INTHE SUPREME COURT OF THE STATE OF MONTANA

STATE BANK OF TOWNSEND, A MONTANA CORPORATION, Plaintiff and Appellant,

vs. MARYANN'S, INC., a Montana corporation, and ARLO B. WESTON and VERNETTA WESTON, husband and wife, Defendants and Respondents.

Appeal from: District Court of the Eighteenth Judicial District, In and for the County of Gallatin Honorable Joseph B. Gary, Judge presiding. Counsel of Record: For Appellant: Hooks and Budewitz, Townsend, Montana Thomas A. Budewitz argued, Townsend, Montana For Respondents: Small, Hatch and Doubek, Helena, Montana Floyd 0. Small argued, Helena, Montana Moore, Rice, O'Connell & Refling, Bozeman, Montana

Filed: Submitted: December 2, 1982 Decided: May 10, 1983

- Clerk

### Mr. JusticeFred J.

### Weber delivered the Opinion of the Court. State Bank of Townsend (Bank) brought this action on a promissory note executed by defendants Maryanns, Inc. and Arlo B. Weston (herein referred to as Maryanns) in the District Court of the Eighteenth Judicial District for Gallatin County. Maryanns counterclaimed, seeking damages alleged to have been caused by the fraudulent misrepresentation of the Rank and the breach of an agreement to loan money. Following jury trial, judgment was entered for Maryanns in the amount of $129,484.13 ($150,000.00 verdict less $16,015.87 owing from Maryanns to the Bank and $4,546.00 attorneys fees). The Bank appeals. We affirm the judgment in part and reverse as to the balance of the judgment, returningthe cause fornew trial. The issues presented by the Bank are: 1. 

### Was it error for the court to refuse to reduce Maryanns' damagesby 40 percent? 2. 

### Did the court err in refusing to instruct on the statuteof frauds? 3. 

### Was there sufficient evidence to supporttheverdict of 

### negligent misrepresentation? 4. Was there sufficient evidence to supportthe finding of damages toMaryanns? 5. Was iterror toadmit Maryanns' Exhibit "AA"? 

### Arlo and Vernetta Weston are the principal stockholders of 

### Maryanns, Inc., a corporation. Maryanns operated a clothing store in Bozeman starting in 1974. In July 1978, the Westons leased a store building in Townsend from Mrs. Ragen under a six month's lease with option to purchase during the lease term;and they also bought certain inventory and fixturesfromMrs. Ragen.In August 1978, Mr. Weston went to the Bank to inquire about borrowing money in connection with the opening of the Townsend store. Mr. Weston applied for a loan and provided personal and corporate financial statements. Mr. Weston was furnished with 

### a corporateborrowing resolution tobe adopted by Maryanns, Inc. On August 29, Mr. Weston returned the incomplete corporate borrowing resolution to Mr. Wilson, a bank officer. After a discussion between banker Wilson and Mr. Weston, Wilson inserted a $50,000 limit in the blank in the borrowing resolution. On August 29, 1978, Maryanns, Inc. and Mr. Weston signed

a promissory note for $20,000, the proceeds of which were deposited in the corporatebank account. On January 3, 1979, $2,000 was borrowed by a note signed by Mr. Weston. On January 18, 1979, an additional $7,000 was borrowed under a note signed by Mr. Weston. In early February 1979, Mr. Weston notified Mrs. Ragen of his intention to exercise his option to purchase her building. At that time Mr. Weston left a check for $20,800 drawn on the Bank for the down payment with banker Wilson and told Wilson "to give it to Kathern Ragen when shehad the necessarypapers that shewas supposed to have ready for the agreement." Upon being advised that the checkwas too large,Mr. Weston delivered to banker Wilson a new check for $17,000 with the same instructions. On March 8, 1979, Mr. Weston called banker Wilson and told him thathe had received thenecessarypapers fromMrs. Ragen and to qiveher the check. On March 9,1979, Mrs. Ragen picked up the check fromWilson and was unable to

securepayment because therewere insufficient funds to cover the check. On March 13, 1979, Mrs. Ragen gave Maryanns written notice of her rescission of the lease-option. On March 19 or March 20, 1979,banker Wilson wrote Mr. Weston aletter which declared all three notes due and payable immediately. On April 1, 1979, after Maryanns vacated the building, the Bank rented the building fromMrs. Ragen, held

a sale of the inventory remaining in the store, and applied the proceeds to the various notes, leaving a remaining balance on the notes in the amount of $14,647.78 together with accruing interest. TheBank then sued theWestons and Maryanns to foreclose upon the various security interests given as collateral. Westons and Maryanns counter-claimed, contending that the Bank had represented that Maryanns had a $50,000 line of creditat theBank and seekingdamages. Following trial, the jury completed special interrogatoriesand a specialverdict, and judgment was entered for Maryanns in the amount of $150,000, less $16,015.87 found to be due and owing by Maryanns to the Bank on the notes, and $4,546.00 attorneys fees

