First Security Bank & Trust v. VZ Ranch

No. 90-418
IN THE SUPREME COURT OF THE STATE OF MONTANA
1991

FIRST SECURITY BANK & TRUST OF
MILES CITY, a Montana corporation,
Plaintiff and Respondent,

VZ RANCH, a Montana corporation,
and LEONARD ROBERTS , an individual,
Defendant and Appellants.
.s

APPEAL FROM: District Court of the Sixteenth Judicial District,
In and for the County of Custer,
The Honorable Kenneth R. Wilson, Judge presiding.

COUNSEL OF RECORD:
For Appellant:
Allen Beck, Esq., Billings, Montana
For Respondent:
Joel Guthals, Esq., Billings, Montana

Submitted on Briefs: February 14, 1991
Decided: March 1 9 , 1 9 9 1
Filed:

I
Clerk
Chief Justice J. A. Turnage delivered the Opinion of the Court.
VZ Ranch, a Montana corporation, and Leonard Roberts appeal
a judgment of the Sixteenth Judicial District, Custer County, which
granted summary judgment on behalf of First Security Bank and Trust
of Miles City (Bank) and against appellants' counterclaim. We
affirm.
Appellants raise the following issue:
Did the District Court err when it granted summary judgment
against appellants' counterclaim?
Appellants became customers of the Bank in approximately 1975.
On February 21, 1983, Roberts, in his individual capacity, executed
a personal guarantee, guaranteeing any and all indebtedness of VZ
Ranch for past, current, or future debts owed to the Bank, together
with any additional expenses and attorney fees.
On January 15, 1985, Leonard Roberts, as President of VZ
Ranch, executed two promissory notes, a renewal note for $1,400,000
and a real estate note for $296,000, both notes payable to the Bank
on November 1, 1985. Because the total loan exceeded the Bank's
$1,200,000 lending limit, the loan required a participating bank,
Richland National Bank of Sydney.
Additionally on January 15, 1985, Roberts, as President of VZ
Ranch, executed a security agreement granting the Bank a security
interest in VZ Ranch's crops, livestock, feed, seed, fertilizer,
silage, straw, hay, farm machinery and equipment. The Bank's
security interest was properly perfected by the filing of UCC
financing statements in the appropriate county and state offices.
From January to November 1985, the Bank extended $1,573,871.03
in operating funds to VZ Ranch. In June, 1985, the Bank notified
appellants that this loan was classified substandard by the Federal
Deposit Insurance Corporation (FDIC) because of, 1) insufficient
cash flow, and 2) the value of the loan exceeded the value of the
cattle serving as primary collateral. Shortly thereafter, Richland
National Bank of Sidney withdrew its participation from this loan
due to the loan's quality. Accordingly, the loan had to be paid
down to remain bankable.
In an effort to remove the substandard classification and make
the loan bankable and renewable, the Bank recommended to Roberts
that VZ Ranch 1) obtain a Small Business Administration (SBA) loan
and apply it to the loan, 2) sell certain property and apply its
proceeds to the loan, and 3) submit an acceptable operating budget.
Upon meeting these three conditions, the Bank agreed to extend
future operating loans to VZ Ranch for 1986. VZ Ranch, however,
failed to meet one of the conditions, the sale of certain property,
and accordingly, the Bank did not extend future operating loans for
1986. In a deposition, Roberts acknowledged that these were the
three conditions expressed by the Bank in order for VZ Ranch to
receive additional operating loans, and that one of the conditions,
the sale of the certain property, was indeed not met.
 Additionally, the Bank advised Roberts to consider selling all
of VZ Ranch's cattle in the fall of 1985, and apply the proceeds
to the loan. During November and December of 1985, upon the Bank's
further direction, VZ Ranch sold its cattle and applied the bulk
of the proceeds to the loan, with the remainder of the proceeds
going toward VZ Ranch's incurred expenses.
In January, 1986, VZ Ranch filed a chapter 11 bankruptcy
petition with the United States Bankruptcy Court, which stayed
