No. 95-415

IN THE SUPREME COURT OF THE STATE OF MONTANA

1996

v.

ROBERT L. DEN HERDER,

Defendant and Respondent.

APPEAL FROM: District Court of the First Judicial District,

In and for the County of Lewis and Clark,

The Honorable Dorothy McCarter, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

John M. Morrison, Meloy & Morrison, Helena, Montana

For Respondent:

Linda M. Deola, Reynolds, Mot1 and Sherwood, Helena,

Montana

Filed:

Submitted on Briefs: February 29, 1996

Decided: July 22, 1996
Justice William E. Hunt, Sr. delivered the Opinion of the Court.

Orlan Wood, Appellant, filed a complaint against Robert Den

Herder, Respondent, in the First Judicial District Court, Lewis and

Clark County, for breach of contract. Respondent filed a motion to

dismiss which the District Court granted. Appellant appeals.

We reverse and remand.

Appellant raises the following issue:

Does an arbitration clause in a brokerage account agreement

preempt a breach of contract action by the client against the

broker on a subsequent promissory note that has nothing to do with

the brokerage agreement and contains its own dispute resolution

language?

FACTS

The facts, as set forth in the complaint, are as follows:

Appellant is a resident of Washington. In 1988, he retired from

the Boeing Corporation with an investment IRA worth approximately

$130,000. In early 1992, he decided to open an account with

Respondent, an investment broker and resident of Lewis and Clark

County, Montana.

Appellant sent Respondent $130,000 for the purpose of

purchasing low-risk, income-producing investments that would

provide for Appellant and his wife in their later years. After

opening the account with Respondent, Appellant selected four frontload mutual funds and invested $90,000. The remaining $40,000 was

placed in a money-market fund.
In March 1992, Respondent advised Appellant that $15,622 from

his money-market fund had been invested in Performance Nutrition.

Appellant told Respondent that he could not afford any risk, and

Respondent assured him that there would be no loss.

In April 1992, without Appellant's consent, Respondent began

to invest money from Appellant's account in the Remington Financial

Group, Inc. Respondent continued to invest in this company through

July 1992. The total investment in Remington reached approximately

$23,437. After learning of the purchase of the Remington stock,

Appellant contacted Respondent and, again, Respondent assured him

both verbally and in writing that he would not incur any losses.

By September 1993, the value of the Performance Nutrition

position had deteriorated to $2,872, and the value of the Remington

position was listed as unavailable.

In October 1993, Respondent confessed to Appellant the loss of

approximately $38,927 from his money market fund. According to the

complaint, in consideration for Appellant's continued business and

trust, and to avoid criminal and civil prosecution, Respondent

signed a promissory note. The note promises Respondent will pay

Appellant $38,927 plus interest and reasonable attorney fees and

costs. The due date for final payment on the note was set for

January 1, 1995.

Appellant filed this complaint for breach of contract in April

1995, after Respondent had failed to pay all or any portion of the

obligation assumed in the promissory note. Appellant requested the

following in damages:
(1) $38,927, plus interest at 12%, calculated from

October 2, 1993; -

(2) Attorney's fees;

(3) costs;

(4) For any such other relief as [the] court may deem

just and proper.

In response to Appellant's complaint, Respondent filed a

motion to dismiss. In the brief supporting the motion, Respondent

alleged that in April 1994, Appellant had filed a claim with the

National Association of Securities Dealers, Inc. (NASD)

Respondent argues that by filing that claim, Appellant had agreed

to "submit the present matter in controversy" to NASD for

arbitration.

Respondent attached a copy of the 1994 NASD arbitration

agreement to his motion to.dismiss. According to the agreement,

the named respondents include Terrence Murphy, Del Mar Securities,

Cowles Sabol & co., Inc., and Respondent. The matter in

controversy was then described by Appellant in a "Statement of the

Claim," which requested the following relief:

(1)

(2)

(3)

(4)

(5)

(6)

$40,000 returned for investments in high risk stock

of Performance Nutrition and Remington Financial,

(plus 12% interest beginning June 19921,

$7,000 returned for Specialized Mobil Radio Station

license in Reno, Nevada due to high risk. (plus 12%

interest beginning January 1993),

[This amount was paid by Schneider Securities, not

a party to this action in order to avoid

arbitration],

$10,000 or, whatever is required for attorney and

expert witness fees,

$20,000 compensatory award for mental anguish of

stress and worry created by these investments which

had lead [sic] to depressed feelings, nervousness

and an effect on my quality of life,

Return of the NASD filing fee of $650.00.

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Respondent contends that when Appellant agreed to submit his claim

to arbitration, he agreed to submit &l-J matters relating to his

account, including the promissory note.

Respondent further argued that, in 1991, Appellant signed a

brokerage-account agreement that containedarbitrationdisclosures.

Respondent alleges that Appellant waived his right to proceed with

an action in court when he signed that agreement.

The District Court granted Respondent's motion to dismiss in

August 1995. In doing so, the court concluded that it was

evident from the pleadings and briefs that both actions

are based on the same investments and the same amount of

money. To permit both actions would enable the Plaintiff

[Appellant] to recover twice for the same loss.

Appellant appeals.

