No. 05-215
IN THE SUPREME COURT OF THE STATE OF MONTANA
2006 MT 193
MARK DENTON and VERNA R. DENTON,
Plaintiffs and Appellants,
v.
FIRST INTERSTATE BANK OF COMMERCE,
n/k/a FIRST INTERSTATE BANK,
Defendant and Respondent.
APPEAL FROM: The District Court of the Forth Judicial District,
In and For the County of Missoula, Cause No. DV 98-86836,
Honorable Edward P. McLean, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
P. Mars Scott, Ryan A. Harrington, P. Mars Scott Law Offices,
Missoula, Montana
For Respondent:
David B. Cotner, Datsopoulos, MacDonald & Lind, P.C.,
Missoula, Montana
Submitted on Briefs: February 8, 2006
Decided: August 22, 2006
Filed:
__________________________________________
Clerk
Justice Patricia O. Cotter delivered the Opinion of the Court.
¶1 Mark Denton (Denton) co-signed a $101,250.00 loan (Denton loan) that the
First Interstate Bank (FIB or the Bank) issued to his friend Eric “Ole” Anderson.
On his own, Anderson obtained a $260,000.00 Small Business Administration
loan (SBA loan) from FIB at the same time. The purpose of both loans was to
purchase logging equipment with which Anderson could start a business.
¶2 Anderson’s business failed and he declared bankruptcy. The Bank
repossessed and sold the equipment and applied all of the proceeds to the SBA
loan. Thereafter, it sought repayment of the Denton loan from Denton. Denton
did not pay. As a result, the Bank initiated proceedings against business property
owned by Denton and his wife which secured the loan. Denton then brought an
action in the Fourth Judicial District Court, Missoula County, claiming that the
purchased logging equipment was collateral for his loan and that FIB had
unlawfully converted and impaired that collateral. Following a bench trial, the
District Court entered judgment for the Bank. Denton appeals. We affirm.
ISSUES
¶3 A restatement of the issues on appeal is:
¶4 Did the District Court abuse its discretion by allowing the Bank to amend
its proposed findings of fact the day before the trial began?
¶5 Did the District Court err in failing to find that the Promissory Note was a
contract of adhesion?
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¶6 Did the District Court err in concluding the Bank did not impair the
collateral identified in the Denton loan?
¶7 Did the District Court err in ruling that the Bank properly distributed the
foreclosure sale proceeds?
FACTUAL AND PROCEDURAL BACKGROUND
¶8 In September 1995, Anderson sought a $360,000.00 loan from FIB to
purchase logging equipment with which to start his own business. The Bank
denied his request, in part because Anderson had no ability to contribute equity to
the transaction. FIB explained that the SBA would not loan 100% of the value of
a depreciable asset.
¶9 Anderson notified his friend Denton, who was a valued FIB customer, that
his loan request had been denied. Denton contacted the Bank and offered to co-
sign a loan for Anderson. 1 The Bank agreed. Thereafter, FIB divided the loan
into two separate loans—the SBA loan for $260,000.00 and the Denton loan for
$101,250.00. The Promissory Note Denton and Anderson signed indicated that
Denton’s mini-warehouse operation would serve as collateral for the Denton loan.
However, the Commercial Security Agreement signed by the two men identified
the logging equipment to be purchased with the loan proceeds as collateral for the
Denton loan. The SBA loan included a general statement that collateral consisted
of “all equipment and machinery.”
1
The District Court later concluded that, under § 30-3-415, MCA (1995), Denton technically was an
“accommodation party.”
3
¶10 In April 1997, FIB notified Anderson that he was in default under the terms
of the SBA loan; it also notified Anderson and Denton that the Denton loan was in
default. Shortly thereafter, Anderson filed a Petition for Chapter 13 bankruptcy.
Ultimately, in November 1997, Anderson petitioned for a Chapter 7 bankruptcy
proceeding. On December 9, 1997, FIB was allowed to sell the logging
equipment. The proceeds from the public auction totaled $160,000.00. FIB
applied the net amount of $137,870.85 to Anderson’s SBA loan. Anderson was
granted a complete discharge of indebtedness on March 16, 1998.
