No. 93-375 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1994 

IN THE MATTER OF THE ESTATE OF 

RUSSELL MICHAEL, JR. , 

claimant and Respondent, 

MARK O'KEEFE, State Auditor and 

Commissioner of Insurance of the 

State of Montana, 

Petitioner and Appellant, 

GLACIER GENERAL ASSURANCE COMPANY, 

A MONTANA CORPORATION, 

Respondent. 

2PEAL FROM: District Court of the First Judicial ~istrict, 

In and for the County of Lewis and Clark, 

The Honorable Jeffrey Sherlock, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Richard Larson, Patrick M. Driscoll; Chronister 

Driscoll & Moreen, Helena, Montana 

For Claimant: 

Robert E. Maclin, 111; Gess, Mattingly & Atchison, 

Lexington, Kentucky 

Filed: 

Submitted on Briefs: December 2, 1993 

Decided: March 22, 1994 
Justice Karla M. Gray delivered the Opinion of the Court. 

Commissioner of Insurance Mark OIKeefe, Liquidator for Glacier 

General Assurance Company (Glacier General), appeals from the 

District Court's grant of summary judgment in favor of the Estate 

of Russell Michael, Jr. (the Estate). The court determined that 

the Estate's claim in the amount of $1,749,000, less a two percent 

deductible, was valid and assigned the claim Class 3 priority in 

the distribution of Glacier General's assets. We affirm. 

The Estate's claim arises from a financial security bond 

issued by Glacier General in November of 1984. At that time, Earl 

Parks (Parks) contractedto purchase ninety-six thoroughbred horses 

from Russell Michael, Jr. (Michael). Parks paid $1,000 and 

executed a promissory note for the $1,749,000 balance. To secure 

the note, Michael retained a security interest in the horses and 

required Parks to obtain a financial security bond in the amount of 

$1,749,000. The bond issued by Glacier General required Michael to 

assign his security interest in the horses to Glacier General in 

the event that performance on the bond was required. 

Parks failed to make the first installment payment to Michael 

later in November. Michael sent notice of default and acceleration 

to Parks. He also notified Glacier General of the default, 

requested performance under the terms of the bond, and indicated 

his expectation that Glacier General take possession of the horses 

or reimburse the costs of holding them. Neither Parks nor Glacier 

General responded. 
In January of 1985, ~ichael filed a lawsuit in the Fayette 

Circuit Court for the Commonwealth of Kentucky against Parks and 

Glacier General. Parks did not appear and a default judgment was 

entered against him. Glacier General appeared and entered into an 

"Agreed OrderF1 with Michael providing for the public auction of the 

horses that had not died or previously been sold privately by 

Michael. The auction was held on September 8 and 9, 1985. 

On September 18, 1985, the Kentucky court filed an llopinionN 

determining that Michael was entitled to summary judgment against 

Glacier General. A subsequent lfopinionll was filed on December 6, 

1985, liquidating Michael's damages against Glacier General in the 

amount of $2,220,484.86, Of that amount, $1,749,000 represented 

Glacier General's liability on the bond; the remainder reflected 

Michael's expenses for the maintenance, upkeep and sale of the 

horses, less the sale proceeds. Judgment was entered in Michael's 

favor on December 6, 1985. 

while Michael's litigation against Parks and Glacier General 

proceeded in Kentucky, Glacier General became financially 

insolvent. It filed a petition for liquidation on August 12, 1985, 

and the First Judicial District Court, Lewis and Clark County, 

subsequently entered an order of liquidation and appointed State 

Auditor and Commissioner of Insurance Andrea Bennett as Liquidator. 

In January of 1986, Michael submitted a proof of claim to the 

Liquidator in the amount of $2,220,484.86. The Liquidator denied 

the claim. 

In April of 1990, by which time Michael had died, the Estate 
filed a complaint with the referee appointed by the First Judicial 

District Court. It requested the referee to assign its claim Class 

3 priority and order the Liquidator to proceed with payment. In 

April of 1991, the parties stipulated to reserve adjudication of 

the Estate's claim in excess of $1,749,000 because Glacier General 

had insufficient funds to distribute to claimants with priority 

below Class 3. 

The Liquidator asserted nine affirmative defenses in its 

amended answer filed August 26, 1991. The defenses included 

allegations that enforcement of the sales agreement was 

unconscionable; that the claim should be assigned Class 4 priority 

as a general creditor's claim; and that the amount of the claim on 

the bond should be offset by the proceeds from the sale of the 

horses. 

