NO. 93-080
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
STANLEY J. KONDELIK and
ELIZABETH A. KONDELIK,
husband and wife,
Plaintiffs and Appellants, ., ~ ~.
APPEAL FROM: District Court of the Seventh Judicial District,
In and for the County of Dawson,
The Honorable Richard G. Phillips, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Arnie A. Hove, Circle, Montana
For Respondent:
Richard A. Simonton, Simonton, Howe & Schneider,
Glendive, Montana
Submitted on Briefs: May 13, 1993
Decided: July 28, 1993
Filed:
Justice Fred J. Weber delivered the Opinion of the Court.
This is an appeal by plaintiffs Stanley J. and Elizabeth
Kondelik from an order of the District Court of the Seventh
Judicial District, Dawson County, granting defendant's motion for
summary judgment in part and dismissing in part without prejudice.
We affirm in part and reverse in part.
The issues for review are restated as follows:
1. Did the District Court err in granting summary judgment in
favor of defendants on plaintiffs' claim for breach of fiduciary
duty?
2. Did the District Court err in determining that claims for
misuse and misappropriation of,corporate funds cannot be brought by
plaintiffs individually?
3. Did the District Court err in dismissing plaintiffs'
claims of fraud and negligent misrepresentation because they were
premature?
Plaintiffs allege tortious conduct on the part of the First
Fidelity Bank of Glendive (Bank) concerning Kondelik Ranch, Inc.
(the Corporation), a Montana farm and ranch corporation which
incorporated in 1968. Stanley 3. Kondelik (Stanley) and his
brother, Emil J. Kondelik (Emil), were the sole shareholders in
1991 when they agreed to divide the land and other corporate assets
based upon Stanley's ownership of 47% of the shares in the
Corporation and Emil's ownership of 53% of the shares. Their plan
was also to divide the liabilities in the same proportion. This
division of liabilities proved to be unsuccessful.
2
In 1990, the Corporation's officers were Stanley, Emil and
Emil's wife, Evelyn Kondelik (Evelyn). Stanley was president of
the Corporation from April 1990, after the death of his father,
until February 1992, when he resigned that office. Stanley's wife,
Elizabeth, was not a shareholder or officer. Prior to October 1988
when Stanley and Elizabeth (the plaintiffs) were married, Elizabeth
had no association with Kondelik Ranch, Inc.
Stanley and Emil both testified by deposition that they had
differed over certain ranch matters as early as 1987, but that it
was not until after the marriage of the plaintiffs in October 1988
that Stanley questioned the conduct of other officers of the
Corporation. No split of the Corporation was pursued prior to
1990, however, because the brothers did not want to upset their
father, Emil Kondelik, Sr., who lived until January 1990.
At the time of Stanley and Elizabeth's marriage in October
1988, the Corporation had two delinquent loans with the Bank which
had recently been guaranteed by Farmers Home Administration (FmHA).
The Bank had required the FmHA guarantees as a condition for
continuing to carry the Corporation's real estate and equipment
loans. One of these loans was in the principal amount of $112,000
and secured by a security agreement, a real estate mortgage and two
brand mortgages (the equipment loan): the other loan, with a
principal amount of $288,000, was secured by a real estate mortgage
(the real estate loan).
In addition, the Bank made operating loans over a period of
years to the Corporation. When the Corporation was unable to pay
current operating loans, the Bank carried them over to the next
3
year. On December 7, 1989, the carryover operating debt was
$220,965.03. The Corporation renewed this debt and included the
1989 operating debt in a new note for $250,000 executed in December
1989 (the operating loan). Emil, Evelyn, Stanley and Elizabeth all
signed personal guarantees for this amount. Although Elizabeth has
never been a shareholder, officer or director of the Corporation,
the Bank required her signature on the operating loan. This
operating loan represented several years of operating expenses
which the Corporation was unable to pay the Bank because of drought
and other conditions beyond its control.
In 1991, the Kondeliks separated the Corporation's assets and
liabilities according to the pro rata shares of stock owned by Emil
and Stanley and began operating the ranch as two units. When the
Bank split the operating loan, plaintiffs were required to sign
personal guarantees on new loans representing both couples' shares
of the $250,000 operating loan. Thus, plaintiffs remain obligated
as guarantors on Emil and Evelyn's share of the operating loan.
