McCoy v. First Citizens Bank

No. 05-507

IN THE SUPREME COURT OF THE STATE OF MONTANA

2006 MT 307

MICHAEL J. MCCOY and DIANE P. MCCOY,

Plaintiffs and Appellants,

v.

FIRST CITIZENS BANK,

Defendant and Respondent.

APPEAL FROM: The District Court of the Thirteenth Judicial District,
In and For the County of Yellowstone, Cause No. DV 2002-750,
Honorable Susan P. Watters, Presiding Judge

COUNSEL OF RECORD:

For Appellants:

David Duke, Attorney at Law, Billings, Montana

For Respondent:

Gerald B. Murphy, Nancy Bennett, Moulton, Bellingham,
Longo & Mather, P.C., Billings, Montana

Submitted on Briefs: March 29, 2006

Decided: November 29, 2006

Filed:

__________________________________________
Clerk
Justice Patricia O. Cotter delivered the Opinion of the Court.

¶1 In 1997, plaintiffs Michael and Diane McCoy (the McCoys) established a line of

credit with the First Citizens Bank (the Bank) against which they periodically borrowed

money for working capital associated with their cattle ranch. As of their last loan on

January 21, 2000, the principal amount owed by the McCoys was $414,173.00. The

Bank notified them that this amount was due on September 30, 2000, and that the Bank

would not issue any further loans to them. The McCoys failed to pay the loan on

September 30, or on January 31, 2001, the extended due date. On August 29, 2002, the

Bank filed a complaint in the Thirteenth Judicial District Court for Yellowstone County

seeking collection and foreclosure. The McCoys counterclaimed that the Bank’s

actions breached the covenant of good faith and fair dealing and breached the fiduciary

duty the Bank owed the McCoys. Subsequently but prior to trial, the McCoys obtained

funds and paid the Bank in full. The parties stipulated to dismissal of the Bank’s

claims, the caption of the case was re-styled with the McCoys as plaintiffs, and the case

proceeded upon McCoys’ claims. The Bank then moved for summary judgment and

the District Court granted the motion. The McCoys appeal. We affirm.

ISSUES

¶2 A restatement of the issues presented on appeal is:

¶3 Did the District Court err in granting the Bank’s motion for summary judgment

on the issue of breach of the covenant of good faith and fair dealing?

¶4 Did the District Court err in granting the Bank’s motion for summary judgment

on the issue of breach of fiduciary duty?

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 FACTUAL AND PROCEDURAL BACKGROUND

¶5 The McCoys became customers of the Bank in February 1997 when they

obtained a line of credit there. The purpose of the line of credit was to increase their

purebred cattle business. They initially borrowed $50,082.00 against this line of credit,

with the cattle as collateral for the loan. Between February 1997 and March 1999, the

McCoys obtained additional loans against this credit line. By May 6, 1999, the balance

on the loan was $357,500.00.

¶6 In January 2000, the McCoys and the Bank entered into their last loan contract

which increased the McCoys’ indebtedness to the Bank to approximately $414,000.00.

In exchange for this final loan, the McCoys gave the Bank a second mortgage on their

real property. Under the terms of the contract, the McCoys were to pay the balance of

their loan in one payment on September 30, 2000. The parties agreed that the McCoys

would sell their herd by that date to acquire the funds to pay the note.

¶7 The McCoys scheduled their cattle sale for September 23, 2000. However, a

severe snow storm occurred on September 21 and 22, 2000. According to Mike

McCoy, he asked the Bank to allow them to postpone the liquidation sale and extend

the due date of the loan. It is undisputed that the Bank refused to extend the loan’s due

date.

¶8 McCoys held the sale on September 23, but turn-out was poor and the bids for

the cattle were low. After about 10 sales, McCoys cancelled the sale and sold the

remaining cattle by private treaty to individual buyers contacted by telephone. The

proceeds of the sale were much lower than the McCoys had expected and were not

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enough to cover the balance of their loan. On November 30, 2000, the McCoys’ note

had a $217,906.61 balance. On that date the Bank extended the due date from

September 30, 2000, to January 31, 2001. The McCoys did not pay the remaining

balance.

