No. 90-131 IN THE SUPREME COURT OF THE STATE OF MONTANA

LEE STOTT and BESSIE STOTT,andALLWEST 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, Judgepresiding.

COUNSEL OF RECORD: #or

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

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### -- rl) CVJ ‘. ) Barry G. OIConnell,Moore, O'Connell, Refling & c,>

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## . rC Submitted: July 13, 1990

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

This legal malpractice action was brought by All West Equipment, Lee Stott,Bessie Stott,andRick Stott. Theplaintiffs 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 StottsandAll West Equipment, with different counsel, filed a complaint in the FourthJudicial 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 amotion to dismiss,whichwas denied by the District Court. When theDistrictCourt denied First Bank'smotion 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 judgmentaction. Confrontedwith thedismissal of their second action,plaintiffs instituted themalpractice 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 earlierrepresentationof theplaintiffs inFirstBank's deficiency judgment action against the plaintiffs.All West Equipment was incorporated in 1971. Lee and Bessie Stott were officers ofAll West Equipmentand 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 loanswere originallymade toAll West by FirstBank. A number of Security agreementswere entered into between First Bank andAll West to perfect First Bank's position. The Stotts also executed a guaranty with First Bank. Furthermore, a llCorporate Authorization Resolutionwwas executed identifying Lee and Bessie Stotts as corporateofficers 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,theparties reducedAll West's indebtednessto two demand notes. Specifically, First Bank loaned toAll 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 StottsandAll West defaulted onboth of thesenotes. The Bank also discovered that All West was dealing out-of-trust with Massey-Ferguson. As therecord reflects,theout-of-trust dealings

were discovered on October 15, 1982. Later, possession of thecollateral was turned over to First Bank, by a written instrument dated October 20, 1982,and signedby Lee and Rick Stott onbehalf of All West Equipment. The assets of All West, pledged as collateral, were sold at

a public and private sale through GardenerAuction on November 13, 1982. As a result of the sales,almost $31,000 was applied toAll 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, againstAll West Equipment and Lee and Bessie Stott, to collect deficiencies owing after the sale of the collateral under the promissory notes and guaranty. Eventually,thedeficiency action between First Bank and All West and the Stotts was settledwithout trial and a stipulation and order of dismissal with prejudicewas filed onJanuary 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 disclosesno genuine issue of material fact, the burden of proof shifts to the party opposing the motion 

### topresent 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 thebriefs but has an affirmative duty to respond by affidavits or sworn testimony with specific facts that show a genuine factual issueexist. Mere conclusoryor 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. Ina legal malpractice action,thecomplainingparty, in order to prevail: [Mlust initially establishthe existence of an attorneyclient relationship. The plaintiff must then establish thattheactsconstitutingthenegligence 

# . . .occurred, proximately causing damages to theplaintiff. The final requirement for the plaintiff is the need to establish, Iv[tlhat 'butforvsuch negligence

# . .. the clientwould havebeen successful intheprosecution or defenseof the action. Lorash v. Epstein (1989), 236 Mont. 21, 24, 767 P.2d 1335, 1337; citingChristyv. Saliterman (1970), 228Minn. 144,179N.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 "suitwithin 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 lgtheplaintiffshave failed to meet theburden that they couldhaveprevailed in any counterclaim against First Bank. The legal malpractice test of Lorash has not been met. We agree with the District Courtgsholding that the plaintiffsgclaimsagainsttheBankwouldhavenotbeen 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 properparties, inthe former liabilityaction, nor could theyhave personally asserted a claim for damages in the dismissed action. The District Court, relying on our holdings inMoats Trucking Co., Inc. v. Gallatin Dairies,Inc. (1988), 231Mont. 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 Stottsgcorporation. The District Court is correct. This issue is controlled by our holdings in Moats and Bottrell. InMoats, 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 corporationgscause of action:



# . . .As a general rule stockholders may not sue upon a cause of actionbelonging to their corporation whether in their own names or in the name of the corporation itself. InMalcolm, this Court addressed for the first time the issue of whether individual shareholders who control allof 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 shareholdersdo 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 theDistrict Courtproperly noted this contentionhas been rejected by this Court in Bottrell. In Bottrell, individual shareholders asserted they should be entitled to individual compensatory damagesbased on the fact they were required to sign personal guarantees of the corporatedebt. We affirmedourholding in Moats, and found the cause of action belonging to the Corporation and not the shareholders. Bottrell, 773 P.2d at 709-

Recently, inWolstad v. Northwest Bank (Mont. 1989), 783 P.2d 1325, 1328, 46 St.Rep. 2160, 2164, we reiterated ourprior 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 negligentmisrepresentation 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 $68,732.30is 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. Topermit this litigation to go forward as to Lee and Bessie Stott, is topermit 'Ireversepiercing of the corporateveil,I1thus allowing the shareholders "to invokethe corporate entityonly 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 entitlingthemtoproceed 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 theabove reasons, thisCourt is compelled to conclude the Stotts are estopped from challengingAll 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 complywith the fictitiousname statute (130-13-203,MCA), and are thusbarred frommaintaining a suit or actionby 5 30-13-215,MCA. We agree with the District Court.

Did the District Court errby 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,aplaintiff in this actionwas not 

### aparty 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 thedismissed actionwas damages for the loss of the Massey-Ferguson farm equipment dealership, which plaintiffs attributed to the wrongful acts of First Bank. To support their contentiontheplaintiffs rely upon the affidavitof Lee Stott. Inhis affidavit Lee Stott swearsthat 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 Bankwould continue to finance our familybusiness." Inhis prior depositiontestimonyhe says justthe opposite. Inhis 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 thedistrict courtsmust exercise extreme carenot 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 sortout,but a district courtmay 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 agreewith the DistrictCourt. Theplaintiffs cannotmake

a material issue of fact, regarding the farm dealership, through the use of his own contradictory testimony. Furthermore, the record reveals the dealership franchisewas terminated by MasseyFergusonprior to any alleged fraudulent action of the Bank. Thus, the Bank, despite Lee Stottlsaffidavit, 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 Stottslpromissorynoteswere 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 Stottlsaffidavit, 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 adviseyou 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 theprovisions of any security agreement is adefault under thenotes. The record is clear thatAll West failed tomake 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, orwarranty of Borrower made herein or any time furnished totheBank isuntrue inany respect as of the datemade;

(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 thebenefit 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 anyBorrowerwho is anatural person or of anypartner of any Borrowerwhich is apartnership;

(h)dissolution, consolidationor merger, or transferof a substantial part of theproperty 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 Bankmay, 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 remediesof a securedparty under theUniform Commercial Code or any other applicable law. The sheriff of any county wherein the Collateral or any part thereof is located is authorizedat the request of theBank 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 theCollateral availableto theBank at aplace orplaces acceptable to Bank, and to pay all costs of the Bank, including reasonable attorneys' fees, in the collection of any of the Secured Obligationsand the enforcement of any of the Bank's rights. If any notification of intended disposition of anyof the'collateralisrequired 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 Bankby virtue of theprovisions 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 actionsnot arbitrary,capricious or unreasonable. It loaned themoney to All West andwhenAll West defaulted andwas also terminatedby 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 Stottsto repossessthe collateral. Stottsfclaim 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 innatureand aroseout of theUniform 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 I1honestyin fact inthe conduct or transactionconcerned." 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, "thenature and extent of an implied covenant of good faith and fair dealing ismeasured 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. 

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