No. 89-389 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1990 

IRVIN ELLIS LARSON, WILLIAM LARSON, 

WYLEY GOOD, THOMAS KEELEY, MELVIN KING, 

PAUL LEHMAN, RONALD PAIGE, ROBIN W. SPARKS, 

AND THOMAS L. TOPE, 

Plaintiffs and Appellants, 

-VSFIRST INTERSTATE BANK OF KALISPELL, and FIRST 

INTERSTATE BANCORP, INC., 

Defendants and Respondents. 

APPEAL FROM: District Court of the Eleventh Judicial District, 

In and for the County of Flathead, 

The Honorable Leif Erickson, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Sidney R. Thomas; Martha Sheehy; Moulton, Rellingham, 

Longo & Mather, Billings, Montana 

William A. Rossbach; Rossbach & Whiston, Missoula, 

Montana 

For Respondent: 

Dana L. Christensen and Debra D. Parker; Murphy, 

Robinson, Heckathorn & Phillips, Kalispell, Montana 

Filed: 

Submitted on Briefs: Dec. 21, 1989 

Decided: February 14, 1990 
Justice Fred J. Weber delivered the Opinion of the Court. 

Plaintiffs, limited partners in Crystal Lakes Limited 

Partnership (I1Crystal Lakes1#) , brought this action to recover 

damages as a result of defendants1 alleged tortious acts against 

Crystal Lakes, including forcing the general partner to breach 

his fiduciary duties. The defendants moved to dismiss for failure 

to state a claim upon which relief can be granted. The District 

Court for the Eleventh Judicial District, Flathead County, granted 

the motion and dismissed the Complaint. Plaintiffs appeal. We 

reverse. 

The sole issue for our consideration is whether the District 

Court properly dismissed the plaintiffs' Complaint for failure to 

state a claim for which relief could be granted? 

It is a well established rule in Montana that a Complaint 

should not be dismissed for failure to state a claim upon which 

relief may be granted unless it appears certain that the plaintiff 

is entitled to no relief under any set of facts which could be 

proved in support of his claim. See Mogan v. City of Harlem 

(1987), 227 Mont. 435, 739 P.2d 491. On a motion to dismiss under 

M.R.Civ.P. 12 (b) (6), the court takes the allegations of the 

plaintiff to be true and construes the allegations in a light most 

favorable to the plaintiff. Contway v. Camp (Mont. 1989) , 768 P. 2d 

1377, 46 St.Rep. 270. 

Following are the pertinent portions of the plaintiffs1 

Complaint: 
I: Plaintiffs William E. Larson, Wyley Good, Thomas Tope, 

Melvin King, Irvin Larson and Paul Lehman entered into an agreement 

with Rolland Andrews to form a limited partnership known as Crystal 

Lakes Development Company, with plaintiff William E. Larson and 

Rolland Andrews as general partners and the other plaintiffs as 

limited partners. The purpose of Crystal Lakes was to acquire and 

develop certain real estate in the vicinity of Fortine, Montana as 

a golf course and related recreational and residential development. 

911: In 1979 and 1980 three additional partners joined 

Crystal Lakes: plaintiffs Thomas Keeley, Robin Sparks and Ronald 

Paige. On April 9, 1981, William E. Larson resigned as a general 

partner and became a limited partner. 

9111 and IV: In order to acquire property and develop Crystal 

Lakes Country Club and subdivision, Crystal Lakes entered certain 

financial arrangements with First Interstate Bank of Kalispell 

(''Bank"). Crystal Lakes depended on the Bank to provide it with 

loans and other financial assistance, and for information and 

advice in the management and development of the business. Over 

time Bank officials became more involved in directing Crystal Lakes 

on how it should operate and on what the Bank required it to do to 

keep obtaining financing. 

9V and VI: For the first few years Crystal Lakes made steady 

progress in developing the real estate and was able to keep current 

on its obligations. The Bank's involvement increased. Plaintiffs 

allege the Bank urged Crystal Lakes to acquire an additional 600 

acres of land ("Vredenburg Land''), even though it would entail a 
significant increase in the total debt. 

IVII and VIII: The Vredenburg Land was already encumbered by 

a large debt to the Bank and one of the other subsidiaries of 

Western Bancorp (81Bancorp11). In order to induce Crystal Lakes to 

purchase the Vredenburg land, Bank officials entered into an 

agreement whereby the Bank promised Crystal Lakes that if it 

purchased the acreage, the Bank would provide Crystal Lakes with 

a loan to purchase the land and an open credit line up to five 

million dollars to enable Crystal Lakes to have sufficient funds 

to fully develop the property. The Bank further agreed that once 

the property was fully developed, the five million dollar credit 

line would be converted to a long term real estate loan. 