The operating loan is not guaranteed by FmHA. Since May 1991, the
Bank has provided separate current operating loans to Stanley and
Elizabeth as individuals.
Stanley has signed personal guarantees for over $600,000 of
Corporation debt. In addition to the guarantees for the operating
loan discussed above, Stanley has signed personal guarantees for
100% of the equipment and real estate loans. As far as the real
estate and equipment loans are concerned, the Bank has merely
accommodated the Kondeliks by allowing them to make separate
payments based on stock ownership; it has not actually split the
4
responsibility for the loans. The couples have split all other
assets and liabilities on a 47%/53% basis and have operated
separately since May or June of 1991.
Stanley and Elizabeth testified in their depositions that they
wanted to separate the ranching operations because they believed
that Emil and Evelyn were misusing and misappropriating Corporation
funds. Evelyn was secretary-treasurer of the Corporation and
handled its bookkeeping matters. At a shareholder meeting in 1989,
Evelyn admitted using corporate operating funds inappropriately and
agreed to stop this practice. Plaintiffs also testified in their
depositions that when Evelyn's inappropriate spending continued,
they advised Perry 0. King (King) of their concerns regarding
Evelyn's conduct. King was an agricultural loan officer, vice-
president and employee of the Bank. He was in charge of servicing
the Corporation's loans at the time plaintiffs advised him of
Evelyn's conduct. Plaintiffs contend that King agreed to monitor
the Corporation operating account for inappropriate advances and
withdrawals of operating funds by Evelyn.
Plaintiffs have further testified that in February 1991, the
Bank agreed to split the Corporation's debt if the shareholders
reached an agreement concerning the misappropriated funds. The
Kondeliks reached an agreement in May 1991. Pursuant to this
agreement, Emil and Evelyn agreed to pay Stanley $30,000 in
exchange for his release of all claims against them relating to
misuse and misappropriation of corporate funds. Plaintiffs claim
the Bank pressured them into signing this agreement before their
accountant's review was final by refusing to give them a loan for
5
current operating expenses prior to reaching an agreement and
settlement.
After the Kondeliks settled the matter, the Bank prepared
separate notes to refinance the operating loan. Plaintiffs signed
a note individually for 47% of this debt with the Bank. They also
signed personal guarantees for Emil and Evelyn's share of the
operating loan. Emil and Evelyn's share of the operating loan
remains in the name of Kondelik Ranch, Inc. and Emil and Evelyn
continue to operate their share of the ranch as the corporate
entity. In addition to the operating loan, which is not FmBA
guaranteed, Stanley remains responsible for 100% of the FmBA-
guaranteed equipment and real estate loans.
Plaintiffs testified by deposition that King told them he
would handle the split of the debt and, specifically, that he would
arrange to have the equipment and real estate loans separated by
FmBA to reflect the Kondeliks' split of land and equipment so that
each couple would be responsible only for their share of the total
debt. King testified that he agreed to work with the Kondeliks--in
his capacity as a loan officer servicing their accounts--in order
to effectuate the split of the Corporation. King did try to
achieve this separation with FmBA for the Kondeliks but the first
request was denied by FmHA.
Stanley, Emil and Evelyn remain obligated on the entire
corporate debt which totals over $600,000. Elizabeth remains
obligated on $250,000 in corporate operating loan debt. Stanley
and Elizabeth, who now operate their share of the ranch as
6
individuals, have pledged personal collateral to the Bank for these
debts.
On March 17, 1992, after learning that Emil and Evelyn were
late on their payments to the Bank, plaintiffs filed a complaint
against the Bank charging two counts of malice, and one count each
of breach of fiduciary duties, negligent misrepresentation and
fraud. They requested actual and punitive damages and specific
performance of the Bank's alleged agreement to split the loans.
The District Court granted summary judgment in favor of the Bank on
plaintiffs' claims for malice and breach of fiduciary duties and
dismissed without prejudice the claims of fraud and
misrepresentation. Additional facts are provided throughout this
opinion as necessary.
I.