¶9 On August 29, 2002, the Bank filed a complaint against the McCoys seeking

judgment in the amount of $226,506.91, representing the balance due on that date. The

McCoys counterclaimed that the Bank had breached the covenant of good faith and fair

dealing and that it had breached its fiduciary duty to the McCoys. Subsequently and

before the trial, the McCoys obtained funding with which to pay off the Bank. The

Bank’s claims were therefore dismissed and the District Court changed the style of the

case to reflect the McCoys as plaintiffs and the Bank as defendant.

¶10 In February 2005, the Bank filed a motion for summary judgment. In April

2005, the District Court granted the motion. McCoys filed a timely appeal.

STANDARD OF REVIEW

¶11 We review a district court’s grant of summary judgment de novo, and apply the

same criteria applied by the district court pursuant to M. R. Civ. P. 56(c). A district

court properly grants summary judgment only when no genuine issues of material fact

exist, and the moving party is entitled to judgment as a matter of law. Sampson v.

National Farmers Union Property, 2006 MT 241, ¶ 7, 333 Mont. 541, ¶ 7, 144 P.3d

797, ¶ 7 (citation omitted).

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 DISCUSSION

¶12 Did the District Court err in granting the Bank’s motion for summary judgment

on the issue of breach of the covenant of good faith and fair dealing?

¶13 The McCoys argued to the District Court that the Bank breached the covenant of

good faith and fair dealing when it refused to allow them to cancel their cattle sale and

refused to lend them the additional funds necessary to care for the cattle until the sale

could be rescheduled. 1 Relying on Story v. City of Bozeman, 242 Mont. 436, 791 P.2d

767 (1990), McCoys asserted that to prevail on a contract-based breach, they need only

establish the commercial standards of the trade and show that the Bank’s conduct failed

to meet those standards. They maintained that the applicable commercial standards

were those of the cattle industry, rather than the banking industry, and that it was the

reasonable commercial standard to postpone a sale when severe weather is likely to

impair turn-out. By refusing to “permit” the McCoys to cancel their sale, the McCoys

averred that the Bank failed to meet the applicable commercial standard. The McCoys

also opined that the Bank was “over-collateralized,” holding McCoy assets valued at

more than $1,161,000.00, and thus making their refusal to extend the due date more

unreasonable.

¶14 The Bank countered that the McCoys’ contractual claim alleging such a breach

was without merit because the relevant contracts between the parties clearly required

repayment of the loan on September 30, 2000, and did not commit the Bank to issuing

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In their Brief to this Court, McCoys acknowledge that the record does not establish that they
requested additional funds to care for their cattle.

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further loans to the McCoys. Moreover, the Bank maintained that the “trade” to which

the covenant of good faith and fair dealing applies is the commercial banking industry,

and that under its standards, the Bank gave the McCoys ample time to repay their loan

and was under no legal obligation to extend the maturity date of the loan or lend more

funds. It asserted that the McCoys failed to establish a contract claim, and therefore it

was entitled to summary judgment as a matter of law.

¶15 Quoting Simmons Oil Corp. v. Holly Corp., 258 Mont. 79, 87, 852 P.2d 523, 528

(1993), the District Court held that the Bank did not breach the covenant because the

Bank’s acts were “authorized by the express provisions of the contract, [therefore] no

covenant of good faith and fair dealing can be implied which forbids such acts and

conduct.” The court continued that “[a] bank has the right to terminate financing as

long as it does so reasonably and not capriciously.” (Citing Blome v. First Nat. Bank of

Miles City, 238 Mont. 181, 188, 776 P.2d 525, 529 (1989)).

