No. 89-113
IN THE SUPREME COURT OF THE STATE OF MONTANA
FIRST SECURITY BANK OF GLENDIVE,
a Montana Banking Corporation of
Glendive, Montana,
Plaintiff, Respondent and Cross-Appellant,
-v-
LARRY J. GARY and MARY GARY,
husband and wife; R. H. SCHWARTZ
CONSTRUCTION SPECIALTIES, INC.,
a Montana Corporation of Glendive,
Montana,
Defendants, Appellants and Cross-Respondents,
and
FIRST SECURITY BANK OF GLENDIVE,
a Montana Banking Corporation of
Glendive, Montana,
Plaintiff, Respondent and Cross-Appellant,
-v-
GARY DATSUN, INC., a Montana Corporation
of Glendive, Montana,
Defendant, Appellant and Cross-Respondent.
APPEAL FROM: District Court of the Seventh Judicial District,
In and for the County of Dawson,
The Honorable Leroy L. McKinnon, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Gene Huntley, Baker, Montana, argued
I<
For Respondent:
5- =,
a
*,C, Thomas Monaghan; Lucas & Monaghan; Miles City,
d :flu Montana, argued
Submitted: April 24, 1990
Decided: September 6, 1990
Clerk
Justice Fred J. Weber delivered the Opinion of the Court.
This is an appeal from a judgment notwithstanding the verdict
(NOV) entered by the District Court for the Seventh Judicial
District, Dawson County. The judgment NOV nullified a jury verdict
of over $1.2 million for Larry and Mary Gary. In addition, the
~istrictCourt decided that punitive damages would not be awarded
and entered judgment in favor of First Security Bank on its claims
in the amount of $314,272.96 plus interest from date of trial.
Larry J. Gary, Mary Gary, and Gary Datsun, Inc., appeal. First
Security Bank cross-appeals. We reverse and remand for retrial.
The issues upon which we base our opinion are:
1. Did the District Court err in ruling that there was
insufficient evidence to support the jury verdict?
2. Was the judgment denying punitive damages improper?
3. Was Gary Datsun, Inc., properly added as a real party in
interest on the counterclaims?
4. Was the jury's award of damages proper?
In 1977, Larry Gary owned an automobile sales and repair
business in Glendive, Montana. He and his wife, Mary, did both
their personal and business banking with First Security Bank of
Glendive (Bank). Larry Gary wanted to expand his business to
include a dealership franchise. He consulted with Bank officers
about this plan and received advice and encouragement.
In September 1977, the Bank certified a floor plan financing
agreement with Larry Gary to the Nissan Corporation. This floor
plan financing, essential for the operation of the business, would
1
allow Larry Gary to use a line of credit from the Bank to pay
Nissan for vehicles shipped to the dealership. When the vehicles
were sold, Larry Gary would use the proceeds to repay the Bank.
Nissan granted Larry Gary a franchise contingent on Gary
constructing an approved dealership building.
Gary required financing to construct the building and sought
the Bank's assistance. On December 14, 1978, the Bank committed
to loan $168,000 for the purpose of constructing the dealership
facility. The original promissory note, signed by both Larry and
Mary Gary and secured by a mortgage on the building, was to be paid
and converted to a long term mortgage insured by the Small Business
~dministrationby June 14, 1979.
On December 27, 1978, Larry Gary and Schwartz Construction
(Schwartz) entered into a building contract which specified that
Schwartz would complete the building by April 30, 1979, for
$163,000. The Bank had recommended Schwartz, another of its
customers, to Gary. The Garys contended at trial that the Bank
pressured them into contracting with Schwartz for the Bank's
benefit.
Larry Gary encountered numerous difficulties with Schwartz
during the building's construction. These difficulties, their
causes, and the attempts to resolve them constituted the bulk of
the evidence at trial. The Garys presented evidence that Schwartz
initially staked the building in the wrong location, causing
additional expense to move utilities; that Schwartz constructed
the building with a leaky roof which ruined insulation; that,
in violation of the building contract, Schwartz began building
lower level rest rooms with ceilings only six feet high; that
Schwartz failed to complete the building even remotely within the
contractual time period; and that they were forced to finish the
building themselves after Schwartz walked off the job.
