No. 88-336 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1989 

ED H. BLOME and SHIRLEY A. BLOME, 

Plaintiffs and Appellants, 

-vsFIRST NATIONAL BANK OF MILES CITY, 

Defendant and Respondent. 

APPEAL FROM: District Court of the Sixteenth Judicial District 

In and for the County of Custer, 

The Honorable Alfred B. Coate, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Michael P. Sand; Bozeman, Montana 

For Respondent: 

Thomas M. Monaghan, Lucas & Monaghan; Miles City, MT 

Filed: 

c-' ! 

I I 

Submitted on Briefs: January 26, I989 

Decided: July 18, 1989 

9 - 

Clerk 
Mr. Justice John C. Sheehy delivered the Opinion of the 

Court. 

E. H. Blome and Shirley A. Blome appeal from a summary 

judgment granted against them in the District Court, 

Sixteenth Judicial District, Custer County, and in favor of 

~irst National Bank in Miles City. We determine that the 

record discloses no genuine issue of material fact so as 

preclude summary judgment and so affirm the District Court. 

The issues on appeal as stated in the Blornes' brief are 

as follows: 

1. Whether summary judgment is proper where the record 

discloses genuine issues of material fact and that the moving 

party is not entitled to judgment as a matter of law. 

2. Whether the trier-of-fact could find that the Bank 

acted arbitrarily, unreasonably or capriciously and in 

violation of the Blomes' justifiable expectations that the 

Bank would loan them money for the purchase of feeder cattle 

and to pay on their Contract for Deed with Charles McRae and 

Jack Ross in December of 1982. 

3. Whether the trier-of-fact could find that the Bank 

acted arbitrarily, unreasonably or capriciously and in 

violation of the Blornes' justifiable expectations by failing 

to give the Blomes reasonable notice that their credit was in 

jeopardy prior to December 23, 1982. 

4. Whether the court could find that the Bank breached 

a contract with the Blomes when it refused to loan them money 

for the purchase of feeder cattle and to pay on the 

McRaeIRoss contract in December of 1982. 

5. Whether the trier-of-fact could find, assuming an 

absence of tortious.bad faith or breach of contract, that the 
Blomes relied, to their detriment, on a justifiable belief 

that the Bank had agreed to loan money for the purchase of 

feeder cattle and to pay on the McRae/Ross contract in 

December of 1982. 

The Blomes, who had been successful farmers near Dillon, 

Montana, for a number of years, in 1981 sold their farm for 

$360,000. That summer the Blomes approached Charles McRae, 

co-owner of a farming and feedlot operation near Hysham, 

Montana, as interested buyers. Eventually the Blomes entered 

into a contract for deed to purchase for $1,100,000 from 

Charles McRae and Jack Ross, the ranching and feedlot 

operation at Hysham. The Blomes agreed to make and did make 

payments totalling $300,000 on the contract, and agreed to 

make annual payments of $77,872 beginning in January of 1983 

until the amortized debt was paid. 

Charles McRae was a director of the First National Bank 

in Miles City. He suggested to the Blomes that they deal 

with the Bank for their financing. ~eginning on October 6, 

1981, and ending on December 23, 1982, the Bank loaned the 

Blomes money on 27 occasions, each time evidencing the loans 

through promissory notes. 

The memoranda appearing on the Bank records indicate the 

progress of the loan and the Blomes' new ranching operation. 

On March 17, 1982, the Bank learned that Ed Blome had made a 

crop sharing agreement on 330 acres of land with a 

neighboring owner. The Bank officers expressed some dismay 

that the agreement was made without their knowledge. 

Nonetheless, on July 21, 1982, their inspection report showed 

an excellent crop of corn being raised, with excess silage 

also on hand. On November 5, 1982, the Bank noted the 

purchase by the Blomes of a 1970 ~eterbilt truck and a 1966 

Wilson grain hopper at a total cost of $14,500. At this 

point the Bank expressed to Shirley Blome the displeasure of 
the officers that these purchases had been made without 

consultation with the Bank. 

