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No. 99-430
IN THE SUPREME COURT OF THE STATE OF MONTANA
2000 MT 223
301 Mont. 212
7 P. 3d 409
TRANSACTION NETWORK, INC.,
Plaintiff and Appellant,
v..
WELLINGTON TECHNOLOGIES, INC.,
and JERRY MAGNUSON,
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable Russell C. Fagg, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Patricia D. Peterman, Billings, Montana; W. Scott Green, West, Patten, Bekkedahl & Green, Billings,
Montana
For Respondent:
Russell D. Yerger, Billings, Montana, Ronald D. Allie, Allie Law Firm, Billings, Montana
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Submitted on Briefs: October 21, 1999
Decided: August 15, 2000
Filed:
__________________________________________
Clerk
Justice James C. Nelson delivered the Opinion of the Court.
¶1 TransAction Network, Inc. (TANI), appeals a May 12, 1999 Order and Memorandum
issued by the Thirteenth Judicial District Court, Yellowstone County, which denied its
motion to amend the Findings of Fact and Conclusions of Law issued by the court on
April 8, 1999. TANI's motion sought attorney's fees pursuant to a release agreement
between the parties, as well as under Montana's reciprocal fees statute, after judgment was
entered in its favor for $3,673.53
¶2 We reverse and remand for an evidentiary hearing for the determination of attorney's
fees.
¶3 TANI raises the following issue:
Did the District Court err in dismissing TANI's motion to amend the Findings of Fact and
Conclusions of Law that would have allowed recovery of attorney's fees?
FACTUAL AND PROCEDURAL BACKGROUND
¶4 This appeal focuses exclusively on whether one party may recover its attorney's fees
from the opposing party based on an indemnification provision found within an underlying
contract. Thus, the factual background of this fairly complex matter is accordingly reduced
to the essential facts necessary for this Court's review, and is largely adopted from the
undisputed findings of the District Court.
¶5 Four persons, H. James Marlow, Dave Hughes, Keith Kerbaugh, and Jerry Magnuson,
conceived of a business plan in November of 1996 to purchase, place, own, and operate
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automated teller machines (ATMs). Various business entities were created pursuant to this
plan. A partnership known as DKW was formed. The partnership consisted of Data
Capture Systems, Inc., a corporation owned by Marlow; Kadoka Investments, Inc., a
corporation owned by Kerbaugh and Hughes; and Wellington Technologies, Inc., a
corporation owned by Magnuson. The latter (hereinafter Wellington), is the Defendant and
Respondent here.
¶6 The foregoing partnership created the corporate entity TransAction Network, Inc.
(hereinafter TANI), to implement the business concept of purchasing, owning, placing,
and operating ATMs nationwide. TANI is the Plaintiff and Appellant here, seeking more
than $40,000 in attorney's fees from Wellington.
¶7 Needless to say, within less than a year the entire deal went sour. At a July 1997 board
of directors meeting, it was decided that Marlow would manage TANI. The other three
persons, Kerbaugh, Hughes, and Magnuson, determined that they wanted out of the
business based upon considerable difficulties that prevented the four men from "getting
along and running an efficient business," according to the District Court's findings. The
four, on behalf of themselves and their respective business entities, all signed a
"GENERAL RELEASE AND AGREEMENT FOR RELINQUISHMENT OF STOCK"
agreement on July 30, 1997. The release, essentially, allowed the departing three parties to
exchange their respective shares of TANI stock for cash from TANI.
¶8 The release provided that TANI would hold "HKM" (Hughes, Kerbaugh, and
Magnuson) "harmless from all causes of action relating to the incorporation of TANI," and
that upon payment of consideration called for under the agreement, the parties would
"mutually release each other from all other claims, demands and causes of action that they
had, have or may have against each other . . . based upon stock issued in Transaction
Network, Inc., and any contractual relationships between HKM, Releasees and TANI."
¶9 Of particular relevance here, the release also contained the following provision:
11. Indemnification. Each party hereto shall indemnify and hold the other parties
harmless from and against all liability, claim, loss, damage or expense, including
reasonable attorneys' fees, incurred or required to be paid by such other parties by
reason of any breach or failure of observance or performance of any representation,
warranty or covenant or other provision of this agreement by such party.