¶11 In February 1998, FIB requested full repayment ($98,460.39 plus interest)
from Denton of the Denton loan. Denton initially acknowledged responsibility for
the debt but later refused to pay, maintaining that the Denton loan should have
been paid first because he was protected as a “purchase money secured creditor.”
Although the Bank offered it, Denton refused to agree to a repayment schedule of
the Denton loan.
¶12 On May 26, 1998, FIB prepared and filed a Notice of Sale of Denton’s real
property that served as collateral for the Denton loan. On July 15, 1998, Denton
initiated the underlying action, seeking declaratory relief and a ruling that his loan
took priority over the SBA loan. Eventually, on March 26, 2002, the District
Court determined that Denton was a debtor, not a creditor, and therefore was not
entitled to protection as a purchase money secured creditor. While a
determination of creditor/debtor status was the only issue presented to the District
Court by Denton, the court nonetheless identified, among others not relevant to
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this appeal, an additional issue to be tried, i.e., whether FIB had impaired the
logging equipment collateral by failing to inform Denton that the SBA held the
first lien and rights to the proceeds from the sale of this equipment in the event of
a default.
¶13 A bench trial was held on December 2 and 3, 2003. On December 15,
2003, the District Court issued its Findings of Fact, Conclusions of Law and
Judgment. The court found that Denton knew at the time he signed the
Promissory Note that, in the event Anderson defaulted and the Bank repossessed
the collateral, the sale proceeds would be applied first to the SBA loan and
thereafter, if any proceeds remained, to the Denton loan. Moreover, the court
found that under the express terms of the promissory agreement signed by Denton,
the Bank had the right to release Anderson from liability and to release or impair
the collateral.
¶14 The District Court further concluded that the Bank had not impaired the
collateral. However, the court continued that Denton 1) failed to meet his burden
of proof establishing impairment; 2) consented to the structure of the loan granting
the SBA loan a first lien on the collateral; and 3) waived the defense of
impairment by signing a promissory agreement that expressly allowed impairment.
Additionally, the court determined that FIB did not fail to comply with any
applicable laws pertaining to disposing of collateral and had met all the
requirements of the Uniform Commercial Code (UCC). The court also held that
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because Denton had no ownership interest in the collateral, he had no basis for his
theory of conversion. Lastly, the court awarded attorney fees to the Bank.
¶15 Denton filed a timely appeal.
¶16 Additional facts will be discussed as needed for our analysis.
STANDARD OF REVIEW
¶17 The granting or denial of a motion to amend a pleading is a discretionary
ruling. State Highway Commission v. Schmidt, 148 Mont. 316, 318, 420 P.2d 153,
155. We review such a ruling for an abuse of discretion. State v. Abe, 1998 MT
206, ¶ 28, 290 Mont. 393, ¶ 28, 965 P.2d 882, ¶ 28 (citations omitted).
¶18 We apply a clearly erroneous standard using a three-part test to review a
district court’s findings of fact. First, we review the record to determine if the
findings are supported by substantial evidence; second, if the findings are
supported by substantial evidence, we will determine if the trial court has
misapprehended the effect of the evidence; and third, if substantial evidence exists
and the effect of the evidence has not been misapprehended, the Court may still
conclude that a finding is clearly erroneous when a review of the record leaves the
Court with the definite and firm conviction that a mistake has been made. We
review a district court’s conclusions of law to determine whether the district court
correctly interpreted the applicable law. Fiedler v. Fiedler, 266 Mont. 133, 137,
879 P.2d 675, 678 (1994) (citations omitted).
¶19 Our standard of review of a trial court’s order granting or denying attorney
fees and costs is whether the court abused its discretion. Somont Oil Co. v. A & G
6
Drilling, Inc., 2006 MT 90, ¶ 25, 332 Mont. 56, ¶ 25, 137 P.3d 536, ¶ 25 (citation
omitted).
DISCUSSION
ISSUE ONE
¶20 Did the District Court abuse its discretion by allowing the Bank to amend
its proposed findings of fact the day before the trial began?
