No. 90-131
IN THE SUPREME COURT OF THE STATE OF MONTANA
LEE STOTT and BESSIE STOTT, and ALL WEST EQUIPMENT, and RICK STOTT,
Plaintiffs and Appellants,
-vs-
RAYMOND FOX,
Defendant and Respondent.
APPEAL FROM: District Court of the Fifth Judicial District,
In and for the County of Jefferson,
The Honorable Frank Davis, Judge presiding.
COUNSEL OF RECORD:
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3 I- Helena, Montana
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. Barry G. OIConnell, Moore, O'Connell, Refling &
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. rC Submitted: July 13, 1990
Decided: October 30, 1990
Filed:
Justice John C. Sheehy delivered the Opinion of the Court.
This legal malpractice action was brought by All West
Equipment, Lee Stott, Bessie Stott, and Rick Stott. The plaintiffs
allege that Raymond Fox failed to represent them properly in an
action for a deficiency judgment brought by First Bank Western.
Specifically, plaintiffs contend that Fox was negligent in
stipulating to the dismissal of the Bank's deficiency judgment
action with prejudice, having failed to explain to the plaintiffs
the effect of the dismissal upon the plaintiffs1 alleged claims
against the Bank under various lender liability theories.
After the District Court dismissed the deficiency action, on
October 15, 1985, the Stotts and All West Equipment, with different
counsel, filed a complaint in the Fourth Judicial District against
First Bank alleging fraud, misrepresentation, and breach of the
covenant of good faith and fair dealing on the part of First Bank
in making the loans to them and in obtaining their signature for
the release of collateral. The plaintiffs also alleged that the
collateral was sold without commercial reasonableness and that
First Bank violated the requirements set out in 5 30-9-504, MCA.
First Bank filed a motion to dismiss, which was denied by the
District Court. When the District Court denied First Bank's motion
to dismiss, it sought a writ of supervisory control from this
Court. First Bank v. Fourth Judicial District Court (1987), 226
Mont. 515, 737 P.2d 1132. We granted First Bank's petition for
writ of supervisory control, and dismissed the plaintiffs'
complaint. In that case, we held the plaintiffs1 claims were
barred by the stipulated dismissal with prejudice of the Bank's
deficiency judgment action. Confronted with the dismissal of their
second action, plaintiffs instituted the malpractice suit against
their former counsel Fox. The Fifth Judicial District Court,
Jefferson County, entered summary judgment in favor of defendant
Fox on the plaintiffs1 claim of legal malpractice. Now the
plaintiffs appeal the District Court's summary judgment in favor
of Fox. We affirm.
The parties raise the following issues on appeal:
1. Did the District Court err by finding that Lee and Bessie
Stott were not the real parties in interest in the underlying
lender liability action?
2. Did the District Court err by finding that an attorney-
client relationship did not exist between Rick Stott and Raymond
Fox?
3. Did the District Court err by finding that plaintiffs
could not have prevailed on their claim for damages allegedly
caused by the loss of the Massey-Ferguson dealership?
4. Did the District Court err in finding that Bank did not
act in bad faith in its contractual relationship with the
plaintiffs?
In order to determine whether Fox was guilty of legal
malpractice, we must first examine the facts surrounding Fox's
earlier representation of the plaintiffs in First Bank's deficiency
judgment action against the plaintiffs.
All West Equipment was incorporated in 1971. Lee and Bessie
Stott were officers of All West Equipment and spouses. Rick Stott,
the son of the Stotts, was an employee of All West Equipment.
All West engaged in the sale and repair of farm implements.
All West was a dealer for Massey-Ferguson. On October 18, 1982,
Massey-Ferguson terminated All West's dealership, when Massey-
Ferguson received a aonsufficient funds check from All West and
further investigation revealed that All West was 'lout of trustn
exceeding $50,000.
All West began its relationship with First Bank in late 1980.
Two loans were originally made to All West by First Bank. A number
of Security agreements were entered into between First Bank and All
West to perfect First Bank's position. The Stotts also executed
a guaranty with First Bank. Furthermore, a llCorporate
Authorization Resolutionw was executed identifying Lee and Bessie
Stotts as corporate officers and having the right to borrow funds.