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¶10 Notwithstanding the foregoing, in May of 1998, TANI brought suit against
Wellington and its president and owner, Magnuson, under a number of tort theories,
including breach of fiduciary duty, conversion, actual and constructive fraud, and
negligent misrepresentation. TANI sought general damages of approximately $110,000,
and also punitive damages.
¶11 In response, Wellington contended that pursuant to the general release such claims
were barred, and filed a counterclaim that the legal action commenced by TANI breached
the release agreement. In addition to the breach of contract claim, Wellington alternatively
claimed that due to either mistake or fraud, the release agreement should be rescinded.
Wellington further contended that under either theory, it was entitled to recover its
attorney's fees pursuant to the indemnification provision. Its amended answer and
counterclaim alleging the foregoing was filed on November 6, 1998. Both parties moved
for summary judgment in early 1999.
¶12 In a March 4, 1999 Order and Memorandum, the court denied Wellington's motion for
summary judgment, and concluded that the release did not bar TANI's tort claims due to
apparent ambiguities in the release agreement. Thus, the court determined that TANI
could not be "subject to a counter-claim for a breach of the Release when the Court has
concluded, as a matter of law, the Release does not bar the filing of this tort action." The
court also concluded that neither fraud nor mistake had been appropriately pled, and
therefore were dismissed.
¶13 Following a non-jury trial on March 17, 1999, the court issued its Findings of Fact and
Conclusions of Law. On all of TANI's various tort claims, the court awarded only
$3,673.53 for constructive fraud. The court further concluded that it had "ruled that all
claims based upon the parties' 'contractual relationship' with each other are barred." The
court also concluded that without the causes of action for fraud or mistake, Wellington had
no basis to rescind, and was not entitled to any of the requested relief under that particular
equitable remedy.
¶14 In April of 1999 an exchange of briefing ensued, as both parties moved to amend the
court's findings and conclusions. Each party requested attorney's fees as a "prevailing
party," pursuant to the indemnification clause found in the release agreement. Both
motions were grounded in the assertion that Wellington's counterclaim for breach in the
midst of TANI's tort claims activated the indemnification clause. TANI submitted its
claim for attorney's fees that it had incurred from October 13, 1998 (the date Wellington
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filed its counterclaim for breach) through April of 1999, for a total sum of $42,990. This
claim did not provide any break down as to hours spent on any particular portion of the
litigation. Similarly, Wellington sought more than $20,000 in attorney's fees.
¶15 The District Court, in a May 12, 1999 Order and Memorandum, denied the parties'
motions, concluding that there was "no prevailing party because both parties have gained a
victory but also suffered a loss." The court reasoned that the "entire case disposition must
be considered . . ." The court stated that:
Since the majority of plaintiff counsel's time (and the majority of trial time) was
spent on the tort claim, it is neither fair nor equitable to award the amount of
attorney fees. Likewise, counsel has not presented any evidence (verified or
otherwise) as to the percentage of the $45,000 spent [attorney's fees plus costs]
defending the counterclaim. Thus, the Court is unable to make any calculation in
that regard.
¶16 TANI appeals this final order of the District Court, claiming it is entitled to attorney's
fees as the prevailing party. TANI further requests that it be awarded reasonable attorney's
fees and costs generated on appeal.
STANDARD OF REVIEW
¶17 Normally, this Court reviews the findings of a trial court sitting without a jury to
determine if the court's findings are clearly erroneous. Rule 52(a), M.R.Civ.P. However,
the issue here on appeal--whether the court erred by not allowing TANI to recover its
attorney's fees--is strictly a question of law. We review a district court's conclusions of law
pertaining to the recovery of attorney's fees to determine whether those conclusions are
correct. See Doig v. Cascaddan (1997), 282 Mont. 105, 112, 935 P.2d 268, 272.
DISCUSSION Did the District Court err in dismissing TANI's motion to amend the
Findings of Fact and Conclusions of Law that would have allowed recovery of
attorney's fees?
¶18 The District Court, in its May 12, 1999 Order and Memorandum, denied both parties'
motions to amend the court's April 8, 1999 findings and conclusions. It is apparent from
the court's order that on the whole the litigation was a great waste of time and money in
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that each party sought recovery in excess of six figures in damages, and in the end TANI
was award approximately $3,700. It is not surprising, therefore, that the court, in
determining that the "entire case disposition must be considered," concluded that neither
party, ultimately, prevailed.
