State Ex Rel. Farm Credit Bank v. District Court of the Third Judicial District

No. 92-480
IN THE SUPREME COURT OF THE STATE OF MONTANA
1994

STATE OF MONTANA, ex rel.,
FARM CREDIT BANK OF SPOKANE,
Relator,

THE DISTRICT COURT OF THE THIRD JUDICIAL
DISTRICT OF THE STATE OF MONTANA, IN AND
FOR THE COUNTY OF POWELL, and the
Honorable Judge thereof, TED L. MIZNER,
Respondents.

ORIGINAL PROCEEDING

COUNSEL OF RECORD:
For Relator:
Martin S. King, Worden, Thane & Haines, Missoula,
Montana (argued); W. Arthur Graham, Central Coast
Farm Credit, Arroyo Grande, California
For Respondents:
Allen Beck, Attorney at Law, Billings,
Montana (argued); Peter Pauly, Attorney at Law,
Helena, Montana (for Clifford and Patricia Graveley)

Submitted: November 5, 1 9 9 3
Decided: ~ u g u s t12, 1994
Filed:
Justice Terry N. Trieweiler delivered the opinion of the Court.
Plaintiffs Clifford E. Graveley and Patricia E. Graveley filed
their complaint in the District Court for the Third Judicial
District in Powell county claiming the right to damages from
defendant Farm Credit Bank of Spokane (FCB) based on numerous
allegations, including breach of contract and breach of the Bank's
independent covenant to perform that contract in good faith. The
Graveleys sought contract damages and specific performance of what;
they alleged were the Bank's obligations pursuant to the contract.
The Bank denied the Graveleys' allegations and counterclaimed to
foreclose the real estate mortgage that had been given by the
Graveleys to the Bank as security for a promissory note executed by
the Graveleys and the Bank on April 6, 1984. The FCB also sought
a deficiency judgment in the event the land which secured the
Graveleys loan was sold for less than the amount of the Bank's
judgment. The FCB moved for summary judgment in its favor on its
foreclosure action and to dismiss the claims in the Graveleys'
complaint.
The District Court denied the FCB's motion because: (1) it
concluded that there were genuine issues of fact raised by the
Graveleys* affirmative defense based on equitable estoppel; and
(2) it concluded that there were issues of fact raised by the
Graveleys' affirmative defense based on the Bank's alleged failure
to comply with the Agricultural Credit Act of 1987.
Since the issues decided by the court, pursuant to the FCB'S
motion for summary judgment, were issues of first impression in
Montana, and in the interest of judicial economy, the District
Court joined counsel for both parties in their request that we
grant supervisory control to review the legal issues decided by the
District Court.
The Supreme Court of this state is given general
supervisory control over all of the state courts.
Art. VIP, 5 2(2), Mont. Const. Our Rule 19(a), Montana
Rules of Appellate Procedure, recognizes that the
institution of original proceedings in the Supreme Court
is sometimes justified by circumstances of an emergency
nature, when supervision of a trial court other than by
appeal is deemed necessary or proper.
State exreL Racicot v Dismmct
. Court (1990), 244 Mont. 521, 524, 798 P.2d

In this case, final resolution of the legal issues presented
is necessary in order to assure that any subsequent trial is based
on the true legal merits of the complaint and counterclaim, and
thereby, to avoid needless and expensive litigation based on
uncertainty about the controlling law. We have, in the past, held
that this is a sufficient basis for granting supervisory control,
and therefore, accept supervisory control in this case. Fimt Bank
Systemv.DismmctCourt (1989)' 240 Mont. 77, 782 P.2d 1260. After

considering the arguments of the parties, we affirm in part and
reverse in part.
The District Court's order, the petition for supervisory
control, and the briefs of the parties present the following issues
for our consideration:
1. When provisions of the Agricultural Credit Act of 1987
found at 12 U.S.C. § 2202a (1988) are included by reference as
terns in a mortgage agreement, can a party to the agreement sue to
enforce those provisions in district court?
2. Can an allegation that a Farm Credit Bank failed to
comply with the restructure provisions of the Agricultural Credit
Act of 1987 found at 12 U.S.C. 5 2202a (1988) provide an
affirmative defense to a foreclosure action by that bank?
3. can unilateral representations allegedly made by the
lender and upon which a borrower relies to his detriment provide a
basis for the affirmative defense of equitable estoppel to a
foreclosure action when those representations are verbal and not
included in the parties1 written agreement?
4. Are the plaintiffs entitled to a jury trial of the issues
remaining after resolution of the three previous issues?
FACTUAL BACKGROUND
This factually complex litigation was commenced by the
Graveleys' complaint filed on March 17, 1987. Since then,
extensive discovery has been completed, numerous depositions taken,
and several lengthy affidavits filed, both in support of and in
opposition to the FCB1smotion for summary judgment. The following
summary necessarily omits many facts which may ultimately be
important to the resolution of this claim on its merits. They are
provided in summary form to illustrate the nature of the claim and
counterclaim, and the basis for this opinion. Furthermore, since
we are reviewing an opinion and order partly denying and partly
granting summary judgment, we also review the facts most favorably
to the Graveleys, who are the nonmoving parties, Where conflicts
have been established, we will attempt to note them.
The Graveleys are cattle ranchers who have operated on a 4000
to 5000 acre piece of land known as the "Home Place" since 1934,
and whose family has owned that piece of property since 1940. That
land has never been encumbered and was not encumbered as part of
the loan which is the subject of this lawsuit.
In 1963, the Graveleys added to their ranching operation by
purchasing the "Garrison Place" which consisted of approximately
5000 acres and was located about 12 miles away from the "Home

Place." By 1984, the balance due on the loan with which the
Garrison Place was purchased was under $25,000, and the Graveleys
estimated its value at $1,000,000.
The Graveleys have three sons and wanted to expand their
ranching operation so that their sons could participate and so that
it could support more than one family. That opportunity presented
itself in 1983 when an area of pasture land known as the "Snowshoe
Place," which consisted of 3240 acres came on the market. The
price of the Snowshoe Place was $673,920.
In order to purchase the Snowshoe Place, the Graveleys
approached Valerie Warehime, a loan officer at what was then the
Federal Land Bank of Spokane and has since been reorganized and
renamed Farm Credit Bank of Spokane.
The Graveleys requested a loan of $770,000 in order to
purchase the Snowshoe Place, pay off the balance due on the
Garrison Place, and pay for the lease of additional federal land.
As part of its review of the loan application, the Bank appraised
the ~arrisonPlace at a value of $690,000, and the Snowshoe Place
at a value of $600,000. Therefore, in order to secure a loan in
the amount requested by the Graveleys, the FCB demanded a mortgage
interest in both pieces of property. Up to this point, the parties
are in agreement.
Both Mr. and Mrs. Graveley have testified by deposition or
affidavit that they did not need to expand their ranching operation
and did not wish to do so if the Home Place, which had been in
their family for several generations, would in any way be
jeopardized. They state that they requested and received
assurances from Valerie Warehime that the loan was feasible without
encumbering the Home Place, and that it would not otherwise be at
risk, regardless of their ability to repay the loan. The Graveleys
have testified that they were told by Warehime that in the event
they were unable to make payments on the loan, they could simply
give FCB deeds to the secured property in lieu of foreclosure
proceedings, and that "that would be the end of it." They state
that they were repeatedly advised by Warehime that the Garrison and
Snowshoe Places were sufficient to secure the loan. In fact, based
on the Bank's appraisal of the two secured properties, the loan at
that time represented only 59 percent of the land's value.
Warehime acknowledges that at the time the loan negotiations
were conducted, the Graveleys were concerned about neither
encumbering nor endangering the Home Place and admits believing
that the security provided by the other two parcels of land was
sufficient in the event of default. However, she denies making any
representations about the safety of the Home Place, or that the
Bank would accept a deed in lieu of foreclosure in the event of
default.
On April 6, 1984, the Graveleys signed a promissory note in
which they acknowledged borrowing, and agreed to repay, the amount
of $770,000 to the FCB in 35 annual installments at a variable rate
of interest. The installments were due on the first day of January
of each year, beginning in 1985. The initial interest rate was
11.75 percent, but could vary based on the provisions of the Farm
Credit Act of 1971 (12 U.S.C. §§ 2001, etseq.) and the regulations