In June of 1987, All West was in arrears on its debt
retirement to First Bank. For that reason, the parties reduced All
West's indebtedness to two demand notes. Specifically, First Bank
loaned to All West and Lee Scott (individually) $68,732.30, due in
September, 1982. Also, First Bank loaned $21,566.63 to All West.
The second loan was due December 15, 1982.
The Stotts and All West defaulted on both of these notes. The
Bank also discovered that All West was dealing out-of-trust with
Massey-Ferguson. As the record reflects, the out-of-trust dealings
were discovered on October 15, 1982. Later, possession of the
collateral was turned over to First Bank, by a written instrument
dated October 20, 1982, and signed by Lee and Rick Stott on behalf
of All West Equipment.
The assets of All West, pledged as collateral, were sold at
a public and private sale through Gardener Auction on November 13,
1982. As a result of the sales, almost $31,000 was applied to All
West's indebtedness on the operating note, leaving a balance due
on the loan of $42,088. On January 7, 1983, First Bank filed a
complaint, in the Fourth Judicial District Court, against All West
Equipment and Lee and Bessie Stott, to collect deficiencies owing
after the sale of the collateral under the promissory notes and
guaranty. Eventually, the deficiency action between First Bank and
All West and the Stotts was settled without trial and a stipulation
and order of dismissal with prejudice was filed on January 4, 1984.
In reviewing an order for summary judgment, the standard of
review for this Court is the same as that used by the District
Court under Rule 56(c), M.R.Civ.P. Kronen v. Richter (1984), 211
Mont. 208, 211, 683 P.2d 1315, 1317. Therefore, we may find
summary judgment when "the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment
as a matter of law. Rule 56 (c), M.R.Civ.P. ; Mayer Bros. v. Daniel
Richards Jewelers, Inc. (1986), 223 Mont. 397, 399, 726 P.2d 815,
816. Once the record discloses no genuine issue of material fact,
the burden of proof shifts to the party opposing the motion to
present facts of a substantial nature that a material fact issue
does exist. Ma~er,726 P.2d at 816. The party opposing summary
judgment may not rest upon mere allegations in the pleadings or
conclusory statements in the briefs but has an affirmative duty to
respond by affidavits or sworn testimony with specific facts that
show a genuine factual issue exist. Mere conclusory or speculative
statements are insufficient to raise a genuine issue of material
fact. National Gypsum Co. v. Johnson (1979), 182 Mont. 209, 212,
595 P.2d 1188, 1189. Mayer, 726 P.2d at 816; citing Rule 56(e),
M.R.Civ.P. Further, the District Court judge is not required to
anticipate possible proof at trial when ruling on a summary
judgment motion. Tucker v. Trotter Treadmills, Inc. (1989), 239
Mont. 233, 235, 779 P.2d 524, 525.
In a legal malpractice action, the complaining party, in order
to prevail:
[Mlust initially establish the existence of an attorney-
client relationship. The plaintiff must then establish
that the acts constitutingthe negligence . . . occurred,
proximately causing damages to the plaintiff. The final
requirement for the plaintiff is the need to establish,
...
Iv [tlhat 'but forv such negligence the client would
have been successful in the prosecution or defense of the
action.
Lorash v. Epstein (1989), 236 Mont. 21, 24, 767 P.2d 1335, 1337;
citing Christy v. Saliterman (1970), 228 Minn. 144, 179 N.W.2d 288,
In order for All West and the Stotts to prevail against Fox,
they must show that their underlying action against First Bank
would have been successful. Some courts, in describing this
procedure, have termed it as a "suit within a suit.vf Liberman v.
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Employers Insurance of Wausau (1980), 84 N. J. 325, 419 A.2d 417,
426. The District Court found that lgtheplaintiffs have failed to
meet the burden that they could have prevailed in any counterclaim
against First Bank. The legal malpractice test of Lorash has not
been met. We agree with the District Courtgs holding that the
plaintiffsg claims against the Bank would have not been successful.
Did the District Court err by finding that Lee and Bessie
Stott were not the real parties in interest in the underlying
action?
The District Court found that Lee and Bessie Stott were not
proper parties, in the former liability action, nor could they have
personally asserted a claim for damages in the dismissed action.