In October of 1991, the Estate moved for summary judgment. 

The Liquidator opposed the motion. The referee determined that the 

Liquidator had not adequately defended against the motion under 

Rule 56 (e) , M.R. Civ. P. , but declined to grant summary judgment. 

The referee gave the Liquidator a "second chance1* to establish the 

existence of a genuine issue of material fact. Following the 

Liquidator's filing of additional affidavits, supplemental briefing 

and a second hearing on the motion, the referee recommended that 

summary judgment be granted in the Estate's favor. The District 

Court adopted the recommendation and granted the Estate's motion 

for summary judgment on April 12, 1993. 

Mark O'Keefe, successor to Andrea Bennett as Liquidator, 
appeals from the grant of summary judgment in favor of the Estate. 

He asserts the existence of genuine issues of material fact 

affecting Glacier General's obligation to perform under the bond 

and challenges the classification and amount of the claim. 

Did the District Court err in determining that no genuine 

issues of material fact existed regarding the enforceability of the 

sales agreement and financial security bond? 

Our standard for reviewing a grant of summary judgment is the 

same as that used by the district court. Emery v. Federated Foods 

(Mont. l993), 863 P.2d 426, 431, 50 St.Rep 1454, 1456. Summary 

judgment is appropriate when the pleadings, affidavits, depositions 

and other documents on file demonstrate that no genuine issues of 

fact exist and the moving party is entitled to judgment as a matter 

of law. Rule 56(c), M.R.Civ.P. 

Once the party moving for summary judgment meets its burden of 

establishing that no genuine issues of material fact exist, the 

burden of proof shifts to the party opposing the motion to present 

substantial evidence raising an issue of material fact. Kelly v. 

Widner (1989), 236 Mont. 523, 526, 771 P.2d 142, 144. The opposing 

party must set forth specific facts, by affidavit or as otherwise 

provided by Montana law, showing the existence of genuine issues 

for trial; affidavits must be based on personal knowledge and set 

forth facts which would be admissible in evidence. Rule 56(e), 

M.R.Civ.P. 

The Liquidator asserts that sworn statements by Ryan Mahan, a 
licensed auctioneer in Kentucky, and John Hayden, Glacier General's 

president when the bond was issued, established issues of material 

fact regarding the enforceability of the sales agreement and bond. 

He argues that the court erred by weighing the credibility of Mahan 

and Hayden rather than resolving the purported factual disputes at 

trial, in contravention of Morrow v. FBS Ins. (1988), 230 M0nt. 

262, 749 P.2d 1073. We disagree. 

In Morrow, conflicting allegations regarding issues of 

material fact were contained in the affidavits and depositions of 

the parties. The trial court conceded as much when it noted that 

the case was a question of the plaintiff's word versus the 

defendant's word. The court went on to resolve the conflicts in 

granting summary judgment. We reversed the court, stating that 

summary judgment is improper where an affiant's credibility may be 

crucial to the determination of a material fact. Morrow, 749 P.2d 

at 1075. 

Morrow has no application here because the Mahan and Hayden 

materials did not create genuine issues of material fact regarding 

the enforceability of the sales agreement and bond. In his first 

affidavit, Mahan stated that the sales transaction was "highly 

irregular" because Parks paid only $1,000 as a down payment. The 

Liquidator relies on this statement as evidence that the underlying 

transaction was invalid, in an effort to preclude enforcement of 

the transaction via the bond. In his later deposition, however, 

Mahan testified that his characterization of "irregularity" was 

incorrect because he had not reviewed the sales agreement or 
considered the financial guarantee bond as part ofthe transaction. 

Focusing on the content of the affidavit and deposition, the 

court determined that the ltirregularity" of the sales transaction 

had been eliminated as an issue by Mahan's repudiation of his 

earlier statement. Thus, the court did not evaluate Mahan's 

credibility but determined, pursuant to Rule 56(e), M.R.Civ.P., 

that his statements did not raise a genuine issue of material fact 

impugning the enforceability of the sales agreement via the bond. 

In a similar vein, the Liquidator argues that enforcement of 

the sales agreement via the bond would be unconscionable because of 

a disparity between the market value of the horses and the 

contracted price. He relies on statements by Mahan as a basis for 

his unconscionability argument and again contends that the District 

Court impermissibly weighed Mahan's credibility to determine that 

no genuine issue had been raised. 