of the Farm Credit Administration. In the event of default, the
FCB retained the right to accelerate the loan, declare the entire
balance due, and increase the interest rate by an annual rate of
two percentage points.
On that same date, the Graveleys executed a written mortgage
agreement which gave the FCB a security interest in both the
Snowshoe Place and the Garrison Place to secure performance of the
promissory note. The mortgage agreement did not provide for a deed
in lieu of foreclosure in the event of default. However, it did
include the following term:
This mortgage and the note secured hereby are
executed and delivered under and in accordance with the
Farm Credit Act of 1971 and any Acts amendatory or
supplementary thereto and the regulations of the Farm
Credit Administration, and are subject to the terms,
conditions and provisions thereof applicable to Federal
Land Bank loans.
 The Graveleys made their first annual installment in the
amount of $64,789.74 on December 30, 1984. However, during the
following year, the Graveleys experienced numerous problems which
made it impossible to make the payment due on January 1, 1986. Due
to drought, their hay crop was inadequate for their needs; due to
disease, a large number of their cattle died: and their operating
loan which they had received from another lending institution was
not extended as it had been in the past, but they were required to
pay the entire balance in 1985. This required that all the
proceeds from the sale of their cattle in 1985 be applied to the
payment of their operating loan.
Clifford Graveley testified that when he realized he would be
unable to make the second annual installment on his loan with the
FCB, he met with Warehime in December 1985 to advise her of that
fact and tendered the property which had secured his loan in lieu
of foreclosure. It was his opinion at that time that the value of
the Garrison Place itself exceeded the balance due on the loan. He
states that Warehime told him the Bank did not want the deeds at
that time, but would prefer that he try to sell the Garrison Place
himself. She suggested that they enter into a written agreement
extending the January 1 due date to July 1, 1986. It is Warehimess
recollection that prior to the due date of the second annual
installment, the Graveleys offered the Garrison Place in lieu of
foreclosure, but not both secured properties, and that the Garrison
Place was not sufficient to satisfy the amount due on the note.
She agrees that she advised him the Bank was not interested in a
deed in lieu of foreckosure at that time, that she suggested that
he try to sell the property, and that they enter into an extension
agreement.
Warehime acknowledged that in 1986 the Bank did have a policy
which allowed it to accept a deed in lieu of foreclosure under some
circumstances. However, the Graveleys did not meet the criteria
for such an exchange because they had sufficient unsecured property
that the Bank was confident it could collect its deficiency after
foreclosure, even if the collateral was inadequate to cover the
loan.
Apparently agricultural land values in the area began to
decline in 1986. However, on March 31, 1986, a loan examiner at
the Bank estimated the combined value of the secured properties had
declined to $980,000, and the balance due on the Graveleys* loan
was $847,409. In other words, the balance due was still only 86.5
percent of the properties* appraised value.
By July 1, 1986, the Graveleys had still been unable to sell
the Garrison Place, and by October 23, 1986, the combined value of
the two secured properties had declined to $560,000. No further
appraisals have been done since that time.
On the other hand, the Graveleys' debt obligation has
substantially increased since 1986. The promissory note was
accelerated in January 1987 and at that time the interest rate on
the unpaid balance was increased to 14.25 percent. By the time the
Bank filed its counterclaim for foreclosure, it claimed a total
amount due of $950,602, with interest accruing at the rate of 14.25
percent annually. By the tine of its motion for summary judgment
on November 5, 1987, the Bank claimed that the balance of the
accelerated amount due was $1,013,463.24, nearly twice the most
recent estimated value of the property held as security. The Bank
also sought a deficiency judgment, which would presumably be
collected by execution on the Graveleys' Home Place.
The Graveleys contend that they only went ahead with the loan
because they were repeatedly advised by Warehime that the Garrison
and Snowshoe Places were sufficient to secure the loan, that their
Home Place would never be placed in jeopardy, and that the Bank
would take a deed in lieu of foreclosure in the event they were
unable to make loan payments. They contend that they did not need
the loan and would not have taken the loan without these
assurances, but that in spite of these assurances, the Bank refused
to accept deeds in lieu of foreclosure, and they now find
themselves in danger of losing their home,
In their original complaint against the FCB, the Graveleys
alleged, among other things, that the Bank's representations to
them regarding the adequacy of their collateral breachedthe Bank's
covenant of good faith and fair dealing, and sought specific
performance of the Bank's agreement to take a deed in lieu of
foreclosure. In reply to the Bank's counterclaim for foreclosure,
the Graveleys admitted executing the loan documents, but set forth
numerous affirmative defenses, including actual and constructive
fraud, breach of the covenant of good faith, breach of contract,
equitable estoppel, and violation of statuto~yduties under the
~gricult~ral
Credit Act of 1971.
Subsequent to the original pleading in this case, the Farm
credit Act of 1971 was amended by the enactment of the Aqricultural
Credit Act of 1987 which became effective January 6, 1988.
Agricultural Credit Act of 1987, Pub. L. 100-233, title I,
5 l02(a), 101 Stat. 1574 (codified at 12 U.S.C. 5 2202a (1988)).
Among the Actts provisions was the provision at 5 2202a(e) that:
If a qualified lender determines that the potential
cost to such qualified lender of restructuring the loan
in accordance with a proposed restructuring plan is less
than or equal to the potential cost of foreclosure, the
qualified lender shall restructure the loan in accordance
with the plan.
On February 18, 1988, pursuant to the new statute, the FCB
notified the Graveleys that it would consider an application for
restructuring their loan under the new Act. On March 31, 1988,
-..!A-L:
wlcruri t l time allowed, k n Graveleys submicced an appiication for
ie ie
restructuring, which was denied by the FCBts loan officer on
July 18, 1988. Pursuant to the provisions of the new Act, the
Graveleys then requested and received review of the loan officer's
decision by a credit review committee. The committee affirmed the
denial on September 19, 1989.
On August 24, 1989, the Graveleys filed an amendment to their
complaint which set forth the history of their application for
restructuring and alleged that the FCBts denial of their
application was contrary to the provisions of the 1987 Act, and
therefore, breached the terms of the contract between the parties
which incorporated that Act by reference. They added that the
Bank's refusal to restructure was an additional example of its
breach of the covenant of good faith and fair dealing, and also
sought specific performance of the contractual agreement to
restructure.
The District Court's disposition of these claims,
counterclaims, and affirmative defenses was as set forth above.
STANDARD OF REVIEW
This Court reviews an order of summary judgment by utilizing
the same criteria used by a District Court initially under Rule 56,
M.R.Civ.P., Minniev. CiqofRoundup (1993), 257 Mont. 429, 849 P.2d

212. Pursuant to Rule 56(c), summary judgment is proper when no
genuine issues of material fact exist and the moving party is
entitled to judgment as a matter of law.
I
BREACH OF CONTRACT CLAIM
When provisions of the Agricultural Credit Act of 1987 found
at 12 U.S.C. !
j 2202a (1988) are included by reference as terms in
a mortgage agreement, can a party to the agreement sue to enforce
those provisions in district court?
The credit transaction which gave rise to this litigation was
made possible by the Farm Credit System, which is governed by the
Farm Credit Act of 1971, as amended. 12 U.S.C. §§ 2001, etseq.

The part of this legislation with which the first issue is
concerned resulted from amendments to the Farm Credit Act of 1971
which are found in part at 12 U.S.C. 5 2202a, and which provide for
the restructure of distressed loans. Some courts have held that
those amendment were for the benefit of the lending institutions

12
involved in the Farm Credit System and to minimize the possible
exposure of the federal budget. See, e.6, Harper v. Federal Land Bank of

Spokane (9th cir. 1989), 878 F.2d 1172, 1174-75, cert. denied (1990),

493 U.S. 1057, 110 S. Ct. 867, 107 L. Ed. 2d 951. However,
resolutions of the United States Congress which preceded enactment
of the amendments, indicate that Congress was equally or more
concerned with providing borrowers who faced unusual financial
difficulties additional time to resolve their problems through
forbearance and restructuring programs which were consistent with
maintaining a viable credit delivery system. See H.Con.Res. 310,