¶21 In accordance with the District Court’s Scheduling Order, both parties filed
proposed findings of fact and conclusions of law by November 25, 2003, one
week before trial. FIB failed to include in its November 25 original proposed
findings reference to the “General Provisions” language in the Promissory Note
which expressly stated that the Bank may “release any party . . . or collateral; or
impair, fail to realize upon or perfect [FIB’s] security interest in the collateral; and
take any other action deemed necessary by [FIB] without the consent of or notice
to anyone.” On December 1, the day before the trial began, the Bank filed
amended proposed findings of fact and conclusions of law which specifically
referenced these General Provisions, and concluded that by signing the Promissory
Note, Denton had consented to the General Provisions and waived defenses based
on impairment.
¶22 At the start of the trial, Denton moved to quash the Bank’s amended
proposed findings and conclusions on the ground that the filing was untimely.
Denton also requested that he be allowed to amend his findings in the event the
District Court accepted the Bank’s amended proposed findings and conclusions.
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The court allowed the Bank’s amended findings to be received and instructed
Denton to file his amended pleading by close of trial. On December 3, Denton
filed his Objection and Response to [FIB’s] Amended Proposed Findings and his
own Proposed Amended Findings of Fact, Conclusions of Law and Judgment.
¶23 Denton maintains on appeal that the District Court erred by allowing the
Bank to amend its proposed findings and conclusions the night before trial. He
claims that FIB had “never brought up the issue of the ‘General Provisions’
language” and had not raised waiver as an affirmative defense. The Bank refutes
Denton’s claim, pointing out that it raised the issue of “waiver” as an affirmative
defense in its initial and amended answers to Denton’s complaint and attached a
copy of the Promissory Note containing the “waiver” language to its Answer. The
Bank further argues that Denton was not prejudiced by FIB’s amended proposed
findings and conclusions because the District Court granted Denton’s request to
amend his own proposed findings and conclusions in response to the Bank’s
amended pleading.
¶24 An abuse of discretion occurs when the district court judge acts arbitrarily
without employment of conscientious judgment or exceeds the bounds of
reasoning resulting in substantial injustice. Grover v. Cornerstone Const. N.W.,
Inc., 2004 MT 148, ¶ 10, 321 Mont. 477, ¶ 10, 91 P.3d 1278, ¶ 10. Our review of
the record reveals that FIB asserted waiver as an affirmative defense early in the
litigation, and on multiple occasions thereafter. While FIB did not initially
associate its waiver defense directly with the General Provisions’ language in the
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Promissory Note, Denton nonetheless was put on notice that FIB intended to argue
that Denton had waived his right to complain that FIB had misapplied the
proceeds from the collateral sale, thereby impairing his collateral.
¶25 FIB having adequately put Denton on notice of its intention to assert a
waiver defense early in this litigation, the District Court’s decision to allow the
Bank to amend its proposed findings and conclusions to amplify its previously-
claimed defense on the eve of trial was not an abuse of discretion, especially in
light of the court’s agreement to allow Denton to amend his proposed findings and
conclusions. Therefore, we find no error.
ISSUE TWO
¶26 Did the District Court err in failing to find that the Promissory Note was a
contract of adhesion?
¶27 As noted above, the Bank argued that under the express language of the
Promissory Note’s General Provisions, Denton had waived his right to rely upon
the defense of impairment. Denton argued in his Objection and Response to the
Bank’s amended proposed findings that this waiver provision “falls directly under
the definition of a contract of adhesion, and is therefore unenforceable.” The
District Court did not make a finding nor render a specific legal conclusion on
whether the Promissory Note was, or was not, a contract of adhesion; however,
given the District Court’s findings and conclusions, it is apparent the court
determined that the Promissory Note as a whole was an enforceable contract.
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¶28 Denton presents numerous complaints about the Promissory Note and its
General Provisions clause: 1) the Bank prepared the Promissory Note and he had
no opportunity to negotiate its terms; 2) the General Provisions were exceedingly
broad and gave the Bank the power to destroy collateral without notifying the
parties; 3) the General Provisions clause was difficult to find in the Promissory
Note; 4) the terms of the General Provisions clause were unconscionable; 5) he did
not voluntarily and intentionally relinquish the rights contained in the General
Provisions clause and, therefore his waiver was invalid; and 6) the General
Provisions clause was inapplicable because the Bank changed the actual terms of
the Note without Denton’s consent.
