No. 90-131 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

LEE STOTT and BESSIE STOTT, and ALL WEST EQUIPMENT, and RICK STOTT, 

Plaintiffs and Appellants, 

-vsRAYMOND FOX, 

Defendant and Respondent. 

APPEAL FROM: District Court of the Fifth Judicial District, 

In and for the County of Jefferson, 

The Honorable Frank Davis, Judge presiding. 

COUNSEL OF RECORD: 

#or . y Appellant : , . c'- 1.3 

?- ., c-? .I. c > John C. Doubek, Small, Hatch, Doubek & Pyfer, c.3 I - 4 L-: Helena, Montana . - 1 ,-- 

. . '-' .For Respondent: 

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CVJ 

‘. ) Barry G. OIConnell, Moore, O'Connell, Refling & 

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I- Manos, Bozeman, Montana 

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. -. - rC Submitted: July 13, 1990 

Filed: 

Decided: October 30, 1990 
Justice John C. Sheehy delivered the Opinion of the Court. 

This legal malpractice action was brought by All West 

Equipment, Lee Stott, Bessie Stott, and Rick Stott. The plaintiffs 

allege that Raymond Fox failed to represent them properly in an 

action for a deficiency judgment brought by First Bank Western. 

Specifically, plaintiffs contend that Fox was negligent in 

stipulating to the dismissal of the Bank's deficiency judgment 

action with prejudice, having failed to explain to the plaintiffs 

the effect of the dismissal upon the plaintiffs1 alleged claims 

against the Bank under various lender liability theories. 

After the District Court dismissed the deficiency action, on 

October 15, 1985, the Stotts and All West Equipment, with different 

counsel, filed a complaint in the Fourth Judicial District against 

First Bank alleging fraud, misrepresentation, and breach of the 

covenant of good faith and fair dealing on the part of First Bank 

in making the loans to them and in obtaining their signature for 

the release of collateral. The plaintiffs also alleged that the 

collateral was sold without commercial reasonableness and that 

First Bank violated the requirements set out in 5 30-9-504, MCA. 

First Bank filed a motion to dismiss, which was denied by the 

District Court. When the District Court denied First Bank's motion 

to dismiss, it sought a writ of supervisory control from this 

Court. First Bank v. Fourth Judicial District Court (1987), 226 

Mont. 515, 737 P.2d 1132. We granted First Bank's petition for 

writ of supervisory control, and dismissed the plaintiffs' 
complaint. In that case, we held the plaintiffs1 claims were 

barred by the stipulated dismissal with prejudice of the Bank's 

deficiency judgment action. Confronted with the dismissal of their 

second action, plaintiffs instituted the malpractice suit against 

their former counsel Fox. The Fifth Judicial District Court, 

Jefferson County, entered summary judgment in favor of defendant 

Fox on the plaintiffs1 claim of legal malpractice. Now the 

plaintiffs appeal the District Court's summary judgment in favor 

of Fox. We affirm. 

The parties raise the following issues on appeal: 

1. Did the District Court err by finding that Lee and Bessie 

Stott were not the real parties in interest in the underlying 

lender liability action? 

2. Did the District Court err by finding that an attorneyclient relationship did not exist between Rick Stott and Raymond 

Fox? 

3. Did the District Court err by finding that plaintiffs 

could not have prevailed on their claim for damages allegedly 

caused by the loss of the Massey-Ferguson dealership? 

4. Did the District Court err in finding that Bank did not 

act in bad faith in its contractual relationship with the 

plaintiffs? 

In order to determine whether Fox was guilty of legal 

malpractice, we must first examine the facts surrounding Fox's 

earlier representation of the plaintiffs in First Bank's deficiency 

judgment action against the plaintiffs. 
All West Equipment was incorporated in 1971. Lee and Bessie 

Stott were officers of All West Equipment and spouses. Rick Stott, 

the son of the Stotts, was an employee of All West Equipment. 

All West engaged in the sale and repair of farm implements. 

All West was a dealer for Massey-Ferguson. On October 18, 1982, 

Massey-Ferguson terminated All West's dealership, when MasseyFerguson received a aonsufficient funds check from All West and 

further investigation revealed that All West was 'lout of trustn 

exceeding $50,000. 

All West began its relationship with First Bank in late 1980. 

Two loans were originally made to All West by First Bank. A number 

of Security agreements were entered into between First Bank and All 

West to perfect First Bank's position. The Stotts also executed 

a guaranty with First Bank. Furthermore, a llCorporate 

Authorization Resolutionw was executed identifying Lee and Bessie 

Stotts as corporate officers and having the right to borrow funds. 

