No. 88-336

INTHE SUPREME COURTOF THE STATEOF MONTANA 1989

ED H. BLOME and SHIRLEYA. BLOME, Plaintiffs andAppellants,

-vsFIRSTNATIONAL BANK OF MILES CITY, Defendantand Respondent.

APPEAL FROM: District Courtof the SixteenthJudicial District In and for the County of Custer, The HonorableAlfred B. Coate, Judgepresiding.

COUNSELOF RECORD:

ForAppellant: Michael P. Sand; Bozeman,Montana

For Respondent:
ThomasM. Monaghan,Lucas & Monaghan; Miles City,MT

Filed: c-' ! I I Submittedon Briefs: January 26, I989 Decided: July 18, 1989

9

### - ClerkMr. Justice John C. Sheehy delivered the Opinion of the Court.

E. H. Blome and ShirleyA. 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 issuesofmaterial fact and that themoving party isnot entitled to judgment as amatter 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 themmoney for the purchase of feeder cattle and to pay on their Contract for Deed with CharlesMcRae and JackRoss in Decemberof 1982. 3. Whether the trier-of-fact could find that the Bank acted arbitrarily, unreasonably or capriciously and in violation of the Blornes' justifiable expectationsby failing to give the Blomes reasonablenotice that their creditwas in jeopardyprior to December 23, 1982. 

### 4. Whether the court could find that the Bank breached a contractwith the Blomes when itrefused 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.badfaithor breach of contract, that theBlomes 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 successfulfarmersnear 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 interestedbuyers. 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 tomake and did make payments totalling $300,000 on the contract, and agreed to make annual payments of $77,872beginning in January of 1983 until the amortized debt waspaid. Charles McRae was a director of the FirstNational Bank in Miles City. He suggested to the Blomes that they deal with the Bank for their financing. ~eginningon October 

### 6, 1981, and ending on December 23, 1982, the Bank loaned the Blomes money on 27 occasions,each time evidencing the loans throughpromissory notes. Thememoranda appearingon 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 inspectionreport 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 ofthe officers that these purchases had been made without consultationwith theBank. The notation forDecember 23, 1982,showed thatEd Blome had approached the officerswith aproposal 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 todecline renewalof loans for the entireupcoming 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 foreclosurehad 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 whowas 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 ~istrictCourt of the Sixteenth Judicial District for Custer County was eventually granted. On December 23, 1987, First Bank moved for summary judgmentwhich the District Court granted on May 12, 1988. 

### his appeal followed. This case is similarto,and inmany respects controlled by our decision in Shiplet v. ~irstsecurity 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, themoving 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. Frigonv. 

### orriso on ~aierle, Inc

# . (Mont

# . 1988), 760 P.2d 57, 45 St.Rep. 1344, and cases cited therein.
762P.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 theBlomes money for their ranching operation, and to pay on their contract for deedwith CharlesMcRae 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.

(Arbitraryand capricious issue)? DID

### AN EXPRESSOR IMPLIED CONTRACTEXIST? 

### -- - This caption subsumes issues 4 and 5 first above noted

aspresented by theBlomes for review.Blomes contended there was an agreement by the Bank to provide the Blomes financing for their operation 

### - as long

# as they needed - itwith repayment to be made when they 

### -- were able to with respect to the operation of the ranch and the - payments on the contract fordeed. Totally lacking before the District Court and here is any evidence of facts uponwhich an express contractcould be based. The loans by the Bank were evidenced by promissory notes signed by the Blomes; thememoranda 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 representationsby any bank officersmay be foundwhich 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 canbase a causeof action. The same problem attends the contention of the Blomes that therewas an implied contractbetween 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 relationshipwas
one of an ordinary bank-customer

# . Each time the Blomes needed financing, the Bank reviewed their progress, determined their financingneeds,and in accordance therewith issued loansbased onpromissory notes on a short termbasis. Nothing in the evidence suggests anything more than aday-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 agreementoutside the notes for loans to theBlomes when they needed them, and without regard to the necessity of repayment. Moreover, the claimed existence of an implied contract between theparties runs into legalquestionswhich cannotbe answered here on the facts. First, an implied contract the performance of which exceeded oneyear would run afoulof 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 representationsby 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), 705P.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,
waspresented to the ~istrict Court so as to preclude summary judgment. We find no error on these issues. DID THEBANK BREACHAN IMPLIED COVENANTOF GOOD FAITHAND FAIRDEALING? 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 conductor transactionconcerned." 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 standardsby 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 leadsus to the next issue raisedby the Blomes. DID THEBANK GIVE REASONABLE NOTICE OF ITS INTENTIONNOT TORENEW ITS FINANCINGTO THE BLOMES OR OTHERWISEACT ARBITRARILYOR CAPRICIOUSLY? 

### his caption subsumes issues 2 and 3 first noted above by the Blomes asproper forreview. 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 feedercattle,and to pay on their contract fordeed. Blomes further contend that they were entitled to reasonable notice that their creditwas in jeopardy prior to December 23, 1982. InNicholson v. United pacific InsuranceCompany (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 termedmore accuratelyas thetort ofbreach of the implied covenantofgood faith and fair dealing." There this Court stated:



# ..

# . [wle agree with the statement in Quigley, supra, [Quigleyv. Pet, Inc. (1984) 162Cal.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 covenantof 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 reasonablyand 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 whenthey 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 financingof the operation. That was a business decision made by theBank 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 ~istrictCourt's ruling cited authority from this Court requiring thatabreach of contract must be a resultof some "impermissible activity" before the breaching party can be held to have breached the implied covenant of good faith and fair dealing. (Citingcases.) The Shiplets seek to distinguish this authority by noting in Nicholson, we held a breach of contract was not aprerequisite to'abreach 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 conductby 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 isno evidence adduced by the Blomes here that would indicate either an express or an implied contract,or abreach 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 inDillon, is regrettable,but it cannotbe 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 DistrictCourt to grant summary judgment 

### in favorof the Bank isherebv affirmed.

Mr. Justice

### L. C. Gulbrandson specially concurring.

Iconcurwith the result of the foregoing opinionbut not with all that is expressed therein. 

# ///& Justice I