¶19 In general, we agree with the court's assessment, but the legal question posed here
requires further scrutiny. This Court has often stated that if an agreement between parties
provides for attorney's fees, a district court is bound by its terms. See Doig v. Cascaddan
(1997), 282 Mont. 105, 112, 935 P.2d 268, 272.
¶20 The District Court, in denying both parties' requests for attorney's fees, concluded that
each party "gained a victory but also suffered a loss." The court stated that "[t]he entire
case disposition must be considered . . . ." Primarily, the court relied on ample authority in
Montana case law suggesting that a party who receives a money judgment in the end is not
necessarily the "prevailing party" in determining attorney's fees. See Marriage of Herbert
(1992), 255 Mont. 69, 72, 840 P.2d 584, 586. On this legal point, as applied here, we
disagree.
¶21 In accordance with Herbert, this Court recently stated that in determining which party
prevailed under a "prevailing party" provision in a contract "[n]o one factor should be
considered . . . [t]he party that is awarded a money judgment in a lawsuit is not necessarily
the successful or prevailing party." Doig, 282 Mont. at 112-13, 935 P.2d at 272. Even so,
TANI's claim to attorney's fees in this instance is not only determined by a provision in a
contract, but by statute as well.
¶22 The longstanding rule in Montana, often referred to as the American Rule, is that
absent statutory or contractual authority, attorney's fees will not be awarded to the
prevailing party in a lawsuit. See Erker v. Kester, 1999 MT 231, ¶ 43, 296 Mont. 123, ¶
43, 988 P.2d 1221, ¶ 43. The contract that TANI allegedly breached, in fact, did not
expressly provide that the "prevailing party" or "successful party" shall recover reasonable
attorney's fees; rather, it provided as follows:
11. Indemnification. Each party hereto shall indemnify and hold the other parties
harmless from and against all liability, claim, loss, damage or expense, including reasonable
attorneys' fees, incurred or required to be paid by such other parties by reason of any
breach or failure of observance or performance of any representation, warranty or
covenant or other provision of this agreement by such party.
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¶23 Paradoxically, the foregoing provision is found within a release agreement, one
purpose of which was to require that the parties mutually release each other from "all other
claims, demands and causes of action that they had, have or may have against each
other . . . based upon stock issued in Transaction Network, Inc., and any contractual
relationships . . . " (Emphasis added). Logically, the mutual release agreement would
encompass a future contract claim for breach of the release agreement itself, thereby
producing a nullity. Thus, although the District Court permitted TANI to proceed with its
tort claims, Wellington's attempt to enforce the agreement by bringing an action for breach
was barred pursuant to the release agreement itself--an ironic legal twist in light of the fact
that Wellington claimed TANI's law suit should be barred for the very same reason. The
District Court made this conclusion in its April 8, 1999 Findings of Fact and Conclusions
of Law: "This court has ruled that all claims based upon the parties' 'contractual
relationship' with each other are barred." (Emphasis added).
¶24 Nevertheless, Wellington's breach of contract claim survived long enough to proceed
to summary judgment, and each party incurred attorney's fees in pursuing and defending
this particular claim in the midst of TANI's tort claims. We agree with the District Court's
assessment that as a non-breaching party, Wellington would have been entitled to
(1)
attorney's fees under the indemnification provision if it had prevailed. Nevertheless, the
plain language of the provision does not require that in the event any litigation arose the
prevailing party would be entitled to indemnification for its attorney's fees. Rather,
indemnification was expressly afforded to the non-breaching party only in the event of
"any breach" by another party.
¶25 As the alleged breaching party, TANI was consequently compelled to rely on a
statutory right that supplements such contract provisions. On appeal, TANI argues that by
successfully defending against Wellington's breach of contract claim, it is entitled to
reciprocal attorney's fees pursuant to § 28-3-704, MCA. We agree. The relevant language
of this statute provides:
Whenever, by virtue of the provisions of any contract . . . one party to such
contract . . . has an express right to recover attorney fees from any other party to the
contract . . . in the event the party having that right shall bring an action upon the
contract . . . then in any action on such contract . . . all parties to the contract . . .
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
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the losing party or parties.
Accordingly, TANI contends that contrary to the District Court's conclusion it was the
prevailing party, and thus should be entitled to reciprocal attorney's fees pursuant to § 28-
3-704, MCA.
