No. 86-231 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1987 

DANIEL NOONAN and LEO NOONAN, 

d/b/a EXCELSIOR MEATS, 

Plaintiffs and Respondents, 

-vsFIRST BANK BUTTE, a Corporation, 

Defendant and Appellant. 

APPEAL FROM: District Court of the Second Judicial District, 

In and for the County of Silver Bow, 

The Honorable Mark P. Sullivan, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

James A. Robischon argued, Kalispell Montana 

For Respondent: 

John Doubek argued ; Small, Hatch, Doubek & Pyfer, 

Helena, Montana 

Submitted: April 3, 1987 

Decided: July 11 1987 

Filed : 

JUL 1 - 1987 

Clerk 
Mr. Justice Fred J. Weber delivered the Opinion of the Court. 

This is an appeal from a jury verdict and judgment 

entered by the District Court of the Second Judicial District, Silver Bow County, in favor of the Noonans and against 

First Bank Butte (FBB) . The jury awarded the Noonans 

$800,000 for loss of profits, wages, business opportunities, 

and credit, and $700,000 for emotional distress. We reverse 

and remand for a new trial. 

FBB raises nine issues on appeal. The case requires a 

new trial based on two of the issues raised. First, the jury 

was improperly instructed on the tort of bad faith, and 

second, the jury was improperly instructed on emotional 

distress. For the guidance of court and counsel on remand, 

we also discuss the issues of whether the jury should have 

been instructed on both the implied and statutory duties of 

good faith, the propriety of excluding certain testimony of 

an attorney for the Noonans, and whether the jury should have 

been instructed on negligence. Because we remand the case 

for new trial, we will not address the issues raised by FBB 

on sufficiency of the evidence. 

Excelsior Meats was a partnership in Butte, Montana, 

operated by brothers Leo and Dan Noonan. Leo and Dan both 

have limited educational backgrounds and began working in the 

family business at a young age. Leo took care of the business aspect of the partnership and Dan worked in the store. 

Leo also operated a cattle feedlot. The cattle from the 

feedlot were sold to Excelsior Meats. Dan began his own 

feedlot operation in May 1981, and also sold cattle to the 

partnership. 

Larry Dwyer was a loan officer at FBB. He had known Leo 

and Dan Noonan for a long time. There is a conflict in the 

testimony as to whether Mr. Dwyer first approached Leo Noonan 
or vice versa, but in 1973, FBB began loaning money to Leo 

Noonan. The initial loan was for $7,000 to purchase cattle. 

The Noonans maintained a large checking account balance at 

FBB and promised to transfer $12,000 in certificates of 

deposit to FBB. No security was required for the loan. 

Leo Noonan continued to borrow from FBB and by April 

1975 had over $77,000 on loan. In 1975, FBB also loaned the 

Noonans $100,000 to expand their meat market building. This 

loan was secured by a real estate lien on their property. 

In November 1980, John Johnson took over the Noonan 

loans at FBB. At that time, the loans to Leo Noonan and the 

partnership totaled almost $200,000, excluding the real 

estate loan. The loans were secured by feedlot cattle, 

inventory, accounts receivable, furniture, and fixtures of 

the meat market. When he took over the loans, Mr. Johnson 

requested financial statements and tax returns. Bob Prigge, 

a CPA and the Noonans' accountant, prepared the financial 

statements. 

Mr. Johnson testified that at the time he believed the 

Excelsior Meats' financial statements supported FBB's loans 

to the Noonans. However, because the statements reflected 

only the Excelsior Meats' partnership income, they did not 

accurately show the profitability or debt of the total Noonan 

operations. Leo Noonan's feedlot business, which lost money 

in every year between 1977 and 1981, was not reflected in the 

financial statements. Mr. Prigge testified that he offered 

to provide tax returns for the feedlot operation but that Mr. 

Johnson refused. Mr. Johnson testified that he was not 

informed that the financial statements given to him were 

incomplete. 

The financial statements did not disclose that between 

1978 and 1981 the Noonans borrowed $125,000 from K.B. Williams, or that they borrowed $45,000 in 1980 from the 
McLaughlins. Of even greater significance, the Noonans did 

not disclose to anyone in FBB and the financial statements 

did not disclose $220,000 owed by Leo Noonan to Miners Bank 

at the end of 1980, and $93,000 owed by Dan Noonan to Montana 

Bank in August 1981. 

