No. 

### 1.2147 TN WE SUPREME COURT OF THE STATE OF MONTANA 1972

PRENTICE LUMBER COMPANY, 

### INC., Plaintiff and Appellant,

-vs

# - HENRY 

### J. HUKILL 

### et al., Defendants and ~espondents.

Appeal from: District Court of the Third Judicial District, Honorable Sid G. Stewart, Judge presiding. Counsel of Record: For Appellant: Boone, Karlberg & Haddon, Missoula, Montana. Sam E. Haddon argued, Missoula, Montana. For Respondents: Boyd and Radonich, Anaconda, Montana. Robert J. Boyd argued, Anaconda, Montana. Bolkovatz and Romine, Helena, Montana. William L. Romine appeared, Helena, Montana. Loble, Picotteand Loble, Helena, Montana. William G. Sternhagen appeared, Helena, Montana. Garlington, Lohn and Robinson, Missoula, Montana. George D. Goodrich appeared, Missoula, Montana.

Submitted: September 20, 1972 Decided:

## DEC1 1972 Filed: - 

## OEC

- 

## 1 1572Mr. Justice Frank I. Haswell delivered the Opinion of the Court,

Plaintiff corporation filed this action against defendant directors of Elliston Lime Company, 

### a Montana corporation, seeking



### a joint and severaljudgment against the directors for an obligation allegedly owed by EllistanLime Company toplaintiff. The action seeks to impose a statutory personal liabilityon the directorsby reason of their failure to fileannual statements of the corporation, pursuant to section 15-811, R,C.M, 1947. From an order of the district court of Powell County denying plaintiff's motion to filea second amended complaint and dismissing the action, plaintiff appeals, A history of the litigationbetween plaintiff and Elliston Lime Company and itsdirectors furnishes thebackground for determination of the issues inthis appeal. Case 

### !,I was filedon July 14, 1967, in the district court of Missoula County by plaintiff herein against the Elliston Lime Company, seekingjudgment for thebalance owed on an itemized account dated June 30, 1967, in the sum of $20,752,13. 

### An attachment was levied against Elliston's property, Subsequently a defaultjudgment was entered in favor of plaintiff Prentice Lumber Co. against Elliston for $20,971.15, 

### An execution salewas held atwhich plaintiff purchased the attached property of Elliston for $500. Thereafter on August 

### 2, 1968, Case #2, the instant action,

was filedby plaintiff against the directors of Elliston seeking



### a joint and severaljudgment against the directors of Elliston Lime Company for thebalance of thejudgment against Elliston in Case 

### #I. The amount sought was $20,903.76 asof January 10, 1968, representing the amount of the originaljudgment inCase 

### 81, less

a credit forplaintiff's purchase of ~lliston's property atthe execution saleplus interest on the balance of thejudgment.Thirteen days later on August 15, 1968, Elliston filed Case 

### #3, a separate and independent action to setaside the defaultjudgment i.n Case 

### 81. On March 2, 1970, the district court of Missoula County set aside this defaultjudgment and

on appeal to this Court was affirmed on March 16, 1971. Elliston Lime Co, v. Prentice Lumber Co., 157Mont. 64, 483 P.2d 264, In the meantime on September 

### 3, 1968, plaintiff herein filed a firstamended complaint in Case #2, the instant action. This did not differ substantially from the original complaint, but supplied certain factual omissions in the original complaint relating tothe directors' failure to filethe required annual statements, The individual directors filed consolidated motions (1) todismiss the first amended complaint, 

### (2) tochange the

venue of the action toPowell County, and 

### (3) tocontinue further proceedings pending judgment inCase 

### #3, On January 20, 1969, the district court of Missoula County 

### (1) denied the motion to dismiss, (2) granted the change of venue to Powell County, and 

### (3) reserved ruling on continuance for the district court of Powell County. On June 25, 1971, some three months afterwe afftrmed the settingaside of the defaultjudgment inCase 

### !/I, plaintiff herein moved the district court of P~well County for leave to filea second amended complaint inthe instant action. In substance, the proposed second amended complaint substituted the alleged underlying indebtedness of Elliston toplaintiff for the balance owing on thejudgment set aside in Case 

### #I., and sought tohold the directors personally liable for the same by reason of their failure to fileannual statements during the period this indebtedness was incurred pursuant to section 15-811, 

