No. 83-272
IN THE SUPREME COURT OF THE STATE OF MONTANA
E.C.A. ENVIRONMENTAL MANAGEMENT
SERVICES, INC., a Montana corp.,
Plaintiff and Appellant,
JOHN B. TOENYES and MICHAEL
ROBB, d/b/a TERRA-SPREAD,
Defendants and Respondents.
........................
MONTANA MERCHANDISING, INC.,
a Montana corp.,
Plaintiff and Appellant,
JOHN B. TOENYES, and MICHAEL
ROBB, d/b/a TERRA-SPREAD,
Defendants and Respondents.
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable Joel G. Roth, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Dzivi, Conklin & Nybo; L.D. Nybo, Great Falls,
Montana
For Respondents:
Linnell & Newhall, Great Falls, Xontana
Submitted on Briefs: December 1, 1983
Decided: March 9 , 1984
Filed: ,I. '
vil",; . !:j94
.
id
-
Clerk
Mr. Chief Justice Frank I. Haswell delivered the Opinion of
the Court.
This appeal is from a iudgment of the Cascade County
District Court awarding defendants damages for their success-
ful counterclaim on a breach of a commercial contract.
Plaintiff corporations, ECA Environmental Management Servic-
es, Inc. (hereinafter "ECA"), and Montana Merchandising, Tnc.
(hereinafter "MMI"), originally brought separate actions
against defendants Toenyes and Robb, d/b/a Terra-Spread
(defendants hereinafter referred to as "Terra-Spread") .
These actions were consolidated for trial.
In 1973, John Toenyes incorporated ECA which was en-
gaged in the custom application of mosquito control chemicals
and the sale of pesticide control equipment. In the spring of
1 9 7 6 , MMI purchased 100 percent of the shares of ECA retain-
ing Toenyes as manager. MMI began a fertilizer operation and
built a manufacturing plant on its property. The fertilizer
operation was known as Agricultural Management Services. MMI
employed L,inn Stord-ah1 to manage this operation. ECA ' s
operations were physically relocated and became part of P.IMI1s
fertilizer operations.
Toeynes and his brother-in-law Michael Robb began their
joint venture, Terra-Spread, upon the suggestion of the MMI
Board of Directors. Toeynes had initially proposed that MMI
purchase some sophisticated spreading equipment. The Board
suggested that Toeynes himself purchase the equipment.
Consequently, Toeynes formed Terra-Spread and entered into a
contract with Agricultural Management to do its fertilizer
spreading work. The agreement provided that Terra-Spread
~,7ould receive a minimum of 4000 tons of fertilizer spreading
business in the fall of 1 9 7 8 and spring of 1 9 7 9 . In order to
finance the new venture, Terra-Spread gave a demand promisso-
ry note to JYNI the amount of $7,000 plus interest at 114
in
percent in exchange for a loan of that amount. On Auqust 1,
1979, Terra-Spread purchased $1,062 worth of diesel fuel on
credit from Agricultural Management.
The spreading contract was not fully performed by
Agricul-tural Management Services. Terra-Spread was provided
with less than one-fourth of the promised tonnage.
Terra-Spread left unpaid the balance due for the fuel and
upon notice of demand, paid only $5,000 of the $7,000 obliqa-
tion on the promissory note. After the fertilizer spreading
agreement expired, the remaining assets of ECA were trans-
ferred to F I M I and ECA ceased business.
ECA filed suit to recover the amount owed for the
diesel fuel. MMI brouqht action to recover the balance due
on the promissory note. Terra-Spread counterclaimed in both
actions for damages arising from breach of the spreading
agreement.
Following a nonjury trial, the District Court found
that ECA was not a party to either the fuel sale or the
spreading contract. Roth contracts were found to be with
Agricultural Management as a division of MMI. Thus, MMI was
the contracting party in both cases. The court held that
Terra-Spread owed MMI $1,062 plus interest at 6 percent for
the diesel fuel. It also concluded that the interest rate on
the promissory note was usurious. After subtracting the
statutory penalty, Terra-Spread was entitled to a refund of
$656.94 from the $5,000 it had paid. Finally, the court held
that Terra-Spread had been damaged by MMI's breach of the
spreading agreement. After calculating the amount that would
have been due under the contract and adding the credit from
the promissory note, the court subtracted the fuel, labor,
food and 1-odging, and repair and maintenance costs saved by
Terra-Spread in not performing the contract. Lastly, it
subtracted the amount of the fuel bill plus interest, and
came up with a total of $83,412.55 net damaqes. A judgment
for that amount plus attorney fees of $750 was rendered for
Terra-Spread. From this judqment, appellants appeal raising
the following issues:
1. Js MMI entitled to the rate of interest provided on
the diesel fuel invoice or only the statutory amount?