Based on the financial statements, Mr. Johnson renewed a 

$70,000 loan to Leo Noonan and the partnership in November 

1981, and a $250,000 loan in December of the same year. The 

$70,000 loan was due on demand and was secured by certificates of deposit on account with FBB. The $250,000 loan was 

due in November 1982 and was secured by 220 head of steers at 

the feedlot, and by the inventory, accounts receivable, 

furniture, and fixtures at Excelsior Meats. 

In March 1982, Leo Noonan received a letter from Miners 

Bank requiring payment of one of his delinquent loans. He 

contacted his attorney, who arranged a meeting with Miners 

Bank and FBB. At that meeting the Noonans disclosed debts of 

$980,156.54. Their assets, as of their most recent financial 

statement, for fiscal year 1980, were $509,800. This information is contained in defendants' Exhibit 10, introduced at 

trial. 

On learning of the financial position of the Noonans, 

FBB contacted its attorneys. On their advice, and acting 

under the default provision of its security agreement, FBB 

froze the assets in the Noonans' partnership checking account 

and cashed in their certificates of deposit. The Noonans' 

counsel presented a workout plan to all three banks, but FBB 

refused to go along with the plan. In April 1982, FBB took 

control of and liquidated Excelsior Meats pursuant to an 

authorization for peaceful repossession of collateral signed 

by Leo and Dan Noonan. 

Leo and Dan Noonan filed for bankruptcy individually and 

on behalf of the partnership in June 1982. They received 
discharges in bankruptcy in October 1982. After the discharges, they paid $9,432 to bring current their mortgage 

payments to FBB and $8,100 to bring current other obligations 

on the market, including repair bills caused by FBB's repossession of the building. FBB returned the building to them, 

and Dan Noonan reopened the business. 

In March 1984, the Noonans sued FBB. Dan Noonan testified his sales are approximately one-half their 1981 level, 

he has a hard time getting credit, and because of the bankruptcy he lost his USDA license, which enabled him to sell 

wholesale. The jury returned a verdict in favor of the 

Noonans for $800,000 in lost profits and $700,000 in emotional distress. FBB appeals. 

I 

Was the jury improperly instructed on the implied covenant of good faith and fair dealing? 

FBB argues that the implied covenant of good faith and 

fair dealing cannot apply where a statutory duty of good 

faith exists. Here, a statutory duty of good faith is 

present under the Uniform Commercial Code, 5 30-1-203, MCA: 

Every contract or duty within this code imposes an 

obligation of good faith in its performance or 

enforcement. 

FBB also contends that, even if an instruction on the common-law duty of good faith is allowed in this case, the one 

given was inadequate. 

This Court has not prohibited application of an implied 

covenant of good faith and fair dealing where there is a 

statutory duty of good faith present. In the past, the Court 

has extended the implied duty of good faith and fair dealing 

to cases involving banks dealing with their customers. In 

Tribby v. Northwestern Bank of Great Falls (Mont. 1985), 704 
P.2d 409, 419, 42 St.Rep. 1133, 1142, we extended the implied 

covenant of good faith and fair dealing to the commercial 

area of bank-customer relations. In Nicholson v. United 

Pacific Ins. Co. (Mont. 1985), 710 P.2d 1342, 1347, 42 

St.Rep. 1822, 1828, we noted the extension of the tort theory 

to banks dealing with customers and cited Tribby and First 

National Bank of Libby v. Twombly (Mont. 1984), 689 P.2d 

1226, 41 St.Rep. 1948. In Northwestern Nat. Bank v. 

Weaver-Maxwell (Mont. 19861, 729 P.2d 1258, 43 St.Rep. 1995, 

we allowed a case of a bank-customer dispute to be remanded 

for retrial on a bad faith theory. In Central Bank of Montana v. Eystad (Mont. 1985), 710 P.2d 710, 42 St.Rep. 1850, 

we declined to determine whether the jury could be instructed 

on both the implied duty of good faith and fair dealing and 

the statutory duty of good faith imposed by 5 30-1-203, MCA, 

as part of the Uniform Commercial Code. Instead, we found 

that there was sufficient evidence as a matter of law to 

support the trial court's denial of the tortious bad faith 

counterclaim. We hold that both an instruction on the implied covenant and an instruction on the UCC duty of good 

faith may be proper in this case. Whether such instructions 

are proper will depend upon the evidence submitted on 

retrial. 