¶16 On appeal, the McCoys argue they are not asserting that the Bank violated the

covenant of good faith by refusing to lend additional money, but that it violated the

covenant by refusing to extend time to pay the loan, which would have enabled them to

sell their herd “in a commercially reasonable fashion.” Without supporting authority,

the McCoys continue to maintain that the applicable standard for this case is the cattle

industry standard, which their experts testified would have meant postponement of the

sale until better weather.

¶17 Additionally, the McCoys argue that because the Bank forced them to sell their

cattle in a “fire sale,” the three provisions of § 30-9A-627(2), MCA (2004), of the

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U.C.C. requiring commercially reasonable disposition of collateral were not met.

Acknowledging that § 30-9A-627(2), MCA, traditionally applies to the sale of collateral

that has been repossessed and is being sold by the secured creditor, McCoys assert that

to conclude that this provision does not apply to the circumstances before us would

constitute “a hair splitting distinction . . . elevat[ing] form over substance.” They allege

that while they retained “possession” of the cattle collateral, the Bank was “in control”

of the cattle.

¶18 The Bank repeats on appeal its argument that the applicable “trade standard” is

the commercial banking standard and that the Bank’s actions must be measured against

that standard. It posits that to do otherwise would illogically subject a lending bank to

hundreds of different commercial standards depending upon the business in which its

borrower is engaged. It relies on Lachenmaier v. First Bank Systems, Inc., 246 Mont.

26, 32, 803 P.2d 614, 617 (1990), in which this Court applied banking industry

standards to a claim that First Bank breached the covenant of good faith and fair dealing

with the Lachenmaiers.

¶19 The Bank further asserts that McCoys’ claim that the Bank was over-

collateralized is disingenuous given that the second mortgage signed by the parties on

January 21, 2000, expressly stated that the maximum lien to which the Bank was

entitled was $414,173.00—i.e., the amount of the principal indebtedness. The Bank

also reiterates that it acted in complete accord with the express terms and conditions of

its contract with McCoys and therefore under Simmons Oil, no breach of the contract or

the covenant of good faith and fair dealing occurred.

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 ¶20 Lastly, the Bank challenges McCoys’ assertion that § 30-9A-627(2), MCA,

applies to this case. First, the Bank argues that McCoys did not raise this argument in

the District Court and therefore we should not address it. Second, the Bank maintains

that § 30-9A-601, et. seq., MCA, deals with a secured party’s rights after default, and

therefore, this statute is irrelevant to the debtor-creditor situation before us. Moreover,

the Bank posits that it was McCoys who, with ample time and notice, chose where,

when and how to liquidate the cattle.

¶21 In Story, we conducted a detailed analysis of the contractual covenant of good

faith and fair dealing. We held that:

[E]very contract, regardless of type, contains an implied covenant of good
faith and fair dealing. A breach of the covenant is a breach of the contract.
Thus, breach of an express contractual term is not a prerequisite to breach
of the implied covenant. For every contract not covered by a more specific
statutory provision, the standard of compliance is that contained in § 28-1-
211, MCA:

The conduct required by the implied covenant of good faith
and fair dealing is honesty in fact and the observance of
reasonable commercial standards of fair dealing in the trade.

Story, 242 Mont. at 450, 791 P.2d at 775.

¶22 We first address the “commercial trade standard” applicable to this transaction.

We have consistently judged a bank’s actions vis-à-vis a borrower’s claim of breach by

determining whether the bank’s actions comport with banking industry standards. In

Blome, we held that the bank had not breached the implied covenant of good faith and

fair dealing when it denied a borrower’s request for additional funds and notified the

borrower, with little notice, that it would not renew the existing loans. We observed

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that the bank made its decision after “analyzing the financial situation” of the Blomes

and that it was entitled to make such a “business decision.” Blome, 238 Mont. at 188,