Mahan stated in his first affidavit that the market value of 

the horses as of the date the sales agreement was executed was 

substantially less than the purchase price. However, the appraisal 

attached to his supplemental affidavit reflected only the market 

value of the horses in September of 1985; it did not include an 

estimate or appraisal of the market value of the horses at the time 

of the underlying sales transaction in November, 1984. 

Furthermore, Mahan's deposition states that the market value of 

horses generally declined significantly in the early part of 1985 

from the "pinnacle" of thoroughbred horse prices reached in 1984; 

the inference is clear that the market value of the horses at the 
time the sales agreement was executed was significantly higher than 

Mahan's appraised value as of September, 1985. 

We agree with the court that the totality of Mahan's testimony 

considered in a light most favorable to the Liquidator fails to 

establish the existence of a genuine issue of fact relating to the 

value of the horses at the time the sales agreement was executed. 

More importantly, we conclude that a disparity between the horses' 

market value and the purchase price, even if properly raised as an 

issue, would not be material to the "conscionability" of enforcing 

the sales agreement. Oppression and a disparity of bargaining 

power are the indicia of unconscionability relating to a sales 

contract between two business professionals. All-States Leasing v. 

Top Hat Lounge (1982), 198 Mont. 1, 6-7, 649 P.2d 1250, 1253. 

Those indicia are totally lacking here. 

The Liquidator also contends that Hayden's affidavit raises a 

factual dispute concerning Michael's representation of the horsest 

market value in his bond application. The thrust of this 

contention is that Michael misrepresented the market value in order 

to obtain the bond and, therefore, that enforcement of the bond 

itself would be unconscionable. 

The court determined that none of the application materials 

for the bond purported to represent the horses' market value and 

that Hayden was not competent to testify as to that market value. 

Thus, the court did not assess Hayden's credibility but applied 

principles governing summary adjudication and determined that 

Hayden's sworn statements did not raise a material issue regarding 
the conscionability of enforcing the bond. 

The Liquidator also contends that a shift in the referee's 

position regarding payment of the bond reflects an impermissible 

resolution of a factual issue. In his first order, the referee 

characterized the evidence surrounding the transaction as 

"suspicious" based, in part, on the payment of the premium by a 

cashier's check remitted by an escrow company. The referee 

directed the Liquidator--in the Liquidator's effort to oppose 

summary judgment--to contact the escrow company to determine the 

source of the funds used to pay the premium. In his second order, 

the referee unequivocally stated that Parks paid the premium, a 

position adopted by the District Court. 

The supplemental materials filed by the Liquidator neither 

indicate that the escrow company was contacted nor contain any 

facts showing that Parks did not pay the premium via the escrow 

company. Thus, the referee's change in position does not represent 

a factual determination, but again reflects the Liquidator's 

failure to advance evidence establishing the existence of a genuine 

issue of material fact for trial. 

We conclude that the District Court did not resolve genuine 

issues of material fact; it properly applied the principles 

governing summary judgment set forth in Rule 56(e), M.R.Civ.P. We 

hold that the District Court did not err in determining that the 

Liquidator failed to raise genuine issues of material fact 

regarding the enforceability of the sales agreement or the 

financial guarantee bond. 
Did the District Court err in assigning Class 3 priority to 

the Estate's claim? 

Relying on the doctrine of. merger, the Liquidator contends 

that the Estate's claim on the bond was extinguished by the entry 

of the Kentucky court's "opinion" on September 18, 1985. Under 

this approach, the Estate's claim would be solely on the Kentucky 

judgment, entitling it to Class 4 priority as a general creditor. 

While the Liquidator's attempt to escape the effect of the District 

Court's 1989 declaratory judgment that claims on Glacier General's 

bonds are entitled to Class 3 priority is understandable, his 

arguments are not persuasive on either the facts or the law before 

us. 

At the outset, we note that the record establishes that the 

bond itself was the basis for the Estate's claim. In its "proof of 

claim" submitted to the Liquidator, the Estate supported its claim 

on the underlying transaction, attaching copies of the sales 

agreement, promissory note and bond. While the Estate also 

attached a copy of the ultimate Kentucky judgment, it relied on the 

judgment only as evidence to support its claim on the bond. 

Furthermore, the defenses asserted by the Liquidator were to the 

claim on the bond itself. 

Nor is there merit to the Liquidator's argument that the 

Estate's claim is on the Kentucky judgment as a matter of law. The 

Liquidator correctly points out that this Court applied the merger 

doctrine in Nee1 v. First Fed. Sav. & Loan Assoc. (1984), 207 Mont. 