The notation for December 23, 1982, showed that Ed Blome 

had approached the officers with a proposal to purchase 1,200 

head of calves to utilize his existing silage. Since the 

finances would have to come from the Bank, the officers had 

presented the proposal to the Bank's loan committee. The 

loan committee had decided not to allow the loan request and 

to decline renewal of loans for the entire upcoming year. So 

it was that on November 23, 1982, the Blomes were advised 

orally that the Bank would no longer be financing Blomes' 

operations. At that time their outstanding debt to the Bank 

amounted to $372,131.24. 

Because of the Bank's withdrawal of support, the Blomes 

were unable to meet the January, 1983, payment on their 

contract for purchase with Charles McRae and Jack Ross. The 

default resulted in a complete loss of the Blomes' investment 

in the ranch operation. 

The Bank did not commence foreclosure until after the 

1983 harvest, apparently with the consent and cooperation of 

the Blomes who aided the Bank in disposing of the various 

items of property and crops so that the debt as of the time 

of foreclosure had been reduced to $64,899.45 on November 29, 

1983. There is a notation in the Bank records that the 

cooperation of the Blomes helped Charles McRae, the Bank 

director, who would otherwise have had to farm the unit and 

who was in no position to do the farming. 

The Blomes filed their complaint against the Bank in the 

Yellowstone County District Court on October 15, 1986. A 

change of venue to the ~istrict Court of the Sixteenth 

Judicial District for Custer County was eventually granted. 

On December 23, 1987, First Bank moved for summary judgment 
which the District Court granted on May 12, 1988. his 

appeal followed. 

This case is similar to, and in many respects controlled 

by our decision in Shiplet v. ~irst security Bank of 

Livingston (1988), - Mont. - , 762 P.2d 242. There, with 

respect to the appropriate standard of review we stated: 

In order for summary judgment to issue, the moving 

party must show there is no genuine issue as to 

facts that are material in the light of the 

substantive principles entitling that party to 

judgment as a matter of law. If the moving party 

meets this burden, the non-moving party then has 

the burden of showing a genuine issue of material 

fact. These standards also apply to this Court 

when reviewing the grant or denial of summary 

judgment. Frigon v. orriso on ~aierle, Inc . (Mont . 1988), 760 P.2d 57, 45 St.Rep. 1344, and cases 

cited therein. 

762 P.2d at 244. 

The issues presented for review by the Blomes which we 

have quoted above, can be boiled down to these essential 

questions: 

(1) Was there ever an expressed or implied contract on 

the part of the Bank to continue to loan the Blomes money for 

their ranching operation, and to pay on their contract for 

deed with Charles McRae and Jack Ross? 

(2) Was there an implied covenant of good faith and 

fair dealing between the Blomes and the Bank which the Bank 

breached? 

(3) Did the Bank give reasonable notice of intention 

not to renew credit for the Blomes after December 23, 1982. 

(Arbitrary and capricious issue)? 

-- DID AN EXPRESS - OR IMPLIED CONTRACT EXIST? 

This caption subsumes issues 4 and 5 first above noted 

as presented by the Blomes for review. 
Blomes contended there was an agreement by the Bank to 

provide the Blomes financing for their operation - as long as 

they needed - it with repayment to be made when they -- were able 

- to with respect to the operation of the ranch and the 

payments on the contract for deed. 

Totally lacking before the District Court and here is 

any evidence of facts upon which an express contract could be 

based. The loans by the Bank were evidenced by promissory 

notes signed by the Blomes; the memoranda in the Bank records 

are simply journal reports of the progress of the ranching 

operations and the prospects of payment for the loans; no 

oral representations by any bank officers may be found which 

would bind the Bank to perform as the Blomes contend. In 

other words in this case there can be no express contract 

upon which the Blomes can base a cause of action. 

