices
~usticeWilliam E. Hunt, Sr., dissenting:
I dissent. The ~istrict Court incorrectly concluded.
that a breach of the implied covenant of good faith and fair
dealing depends on the existence of an underlying breach of
contract. his is not so. The existence of the tort of bad
faith is a question separate and independent from the
question of breach of contract. As this Court pointed out in
~icholsonv. United pacific Insurance Co. (1985), 219 Mont.
32, 41-42, 710 P.2d 1342, 1348:
But whether performing or breaching, each party has
a justifiable expectation that the other will act
as a reasonable person. [Citation omitted.] The
nature and extent of an implied covenant of good
faith and fair dealing is measured in a particular
contract by the j.ustif iable expectations of the
parties. Where one party acts arbitrarily,
capriciously or unreasonably, that conduct exceeds
the justifiable expectations of the second party.
The second party then should be compensated for
damages resulting from the others c.ulpable conduct.
In Shiplet v. First Sec. Bank (Mont. 19881, 762 P.2d
242, 246, 45 St.Rep. 1816, 1821, we reaffirmed this rule,
noting that a breach of contract is not a prerequisite to a
breach of the covenant of good faith and fair dealing.
~7hilethe existence of a duty to act in good faith is a
question of law which may be determined by a district court
on summary judgment, the existence of a breach of the duty is
a question of fact and is not properly decided on summary
judgment. Simmons v. ~ e n k i n s (Mont. 1988), 750 P.2d 1067,
1071, 45 St.Rep. 328, 332. In this case, defendants had an
obligation to act reasonably and in good faith to its
longstanding customer, Coles Department Store. ater rial
questions of fact indicate that this duty may have been
breached. Summary judgment w a s improper.
I would r e v e r s e t h e ~ i s t r i c t o u r t .
C