Did the District Court err in granting summary judgment in
favor of the Bank on plaintiffs' claim for breach of fiduciary
duties?
The plaintiffs contend that when the Kondeliks requested a
split of the Corporation's assets and liabilities, the Bank agreed
to do so subject to certain conditions. They claim that the
Kondeliks met these conditions, but the Bank did not split the debt
as agreed. The Bank's failure to split the Corporation's debt is
the primary issue here. Stanley and Elizabeth contend that a
fiduciary relationship existed between them and the Bank. The
District Court determined that no fiduciary duty was owed by the
Bank to either Stanley or Elizabeth.
7
Plaintiffs contend that King acted in a fiduciary relationship
with them regarding the split of the Corporation. They further
contend that the Bank owed Elizabeth a separate duty to monitor for
misuse and misappropriation of operating funds. According to the
plaintiffs, King assured them that he would obtain separate loan
guarantees if they reached an agreement with Emil and Evelyn
concerning the misuse and misappropriation of corporate funds.
Plaintiffs claimthatthey contacted King regarding the misuse
and misappropriation of Corporation funds, that they provided
evidence of the same and that King assured them that the Bank would
monitor the operating loans. Plaintiffs further contend that the
misuse and misappropriation continued and that no monitoring was
done.
The plaintiffs also argue that the District Court disregarded
the fact that Elizabeth was never a shareholder, officer or
director of the Corporation. In addition, the plaintiffs have
presented other facts which they contend are relevant to the issue
of whether a fiduciary relationship existed here between the Bank
and themselves.
As previously stated, FmBA rejected the split of the real
estate and equipment loans. The FmHA guarantees were obtained at
the urging of the Bank in lieu of other remedies when the
Corporation was having difficulty meeting its obligations. In
1987, the Bank had required the Corporation to obtain FmBA
guarantees on the Corporation's existing real estate and equipment
loans as a condition for carrying these loans. Acting on behalf of
the Corporation, King obtained the first FmIiA guarantees in 1987.
8
Plaintiffs contend that King was acting or agreed to act in a
fiduciary relationship in 1991 when he assured them that the Bank
would again handle the FmHA paperwork to obtain separate guarantees
for split loans. According to the plaintiffs, King further assured
them in May of 1991 that he would obtain separate loan guarantees
if they agreed on a split of the ranch and if Stanley and Elizabeth
would release their claims of misuse and misappropriation against
Emil and Evelyn.
In the order granting summary judgment to the Bank on this
issue, the District Court stated:
All of the material contacts, conversations, ranch
visits, etcetera [sic], had to do with the corporation's
farming activity and its operating loan not with any
individual loan that the Plaintiffs may have had.
Further, the court stated that if a fiduciary relationship existed,
it was with the Corporation and not with Stanley and Elizabeth as
individuals.
Summary judgment is proper when there are no genuine issues of
material fact and the moving party is entitled to judgment as a
matter of law. Rule 56(c), M.R.Civ.P. The standard that an
appellate court applies in reviewing the grant or denial of a
motion for summary judgment is the same as that used by the trial
court. Musselman v. Mountain W. Farm Bureau (1992), 251Mont. 262,
824 P.2d 271, 273. The party moving for summary judgment is
entitled to judgment on the law applicable to the facts established
by the pleadings, depositions, answers to interrogatories and
admissions in the record. Musselman, 824 P.2d at 274.
9
Plaintiffs contend that the Bank owed fiduciary duties to them
personally in addition to any fiduciary duty owed to the
Corporation. Because Stanley and Elizabeth are not similarly
situated, we will address their claims separately.
Stanley claims the Bank owed him a fiduciary duty because he
transacted ranch business with the Bank individually as well as
through the corporate entity. Stanley was a shareholder, guarantor
and officer of the Corporation before, during and after the split
of assets and liabilities. Montana law provides that a shareholder
who guarantees corporate loans may recover individual damages from
the lender only where a separate duty exists apart from that owed
by the lender to the corporation. Walstad v. Nor-west Bank of Great
Falls (1989), 240 Mont. 322, 327, 783 P.2d 1325, 1328. In our most
recent opinion addressing the rights of shareholders to sue on
their own behalf, we stated:
Montana law is clear that the stockholders and guarantors
of a corporation do not have the right to pursue an
action on their own behalf when the cause of action
accrues to the corporation. Bottrell v. American Bank
C-89) r 237 Mont. 1, 26-27, 773 P.2d 694, 708-10;
Walstad, 783 P.2d at 1328; Moats Trucking Co., Inc. v.