The same problem attends the contention of the Blomes 

that there was an implied contract between them and the Bank. 

Under 5 28-2-103, MCA, an implied contract is one the 

existence and terms of which are manifested by conduct. The 

evidence here is that from the time the Blomes entered into 

financing arrangements with the Bank, until the arrangements 

were terminated on December 23, 1982, their relationship was 

one of an ordinary bank-customer . Each time the Blomes 

needed financing, the Bank reviewed their progress, 

determined their financing needs, and in accordance therewith 

issued loans based on promissory notes on a short term basis. 

Nothing in the evidence suggests anything more than a day-today or month-to-month financing arrangement, based upon a 

review of the financial condition of the borrowers at the 

time the notes were executed and delivered. Particularly, 

there is no indication in the Bank memoranda or any oral 

evidence that the Bank did not expect the notes to be paid 

when due nor any agreement outside the notes for loans to the 
Blomes when they needed them, and without regard to the 

necessity of repayment. 

Moreover, the claimed existence of an implied contract 

between the parties runs into legal questions which cannot be 

answered here on the facts. First, an implied contract the 

performance of which exceeded one year would run afoul of the 

statute of frauds, 5 28-2-903, MCA. Secondly, the language 

of the notes in each case is clear and explicit as to due 

dates and payment. The claimed implied contract would have 

the effect of varying the terms of written instruments. So 

we said in Shiplet, supra: 

As to any oral representations by the Bank that the 

application was in fact a contract, the District 

Court quoted language from our decision in ~irst 

National Montana Bank of Missoula v. McGuiness 

(Mont. 1985), 705 P.2d 579, 42 St.Rep. 288: 

[Elvidence of prior oral agreements is not 

admissible for the purpose of altering 

subsequent written agreements dealing with the 

same subjects, and that the prior oral 

agreements and the written agreement will 

merge into the subsequent written agreement 

unless they are distinct and can stand 

independently of one another. 705 P.2d at 

584. 

Under the doctrine of merger as enunciated in 

McGuiness, any oral representations made by the 

Bank merged wlth the terms of the note, which then 

represented the contract reached between these two 

parties. 

As a matter of law therefore, neither an express nor 

implied contract, nor evidence tending to support the same, 

was presented to the ~istrict Court so as to preclude summary 

judgment. We find no error on these issues. 

DID THE BANK BREACH AN IMPLIED COVENANT 
OF GOOD FAITH AND FAIR DEALING? 

Under the Uniform Commercial 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 "honesty in fact in 

the conduct or transaction concerned." Section 30-1-201(19), 

MCA . 

The duty of good faith may not be disclaimed by 

agreement between the parties, though their agreement may 

determine the standards by which good faith is to be measured 

if the standards are not manifestly unreasonable. Section 

30-1-102 (3) , MCA. 

We may assume then that there did exist between the 

parties, mutually, and to each other, because the instruments 

involved here were related to the uniform commercial Code, a 

duty of good faith in their conduct or performance. This 

leads us to the next issue raised by the Blomes. 

DID THE BANK GIVE REASONABLE NOTICE OF ITS INTENTION NOT 

TO RENEW ITS FINANCING TO THE BLOMES OR OTHERWISE ACT 

ARBITRARILY OR CAPRICIOUSLY? 

 his caption subsumes issues 2 and 3 first noted above 

by the Blomes as proper for review. 

Essentially, the Blomes are claiming that the conduct of 

the Bank gave rise to their justifiable expectations that the 

Bank would continue to loan them money for the purchase of 

feeder cattle, and to pay on their contract for deed. Blomes 

further contend that they were entitled to reasonable notice 

that their credit was in jeopardy prior to December 23, 1982. 