776 P.2d at 529. Applying banking industry standards, we acknowledged that the

bank’s actions were driven by the policies and procedures employed by the bank in

making lending decisions. In Coles Dept. Store v. First Bank, 240 Mont. 226, 783 P.2d

932 (1989), we concluded that First Bank’s decision to discontinue financing Coles

Department Store, after determining that it was experiencing accelerating financial

deterioration, was based upon “prudent banking policy,” and therefore did not

constitute a breach of the implied covenant of good faith. See also Tresch v. Norwest

Bank of Lewistown, N.A., 238 Mont. 511, 778 P.2d 874 (1989) (Norwest’s

determination that providing additional funds to a borrower would not result in

sufficient additional income to repay the loan was a decision based upon “solid business

reasons” and not a breach of the implied covenant of good faith.). Lastly, in

Lachenmaier, as argued by the Bank above, we noted that First Bank Systems, in

foreclosing on Lachenmaier’s loan, “was simply exercising sound business judgment as

a creditor.” Lachenmaier, 246 Mont. at 32, 803 P.2d at 617. Thus it was appropriate

for the court to apply commercial banking industry standards to its analysis of the

Bank’s relationship with the McCoys and the McCoys’ ability to service their loans.

¶23 As for McCoys’ U.C.C. claim, nothing in the record establishes that McCoys

raised this issue before the District Court, nor does the District Court address it in its

Order. To the extent McCoys may have raised the theory at oral argument, failure to

provide a full transcript of such proceeding precludes a review by this Court.

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Therefore, based on the record before us and as we have held on numerous occasions,

we will not address a new legal theory raised for the first time on appeal. State v.

Osterloth, 2000 MT 129, ¶ 20, 299 Mont. 517, ¶ 20, 1 P.3d 946, ¶ 20.

¶24 The District Court concluded that since McCoys cancelled the sale without the

Bank’s permission to do so, their complaint was not that the Bank refused to let them

cancel the sale but rather that the Bank refused to loan them additional funds. After

establishing this as the issue, the District Court held that the Bank’s actions did not

constitute a contractual breach of the covenant of good faith and fair dealing in that the

actions were fully authorized by the express language of the contract signed by

McCoys. While the court may have misidentified the issue, the court’s conclusion is

nonetheless correct. The Bank’s refusal to extend the maturity date of McCoys’ loan

was both in accordance with the express provisions of the contract and comportable

with prudent banking policy and reasonable commercial standards; therefore, it was not

a breach of the covenant of good faith and fair dealing. The District Court did not err in

granting summary judgment in favor of the Bank on this issue.

¶25 Did the District Court err in granting the Bank’s motion for summary judgment

on the issue of breach of fiduciary duty?

¶26 The District Court, relying on Simmons, determined that the Bank’s actions, as

they pertained to the McCoys’ account, were typical to a debtor-creditor relationship, as

opposed to an “advisor-advisee” or “special” relationship, and, as such, did not give rise

to a fiduciary duty. The court also determined that had the Bank acted as a financial

advisor, which under some circumstances may give rise to a fiduciary duty, the

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relationship between the Bank and the McCoys did not in any event last long enough to

establish such a fiduciary relationship.

¶27 The McCoys argue that the question of whether a “special relationship” existed

between them and the Bank presented factual issues which precluded summary

judgment. They maintain that factual evidence of a special relationship consisted of:

(1) the Bank’s annual requirements that McCoys submit a budget; (2) the Bank’s

demand that McCoys sell cattle in 1999; and (3) the Bank’s demand that McCoys

liquidate their herd by September 30, 2000, under poor weather conditions.

Additionally, McCoys maintain that the District Court erred in determining that a “long

history” between bank and borrower was a required element of a fiduciary relationship.