On July 25, 1979, the Gary Datsun business was incorporated
as Gary Datsun, Inc. The officers of the corporation were Larry
Gary, president; Mary Gary, secretary/treasurer; and Phyllis Gary
(Larry Gary's mother) , vice-president. In August, the Bank made
a $7,000 loan to Gary Datsun, Inc.
In September 1979, the dealership building still had not been
completed. The corporate minutes of Gary Datsun, Inc., showed that
Larry and Mary Gary conveyed all business assets of Gary Datsun to
the corporation on September 7, 1979. This was done without the
written consent of the Bank as required under the floor plan
financing agreement: "Dealer will not lease, pledge, mortgage,
encumber or lien any Inventory in which Bank has an interest
hereunder . . . without Bank's prior written consent." On
September 19, 1979, without notice to the Garys, the Bank took
interest due on the building construction loan from the business
account of Gary Datsun.
Starting October 1, 1979, Gary Datsun, Inc., no longer made
deposits to its account with the Bank, and instead made its
deposits in an account with another bank. The Bank discovered this
change in banking, and as of November 16, 1979, cancelled its floor
plan financing agreement with Larry Gary. Under the agreement
either party could cancel at any time upon notice to the other
party. Gary Datsun, Inc., eventually obtained financing from
another bank at a higher rate of interest. The Garys state in
their briefs that the corporation was dissolved involuntarily in
1986, but the record does not demonstrate that dissolution.
The Bank brought suit against Gary Datsun, Inc., on the $7,000
promissory note dated August 10, 1979. It brought separate suit
against Larry and Mary Gary to foreclose the mortgage securing the
$168,000 promissory note. The Garys counterclaimed alleging fraud,
constructive fraud, breach of a fiduciary relationship, and breach
of a covenant of good faith and fair dealing. The two cases were
consolidated. An appeal to this Court was filed after a dispute
arose over whether Gary Datsun, Inc., could be added as a
counterclaim plaintiff. See First Sec. Bank of Glendive v. Gary
(1986), 221 Mont. 329, 718 P.2d 1345. On remand, the District
Court determined that Gary Datsun, Inc., was a real party in
interest as to the counterclaims.
By agreement of the parties, only the counterclaims of Larry
J. Gary, Mary Gary,and Gary Datsun, Inc., were tried. Essentially
the defendants admitted that the claims of the Bank against them
were valid, subject to any judgment on their counterclaims.
The jury was given two special interrogatories. The first
asked:
Is the plaintiff, First Security Bank, liable to
defendants Larry J. Gary or Mary Gary or Gary Datsun,
Inc., because of fraud or constructive fraud or breach
of fiduciary relation or bad faith as defined in the
Court's instructions?
The jury answered wYes.l' The jury awarded defendants Larry and
Mary Gary a total of $355,000 in special damages, $800,000 in
general damages, and $50,000 in emotional damages. The jury did
not award Gary Datsun, Inc., any damages.
The second special interrogatory asked:
Is the First Security Bank liable to Larry J. Gary, Mary
Gary or Gary Datsun, Inc. for punitive damages?
The jury answered "Yes. Under 5 27-1-221, MCA, that finding made
necessary a further hearing before the jury on the amount of
punitive damages to be awarded. After the verdict was read, the
court determined that it would reconvene later on Sunday morning
for the punitive damages hearing.
At the 10: 00 a.m. Sunday morning session, counsel and the
court first met in chambers. Counsel for the Bank informed the
court of his belief that there would be a run on the Bank if its
precarious financial position were disclosed in the hearing on
punitive damages. The court ruled as a matter of law that no
punitive damages would be allowed. It dismissed the jury and
requested briefing of motions before it would enter judgment.
After briefing, the court granted the Bank's motion for
judgment NOV. It also entered judgment for the Bank on the
mortgage foreclosure and the promissory note. This appeal
followed.
Did the District Court err in ruling that there was
insufficient evidence to support the jury verdict?
Four theories were presented as bases for the claims for
5
damages against the Bank - fraud, constructive fraud, breach of the
covenant of good faith and fair dealing, and breach of a fiduciary
duty. The special interrogatories did not require the jury to
specify under which theory it found the Bank liable. The court
granted the motion NOV on the grounds of lack of evidence to
support the verdict.
In considering a motion for judgment NOV, the evidence must
be viewed in a light most favorable to the non-moving party.