376, 675 P.2d 96. There, we determined that when a contract claim 
is reduced to judgment, the contract is surrendered and cancelled 

by merger in the judgment and ceases to exist. w, 675 P.2d at 

101. The Liquidator asserts that the same doctrine is applicable 

to the Estate's claim on the bond. We disagree. 

The Kentucky court's September 18, 1985, opinion did not 

cancel the claim on the bond. Caine & Weiner v. Barker (Wash. App. 

1986), 713 P.2d 1133, relied on by the Liquidator to support 

application of the merger doctrine, actually supports the 

inapplicability of the doctrine here. It clarifies that the 

doctrine is available only where a final judgment has been entered 

for the payment of money. Caine & Weiner, 713 P.2d at 1134. The 

September 1985 opinion was not a judgment, much less a final 

judgment; nor did it award damages. Indeed, the opinion expressly 

anticipated the filing of a subsequent order. Thus, it does not 

support application of the merger doctrine. 

Moreover, S 33-2-1365(4), MCA, precludes merger of the claim 

on the bond into the final judgment entered by the Kentucky court 

on December 6, 1985. Section 33-2-1365(4), MCA, provides in 

pertinent part: 

No judgment or order against . . . the insurer entered 

after the date of filing of a successful petition for 

liquidation . . . need be considered as evidence of 

liability or of quantum of damages. 

Here, Glacier General's petition for liquidation was filed on 

August 12, 1985, and the order of liquidation entered on November 

12, 1985. Because the December 6, 1985 judgment was filed after 

the liquidation order, it has no binding effect on either liability 

or damages under g 33-2-1365(4), MCA. 
We recently addressed this statute's relationship to prior 

judgments in Claim of Kowalski (Mont. 1993), 860 P.2d 104, 50 St. 

Rep. 1038. There, the Liquidator attempted to rely on the res 

iudicata effect of a post-liquidation consent judgment obtained by 

claimant Kowalski. We initially determined that the effect of such 

a prior judgment was governed primarily by the liquidation 

statutes, relying on S 1-1-108, MCA. Kowalski, 860 P.2d at 108. 

Pursuant to those statutes, we held that the prior judgment did not 

conclusively establish the amount of damages claimed. The only 

procedure by which claimant could establish that amount following 

the Liquidator's denial of her claim was to present proof of the 

claim to the referee. Kowalski, 860 P.2d at 109. 

Here, as in Kowalski, the Estate must prove both liability and 

damages in order to establish its claim under the liquidation 

statutes. Because the Kentucky judgment had no conclusive effect, 

the only claim upon which the Estate could establish Glacier 

General's liability and quantum of damages is the claim on the 

bond. The Estate properly established its claim on the bond and, 

therefore, is entitled to Class 3 priority pursuant to the court's 

1989 declaratory judgment. We hold that the District Court did not 

err in assigning Class 3 priority to the Estate's claim. 

Did the District Court err in concluding that the proceeds 

from the sale of the horse collateral should be applied first to 

offset Michael's expenses in maintaining and selling the horses 

rather than to reduce the Estate's claim under the bond? 
According to the District Court, Glacier General's failure to 

perform under the bond caused Michael to suffer losses in two 

categories. It determined that the expenses incurred by Michael in 

maintaining and selling the horses represented a loss separate 

from, and in addition to, the unpaid debt secured by the bond. The 

court then determined that the sales proceeds would not cover the 

maintenance and sales expenses and, as a result, that no proceeds 

would remain to apply to the loss under the bond. On that basis, 

the court refused to apply 33-2-1371(3), MCA, to reduce the 

amount of the Estate's Class 3 claim on the bond. 

The Liquidator advances two arguments challenging the court's 

determination that the sales proceeds should be first applied to 

maintenance and sales expenses. First, he argues that the court 

improperly circumvented 33-2-1371(3), MCA, by dividing ~ichael's 

losses into two categories. We disagree. 