May 14, 1986, and S.Con.Res. 138, May 14, 1986.
While the 1987 amendments were wide ranging, the particular
amendment with which this case is concerned is found at 12 U.S.C.
5 2202a and provided for restructuring distressed loans.
Under the terms of ths Act, ii distressed loan is any loan that
the borrower does not have the financial capacity to pay according
to its terms, has become delinquent under the terms of the loan
agreement, and which presents a high probability of loss to the
lender. 12 U.S.C. 5 2202a(a) (3) (1988). Both of the parties in
this case agree that by February 1988, the Graveleys' loan with the
FCB was "distressed."
Under the Act, restructuring includes:
[Rlescheduling, reamortization, renewal, deferral of
principal or interest, monetary concessions, and the
taking of any other action to modify the terms of, or
forbear on, a loan in any way that will make it probable
that the operations of the borrower will become
financially viable.
 The source of the parties' disagreement in this case over the
1987 Act is 5 2202a(e). That section sets forth the circumstances
under which restructuring should be permitted. It provides as
follows:
If a qualified lender determines that the potential
cost to such qualified lender of restructuring the loan
in accordance with a proposed restructuring plan is less
than or equal to the potential cost of foreclosure, the
qualified lender shall restructure the loan in accordance
with the plan.
It is the Graveleysi contention that these provisions for
restructuring distressed loans became terms of their mortgage
agreement with the FCB by reference when that agreement provided
that:
This mortgage and the note secured hereby are
executed and delivered under and in accordance with the
Farm Credit Act of 1971 and any acts amendatory or
supplementary thereto and the regulations of the Farm
*--a:+ - i 0 . u l l l l l f l i 9 ~ ~ ~ ~ ~ ~ ~ ~ r are J-tibject to the terms,
bLSUAI
=a-a-a-+."-*:-- and
conditions and provisions thereof applicable to the
Federal Land Bank loans.
In opposition to the FCB's motion for summary judgment, the
Graveleys submitted the affidavits of David K Johnson and Tim J.
.
Watts. Johnson stated that he was a certified public accountant in
Helena who assisted the Graveleys in the preparation of their
application for restructure of their loan. As part of that
application, he determined the cost of foreclosure and the cost of
restructure according to the standards provided for in the Act, and
concluded that based on the terms of the Act, restructuring would
clearly cost less than foreclosure. It was, in fact, his opinion
as an accountant who had worked on a number of loan restructure
applications, that the Graveleys' application possessed the highest
probability of success of all of those that he had worked on.
Watts is an agricultural economist who specializes in the
development of financial alternatives for distressed agricultural
firms. He stated in his affidavit that in that capacity he has
developed restructuring alternatives for approximately 300 farms
and ranches. He was retained on behalf of the Graveleys to analyze
the FCB's decision to deny their application for restructure of
their loan. He stated that his analysis did not involve a
substitution of his judgment for that of Valerie Warehime, but that
using the Bank's own work sheets, and applying correct mathematical
calculations and values, he concluded that her calculations were
incorrect. He expressed the opinion that using correct figures and
including the correct expenses of foreclosure, the net benefit of
restructuring was $23,347 greater than the net benefit of
foreclosure, even if it was assumed that the Bank had a right to a
deficiency judgment. If, based on the affirmative defense of
collateral estoppel there was no right to deficiency judgment, then
the financial advantage to the Bank by restructuring the Graveleys'
loan would be $373,078.60, according to Watts.
Under 12 U.S. C. § 2202, a board of directors of a lender like
the FCB can establish a credit review committee which includes
farmer representation. It further provides that within seven days
after receiving notice from the lender that an application for
restructuring has been denied, a borrower may obtain review of that
decision before the credit review committee. As mentioned
previously, review was requested of the Graveleys* restructure
application, and the lender's decision to deny restructure was
affirmed by the credit review committee.
Judicial review is neither expressly provided for nor
prohibited by the terms of the Agricultural Credit Act of 1987.
However, FCB argues that pursuant to 12 C.F.R. 5 614.4443 (d) (1992)
the decision of the credit review committee is final under federal
law and that pursuant to numerous federal and state decisions,
there is no private right of action to enforce the provisions of
the Act.
First, we note that 5 614.4443(d) was not in effect on the
date application for review was made. Second, the provision relied
on by FCB merely provides that the credit review committee's
decision "shall be the final decision of the lender.'* (Emphasis
added). It makes no reference to what other remedies may or may
not be available to enforce the provisions of the Act.
Third, none of the federal decisions relied on by the FCB
involve a claim that the terms of the Act were incorporated by
reference in a contract and that by failing to comply with the
terms of the Act, a lender breached the terms of its contract with
the borrower. See Smith v. ~ s e l l v i l l Production CreditAss In
e ( 11th .
cir 1985) ,

777 F.2d 1544; Harper, 878 F.2d 1172; Farm CreditBankofSpokanev. Debuf

(D. Mont. 1990), 757 F. Supp. 1106; Griffin v. FederalLandBankof Wichita

(10th Cir. 1990), 902 F.2d 22; Zajackv. FederalLandBankofSt. Paul (8th

cir. 1990), 909 F.2d 1181; Saftzmanv.FarmCreditServices (7th Cir. 1991),

950 F.2d 466. Furthermore, none of the state authorities cited by

16
FCB deal with an action based on breach of contract, with the
exception of one intermediate appellate court decision from the
state of Minnesota. See Yoest v. Farm Credit Bank of St. Lou& (Mo. App. W. D.

1992 ) , ..
832 S W 2d 325 ; Sierra B y Federal Land Bank Ass @ nv. Superior Courl
a
(1999), 227 Gal. App. 3d 318, 277 Cal. Rptr. 753; FederalLandBankof

Omaha v. Woods (Iowa 1991), 480 N.W.2d 61; InterstateProduction CreditAssln

v MacHugh (Wash. App. 1991) , 810 P. 2d 535 ; Federal Land Bank of Spohne
.

v. Wright (Idaho App. 1991), 813 P.2d 371; Production CreditAss*nofFargov.

Zsta (N.D . 1990) , 451 N. W 2d 118 ; Production Credit Ass'n of Worthiitgron v.
.

Van Iperen (Minn. App. 1986) , 396 N.W. 2d 35. The Van fperen decision,

which does deal with a claim based on breach of contract, contains
no analysis to explain why a contract action should be dealt with
in the same summary fashion as a private cause of action pursuant
to the statute, and is not directly on point hecause it related to
the forbearance provisions of the Farm Credit Act, rather than the
more specific and mandatory restructure provisions of the
Agricultural Credit Act of 1987.
The Graveleys, on the other hand, point out that the Harper

line of cases cited above are not applicable because their claim
does not depend upon creation of a private right of action to
enforce the Agricultural Credit Act. They contend that they simply
seek to enforce the provisions of the Act to the extent that they
have been incorporated into their contract with the FCB by
reference to the Act. They point out that it was the Bank which
drafted the agreement and included the terms of the Act by
reference, and had the Bank wished to avoid judicial enforcement of
the terms of the Act pursuant to the line of cases that it relies
on, it could have deleted that provision from the contract. They
also point out that according to the terms of the contract prepared
by the FCB, the variable interest rate which has been applied to
the Graveleys' loan is determined by reference to the Act and
regulations of the Farm Credit Administration, and that by bringing
its suit to foreclose and for a deficiency judgment, the FCB seeks
to enforce at least some terms of the Act. The Graveleys argue
that it would be unfair for the FCB to be able to pick and choose
which terms of the contract are enforceable and which are
unenforceable. The Graveleys rely, in part, on the maxim of
jurisprudence which provides that "he who takes the benefit must
bear the burden." Section 1-3-212, MCA.
The District Court first concluded that the contractual
provision incorporating the Farm Credit Act by reference does allow
the provisions of the Act to be enforced in court, and to the
extent that that same reference incorporated procedural limitations
from the Act which precluded access to court, those provisions were
unenforceable based on Article 11, Section 16, of the Montana
Constitution, and 5 28-2-708, MCA. Article 11, Section 16,
guarantees that the courts of this State will remain open to every
person, and 5 28-2-708, MCA, insures that legal redress may not be
abridged by contract. However, after reconsideration, the District
Court concluded that the constitutional and statutory authority
that it reliec? an was impliedly preempted by the procedural
remedies provided for in the Act.
We reverse the order of the District Court which dismissed the
Graveleys' breach of contract claim based on failure to comply with
the provisions of the Agricultural Credit Act and hold that the
terms of the Act were incorporated by reference in the Graveleyst
contract and are as enforceable as any other contract right,
including the variable interest rate which was incorporated by
reference in the Graveleysl promissory note.
We further conclude that the Graveleys* right to enforce these
contract provisions is not preempted by other terms of the
Agricultural Credit Act.
Whether or not there is a direct private cause of action to
enforce the terms of the Agricultural Credit Act of 1987 has been
the subject of a good deal of judicial discussion and has been
consistently decided in accordance with the Ninth Circuit Courtls
decision in Harper. The analysis has always focused on the

four-part test set forth in C o r t v . h h (1975), 422 U.S. 66, 78, 95

S. Ct. 2080, 2087-88, 45 L. Ed. 2d 26, 37-40, for determining
whether Congress intended to imply a private cause of action in a
federal statute. Relying primarily on the Harper summary of this

Act's legislative history, courts have uniformly concluded that no
private cause of action was intended, even though using the full
legislative history, a persuasive argument can be made to the
contrary. SeeZajackv. FederalLandBankofSt. Paul (8th Cir. 1990), 909

F.2d 1181, 1190-92 (Heaney, J., dissenting). However, it is
neither necessary nor appropriate that we analyze whether Congress
intended to permit a private right of action to directly enforce
the terms of the Agricultural Credit Act in this case.
The power of parti@s "to contract as they please for lawful
purposes is a basic principle of our legal system . . . . II

Calamari and Perillo, Law of Contracts 6 (3d ed. 19811.
Furthermore, "parties are generally free by agreement to impose new
duties on each other . . . ." Restatement (Second) of Contracts
introductory note to topic 4, Interference W t h Other Protected Interests,

Vol. 11, p. 60 (1981).
A recent Montana case on point is Mueske v. Piper, Jafiay & Hopwood

(1993), 260 Mont. 207, 859 P.2d 444. In that case, the issue was
whether an arbitration clause in a brokerage firm's margin
agreement was valid. We held that where the contract incorporated
the rules of the National Association of Security Dealers by
reference, we were bound to determine the validity of the
arbitration clause in accord with those rules, regardless of
whether the clause would have otherwise satisfied state and federal
law. Those rules required that the customer acknowledge in writing
receipt of a copy of the agreement. Since that had not been done,
we affirmed the district court's invalidation of the arbitration
clause. In language relevant to this case, we stated:
As the drafter of the arbitration clause, Piper,
Jaffray & Hopwood should have specified therein if it had
intended to submit disputes to arbitration under the
terms of the NASD and NYSE rules but did not intend to
have the determination of validity of the arbitration
agreement made by using the same rules. ...
 Piper, Jaffray & Hopwood's arbitration clause
incorporates the rules of the NYSE and NASD as
controlling law. The arbitration clause does not include
an exception for allowing other law to govern
determinations of validity. Applying the general rules
of contract interpretation set forth above, we conclude
that those rules, along with the public policy
considerations expressed by the SEC, direct that the
validity of the arbitration clause be determined
according to the incorporated controlling law --
the NYSE
and the NASD rules -- unless such rules contravene the
substantive law of the FAA.
We hold Piper, Jaffray & Hopwood's failure to comply
with the NYSE and NASD rules renders the predispute
arbitration clause within Piper, Jaffray & Hopwood's
Margin Agreement invalid.