# . Unfortunately it isnecessary to commenton the stateof the record beforewe address the specific issuesraised. In the course of preparation for trial, the court prepared an extensivepre-trial order which included agreed factsand the contentions of both the Bank and Maryanns. The substance of the contentions of Maryanns was that the Bank fraudulently caused Maryanns to believe the Bank was willing to gra.nt credit of up to $50,000 and that the Bank knowingly, willfully, deceitfully and fraudulently failed to inform Weston that theBankwasnot going to advance themoney; that the Bank acted in a fraudulent and precipitous manner in declaring the notes of Maryanns to be due and payable; and that as a result of the foregoing, damages were caused to Maryanns. Under Rule 16,M.R.Civ.P., such an order controls the subsequent course of the action unless modified at thetrial to prevent manifest injustice. As appears from the instructions, the theory of Maryanns casewas changed during the course of the trial to one of negligent misrepresentation. In the absence of an issue of negligent misrepresentation in the pre-trial order or subsequent amendment, the District Court should not have allowed the legal theory of negligent misrepresentation to be presented to the jury. Sufficient objections were notmade to justify

a reversal by this Court. The chanqe in theory during the course of the trial resulted in confusion as to the law of the case on the part of the attorneys and the trial court. Contradictory and confusing instructionswere one result. In addition we have found it almost impossible to analyze the confused record. The Bank contends that it was error for the District Court to refuse to reduce the damage verdict of $150,000by 40%. The Rank contends that under the form of interrogatory completed by the jury, the jury determined that the full amount or total amount of Maryanns' compensatory damageswas $150,000 and that such amount should be reducedby 40%,which was the jury determination of the percentage of negligence chargeable to Maryanns. In its order refusing to reduce the award, the District Court considered the special interrogatories and the instructions, and in particular InstructionNo. 35. The Court concluded that because of the wording of the latter portion of Instruction 35, which provided that damage ahlowed shall be diminished in proportion to the amount of negligence attributable to the party recovering, the jury may have considered both the instruction and the interrogatory and diminished the damages when it fixed a figure of $150,000. In pertinent part, theinterrogatories which were completed by the jury were as follows: "On the defendant's counter-claim against the plaintiff you will answer the following interrogatories: "INTERROGATORY NO. 2.: Did you find that the plaintiff actually or impliedly represented to the defendants that it would loan sufficient funds to make the downpayment to Katherine Hunsaker [Ragen] for thepurchase of theTownsend store? (markone) Yes X No

"If your answer is "yes," answer the following interrogatories. "INTERROGATORY NO. 3.: Was the plaintiff's representationintentionalor an act of negligence?

(mark one) Intentional Negligent X

"INTERROGATORY NO. 6.: Were the defendants guilty of negligence? (markone) Yes 

### X No "INTERROGATORY NO. 7.: If your answer to Interrogatory No. 6 is "yes," of what percentage out of 100%are the defendants guilty?

"INTERROGATORYNO. 8.: What is the full amount of defendant's compensatorydamages? Amount

## - $ 150,000 In addition to the foregoing special interrogatories, the District Court gave an instruction on contributory negligence: "INSTRUCTIONNO. 35 "You are instructed that the laws of the State of Montana provide that contributory negligence shall not bar recovery in an actionby any person or his legal representative to recover damaqes for negligencg resulting in death or injury goperson or property, if such negligence was not greater thanthe negligence of the person against whom the recovery is sought, but any damageallowed shallbe diminished in proportion to the amount of negligence attributable to the person recovering.Contributory negligence is not a defense to a willfulwrongdoing." (underscoringadded) In considering the motions of the Bank seeking a reduction of the $150,000 damage figure, the District Court

was presented with juror affidavitsby counsel forMaryanns. Relying on Harryv. Elderkin Mont. I 809, 38 St.Rep. 2076, the DistrictCourt refused to consider the jurors' affidavits, which had been filed by the defendants with the aim of explaining the jurors1viewpoint of the damage award. We affirm the holding of the District Court with regard to juror affidavits. The following statementsfromHarry arepertinent: "Montana law on the use of juror testimony and affidavits upon an inquiry into thevalidity of the verdict is concisely summarized by Rule 606(b), Montana Rules of Evidence as follows: "'Inquiry into validity of verdict or indictment. Upon an inquiry into the validity of a verdict or indictment, a juror may not testify as to any matter or statement occurring during the course of the jury's deliberations or to the effect of anything upon his or any other juror's mind or emotions as influencing him to assent or dissent from the verdict or indictment or concerning his mental processes in connection therewith. Nor may his affidavit or evidence of any statement by him concerning a matter about which he would be precluded from testifying be received for these purposes." Mont. at 