¶28 The Bank counters that summary judgment was appropriate because the facts

relied on by the McCoys were immaterial and failed to establish that a “special

relationship” existed between the Bank and the McCoys. The Bank argues that it is

customary in agricultural banking to require a borrower to submit an annual budget for

review by the lending bank. The Bank also asserts that requiring the McCoys to show a

positive cash flow in 1999, through the sale of some cattle, was a business decision

which did not create a fiduciary relationship. The Bank notes that the McCoys had

shown a two-year negative cash flow in 1997 and 1998 but had continued to increase

their debt with the Bank. It argues that requiring the McCoys to meet their loan

obligations under their loan agreements does not put a bank in the position of a

fiduciary.

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¶29 Lastly, the Bank submits that it had the right to stop lending the McCoys money

and to require the McCoys to pay their loans. At the time of the Bank’s final loan to the

McCoys in January 2000 it expressly established a loan maturity date of September 30

and expressly stated that this was the final loan. Relying on Lachenmaier, the Bank

maintains that choosing not to extend the maturity date of McCoys’ loan or to lend

additional funds were prudent business decisions on the Bank’s part and did not create a

special relationship with a fiduciary duty.

¶30 In Montana, the relationship between a bank and its customer is generally

described as that of debtor and creditor, and does not give rise to fiduciary

responsibilities. A limited exception to this rule exists, however, when special

circumstances place a bank beyond the role of a simple creditor and into the role of

advisor. PTE v. United Banks, 2006 MT 236, ¶ 29, 333 Mont. 505, ¶ 29, 143 P.3d 442,

¶ 29 (citing Lachenmaier, 246 Mont. at 33, 803 P.2d at 618). Such “special

circumstances” creating an advisor-advisee relationship (Simmons Oil, 258 Mont. at 85,

852 P.2d at 526) or an agency relationship (Diest v. Wachholz, 208 Mont. 207, 678 P.2d

188) must exist before a fiduciary duty arises. Simmons Oil, 258 Mont. at 85, 852 P.2d

at 526.

¶31 Additionally, “whether a fiduciary duty exists between two parties is a question

of law, not fact, and it may be resolved on summary judgment when no genuine issues

of material fact remain. Likewise, whether a ‘special relationship’ exists between two

parties such as would give rise to a fiduciary duty is a question of law, not fact, for the

relationship and the duty are two sides of the same coin.” PTE, ¶ 31.

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¶32 In PTE, we also noted that since a “special relationship” does not normally exist

in dealings between a bank and its customer, the court may have to make a fact-

intensive inquiry. Importantly, however, while the circumstances of the particular

relationship are factual and disputes over material facts will preclude summary

judgment, “the conclusion drawn by a court from undisputed facts is one of law, not of

fact.” PTE, ¶ 31.

¶33 For the most part, the facts here are undisputed. To the extent a dispute was

raised, the District Court construed the evidence in the light most favorable to the

McCoys as the non-moving parties. See Jobe v. City of Polson, 2004 MT 183, ¶ 10,

322 Mont. 157, ¶ 10, 94 P.3d 743, ¶ 10. However, the District Court nonetheless

concluded that the Bank’s activities with respect to the McCoys did not elevate the

relationship beyond that of a creditor and debtor. We agree. Nothing in the record

suggests that the Bank thrust itself into the role of financial advisor. As the bank

experts testified, the requirement of annual budgets is routine for agricultural

borrowers. Moreover, the Bank did not force the sale of the McCoys’ cattle; it simply

sought to enforce the repayment provisions of its contracts with the McCoys. In sum,

the Bank acted as a creditor, and nothing more. The District Court did not err in so

concluding.

¶34 McCoys also challenged the District Court’s conclusion that longevity of the

debtor-creditor relationship was an “element” of a fiduciary duty. Having determined

that no fiduciary relationship existed between the McCoys and the Bank, we need not

address this claim.

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 ¶35 For the foregoing reasons, we affirm the District Court.

/S/ PATRICIA COTTER

We concur:

/S/ JAMES C. NELSON
/S/ JOHN WARNER
/S/ W. WILLIAM LEAPHART
/S/ BRIAN MORRIS

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