Likewise, in this case, it was the FCB which drafted the
mortgage agreement so that it included the terms of the
Agricultural Credit Act by reference. If the FCB had intended to
allow only such enforcement of the Act's provisions as is provided
for in the case law on which it relies, it could have deleted any
reference to the Act or incorporated reference to the Act solely
for the purpose of establishing the variable interest rate. By
including reference to the Act as a controlling contract term, the
FCB is bound by the terms of the Act under the contract, and the
Graveleys have the same right to enforce the provisions of the Act
as the parties have to enforce any other provision in the contract.
After arriving at this same conclusion, the District Court
erroneously concluded that judicial enforcement of the Act as a
specific contract term was preempted by federal law. However, we
disagree.
 While the existence of a private cause of action is correctly
analyzed under Cort v. Ash, federal preemption is analyzed

differently. In State Medical Oxygen and Supply, inc. v. American Medical w e n

Company jl992), 256 Hont. 38, 44, 844 P.2d 100, 104, we pointed

out:
It is well settled that state laws are presumed valid
against preemption challenges unless Congress clearly
intended they be preempted by federal law. Mountain States
.
Telephone v. Commiwioner of Labor (1979), 187 Mont 2 2, 41, 608
P.2d 1047, 1057: CipoIZonev. Liggett Group, Znc. (19921, - U.S.
-, 112 S.Ct. 2608, 2618, 120 L.Ed.2d 407.
We also noted the following test for analyzing federal
preemption:
A state law can be preempted by federal law in one of
three ways. K-W Industries v. National Surety Corporation (9th Cir.
1988), 855 F.2d 640, 642 n.3. First, the federal law may
expressly preempt state law; second, Congress may have
intended the federal law occupy the entire field in the
area: third, the state law may conflict with the federal
law. K-Windustries, 855 F.2d at 642 n.3.
State Medical, 844 P.2d at 104.

The parties agree, and the District Court correctly concluded,
that the Act does not expressly preempt state law other than as it
pertains to usury. Therefore, our discussion will focus on whether
it can be inferred from the Act that Congress intended to occupy
the entire field in the area. In this part of our analysis, we
must decide whether the federal law so thoroughly occupies the
field of legal remedies Itasto make reasonable the inference that
Congress left no room for the states to supplement it." Cipollonev.

Liggett Group, inc. (1992), 112 S. Ct. 2608, 2617, 120 L Ed. 2d 407,
.
 There is some indication in the Act itself that Congress did
not intend to preempt the application of state law. 12 U.S.C.

5 2214 specifically provides:
State and other laws shall apply to corporations
organized pursuant to this part [I2 U.S.C. § § 2211
et seq.] to the same extent such laws would apply to the
organizing banks engaged in the same activity in the same
jurisdiction: Provided, however, That to the extent that
sections 2023, 2098, and 2134 may exempt banks or
associations of the Farm Credit System from taxation,
such exemptions, other than with respect to franchise
taxes, shall not extend to corporations organized
pursuant to this part.
The FCB points out that 5 2214 pertains to service
corporations, rather than a Farm Credit Bank, and therefore, is not
directly applicable. However, the sole purpose of creating such a
corporation is to carry out the functions of the bank and it makes
little sense that Congress would intend that state law apply to the
activities of a bank's agents, but that state law be preempted when
t n same activities are pertormed by the bank itself.
ie This same
view finds support in Birbeck v Southern New England Production Credit Assun
.

(D. Conn. 1985), 606 F Supp. 1030.
. In that case, the plaintiffs
executed a settlement agreement with a Production Credit
Association whereby they agreed to transfer certain real estate to
the PCA in lieu of foreclosure. However, after learning that the
real estate was worth substantially more than they were allegedly
advised by the PCA, they sued in Federal District Court to set
aside the settlement agreement based on fraud, mutual mistake, and
breach of the fiduciary duties owed to them by the PCA. The PCA
moved to dismiss on the grounds that the plaintiffs' claims were
based upon state laws which require that they proceed in state
court. In other words, the PCA in that case alleged that the
Federal District Court lacked subject matter jurisdiction over the
claims alleged. After concluding that Federal Land Banks are
private corporations and not federal agencies, the District Court
also concluded that there was no need for uniform federal common
law regarding claims made in the Farm Credit System, and cited
12 U.S.C. 5 2214 as an example of Congress's intent not to preempt

claims against Federal Land Banks or Production Credit
Associations. That court reasoned:
Glaring evidence that Congress did not intend that
federal law preempt the field with respect to federal
land banks and production credit associations can be
found in the 1980 Amendments to the Farm Credit Act,
specifically 12 U.S.C. 5 2214, which provides that state
and other laws shall apply to service corporations
organized pursuant to part D of that legislation to the
same extent that such laws would apply to the organizing
banks already existing under the Farm Credit System that
were engaged in the same activity in the same
jurisdiction. The necessary implication of section 2214
is Chat federal law has not preempted the field with
respect to banks chartered under the Farm Credit Act and
that to some degree, although unspecified in the statute,
state law will control their activities.
An overview of the Farm Credit Act of 1971, its
associated legislative history, and its subsequent
amendments (including the jurisdictional provisions
regarding PCAs) indicates that other than in those areas
where Congress had specifically legislated and regulated,
institutions within the Farm Credit System were meant to
be treated as local privately owned entities, citizens of
the states in which their principal offices were located,
and subject to state law.
Birbeck, 606 F. Supp. at 1041.
Furthermore, there is no logical basis for concluding that
simply because Congress required that loan officers' decisions be
reviewed by a credit review committee that it intended by that
procedure to occupy the entire field of law pertaining to
restructure applications.
Based on the fact that foreclosure proceedings are
traditionally based on state law, that the FCB invoked state law as
the basis for its foreclosure proceedings in this case, the further
fact that the Act's restructure provisions are interrelated with
the lender's right to foreclosure, and based on 5 2214, which is
discussed above, we conclude that Congress did not intend to occupy
the entire field of remedies for enforcement of borrowers1 or
lenders* rights under the Agricultural Credit Act of 1987. This
conclusion is consistent with decisions from other jurisdictions
which have held that:
Even though the Farm Credit Act does not create a
private cause of action for violation of the standards of
conduct it prescribes, such conduct may give rise to a
state common law cause of action. Whether a duty arises
based upon breach of provisions of the Farm Credit Act is
a question for the courts of " t particular state.
&e
InterstateProduction CreditAssmnv. MacHugh (Wash. App. 1991), 810 P.2d 535,

53 8 (citing Mendel v. ProduGtio~l Credit Association of the Midlands (8th Cir.

1988), 862 F.2d 180) .
Finally, we must consider whether by allowing parties to
incorporate the terms of the Act in their contract, and further
allowing enforcement of the terms as an ordinary contract
provision, a conflict with federal law would be created. We
conclude that there is no conflict, but that instead, contractual
enforcement of the Act's terms furthers the purpose of the federal
legislation.
 Whether we accept the PCB's argument that the Act was intended
to strengthen the financial integrity of the Farm credit System, or
the Graveleys' argument that the purpose of the Act is to provide
more protection for borrowers with distressed loans, we fail to see
how specific enforcement of the Act's provisions through
incorporation by reference in a contract would conflict with
federal law. There is no basis for concluding that simply because
Congress provided for a minimum procedure for reviewing a loan
officer's decision that it meant to foreclose any other method of
enforcing the right to restructure provided for by statute. This
conclusion seems especially necessary since the credit review
committee is in fact appointed by the lending institution which
denied the application for restructure in the first place.
Our conclusion that there is no conflict between permitting
contractual enforcement of the Graveleys' rights under the Act, and
the purpose of the Agricultural Credit Act of 1987 is further
supported by the plain and mandatory language of the Act itself.
The Act provides that when a lender deternines that a loan is
distressed, the lender %halln notify the borrower that
restructuring may be suitable. 12 U.S.C. § 2202a(b)(l). The Act
provides that *no lender mayn foreclose a distressed loan before
consideration of restructuring. 12 U.S.C. g 2202a(b)(3). 1t
provides that a lender "shallm give the borrower a reasonable
opportunity to meet personally with the lending institution.
12 U.S.C. § 2202a(c), and if the lender determines that the cost of
restructuring is less than the cost of foreclosure, then the Act

26
provides that the lender "shalln restructure the loan. 12 U.S.C.
§ 2202a(e) (1).
Considering the nature of the language used to set forth the
lender's obligations, and the detail and precision with which those
obligations are established in the Act, we conclude that state
contract law which permits those provisions to be enforced when
included as a term of a contract by reference does not conflict
with the purposes of the Federal Act.
We hold that when the terms of the Farm Credit Act of 1971,
found at 12 U.S.C. 55 2001, etseq., including the restructuring

provisions of the Agricultural Credit Act of 1987, found at
12 U.S.C. 5 2202a, are incorporated by the parties as a term of
their contract, that those provisions are as enforceable in a court
of law as any other contract term. We further hold that the mere
provision in the Act for review of restructuring denial by a credit
review committee does not in any way express or imply a
Congressional intent to limit other methods of enforcing the Act's
provisions when incorporated by reference in the partiesv contract.
II
ESTOPPEL UNDER THE ACT