## , 637 P.2d at 813, 38 St.Rep. at 2079. There are exceptions set forth in Rule 606(b) which are not pertinent. Juror affidavits are useable where external influenceshave been exerted upon a jury orwhere extraneous prejudicial information is brought to the jurors1attention. In holding that affidavits are not admissible to prove the thoughtprocesses of the jurors,thisCourt stated: "Here, the juror affidavit reflects the foreman's belief that the jury did not understand the instructions on contributory negligence, comparative negligence and mitigation of damages. This case falls into the category of cases involving internal influenceson the jury. We hold that the District Court abused its discretion in granting a new trial on the basis of a juroraffidavit which purports to impeach the verdict by delving into the thoughtprocesses of the jurors." Harry, Mont. at- 

## , 637 P.2d at -813, 38 St.Rep. at 2080. We hold in this case that it would be improper to consider the juror affidavits to delve into the thought processes of the jurors in connection with the completion of the special interrogatories. After careful consideration of Instruction 35 and the other instructions, as well as the special interrogatories,

we have concluded that the law of the case as contained in the instructions and interrogatories is so inherently contradictory and confusing that a new trial is required in justice toboth the plaintiff and defendants. As pointed out by the District Court, the latter portion of Instruction 35

can be interpreted as instructing the jury that any damages allowed to Maryanns shall be diminished inproportion to the amount of negligence attributable to Maryanns, even though Interrogatory No. 8 asks that the jury determine the "full amount of defendants' compensatory damages." We find it impossible to determine which standard the jury should have applied or did apply. This confusion is compounded by the placement of Interrogatory

### No. 8,asking the determinationof the compensatorydamages,immediatelyafter InterrogatoryNo. 7,which covers the percentage of negligence on the part of the defendant. This confusion is enhanced by the reference in InstructionNo. 35 to "negligence resulting in death or injury to person or property." Obviously this was an instruction prepared for a different type of case than the present case,which does not involve either death or injury. In addition the failure to carefully instruct on negligent misrepresentation as distinguished from fraudulentmisrepresentation is demonstrated in the first paragraph of InstructionNo. 24,towhich the Bank did object: "In this action defendants and counter-claimants, Arlo Weston and Maryanns, Inc., seek to recover damages they claim they sustained as a result of negligent and fraudulent misrepresentations made by the Bank

# ..."
The remainder of the instruction sets forth the elements of negligent misrepresentation. The initial sentence only muddies the clear legal distinction between fraudulent misrepresentationand negligentmisrepresentation. In a similarmanner, InstructionNo. 36makes reference

a number of times to the injuries to the defendant and plaintiff's negligence as a proximate cause of the injuries to the defendant,raising the probability of confusionon the part of the jury in considering the instructions. Initially the District Court concluded that it was the functionof the judge to apportiondamages dependingupon the percentage determined by the jury. Because of the confusion resulting from the interrogatories and instructions, the DistrictCourt subsequently reversed that conclusion. We are not able to determine what the iury was instructed to do by virtue of the interrogatories and instructions, nor are we able to determine what the jury actually did. In the absence of adequate objections of record, we have concluded that this Court may apply the "plain error" doctrine under which we consider questions raised for the first time on appeal if the existing error affects the substantial rights of theparties. Halldorsonv. Halldorson (1977),175Mont. 170,573 P.2d 169. In this case both parties have a substantial right to instructionswhich correctly set forth a legal basis for the assessment of damages,as well asanunderstandablemethod of computing the amount of suchdamages.Rule 51, M.R.Civ.P., does provide that no party may assign as error the failure to instruct on a point of law unless he offers an instruction thereon, and this Court frequently has refused a review on thatbasis. Nevertheless, this Court will consider whether parties have been denied substantial justice by the trial court. As stated in McAlpine v. Midland Elec. Co. (1981), Mont

# . , 634

"Normally, the party complaining of error must stand or fall upon the ground relied upon in the trial court and objections which are urged for the firsttime on appealwill notbe consideredby this Court. Bower 

### - v. Tebbs (1957),132Mont. 146, 160, 314 P.2d 731, 739. Nevertheless, this Court has a duty to determine whether the parties before it have been denied substantial justice by the trial court. This Court can, within its sound discretion, consider whether the trial court has deprived a litigant of a fair and impartial trial, even if the parties ignored the mandate of a statuteor an established precedent." To the same affect is our holding in Kudrna v. Comet Corp.