### R.C.M. 1947, The amount sought in the prayer was $19,845.11, together with interest from January 10, 1968. After hearing, the district court of Powell County denied plaintiff's motion for leave to filethe second amended complaintand granted the "motion of defendants to dismiss the cause of action". Plaintiff now appeals from the order of the district court denying plaintiff leave to filethe second amended complaint and dismissing the action. The issuewhich p1ainti.ff assigns forreview is the correctness of the district court's order, Additionally, defendants raise a second issue---whether the order from which the appeal is taken isan appealable order? Initially, we direct our attention to the appealability of the district court's order denying leave to amend and dismissing the action. Defendants point out that this order isnot enumerated

as one of the orders from which an appeal may be taken under Rule 1, M.R.App.Civ.P, They liken the orderhere toan order sustaininga demurrer under Montana's former practice prior to adoption of the Montana Rules of Civil Procedure and citePentz v, Corscadden, 49 Mont. 581, 144 P, 157, as authority that an order sustaining a demurrer under ~ontana's former practice was not appealable. Defendants point out that under the present Montana Rules of Civil Procedure a motion to dismiss under Rule 12, M.R,Civ,P., isequivalent to the use of demurrers under our former practice, citingPayne v. Mountain States Tel, & Tel., 142Mont. 406, 385 P.2d 100, and Rambur v. Diehl Lumber Co,, 

### 1.43Mont. 432, 391 P.2d 1, in support. Accordingly, they contend that a motion to dismiss isnot an appealable order. At the outset, we observe that no judgment was entered for defendants pursuant to the districtcourt's order of dismissal. Had a judgment been entered, it would clearlybe appealable as 

### a finaljudgment under Rule l(a), M.R.App.Civ.P. 

### In reviewing such final.judgment, the district court's denial of leave to amend could be reviewed aswell as itsorder of dismissalunder the provisions of Rule 2, M.R,App.Civ.P., which provides inpertinent part:11 Upon appeal from a finaljudgment,the court may review 9; 

# * any intermediate order or decision

# *** which involves the merits, or necessarily affects thejudgment 

# * f:." In our view, substance rather than form iscontrolling. The effect of the districtcourt's order is substantially the sdme as a judgment for defendants. As matters now stand, plaintiff 

### is out of court and denied relief just as completely as ifjudgment had been entered against it. This Court has recognized this situation and has recently rendered decisions on the merits in appeals from orders dismissing complaints. See: Rooney v. Agricultural Ins. Co,, 156Mont, 118, 476 P.2d 783; Smith v, Davis, 156Mont. 150, 477 P.2d 114; Kielmann v. Mogan, 156Mont. 

### 230, 478 P.2d 275. While we recognize that these cited decisions did not involve an express ruling on the appealability of the order of dismissal because that issue was not raised therein, stillthe appealability of the order of dismissal 

### isimplicit 

### in these decisions. We perceive no rationalbasis in fact or in law for denying the aggrieved party the right of appeal where the prevailing party neglects toenter a formal judgment inconformity with the court's ruling. Nor do we believe that the framers of the Montana Rules of Appellate Civil Procedure intended to preclude an appeal by the aggrieved party under such circumstances. Accordingly, we hold that an order dismissing

a complaint and denying leave toamend 

### isequivalent to a final judgment forpurposes of appeal. Proceeding toplaintiff's issue, i.e. the correctness of the district court's order refusing leave to amend and dismissing the complai-nt, 

### we examine thebasic contentions of the parties. Plaintiff Prentice contends that atthe time the original complaint and first amended complaint were filed the alleged indebtedness of Elliston toPrentice had been merged in the defaultjudgment against Elliston, precluding suit on the underlying indebtedness against the directors. Prentice argues that whenthis default judgment was setaside, the underlying obligation

was reinstated and only then could Prentice seek to impose a personal statutory liabilityagainst the directors based on ~lliston's alleged underlying indebtedness to Prentice. Prentice further argues that thiswas sought tobe done by its second amended complaint which relatedback tothe original complaint avoiding the three year statuteof limitations, that the amendment should have been allowed, and the action should nothave been dismissed. On the otherhand, the directors contend that the proposed second amended complaint 

### isbased upon a different obligation than that contained inthe two previous complaints, that it seeks recovery of a different amount, covers 

### a different period of time, and 

### isbased upon an alleged indebtedness on an account and not a judgment debt. Accordingly, they argue, it does not relateback to the original or first amended complaint and 

### isbarred on its faceby the statute of limitations. Additionally, they claimnone of the complaints alleges that the action was brought within the three year statute of limitationswhich must be affirmatively alleged to state a claim forrelief under the statute imposing personal liability on the directors. Thus, they contend, the district court was correct indismissing the action. Two separate considerations underlie determination of the correctness of the districtcourt's order: (1) Does the proposed amendment relateback to the original or firstamended complaint, thus avoiding the bar of the statute of limitations? (2) Should the amendment have been allowed? Directing our attention to the first consideration, we note that although the bar of the statute of limitations 

