No. 89-389
IN THE SUPREME COURT OF THE STATE OF MONTANA
1990
IRVIN ELLIS LARSON, WILLIAM LARSON,
WYLEY GOOD, THOMAS KEELEY, MELVIN KING,
PAUL LEHMAN, RONALD PAIGE, ROBIN W. SPARKS,
AND THOMAS L. TOPE,
Plaintiffs and Appellants,
-VS-
FIRST INTERSTATE BANK OF KALISPELL, and FIRST
INTERSTATE BANCORP, INC.,
Defendants and Respondents.
APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable Leif Erickson, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Sidney R. Thomas; Martha Sheehy; Moulton, Rellingham,
Longo & Mather, Billings, Montana
William A. Rossbach; Rossbach & Whiston, Missoula,
Montana
For Respondent:
Dana L. Christensen and Debra D. Parker; Murphy,
Robinson, Heckathorn & Phillips, Kalispell, Montana
Submitted on Briefs: Dec. 21, 1989
Decided: February 14, 1990
Filed:
Justice Fred J. Weber delivered the Opinion of the Court.
Plaintiffs, limited partners in Crystal Lakes Limited
,
Partnership (I1Crystal Lakes1#) brought this action to recover
damages as a result of defendants1 alleged tortious acts against
Crystal Lakes, including forcing the general partner to breach
his fiduciary duties. The defendants moved to dismiss for failure
to state a claim upon which relief can be granted. The District
Court for the Eleventh Judicial District, Flathead County, granted
the motion and dismissed the Complaint. Plaintiffs appeal. We
reverse.
The sole issue for our consideration is whether the District
Court properly dismissed the plaintiffs' Complaint for failure to
state a claim for which relief could be granted?
It is a well established rule in Montana that a Complaint
should not be dismissed for failure to state a claim upon which
relief may be granted unless it appears certain that the plaintiff
is entitled to no relief under any set of facts which could be
proved in support of his claim. See Mogan v. City of Harlem
(1987), 227 Mont. 435, 739 P.2d 491. On a motion to dismiss under
M.R.Civ.P. 12 (b)(6), the court takes the allegations of the
plaintiff to be true and construes the allegations in a light most
favorable to the plaintiff. Contway v. Camp (Mont. 1989), 768 P.2d
1377, 46 St.Rep. 270.
Following are the pertinent portions of the plaintiffs1
Complaint:
I : Plaintiffs William E. Larson, Wyley Good, Thomas Tope,
Melvin King, Irvin Larson and Paul Lehman entered into an agreement
with Rolland Andrews to form a limited partnership known as Crystal
Lakes Development Company, with plaintiff William E. Larson and
Rolland Andrews as general partners and the other plaintiffs as
limited partners. The purpose of Crystal Lakes was to acquire and
develop certain real estate in the vicinity of Fortine, Montana as
a golf course and related recreational and residential development.
911: In 1979 and 1980 three additional partners joined
Crystal Lakes: plaintiffs Thomas Keeley, Robin Sparks and Ronald
Paige. On April 9, 1981, William E. Larson resigned as a general
partner and became a limited partner.
9111 and IV: In order to acquire property and develop Crystal
Lakes Country Club and subdivision, Crystal Lakes entered certain
financial arrangements with First Interstate Bank of Kalispell
(''Bank"). Crystal Lakes depended on the Bank to provide it with
loans and other financial assistance, and for information and
advice in the management and development of the business. Over
time Bank officials became more involved in directing Crystal Lakes
on how it should operate and on what the Bank required it to do to
keep obtaining financing.
9V and VI: For the first few years Crystal Lakes made steady
progress in developing the real estate and was able to keep current
on its obligations. The Bank's involvement increased. Plaintiffs
allege the Bank urged Crystal Lakes to acquire an additional 600
acres of land ("Vredenburg Land''), even though it would entail a
significant increase in the total debt.
IVII and VIII: The Vredenburg Land was already encumbered by
a large debt to the Bank and one of the other subsidiaries of
Western Bancorp (81Bancorp11).In order to induce Crystal Lakes to
purchase the Vredenburg land, Bank officials entered into an
agreement whereby the Bank promised Crystal Lakes that if it
purchased the acreage, the Bank would provide Crystal Lakes with
a loan to purchase the land and an open credit line up to five
million dollars to enable Crystal Lakes to have sufficient funds
to fully develop the property. The Bank further agreed that once
the property was fully developed, the five million dollar credit
line would be converted to a long term real estate loan.