¶29 The Bank counters that neither the Note as a whole, nor any of its
individual clauses, created a contract of adhesion. It argues that Denton presented
no evidence establishing that he was denied the opportunity to negotiate the terms
of the contract with the Bank. FIB further opines that inequality in bargaining
power does not equate to unenforceability. In addition, the Bank points out that
§ 30-3-607(7)(b), MCA (1995), expressly states that “accommodation parties” will
not be discharged by way of a collateral impairment claim if the accommodation
party signed a contract containing a waiver of such a defense. It also asserts that
because Denton acknowledged that he had studied the Promissory Note before
signing it, he cannot now claim that he was unaware of the existence of the
General Provisions clause. Moreover, the Bank claims that it was Denton’s legal
duty to execute the Note “with the prudence and care of a reasonable
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businessman” and that he cannot avoid the effects of the Note by failing to
exercise such care or to read the document in its entirety before signing it.
¶30 A contract of adhesion is a contract whose terms are dictated by one
contracting party to another who has no voice in its formulation. Contracts of
adhesion are unenforceable if not within the reasonable expectations of the weaker
party or if they are unduly oppressive, unconscionable, or against public policy.
Kloss v. Edward D. Jones & Co., 2002 MT 129, ¶ 24, 310 Mont. 123, ¶ 24, 54
P.3d 1, ¶ 24.
¶31 Both parties rely on Kloss to support their claims. Kloss, a 95-year old
widow, filed suit against her brokerage firm, Edward Jones (Jones) and its local
manager, Paul Husted, alleging they tortiously caused her to execute a charitable
remainder trust. Kloss, ¶¶ 6, 12. We held that the brokerage service agreements
Kloss had signed constituted contracts of adhesion and, therefore, the challenged
mandatory arbitration provision could not be enforced. Kloss, ¶¶ 27, 32. We
explained:
Contracts of adhesion arise when a standardized form of agreement,
usually drafted by the party having superior bargaining power, is
presented to a party, whose choice is either to accept or reject the
contract without the opportunity to negotiate its terms. . . .
However, mere inequality in bargaining power does not render a
contract unenforceable, nor are all standardized contracts
unenforceable. As a consequence of current commercial realities,
form forum clauses will control, absent a strong showing it should
be set aside. For such a contract or clause to be void, it must fall
within judicially imposed limits of enforcement. It will not be
enforced against the weaker party when it is: (1) not within the
reasonable expectations of said party or (2) within the reasonable
11
expectations of the party, but, when considered in its context, is
unduly oppressive, unconscionable, or against public policy.
Kloss, ¶ 24.
¶32 We determined that the contracts in Kloss were adhesion contracts based on
the following facts and reasons, among others: 1) they were standardized form
contracts prepared by Jones, and Kloss had no meaningful opportunity to negotiate
the terms of the contracts; 2) because the use of the challenged arbitration clause
was standard industry practice, Kloss would have been excluded from the
securities market altogether had she not accepted the agreement to arbitrate; 3)
acceptance of the arbitration clauses resulted in Kloss waiving several
constitutional rights which was not within Kloss’ reasonable expectations; 4)
Husted typically explained the contract terms to investors but did not explain the
arbitration clause to Kloss; and 5) Kloss did not read the contract but relied on
Husted to explain it to her (routine practice between Kloss and Husted); therefore,
she was unaware of the arbitration provision.
¶33 The analysis in Kloss is relevant to the case at bar, but it favors the Bank
and not Denton. As argued by FIB, inequality in bargaining power does not
equate to unenforceability and not all standardized contracts are unenforceable as
adhesion contracts. Denton, unlike Kloss, was a sophisticated business person.
There was no evidence presented that he required specific protection or was
improvident in his business dealings. Moreover, the Bank agreed to enter into the
transaction solely at Denton’s behest. There was no evidence presented that he
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attempted to negotiate the terms of the contract nor was evidence presented that he
would have been unsuccessful in such attempt given his standing as a “valued FIB
client.”