### isan affiwmative defense tobe pleaded by answer (Rule 8(a), M.R.Civ, P.) and need not be negatived inthe complaint, thebetter rule permits the court to consider, on application for leave to amend,whether the proposed amended pleading relatesback tothe original complaint and so avoids thebar of the statute of limitations. 3 ~oore's Federal Practice, !$ 15.08[4], p, 906; Pasos v. Pan American Airways, Inc., 17Fed.Rules Serv, 15a.34, Case 

### 1;Walker 

### v. Bank of America National Trust & ~av.~ss'n,

Rule 15(c), M.R.Civ.P., isthe controllingrule and provides inpertinent part: "Relation Back of Amendments. Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted tobe set forth inthe orisinal pleading, the amendment relatesback to the date of the originalpleading. II We have not previouslyhad occasion to construe this rule. Accordingly, we refer for guidance toFederal Rule l5(c) which contains identical language tothat quoted above, and to federalcourt decisionsconstruing 

### itsmeaning and application. In speaking of Federal Rule 15(c), LA Barron & Holtzoff, Federal Practice and Procedure, !$ 448, p. 757, has this to say: "The general rule of 'relation back' 

### isthat a pleading may not be amended to allege a new or different claim or defense unless it arose out of, or 

### isbased upon or related to, the claim, transaction or occurrence originally set forth or attempted tobe set forth. If the new claim or 'cause of action' meets this requirement, the amendment relates back tothe time of the original filing so as toprevent therunnin of limitationswhich might otherwise bar the claim.

# 6
The following statement from 

### 3 ~oore's Federal Practice, 

### 1 15.15[3], pp. 1025-1027, delineates the types of amendments thatwillrelateback:

"J;

# * Jc Rule 15(c) isbased on the concept that a party who isnotified of litigation concerning a given transaction or occurrence has been given all the notice that statutes of limitations are intended toafford, Thus, if the originalpleading gives fairnotice of the general fact situation out of which the claim or defense arises, an amendment which merely makes more specific what has alreadybeen alleged, such asby specifying particular acts of negligence under a general allegation of negligence, or remedies a defective pleading, 

### will relateback even though the statute of limitations has run inthe interim. Similarly, while it 

### is

### stillthe rule that an amendment which states an entirelynew claim for relief based on different facts

### willnot relateback, ifthe pleading sufficiently indicates the transaction or occurrence on which the claim or defense 

### is based, amendments correcting specific factual details, such as time and place, aswell as other items, 

### willrelateback," An amendment that changes only the legal theory of the action

### willrelateback. 3 ~oore's Federal Practice, Q 15.15[3], p, 1028, and cases cited therein, It 

### is equally clear that an amendment that adds another claim arising out of the same transaction or occurrence

### willrelateback, 

### 3 Moore's Federal Practice, $ 15.15[3], p. 1029, and cases cited therein, In the instant case, the proposed second amended complaint seeks to substitute an indebtedness on account of goods sold and delivered for a judgment indebtedness covering substantially the same account because thejudgment was subsequently set aside. The amount sought 

### is slightlydifferent due to accrued interest and credits allowed to a subsequent date. Additionally, the proposed second amended complaint pleads with more particularity the facts rendering the directors personally liable for the debts of the corporation by reason of their failureto file the annual statement. In short, the proposed amendment seeks to substitute the underlying account indebtedness for thejudgment indebtedness thatwas subsequently vacated, and toperfect the basis of personal liability. In an analogous situation, such amendment was permitted inGreen v. Walsh, 21 

### F.R.D. 15. There the plaintiffs had obtained a judgment by confession in state court and suitwas commenced on thisjudgment in federal court; subsequently the state court judgment was vacated for lack of jurisdiction. The court held that plaintiffswere entitled to amend their pleadings in the federal court action to sue on the underlying promissory note, guarantee, cognovit, and sellers' recourse endorsement, and to have such amendment relateback to the time of filingthe original complaint, even though the statute of limitations hadrun on part of plaintiffs' underlying claim in the interim. The reasoning of the court was that the general wrong suffered and the general conduct causing thewrong controlled the determination of whether a new and different claimwas stated inthe amended pleading, and that the specified conduct of defendant upon which plaintiff tries toenforce his claim 

### is tobe examined rather than the theory of law on which the action 

### isbrought. Accordingly, we hold that the proposed amendment, ifpermitted, would relateback to the firstamended complaint and avoid the bar of the statute of limitations, But, should the amendment have been allowed? Rule 15(a), M.R.Civ.P., governs the allowance of amended pleadings and provides as follows: "Amendments. A party may amend hispleading once as a matter of course at any time before a responsive pleading issewed or, ifthe pleading 