The District Court, relying on our holdings in Moats Trucking Co.,
Inc. v. Gallatin Dairies, Inc. (1988), 231 Mont. 474, 753 P.2d 883,
and Bottrell v. American Bank (1989), 237 Mont. 1, 773 P.2d 694,
explained that the alleged damages could only have been claimed by
All West Equipment, the Stottsg corporation.
The District Court is correct. This issue is controlled by
our holdings in Moats and Bottrell. In Moats, we said:
In Malcolm v. Stondall Land Co. (1955), 129 Mont. 142,
145, 284 P.2d 258, 260, this Court stated the general
rule regarding a stockholdergspersonal right to sue in
the corporationgscause of action:
... As a general rule stockholders may not sue upon
a cause of action belonging to their corporation whether
in their own names or in the name of the corporation
itself.
In Malcolm, this Court addressed for the first time the
issue of whether individual shareholders who control all
of the stock of the corporation may disregard the
corporate entity and sue as individuals on the
corporation's cause of action. We held that such
individual shareholders do not have the right to pursue
an action on their own behalf when the cause of action
accrues to the corporation. Malcolm, 129 Mont. at 146,
284 P.2d at 260.
The plaintiffs rely on the fact that as guarantors of the
corporate debt of All West Equipment that they should have
standing. As the District Court properly noted this contention has
been rejected by this Court in Bottrell. In Bottrell, individual
shareholders asserted they should be entitled to individual
compensatory damages based on the fact they were required to sign
personal guarantees of the corporate debt. We affirmed our holding
in Moats, and found the cause of action belonging to the
Corporation and not the shareholders. Bottrell, 773 P.2d at 709-
Recently, in Wolstad v. Northwest Bank (Mont. 1989), 783 P.2d
1325, 1328, 46 St.Rep. 2160, 2164, we reiterated our prior holding
Bottrell :
We previously held that when corporate shareholders
personally guarantee corporate debts, the shareholders
may not recover as individuals for the lender's breach
of the covenant of good faith and fair dealing and
negligent misrepresentation absent a separate duty owed
to the shareholders. Bottrell, 773 P.2d at 709.
The evidence overwhelmingly supports the District Court's
conclusions 'Ithat individual stockholders (Stotts) do not have a
right to pursue an action on their own behalf when the cause of
action accrues to the corporati~n.~~ review of the notes
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identifies the borrower as "All West Equipment" signed by "Lee
Stott as President." The demand note in the amount of $68,732.30
is likewise signed by Lee Stott individually although that is of
no significance in view of the existence of guarantees signed by
the Stotts with First Bank, and our earlier holdings in Bottrell
and Walstad.
To permit this litigation to go forward as to Lee and Bessie
Stott, is to permit 'Ireverse piercing of the corporate veil,I1 thus
allowing the shareholders "to invoke the corporate entity only when
it would be to their advantage." Moats, 753 P.2d at 885. Bessie
Stott or Rick Stott may not recover under this theory since they
were not signatories to either promissory note.
Next, Lee and Bessie Stott argue that All West was not a
corporation in 1982 since it was dissolved in 1979 for failure to
register, thereby entitling them to proceed individually. However,
All West held itself out as a corporation in its dealings until the
very end and took full advantage of the corporate structure. The
District Court in its order found that:
It is not disputed that after ALL WEST'S corporate
existence had technically expired, it acted as a
corporate entity. Among other things it prepared and
filed corporate tax returns, issued corporate
resolutions, borrowed money, issued corporate notes and
security agreements to secure payment of the same. It
generally held itself out to be a corporation to the
Court, the Bank, its own accountants and to the world.
For the above reasons, this Court is compelled to conclude the
Stotts are estopped from challenging All West's corporate status.
"An organization that has held itself out as a corporation is
estopped from denying the legality of its corporate existence.'I
18A Am.Jur.2d Corporations 5 269.
Furthermore, the District Court considered the possibility
that a material fact might exist as to the precise nature of the
business entity of All West (i.e. sole proprietorship or
partnership.) The District Court found that the Stotts failed to
comply with the fictitious name statute ( 1 30-13-203, MCA), and are
thus barred from maintaining a suit or action by 5 30-13-215, MCA.
We agree with the District Court.
Did the District Court err by finding that an attorney-client
relationship did not exist between ~ i c k
Stott and Fox?