Nicholson v. United pacific I s , Co. (1985), 219 Mont. 32, 37, 710
n.
P.2d 1342, 1345. The motion must be denied if a prima facie case
has been made out, and if there is substantial conflict in the
evidence, the motion cannot be granted. Nicholson, 710 P.2d at
1345.
In its answer to the cross-complaint, the Bank admitted "that
a fiduciary relationship existed between [itself] and defendants
Gary. The jury was instructed that although a fiduciary
relationship does not ordinarily arise when a bank transacts
business with a depositor or other customer, "[a] fiduciary
relationship and duty of disclosure may be created when a customer
relies upon the bank for advice on financial mattersffand that
I1[t]he fiduciary relationship implies that the principal has
reposed some trust or confidence in the fiduciary, and the
fiduciary is bound to exercise the utmost good faith, loyalty and
honesty toward his principal."
Larry Gary testified that Mr. Lilejord, President of the Bank,
encouraged him to pursue a Datsun dealership. He testified that
Datsun's approval for the franchise was contingent upon his
building a new Datsun sales facility. He testified that Miss
Remillard, the loan officer at the Bank, told him, in effect, that
he must hire Schwartz as the contractor on this job. The Bank
admittedly did not disclose to Gary that Schwartz had outstanding
loans from the Bank. The Garys contended that Schwartz was in a
precarious financial position which later resulted in bankruptcy.
Miss Remillard testified that she vetoed inclusion in the
building contract of a penalty clause to be applied in case
Schwartz did not complete the building on time. She also testified
that she exercised the authority to decide when and how much
Schwartz was paid and that it was the Bank's responsibility to
insure that money was not paid out before work was completed. Ten
percent of the money was to be withheld until construction was
completed. Additionally, a specific cost breakdown had been
prepared with respect to each major component of the building.
However, by September 1979, the Bank notified the Garys that there
was not enough money left in the building account to complete the
building.
Viewing the evidence in the light most favorable to the Garys,
we conclude that there was substantial evidence from which a jury
could have concluded that the Bank breached a fiduciary duty to the
Garys in requiring Larry Gary to hire Schwartz as the contractor
on the building, in failing to require Schwartz to properly
complete the building within the contractual time frame, and in
disbursing building funds without adequately protecting the Garys.
Damages for those breaches could include the costs of completing
the building and losses caused by the delay in its completion.
Without considering the other theories of liability offered by the
Garys, we hold that the entry of judgment NOV was reversible error
and that this case must be remanded for retrial. For the reasons
explained below under Issue IV, we do not reinstate the jury's
verdict.
Did the District Court err in refusing to submit the issue of
punitive damages to the jury?
The controlling law on punitive damages is set forth at 3 27-
1-221(6) and (7), MCA:
(6) Liability for punitive damages must be determined
by the trier of fact, whether judge or jury.
(7)(a) Evidence regarding a defendant's financial
affairs, financial condition, and net worth is not
admissible in a trial to determine whether a defendant
is liable for punitive damages. When the jury returns
a verdict finding a defendant liable for punitive
damages, the amount of punitive damages must then be
determined by the jury in an immediate, separate
proceeding and be submitted to the judge for review as
provided in subsection (7)(c) . In the separate
proceeding to determine the amount of punitive damages
to be awarded, the defendant's financial affairs,
financial condition, and net worth must be considered.
(c) The judge shall review a jury award of punitive
damages, giving consideration to each of the matters
listed in subsection (7)(b). If after review the judge
determines that the jury award of punitive damages should
be increased or decreased, he may do so. The judge shall
clearly state his reasons for increasing, decreasing, or
not increasing or decreasing the punitive damages award
of the jury in findings of fact and conclusions of law,
demonstrating consideration of each ofthe factors listed
in subsection (7)(b) .
The second special interrogatory required the jury to determine if
the Bank was liable for punitive damages, and the jury answered
ItYeslt to that second interrogatory. Under the statute, the
District Court should have held an immediate, separate proceeding
for the determination of the amount of punitive damages, but failed
to do so. As a result, the District Court determination that no
punitive damages would be allowed was premature and not allowed
under the statute. We hold that the finding that the Garys were
not entitled to punitive damages was reversible error.