IVIII through XI: In reliance upon these promises, Crystal
Lakes entered into agreements to purchase the Vredenburg land for
$1,500,000. At the time of the closing, Andrews was assured by
the Bank that Crystal Lakes would have the time and credit it
needed to make the project work. In reliance on this promise,
general partner Andrews entered into the agreement on behalf of
Crystal Lakes. Crystal Lakes then initiated major expansion
efforts, borrowing additional funds and doing additional
developments on the property. On August 5, 1982, the general
partner executed a mortgage with the Bank which reflected the five
million dollar credit line the partnership agreed to as part of the
earlier agreement. During this period of time, the Bank came more
directly under the control of Bancorp.
fix11 through XV: In approximately June of 1983, the Bank,
under the direction of Bancorp, gave the partnership notice that
it no longer intended to perform as promised, breaching its
agreement to provide credit and compelling all of the plaintiff
limited partners individually to enter into a new "work out"
agreement. Under the terms of this agreement, the Bank would
provide limited additional short term funding, but would not give
the partnership the financial assistance agreed to and would not
permit Crystal Lakes to continue to develop the land completely.
The general partner, Andrews, was compelled to pledge all his
personal assets to the Bank. After the execution of the new work
out agreement, the Bank stopped all further cooperation and
assistance and made it impossible for the partnership to sell the
property for its full value.
IXVI: On May 15, 1985, the Bank forced the general partner
to sign certain documents, including a deed in lieu of foreclosure,
to deed over essentially all the real estate of the partnership to
the Bank. These documents were coerced by financial pressure on
the general partner who had pledged all of his personal assets to
the Bank. The Bank, under the direction of Bancorp, knowingly
forced the general partner to violate his duty of trust and good
faith to the limited partners. This resulted in severe financial
detriment to the limited partners, causing them to lose their
investment and all prospects of profit from that investment.
IXVII: General partner Andrewsl actions under duress caused
substantial detriment to the limited partners and Andrews breached
his duties of trust and good faith to the limited partners. He did
not advise the limited partners of his actions or in any way give
them notice of the foreclosure documents until approximately one
month later.
Plaintiffs sued to recover damages claimed by defendants'
alleged tortious acts toward Crystal Lakes. Defendants moved to
dismiss for failure to state a claim upon which relief may be
granted. The District Court granted the motion and dismissed the
Complaint. Plaintiffs appeal.
I
Did the District Court properly dismiss the plaintiffs'
Complaint for failure to state a claim for which relief may be
granted?
In granting the Motion to Dismiss, the District Court
concluded that the Complaint failed to state a claim for which
relief may be granted and more specifically, because the named
plaintiffs were not the real parties in interest. The memorandum
of the District Court pointed out that the plaintiffs argued that
their losses were individual losses rather than losses to the
partnership so that the individual partners could successfully
maintain the present action. The District Court concluded that the
Montana derivative action statutes, §§ 35-12-1401 through 1404,
MCA, granted a limited partner the right to bring only a derivative
action in the right of the limited partnership. The court based
its decision on the case of Phillips v. Kula 200 I1 (Haw. Ct. App.
1983), 667 P.2d 261, 262, which held:
Limited partners may not maintain individual actions for
damages allegedly caused by a breach of the fiduciary
duty owed by the general partners to the limited
partnership. The only way they may pursue that claim is
derivatively.
The District Court concluded that the Complaint demonstrated that
any profits which the plaintiffs alleged they were entitled to
recover were based on their expectations from the limited
partnership and that any damage had accrued as a result of the
Bank's interactions with the general partner. The District Court
concluded that the relief sought by the plaintiffs was available
to them only by derivative action and that they were bound to
follow that course.
In the appeal, the plaintiffs concede that Counts 11, I11 and
IV are properly to be brought as derivative actions or claims.
Plaintiffs argue that Count I, which alleges that the defendants
assisted and compelled the general partner to breach his duty of
trust and good faith to the limited partners, allows the partners
to bring individual actions as distinguished from the derivative
action as limited partners.
Defendants maintain that the plaintiffs* claim failed to state
a claim upon which relief could be granted because the action must
be brought as a derivative action and the Complaint failed to set
forth with particularity the effort of the plaintiffs to secure
initiation of the action by the general partner, as required by
XXX-XX-XXXX, MCA.
The controlling statutes for derivative actions in
partnerships are 8835-12-1401 through 1404.
Section 35-12-1401, MCA, states:
A limited partner may bring a derivative action in the
right of a limited partnership to recover a judgment in
its favor if the qeneral partners havinq authority to do
so have refused to brinq the action or an effort to claim
those qeneral partners to brinq the action is not likely
to succeed (emphasis added).