We have held that a plaintiff, in a legal malpractice action,
I1must initially establish the existence of an attorney-client
relationship." Lorash, 767 P.2d at 1337. There was never an
attorney-client relationship between Rick Stott and Fox. Rick's
right to recover is premised upon Fox's allegedly negligent
handling of First Bank's deficiency judgment action. The parties
in that dismissed action were First Bank as plaintiffs, and All
West Equipment, a corporation and Lee and Bessie Stott as
defendants. Rick Stott, a plaintiff in this action was not a party
to the dismissed action. These facts negate the existence of an
attorney-client relationship between Rick Stott and Fox.
111.
Did the District Court err by finding that plaintiffs could
not have prevailed on their claim for damages allegedly caused by
the loss of the Massey-Ferguson dealership?
One of the claims in the dismissed action was damages for the
loss of the Massey-Ferguson farm equipment dealership, which
plaintiffs attributed to the wrongful acts of First Bank. To
support their contention the plaintiffs rely upon the affidavit of
Lee Stott. In his affidavit Lee Stott swears that the Bank advised
him to terminate the dealership. According to Lee, "The intent of
doing this was to, again, free up funds for the Bank and to allow
the Bank to better situate its collateral and become more secure
in its position. The promise made by Dan Simpkins was that the
Bank would continue to finance our family business." In his prior
deposition testimony he says just the opposite. In his deposition,
he testified the bank never advised him of the day-to-day
operations and management of his business. The District Court,
relying on Wilson v. Westinghouse (8th Cir. 1988), 838 F.2d 286,
found that Lee Stott's contradiction between his deposition
testimony and his affidavit did not create a genuine issue of
material fact. The court in Wilson stated:
While the district courts must exercise extreme care not
to take genuine issues of fact away from juries, (a
party should not be allowed to create issues of
credibility by contradicting his own earlier
testimony' ... Ambiguities and even conflicts in a
deponent's testimony are generally matters for the jury
to sort out, but a district court may grant summary where
a party's sudden and unexplained revision of testimony
creates an issue of fact where none existed before.
Otherwise, any party could head off a summary judgment
motion by supplementing previous depositions ad hoc with
a new affidavit, and no case would ever be appropriate
for summary judgment .
Wilson, 838 F.2d at 289.
We agree with the District Court. The plaintiffs can not make
a material issue of fact, regarding the farm dealership, through
the use of his own contradictory testimony. Furthermore, the
record reveals the dealership franchise was terminated by Massey-
Ferguson prior to any alleged fraudulent action of the Bank. Thus,
the Bank, despite Lee Stottls affidavit, could not have played a
part in All West's loss of the Massey-Ferguson farm dealership.
IV.
Did the District Court err in finding that the Bank acted in
bad faith in its contractual relationship with the plaintiffs?
The plaintiffs contend that the District Court erred in
finding that the Stottsl promissory notes were overdue. The Stotts
contend that a special relationship existed between the Bank and
themselves, and therefore the foreclosure constituted a breach of
the covenant of good faith and fair dealing. Notwithstanding Lee
Stottls affidavit, his deposition testimony reflects a strictly
contractual banking relationship:
Q. Can you tell me during your relationship with Mr.
Simpkins whether or not he advised you on the day-to-
day operations of the business?
A. No, he never did.
Q. Did he ever advise you as to long-term goals for the
business?
A. No.
Q. Did he ever advise you as to capitalization of the
business?
A. No.
Q. Ever advise you on management decisions in the business?
A. No.
Q. Did he take an interest in the business other than
that of just a lender of money?
A. Not really, no.
Q. Did Mr. Simpkins ever take any part in the stocking
of inventory and the decision integral to that?
A. No.
Q. And did he give you any advice as to the level of
inventory that should be kept?
A. No.
Q. Did he ever advise you as to your expansion plans?
A. No.
The relationship of the parties in the summer of 1982 was
governed by the promissory notes and security agreements. The
notes provided that upon any default in payment, "The holder of
this note may at its option without notice declare this note
immediately due and payable for the entire principal hereof plus
accrued interest ... The notes, likewise, provide that any
default under the provisions of any security agreement is a default
under the notes. The record is clear that All West failed to make
the payments.