Can an allegation that a Farm Credit Bank failed to comply
with the restructure provisions of the Agricultural Credit Act of
1987 found at 12 U.S.C. § 2202a (1988) provide an affirmative
defense to a foreclosure action by that bank?
The District Court concluded that even though there was no
private cause of action to enforce the terms of the Agricultural
Credit Act, and even though the Graveleys' contract cause of action
was preempted by federal law, the Graveleys could assert an
affirmative defense to the effect that the FCBrs denial of the
Graveleys' restructure application was arbitrary and an abuse of
discretion.
The FCB argues that such an affirmative defense should be
disallowed for the same reasons that private causes of action are
disallowed under the authorities previously cited. The FCB also
argues that whether or not to grant a restructure application is a
discretionary act by the lending institution which requires lending
expertise, and that to allow review of those decisions by courts
would be contrary to the purpose of the Act which, according to the
PCB, was to provide financial stability to the Farm Credit System.
However, none of the authorities cited by the FCB support the
argument that in an equitable foreclosure action failure to comply
with the Act's restructure requirements cannot be raised as an
equitable defense. In fact, in a , the seminal decision on

which all other decisions denying a private cause of action are
based, the Ninth Circuit Court contended that the harshness of its
decision was mitigated by the opportunity for borrowers in some
states to raise a lender's failure to comply with the Act as an
affirmative defense. The Ninth Circuit specifically stated:
Moreover, the argument that a private right of action
must be implied or else borrowers will be without a
remedy overlooks the apparent right in some states of a
borrower to allege the failure to afford restructuring
rights as an affirmative defense to foreclosure. See
Federal Land Bank of St. Paul v Bosch, 432 N.W.2d 855, 858-59
.
(N.D. 1988) (allowing use of 1986 regulations as an
affirmative defense in state foreclosure actions);
@erboe, 404 N.W.2d at 449 (allowing use of 1985 Act as an
 .
affirmative defense in state foreclosure actions) But see
Federal Land Bank of St. Louis v. Hopmann, 658 F.supp. 92, 94
(E.D.Ark. 1987) (rejecting defense).
Harper, 878 F.2d at 1177.

The Overboe decision referred to by the Ninth Circuit in its

.
Harper decision is Federal Land Bank of St. Paul v Overboe (N D . 1987), 404
.
N.W.2d 445. In that case, the Federal Land Bank of St. Paul sued
to foreclose pursuant to a mortgage agreement with David and Debra
Overboe. As an affirmative defense to the foreclosure action,
Overboes contended that the bank did not comply with regulations of
the Farm Credit Administration which required forbearance by the
lender under certain circumstances. These regulations were enacted
pursuant to the Farm Credit Act of 1971 found at 12 U.S.C. 5 9 2001,
et seq .
The North Dakota Supreme Court, while recognizingthat federal
courts have not permitted a private cause of action under the Farm
Credit Act or its regulations, held that those decisions did not
control "whether a qualified borrower may resist a foreclosure upon
the grounds that he did not receive the forbearance called for by
the regulation." &erb~e, 404 N.W.2d at 448. In arriving at its

conclusion that a lender's failure to comply with the Farm Credit
Act could serve as the basis for an affirmative defense to
foreclosure, the North Dakota court noted that @ [ ] action to
'an
foreclose a mortgage is an equitable proceeding," and that
although no implied private right of action may exist for
damages or injunctive relief under the Farm Credit Act
and regulations, courts have recognized that federal
regulations which have been held to not imply a private
 cause of action may nevertheless afford a basis for an
equitable defense to a foreclosure action. [Citations
omitted].
Overboe, 404 N.W.2d at 448.

The North Dakota court pointed out the forbearance regulation
was adopted to foster agricultural development, and that
"[a]llowing FLB to foreclose its mortgages without regard to the
administrative forbearance regulation would be inimical to the
achievement of this goal." Overboe, 404 N.W.2d at 449. For that

reason, the court held in Overboe that a Federal Land Bank's failure

to comply with the forbearance regulations gave rise to a valid
qcpiitable defense to a foreclosure action under state law.
However, even though it concluded that noncompliance with the
Farm Credit Act and its regulations was a valid defense to a
foreclosure action, that court did not conclude that a foreclosure

appropriate for that of the Federal Land Bank's loan officers. In
that case, the court adopted the following standard of review when
such an affirmative defense is considered:
Thus, a trial court cannot overturn a[n] FLB loan
officer's determination of a lack of borrower qualifica-
tion for forbearance relief unless the borrower can prove
that the Bank abused its discretion by acting in an
arbitrary, capricious, unreasonable or unconscionable
manner. On appeal, we will not disturb a trial court's
determination on this matter unless the abuse of discre-
tion standard of review "appears to have been misappre-
hended or grossly misapplied. Universal Camera Cop. v
.
NalionalhborRelatiomBoard, 340 U S 474, 491, 7 1 s.ct. 456,
..
466, 95 L.Ed. 456 ( 1 9 5 1 ) .
 Based upon the Overboe decision, the language cited fromNupr,

and our own prior decisions regarding foreclosure proceedings in
courts of equity, the Federal District Courts in this state have
allowed noncompliance with the restructure provisions of the
Agricultural Credit Act of 1987 to be raised as an affirmative
defense in each foreclosure action in which that defense has been
considered. See Debuf, 757 F. Supp. 1106; Farm C e i Bunk o Spokane v
rdt f .

P r o s (D. Mont. 1990), 758 F. Supp. 1368; FarmCreditBunkofS'kanev.
asn

N l e (D. Mont. 1990), 758 F. Supp. 1372.
isn

In the Parsons case, this same Farm Credit Bank of Spokane sued

to foreclose its mortgage with the defendant, Rupert Parsons. As
an affirmative defense, Parsons raised the bank's failure to comply
with the same restructuring provisions of the Agricultural Credit
Act of 1987. The bank moved to strike that affirmative defense as
a matter of law. However, after reviewing Harper, Overboe, and the

nature of foreclosure actions in Montana, the Federal District
Court concluded that such a defense is available in Montana. In
arriving at its conclusion, the court pointed out that:
An action to foreclose a mortgage is an action in
equity. C t z n Bank v D m , 154 Mont. 18, 459 P.2d 696
iies .
(1969); Moorev. CupitulGasCorp., 117 Mont. 148, 158 P.2d 302
(1945). ...
Montana recognizes the general maxim that courts of
equity are governed by flexible, not cast-iron, rules
which call upon the courts of equity to adapt themselves
to the exigencies of the particular case. S e Dutton v
e, .
RockyMountainPhosphares, 151 Mont. 54, 438 P.2d 674 (1968).
Consequently, when the jurisdiction of a court in equity
is invoked for an equitable purpose, the court will
properly proceed to determine any other equities existing
between the parties in an effort to grant all relief
 necessary to adjust the controversy between the parties;
an undertaking designed to do complete justice. See,
Rflany v. Uhde, 123 Mont. 507, 216 P.2d 375 (1950): H a m v.
CifyofPokoiZ, 123 Mont. 469, 215 P.2d 950 (1950). These
principles, well established in Montana, provide this
court with a sufficient basis upon which to conclude the
failure of the FCBS to comply with the restructuring and
forbearance statutes, regulations and policies governing
the activities of that entity would constitute a valid
defense to a foreclosure action under Montana law. The
FCBS fails to present a cogent argument to the contrary.
Parsons, 758 F . Supp. at 1371.

We agree with the reasoning of the Federal District Court in
Parsons and conclude that in an action to foreclose a mortgage on

property covered by the Farm Credit Act of 1971, or the
Agricultural Credit Act of 1987 found at 12 U.S.C. 5 5 2001, etseq.,

an affirmative defense to the foreclosure action may be predicated
upon the lender's failure to comply with the requirements of the
Act.
We also agree with the decision in Overboe, 404 N.W.2d at 449,

that adopting noncompliance with the Act as a valid defense to a
foreclosure action "is not synonymous with allowing a foreclosure
court to substitute its judgment for that of FLB's loan officers."
Therefore, we hold that the trial court's standard of review when
considering such an affirmative defense is whether the bank abused
its discretion by acting in an arbitrary, capricious, unreasonable,
or unconscionable manner. Furthermore, on appeal, we will not
reverse the trial court unless its standard of review has been
misapprehended or grossly misapplied.
Based on the trial court's appropriate standard for reviewing
the restructure decision of the FCB, and based upon the affidavit
32
 of Tim Watts submitted in opposition to the FCB's motion for
summary judgment, we conclude that there are factual issues to be
resolved in order to determine the merits of the Graveleyss
affirmative defense, and therefore, affirm the District Court's
denial of summary judgment which was based on that issue.
I11
AFFIRMATIVE DEFENSE OF EOUITABLE ESTOPPEL
Can unilateral representations allegedly made by the lender
and upon which a borrower relies to his detriment provide a basis
for the affirmative defense of equitable estoppel to a foreclosure
action when those representations are verbal and not included in
the parties' written agreement?
As an additional affirmative defense to the FCBss
counterclaim, the Graveleys alleged that the Bank is equitably
estopped from recovering a deficiency judgment based on Valerie
e,
,r.T--...%.
,, 4 .. ' s repreneiitations that in ""- r v r i l C of default the
s a r -----' Bank