In June of 1987, All West was in arrears on its debt 

retirement to First Bank. For that reason, the parties reduced All 

West's indebtedness to two demand notes. Specifically, First Bank 

loaned to All West and Lee Scott (individually) $68,732.30, due in 

September, 1982. Also, First Bank loaned $21,566.63 to All West. 

The second loan was due December 15, 1982. 

The Stotts and All West defaulted on both of these notes. The 

Bank also discovered that All West was dealing out-of-trust with 

Massey-Ferguson. As the record reflects, the out-of-trust dealings 

were discovered on October 15, 1982. Later, possession of the 
collateral was turned over to First Bank, by a written instrument 

dated October 20, 1982, and signed by Lee and Rick Stott on behalf 

of All West Equipment. 

The assets of All West, pledged as collateral, were sold at 

a public and private sale through Gardener Auction on November 13, 

1982. As a result of the sales, almost $31,000 was applied to All 

West's indebtedness on the operating note, leaving a balance due 

on the loan of $42,088. On January 7, 1983, First Bank filed a 

complaint, in the Fourth Judicial District Court, against All West 

Equipment and Lee and Bessie Stott, to collect deficiencies owing 

after the sale of the collateral under the promissory notes and 

guaranty. Eventually, the deficiency action between First Bank and 

All West and the Stotts was settled without trial and a stipulation 

and order of dismissal with prejudice was filed on January 4, 1984. 

In reviewing an order for summary judgment, the standard of 

review for this Court is the same as that used by the District 

Court under Rule 56(c), M.R.Civ.P. Kronen v. Richter (1984), 211 

Mont. 208, 211, 683 P.2d 1315, 1317. Therefore, we may find 

summary judgment when "the pleadings, depositions, answers to 

interrogatories, and admissions on file, together with the 

affidavits, if any, show that there is no genuine issue as to any 

material fact and that the moving party is entitled to a judgment 

as a matter of law. Rule 56 (c) , M.R.Civ.P. ; Mayer Bros. v. Daniel 

Richards Jewelers, Inc. (1986), 223 Mont. 397, 399, 726 P.2d 815, 

816. Once the record discloses no genuine issue of material fact, 

the burden of proof shifts to the party opposing the motion to 
present facts of a substantial nature that a material fact issue 

does exist. Ma~er, 726 P.2d at 816. The party opposing summary 

judgment may not rest upon mere allegations in the pleadings or 

conclusory statements in the briefs but has an affirmative duty to 

respond by affidavits or sworn testimony with specific facts that 

show a genuine factual issue exist. Mere conclusory or speculative 

statements are insufficient to raise a genuine issue of material 

fact. National Gypsum Co. v. Johnson (1979), 182 Mont. 209, 212, 

595 P.2d 1188, 1189. Mayer, 726 P.2d at 816; citing Rule 56(e), 

M.R.Civ.P. Further, the District Court judge is not required to 

anticipate possible proof at trial when ruling on a summary 

judgment motion. Tucker v. Trotter Treadmills, Inc. (1989), 239 

Mont. 233, 235, 779 P.2d 524, 525. 

In a legal malpractice action, the complaining party, in order 

to prevail: 

[Mlust initially establish the existence of an attorneyclient relationship. The plaintiff must then establish 

that the acts constitutingthe negligence . . . occurred, 

proximately causing damages to the plaintiff. The final 

requirement for the plaintiff is the need to establish, Iv [tlhat 'but forv such negligence . . . the client would 

have been successful in the prosecution or defense of the 

action. 

Lorash v. Epstein (1989), 236 Mont. 21, 24, 767 P.2d 1335, 1337; 

citing Christy v. Saliterman (1970), 228 Minn. 144, 179 N.W.2d 288, 

In order for All West and the Stotts to prevail against Fox, 

they must show that their underlying action against First Bank 

would have been successful. Some courts, in describing this 

procedure, have termed it as a "suit within a suit.vf Liberman v. 
? 1 

Employers Insurance of Wausau (1980), 84 N. J. 325, 419 A.2d 417, 

426. The District Court found that lgthe plaintiffs have failed to 

meet the burden that they could have prevailed in any counterclaim 

against First Bank. The legal malpractice test of Lorash has not 

been met. We agree with the District Courtgs holding that the 

plaintiffsg claims against the Bank would have not been successful. 

Did the District Court err by finding that Lee and Bessie 

Stott were not the real parties in interest in the underlying 

action? 