Gallatin Dairies, Inc. (1988), 231 Mont. 474, 477, 753
P.2d 883, 885. Here, [the corporation] borrowed
operating funds from the Bank: the Swensons as
individuals did not borrow operating funds but had
borrowed from the Bank to purchase a truck. Nor did the
Swensons as individuals request a loan related to the
auger rig since it was refinanced in 1984. The corporate
entity . . . was requesting an advance for operating
funds under its promissory note. . . . The Bank properly
exercised its contractual right and refused this
requested advance. The District Court correctly
concluded that the Swensons as individuals are precluded
from asserting any cause of action arising from this
refusal by the Bank to continue financing [the
corporation].
10
Richland Nat'1 Bank & Trust v. Swenson (1991), 249 Mont. 410, 424,
816 P.2d 1045, 1054.
Stanley's argument that he can sue the Bank individually
because he and Elizabeth now operate as a sole proprietorship and
because the Bank has been dealing with him in both the corporate
capacity and personally is the same argument made by the bank
customers in Swenson. This argument did not stand up there and is
similarly flawed here. Stanley was a shareholder and officer of
Kondelik Ranch, Inc. before, during and after the split. He
continued to hold the office of president of the Corporation until
February 1992. Similarly, the fact that the Bank allowed Stanley
to term out 47% of the corporate operating lona, which was not
subject to FmHA guarantees, created no separate duty owed by the
Bank to Stanley regarding the FmHA-guaranteed loans.
Any causes of action relating to the split accrue to the
Corporation, and cannot be prosecuted by Stanley as a shareholder
and guarantor merely because he also transacted business with the
Bank individually. Like the shareholders in Swenson, Stanley has
failed to establish that the Bank owed him a separate duty here.
We conclude that Stanley has no standing to bring an action for
breach of fiduciary duty against the Bank here because the cause of
action accrued to the Corporation, not the shareholders.
We hold the District Court correctly determined that the Bank
owed no separate duty to Stanley Kondelik and properly granted
summary judgment in favor of the Bank on Stanley's claim for breach
of fiduciary duty.
11
Elizabeth, however, has always had a different status than
that of the other Kondeliks. Unlike Emil, Evelyn and Stanley, she
has never been a shareholder, director or officer of the
Corporation. Stanley, Emil and Evelyn have all acted in one or
more such capacities. Moreover, Elizabeth has pledged personal
property as security for corporate loans.
The Bank required Elizabeth's signature as guarantor on the
Corporation's operating loans. Thus, Elizabeth remains obligated
on Emil and Evelyn's share of the Corporation debt as well as
Stanley's share. In 1989, Elizabeth signed a personal guaranty for
the Corporation's $250,000 operating loan. On May 23, 1991,
Elizabeth signed two separate notes for the refinancing of the
operating loan--one reflecting Stanley's 47% share of the debt
($156,142) and the other reflecting Emil and Evelyn's 53% share of
such debt ($180,000). At the time Elizabeth signed these notes,
King was servicing the Corporation's loans. In 1989, Elizabeth
advised King that she believed corporate funds were being misused
and misappropriated by Evelyn and asked the Bank to monitor the
operating loan advances and expenditures.
The District Court relied on our prior decisions concerning
shareholder/guarantors to determine that Elizabeth, like Stanley,
had no standing to sue here. However, the principles established
by Bottrell, Walstad, and Swenson do not apply to these facts where
Elizabeth is a guarantor and is not and has never been an officer,
shareholder, or director of the Corporation.
A bank may owe a fiduciary duty to a customer if special
circumstances exist where the bank acts as an advisor or asserts
12
-
influence in a customer's business. Lachenmaier v. First Bank
Sys., Inc. (1990), 246 Mont. 26, 33, 803 P.2d 614, 618-19. When a
fiduciary relationship exists, the party in the stronger position
owes an obligation by virtue of the trust relationship to act in
the best interests of the beneficiary. Davis v. Church of Jesus
Christ of Latter Day Saints (Mont. 1993), 852 P.2d 640, 646, 50
St.Rep. 535, 539.