The security agreements executed by All West state in
pertinent part:
9. The occurrence of any of the following events shall
constitute a Default: (a) failure of Borrower, or of any
co-maker, indorser, surety or guarantor to pay when due
any amount payable under any of the Secured Obligations:
(b) failure to perform any agreement of Borrower
contained herein; (c) any statement, representation, or
warranty of Borrower made herein or any time furnished
to the Bank is untrue in any respect as of the date made;
(d) entry of any judgment against Borrower; (e)
appointment of a receiver for, loss, substantial damage
to, destruction, theft, sale or encumbrance to or of any
portion of the Collateral, or the making of any levy,
seizure, or attachment thereof; (f) Borrower becomes
insolvent or unable to pay its debts as they mature or
makes assignment for the benefit of its creditors or any
proceeding is commenced by or against Borrower alleging
that it is insolvent or unable to pay its debts as they
mature; (g) death of any Borrower who is a natural person
or of any partner of any Borrower which is a partnership;
(h) dissolution, consolidation or merger, or transfer of
a substantial part of the property of any Borrower which
is a corporation or a partnership; (i) such a change
in the condition or affairs (financial or otherwise) of
Borrower or any co-maker, indorser, surety or guarantor
of any of the Secured Obligations as in the opinion of
the Bank impairs the Bank's security or increases its
risk; or (j) the Bank deems itself insecure for any
reason whatsoever.
10. Whenever a Default shall exist, the Bank may, at its
option and without demand or notice, declare all or any
part of the Secured Obligations immediately due and
payable, and the Bank may exercise, in addition to the
rights and remedies granted hereby, all rights and
remedies of a secured party under the Uniform Commercial
Code or any other applicable law. The sheriff of any
county wherein the Collateral or any part thereof is
located is authorized at the request of the Bank and upon
delivery of the security agreement, to take possession
of the Collateral and sell the same as provided by Law.
11. Borrower agrees, in the event of Default, to make
the Collateral available to the Bank at a place or places
acceptable to Bank, and to pay all costs of the Bank,
including reasonable attorneys' fees, in the collection
of any of the Secured Obligations and the enforcement of
any of the Bank's rights. If any notification of
intended disposition of any of the'collateral is required
by law, such notification shall be deemed reasonably and
properly given if mailed at least ten (10) days before
such disposition, postage prepaid, addressed to the
Borrower at the address shown below.
First Bank by virtue of the provisions of the notes, security
agreements and the actions of All West, had the right to declare
the loans due and take possession of its collateral. Its actions
not arbitrary, capricious or unreasonable. It loaned the money to
All West and when All West defaulted and was also terminated by its
major supplier, Massey-Ferguson, the Bank took action necessary to
secure the pledged collateral. The Bank obtained the consent of
All West and the Stotts to repossess the collateral. Stottsf claim
that they do not remember signing the documents relinquishing the
collateral or that they only signed blank pieces of paper are
conclusory assertions not supported by the evidence.
The relationship between plaintiffs and First Bank was
contractual in nature and arose out of the Uniform Commercial Code.
Under the Code, every contract or duty within the Code imposes an
obligation of good faith in its performance or enforcement.
Section 30-1-203, MCA. "Good faith" is defined in the Code as
I1honestyin fact in the conduct or transaction concerned." Section
30-1-201(19), MCA. The above facts, amply demonstrate the Bank
dealt in good faith with All West Equipment and the Stotts.
Under the law applicable at the time, "the nature and extent
of an implied covenant of good faith and fair dealing is measured
in a particular contract by the justifiable expectations of the
parties. Where one party acts arbitrarily, capriciously or
unreasonably, that conduct exceeds the justifiable expectations of
the second party." Nicholson v. United Pacific Insurance Co.
(1985), 219 Mont. 32, 41-42, 710 P.2d 1342, 1348. Clearly, under
Nicolson, a breach of the implied covenant of good faith and fair
dealing requires the breaching party to conduct itself in an
impermissible activity, and in doing so, to act arbitrarily,
capriciously or unreasonably. In this case, evidence of the
implied breach is missing. The Bank here had the right to
terminate its financing as long as it did so reasonably and not
capriciously. Despite the plaintiffs bare allegations to the
contrary, the Bank, from the evidence in this case, did act
reasonably and not capriciously or arbitrary.
We affirm.
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