No. 89-239 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

COLES DEPARTMENT STORE, 

plaintiff and Appellant, 

-vsFIRST BANK (N.A.)-BILLINGS and 

FIRST BANK SYSTEM, INC., 

Defendants and Respondents. 

APPEAL FROM: District Court of the Thirteenth Judicial ~istrict, 

In and for the County of Yellowstone, 

The Honorable Robert Holmstrom, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

A. Clifford Edwards; Anderson, Edwards & Molloy, 

Billings, Montana 

For Respondent : 

Gerald B. Murphy and T. Thomas Singer; Moulton, 

 el ling ham, Longo & Mather, Billings, Montana 

Submitted on Briefs: Sept. 27, 1989 

Decided: December 12, 1989 
Chief Justice J. A. Turnage delivered the Opinion of the Court. 

Coles Department Store (Coles) appeals from summary judgment 

granted to defendants First Bank (N.A.)-Billings and First Bank 

System, Inc. The District Court for the Thirteenth Judicial 

District, Yellowstone County, ruled that Coles had failed to make 

a case that the defendants1 actions, which Coles claimed led to the 

closing of the store, were wrongful under any theory pled. We 

affirm. 

The issues are: 

1. Did the District Court err in granting judgment to 

defendants on Colest claim that defendants breached a fiduciary 

duty they owed to Coles? 

2. Did the District Court err when it found that defendants' 

actions did not amount to actual or constructive fraud? 

3. Did the District Court err in entering judgment in favor 

of defendants on Colesl claim of breach of the statutory obligation 

of good faith and fair dealing? 

4. Did the District Court err in granting judgment in favor 

of defendants on Colesl claim of breach of the implied covenant of 

good faith and fair dealing? 

Plaintiff Coles was a corporation owned by two brothers, Ron 

and Bruce Simon, and, before that, by their father. The corporation operated a retail clothing store in downtown Billings for 

approximately fifty years. During all that time, Coles banked with 

defendants or their predecessor. 

For a number of years, Colesl account at defendant bank was 

handled by Tom Chakos, an old fraternity brother of Ron Simon. 

Colesl practice for some time had been to execute a separate 

ninety-day note each time it needed to finance operating expenses. 

Thus, it would often have several notes outstanding with defendants. In the fall of 1984, Chakos suggested that, instead, one 
master note establishing a line of credit be used. Ron and Bruce 

Simon executed a $450,000 line of credit note with a due date of 

March 31, 1985. At the same time, the Simons had discussions with 

Chakos about the need to reduce the expenses of Coles. The store 

had lost money in six of the last eight years, losing in excess of 

$53,000 in fiscal year 1983 and $81,000 in fiscal year 1984. 

In March or early April 1985, Ron Simon, who was on the Board 

of Directors of the defendant bank, learned that Chakos was being 

transferred to another bank and would no longer be handling Colesl 

credit. Ron Simon requested that Greg Lovell, a commercial loan 

officer, be assigned to the account. 

Colesl financial report for the fiscal year ending January 

1985 became available in March. It showed losses for that year in 

excess of $152,000, which reduced the shareholders' equity to 

$131,000. On April 9, 1985, Greg Lovell and Ron Simon met to 

discuss Coles' credit. The meeting lasted for several hours. 

Lovell advised Ron Simon that he did not feel that the bank would 

continue financing Coles beyond September of 1985 unless additional 

capital was invested in the corporation or additional collateral, 

including mortgages on Ron and Bruce Simon's homes, was provided. 

In spite of Ron Simon's insistence that the bank's valuation of the 

store's assets was too low and that the Simons were implementing 

steps to strengthen the store's financial position, Lovell also 

suggested that the best thing might be to liquidate Coles. 

The day after the meeting, which he stated in a deposition 

left him Ndevastated,ll Ron Simon went on a scheduled buying trip 

to California. When he returned, Coles entered into a promissory 

note with defendants on a $360,000 line of credit due September 10, 

1985. Coles also began liquidating its assets. By August, the 

defendants had been paid off and Coles' name, fixtures, inventory, 

and accounts had been sold. 
This action was filed in July 1987. During discovery, the 

Simons learned of the existence of an "Action Plan," dated February 

1985 and prepared by Tom Chakos. The l1Action Plan" set out a time 

frame for the liquidation of Coles by September 1985. Coles has 

alleged breach of the implied covenant of good faith and fair 

dealing, breach of fiduciary duty, negligence, breach of the 

obligation of good faith under the Uniform Commercial Code, fraud 

and constructive fraud. Defendants each moved separately for 

summary judgment. After a hearing, the District Court granted both 

motions with an order and extensive memorandum. 

Did the District Court err in granting judgment to defendants 

on Coles' claim that defendants breached a fiduciary duty they owed 

to Coles? 