The instruction given on the implied covenant of good 

faith and fair dealing, instruction no. 24, was: 

You are instructed that First Bank Butte and its 

agents owed plaintiffs an implied-in-law duty of 

good faith and fair dealing in the banking relationship, that it should do nothing to unnecessarily deprive the plaintiffs of the benefits 

associated with the banking relationship between 

the parties. The duties or obligations arising 

from the banking relationship between the parties 

imposed an obligation of good faith in both the 

performance and enforcement of those duties and 
obligations. Good faith is defined as honest (sic) 

in fact in the conduct or relationship concerned. 

If you find that First Bank or its agents violated 

this obligation imposed by law, the plaintiffs are 

entitled to be compensated for all of the detriment 

or injury proximately caused thereby whether that 

detriment or injury could be anticipated or not. 

This instruction is virtually identical to an instruction 

given in McGregor v. Momer (Mont. 1986), 714 P.2d 536, 546, 

43 St.Rep. 206, 218. It defines good faith as "honesty in 

fact", which is the definition given in the Uniform Comercia1 Code, (5 30-1-201(19), MCA. We held in McGregor that 

breach of the UCC standard of honesty in fact is not enough 

to constitute a tort. The minimal requirement for the tortious breach of the covenant of good faith and fair dealing 

is action by the defendant which was arbitrary, capricious or 

unreasonable, and exceeded plaintiffs' justifiable expectation. McGregor, 714 P.2d at 543. The instruction given in 

this case inadequately defined the tort. We hold, as in 

McGregor, that giving of this instruction is reversible 

error. 

I1 

Did the lower court erroneously instruct the jury on 

damages for emotional distress and mental anguish? 

Instruction no. 20 on emotional distress read: 

You are instructed that the law does not prescribe 

any definite standard by which to compensate an 

injured person for emotional distress or mental 

anguish. This case does not require that any 

witness should have expressed an opinion as to the 

amount of damages that would compensate for such 

injury. The law does require, however, that when 

making an award for emotional distress or mental 

anguish, the jury shall exercise calm and reasonable judgment. If you find for plaintiffs, you 

must award them damages for all emotional distress 

and mental anguish suffered as a result of the 
defendant's conduct. The damages must be just and 

reasonable. 

Notwithstanding the substantial amount of damages awarded for emotional distress, the record is devoid of significant evidence on this point. There was no medical testimony 

indicating emotional distress. The only testimony on this 

issue was the testimony of the Noonans themselves, and they 

made only general statements of mental strain and stress, 

inability to sleep, and stiffness. As a result, the statement in the above jury instruction that damages "must" be 

awarded may have misled the jury, especially in view of their 

$700,000 damage award for emotional distress. 

The instruction given is, in relevant part, identical to 

an instruction given in McGregor. There, we held the jury 

instruction in effect directed a verdict on emotional distress because it stated the jury must award damages for all 

emotional distress suffered. We cited Johnson v. Supersave 

Markets, Inc. (Mont. 1984), 686 P.2d 209, 41 St.Rep. 1495, as 

authority for the proposition that we do not yet live in an 

eggshell society where every harm to a property interest 

gives rise to a right of action for mental distress. We said 

that mental distress is compensable absent a showing of 

physical or mental injury only if the tortious conduct results in a substantial invasion of a legally protected interest and causes a significant impact on the person of the 

plaintiff. McGregor, 714 P.2d at 544-45. Another instruction given in this case improperly required the jury to award 

damages for emotional distress without a finding of a substantial invasion of a legally protected interest and a 

significant impact on the person of the plaintiffs. We hold 

that the trial court erred in giving this instruction. 
I11 

Did the trial court err in excluding testimony of William Kebe, the Noonans' attorney during some of the time at 

issue in this action? 

Attorney William Kebe represented the Noonans prior to 

and during the foreclosure of Excelsior Meats. At trial, FBB 

attempted to elicit testimony from Mr. Kebe about his impressions and observations as to whether FBB's conduct constituted bad faith, and about certain discussions he had with 

attorneys for FBB and Miners Bank. The District Court applied the attorney-client privilege and ruled the testimony 

inadmissible. 

In Kuiper v. Dist. Court of Eighth Judicial Dist. (Mont. 

