NO. 84-125 

IN THE SUPREME COURT OF THE STATE OF MOlJTANA 

1984 

FIRST NATIONAL BANK IN LIBBY, 

Plaintiff and Respondent, 

-vsCRAIG L. TWOMBLY and LORRAINE E. TWOMBLY, 

Defendants and Appellants. 

APPEAL FROM: District Court of the :.lineteenth Judicial District, 

In and for the County of Lincoln, 

The Honorable Robert M. Holter, Judge presiding. 

COUNSEL OF RECORD: 

For Appellants: 

Keller & German, Libby, Montana 

For Respondent : 

Sverdrup & Spencer, Libby, Montana 

---- 

Submitted on Briefs: July 19, 1984 

Decided: October 22, 1984 

Filed: 

. -- - - Clerk 
Mr. Justice Frank R. Morrison, Jr. delivered the Opinion of 

the Court. 

First National Bank of Libby (Bank) initiated an action 

in the Nineteenth Judicial District to recover on a 

delinquent promissory note executed by the Twomblys. 

Twomblys counterclaimed for breach of duty of good faith. 

The jury verdict awarded Twomblys compensatory damages of 

$4,000. The trial court's judgment offset the balance due on 

the note, the interest accrued and attorney's fees in favor 

of the Bank. Twomblys appeal. The Bank's appeal was 

dismissed. 

Prior to the trial, the Bank's motion in lirnine to 

exclude any evidence of punitive damages was granted by the 

trial court on the grounds that a contract action prohibits 

punitive damages. Twomblys sought a writ of supervisory 

control in this Court directing the trial court to allow 

punitive damages. The writ was denied since Twomblys had an 

adequate remedy of appeal. Following a two-day jury trial, 

the Twomblys' request. for instructions on punitive damages 

was denied. The defense, in support of counterclai.m, argued 

that the Bank's acceleration of the maturity date of the note 

and subsequent wrongful offset was in bad faith and warranted 

exemplary damages. This second attempt to have the jury 

instructed on punitive damages was denied. 

Based on special interrogatories, the jury found that 

the Bank made false representations to the Twomblys and 

breached its obligation of good faith to Twomblys by 

accelerating the maturity of the promissory note. Following 

the offset, judgment was entered for Twomblys in the amount 

of $1-,392.49. 
Twomblys filed notice of appeal on December 23, 1983, 

challenging refusal by the trial court to allow punitive 

damages, and the award of attorney's fees to the Bank. 

In July 1978, Craig and Lorraine Twombly began operating 

the Antlers Restaurant, located between Troy and Libby, 

pursuant to a lease/option agreement. The Twomblys executed 

a promissory note with the Bank on February 16, 1979 for 

$3,500 to purchase a $2,000 ice machine and to pay $1,500 in 

property taxes on the restaurant. The terms required one 

payment of principle and interest due on August 16, 1979. 

The note was accompanied by a standard security agreement, 

granting the Bank a security interest in the ice machine, 

inventory and accounts receivable. 

Twomblys did not exercise their option to purchase the 

Antlers Restaurant, when negotiations with the owner failed. 

This lease was terminated July 31, 1979. Facing unemployment 

after July, the Twomblys became concerned about repayment of 

their note due August 16. In early July Twomblys contacted 

Frank Johnson, the Vice President of the Rank, to renegotiate 

the payment schedule. Mr. Johnson was the bank officer who 

initially arranged and approved of the loan involved in this 

appeal. Most of the discussions concerning restructuring of 

the loan took place at the restaurant when Mr. Johnson 

stopped on his way home from the Rank after working hours. 

All parties agree that at all times during these negotiations 

Mr. Johnson was acting in the scope of his employment as an 

agent for the Bank. 

Twomblys offered to reduce the $3,500 principle amount 

by $500 and bring the interest current on August 16, if the 

Bank would convert the remaining $3,000 balance into an 

installment loan. Although the Twomblys had the funds to 

satisfy the subject note in full on August 16, they explained 
they needed the money they had saved to pay for living 

expenses. Mr. Johnson testified in his deposition that he 

assured Mr. Twombly in unequivocal terms that the "straight" 

promissory note would be ccnverted to an installment note, if 

the Twomblys made some reduction of the principle and brought 

the interest current on the note by August 16, 1979. Mr. 