(1977),175Mont. 29, 51, 572 P.2d 183, 195: "By thisdecision this Court isnot repudiating the sound rules of practice which require timely, specific objections to instructions and the full presentation of issues for review on appeal. On the facts having carefully reviewed the entire record,we hold that a serious error which appears on the face of that record is reviewable,although notpresented by theparties." Our holding is consistent with the holding in Black v. Stephens (3rdCir. 1981), 662F.2d 181,cert. denied 

### -- subnom. Stephens 

### v. Black (1982), 455 U.S. 1008, 102 S.Ct. 1646, 71 L.Ed.2d 876,inwhich the Circuit Court explained theproblem with regard to Rule 51 and failure to object and reached a conclusionwhichwe specifically approve: "It is true that Rule 51 of the Federal Rules of Civil Procedure provides that '[nlo party may assign as error the giving or the failure to give an instructionunlesshe objects thereto before the jury retires to consider its verdict, stating distinctly the matter to which he objects and the grounds of his objection.' 

# . . . In [City of Newport v. Fact Concerts, Inc. (1981), 453 U.S.247, 

### 101 S.Ct. 2748, 69 

### L.Ed.2d 6161, the Supreme Court recognized that the purpose of Rule 51 is to encourage counsel to correct errors in the judge's charge before the trial ends, while these errors can still be rectified. The Rule seeks to avoid situations in which an error in jury instructions would necessitate a new trial,one that could have been prevented had the error been brought to the judge's attention before jury deliberationsbegan.

"'Althoughgenerally jury instructionswill not be reviewed on appeal if theywere not objected to at trial, we have the discretion to review instructionssua sponte if the error is fundamental and highly prejudicial

# . .

# . and our failure to consider the errorwould result in amiscarriage of justice.'" 662F.2d at 206-07. We also find an inherent error in the instructionsand special interrogatories as submitted to the jury. This question was analyzed by Justice Sheehy in his dissent in Harry v. Elderkin, supra. The special interrogatories and instruction in Harry v. Elderkin are directly comparable to the above-quoted interrogatories and instruction. As pointed out by Justice Sheehy, the error arose because the District Court submitted a special verdict without an instruction telling the jury how to use the special verdict. In this case, Instruction No. 35 does conflict with the directions contained in the special verdict. On retrial, should the question arise, an instruction similar to that set forth in the Harry

### v. Elderkindissentproperly could be used. Becausewe are sendingthe caseback for a new trial, it is appropriate that we comment upon the issue of negligent misrepresentation. We approve the definition of negligent misrepresentation as contained in Restatement (Second) of Torts S552: 'IS 552. InformationNegliqently Supplied 

### -- for the Guidance

### - ofOthers "(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of

### others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiablerelianceupon the information,if he fails to exercise reasonable care or competence in obtaining or communicating the information. 

### "(2) 

### Except as stated in Subsection (3), 

### the liability stated in Subsection (1) is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intendsto supply it;and

(b) through relianceupon it in a transaction that he intends the information to influence or knows that the recipient so intendsor in a substantially similar transaction.

In considering the definition, we find the following comment by the authors of the Restatement to be applicable: "The liability stated in this Section is likewise more restricted than that for fraudulent misrepresentation stated in § 

### 531. When there is no intent to deceive but only good faith coupled with negligence, the fault of the maker of the misrepresentationis sufficiently less to justifya narrower responsibility for its consequences. "The reason a narrower scope of liability is fixed for negligent misrepresentation than for deceit is to be found in the difference between the obligations of honesty and of care, and in the significance of this difference to the reasonable expectations of the users of information that is supplied in connection with commercial transactions. Honesty requires only that themaker of a 

