FIRST NAT. BANK IN LIBBY v. Twombly

NO. 84-125

I N THE SUPREME COURT O THE STATE O M l T N
F F OJ A A

1984

FIRST NATIONAL BANK I N L I B B Y ,

P l a i n t i f f and Respondent,

-vs-

CRAIG L. TWOMBLY and LORRAINE E . TWOMBLY,

D e f e n d a n t s and A p p e l l a n t s .

APPEAL FROM: D i s t r i c t Court of t h e :.lineteenth J u d i c i a l D i s t r i c t ,
I n and f o r t h e County o f L i n c o l n ,
The Honorable R o b e r t M. H o l t e r , Judge p r e s i d i n g .

COUNSEL O RECORD:
F

For A p p e l l a n t s :

K e l l e r & German, L i b b y , Montana

For Respondent :

S v e r d r u p & S p e n c e r , L i b b y , Montana

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S u b m i t t e d on B r i e f s : J u l y 1 9 , 1984
Decided: October 2 2 , 1984

Filed:

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Clerk
Mr. Justice Frank R . Morrison, Jr. delivered the Opinion of
the Court.

First National Bank of Libby (Bank) initiated an action
in the Nineteenth Judicial District to recover on a
delinquent promissory note executed by the Twomblys.
Twomblys counterclaimed for breach of duty of good faith.
The jury verdict awarded Twomblys compensatory damages of
$4,000. The trial court's judgment offset the balance due on
the note, the interest accrued and attorney's fees in favor
of the Bank. Twomblys appeal. The Bank's appeal was
dismissed.
Prior to the trial, the Bank's motion in lirnine to
exclude any evidence of punitive damages was granted by the
trial court on the grounds that a contract action prohibits
punitive damages. Twomblys sought a writ of supervisory
control in this Court directing the trial court to allow
punitive damages. The writ was denied since Twomblys had an
adequate remedy of appeal. Following a two-day jury trial,
the Twomblys' request. for instructions on punitive damages
was denied. The defense, in support of counterclai.m, argued
that the Bank's acceleration of the maturity date of the note
and subsequent wrongful offset was in bad faith and warranted
exemplary damages. This second attempt to have the jury
instructed on punitive damages was denied.
Based on special interrogatories, the jury found that
the Bank made false representations to the Twomblys and
breached its obligation of good faith to Twomblys by
accelerating the maturity of the promissory note. Following
the offset, judgment was entered for Twomblys in the amount
of $1-,392.49.
 Twomblys filed notice of appeal on December 23, 1983,
challenging refusal by the trial court to allow punitive
damages, and the award of attorney's fees to the Bank.
In July 1978, Craig and Lorraine Twombly began operating
the Antlers Restaurant, located between Troy and Libby,
pursuant to a lease/option agreement. The Twomblys executed
a promissory note with the Bank on February 16, 1979 for
$3,500 to purchase a $2,000 ice machine and to pay $1,500 in
property taxes on the restaurant. The terms required one
payment of principle and interest due on August 16, 1979.
The note was accompanied by a standard security agreement,
granting the Bank a security interest in the ice machine,
inventory and accounts receivable.
Twomblys did not exercise their option to purchase the
Antlers Restaurant, when negotiations with the owner failed.
This lease was terminated July 31, 1979. Facing unemployment
after July, the Twomblys became concerned about repayment of
their note due August 16. In early July Twomblys contacted
Frank Johnson, the Vice President of the Rank, to renegotiate
the payment schedule. Mr. Johnson was the bank officer who
initially arranged and approved of the loan involved in this
appeal. Most of the discussions concerning restructuring of
the loan took place at the restaurant when Mr. Johnson
stopped on his way home from the Rank after working hours.
All parties agree that at all times during these negotiations
Mr. Johnson was acting in the scope of his employment as an
agent for the Bank.
Twomblys offered to reduce the $3,500 principle amount
by $500 and bring the interest current on August 16, if the
Bank would convert the remaining $3,000 balance into an
installment loan. Although the Twomblys had the funds to
satisfy the subject note in full on August 16, they explained
they needed the money they had saved to pay for living
expenses. Mr. Johnson testified in his deposition that he
assured Mr. Twombly in unequivocal terms that the "straight"
promissory note would be ccnverted to an installment note, if
the Twomblys made some reduction of the principle and brought
the interest current on the note by August 16, 1979. Mr.
Johnson also advised the Twomblys that they could wait until
July 31, when their restaurant management responsibilities
were compl-eted, to take care of this bank matter with First
National. Since he was scheduled to be out of town, Mr.
Johnson informed the Twomblys that he had discussed the
matter with Mr. Wayne Haines, Vice President, who would
supervise necessary documentation of conversion of the note.
Craig Twombly telephoned Mr. Haines on August 2. Mr.
Haines informed Craig Twombly that he knew nothing about b r
l.
Johnson's promise to convert the loan. He refused to convert
the subject $3,500 obligation to an installment note because