2. Did the trial court correctly determine the statu-
tory usury penalty of section 31-1-108, MCA, j n allowing
.
interest on the demand note to accrue up to the date of
trial?
3. Which side was the prevailing party in relation to
the promissory note for the purposes of awarding attorney
fees under section 28-3-704, MCA?
4. Did the trial court err by holding the corporate
veil of ECA was pierced and mI was liable on the fertilizer
contract?
5. Did the District Court deduct all avoided costs of
completing the spreading contract?
6. Did the District Court err by failing to consider
mitigation of damages?
Appellants' first issue alleges the diesel fuel bill
was erroneously found to carry a usurious rate of interest.
We agree with appellants that this bill was not usurious,
although we reach our result independent of the arguments
presented to the Court.
The transaction evidenced by the invoice of P.ugust 1,
1979, was a bona fide sale of diesel fuel. It was never
alleged that the transaction was anything more than a good
faith credit sale in which the purchaser Terra-Spread was
permitted to take possession of the fuel and defer payment.
While certain forms of credit sales are statutorily regulated
in Montana, this type of transaction is not covered by either
our usury or consumer credit laws.
The fuel transaction was not a subterfuge devised to
conceal what was in fact a loan. For loans to be considered
usurious there must be intent on the part of the lender to
take more than the legal rate of interest for the sum loaned.
Hansen v. Bonner (Mont. 1983), 661 P.2d 421, 424, 40 St.Rep.
245,249-250. Here, there was neither the intent to loan a
sum of money nor the intent to extract usurious interest.
Terra-Spread took possession of the goods without paying and
received a significant benefit. For this benefit, the seller
is justified in imposing an additional charge. The contrac-
tor on receiving the goods, signed and received an invoice
that contained an agreement providinq for charging an annual
interest rate of 18 percent on balances more than thirty days
old. Without more, this agreement constitutes a simple
commercial charge agreement to which usury laws are inappli-
cable. Empire Building Supply v. EKO Investments, Inc.
(1979), 40 Or.App. 739, 596 P.2d 593.
Certain forms of credit sales are regulated by statute.
Appellants argue that this fuel sale fits within the regula-
tory umbrella of the Montana Retail Installment Sales Act,
section 31-1-201 et seq., MCA. This diesel sale was not a
retail installment contract whereby the purchaser agreed to
pay "in one or more deferred installments." Section
31-1-202(n), MCA. Nor was there a retail charge account
aqreement that created an open credit card account. Section
31-1-202 (m), MCA.
, See also, Cecil v. Allied Stores (1973),
162 Mont. 491, 513 P.2d 704.
The invoice signed by Terra-Spread's agent created an
obligation to pay within thirty days. If that obligation was
not fulfill.ed, the agreement provided for assessment of a
finance charge. Use of these "thirty-day accounts," under
which the customer i s extended credit subject to his agree-
ment to pay the full sales price within thirty days, does not
involve installment payments and is not subject to the Retail
Installment Sales Act. Cf., Siebert v. Sears, Roebuck & Co.
(19751, 45 Cal.App.3d 1, 120 Cal.Rptr. 233. The diesel sale
was a bona fid.e credit sale outside the scope of usury and
retail instirll-ment contract statutes. The decision of the
District Court is vacated to the e x t ~ n tthat appellants were
granted an offset based on 6 percent interest on the $1,062
bill. Appellants should be granted. an offset that reflects
the 18 percent annual interest agreed upon by the parties to
the fuel bill dated August 1, 1979.
Appellants' second issue concerns the $7,000 promissory
note which was found usurious by the District Court. On
appeal, appellants concede that the note is usurious but
contend that the lower court incorrectly calculated the
statutory penalty.
Section 31-1-108, MCA, prescribes the penalty for
usury. Subsection (1) reads:
"The taking, receiving, reserving, or
charging a rate of interest greater than
is allowed by 31-1-107 shall be deemed a
forfeiture of a sum double the amount of
interest which the note, h i 11, or other
evidence of debt carries or which has
been agreed to be paid thereon."
The District Court calculated the forfeiture penalty based on
the note's interest from the date of its making up to the
time of trial. The note was payable on demand and such
demand was made prior to the initiation of this action.