I11
Was Gary Datsun, Inc., properly added as a real party in
interest on the counterclaims?
Rule 17(a), M.R.Civ.P., provides that "Every action shall be
prosecuted in the name of the real party in interest.If The "real
party in interest" is the party who has the right sought to be
enforced. 3A J.Moore, Federal Practice, 5 17.02 at 42 (1989) . The
District Court ruled that Gary Datsun, Inc., was a real party in
interest on the counterclaims originally brought by Larry and Mary
Gary individually, noting that the counterclaims run to the benefit
of Gary Datsun, Inc.
As discussed below under Issue IV, the evidence at trial
showed that a large portion of the damages claimed under the
counterclaims were suffered by Gary Datsun, Inc. We hold that Gary
Datsun, Inc., is a real party in interest and was properly joined.
9
Is the jury's award of damages proper?
The jury allocated all damages to the Garys individually. The
record shows that the Garys' attorney argued that this would be
proper because the corporation was closely held and had been
dissolved by the time of trial. We cannot agree with that
position.
A corporation has a separate and distinct identity from its
stockholders. Wortman v. Griff (1982), 200 Mont. 528, 534, 651
P.2d 998, 1001. The general rule is that stockholders may not sue
upon a cause of action belonging to their corporation. Malcom v.
Stondall Land and Investment Company (1955), 129 Mont. 142, 145-
46, 284 P.2d 258, 260. As this Court has stated, such a reverse
piercing of the corporate veil llwould allow persons who have
incorporated to invoke the corporate entity only when it would be
to their advantage." Moats Trucking Co. v. Gallatin Dairies
(1988), 231 Mont. 474, 477, 753 P.2d 883, 885.
The Garys argue that at the time of trial, Gary Datsun, Inc.,
had been involuntarily dissolved, and that Larry Gary and Mary
Gary, as the primary stockholders and the trustees for creditors
and stockholders, were entitled to all damages. Under 5 35-6-
104(5), MCA, the directors of an involuntarily dissolved
corporation shall hold the corporationts property in trust. The
record is devoid of evidence of the dissolution of the corporation
and of the status of Larry Gary and Mary Gary with regard to the
dissolved corporation. Whether the stockholders of a corporation
are entitled to any of the corporate assets depends upon the extent
and nature of the claims which may be properly made against the
corporation. In view of the fact that Gary Datsun, Inc., failed
as a going business, the possibility of other claimants, including
creditors, is clearly present.
The only evidence in the present case supporting the $800,000
awarded in general damages was a calculation of lost profits
submitted by an expert witness for the Garys. He gave $899,072 as
the present value (at time of trial) of the Gary Datsun
dealership's lost profits for the years 1979 to 1986. During those
years, Gary Datsun, Inc., owned the business, not Larry and Mary
Gary personally. As a result, there was an absence of any proof
of lost profits by Larry Gary and Mary Gary.
In a similar manner, the evidence in support of special
damages consisted of cancelled checks written on the account of
Gary Datsun, Inc. Again this demonstrates damages, if any, only
as to the corporation and not as to the Garys individually. We
therefore hold that the award of general and special damages to
Larry J. Gary and Mary Gary was improper and that it constitutes
reversible error.
Because of our answers to the issues set forth above and our
ruling that this case must be retried, we need not discuss the
other issues raised on appeal and cross-appeal. In view of the
potential offset should the Garys be successful in a new trial on
their counterclaims, we conclude that it would not be appropriate
to affirm the judgment in favor of the Bank on its claims. We
therefore reverse on that aspect as well. This matter is remanded
to the District Court for the Seventh Judicial District, Dawson
County, for retrial.
We Concur: w
.-
1/ chief Justice
Justices .
sitting for just&&' e R.C.
McDonough
Justice John Conway Harrison dissenting.
I would reinstate the jury's verdict which was set aside by
the District Court, provide an off-set to the damages in favor of
the Garys for the amounts of the notes held by the Bank, and
terminate the case without further reference to a jury for punitive
damages. I base this opinion on two grounds: (1) the error in not
submitting punitive damages to the same jury is now incurable; and
(2) the purpose of punitive damages, by way of punishment to the
Bank cannot be effectuated because that Bank has now gone out of
existence.