creditors, including the Bank, from pursuing collection of VZ
Ranch's pre-petition debts. During this bankruptcy proceeding, the
Bankruptcy Court, in an August 29, 1986, order, allowed VZ Ranch,
the debtor-in-possession, to use cash collateral of the bankruptcy
estate under U.S.C. 5 364, to harvest its 1986 crop. This order
further stated that all cash collateral was to remain in the
possession of VZ Ranch pending further order. Therefore, when the
1986 crop was harvested, VZ Ranch retained control of the crop
proceeds, which totaled $103,796.70. Although the Bank appealed
this order to the Bankruptcy Appellate Panel of the Ninth Circuit
on September 4, 1986, and the panel remanded the order back to the
Bankruptcy Court for reconsideration on November 19, 1986, the
bankruptcy proceeding was dismissed on January 29, 1987, before a
hearing to reconsider the order was conducted. Accordingly, the
appellants retained control of the proceeds of the 1986 crops
through and following the dismissal of the bankruptcy proceeding.
 On March 16, 1987, the Bank filed a complaint against
appellants for claim and delivery, foreclosure of security
interests, and injunctive relief. On July 7, 1987, the District
Court ordered appellants to turn over the $103,796.70 in proceeds
from the 1986 crop to the court. On July 29, 1987, the Bank moved
for contempt of appellants failing to comply with the order.
On August 13, 1987, the District Court found Roberts in
contempt of the order. Accordingly, the District Court ordered
Roberts jailed until September 15, 1987, the day he turned over
the proceeds to the court. Additionally, on August 13, 1987,
appellants filed a counterclaim, which alleged that the Bank,
glcommenceda willful and malicious course of action seeking to
force the [appellants] out of business and/or into bankruptcy.I1
The counterclaim asserted that I1[t]his course of action is in
breach of the duty of the [Bank] to the [appellants] of good faith
and fair dealing." The counterclaim alleged that the Itaction
commenced when the [appellants] refused to enter into a business
transaction with Mr. Nefsy, an owner of the [Bank].Iu In par-
ticular, the counterclaim alleged that the Bank forced appellants,
"to liquidate livestock at a time and in a manner calculated to
minimize the return thereon and to further jeopardize the rappel-
lantsl] financial condition.It The counterclaim alleged that the
Bank Itrepresented to the [appellants] that they should continue
certain farming and ranching operations in the fall of 1985 and
that continued financing for those operations would be provided;
upon those assurances, the [appellants] conducted said farming
operations incurring debt but when loan advances were requested
they were denied by [the Bank]."
Furthermore, the counterclaim alleged that the Bank assured
appellants that if they obtained an SBA loan, "and paid the
proceeds thereof over to the [Bank] that the [Bank] would continue
financing [appellants1]operations; the [appellants] obtained such
[SBA] loan and paid the proceeds over to the [Bank] but [Bank]
failed to provide the promised financing." Finally, the counter-
claim alleged that appellants relied on the Bank's promises and
assurances to their detriment, and that the Bank Igha[d] been
motivated by ill-will and for the purpose of injuring and damaging
[appellants]."
On October 31, 1989, the Bank moved for summary judgment when
attempted negotiations failed. In an amended memorandum and
opinion dated July 12, 1990, the District Court granted the Bank
summary judgment on its complaint and against appellantst counter-
claim. The District Court held that the counterclaim lacked
sufficient facts to support a claim of breach of contract.
~dditionally,the District Court held Itthatthere was no breach of
the covenant of good faith and fair dealing nor was there a
fiduciary relationship between the parties that directed an
extension of further credit [by the Bank] ." From this judgment,
appellants appeal.