In Nicholson v. United pacific Insurance Company (1985), 

- Mont. - , 710 P.2d 1342, this Court took pains to "more 

fully articulate our conception of what has been termed 

loosely as 'bad faith,' but has termed more accurately as the 
tort of breach of the implied covenant of good faith and fair 

dealing." There this Court stated: 

. . . [wle agree with the statement in Quigley, 

supra, [Quigley v. Pet, Inc. (1984) 162 Cal.App.3rd 

223, 208 Cal.Reptr. 3941 that the tort resulting 

from this breach depends on some impermissible 

activity. The Montana cases discussed above focus 

on the action of the breaching party in the 

relationship to find a breach of the implied 

covenant, not just the existence of a breach of 

contract. 

. . . But whether performing or breaching, each 

party has a justifiable expectation that the other 

party will act as a reasonable person (citing a 

case). 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 expectation of the 

second party. The second party then should be 

compensated for damages resulting from the other's 

culpable conduct. 

Nicholson, 710 P.2d at 1348. 

Clearly, under Nicholson, a breach of implied covenant 

of good faith and fair dealing requires the breaching party 

to conduct itself in an impermissible activity, and in so 

doing, to act arbitrarily or capriciously. In the case now 

before us, evidence of such a breach of implied covenant is 

totally lacking. Certainly the Bank here, analyzing the 

financial situation of the Blomes, had a right to terminate 

its financing as long as it did so reasonably and not 

capriciously. The Bank, from the evidence here, did act 

reasonably and not capriciously or arbitrarily. As to notice 

of its intention not to renew the financing, there is no 

common law or statutory duty to give notice. It further 

appears here that the Bank gave notice to the Blomes when 
they applied to the Bank for additional financing to purchase 

a large herd of feeder cattle. The Bank officials decided 

that they had gone as far as they could and it was time to 

call a halt to their financing of the operation. That was a 

business decision made by the Bank which it fully had a right 

to make. Again, this point was covered in Shiplet, supra: 

The Shiplets' fourth count alleged breach of the 

implied covenant of good faith and fair dealing. 

The ~istrict Court's ruling cited authority from 

this Court requiring that a breach of contract must 

be a result of some "impermissible activity" before 

the breaching party can be held to have breached 

the implied covenant of good faith and fair 

dealing. (Citing cases. ) 

The Shiplets seek to distinguish this authority by 

noting in Nicholson, we held a breach of contract 

was not a prerequisite to'a breach of the covenant, 

because the implied covenant of good faith is not 

an oblisation arisins from the contract itself. 

~icholso~, 710 P.2d at 1348. while this is true, 

we also stated the obligation imposed by the 

covenant is to act reasonably. Under this 

standard, we have held the 'minimal requirement' 

for breach of the covenant is action by the 

defendant that is 'arbitrary, capricious or 

unreasonable, and exceeded plaintiffs' justifiable 

expectation [that the defendant act reasonably].' 

Noonan, 740 P.2d at 635. 

In this case the Shiplets had a justifiable 

expectation that the Bank would act reasonably by 

lending money on the terms agreed upon in the 

notes. As we found above, this was done. The 

evidence induced by the Shiplets fails to show 

arbitrary or unreasonable conduct by the Bank. The 

District Court was correct in granting summary 

judgment. 

CONCLUSION 

The first issue presented by the Blomes for review is 

that summary judgment is not proper where the record 

discloses genuine issues of material fact. There simply is 
no evidence adduced by the Blomes here that would indicate 

either an express or an implied contract, or a breach of the 

implied covenant of good faith imposed on transactions under 

the Uniform Commericial Code. The plight of the Blomes in 

this case, who lost the entire proceeds of their former 

farming operation in Dillon, is regrettable, but it cannot be 

said in this case that the Bank is legally responsible for 

any of the losses sustained by the Blomes. There is no 

genuine issue of material fact presented in this case, and 

the decision of the District Court to grant summary judgment 

in favor of the Bank is herebv affirmed. 

Mr. Justice L. C. Gulbrandson specially concurring. 

I concur with the result of the foregoing opinion but not 

with all that is expressed therein. 

///& Justice I