1981), 632 P.2d 694, 38 St.Rep. 1288, we held that the 

attorney-client privilege applies to communications made by a 

client to his attorney and legal advice given in response in 

the course of professional employment. Section 26-1-803, 

MCA. The District Court correctly excluded testimony by Mr. 

Kebe on his evaluation of the Noonans' legal position because 

it was covered by the attorney-client privilege. Conversations occurring in the presence of third parties are not 

privileged. Jones v. Jones (Mont. 1980), 620 P.2d 850, 852, 

37 St.Rep. 1973, 1976. In this case, the District Court 

correctly allowed FBB to elicit testimony from Mr. Kebe as to 

the conversations that took place at the meeting between bank 

officials, attorneys, and the Noonans. However, the District 

Court excluded Mr. Kebe's testimony about his conversations 

with third parties when the Noonans were not present. These 

conversations are not protected by the attorney-client privilege. On retrial, the District Court shall allow Mr. Kebe to 

testify about his conversations with third parties, whether 

or not the Noonans were present. 
IV 

Did the trial court err in submitting the negligence 

theory to the jury? 

FBB asserts that the jury should not have been separately instructed on negligence. We discuss the instruction 

because the case is returned for retrial. We have approved 

an instruction on a separate negligence theory in the 

employer-employee context of an action alleging breach of the 

implied covenant of good faith and fair dealing. Flanigan v. 

Prudential Federal Sav. & Loan (Mont. 1986), 720 P.2d 257, 

263, 43 St.Rep. 941, 948; Crenshaw v. Bozeman Deaconess Hosp. 

(Mont. 1984), 693 P.2d 487, 493, 41 St.Rep. 2251, 2259. 

However, such an instruction must be supported by the pleadings and the evidence. We conclude that, on retrial, a 

negligence instruction may properly be given if the court 

concludes that the allegation of negligence is established in 

the pleadings and if the proof establishes a claim for the 

elements of negligence, including unreasonable conduct on the 

part of the bank. 

Reversed and remanded for new trial. 

Justices 
Mr. Justice John C. Sheehy, dissenting: 

I dissent. The majority opinion leaves the Noonans 

bereft and gelded of their just verdict which arose from the 

unjust actions of the Bank. 

The evidence heard by the jury was not cast in the form 

reported by the majority opinion. Instead the jury heard of 

business perfidy which the Bank could not deny and on which 

the jury based a necessarily substantial verdict. 

The Noonan's were a respected business family in Butte. 

They had limited education, they were not country club folk, 

but they were hard working and industrious. The Bank's 

representative, Dwyer, saw their potential, and sought to 

obtain all of their banking business. It was through the 

Bank's agent that loans were originally made, without the 

requirement of financial statements or other financial data, 

and against the Bank's own protocol. Expansions of buildings 

and operations were counseled by the Bank and the promise was 

both expressed and implied that the money needed for their 

expanding operations would be supplied by the Bank. 

When the Noonan's obtained loans, they signed whatever 

security agreements were required by the Bank and it is 

undisputed in this case that for the loans given, the Bank 

had a first position with respect to the assets and 

collateral which the Bank had required in making the loans. 

The president of the Bank became furious when he learned 

that the Noonans had been borrowing money from other banks. 

On March 31, 1982, the Bank gave notice of default to the 

Noonans, based on the opinion of the Bank that the financial 

conditions and affairs of the borrower impaired the Rank's 

security, increased its risk, and that the Bank deemed itself 

insecure. When the notice was given, the Noonans had 
faithfully made the payments which were due to Bank. They 

were not in default as to any payment and the Bank had a 

first position with respect to the collateral which it had 

demanded. Nonetheless the Bank after March 31, 1982, stopped 

all payments out of Noonans' checking account with the Bank, 

seized $70,000 in certificates of deposit which the Noonans 

had put up for collateral, and obdurately refused to 

cooperate to keep the Noonans in business. The Noonans were 

forced into bankruptcy. Thus did the Noonans lose the 

business which had been operated by their family for over 40 

years. 

That in brief was the factual background which led this 

jury, acting responsibly, to award the Noonans $800,000 for 

loss of profits, wages, business opportunities, and credit, 

and $700,000 for emotional distress. 