¶26 This Court's interpretation of the foregoing statute both favors and limits TANI's right
to recovery in this instance. First, we agree with TANI that its successful defense against
Wellington's counterclaim invokes the reciprocal right under § 28-3-704, MCA. In
Garrison v. Averill (1997), 282 Mont. 508, 938 P.2d 702, for example, we concluded that
"the same right to recover attorney fees" included a successful defense of an action.
Garrison, 282 Mont. at 521, 938 P.2d at 709-10. We stated that "[i]n the event of a
successful defense of the types of actions specified in paragraphs 5 and 6 of the buy-sell
agreement, § 28-3-704, MCA, would vest the defendant with the same rights to attorney
fees as are expressly provided to a successful plaintiff in the agreement." Garrison, 282
Mont. at 521, 938 P.2d at 709-10.
¶27 Similar to the indemnification provision here, the referenced paragraphs within the
Garrison agreement provided that in the event one party defaulted on a buy-sell
agreement, "the non-defaulting party may recover damages and reasonable attorney's fees
to be awarded by the court in any action for a specific performance or otherwise" and "the
non-defaulting party shall have the right to an action for specific performance and shall be
entitled to recover damages, including a reasonable attorney's fee to be awarded by the
court." Garrison, 282 Mont. at 520-21, 938 P.2d at 709.
¶28 We therefore agree with TANI that its successful defense against "the types of
actions" specified in the indemnity clause (i.e., "any breach"), should entitle it to attorney's
fees under § 28-3-704, MCA, in defending against Wellington's claims under our decision
in Garrison. That TANI was successful in this defense was clearly stated by the District
Court, in its May 12, 1999 Order: "on the other hand, [Wellington] lost their
counterclaim . . . [and TANI] received a small victory by . . . prevailing on the
counterclaim."
¶29 Nevertheless, under § 28-3-704, MCA, and Garrison, TANI's right to recovery must
be the "same right to recover attorney fees" as Wellington's. We concluded in Garrison
that because the party that brought suit did not allege default or breach of any term of the
agreement, the party claiming reciprocal fees under § 28-3-704, MCA, in defending what
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in fact were fraud and failure of consideration claims, could not recover attorney's fees.
See Garrison, 282 Mont. at 521, 938 P.2d at 710.
¶30 As acknowledged by TANI, this Court has frequently declared that, pursuant to § 28-
3-704, MCA, "contractual rights to attorney fees are reciprocal when the party from whom
one is requesting fees has an express right to attorney fees." Bell v. Richards (1987), 228
Mont. 215, 218, 741 P.2d 788, 790 (citing Lasar v. Bechtel Power Corp. (1986), 223
Mont. 491, 494, 727 P.2d 526, 528) (emphasis added). See Rauch v. Michel (1986), 221
Mont. 1, 6-7, 716 P.2d 617, 620 (awarding reciprocal attorney's fees for contract "portion"
of the action that also included action for "interference with peaceable occupation of home
and property" after sprinkler system was wrongfully repossessed). See also Town Pump
Inc. v. Diteman (1981), 191 Mont. 98, 105, 622 P.2d 212, 216-17 (reciprocal right under §
28-3-704, MCA, cannot exist without express right held by losing party).
¶31 Thus, under § 28-3-704, MCA, a "prevailing party" analysis may be required, but the
claiming party's right to recovery is nevertheless limited by the reciprocal contract
provision itself.
¶32 Here, under the indemnification clause, the only action that could have given rise to
the recovery of attorney's fees was "any breach" of the release agreement. Accordingly,
the only action upon which a reciprocal recovery may be based, under § 28-3-704, MCA,
is a successful defense of an action for breach. Accordingly, TANI's contention that fees
for defending Wellington's action for rescission, which was not finally resolved until the
District Court issued is Findings of Fact and Conclusions of Law following trial, must fail.
¶33 Further, in contrast to the "portion of action" award in Rauch, much of the authority
TANI relies on involves much broader "prevailing party" provisions, offering greater
express rights to recovery. For example in Bell, the attorney's fee provision provided that
"[i]n the event that either party may institute legal action for the enforcement of any right,
obligation, provision or covenant of this Agreement, the prevailing party shall be entitled
to a reasonable attorney's fee in addition to costs of suit." Bell, 228 Mont. at 217, 741 P.2d
at 789 (emphasis added). Similarly, in Wise v. Sebena (1991), 248 Mont. 32-34, 808 P.2d
494-496, the attorney's fees provision in a buy-sell agreement provided in the event of
litigation concerning the contract, the successful party was entitled to reasonable
attorney's fees.