This Court has set forth the following standard which 

determines whether a fiduciary duty may be said to exist between 

a bank and its debtor: 

A fiduciary relationship exists between a bank 

and its debtor only if special circumstances 

indicate exclusive and repeated dealings with 

the Bank. Pulse v. North American Land Title 

Co. of Montana (1985), 218 Mont. 275, 707 P.2d 

1105, 42 St.Rep. 1578. This Court has recently interpreted the Pulse case as requiring a 

bank to act as a financial advisor in some 

capacity, other than that common in the usual 

arms-length debtor/creditor relationship, in 

addition to requiring a long history of dealings with the bank, to establish a fiduciary 

relationship. Simmons v. Jenkins (Mont. 1988), 

750 P.2d 1067, 1070, 45 St.Rep. 328, 331. 

First Bank (N.A.) Billings v. Clark (Mont. 1989), 771 P.2d 84, 92, 

In the present case, the District Court conceded that there 

existed a long-term relationship between Coles and defendants. But 

it found no evidence that the bank acted as a financial advisor lvin 
some capacity other than that common to a usual arms-length 

debtor/creditor relationship." Coles argues on appeal that Tom 

Chakos acted as a financial advisor to the Simons when he suggested 

that Coles use one master note for its borrowing rather than a 

series of notes. Coles also points out that it was not represented 

by attorneys during Ron Simon's discussion with defendant bank 

regarding the operation of the store. 

The depositions on file reveal that both Ron and Bruce Simon 

possess advanced degrees in management and business. The brothers 

had managed Coles well in excess of ten years. The depositions 

also indicate that, during that entire time, decisions about the 

financial management of Coles were theirs with nominal, if any, 

input from bank representatives. The only time the bank could be 

said to have stepped in on financial management of Coles is when 

it stated its intent to cut off Coles' credit. Even then, though, 

the timing and manner of liquidation of the store was controlled 

by the Simons, not by the bank. We conclude that the District 

Court did not err in granting judgment to defendants on the claim 

of breach of a fiduciary duty. 

I1 

Did the District Court err when it found that defendants1 

actions did not amount to actual or constructive fraud? 

The nine elements of fraud are: 

1. a representation; 

its falsity; 

3. its materiality; 

4. the speaker's knowledge of its falsity or 

ignorance of its truth; 

5. the speaker's intent that it should be relied 

upon ; 
6. the hearer's ignorance of the falsity of the 

representation; 

7. the hearer's reliance upon the representation; 

8. the hearerts right to rely upon the representation; and 

9. consequent and proximate injury caused by 

reliance upon the representation. 

McGregor v. Mommer (1986), 220 Mont. 98, 105, 714 P.2d 536, 540. 

Coles claims that defendantst failure to disclose the llAction 

Planw was fraudulent. But as defendants point out, the Simons were 

aware that their store was losing money and had talked to Tom 

Chakos about the need to cut costs. It would be poor banking 

practice if the bank had been concerned about Coles' losses. 

As a member of the bank's Board of Directors, Ron Simon was aware 

of proper banking practice. The essential element of the "Action 

Plann--that the bank no longer wished to extend credit to Coles 

without additional security--was disclosed to Ron Simon in the 

April 9, 1985, meeting with Greg Lovell. We conclude that there 

is no evidence of a false material representation relating to the 

alleged failure to disclose the "Action Plan." 

Coles claims that Greg Lovell's statements at the April 9, 

1985, meeting with Ron Simon were fraudulent. There were certainly 

representations made at that time, but Coles has produced nothing 

to indicate that Greg Lovell's representations about the bank's 

reluctance to continue financing Coles were false. Because the 

element "falsity of the representation" has not been shown, Coles 

has failed to show that Lovell's statements at that meeting were 

fraudulent. 

Coles also asserts that defendantst failure to disclose the 

"Action Plan" to the Simon brothers constituted constructive fraud 

because of the special and fiduciary relationship between the 
parties. As discussed under Issue I, Coles did not present 

adequate evidence to show a fiduciary relationship. We conclude 

that Coles has not shown a special relationship between the parties 

which would have required earlier disclosure of defendants' 

internal memorandum (the "Action Plan"). We hold that the bank had 

no duty to disclose to Coles any more any sooner than it did. 

In sum, we conclude that the District Court did not err when 

it found that defendant's actions did not amount to actual or 

constructive fraud. 

I11 

Did the District Court err in entering judgment in favor of 

defendants on Colest claim of breach of the statutory obligation 

of good faith and fair dealing? 

The claim of breach of a statutory duty of good faith and fair 

dealing is made under 5 30-1-203, MCA, which is part of the Uniform 

Commercial Code (UCC). That statute provides: 

Obligation of good faith. Every contract or 

duty within this code imposes an obligation of 

good faith in its performance or enforcement. 

It is undisputed that Colest promissory notes to defendants are 

controlled by the UCC. 