would accept deeds to the secured property in lieu of foreclosure.
The District Court held that sufficient evidence had been offered
to raise an issue of fact regarding the defense of equitable
estoppel, and partially on that basis, denied the FCB's motion for
summary judgment. The District Court went on to conclude as a
matter of law that if the trier of fact ultimately found the
Graveleys had proven their equitable estoppel defense, then the
Bank is also estopped from obtaining a security interest on the
Graveleys' Home Place as a condition to granting their restructure
obligation. The District Court also held that conversely if the
Graveleys failed to establish the defense of equitable estoppel,
then their a f firnative defense based on the FCB's failure to comply
with the provisions of the Agricultural Credit Act will be
dismissed as a matter of law because the Bank would have been
justified in denying the application for restructure based on the
Graveleys' refusal to provide additional collateral, whether or not
the cost of restructure was less than the cost of foreclosure.
On appeal, the FCB contends that the only evidence in support
of the Graveleys* equitable estoppel defense is the Graveleys'
testimony regarding Valerie Warehime's oral representation, and
that since those representations are superseded by the written
terms of the parties* loan documents, that evidence is barred by
Montana's parol evidence rule found at § 28-2-905, MCA. The FCB
cites this Court's decision in S h e d , Inc. v Modson-ffiudven Company
.

(1991), 249 Mont. 282, 815 P.2d 1135, for the proposition that oral
negotiations which contradict the terms of the written contract are
not admissible and that on this basis the District Court's order
denying summary judgment should be reversed.
The Graveleys respond that reliance on the statute of frauds
in this case is not applicable because it is a legal theory and the
issues raised by the counterclaim and affirmative defense are
equitable issues. The Graveleys further assert that neither
Shenodd, nor any other authorities cited by the FCB, are on point

because none of them involve the issue of equitable estoppel.
Finally, the Graveleys contend that to the extent that 28-2-905,
MCA, which sets forth the parol evidence rule is applicable, we
should consider the defense of equitable estoppel analogous to the
exception for evidence of fraud which is made in 9 28-2-905(2),
MCA .
We conclude that the Graveleys' arguments are more persuasive,
and therefore, affirm the District Court's conclusion that there
was evidence to support the defense of equitable estoppel, but
reverse that part of the District Court" order which held that the
resolution of the estoppel issue must necessarily decide the
affirmative defense based on the Agricultural Credit Act as a
matter of law.
First, our decision in sherrodd is net on point. In that

action, a subcontractor brought a claim for damages based on oral
representations by the defendant general contractor which this
Court held were contrary to the express terms of the contract, and
therefore, superseded by the contract pursuant to 5 28-2-904, MCA.
That case neither involved an equitable claim for foreclosure, nor
the defense of equitable estoppel. Therefore, we conclude that our
decision in S h e d does not apply to this case.

Second, it is well recognized that courts of equity will
consider the statute of frauds differently than courts of law. For
example, it is stated that:
The purpose and intent of the statute of frauds is
to prevent fraud, and not to aid in its perpetration, and
the courts, particularlv courts of eauity, will, so far
as possible, refuse to allow it to be used as a shield or
cloak to protect fraud, or as an instrument whereby to
perpetrate a fraud, or as a vehicle or means of culpable
wrong, injustice, or oppression. [Emphasis added].
73 Am. Jur. 2d StatuteofFrauds § 562 (1974).
 In particular, courts have been reluctant to apply the statute
of frauds to bar a claim of collateral estoppel.
Closely allied to the principles of protection
against the assertion of the statute of frauds to
accomplish a fraud upon the party who has acted in
reliance upon an oral contract or the assertion of the
statute as a shield to protect fraud is the doctrine of
estoppel to assert the statute. It is universally
conceded that the doctrine of equitable estoppel may be
invoked to preclude a party to a contract from asserting
the unenforcibility of a contract by reason of the fact
that it is not in writing as required by the statute of
frauds. As is often said, the statute of frauds may be
rendered inoperative by an estoppel in pais. Where one
has acted to his detriment solely in reliance on an oral
agreement, an estoppel may be raised to defeat the
defense of the statute of frauds. This is based upon the
principle established in equity, and applying in every
transaction where the statute is invoked, that the
statute of frauds, having been enacted for the purpose of
preventing fraud, shall not be made the instrument of
shielding, protecting, or aiding the party who relies
upon it in the perpetration of a fraud or in the
consummation of a fraudulent scheme. It is called into
operation to defeat what would be an unconscionable use
of the statute, and guards against the utilization of the
statute as a means for defrauding innocent persons who
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in reliance upon oral agreements within its operation.
73 Am. Jur. 2d StatlcteofFrauds 9 565 (1974).

Our prior decisions are consistent with these equitable
principles. In Fiers v. Jacobson (1949), 123 Mont. 242, 211 P.2d 968,

the plaintiff sought to enforce a provision in his lease agreement
which gave him the option to purchase the property he was leasing.
However, the defendant sold the land while the agreement was in
effect, and when sued by the plaintiff, claimed that the plaintiff
was estopped from enforcing the option because he had repeatedly
told the defendant that he had no intention of exercising it. The
plaintiff in that case, as does the defendant in this case, sought
to prohibit evidence of the oral representations based on the parol
evidence rule.
In Fiers, this Court concluded that the evidence of the

plaintiff's oral statements was insufficient to establish estoppel,
however, refused to disregard that evidence based on the parol
evidence rule.
Finally, we note that pursuant to 5 28-2-905, MCA, which
precludes evidence of oral statements when the terms of a contract
have been reduced to writing, an exception is made in subparagraph
(2) for evidence of fraud. The elements of fraud are substantially
the same as the elements of equitable estoppel.
We have held that actual fraud includes nine elements:
1. A representation;
2. Falsity of the representation;
3. Materiality of the representation;
4. Speaker's knowledge of the falsity of the
representation or ignorance of its truth;
5. SpeakerIs intent that it should be relied upon;
6. The hearer's ignorance of the falsity of the
representation;
7. The hearer's reliance on the representation;
8. The hearer's right to rely on the
representation; and
9. Consequent and proximate injury caused by the
reliance on the representation.
VinEttingerv. Pappin (1978), 180 Mont. 1, 10, 588 P.2d 988, 994.
 Although organized somewhat differently, we have previously
held that substantially the same elements are necessary to
establish equitable estoppel. They are:
(1) there must be conduct, acts, language or silence
amounting to a representation or concealment of facts;
(2) facts must be known to the party estopped at the time
of his conduct; (3) truth concerning the facts must be
unknown to the other party: (4) conduct must be done with
the intention that it will be acted upon by the other
party, or under circumstances that is both natural and
probable that it will be so acted upon; (5) conduct must
be relied upon by the other party; and (6) the party must
in fact have acted upon it to his detriment.
In theMafferofShaw (198O), 189 Mont. 310, 316-17, 615 P.2d 910, 914.

For these reasons, we conclude that the Graveleys' testimony
about the representation made to them by Valerie Warehime that in
the event of default the FCB would accept deeds to their secured
property in lieu of foreclosure is admissible in support of the
Graveleys* defense of equitable estoppel and that based on the
evidence offered in support of that defense and in opposition to
the FCBss motion for summary judgment, the District Court acted
correctly when it denied the Bank's motion for summary judgment.
However, we note that 12 U.S.C. 5 2202a(e) provides that if a
lender determines "in accordance with a proposed restructuring
plan" that the potential cost of restructuring is less than or
equal to the potential cost of foreclosure, the lender %hall
restructure the loan in accordance with the plan." We conclude
from this requirement that the plan must succeed or fail on its
merits, and that if the plan satisfies the "equal or less costii
requirement without providing additional collateral, then the court
cannot require as a matter of law that additional collateral be
provided simply because the FCB requested it. For that reason, we
reverse that part of the District Court's order which held that if
the Graveleys failed to prove the affirmative defense of equitable
estoppel their affirmative defense based on the FCB's alleged
failure to comply with the Agricultural Credit Act of 1987 also
fails as a matter of law.