The Bank maintains here that the existence of a fiduciary duty
is a question of law properly determined through summary judgment
proceedings, citing Simmons v. Jenkins (1988), 230 Mont. 429, 435,
750 P.2d 1067, 1071. That is an inapposite statement of the law as
Simmons held that the existence of a dutv of qood faith is a
question of law properly determinable during summary judgment
proceedings. In this case, we are concerned with the existence of
a fiduciary duty, not the existence of a duty of good faith.
The existence of a fiduciary duty depends upon satisfactory
proof of a special relationship. Davis, 852 P.2d at 646. This
relationship is known as a fiduciary relationship. In a prior
Montana case which addressed the fiduciary relationship which may
exist between a bank and its customer, we noted:
[Mlodern banking practices involve a highly complicated
structure of credit and other complexities which often
thrust a bank into the role of advisor, thereby creating
a relationship of trust and confidence which may result
in a fiduciary duty upon the bank to disclose facts when
dealing with the customer.
Deist v. Wachholz (1984), 208 Mont. 207, 216-17, 678 P.2d 188, 193
(quoting Tokarz v. Frontier Fed. Sav. & Loan Ass'n (1983), 33
Wash.App. 456, 656 P.2d 1089, 1092).
13
The existence of a fiduciary relationship is not a question of
law and it is not appropriate for a district court to make this
determination on summary judgment where genuine issues of material
fact concerning this relationship are present. Davis, 852 P.2d at
646. The record in this case establishes that there are genuine
issues of material fact with regard to a fiduciary relationship
between the Bank and Elizabeth. In addition, the District Court
failed to distinguish Elizabeth's position as compared to Stanley's
position. As a result, we conclude that it was not appropriate
here for the District Court to grant summary judgment in favor of
the Bank when there are genuine issues of material fact which go to
the question of whether a fiduciary relationship existed between
the Bank and Elizabeth.
We hold the District Court erred in granting summary judgment
in favor of the Bank on Elizabeth Xondelik's claim for breach of
fiduciary duty.
II.
Did the District Court err in determining that claims for
misuse and misappropriation of corporate funds cannot be brought by
plaintiffs individually?
The District Court determined that the claims for misuse and
misappropriation of corporate funds were claims which accrued to
the Corporation and as such could not be brought individually by
Stanley and Elizabeth. As the court noted, every cause of action
must be brought by the real party in interest. Rule 17(a),
M.R.Civ.P., provides in pertinent part:
14
Every action shall be prosecuted in the name of the real
party in interest. A personal representative, guardian,
bailee, trustee of an express trust, a party with whom or
in whose name a contract has been made for the benefit of
another . . . may sue in that person's own name without
joining the party for whose benefit the action is brought
. . . .
The effect of the first sentence of Rule 17(a) is that the action
must be brought by the person who is entitled to enforce the right
according to the governing substantive law and will not necessarily
be brought in the name of the person who ultimately will benefit
from the recovery. 6A Wright, Miller & Kane, Federal Practice and
Procedure: Civil 2d § 1543 (1990).
In order to apply Rule 17(a) properly, it is necessary to
identify the law that created the substantive right being asserted
by the plaintiff. Id., at g 1544. In this case, the substantive
law is the law of corporations. The law of corporations must give
a person named in Rule 17(a) a right to sue--in this case, 'Ia party
with whom or in whose name a contract has been made for the benefit
of another."
Montana law provides that a corporation may sue or be sued in
the corporate name. Section 35-l-115(1), MCA. It also provides
for shareholder derivative actions in certain circumstances. See
3 35-l-542, MCA. Neither the Montana Business Corporation Act, §§
35-l-101 through 35-1-1312, MCA, nor the Montana Close Corporation
Act, §§ 35-g-101 .through 35-g-504, MCA, provides for an individual
guarantor to sue on behalf of the corporation.