The District Court found that Lee and Bessie Stott were not 

proper parties, in the former liability action, nor could they have 

personally asserted a claim for damages in the dismissed action. 

The District Court, relying on our holdings in Moats Trucking Co., 

Inc. v. Gallatin Dairies, Inc. (1988), 231 Mont. 474, 753 P.2d 883, 

and Bottrell v. American Bank (1989), 237 Mont. 1, 773 P.2d 694, 

explained that the alleged damages could only have been claimed by 

All West Equipment, the Stottsg corporation. 

The District Court is correct. This issue is controlled by 

our holdings in Moats and Bottrell. In Moats, we said: 

In Malcolm v. Stondall Land Co. (1955) , 129 Mont. 142, 

145, 284 P.2d 258, 260, this Court stated the general 

rule regarding a stockholdergs personal right to sue in 

the corporationgs cause of action: 

. . . As a general rule stockholders may not sue upon 

a cause of action belonging to their corporation whether 

in their own names or in the name of the corporation 

itself. 

In Malcolm, this Court addressed for the first time the 

issue of whether individual shareholders who control all 
of the stock of the corporation may disregard the 

corporate entity and sue as individuals on the 

corporation's cause of action. We held that such 

individual shareholders do not have the right to pursue 

an action on their own behalf when the cause of action 

accrues to the corporation. Malcolm, 129 Mont. at 146, 

284 P.2d at 260. 

The plaintiffs rely on the fact that as guarantors of the 

corporate debt of All West Equipment that they should have 

standing. As the District Court properly noted this contention has 

been rejected by this Court in Bottrell. In Bottrell, individual 

shareholders asserted they should be entitled to individual 

compensatory damages based on the fact they were required to sign 

personal guarantees of the corporate debt. We affirmed our holding 

in Moats, and found the cause of action belonging to the 

Corporation and not the shareholders. Bottrell, 773 P.2d at 709- 

Recently, in Wolstad v. Northwest Bank (Mont. 1989), 783 P.2d 

1325, 1328, 46 St.Rep. 2160, 2164, we reiterated our prior holding 

Bottrell : 

We previously held that when corporate shareholders 

personally guarantee corporate debts, the shareholders 

may not recover as individuals for the lender's breach 

of the covenant of good faith and fair dealing and 

negligent misrepresentation absent a separate duty owed 

to the shareholders. Bottrell, 773 P.2d at 709. 

The evidence overwhelmingly supports the District Court's 

conclusions 'Ithat individual stockholders (Stotts) do not have a 

right to pursue an action on their own behalf when the cause of 

action accrues to the corporati~n.~~ A review of the notes 

identifies the borrower as "All West Equipment" signed by "Lee 

Stott as President." The demand note in the amount of $68,732.30 
is likewise signed by Lee Stott individually although that is of 

no significance in view of the existence of guarantees signed by 

the Stotts with First Bank, and our earlier holdings in Bottrell 

and Walstad. 

To permit this litigation to go forward as to Lee and Bessie 

Stott, is to permit 'Ireverse piercing of the corporate veil,I1 thus 

allowing the shareholders "to invoke the corporate entity only when 

it would be to their advantage." Moats, 753 P.2d at 885. Bessie 

Stott or Rick Stott may not recover under this theory since they 

were not signatories to either promissory note. 

Next, Lee and Bessie Stott argue that All West was not a 

corporation in 1982 since it was dissolved in 1979 for failure to 

register, thereby entitling them to proceed individually. However, 

All West held itself out as a corporation in its dealings until the 

very end and took full advantage of the corporate structure. The 

District Court in its order found that: 

It is not disputed that after ALL WEST'S corporate 

existence had technically expired, it acted as a 

corporate entity. Among other things it prepared and 

filed corporate tax returns, issued corporate 

resolutions, borrowed money, issued corporate notes and 

security agreements to secure payment of the same. It 

generally held itself out to be a corporation to the 

Court, the Bank, its own accountants and to the world. 

For the above reasons, this Court is compelled to conclude the 

Stotts are estopped from challenging All West's corporate status. 

"An organization that has held itself out as a corporation is 

estopped from denying the legality of its corporate existence.'I 

18A Am.Jur.2d Corporations 5 269. 
Furthermore, the District Court considered the possibility 

that a material fact might exist as to the precise nature of the 

business entity of All West (i.e. sole proprietorship or 

partnership.) The District Court found that the Stotts failed to 

comply with the fictitious name statute (1 30-13-203, MCA), and are 

thus barred from maintaining a suit or action by 5 30-13-215, MCA. 

We agree with the District Court. 