Are the plaintiffs entitled to a jury trial of the issues
remaining after resolution of the three previous issues?
Based on its contention that there was no claim for damages
pursuant to the Agricultural Credit Act or pursuant to a breach of
contract theory, the FCB took the position that the issues involved
in this case were purely equitable, and therefore, moved the
District Court to strike the Graveleys' demand for a jury trial.
,nL- ,,:-&-:-&
LLPS UIJLLILL
"
C.VUL~'J of
di~positioii the W i n k ? ~
motion for summary
judgment resulted in elimination of the Graveleys' legal claim.
However, the District Court failed to act on the Bank's motion to
strike the jury demand.
The Graveleys concede that if the only issues involved are
equitable, they are not entitled to trial by jury. However, they
contend, and we agree, that where there are mixed legal and
equitable issues (as there are based on our disposition of this
case), then they are entitled to trial by jury. In Ga v City o
ry . f

B l i g (1984), 213 Mont. 6, 689 P.2d 268, we held that the fact that
ilns
equitable claims are joined with a legal claim such as breach of
contract does not destroy a party's right to have all legal or
common issues tried by jury. We held that:
The pleading of equitable issues and issues involving
only questions of law did not destroy their rights
granted plaintiffs by our Constitution and Rules of Civil
Procedure. Art. 11, Sec. 26, 1972 Mont. Const. ; Rule
38(a), M.R.Civ.P. "[Wlhere equitable and legal claims
are joined in the same action, there is a right to jury
trial on the legal claims which must not be infringed
either by trying the legal issues as incidental to
equitable ones, or by a court trial of a common issue
between the claims." Ross v. Benrhard (19701, 396 U.S. 531,
537-38, 90 S. Ct. 733, [738,] 24 L Ed. 2d 729.
.
Gray, 689 P.2d at 272.
For these reasons, and based on our holding under Issue No. 1,
we affirm the District Court's refusal to grant the FCB's motion to
strike the Graveleys' demand for jury trial regarding legal issues
and factual issues common to both legal and equitable claims.
Factual issues related solely to equitable claims may be decided by
the District Court.
The District Court is affirmed in part and reversed in part,
and this case is remanded to the District Court for further
proceedings consistent with this opinion.

We concur:

Chief Justice
n
Justices
Justice Fred J. Weber dissents and concurs as follows:
In order to clarify my dissent, I will address the issues in
a different order than in the majority opinion.
I1 (as listed in majority opinion)
Can an allegation that a Farm Credit Bank failed to
comply with the restructure provisions of the
Agricultural Credit Act of 1987 provide an affirmative
defense to a foreclosure action by that Bank?
The Agricultural Credit Act of 1987 (Act) contains an
extensive array of procedures which both lenders and farmers must
follow. It is true that the Act neither specifically requires nor
denies judicial review of a restructuring decision by a lender.
That is the critical issue before us in the present case. A review
of a restructuring decision is specifically provided for in the Act
by the use of the Credit Review Committee (Committee). With regard
to the Committee the Act specifically provides that participation
in the Committee is limited to persons who have not previously been
involved in the decision on restructuring. 12 CFR 5614.4442. The
record does not indicate that anyone involved in the restructuring
decision with the Graveleys was a part of the Credit Review
Committee.
The Graveleys stated in a memorandum dated September 12, 1990,
that "they were accorded their procedural rights." In other words,
they were properly given the opportunity provided by the Act to
question the restructuring decision and to appeal the same to the
Credit Review Committee. As a result, the procedural requirements
of the Act were not questioned. The Graveleys filed an amendment to
their complaint in which they alleged that the Bank's denial of the
42
restructure application was contrary to provisions of the Act's
attendant regulations and, as a consequence, breached the terms of
the contract between the parties.
In considering the question of allowing a party to sue to
enforce the Act, and its regulations it is essential to carefully
consider Harper v. Federal Land Bank of Spokane (9th Cir. 1989),
878 F.2d 1172, which is the leading case on this issue and has been
cited frequently by many courts throughout the United States. The
Harper court concluded there was no congressional intent to create
a private right of action in courts, stating:
Even if the congressional statements are ambiguous on the
creation of private right of action, our review of the
administrative remedies provided by the 1987 Act
convinces us that Concrress intended administrative review
to be the exclusive remedy. (Emphasis supplied.)
Harper, 878 F.2d at 1176; citing Middlesex County Sewage Authority
v. National Sea Clammers Ass'n (1981), 453 U.S. 1, 15, 101 S.Ct.
2615, 2623-24, 69 L.Ed.2d 435. With regard to the aspect of
judicial review, the Ninth Circuit Court then concluded:
In the absence of strong indicia of a contrary
congressional intent, we are compelled to conclude that
Conuress provided preciselv the remedies it considered
approwriate. (Emphasis supplied.)
Harwer, 878 F.2d at 1176: citing Karahalios v. National Fed'n of
Fed. Employees, Local 1263 (1989), 489 U.S. 527, 109 S.Ct. 1282,
1287, 103 L.Ed.2d 539. I will not burden the dissent with
additional citations but I do point out that the great majority of
cases considering the issue have adopted the Harper rationale. I
conclude that we should follow the Harper rationale and hold that
administrative review under the Act is the exclusive remedy
available to the Graveleys. Under that conclusion, the Graveleys
only appeal was to the Committee,
With that background conclusion, I now consider the issue as
to whether the Graveleys may provide an affirmative defense to
foreclosure which consists of a claim that the Bank failed to
comply with the restructure provisions. Where the parties are
already before the court on cross-claim of foreclosure, I would
conclude that it is appropriate to allow the Graveleys to raise
such a question. But I would emphasize at this point, that the
nature of the action is equitable. The legal claim of breach of
contract is not permitted under the Farm Credit Act. All that is
left is the lender's equitable claim of foreclosure.
I would point out that the Graveleys did have an option under
the Act that they did not take; their contract called for protest
to errors in valuations by having another independent appraisal
done of Ifany interests in property securing the loan." 12 USC
§2202(d)(1)(1988). The Graveleys did not even attempt to secure a
second appraisal which they should have done before attempting to
hire their own expert. The Act requires that the Graveleys choose
from three independent appraisers whose names would be provided by
the Bank. 12 USC §2202(d)(2)(1988). Had they done this, the
Graveleys could have established a basis to contest errors in the
Warehime worksheet. Instead, they seek to have the District Court
do this.
What the Graveleys argue is that it is appropriate for the
District Court to go over the Bank's worksheet for substance and
determine whether the Bank made a correct restructuring decision.
That clearly is not the intention of the Congress under the terms
of the Act. Congress prescribed a detailed set of procedures which
must be followed.
I conclude the District Court could properly review the facts
to determine if the procedures used under the Act have been
completed by the Bank; if not, this failure can act as a defense to
the lender's foreclosure action. However, I would further conclude
that the Act does not provide for judicial review of the substance
of the Bank's denial of the restructuring decision. The power of
the District Court is limited to a determination of whether the
Bank followed the proper procedures as laid out both in the
extensive code and in the attendant regulations. I would therefore
affirm the District Court's determination that the Farm Act and its
regulations preempt other remedies by providing an exhaustive set
of remedies and rights.

When provisions of the Act are inciuded by reference as
terms in a mortgage agreement, can a party to the
agreement sue to enforce those provisions in District
Court?
As previously indicated, I have concluded that the Graveleys
can sue to enforce the Act to the extent of the restructure
provisions by using failure to comply with the Act as a defense to
foreclosure but that is as far as the Act would allow. Once the
court determines whether the lender followed procedures of the Act
and its regulations I would not allow any further right of action
to the Graveleys.
 Can unilateral representations allegedly made by the Bank
upon which the borrower relies to its detriment, provide
a basis for the affirmative defense of equitable estoppel
to a foreclosure action, when the representations are
verbal and not included in the parties written agreement?
Equitable estoppel is a principle of equity used to promote
justice, honesty, fair dealing and to prevent injustice; the object
of equitable estoppel is to prevent a party from taking advantage
of his own wrong while asserting his strict legal right. Matter of
Adoption of D.J.V. (1990), 244 Mont. 209, 796 P.2d 1076. Equitable
estoppel is not favored and will only be sustained upon clear and
convincing evidence. Berglund and Berglund, Inc. v. Contributions
Bureau, Unemployment Ins. Div., Montana State Dept. of Labor and
Industry (1990), 241 Mont. 49, 784 F.2d 933.
If the underlying action is one for foreclosure, the Graveleys
have the right to raise an affirmative defense in an attempt to
stop the foreclosure. While it seems only logical that they could
raise the affirmative defense of equitable estoppel, our case law
on the subject would hold the Graveleys to a high standard of
proof. As the aforementioned case law indicates, the defense of
equitable estoppel is not favored in the law and will only be
sustained upon clear and convincing evidence. But although it may
be hard to prove, the Graveleys should be given an opportunity to
prove it because of the lender's cross-claim for foreclosure and
because a question of fact exists. I would therefore, affirm the
District Court in its refusal to grant summary judgment to the
lender on this issue.
 I would point out that the District Court's attendant
determination that if the factfinder decided that the Graveleys had
proven their claim of equitable estoppel, then the Bank is also
estopped from obtaining a security interest on the Graveleys Home
Place as a condition to granting their restructure obligation is an
accurate assessment of the situation. However, the court ' s
converse determination is not correct. Conversely the court
determined that if the Graveleys failed in their quest to prove the
estoppel claim, then the Graveleys affirmative defense that the
lender did not comply with the regulations attendant to the Act
will be dismissed as a matter of law because the Bank would have
been justified in denying the application for restructure based on
the Graveleys' refusal to provide additional collateral.
I find these notions only tenuously bound to each other. The
majority opinion determines that the lender had no legal right to
ask for collateral. I find that the Farm Act, which is what has
been incorporated into the Graveleys' contract, certainly contains
several references to the lender's ability to demand additional
collateral, Particularly 12 U.S.C. 5 2202(d)(4)(1988):
Additional Collateral. An independent appraisal shall be
permitted if additional collateral for a loan is demanded
by the aualified lender when determininq whether to
restructure the loan. (Emphasis added.)
This is a clear indication that the majority's conclusion that the
lender does not have the right to ask for additional collateral is
in error.
Another section of the Farm Act prohibits foreclosure if the
lender has asked for additional collateral and the borrower
47
refuses, but has made all accrued payments of principal. 12 U.S. C.