Stanley, as a shareholder, cannot sue on a corporate cause of
action except in a shareholder derivative suit. Elizabeth was a
guarantor of corporate debt but never an officer, director or
15
shareholder of the Corporation. We have said Elizabeth may sue
personally on her breach of fiduciary duty claim. The claim for
misuse and misappropriation of corporate funds is a cause of action
belonging to the Corporation. It does not follow that Elizabeth
can sue personally based on a corporate cause of action for misuse
and misappropriation of corporate funds merely because she signed
personal guarantees. Elizabeth cannot prosecute the claims of the
Corporation, she may only pursue her own causes of action. We
conclude that Elizabeth and Stanley have no standing to sue
individually for an action which belonged to the Corporation.
We hold the District Court correctly determined that claims
for misuse and misappropriation of corporate funds cannot be
brought by plaintiffs individually.
III.
Did the District Court err in dismissing plaintiffs' claims of
fraud and negligent misrepresentation because they were premature?
Stanley and Elizabeth alleged claims of fraud and negligent
misrepresentation against the Bank, claiming they were damaged
because the Bank failed to monitor for misuse and misappropriation
of corporate funds which they reported to the Bank in 1989. The
District Court dismissed this claim without prejudice because any
damages were speculative and premature as the Bank had not
initiated any foreclosure action.
Plaintiffs claim that certain damages are not speculative or
premature. First, they claim the Bank incorrectly calculated the
amortization of the principal and interest of the operating loan
when it split the amounts and allocated 41% of the debt to Stanley
16
and Elizabeth. This claim was not argued before the District Court
and we will not address it for the first time on appeal.
Second, the plaintiffs claim that the difference between the
amount they settled on with Emil and Evelyn ($30,000) and the
actual amount of money misused or misappropriated by Emil and
Evelyn is also calculable as damages. This claim relates to the
misuse and misrepresentation claim which belongs to the Corporation
and not to plaintiffs individually.
Third, Elizabeth claims she was damaged personally when the
Bank allowed the misuse and misappropriation to continue after she
had signed personal guarantees and had reported the misuse and
misappropriation to King. This claim of damages relates to
Elizabeth's separate claim for breach of fiduciary duty.
Finally, plaintiffs claim that the misuse and misappropriation
is being allowed to continue and as they remain obligated on 100%
of the operating loans and Stanley remains obligated on 100% of the
FmHA-guaranteed real estate and equipment loans, they are
continuously being damaged by the Bank's failure to monitor the
accounts of the Corporation.
We agree with the District Court that any claim for fraud or
negligent misrepresentation is premature. Unless the primary
obligor--here the Corporation--fails to make payments on the
corporate debt, plaintiffs damages are speculative and premature.
In Montana Bank of Circle, N.A. v. Ralph Meyers & Son, Inc. (1989),
236 Mont. 236, 243, 769 P.2d 1208, 1213, we stated:
17
A guarantor differs from a surety in that a surety
holds primary liability equal with that of the original
borrower. However. a quarantor does not become liable
until an intervenina act occurs, such as a default of the
oriainal borrower. . . .
In the instant case, Bank exhausted its remedies
against Corporation and the collateral. Thus it was ripe
to proceed against Meyers as both a surety and a
guarantor. (Emphasis supplied.)
The plaintiffs have not been called upon to honor any guaranty of
corporate debt. They will not be held liable on the Corporation's
loans unless some intervening act occurs, such as default or
foreclosure of the Corporation's debt. If the Bank institutes a
foreclosure or collection action against Kondelik Ranch, Inc. in
the future, plaintiffs may have a claim relating to fraud or
misrepresentation at that time. We conclude that the claims of
fraud and misrepresentation were premature because the Bank had not
instituted a collection or foreclosure action.
We hold the District Court properly dismissed the plaintiffs'
claims of fraud and misrepresentation as being premature.
We affirm the judgment in favor of the Bank as to Stanley
Kondelik in all respects and as to Elizabeth Kondelik with the
exception of the claim for breach of fiduciary duty. We reverse
the summary judgment in favor of the Bank insofar as the breach of
fiduciary duty claim of Elizabeth is concerned and remand for
further proceedings consistent with this opinion.
18
WE! concur:
19