It is unbelievable to me how the District Court dispensed with
the punitive damages question. The record shows that the jury held
that the Garys were entitled to punitive damages, and the District
Court, upon a mere suggestion of counsel for the Bank that a
punitive damage award would cause a run on the Bank, refused to
submit the issue to the jury which was sitting there waiting to go
on. This error is especially grievous, because if the jury had
awarded excessive damages, damages that the District Court could
not accept, the court had the right to reduce those damages or to
remit them altogether upon later review.
In this case, the Bank's argument in seeking to reverse the
verdict or remand for a new trial is that the damages accrued to
the corporation and not to the Garys personally, and therefore a
new trial is required to separate the damages due the corporation
from the damages due to the Garys. However, here the jury found
no damages in this case for the corporation, and awarded all the
13
damages to the Garys. The majority's reversal of the verdict in
favor of the Garys for a new trial on that ground does violence to
what has happened in this case.
The record indicates that the Bank made a letter agreement
with Larry and Mary Gary to provide floor plan financing for their
Datsun franchise in Glendive. It also acted as their agent in
obtaining financing from the SBA for a building in which the
business was to be located. Although the Bank admitted a fiduciary
relationship in its pleadings, the court allowed the question of
whether a fiduciary relationship existed between the Garys and the
Bank to go to the jury. This was totally unnecessary, and the jury
obviously determined this issue in favor of the Garys. The Bank
provided financing under two notes, one for $7,000 signed by Gary
Datsun Inc., which with interest came to $13,894.28 when the court
rendered judgment. The second note signed by Larry and Mary Gary
for $150,455.13 for which the court rendered judgment with interest
and costs came to the sum of $300,378.68.
During the construction of the building, the jury found that
the Bank paid more to the contractor (who was indebted to the Bank)
than he was entitled, did not keep a reserve of ten percent as the
construction costs were advanced, and refused to apply for a
renewal of SBA's commitment for the construction of the building.
The Bank claimed, and still claims in its appellate brief, that it
never consented to the assignment to Gary Datsun, Inc.; yet the
Bank accepted deposits in that name and certainly issued one of
its notes to the corporation.
Without notice to the Garys, the Bank exercised a claimed
right of set-off by taking interest due on its notes from the
business account of Gary Datsun. At that point, understandably,
Larry Gary decided to make deposits in another bank to prevent
setoffs. Immediately the .Bank sent a notice to them terminating
its floor plan financing. The Garys were forced to go to another
bank, and pay a higher interest rate for their financing.
The record indicates that the building was appraised somewhere
in the area of $295,000. Under the judgment as it now stands,
after the ~istrictCourt set aside the verdict for the Garys, they
will not only lose their building, but be subjected to a deficiency
judgment approaching the original costs of the building.
Here, I find the evidence supported the verdict for the Garys,
and base this upon my review of the final arguments made to the
jury. The special damages, interest, attorney's fees, accounting
fees, bank application fees, amount for completing the building,
and all the other items came to $182,284, which the economist who
testified placed a value at the time of trial at $413,657. No
objection was made to these figures at the time of final argument,
and the award of special damages to each of the Garys does not
exceed that sum.
Involved here also were damages for emotional distress. Mary
Gary apparently attempted to commit suicide sometime following the
Bank's actions. The jury determined that the Garys' emotional
distress was a result of the Bank's action, and awarded each of the
Garys $25,000 for emotional distress.
The jury's awards of $25,000 for emotional distress and
special damages are supported by the evidence and should never have
been reversed. The general damages may include projections for the
business conducted by Gary Datsun, Inc. but that is not important
now.
It is interesting to note that in the records of the office
of the Secretary of State of the State of Montana, is a notice of
involuntary dissolution dated December 8, 1986, under which the
Secretary of State involuntarily dissolved the Gary Datsun
corporation, which had the effect that the corporation forfeited
all its rights to carry on a business within the State of Montana.
When that occurs, under 5 35-6-104(5), MCA, the following is the
result:
(5) In the case of involuntary dissolution, all the
property and assets of the dissolved corporation shall
be held in trust by the directors of such corporation and
35-1-921 or 35-2-711, whichever is appropriate, is
applicable to liquidate such property and assets if
necessary.
I dissent.
*
Justice John C. Sheehy and Jus illiam E. Hunt, Sr., join in
the foregoing dissent of Justice John C. Harrison.