Appellants assert that upon demand the note matured and thev
cannot be penalized for usurious interest after that date.
Obligations on the note in this case continued after
demand was made for payment. The lender, MMJ, did not cancel
the rights it had under the note after demand. The note,
usurious on its face, is usurious as long as its original
existence continues. In order to purge the note of usury, it
has to be wholly abandoned and a new obligation undertaken.
The lender in this instance did not abandon obligations prior
to trial and now claims amounts outstanding on the usurious
note.
There is precedent for calculating the usury penalty by
assessing interest up to the time of trial. In Bermes v.
Sylling (1978), 179 Mont. 448, 587 P.2d 377, this Court found
the District Court acted properly when it simply doubled the
amount of interest which the lender had charged the borrower
up to the date of trial and subtracted the amount from the
principal of the note. The fact that the lender in Bermes,
like MMI, had made a prior demand for payment was not dispos-
itive. Where the indebtedness on a usurious loan remains
uncanceled up to the time of trial, assessment of the usury
penalty up to that date is proper under section 31-1-108,
MCA .
Appellants' third issue concerns the award of attorney
fees to defendants for their defense of the promissory note.
The usury penalty which we have affirmed totaled $2,656.94.
The defendants were awarded a refund from MMI to the extent
that this penalty exceeded the $2,000 balance due on the
note. After awarding $656.54 to defendants, the District
Court found them to be the prevailing party for the purposes
of section 28-3-704, MCA, and awarded an additional $750 in
attorney fees.
Section 28-3-704, MCA, provides:
"Contractual right to attorney fees
treated as reciprocal. Whenever, by
virtue o - h
fte provisions of any contract
or obligation in the nature of a contract
made and entered into at any time after
July 1, 1971, one party to such contract
or obligation has an express right to
recover attorney fees from any other
party to the contract or obligation in
the event the party having that right
shall bring an action upon the contract
or obligation, then in any action on such
contract or obligation all parties to the
contract or obligation shall be deemed to
have the same right to recover attorney
fees and the prevailing party in any such
action, whether by virtue of the express
contractual right or by virtue of this
section, shall be entitled to recover his
reasonable attorney fees from the losing
party or parties."
Appe1.lants brought the action on a note which included an
express right to collect fees; the statute set forth above
grants defendants a reci-procal right if they prevail. At
issue is the proper construction of "prevail-ing party" for
purposes of the statute.
No one factor should be considered in determining the
prevailing party for the purpose of attorney fees. The party
that is awarded a money judgment in a lawsuit is not neces-
sarily the successful or prevailing party. However, this
Court agrees with those jurisdictions that have found the
a.ward of money to be an important item to consider when
deciding who, in fa.ct, did prevail. Ocean West Contractors
v. Halec Const. Co. (1979), 123 Ariz. 4701 600 P-2d llo2-
Here, MMI brought suit to recover sums due it on a note
usurious on its face. The usury penalty assessed MMI result-
ed not only in a denial of recovery, but an adverse award.
The net judgment was in favor of defendantc. The party that
survives an action involving a counterclaim, setoff, refund
or penalty with the net judgment should generally be consid-
ered the successful or prevailing party. Moss Construction
Co. v. Wulffsohn (1953), 116 Cal.App.2d 203, 205, 253 P.2d
483, 485; Szoboszlay v. Glessner (1983), 233 Kan. 475, 664
P.2d 1327. On the facts presented and viewing the action on
the note in its entirety, the defendants were properly found
to he the prevailing party.
The primary contention of appellants is that MMI was
wrongly held liable on the contract between Terra-Spread and
Agricultural Management Services. We affirm the District
Court's judgment finding M I liable.
lI
The first basis of our holding is that Aqricultural
Management Services is arguably a division of the corporation
MMI. Secondly, even if Agricultural Management Services were
considered synonymous with the corporate entity, ECA, this
entity has been controlled and used by MMI to avoid its
contractual obligation with Terra-Spread. In light of this
had faith we would find the parent corporation, MMI, fully
liable for damages flowing from the breach.
The contract at issue was signed by John Toenyes for
the subcontractor Terra-Spread and Linn Stordahl "for Agri-
cultural Management." Agricultural Management, fully known
as Agricultural Management Services, Tnc. (hereinafter "AMS")
is not a reqistered corporation despite the obvious represen-
tation. As established at trial, the name AMS has been used
as a registered trade name for ECA, as well as a business
name for several other companies owned by MMI. Furthermore,
AMS is identified on the contract stationary, business liter-
ature and advertisements as "A Division of MMI, A Montana
Based Corporation."