DISCUSSION

On appeal, Appellant has framed the issue as to whether or not

an arbitration clause in a brokerage-account agreement preempts a

breach of contract action by the client against the broker on a

subsequent promissory note that has nothing to do with the

brokerage agreement and contains its own dispute resolution

language. It is apparent, however, that the issue, as stated by

Appellant, does not directly address the propriety of the District

Court's dismissal of the action. We therefore restate the issue on

appeal as whether the District Court erred in dismissing

Appellant's complaint.

Respondent's motion to dismiss does not specify which of the

enumerated defenses contained in Rule 12(b), M.R.Civ.P, he is

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claiming as grounds for dismissal. Nevertheless, since none of the

other defenses apply in this case, it appears that the motion was

presented for failure to state a claim, under Rule 12(b) (6),

M.R.Civ.P.

Ordinarily, we would review an appeal from a district court's

order granting a motion to dismiss based on the sufficiency of the

complaint. Busch v. Kammerer (1982), 200 Mont. 130, 132, 649 P.2d

1339, 1340 (citing Conley v. Gibson (1957), 355 U.S. 41, 45, 78

s.ct. 99, 102, 2 L.Ed.2d 80, 84). However, the court order

concluded that it was evident from the "pleadings and briefs" that

the promissory note and the arbitration actions were the same. In

order to come to this conclusion, the District Court must have

relied on allegations of arbitration found outside of the

complaint. There is no mention in appellant's complaint of the

arbitration agreement, and the agreement itself was submitted to

the court attached to Respondent's brief. If a court considers

matters outside of the pleadings on a Rule 12(b) (6) motion to

dismiss, that motion is constructively converted into a motion for

summary judgment. See Rule 12(b), M.R.Civ.P.

This Court reviews a district court's grant of summary

judgment decision de novo, and summary judgment is only proper when

there are no genuine issues of material fact and the moving party

is entitled to judgment as a matter of law. Rule 56(c),

M.R.Civ.P.; Eatinger v. Johnson (1994), 269 Mont. 99, 887 P.2d 231.

The facts, as alleged-by the Appellant, are that Respondent

signed a promissory note in 1993 in consideration for Appellant's

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continued business and trust, and to avoid criminal and/or civil

prosecution. This promissory note came due in January 1995, and

Respondent has failed to pay any portion of the assumed obligation.

On appeal, Respondent-does not contest the validity of the

promissory note. Instead, he argues that the 1994 agreement to

arbitrate necessarily includes any claim for breach of contract on

the promissory note. Therefore, Respondent asserts that it would

be inappropriate to allow Appellant to file the "same action" in

two separate forums.

We do not agree. The arbitration claim is expressly based

upon allegations that Respondent ignored the Appellant's investment

objectives and misled him while acting as his security broker. The

arbitration claim requests the return of the money given to

Respondent for investment and for attorney fees and experts

required in the securities arbitration and $20,000 for mental

anguish, stress and worry. He also requests the return of the NASD

filing fee.

The action before us is not here on the arbitration claim but

rather is based on a promissory note. Respondent agreed to pay

Appellant a certain amount of money with interest and costs in an

action to recover on the note. The complaint alleges the

promissory note was a contract between the parties. These

allegations were not controverted by Respondent. In his complaint,

Appellant seeks the amounts that were expressly assumed by the

Respondent on the promissory note.
The note has nothing to do with whether Respondent or anyone

else committed any improprieties prior to the execution of the

promissory note which is a matter to be dealt with in the

arbitration case. The brokerage agreement was signed July 18,

1991, and the promissory note was signed October 2, 1993, more than

two years after the brokerage account agreement.

Therefore, the arbitration matter in Washington state and the

breach of contract on the promissory note in Montana are separate

and distinct actions. As Appellant claims, the promissory note

case here is a simple contract action which turns upon the question

of whether the October 2, i993 promissory note is an enforceable

contract.

Accordingly, we conclude that, as the moving party, Respondent

was not entitled to dismissal as a matter of law pursuant to Rule

56(C), M.R.Civ.P. To the extent that any damages awarded in the

Montana contract action and in the Washington arbitration matter

are duplicative, double recovery can be avoided through an offset.

We take this opportunity to again remind the District Court

that prior to converting a motion to dismiss into a motion for

summary judgment, it is incumbent upon the District Court to notify

the parties of the court's intent. Rule 12(b), M.R.Civ.P. This

step is imperative to guarantee that the non-moving party

appreciates the consequences of the conversion. After notifying

the parties, the non-moving party has the option of coming forward

with affidavits to show that there are genuine issues for trial.
Gebhardt v. D.A. Davidson & Co. (19831, 203 Mont. 384, 391, 661

P.2d 855, 858.

Here, the District Court did not notify the parties of its

intent to convert the motion to dismiss into a motion for summary

judgment. Consequently, the appropriate procedures for a judgment

for dismissal were not followed for either Rule 12(b) (6) or Rule

56, M.R.Civ.P.

Summary judgment was not appropriate in this case because the

Respondent was not entitled to the ruling as a matter of law. We

reverse and remand for proceedings consistent with this opinion.

Reversed and remanded.

Justice

We Concur:

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