¶34 We therefore disagree with TANI that it should recover all of its fees incurred from
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October 13, 1998 to the present. In its own words, TANI argued to the District Court that
the "principle which eludes Defendants' grasp . . . is that Plaintiff is not claiming attorney's
fees for prevailing on it's tort claims; rather Plaintiff is entitled to attorney fees because
Defendants' counterclaim for breach of the Release contract failed." It should therefore not
elude TANI's grasp that under the clear language of the statute, it is vested with only "the
same rights to attorney fees as are expressly provided to a successful plaintiff in the
agreement." Garrison, 282 Mont. at 521, 938 P.2d at 709-10. Thus, under § 28-3-704,
MCA, TANI has the statutory right to recover only those fees incurred in defending
against Wellington's breach of contract counterclaim.
¶35 Accordingly, we hold that the District Court erred by concluding that, in regards to
awarding attorney's fees, "there was no prevailing party in this case." We hold that TANI
prevailed in the underlying breach of contract claim brought by Wellington, and therefore
is legally entitled to recover reasonable attorney's fees for its successful defense of that
claim pursuant to the parties' contract's indemnification provision and § 28-3-704, MCA.
¶36 The District Court specifically concluded that TANI did not present "any evidence
(verified or otherwise) as to the percentage of the $45,000 spent defending the
counterclaim." Having concluded that as a matter of law TANI is entitled to reciprocal
attorney's fees, it may therefore provide the court with such evidence upon remand. The
District Court, however, ultimately has the discretion to determine what constitutes a
reasonable amount for such an award. See Gandy v. Eschler (1993), 261 Mont. 355, 361,
862 P.2d 1116, 1120.
¶37 In addition, TANI requested its attorney's fees and costs incurred on appeal. TANI
directs our attention to the rule that an "award of attorney's fees is proper on appeal where
the fees are based on a contract." Wise, 248 Mont. at 40, 808 P.2d at 499 (citation
omitted); Chamberlin v. Puckett Const. (1996), 277 Mont. 198, 210, 921 P.2d 1237, 1244
(citations omitted).
¶38 The rule in Wise and Chamberlin, however, is shorthand for a more-complete rule
found in Diehl & Associates v. Houtchens (1979), 180 Mont. 48, 53, 588 P.2d 1014, 1017.
In that case we awarded fees on appeal based on a contract that "obviously contemplated
that attorney fees on appeal as well as at trial were to be charged." Diehl, 180 Mont. at 53,
808 P.2d at 1017. The provision in Diehl provided: "In case of suit or action on this
contract, I (referring to Houtchens) agree to pay such additional sum as the court, both
trial and appellate, may adjudge reasonable as plaintiff's attorneys fees." Diehl, 180 Mont.
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at 51, 808 P.2d at 1016 (emphasis added). Under the same reciprocal fee statute at issue
here, we ultimately determined that Houtchens was the prevailing party, and therefore was
entitled to recover attorney's fees including those incurred upon appeal.
¶39 We conclude that the contract provision in question here contemplated such an award.
It expressly provided that "all liability, claim, loss, damage or expense" paid by one party
by reason of "any breach" would be subject to indemnification, including "reasonable
attorney's fees." Therefore, we conclude that TANI may recover reasonable attorney's fees
incurred on appeal as well.
¶40 This case is reversed and remanded to the District Court for determination of
attorney's fees including those accrued by TANI on appeal.
/S/ JAMES C. NELSON
We Concur:
/S/ J. A. TURNAGE
/S/ WILLIAM E. HUNT, SR.
/S/ JIM REGNIER
/S/ W. WILLIAM LEAPHART
1. Recently, in Norwood v. Service Distributing, Inc., 2000 MT 4, ¶ 55-56, 297 Mont. 473,
¶ 55-56, 994 P.2d 25, ¶ 55-56, we held that although a contract which includes an
attorney's fees provision may, as a whole, be unenforceable, the prevailing party may
nevertheless recover its fees pursuant to the contract provision.
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