Consequently, there is uncertainty as to just what
corporation was bound by the fertilizer agreement when
Stordahl signed, for "Agricultural Management." Stordahl,
who prepared the agreement, was a vice-president and director
of MMI at the time the contract was executed. He was unsure
at trial whether AMS was a corporation or whether he was an
officer or director of ECA. The contract is ambiguous and
must be construed against whomever caused the uncertainty to
exist. Section 28-3-206, MCA; Shanahan v. Universal Tavern
Corp. (1978), 179 Mont. 36, 585 P.2d 1314; Lauterjung v.
Johnson (1977), 175 Mont. 74, 572 P.2d 511. In this case that
party is MMI. MPJlI through its business practices permitted
AMS to he loosely used as a collective term encompassing
several subsidiaries, a trade name for ECA, and a division of
MMI. The uncertainty in the contract under which MMI now
attempts to escape liability is attributable to no party but
itself. FJe therefore affirm the finding of the District
Court that the primary intent of Stordahl was to bind MMT as
principal.
Assuming arguendo that the contract technically bound
ECA, we will not allow the parent corporation to hide behind
the veil of its subsidiary and escape contractual
obligations.
ECA was so identified with M J in this transaction that
M
the subsidiary and parent can be viewed as one and the same
corporation. MMI owned 100 percent of the capital stock of
ECA. Virtually all corporate formalities were abandoned by
ECA prior to execution of the contract. There were no
minutes of meetings of either stockholders or directors of
ECA after August 1977. Each of ECA's directors was also a
director of MMI. It was in the course of a meeting of the
MMI Board of Directors that the fertilizer spreading agree-
ment was initially proposed. As far as ECAfs capital is
concerned, I1
QI routinely transferred funds from ECA to its
own account; ECA's and AMS's bank accounts were managed by
MMI. At the time of contract, ECA was seriously undercapi-
talized, owed MMI $1,452,076 and the value of its assets were
pledged to M I as security.
II Finally, ECA's operations were
financed by MMI.
With these indicia of control and domination by MMI
present, its identity with ECA for the purposes of piercing
the corporate veil is established. The District Court was
correct in finding ECA the alter ego of its controlling
shareholder MMI.
Before a corporate entity can be disregarded or pierced
there must be e further showing of "subterfuge to defeat
public convenience, to justify wrong or to perpetrate fraud."
Flemmer v. Ming (Mont. 1980), 621 P.2d 1038, 1042, 37 St.Rep.
1916, 1919, quoting from State ex rel. Monarch Fire Ins. Co.
v. Holmes (1942), 113 Mont. 303, 308, 124 P.2d 994, 996. Our
holdings in Flemmer and Monarch do not require a positive
showing of fraud before the corporate form can be set aside.
Despite appellants' arguments to the contrary, we have previ-
ously found a showing of bad faith sufficient to pierce a
corporate veil. In Stromberq v. Seaton Ranch Company (1972),
160 Mont. 293, 502 P.2d 41, the beneficial owner and alter
ego of a ranch corporation was found personally liable when
she attempted in bad faith to avoid a broker's commission on
a ranch sale. In Stromberg, as in the present case, there
was no specific finding of fraudulent intent. See, Brewster,
Piercing the Corporate Veil, 44 Mt. L. R. 91, 99 (1983).
After the expiration of the fertilizer contract, WII
transferred the assets of ECA to its own books in partial
cancellation of debt owed MMI. ECA effectively ceased busi-
ness. Consequently, ECA has no assets from which to satisfy
a judgment. MMI has attempted to use the shell subsidiary
ECA, its alter ego, to avoid its contractual obligations to
Terra-Spread. Such bad faith amply justifies piercing the
corporate entity of ECA and assigning liabilitv to MMI. We
find no error in the lower court's conclusion of law that the
fertilizer contract effectively hound WNI. MMI cannot escape
contractual liabil-ity by asserting that it is not personally
liable for the obligations of AMS or ECA.
On the issue of the calculation of the damage award,
the parties agree on the applicable law. Both appellants and
respondents acknowledge the general rule that when overhead
or operating expenses are saved as a result of a breach, the
proper measure of recovery is net, not gross, profit, and
when such expenses are constant and no savings occurs, the
rule is otherwise. Rronken's Goodtime Co. v. J. W. Brown
(Mont. 1983), 661 P.2d 861, 865, 40 St.Rep. 549, 553.