Did the District Court err by finding that an attorney-client 

relationship did not exist between ~ick Stott and Fox? 

We have held that a plaintiff, in a legal malpractice action, 

I1must initially establish the existence of an attorney-client 

relationship." Lorash, 767 P.2d at 1337. There was never an 

attorney-client relationship between Rick Stott and Fox. Rick's 

right to recover is premised upon Fox's allegedly negligent 

handling of First Bank's deficiency judgment action. The parties 

in that dismissed action were First Bank as plaintiffs, and All 

West Equipment, a corporation and Lee and Bessie Stott as 

defendants. Rick Stott, a plaintiff in this action was not a party 

to the dismissed action. These facts negate the existence of an 

attorney-client relationship between Rick Stott and Fox. 

111. 

Did the District Court err by finding that plaintiffs could 

not have prevailed on their claim for damages allegedly caused by 

the loss of the Massey-Ferguson dealership? 
One of the claims in the dismissed action was damages for the 

loss of the Massey-Ferguson farm equipment dealership, which 

plaintiffs attributed to the wrongful acts of First Bank. To 

support their contention the plaintiffs rely upon the affidavit of 

Lee Stott. In his affidavit Lee Stott swears that the Bank advised 

him to terminate the dealership. According to Lee, "The intent of 

doing this was to, again, free up funds for the Bank and to allow 

the Bank to better situate its collateral and become more secure 

in its position. The promise made by Dan Simpkins was that the 

Bank would continue to finance our family business." In his prior 

deposition testimony he says just the opposite. In his deposition, 

he testified the bank never advised him of the day-to-day 

operations and management of his business. The District Court, 

relying on Wilson v. Westinghouse (8th Cir. 1988), 838 F.2d 286, 

found that Lee Stott's contradiction between his deposition 

testimony and his affidavit did not create a genuine issue of 

material fact. The court in Wilson stated: 

While the district courts must exercise extreme care not 

to take genuine issues of fact away from juries, (a 

party should not be allowed to create issues of 

credibility by contradicting his own earlier 

testimony' . . . Ambiguities and even conflicts in a 

deponent's testimony are generally matters for the jury 

to sort out, but a district court may grant summary where 

a party's sudden and unexplained revision of testimony 

creates an issue of fact where none existed before. 

Otherwise, any party could head off a summary judgment 

motion by supplementing previous depositions ad hoc with 

a new affidavit, and no case would ever be appropriate 

for summary judgment . 

Wilson, 838 F.2d at 289. 
We agree with the District Court. The plaintiffs can not make 

a material issue of fact, regarding the farm dealership, through 

the use of his own contradictory testimony. Furthermore, the 

record reveals the dealership franchise was terminated by MasseyFerguson prior to any alleged fraudulent action of the Bank. Thus, 

the Bank, despite Lee Stottls affidavit, could not have played a 

part in All West's loss of the Massey-Ferguson farm dealership. 

IV. 

Did the District Court err in finding that the Bank acted in 

bad faith in its contractual relationship with the plaintiffs? 

The plaintiffs contend that the District Court erred in 

finding that the Stottsl promissory notes were overdue. The Stotts 

contend that a special relationship existed between the Bank and 

themselves, and therefore the foreclosure constituted a breach of 

the covenant of good faith and fair dealing. Notwithstanding Lee 

Stottls affidavit, his deposition testimony reflects a strictly 

contractual banking relationship: 

Q. Can you tell me during your relationship with Mr. 

Simpkins whether or not he advised you on the day-today operations of the business? 

A. No, he never did. 

Q. Did he ever advise you as to long-term goals for the 

business? 

A. No. 

Q. Did he ever advise you as to capitalization of the 

business? 

A. No. 

Q. Ever advise you on management decisions in the business? 
A. No. 

Q. Did he take an interest in the business other than 

that of just a lender of money? 

A. Not really, no. 

Q. Did Mr. Simpkins ever take any part in the stocking 

of inventory and the decision integral to that? 

A. No. 

Q. And did he give you any advice as to the level of 

inventory that should be kept? 

A. No. 

Q. Did he ever advise you as to your expansion plans? 

A. No. 

The relationship of the parties in the summer of 1982 was 

governed by the promissory notes and security agreements. The 

notes provided that upon any default in payment, "The holder of 

this note may at its option without notice declare this note 

immediately due and payable for the entire principal hereof plus 

accrued interest . . . The notes, likewise, provide that any 

default under the provisions of any security agreement is a default 

under the notes. The record is clear that All West failed to make 

the payments. 