IVIII through XI: In reliance upon these promises, Crystal 

Lakes entered into agreements to purchase the Vredenburg land for 

$1,500,000. At the time of the closing, Andrews was assured by 

the Bank that Crystal Lakes would have the time and credit it 

needed to make the project work. In reliance on this promise, 

general partner Andrews entered into the agreement on behalf of 

Crystal Lakes. Crystal Lakes then initiated major expansion 

efforts, borrowing additional funds and doing additional 

developments on the property. On August 5, 1982, the general 

partner executed a mortgage with the Bank which reflected the five 

million dollar credit line the partnership agreed to as part of the 

earlier agreement. During this period of time, the Bank came more 

directly under the control of Bancorp. 

fix11 through XV: In approximately June of 1983, the Bank, 
under the direction of Bancorp, gave the partnership notice that 

it no longer intended to perform as promised, breaching its 

agreement to provide credit and compelling all of the plaintiff 

limited partners individually to enter into a new "work out" 

agreement. Under the terms of this agreement, the Bank would 

provide limited additional short term funding, but would not give 

the partnership the financial assistance agreed to and would not 

permit Crystal Lakes to continue to develop the land completely. 

The general partner, Andrews, was compelled to pledge all his 

personal assets to the Bank. After the execution of the new work 

out agreement, the Bank stopped all further cooperation and 

assistance and made it impossible for the partnership to sell the 

property for its full value. 

IXVI: On May 15, 1985, the Bank forced the general partner 

to sign certain documents, including a deed in lieu of foreclosure, 

to deed over essentially all the real estate of the partnership to 

the Bank. These documents were coerced by financial pressure on 

the general partner who had pledged all of his personal assets to 

the Bank. The Bank, under the direction of Bancorp, knowingly 

forced the general partner to violate his duty of trust and good 

faith to the limited partners. This resulted in severe financial 

detriment to the limited partners, causing them to lose their 

investment and all prospects of profit from that investment. 

IXVII: General partner Andrewsl actions under duress caused 

substantial detriment to the limited partners and Andrews breached 

his duties of trust and good faith to the limited partners. He did 
not advise the limited partners of his actions or in any way give 

them notice of the foreclosure documents until approximately one 

month later. 

Plaintiffs sued to recover damages claimed by defendants' 

alleged tortious acts toward Crystal Lakes. Defendants moved to 

dismiss for failure to state a claim upon which relief may be 

granted. The District Court granted the motion and dismissed the 

Complaint. Plaintiffs appeal. 

I 

Did the District Court properly dismiss the plaintiffs' 

Complaint for failure to state a claim for which relief may be 

granted? 

In granting the Motion to Dismiss, the District Court 

concluded that the Complaint failed to state a claim for which 

relief may be granted and more specifically, because the named 

plaintiffs were not the real parties in interest. The memorandum 

of the District Court pointed out that the plaintiffs argued that 

their losses were individual losses rather than losses to the 

partnership so that the individual partners could successfully 

maintain the present action. The District Court concluded that the 

Montana derivative action statutes, §§ 35-12-1401 through 1404, 

MCA, granted a limited partner the right to bring only a derivative 

action in the right of the limited partnership. The court based 

its decision on the case of Phillips v. Kula 200 I1 (Haw. Ct. App. 

1983), 667 P.2d 261, 262, which held: 

Limited partners may not maintain individual actions for 

damages allegedly caused by a breach of the fiduciary 
duty owed by the general partners to the limited 

partnership. The only way they may pursue that claim is 

derivatively. 

The District Court concluded that the Complaint demonstrated that 

any profits which the plaintiffs alleged they were entitled to 

recover were based on their expectations from the limited 

partnership and that any damage had accrued as a result of the 

Bank's interactions with the general partner. The District Court 

concluded that the relief sought by the plaintiffs was available 

to them only by derivative action and that they were bound to 

follow that course. 

In the appeal, the plaintiffs concede that Counts 11, I11 and 

IV are properly to be brought as derivative actions or claims. 

Plaintiffs argue that Count I, which alleges that the defendants 

assisted and compelled the general partner to breach his duty of 

trust and good faith to the limited partners, allows the partners 

to bring individual actions as distinguished from the derivative 

action as limited partners. 

Defendants maintain that the plaintiffs* claim failed to state 

a claim upon which relief could be granted because the action must 

be brought as a derivative action and the Complaint failed to set 

forth with particularity the effort of the plaintiffs to secure 

initiation of the action by the general partner, as required by 

835-12-1403, MCA. 

The controlling statutes for derivative actions in 

partnerships are 8835-12-1401 through 1404. 

Section 35-12-1401, MCA, states: 
A limited partner may bring a derivative action in the 

right of a limited partnership to recover a judgment in 

its favor if the qeneral partners havinq authority to do 

so have refused to brinq the action or an effort to claim 

those qeneral partners to brinq the action is not likely 

to succeed (emphasis added). 