2202d (1988). Here the record shows that the Graveleys made only
the first payment of principal which was due on January 1, 1985,
and have failed to make any subsequent payments of principal. This
also indicates that the lender can request additional collateral.
The Graveleys had notice that collateral could be asked for as
these provisions were part of their contract.
1 concur with the majority opinion that equitable estoppel can

be used as an affirmative defense, subject to the cases previously
cited. I do not agree that the lender was without authority to ask
for collateral.

Are the plaintiffs entitled to a jury trial of
the issues remaining after resolution of the
three previous issues?
Without the contract action by the Graveleys, the underlying
action in this case is foreclosure. That is an equitable action.
Every defense proffered by the Graveleys is an equitable defense.
Because of the equitable nature of the action and the defenses, a
trial by jury is inappropriate. No equitable action can have a
jury as the factfinder, it is for the court to decide.
The majority contends based upon its interpretation of the
first three issues, that the case involves legal and equitable
issues. I disagree because I do not interpret these issues as does
the majority.
The Graveleys cannot bring an action in state court because
the Act does not permit a private right of action. Thus, the only
action that is appropriate in the state court is the lender's
cross-claim for foreclosure. The foreclosure action while

appropriate in state court, is an equitable action in which no jury
is permitted. Therefore, I would reverse the District Court's

refusal to grant the lender's motion to strike the Graveleys'
Chief Justice J. A. Turnage concurring in part and dissenting in
part:
I concur with the majority opinion as to Issues I and 11.
However, I respectfully dissent as to Issue 111, concerning the
affirmative defense of equitable estoppel, and Issue IV, concerning
the right to jury trial.
Section 28-2-904, MCA, provides that a contract in writing
supersedes all oral negotiations or stipulations concerning its
subject which preceded or accompanied execution of the written
contract. Section 28-2-905, MCA, sets forth the circumstances
under which extrinsic evidence concerning a written agreement may
be considered. The portion claimed to be applicable in this case
is subsection (2), evidence to establish fraud.
The District Court ruled, as a matter of law (and the issue
was not appealed), that there was not enough evidence to support a
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that "[tlhe elements of fraud are substantially the same as the
elements of equitable estoppel." If, as the majority states, the
elements of fraud are substantially the same as the elements of
equitable estoppel, what is the effect of the District Court's
ruling as to the claim of fraud on the "substantially the samep9
claim of equitable estoppel?
Beyond that, a claim of equitable estoppel cannot be based
upon a promise to do or not do a future act. Christian v. A.A. Oil
Corp. (1973), 161 Mont. 420, 431, 506 P.2d 1369, 1375. Here, the
alleged oral promises were not to foreclose on the "Home Place" in
any future foreclosure action, and to continue providing operating
50
loans for at least five years. As promises to do or not do future
acts, neither is available as a basis for a claim of equitable
estoppel. The majority opinion does not address this.
Further, Attorney Lester Loble, a twenty-year partner in the
Helena, Montana, firm of Loble and Pauly, P.C., and its
predecessors, stated by deposition that he explored various sources
of financing with Clifford Graveley prior to the Graveleys'
purchase of the Snowshoe Ranch. He acted as the Graveleys'
attorney in connection with the FCB loan, and was present when the
FCB loan agreement was signed. He did not recall suggesting any
changes to the loan document to Valarie Warehime, and, to the best
of his recollection, no changes were made. At his deposition, he
was asked:
Q. Do you recall any discussion by Valarie Warehime
regarding [FCB] taking the collateral back and releasing
Graveleys from an obligation to pay any more at the loan
closing? Any discussion at the loan closing?
A. There was no such discussion at the loan closing.

Q. Were there discussions at that time before the loan
closing?
A. About a deed in lieu of foreclosure?
Q. About deeds in lieu of foreclosure.
A. None whatsoever.
Q. Were there any discussions between you and your
clients relative to protection of the home ranch in the
event of possible default?

A. . . . The answer to that question is no.
Loble testified that only after the Graveleys were unable to meet
their 1985 payment did he discuss with Valarie Warehime the subject
of deeds in lieu of foreclosure on the Graveley loan.
There can be no misrepresentation if the party relying on the
representation had the means to investigate its truth. Aetna Life
Ins. co. v. McElvain (1986), 221 Mont. 138, 148, 717 p.2d 1081,
1087. The Graveleys, and their attorney, clearly had the means to
fully review the loan documents and their obligations thereunder
before signing them. In addition, their attorney had both the duty
and the opportunity to advise the Graveleys on these matters before
they signed the loan agreement with FCB.
Hard cases make bad law. In its eagerness to come to the aid
of the Graveleys, the Court here opens a wide door to variation of
the terms of written contracts by alleged oral agreements. For all
of the above reasons, I would grant summary judgment to Farm Credit
Bank on Issue 111, disallowing the equitable estoppel defense.
I also disagree with the majority's discussion under and
resolution of Issue IV, Right to Jury Trial. The opinion states
that "where there are mixed legal and equitable issues . . . then
they are entitled to trial by jury."
The holding of the case cited, Gray v. City of Billings
(1984), 213 Mont. 6, 689 P.2d 268, was that, where equitable and
legal claims are joined in the same action, there is a right to
jury trial on the leaal claims. The Court noted that the rules
permit severance of claims and issues.
The majority opinion implies that where there are both legal
and equitable claims, jury trial must be allowed on all claims.
This was not the holding of -=

The question of whether juries should be allowed to decide
cases both at law and in equity was specifically considered and
rejected at the 1972 Montana Constitutional Convention. See Con.
Con. Tr., Vol. V, pp. 1788-1792. Delegate Holland moved that
Article 11, Section 26 of the Montana Constitution be amended to
provide that "[tlhe right of trial by jury shall, in all cases in
law and equity, be secured to all." Discussion ensued, in which
delegates opposed to the proposed amendment pointed out the
historical common law distinction between cases tried at equity and
those tried at law. Following the discussion, Delegate Holland's
proposed amendment was rejected. The Constitution retains the
wording which was described as upholding the common law rule that
there is no right to trial by jury in cases at equity.
The Montana Rules of Civil Procedure are designed to
accommodate an action involving both issues triable to a jury and
issues on which a jury trial is not permitted. Rule 38(b),
M.R.Civ.P., speaks of demand for trial by jury "of any issue
triable of right by a jury." Under Rule 42(b), M.R.Civ.P., a court
may order bifurcation of trials on several issues or claims, "in
furtherance of convenience or to avoid prejudice." I believe that
type of procedure would be appropriate in this case. It would also
be appropriate to use the provision of Rule 39(c), M.R.Civ.P.,
allowing a judge to empanel an advisory jury in matters not triable
by jury.
 In summary, the majority opinion on Issue 111 unnecessarily
and without statutory authority or credible precedent has rendered
the par01 evidence rule, I S 28-2-904 and -905, MCA, meaningless as
a practical matter. In doing so, a cloud of confusion is now cast
over our prior decisions interpreting and applying these statutory
provisions. However, to fully appreciate the mischief created by
the majority opinion, it is absolutely necessary to understand the
interrelationship of Issues I11 and IV.
Having erroneously provided for an equitable issue of fact
under Issue 111, the majority opinion then concludes in Issue IV
that there now exist "mixed issuesM of equity and law, thereby
entitling the Graveleys to a jury trial on both the equity and law
issues. I am certain that the bench, bar, and the people of
Montana will be startled to learn that the unambiguous language of
a written contract, entered into by the Graveleys who were
represented by competent attorneys, may be thus thrown into
question by an alleged oral statement preceding the signing of the
contract.

Justice Fred J. Weber joins in the dissent of Chief Justice Turnage
as to Issues 111 and IV.
 August 12, 1994

CERTIFICATE OF SERVICE

1 hereby certify that the following certified order was sent by United States mail, prepaid, to the
following named:

Martin S. King, Esq.
Worden, Thane & Haines
P.O. Box 4747
Missoula, MT 59807-4747

W. Arthur Graham
Sinsheimer, Schiebelhut & Baggett
1010 Peach Street
San Luis Obispo, CA 93401

Peter Pauly
Attorney at Law
P.O. Box 176
Helena, MT 59624

Ailen Beck
Attorney a Law
t
P.O. Box 21253
Billings, MT 59104

C. W. Leaphart
Attorney at Law
One N. Last Chance Gulch
Helena, MT 59601

Joseph M. Sullivan
Attorney at Law
608 Strain Bldg.
Great Falls, MT 59403
Larry E. Johnson
Attorney a Law
t
P.O. Box 2885
Great Falls, MT 59403

Hon. Ted L. Mizraes
District Judge
Powelt County Courthouse, 409 Missouri Ave.
Deer Lodge, MT 59722

ED SMITX
CLERK OF THE SUPREME COURT
STATE OF MONTANA

BY:
D~P