### is one towhich no responsive pleading 

### ispermitted and the actionhas not been placed upon the trialcalendar, he may so amend it atany time within 20 days after it is served. Otherwise a party may amend his pleading only by leave of court or by written consent of the adverse party; and leave shallbe freely

iven when justice so requires. A party shallplead in fesponse to an amended pleading within the time remaining forresponse to the original pleading or within 10 days after service of the amended pleading, whichever period may be the longer, unless the court otherwise orders. 11 (Emphasis supplied)

# . This Court has not heretoforehad occasion torule on the question of when leave toamend should be granted and when it should be withheld pursuant toRule 15. Accordingly, we look to interpretations of identical Federal Rule 15(a) for guidance. The purpose of Federal Rule 15 

### is described in

### 3 ~oore's Federal Practice, 

### 5 15.02[1], p. 813, in this language: "Rule 15 is one of the most important of the rules that dealwith pleadings, It re-emphasizes and assists in attaining the objective of the rules on pleadings: that pleadings arenot an end inthemselves, but are only a means to the proper presentation of a case; that at all times they are to assist, not deter, the disposition of litigation on the merits. 

# * 9; 

# *" The United States Supreme Court reiterated the philosophy of Rule 15 inFoman v, Davis, 371U.S. 178, 83 S. Ct, 227, 

### 9 

### L ed 2d 222, 226, wherein itheld the district court's denial of leave toamend even afterjudgment was errorwhere therewas no apparent

or declared reason for denying leave toamend the complaint: "Rule 15(a) declares that leave to amend 'shall be freely givenwhen justice sorequiresf; thismandate 

### is tobe heeded, [CitingMoore's Federal Practice] If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought tobe afforded an opportunity totest his claim on the merits, In the absence of any apparent or declared reason---such asundue delay, bad faithor dilatorymotive on the part of themovant, repeated failuretocure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.--- the leave sought should, as the rules require, be 'freely given', Of course, the grant or denial of an opportunity toamend iswithin the discretion of the District Court, but outright refusal togrant the leave without anyjustifying reason appearing for the denial 

### isnot an exercise of discretion; it 

### ismerely abuse of that discretion and inconsistent with the spirit of the Federal Rules, 11 Applying these principles to the instant case, we note there isno stated reasonfordenying leave toamend inthe district court's order. Nonetheless thebasis for such denial. isapparent. The evidence of bad faith on the part of plaintiff appears in the record of Case #3, wherein the defaultjudgment against the corportion was setaside. The face of thejudgment inCase 

### #3 contains an express finding that: 

# "**

# * the testimony shows to the satisfaction of this Court that the President of Prentice Lumber Company by his actions and representations to the Elliston Lime Company officers caused Elliston Lime Company officers tobelteve the litigation was merely for the purpose of providing some security toPrentice Lumber Company tocover whatever amount was awed to them,r1 

### It also contains an express finding: 

# "*** that thejudgment should not be for the full sum of $20,971.15, and it appears thatjustice requires that the default be set asi.de and the matter be set dobm forhearing on the merits,II 

### This judgment was dated March 

### 2, 1970, and affirmed on appeal to this Court on March 

### 16, 1971. No further proceedings to establish the liability of Elliston to Prenticehas been taken. Furthermore, the evidencereceived in Case 

### #3 indicates that the defaultjudgment in favor of Prentice against Elliston

was entered without the k~owledge of the president or directorsof Elliston; that thereafter the employees of the Elliston cut stock plant were carried on the payroll of Prentice as employees of Prentice; that the lumber processed atthe Elliston cut stock plant was sold by Prentice, shipped by Prenticewith the shipping orders received by the president of Elliston as agent for Prentice, and the saleproceeds were received by Prentice and credited against the Elliston account. The evidence further indicates that alldealings were carried on between the president of Elliston and the president of Prentice and such dealings were unknown to the other directors of Elliston. Also entered inevidence was 

### a complaint inmandamus by the other directors and stockholders of Elliston against the president of Elliston accusinghim of refusal to produce the books and records of Elliston for their inspection and of wasting and dissipating ~lliston's assets. An alternative

### writ of mandamus

was issued requiring ~lliston's president toproduce these records, including those relating tohis dealingwith Prentice and the indebtedness of the corporation. In short, the evidence indicates the defaultjudgment was taken without the knowledge of the president or directors of Elliston and that the course of dealings between the president of Elliston and the president of Prentice

was withheld from the directors of Elliston. Under such circumstances, 

### we cannot say that the district court abused 

### itsdiscretion 

### in denying Prentice leave toamend inorder toassert a personal liabilityagainst the directors. The order of the di.strict court 

### is affirmed.

Associate Justice(gbhe Concur: P 

# / / Chief ~usiice

~ssoci@eJustices.