The UCC defines good faith as "honesty in fact." Section 30- 

1-201 (19) , MCA. This Court has defined the obligation of good 

faith under the UCC as faithfully carrying out the terms of the 

agreement. Shiplet v. First Sec. Bank of Livingston (Mont. 1988), 

762 P.2d 242, 246, 45 St.Rep. 1816, 1820. 

Coles argues that defendantst failure to disclose the "Action 

Plantt breached the terms of defendants' agreements with Coles. 

However, the agreements between the parties which are covered by 

the UCC are the written promissory notes. There has been no 

allegation that defendants have failed to faithfully carry out the 

terms of those notes. That was the obligation of good faith under 
the UCC. We conclude that the District Court did not err in 

entering judgment for defendants on Colesl claim of breach of the 

statutory obligation of good faith and fair dealing. 

IV 

Did the District Court err in granting judgment in favor of 

defendants on Colesv claim of breach of the implied covenant of 

good faith and fair dealing? 

The District Court held that "the tort of breach of the 

implied covenant of good faith and fair dealing is related to an 

underlying breach of contract without which, it does not exist. 

. . . Here, the Court has determined that the covenant did not 

exist because there was no breach of an underlying contract.Ir This 

Court has held that where the relationship between the parties is 

entirely contractual, there must be an initial finding of breach 

of contract before a claim of breach of the covenant of good faith 

and fair dealing may be considered. Montana Bank of Circle v. 

Meyers & Son (Mont. 1989), 769 P.2d 1208, 1214, 46 St.Rep. 324, 

330-31; Nordlund v. School Dist. No. 14 (1987), 227 Mont. 402, 406, 

738 P.2d 1299, 1302. Coles, however, argues that in this case the 

existence of the tort is an independent factual question which does 

not require an initial claim of breach of contract, so that summary 

judgment on this issue was improper. 

A breach of the implied covenant of good faith and fair 

dealing requires the breaching party to arbitrarily or capriciously 

engage in an impermissible activity. Blome v. First Nat. Bank of 

Miles City (Mont. 1989), 776 P.2d 525, 529, 46 St.Rep. 1186, 1191. 

The nature and extent of the covenant is "measured in a particular 

contract by the justifiable expectations of the parties." Nicholson v. United Pacific Ins. Co. (1985), 219 Mont. 32, 41-42, 710 

P.2d 1342, 1348. 
The Simon brothers were well aware of the declining financial 

position of Coles, and in fact had discussed the need to make 

changes with Tom Chakos prior to February of 1985. We conclude 

that they had no justifiable expectation that defendants would 

continue to loan money to Coles indefinitely. Nor has Coles shown 

that defendants acted arbitrarily or capriciously. The development 

of the "Action Planvt was nothing less than prudent banking policy 

in light of the accelerating financial deterioration of the 

borrower over a period of several years. Moreover, defendants gave 

notice to Coles almost six months in advance of the date they 

intended to stop extending credit to the store. In the absence of 

a claim of breach of contract we conclude that no claim of breach 

of the implied covenant of good faith and fair dealing lies. 

The closing of Coles was undoubtedly a blow to the Simons and 

to downtown Billings. However, we agree with the District Court 

that Coles has not presented a case under which defendants may be 

held responsible for that event. We therefore affirm the summary 

judgment for defendants. 

We concur: 

n A 

Justices 
~ustice William E. Hunt, Sr., dissenting: 

I dissent. The ~istrict Court incorrectly concluded. 

that a breach of the implied covenant of good faith and fair 

dealing depends on the existence of an underlying breach of 

contract. his is not so. The existence of the tort of bad 

faith is a question separate and independent from the 

question of breach of contract. As this Court pointed out in 

~icholson v. United pacific Insurance Co. (1985), 219 Mont. 

32, 41-42, 710 P.2d 1342, 1348: 

But whether performing or breaching, each party has 

a justifiable expectation that the other will act 

as a reasonable person. [Citation omitted.] The 

nature and extent of an implied covenant of good 

faith and fair dealing is measured in a particular 

contract by the j.ustif iable expectations of the 

parties. Where one party acts arbitrarily, 

capriciously or unreasonably, that conduct exceeds 

the justifiable expectations of the second party. 

The second party then should be compensated for 

damages resulting from the others c.ulpable conduct. 

In Shiplet v. First Sec. Bank (Mont. 19881, 762 P.2d 

242, 246, 45 St.Rep. 1816, 1821, we reaffirmed this rule, 

noting that a breach of contract is not a prerequisite to a 

breach of the covenant of good faith and fair dealing. 

~7hile the existence of a duty to act in good faith is a 

question of law which may be determined by a district court 

on summary judgment, the existence of a breach of the duty is 

a question of fact and is not properly decided on summary 

judgment. Simmons v. ~enkins (Mont. 1988), 750 P.2d 1067, 

1071, 45 St.Rep. 328, 332. In this case, defendants had an 

obligation to act reasonably and in good faith to its 

longstanding customer, Coles Department Store. ater rial 
questions of fact indicate that this duty may have been 

breached. Summary judgment was improper. 

I would reverse the ~istrict Court.