Section 35-12-1403, MCA, states: 

In any derivative action, the Complaint shall set forth 

with particularity the effort of the plaintiff to secure 

initiation of the action bv a qeneral partner havinq 

authority to do so or the reasons for not makinq the 

effort (emphasis added) . 

Plaintiffs contend that under M.R.Civ.P. 9(a) they do 

not have to aver the capacity as a derivative action. It states: 

It is not necessary to aver the capacity of a party to 

sue or be sued or the authority of a party to sue or be 

sued in a representative capacity or the legal existence 

of an organized association of persons that is made a 

party. 

M.R.Civ.P. 23.1 states (in part): 

In a derivative action . . .the Complaint shall allege 

with particularity the efforts, if any, made by the 

plaintiff to obtain the action he desires from the 

directors or comparable authority and, if necessary, from 

the shareholders or members, and the reasons for his 

failure to obtain the action or for not making the 

effort. 

The more specific rule governs. In view of the wording of the 

foregoing code sections and Rule 23.1, it would have been better 

practice for the plaintiffs to have specifically pleaded the 

appropriate allegations to meet those provisions. They did not 

specifically do so. However, Paragraph XVI of the Complaint did 

state in pertinent part as follows: 

On May 25, 1986, the Bank . . . forced the general 

partner to sign certain documents . . . to deed over 

essentially all of the real estate of the partnership to 
the Bank. These documents were coerced by financial 

pressure on the general partner who had pledged all of 

his personal assets to the Bank. The Bank . . . knowingly forced the general partner to violate his duty 

of trust and good faith to the limited partners. . . . 

Rule 23.1 was considered in S-W Co. v. John Wight, Inc. 

(1978) , 179 Mont. 392, 403, 587 P. 2d 348, 354, as it applies to 

corporations. In that case, this Court made clear that as an 

alternative to making a demand upon the board of directors, the 

plaintiffs may show "such a state of facts as disclose that the 

demand, if made, would have been entirely una~ailing.~~ Plaintiffs 

argue that Paragraph XVI of the Complaint is sufficient to 

demonstrate that the demand would have been unavailing. 

The key element of our analysis is to determine from the 

Complaint if it does appear beyond doubt that the plaintiffs cannot 

prove a set of facts which would entitle them to relief. From the 

Complaint we can determine the names and statuses of all the 

limited partners. While it would have been appropriate to state 

in the pleading that the limited partners were suing in a 

derivative action in the right of the limited partnership, the 

capacity of the limited partners to sue does appear from the 

Complaint. As a result, using the theory of Mont. R. Civ. P. 9 (a) , 

we conclude that under the record of this case it was not essential 

that the plaintiffs allege that they were suing in a derivative 

capacity in the right of Crystal Lakes. 

Both 935-12-1403, MCA, and Mont. R. Civ. P. 23.1, require 

however, that the Complaint set forth with particularity the 

efforts on the part of these plaintiffs to obtain action by the 
general partner, or the reasons for their failure to make that 

effort. Clearly it would have been proper for the plaintiffs to 

allege with particularity as so required. Had they done so, this 

extended controversy might have been eliminated. 

Notwithstanding this failure, was it necessary that the 

District Court dismiss the Complaint? From the allegations of the 

Complaint, and in particular Paragraph XVI, the allegations 

demonstrate that the Bank forced the general partner to sign 

various documents and to deed over the real estate of the limited 

partnership and in so doing, knowingly forced the general partner 

to violate his duty of trust and good faith. While not clearly 

satisfactory, these allegations do demonstrate a reason for a 

failure on the part of the limited partners to request of the 

general partner that he commence the suit. A reasonable conclusion 

from the allegations is that a general partner who has knowingly 

executed legal instruments of conveyance to the Bank, will not 

commence an action in behalf of the limited partnership because of 

the violation of trust and good faith by the general partner. We 

therefore conclude that it does appear beyond doubt that the 

plaintiffs cannot prove their effort to secure initiation of the 

action by the general partner or the reasons for not making the 

effort. 

We further conclude that a reasonable alternative for the 

District Court was to allow the plaintiffs to remedy the defects 

of the Complaint through amendment. The Complaint is sufficient 

to establish that the plaintiffs have the statutory right and 
standing to bring a derivative cause of action and that the 

plaintiffs are proper plaintiffs in such an action. We hold that 

the Complaint did not justify the entry of the dismissal for 

failure to state a claim upon which relief may be granted. 

We reverse the order of the District Court, and remand with 

the direction that the plaintiffs shall be allowed to make 

appropriate amendments to the Complaint and for further proceedings 

consistent with this opinion. 

We Concur: / 

Justices 

Justice John C. Sheehy participate in this Opinion.