Overhead attributable to a particular contract may be
found to be an avoided cost of performance following a con-
tractual breach. A. T. Klemens and Son v. Reber Plumbing and
Heating Co. (1961), 139 Mont. 115, 360 P.2d 1005. However,
where overhead costs are ongoing, negligible or otherwise
unaffected by a particular performance, they need not be
considered ~rhen a contractual breach prevents performance.
At issue is whether the District Court excluded from
the damage award all the avoided costs of performance.
Specifically appellants claim that the equipment lease ren-
tal, salaries of Toenyes and Robb, and certain overhead
expenses were erroneously omitted from the District Court's
calculation of avoided costs.
The District Court made findings of fact that
Terra-Spread would have incurred additional expenses for
fuel, food and lodging, repair and maintenance, and labor.
These "saved" expenses totaled $12,128.32 and were deducted
from the $96,122.19 due Terra-Spread on the contract to
arrive at the $83,993.87 damage award (absent the additional
offsets for interest on the fuel. bill and credit for overpav-
ment on the promissory note).
Toeynes testified that the omitted expenses of equip-
ment lease and overhead would not have increased if
Terra-Spread had spread all the 4,000 tons of fertilizer
guaranteed by the contract. The financial obligations on the
spreaders and tender trucks were made prior to performance
and survived the breach. The cost of Terra-Spread's overhead
largely remained constant.
The District Court received appellants' evidence that
suggested Terra-Spread would have realized no profit had the
contract been fully performed. However, in reviewing find-
ings of fact in a civil action tried without a jury, this
Court may not substitute its judgment in place of the trier
of facts. Our function is confined to determini-nq whether
there is substantial credible evidence to support the court's
findings. We view the evidence "in a light most favorable to
the prevailing party, recognizing that substantial evidence
may be weak or conflicting with other evidence yet still
support the findings." Lacey v. Herndon (Mont. 1983), 668
P.2d 251, 255, 40 St.Rep. 1375, 1380. In light of Toeynes'
testimony we conclude there was substantial evidence from
which the District Court could conclude that all of
Terra-Spread's avoided costs were properly excluded from the
award.
Our holding is consistent with our recent decision in
Bronken's Goodtime Co. , supra. We remand.ed that case when
the District Court failed to offset the gross profit awarded
with expenses associated with the sale of defendant's wine:
labor, gas, insurance and accounting. In the present case,
there was no such failure. The District Court here made the
deductions for the increased costs that it felt were estab-
lished by the evidence.
Finally, appellants argue that the trial court failed
to make findings with regard to Terra-Spread's duty to miti-
gate. This issue was not raised in the pleadings or other-
wise at trial. The issue was raised tangentially within a
post-trial motion and need not be considered by the Supreme
Court. Huggans v. Weer (Mont. 1980), 615 P.2d 922, 925, 37
St.Rep. 1512, 1515.
Mitigation of damages is properly considered a defense.
The burden of pleading and proving mitigation falls on the
party defending the contractual claim of breach, the appel-
lants in this case. See, A. T. Klemens - - 139 Mont. at
and Son,
125, 360 P.2d at 1010. Appellants failed to carry the burden
in this case. The record. below is devoid of testimony on the
issue. Appellants' reliance on our holding in Rronken's
Goodtime - , supra, is misplaced..
Co. The trial record in
Bronken ' s Goodtime Co. , was replete with testimony on the
issue of plaintiff's failure to mitigate the loss on his wine
inventory. Here, the transcript's silence on the issue of
m i t i g a t i o n p r o v i d e s p r o o f of a p p e l l a n t s ' f a i l u r e t o p r o p e r l y
r a i s e t h e i-ssue.
T h i s c a u s e i s remanded t o t h e D i s t r i c t C o u r t t o amend
i t s judgment c o n s i s t e n t w i t h o u r h o l d i n g t h a t a p p e l l - a n t s a r e
due 1 8 p e r c e n t a n n u a l i n t e r e s t on t h e o u t s t a n d i n g f u e l b i l l ,
beginning t h i r t y days a f t e r t h e d a t e of t h e o r i g i n a l invoice
and e n d i n g on t h e d a t e of t h i s d e c i s i o n . As t o a l l other
ma.tters, the judgment of t h e D i s t r i c t Court is affirmed.
a,
;- Chief J u k t y c e
W concur:
e