Craig Twombly was not employed to assure repayment. Craig
Twombly told Mr. Haines that he had relied upon Mr. Johnson's
promise to convert the note, had expended the money, and
would not be able to pay the note two weeks later. Mr.
Haines testified that Craig Twombly hung up the phone in
anger and did not afford Mr. Haines the opportunity to
discuss any method to resolve the problem. Mr. Haines
admitted that he did not attempt to call Craig Twombly back
to discuss possible recovery on the loan by selling the ice
machine held as security for the loan.
Subsequent to this discussion with Craig Twombly, E r
l.
Haines confirmed that approximately $2800 remained in the
Antlers Restaurant checking account with the Bank. Haines
anticipated that Craig Twombly would withdraw all the funds
from the Antlers checking account and leave the Bank in a.
poor collateral position. Haines discussed the problem with
the President, Bernard Remick. Haines and Remick admitted
that neither had any information other than Craig Twombly's
alleged statement to Mr. Haines to support their belief that
the Twomblys would not repay their debt when it matured.
Both officers decided the note was in jeopardy and declared
it immediately due in its entirety. Mr. Haines prepared and
dra5ted an offset statement against the Twornbley's checking
account in the amount of $2,865, leaving a balance of $1.65.
The Twomblys were given no notice of this offset action
against their checking account. Mr. Twombly first acquired
notice of the offset when he attempted to cash a check the
following day and was advised by the teller of the $1.65
balance in his account. Craig Twombly attempted to dj-scuss
the Bank's offset procedure with Mr. Haines personally but
Mr. Haines was busy with a customer. The same day after
Craig Twombly was unable to reach Mr. Haines on the
telephone, he inquired with the bookkeeper who informed him
of the offset.
Mr. Haines admitted that he knew Mr. Twombly desired to
talk to him about the offset, but that he did not make any
attempt to contact him after Craig Twombly ].eft the bank.
Mr. Haines felt that the teller's and bookkeeper's
explanation and the written statement sent out by the Rank
the following day were sufficient notice to Mr. Twombly
regarding the Bank's offset action.
Mr. Haines testified that he did not freeze the funds
and pursue further negotiations with the Twomblys because
freezing the funds would have caused accrual of additional
interest on the delinquent promissory note. He admitted at
trial that the offset action was based strictly upon Craig
Twombly's telephone statement that he would not pay the
$3,500 on August 16. In determining the Twombly promissory
note to be "in jeopardy", Mr. Haines did not attempt to
establish whether the Twomblys were intending to leave the
community or any other information to support a threat to the
repayment of the note.
All parties agree that as a result of the acceleration
of maturity of the note and the Bank's offset several checks
were dishonored due to insufficient funds. The dishonored
checks totaled approximately $850. In order to cover these
delinquent drafts, Craig Twombly sold the ice machine for
$1,800. Twomblys retained the remaining profits for 1ivir.g
expenses.
Appellants present the following issues on appeal:
1. Whether it was error for the trial judge to refuse
to allow the defendants to introduce evidence in support of
punitive damages, to refuse to instruct the jury on punitive
damages, and to refuse to allow argument on punitive damages,
where it was alleged that the plaintiff acted in bad faith in
accelerating an indebtedness of defendants and exercising an
offset against de5end.a-ntsl
checking account?
2. Whether plaintiff is entitled to attorney's fees
where the net judgment was in favor of the defendants on
their counterclaim for damages for wrongful offset?
Counterclaimants rely upon section 30-1-203, MCA which
provides :
"Obligation of good faith. Every contract or duty
within this code imposes an obligation of good
faith in its performance or enforcement."
The Uniform Commercial Code, from which the quoted
section comes, applies to the type of transaction here at
issue. Appellants further rely upon section 30-1-208, MCA
which provides:
 "Option to accelerate at will. A term providing
that one party or his sucessor in interest may
accelerate payment or performance or require
collateral or additional collateral 'at will' or
'when he deems himself insecure' or in words of
similar import shall be construed to mean that he
shall have power to do so only if he in good fa.ith
believes that the prospect of payment or
performance is impaired. The burden of
establishing lack of good faith is on the party
against whom the power has been exercised."
The obligations owing under these sections of the
Uniform Commercial Code were submitted to the jury with
proper instructions. The special verdict contained, among
others, the following interrogatories:
"2. Did First National- Bank breach its obligation
of good faith to the Twomblys by accelerating the
maturity of the promissory note? If you (sic)
answer is 'yes', proceed to Number 3. If your
answer is 'no', proceed to Number 4.
Yes 10 No 1