Section 33-2-1371(3), MCA, provides that any portion of a loss 

under a ttpolicytt which is recovered by the claimant from other 

sources cannot be included in a Class 3 claim. This statute 

pertains only to Michael's loss under the bond itself, which the 

District Court previously has declared to be a "policy4' of 

insurance. The expenses incurred in maintaining and selling the 

horses are, as the court determined, a separate loss. Thus, only 

the portion of the sales proceeds, if any, which exceeds the 

maintenance and sales expenses would constitute a recovery of the 

Estate's loss under the bond; only that portion would be subject to 

exclusion under § 33-2-1371(3), MCA. 
While the amount of the expenses incurred and sales proceeds 

received has not yet been litigated because Glacier General's 

assets are insufficient to distribute to claims with priority lower 

than Class 3, the record suggests that the incurred expenses 

significantly exceed the sales proceeds. The Liquidator does not 

argue otherwise. Thus, no portion of the sales proceeds represents 

a recovery of the Estate's loss under the bond pursuant to g 33-2- 

1371(3), MCA. 

Next, the Liquidator argues that the District Court improperly 

placed the obligation of the horses' care on Glacier General. 

Under the terms of the sales agreement, possession of the horses 

did not transfer until the first installment was paid. Because 

Parks defaulted on the initial payment, the Liquidator asserts that 

Parks acquired neither possession of the horses nor the obligation 

for their care. On that basis, he contends that Glacier General 

had no corresponding obligation as surety on the bond. 

This argument is without merit. Glacier General's liability 

for the maintenance and sales expenses is derived from its failure 

to perform its obligations under the bond, namely, payment of the 

remaining $1,749,000 purchase price and acceptance of the 

assignment of the horse collateral. Had Glacier General performed 

when requested by Michael, the expenses would not have been 

incurred. The fact that Parks had not yet acquired the obligation 

to care for the horses under the sales contract does not effect 

Glacier General's liability for those expenses under the terms of 

its bond. 
The Liquidator advances one additional argument that we 

address here, although it is only tangentially related to the 

application of the sales proceeds. He asserts that Michael failed 

to give notice of the private sales of some of the horses which 

preceded the public auction. On that basis, he argues that an 

issue of material fact exists regarding the commercial 

reasonableness of the private sales, precluding summary judgment 

under Agricredit Acceptance Corp. v. Michels (1991), 250 Mont. 23, 

817 P.2d 704. 

Section 30-9-504(3), MCA, entitles a secured creditor to 

dispose of collateral so long as every aspect of the disposition is 

commercially reasonable. It specifically requires the secured 

party to give the debtor reasonable notice of the time after which 

any private sale is to be made unless the collateral is perishable 

or threatens to decline speedily in value. 

As the party moving for summary judgment, the Estate was 

required to show the absence of genuine issues of material fact 

regarding the reasonableness of the private sales of the horses. 

To that end, it submitted the affidavit of Don S. Sturgill, an 

expert in the thoroughbred horse industry. In his affidavit, 

Sturgill testified that the private sale of horses often resulted 

in higher prices than sale by public auction, establishing the 

commercial reasonableness of that manner of sale. He also 

indicated that the prices of thoroughbred horses dropped 

dramatically in 1985, establishing the inapplicability of the 

notice requirement of 5 30-9-504(3), MCA, to private sales where 
the value of the collateral is declining speedily. Thus, the 

Estate met its initial summary judgment burden. 

The Liquidator's bare assertion that notice was not given does 

not raise a genuine issue of material fact as to the necessity of 

notice on the record before us. Unlike the debtor in Aqricredit 

Acceptance Corp., the Liquidator failed to advance any evidence 

that placed the commercial reasonableness of the private sales at 

issue. 

We conclude that the District Court correctly determined that 

the proceeds from the sale of the horses should be applied first to 

offset the expenses incurred by Michael in maintaining and selling 

the horses. The Liquidator has not asserted error in the court's 

determination that the sales proceeds would not be sufficient to 

cover these expenses. Thus, we hold that the court properly 

declined to apply any portion of the sales proceeds to reduce the 

Estate's Class 3 claim on the financial guarantee bond. 

Affirmed . 

We concur: / 

Chief Justice 
March 22, 1994 

CERTIPICATE OF SERVICE 

I hereby certify that the following certified order was sent by United States mail, prepaid, to the 

following named: 

Patrick M. Driscall 

Richard Larson 

CHRONISTER, DRISCOLL & MOREEN 

34 West Sixth Ave., Suite 2E 

Helena, MT 59601 

Dane C. Schofield 

PETERSON & SCHOFIELD 

2906 Third Ave. North 

Billings, MT 59101 

Robert E. Maclin, 111 

GESS, MATTINGLY & ATCHISON, PSC 

201 West Short Street 

Lexington, Kentucky 40507 

ED SMITH 

CLERK OF THE SUPREME COURT 

STAWOF VONTANA 

BY: %