The security agreements executed by All West state in 

pertinent part: 

9. The occurrence of any of the following events shall 

constitute a Default: (a) failure of Borrower, or of any 

co-maker, indorser, surety or guarantor to pay when due 

any amount payable under any of the Secured Obligations: 

(b) failure to perform any agreement of Borrower 

contained herein; (c) any statement, representation, or 
warranty of Borrower made herein or any time furnished 

to the Bank is untrue in any respect as of the date made; 

(d) entry of any judgment against Borrower; (e) 

appointment of a receiver for, loss, substantial damage 

to, destruction, theft, sale or encumbrance to or of any 

portion of the Collateral, or the making of any levy, 

seizure, or attachment thereof; (f) Borrower becomes 

insolvent or unable to pay its debts as they mature or 

makes assignment for the benefit of its creditors or any 

proceeding is commenced by or against Borrower alleging 

that it is insolvent or unable to pay its debts as they 

mature; (g) death of any Borrower who is a natural person 

or of any partner of any Borrower which is a partnership; 

(h) dissolution, consolidation or merger, or transfer of 

a substantial part of the property of any Borrower which 

is a corporation or a partnership; (i) such a change 

in the condition or affairs (financial or otherwise) of 

Borrower or any co-maker, indorser, surety or guarantor 

of any of the Secured Obligations as in the opinion of 

the Bank impairs the Bank's security or increases its 

risk; or (j) the Bank deems itself insecure for any 

reason whatsoever. 

10. Whenever a Default shall exist, the Bank may, at its 

option and without demand or notice, declare all or any 

part of the Secured Obligations immediately due and 

payable, and the Bank may exercise, in addition to the 

rights and remedies granted hereby, all rights and 

remedies of a secured party under the Uniform Commercial 

Code or any other applicable law. The sheriff of any 

county wherein the Collateral or any part thereof is 

located is authorized at the request of the Bank and upon 

delivery of the security agreement, to take possession 

of the Collateral and sell the same as provided by Law. 

11. Borrower agrees, in the event of Default, to make 

the Collateral available to the Bank at a place or places 

acceptable to Bank, and to pay all costs of the Bank, 

including reasonable attorneys' fees, in the collection 

of any of the Secured Obligations and the enforcement of 

any of the Bank's rights. If any notification of 

intended disposition of any of the'collateral is required 

by law, such notification shall be deemed reasonably and 

properly given if mailed at least ten (10) days before 

such disposition, postage prepaid, addressed to the 

Borrower at the address shown below. 

First Bank by virtue of the provisions of the notes, security 

agreements and the actions of All West, had the right to declare 

the loans due and take possession of its collateral. Its actions 
not arbitrary, capricious or unreasonable. It loaned the money to 

All West and when All West defaulted and was also terminated by its 

major supplier, Massey-Ferguson, the Bank took action necessary to 

secure the pledged collateral. The Bank obtained the consent of 

All West and the Stotts to repossess the collateral. Stottsf claim 

that they do not remember signing the documents relinquishing the 

collateral or that they only signed blank pieces of paper are 

conclusory assertions not supported by the evidence. 

The relationship between plaintiffs and First Bank was 

contractual in nature and arose out of the Uniform Commercial Code. 

Under the Code, every contract or duty within the Code imposes an 

obligation of good faith in its performance or enforcement. 

Section 30-1-203, MCA. "Good faith" is defined in the Code as 

I1honesty in fact in the conduct or transaction concerned." Section 

30-1-201(19), MCA. The above facts, amply demonstrate the Bank 

dealt in good faith with All West Equipment and the Stotts. 

Under the law applicable at the time, "the nature and extent 

of an implied covenant of good faith and fair dealing is measured 

in a particular contract by the justifiable expectations of the 

parties. Where one party acts arbitrarily, capriciously or 

unreasonably, that conduct exceeds the justifiable expectations of 

the second party." Nicholson v. United Pacific Insurance Co. 

(1985), 219 Mont. 32, 41-42, 710 P.2d 1342, 1348. Clearly, under 

Nicolson, a breach of the implied covenant of good faith and fair 

dealing requires the breaching party to conduct itself in an 

impermissible activity, and in doing so, to act arbitrarily, 
capriciously or unreasonably. In this case, evidence of the 

implied breach is missing. The Bank here had the right to 

terminate its financing as long as it did so reasonably and not 

capriciously. Despite the plaintiffs bare allegations to the 

contrary, the Bank, from the evidence in this case, did act 

reasonably and not capriciously or arbitrary. 

We affirm. g A a,. &b2. 

Justice 4;4,cT 

ef Justice 

& Justices