Did the District Court err when it granted summary judgment
against appellantsf counterclaim?
Here, the appellants do not contest that the Bank was entitled
to summary judgment on its complaint; the sole issue is whether the
District Court erred when it granted summary judgment against the
appellantsf counterclaim. Our discussion will therefore be limited
to the counterclaim.
The counterclaim alleges two causes of action: 1) breach of

the implied covenant of good faith and fair dealing in contract,
where contact damages are allowed, and 2) breach of the implied
covenant of good faith and fair dealing in tort, where actual
damages and punitive damages are allowed. See Story v. City of
Bozeman (1990), 242 Mont. 436, 450-452, 791 P.2d 767, 775-76. The
record, however, does not support any of the appellantsf allega-
tions raised in their counterclaim. Section 28-1-211, MCA,
provides :
The conduct required by the implied covenant
of good faith and fair dealing is honesty in
fact and the observance of reasonable commer-
cial standards of fair dealing in the trade.
Here, the record does not indicate any dishonesty or un-
reasonable commercial behavior on the part of the Bank toward the
appellants. The Bank notified appellants of the substandard
classification of the appellantst loan. The Bank then met with
Roberts to discuss ways to remove the substandard classification
and make the loan bankable and renewable. The Bank agreed to renew
the loan if the appellants could meet three conditions: 1) obtain

an SBA loan, 2) sell certain property, and 3) submit an acceptable
operating budget. Although the appellants1 counterclaim alleges
that obtaining an SBA loan was the only condition stipulated by the
Bank, Roberts acknowledged in a deposition that there were indeed
three conditions to renew the loan. Roberts further acknowledged
in the deposition that although the appellants met two of the
conditions, obtaining an SBA loan and submitting a revised
operating budget, they failed to meet one of the conditions, the
sale of certain property.
In the deposition, Roberts alleges that his troubles with the
Bank began when he refused to enter a business transaction
involving cattle with Mr. Nefsy, an owner of the Bank. The record,
however, is void of any evidence that either supports Roberts's
allegation or points to any wrongdoing on Nefsy's part. The
appellants in their counterclaim further argue that the Bank forced
them to liquidate the cattle Itata time and in a manner calculated
to minimize the return thereon and to further jeopardize the
[appellants1] financial condition.It Here, however, the Bank was
faced with a substandard loan collateralized by cattle, which were
scattered in various locations without adequate feed for their
survival. The Bank could not loan more money to appellants for
cattle feed until the loan was brought into bankable condition.
Thus, the Bank directed appellants to sell the cattle, a reason-
able, if not the only, solution in light of the facts. Further-
more, the appellants presented no evidence regarding insufficient
cattle prices or calculated actions on the Bank's part to worsen
their financial condition through the sale of the cattle at that
particular time. We therefore hold that there was no breach of the
implied covenant of good faith and fair dealing in contract in this
instance.
Regarding appellants' second cause of action, a ''special
relationshipt1must exist between the parties for there to be a
breach of the implied covenant of good faith and fair dealing in
tort. Story v. City of Bozeman, 242 Mont. at 451, 791 P.2d at
776. The elements of a special relationship are:
(1) the contract must be such that the parties
are in inherently unequal bargaining posi-
tions; [and] (2) the motivation for entering
the contract must be a non-profit motivation,
i.e., to secure peace of mind, security,
future protection; [and] (3) ordinary contract
damages are not adequate because (a) they do
not require the party in the superior position
to account for its actions, and (b) they do
not make the inferior party 'whole'; [and] (4)
one party is especially vulnerable because of
the type of harm it may suffer and of neces-
sity places trust in the other party to per-
form; and (5) the other party is aware of this
vulnerability.
Story, 242 Mont. at 451, 791 P.2d at 776 (citation omitted).
Clearly, the appellants had a profit motivation when Roberts,
as President of VZ Ranch, executed the promissory notes to the
Bank. Hence, no "special relationship1I existed between the
appellants and the Bank, and consequently, there was no breach of
the implied covenant of good faith and fair dealing in tort. We
therefore hold that the District Court properly granted the Bank
summary judgment against appellants1 counterclaim as there were
insufficient facts to support the counterclaimls two causes of
action.
Affirmed .

' Chief Justice

We concur:
/