### representationspeak ingood faithandwithout consciousness of a lack of any basis for belief in the truth or accuracy of what he says. The standard of honesty is unequivocal and ascertainable without regard to the character of the transaction in which the information will ultimately be relied upon or the situation of the party relying u.pon it. Any user of commercial informationmay reasonably expect theobservanceof this standard by a supplier of information towhom his use isreasonably foreseeable. "On the other hand, it does not follow that every user of commercial informationmay hold everymaker to aduty of care. Unlike theduty of honesty, the duty of care to be observed in supplying information for use in commercial transactions implies an undertaking to observe a relative standard, whichmay be defined only in terms of the use to which the information will be put, weighed against the magnitude and probability of loss that

### might attend that use if 

### the information proves to be incorrect. A user of commercial information cannot reasonably expect its maker to have undertaken to satisfy this obligation unless the termsof the obligation wereknown tohim. Rather, one who relies upon information in connection with a commercial transactionmay reasonably expect to hold the maker to a duty of care only in circumstances in which the maker was manifestly aware of the use to which the informationwas to be put and intended to supply it for thatpurpose.

# .. "Since the rule of liability stated in Subsection (1) 

### is based upon negligence, the defendant is subjectto liability if,but only if,hehas failed to exercise the care or competence of a reasonable man in obtaining or communicating the information.

(See$5 283, 288 and 289). What is reasonable is, as inother cases of negligence, dependentupon the circumstances. It is, in general, amatter of the care and compentence that the recipient of the information is entitled to expect in the light of the circumstancesand thiswillvary according to a good many factors. The question is one for the jury, unless the facts are so clear as to permit only one conclusion." S552 (comment) at pp. 127-30. The Bank contends that the District Court erred in refusing itsproposed instructionson the applicationof the statuteof frauds. TheBank argues that therewasno ability on the part of the defendants to make the payment of the claimed amount within one year and that section 28-2-903(1)(a), MCA 

### applied. The evidence does not support this contention. While the jury did find that the Bank actually or impliedly represented that it would loan sufficient fundstomake thedownpayment forthepurchase of the Townsend store, the evidence does not disclose any terms of an agreement for payment. In the absence of evidence showing that the agreement could notbe performed within one year,the statuteof frauds isnotapplicable. While the evidence does appear sufficientto support the verdict of negligent misrepresntation and the finding of damages to the defendant, such conclusion isbased upon the contradictory and incomplete instructions with regard to negligent misrepresentation. We therefore d.o notspecifically rule on the sufficiency of such evidence in the absence of adequate and complete instructions on the law of the case. The bank contends that it was error to admitMaryanns' Exhibit "AA" into evidence. The exhibit was prepared by a certifiedpublic accountantwho had many years of experience and had handled the Maryanns store in Bozeman and other communities. He was tkoroughly familiar with the business operations and with profits and losses and his testimony regardinganticipatednet income formed thebasis forExhibit "AA", a ten-year forecast of earnings. Instruction No. 29 detailed the claimed elements of defendants' damages and in part stated: "Defendants and counter-claimants claim in this action that the Bank and its officers have, as a direct and proximate result of their false, negligent, fraudulent and wrongful acts and omissions, caused counter-claimants, Arlo Weston and Maryanns, Inc., damages in the amount of One Million Dollars ($1,000,000,00) 

# . This, as claimed by counter-claimants, is for loss of the clothing store inTownsend (including inventoryand fixtures owned by them) and for profits they might reasonably have expected to enjoy from the operation of said store for the next 10years; for the causing of the rescission,by KathernRagen,of her contract to sell the store building to counter-claimants;fordamage to the reputationand creditrating of counter-claimantswith the general public, and.more particularly with Banks,business establishments and.wholesalers; and also for the subsequent closing of the Bozeman store, as a resultthereof." In addition, Instruction No. 33 was given by the court regardingdamages: "Damages are recoverable for losses caused or for profits and other gains prevented by the breach only to the extent that the evidence affords a sufficient basis for estimating their amount in money with reasonablecertainty. Damages which are amatter of mere speculation cannotbe thebasis of recovery. Recovery cannot be denied for damages simply because they are difficult to ascertain."The instructions adequately establish a standard for computing damages with reasonable certainty. This answers theBank's argument regarding lostprofits. There is substantial evidenceto support the elementsof damages in Instruction No. 29. The testimony of the certified public accountant and the testimony that the Westons invested between $80,000 and $95,000, together with evidence regarding the rescission 

### of the Ragen contract, damage to reputation and credit rating, and subsequent closing of the stores, all afford an adequate basis for the conclusions of the jury. We hold that Exhibit "AA" was properly admitted. We reverse the judgmentof theDistrict Courtand remand

We concur:



# . Chief Justice

- Justices

Mr. Justice Daniel J. Sheawill filea separate opinion later.