¶34 Additionally, while it is a basic tenet of contract law that “[o]ne who
executes a written contract is presumed to know the contents of the contract and to
assent to those specified terms,” (Quinn v. Briggs, 172 Mont. 468, 476, 565 P.2d
297, 301 (1977)), in the case before us, we need not presume Denton knew the
contents of his contract, as he testified that he had “studied” the contract prior to
signing it. Having done so, he cannot now claim that he was unaware of the
waiver provision and that it was not within his reasonable expectation.
¶35 Lastly, § 30-3-607, MCA (1995), specifically provides that an
accommodation maker’s liability may be discharged upon meeting his or her
burden of proof that the value of the collateral has been impaired. Section 30-3-
607(7)(a) and (b), MCA (1995), also establish when liability may not be
discharged:
If:
(a) the party asserting discharge consents to the event or conduct that
is the basis of the discharge; or
(b) the instrument or a separate agreement of the party provides for
waiver of discharge under this section, either specifically or by
general language, indicating that parties to the instrument waive
defenses based on suretyship or impairment of collateral.
¶36 The District Court expressly concluded that Denton had waived his defense
of collateral impairment under § 30-3-607(7), MCA (1995). Additionally, the
court applied § 30-3-607(6)(a)-(d), MCA (1995), which identify causes of
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collateral impairment warranting discharge of liability, and concluded that the
actions of the Bank vis-à-vis the logging equipment collateral did not constitute
impairment. As a result, Denton failed to meet his burden of proof required under
§ 30-3-607(4), MCA (1995).
¶37 Based on the foregoing, we conclude the Promissory Note was not a
contract of adhesion, nor was the General Provisions clause unconscionable as
being outside of Denton’s reasonable expectations. Furthermore, we find no merit
in Denton’s claims that his waiver was involuntary and unintentional or that the
General Provisions clause was inapplicable.
ISSUE THREE
¶38 Did the District Court err in concluding the Bank did not impair the
collateral identified in the Denton loan?
¶39 Denton maintains that the Bank impaired the logging equipment collateral
securing his loan by using the same collateral to secure Anderson’s SBA loan and
subordinating Denton’s loan to the SBA loan without his knowledge or agreement.
Denton argues that this dual use of the collateral and the Bank’s failure to disclose
the SBA loan arrangements and the impact of those arrangements on his loan
constitutes an impairment that relieves him of the obligation to repay the loan. He
relies on § 28-11-412(2) and (3), MCA, which provide:
A surety is exonerated:
...
(2) to the extent to which he is prejudiced by any act of the creditor
which would naturally prove injurious to the remedies of the surety
or inconsistent with his rights or which lessens his security; or
14
(3) to the extent to which he is prejudiced by an omission of the
creditor, when required by the surety, to do anything which it is the
creditor’s duty to do.
¶40 The Bank notes that, as determined by the District Court, the UCC (Title
30, MCA) applies to this transaction rather than Title 28 law governing guaranty
and suretyship as argued by Denton. As noted above, under Title 30, suretyship
defenses can be waived where the party consents to allowing the bank to impair
the collateral. See Section 30-3-607(7)(a) and (b), MCA (1995).
¶41 The Bank also asserts that substantial credible evidence was presented at
trial to support the District Court’s conclusion that Denton “was fully informed of
the structure of the loan, and the requirement that FIB grant a prior lien ‘position’
to the SBA on the collateral,” and that he consented to such loan structure. FIB
argues that in the face of disputed evidence such as was presented in this case, it is
the province of the District Court to weigh the credibility of the witnesses and the
evidence presented, and absent clearly erroneous findings and legally incorrect
conclusions, the District Court’s determination of this issue must be affirmed.