"4 . Did First National Bank make false
representations to the Twomblys prior to the
maturity of the note? If your answer is 'yes',
proceed to Number 5. If your answer is 'no',
proceed to Number 7.
Yes 12 No 0 "

This case presents a rather unique fact situation. The
issues which would form the basis for an award of punitive
damages were submitted to the jury and resolved in favor of
the appellants. However, the issue of punitive damages was
not submitted to the jury and the jury was not permitted to
make an award.
In viewing the evidence in a light most favora-bleto the
appellants, which for purpose of this appeal we must do, a
jury issue was created on whether the Bank breached, its
statutory obligation to exercise good faith. The jury in
this case found that respondent Bank breached its obligation
to act in good faith and further that it made false
representations to the Twomblys. Under the circumstances the
only remaining question is whether appellants are entitled to
punitive damages.
When the duty to exercise good faith is imposed by law
rather than the contract itself, as in Gates v. Life of
Montana Insurance Company (Mont. 19831, 40 St-ReP- 12871 668
P.2d 213, the breach of that duty is tortious. Therefore,
punitive damages are recoverable if the Bank's conduct is
sufficiently culpable.
Punitive damages are recoverable under section 27-1-221,
MCA, where malice, oppression, or fraud is shown. Fe
7
recently defined malice, for these purposes, as:
"When a person knows or has reason to know of facts
which create a high degree of risk of harm to the
substantial interests of another, and either
deliberately proceeds to act in conscious disregard
of or indifference to that risk, or recklessly
proceeds in unreasonable disregard of or
indifference to that risk, his conduct meets the
standard of willful, wanton, and/or reckless to
which the law of this State will allow imposition
of punitive damages on the basis of presumed malice
. . . . " Owens v. Parker Drilling Co. (Mont.
1984), 41 St.Rep. 66, 69, 676 P.2d 162.
Ve
J further defined oppression in Owens, supra, as
including acts which constitute an abuse of power. 41

Viewing the facts in a light most favorable to the
appellants, the jury could find that the respondent Bank
acted in reckless disregard of the appel-lants'rights. Such
a finding could result in the imposition of punitive damages
based upon malice. Furthermore, such a finding, given the
Bank's relationship to its debtor, could justify an exemplary
imposition for oppression. Finally the jury found that
respondent Eank misrepresented facts which could spring the
"fraud" basis for a punitive award.
We find that the trial court erred in refusing to submit
punitive damages to this jury. The remand is for a new trial
on punitive damages only as the jury has already found
liability. The Bank has not cross-appealed contesting
compensatory damages and this issue need not be retried.
The trial court awarded attorney's fees to the Bank as
"prevailing party." In doing so the court erred. This Court
recently held in E.C.A. Environmental Management Services,
Inc. v. Toenyes, et al. (Mont. 1984), 41 St.Rep. 388, 393,
679 P.2d 213, that, "The party that survives an action
involving a counterclaim, setoff, refund or penalty with a
net judgment should generally be considered the successful or
prevailing party."
The awa-rd of attorney's fees in favor of respondent Rank
is vacated. The case is remanded for a trial on the issue of
punitive damages only in accordance with the views herein
expressed.

We concur:

= &L
% l
Chief Justice
d . 9 4

- -
Justices

Mr. Justice L. C. Gulbrandson, dissenting.

I respectfully dissent. I would affirm the rulings
of the trial judge.