The reversal of the judgment in this case on the ground 

of Instruction No. 24 is terribly unfair. The majority have 

disregarded the fact that this case was tried under the 

standards of good faith enunciated in the Uniform Commercial 

Code. Here the majority strikes Instruction No. 24 because 

"the minimum requirement for the tortious breach of the 

covenant of good faith and fair dealing is actions by the 

defendant which are arbitrarily, capricious, or unreasonable, 

and exceeded plaintiff's justifiable expectation." That 

statement finds its origin in Nicholson v. United Pacific 

Insurance Company (Mont. 1985), 710 P.2d 1342, 42 St-Rep. 

1822. 

Instructions based on Nicholson would be out of place in 

a trial of this case. The ~oonans'transactions with the Bank 

were evidenced by commercial paper. As such, the instruments 

were covered by the Uniform Commercial Code. Section 
30-3-101, et. seq. MCA. Under the Uniform Commercial Code, 

there is a statutory, as distinguished from a common law 

obligation of good faith. Section 30-1-203, MCA, provides 

that: 

Every contract or duty within this code imposes an 

obligation of good faith in its performance or 

enforcement. 

Furthermore, under the Uniform Commercial Code, good 

faith is defined as "honesty in fact in the conduct or 

transaction concerned." Section 30-1-201(19), MCA. 

The District Court in this case regarded the provisions 

of the Uniform Commercial Code, and instructed the jury 

accordingly. 

This theory of recovery was acceded - to by -- the Bank, 

because the instructions offered by the Bank and given by the 

court parallel Instruction No. 24. Those instructions 

offered by the Bank were court instructions No. 19 and 26. 

We set them out as follows: 

INSTRUCTION NO. 19 

You are instructed that both parties in a 

commercial relationship, such as existed between 

plaintiffs and defendant in this case, have the 

duty to deal fairly and in good faith with each 

other. Good faith is defined as meaning honesty in 

fact and observance of reasonable standards of fair 

dealing in the trade. 

Therefore in this case, if you find that defendant 

did some dishonest act that harmed the plaintiffs; 

or that Defendant failed to observe reasonable 

standards of fair dealing in the transactions with 

plaintiff, then defendant acted in bad faith and is 

liable to the plaintiffs for any damages 

proximately caused thereby. 

Conversely, if you find that defendant did not act 

in a dishonest manner or fail to observe reasonable 

standards of fair dealing in its transactions with 
plaintiffs, then defendant did not act in bad faith 

and is not liable to the plaintiffs for any losses 

or damages claimed. 

INSTRUCTION NO. 26 

You are instructed that a term in a promissory note 

or security agreement providing that the lender may 

accelerate payment or performance "at will" or 

"when he deems himself insecure", or in words of 

similar import, mean that he shall have power to do 

so only if he in good faith believes that the 

prospect of payment or performance is impaired. 

The burden of establishing lack of good faith is on 

the party against whom the power has been 

exercised, the plaintiffs, in this case. 

There is not a dime's worth of difference between the 

instructions offered in this case by the Bank, and 

Instruction No. 24 which this Court uses to reverse the 

plaintiffs' verdict. 

The majority has failed to distinguish that McGregor v. 

Mommer (Mont. 1986), 714 P.2d 536, 43 St.Rep. 206 was a 

common law implied covenant of good faith action to which the 

Nicholson definition applied from this action based on 

commercial paper, to which the Uniform Commercial Code 

applies. The instructions in this case were proper. 

Finally, the majority have misinterpreted McGregor - v. 

Mommer, supra, as to the impact of Instruction No. 20 on 

emotional distress. 

In McGregor, the use of the word "must" in the 

instruction was held improper because damages for emotional 

distress are a tort remedy, and the jury in McGregor may have 

misinterpreted the instruction as applying to recovery on a 

contract claim. 714 P.2d at 544. The language of 

Instruction No. 24 is not improper in this tort claim, 
because the language is conditioned first, on finding for the 

plaintiff on tort and secondly, that the emotional distress 

is a result of the defendant's conduct. The decision of the 

majority to reverse the emotional distress award seems to be 

based on insufficiency of the evidence to support the award 

which of course we should leave to the jury. It can be 

charitably said that the majority see no adverse emotional 

impact on the Noonans who saw their family business that had 

been 40 years abuilding crumble and disappear through the 

unfair conduct of the Bank. 

I join in the foregoing dissent of Mr. ~uswe John C. Sheehy.