¶42 The District Court specifically found based on the trial testimony of Bank
loan officer Dean Gillmore that Gillmore had explained to Denton that his loan
was junior to the SBA loan and that proceeds from the repossession and sale of the
logging equipment would be applied to the SBA loan first and thereafter to the
Denton loan. The court also found, based on the Bank’s expert’s testimony, that
FIB structured the Denton loan in a manner designed to limit Denton’s potential
15
exposure while ensuring that Denton would not have to provide up-front cash to
assist Anderson in obtaining his loan.
¶43 Our review of the record confirms that significant evidence was presented
that would allow the District Court to conclude that Denton knew his loan would
hold a second position lien to the SBA loan. While Denton’s testimony conflicts
with that of the Bank’s loan officer, it is the District Court’s province to weigh
conflicting evidence. Therefore, we will not second-guess the District Court’s
determination regarding the strength and weight of conflicting testimony.
Moreover, we review a district court’s findings to determine whether substantial
evidence supports those findings, not contrary findings. Bonnie M. Combs-
Demaio Liv. Trust v. Colony, 2005 MT 71, ¶ 9, 326 Mont. 334, ¶ 9, 109 P.3d 252,
¶ 9 (internal citations omitted).
¶44 The District Court’s findings vis-à-vis this issue are not clearly erroneous,
nor are its conclusions based upon these findings incorrect.
ISSUE FOUR
¶45 Did the District Court err in ruling that the Bank properly distributed the
foreclosure sale proceeds?
¶46 The District Court concluded that FIB did not breach its duty to preserve
the value of the collateral as required by § 30-9-207, MCA (1995), nor did it fail to
comply with any applicable law when it disposed of the collateral. The court also
concluded that the requirements of the UCC were satisfied by FIB and the sale
was conducted in a commercially reasonable manner. Denton complains the Court
16
erred in so concluding and repeats his contention that he had no knowledge of the
Bank’s intent regarding the collateral.
¶47 As we have determined already that the District Court received substantial
credible evidence upon which to conclude that Denton knew of and approved of
the structure of his loan, we need only determine whether the District Court
correctly concluded that FIB had distributed the collateral funds in a legally
correct and commercially reasonable manner.
¶48 Section 30-9-504, MCA (1995), addressed a secured party’s right to
dispose of collateral after default and the effect of disposition. It provided in
relevant part that:
(1) A secured party after default may sell, lease, or otherwise dispose
of any or all of the collateral in its then condition or following any
commercially reasonable preparation or processing. . . . The
proceeds of disposition shall be applied in the order following to:
(a) the reasonable expenses of retaking, holding, preparing for sale
or lease, selling, leasing, and the like and, to the extent provided for
in the agreement and not prohibited by law, the reasonable attorneys'
fees and legal expenses incurred by the secured party;
(b) the satisfaction of indebtedness secured by the security interest
under which the disposition is made;
(c) the satisfaction of indebtedness secured by any subordinate
security interest in the collateral if written notification of demand
therefor is received before distribution of the proceeds is completed.
...
(3)(a) Disposition of the collateral may be by public or private
proceedings and may be made by way of one or more contracts.
Sale or other disposition may be as a unit or in parcels and at any
time and place and on any terms, but every aspect of the disposition
including the method, manner, time, place, and terms must be
commercially reasonable. . . . .
17
¶49 FIB’s loan collection manager described at trial the process by which the
Bank declared Anderson in default on the SBA note, and declared Anderson and
Denton in default on the Denton loan and took possession of the collateral. She
provided documents notifying both men of the sale of the collateral at public
auction. FIB also submitted exhibits of the Proofs of Claim FIB filed with the
U.S. Bankruptcy Court in accordance with the Bankruptcy Code. This, in
conjunction with additional credible testimony by bank officials, supports the
District Court’s conclusion that the Bank complied with applicable laws regarding
the repossession and sale of the collateral and the disbursement of proceeds.
¶50 Denton also challenges the District Court’s decision regarding attorney’s
fees, and seeks fees and costs on appeal. Having ruled in favor of FIB, we need
not address this claim.
CONCLUSION
¶51 For the foregoing reasons we affirm the District Court.
/S/ PATRICIA COTTER
We Concur:
/S/ JOHN WARNER
/S/ BRIAN MORRIS
/S/ JAMES C. NELSON
/S/ JIM RICE
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