Section 35-12-1403, MCA, states:
In any derivative action, the Complaint shall set forth
with particularity the effort of the plaintiff to secure
initiation of the action bv a qeneral partner havinq
authority to do so or the reasons for not makinq the
effort (emphasis added) .
Plaintiffs contend that under M.R.Civ.P. 9(a) they do
not have to aver the capacity as a derivative action. It states:
It is not necessary to aver the capacity of a party to
sue or be sued or the authority of a party to sue or be
sued in a representative capacity or the legal existence
of an organized association of persons that is made a
party.
M.R.Civ.P. 23.1 states (in part):
In a derivative action .. .the Complaint shall allege
with particularity the efforts, if any, made by the
plaintiff to obtain the action he desires from the
directors or comparable authority and, if necessary, from
the shareholders or members, and the reasons for his
failure to obtain the action or for not making the
effort.
The more specific rule governs. In view of the wording of the
foregoing code sections and Rule 23.1, it would have been better
practice for the plaintiffs to have specifically pleaded the
appropriate allegations to meet those provisions. They did not
specifically do so. However, Paragraph XVI of the Complaint did
state in pertinent part as follows:
On May 25, 1986, the Bank . .
. forced the general
partner to sign certain documents . . .to deed over
essentially all of the real estate of the partnership to
the Bank. These documents were coerced by financial
pressure on the general partner who had pledged all of
his personal assets to the Bank. The Bank . . .
knowingly forced the general partner to violate his duty
of trust and good faith to the limited partners. ...
Rule 23.1 was considered in S-W Co. v. John Wight, Inc.
(1978), 179 Mont. 392, 403, 587 P. 2d 348, 354, as it applies to
corporations. In that case, this Court made clear that as an
alternative to making a demand upon the board of directors, the
plaintiffs may show "such a state of facts as disclose that the
demand, if made, would have been entirely una~ailing.~~
Plaintiffs
argue that Paragraph XVI of the Complaint is sufficient to
demonstrate that the demand would have been unavailing.
The key element of our analysis is to determine from the
Complaint if it does appear beyond doubt that the plaintiffs cannot
prove a set of facts which would entitle them to relief. From the
Complaint we can determine the names and statuses of all the
limited partners. While it would have been appropriate to state
in the pleading that the limited partners were suing in a
derivative action in the right of the limited partnership, the
capacity of the limited partners to sue does appear from the
Complaint. As a result, using the theory of Mont. R. Civ. P. 9 (a),
we conclude that under the record of this case it was not essential
that the plaintiffs allege that they were suing in a derivative
capacity in the right of Crystal Lakes.
Both XXX-XX-XXXX, MCA, and Mont. R. Civ. P. 23.1, require
however, that the Complaint set forth with particularity the
efforts on the part of these plaintiffs to obtain action by the
general partner, or the reasons for their failure to make that
effort. Clearly it would have been proper for the plaintiffs to
allege with particularity as so required. Had they done so, this
extended controversy might have been eliminated.
Notwithstanding this failure, was it necessary that the
District Court dismiss the Complaint? From the allegations of the
Complaint, and in particular Paragraph XVI, the allegations
demonstrate that the Bank forced the general partner to sign
various documents and to deed over the real estate of the limited
partnership and in so doing, knowingly forced the general partner
to violate his duty of trust and good faith. While not clearly
satisfactory, these allegations do demonstrate a reason for a
failure on the part of the limited partners to request of the
general partner that he commence the suit. A reasonable conclusion
from the allegations is that a general partner who has knowingly
executed legal instruments of conveyance to the Bank, will not
commence an action in behalf of the limited partnership because of
the violation of trust and good faith by the general partner. We
therefore conclude that it does appear beyond doubt that the
plaintiffs cannot prove their effort to secure initiation of the
action by the general partner or the reasons for not making the
effort.
We further conclude that a reasonable alternative for the
District Court was to allow the plaintiffs to remedy the defects
of the Complaint through amendment. The Complaint is sufficient
to establish that the plaintiffs have the statutory right and
standing to bring a derivative cause of action and that the
plaintiffs are proper plaintiffs in such an action. We hold that
the Complaint did not justify the entry of the dismissal for
failure to state a claim upon which relief may be granted.
We reverse the order of the District Court, and remand with
the direction that the plaintiffs shall be allowed to make
appropriate amendments to the Complaint and for further proceedings
consistent with this opinion.
We Concur: /
Justices
Justice John C. Sheehy participate in this Opinion.