Johnson also advised the Twomblys that they could wait until 

July 31, when their restaurant management responsibilities 

were compl-eted, to take care of this bank matter with First 

National. Since he was scheduled to be out of town, Mr. 

Johnson informed the Twomblys that he had discussed the 

matter with Mr. Wayne Haines, Vice President, who would 

supervise necessary documentation of conversion of the note. 

Craig Twombly telephoned Mr. Haines on August 2. Mr. 

Haines informed Craig Twombly that he knew nothing about blr. 

Johnson's promise to convert the loan. He refused to convert 

the subject $3,500 obligation to an installment note because 

Craig Twombly was not employed to assure repayment. Craig 

Twombly told Mr. Haines that he had relied upon Mr. Johnson's 

promise to convert the note, had expended the money, and 

would not be able to pay the note two weeks later. Mr. 

Haines testified that Craig Twombly hung up the phone in 

anger and did not afford Mr. Haines the opportunity to 

discuss any method to resolve the problem. Mr. Haines 

admitted that he did not attempt to call Craig Twombly back 

to discuss possible recovery on the loan by selling the ice 

machine held as security for the loan. 

Subsequent to this discussion with Craig Twombly, Elr. 

Haines confirmed that approximately $2800 remained in the 

Antlers Restaurant checking account with the Bank. Haines 

anticipated that Craig Twombly would withdraw all the funds 

from the Antlers checking account and leave the Bank in a. 
poor collateral position. Haines discussed the problem with 

the President, Bernard Remick. Haines and Remick admitted 

that neither had any information other than Craig Twombly's 

alleged statement to Mr. Haines to support their belief that 

the Twomblys would not repay their debt when it matured. 

Both officers decided the note was in jeopardy and declared 

it immediately due in its entirety. Mr. Haines prepared and 

dra5ted an offset statement against the Twornbley's checking 

account in the amount of $2,865, leaving a balance of $1.65. 

The Twomblys were given no notice of this offset action 

against their checking account. Mr. Twombly first acquired 

notice of the offset when he attempted to cash a check the 

following day and was advised by the teller of the $1.65 

balance in his account. Craig Twombly attempted to dj-scuss 

the Bank's offset procedure with Mr. Haines personally but 

Mr. Haines was busy with a customer. The same day after 

Craig Twombly was unable to reach Mr. Haines on the 

telephone, he inquired with the bookkeeper who informed him 

of the offset. 

Mr. Haines admitted that he knew Mr. Twombly desired to 

talk to him about the offset, but that he did not make any 

attempt to contact him after Craig Twombly ].eft the bank. 

Mr. Haines felt that the teller's and bookkeeper's 

explanation and the written statement sent out by the Rank 

the following day were sufficient notice to Mr. Twombly 

regarding the Bank's offset action. 

Mr. Haines testified that he did not freeze the funds 

and pursue further negotiations with the Twomblys because 

freezing the funds would have caused accrual of additional 

interest on the delinquent promissory note. He admitted at 

trial that the offset action was based strictly upon Craig 
Twombly's telephone statement that he would not pay the 

$3,500 on August 16. In determining the Twombly promissory 

note to be "in jeopardy", Mr. Haines did not attempt to 

establish whether the Twomblys were intending to leave the 

community or any other information to support a threat to the 

repayment of the note. 

All parties agree that as a result of the acceleration 

of maturity of the note and the Bank's offset several checks 

were dishonored due to insufficient funds. The dishonored 

checks totaled approximately $850. In order to cover these 

delinquent drafts, Craig Twombly sold the ice machine for 

$1,800. Twomblys retained the remaining profits for 1ivir.g 

expenses. 

Appellants present the following issues on appeal: 

1. Whether it was error for the trial judge to refuse 

to allow the defendants to introduce evidence in support of 

punitive damages, to refuse to instruct the jury on punitive 

damages, and to refuse to allow argument on punitive damages, 

where it was alleged that the plaintiff acted in bad faith in 

accelerating an indebtedness of defendants and exercising an 

offset against de5end.a-ntsl checking account? 

2. Whether plaintiff is entitled to attorney's fees 

where the net judgment was in favor of the defendants on 

their counterclaim for damages for wrongful offset? 

Counterclaimants rely upon section 30-1-203, MCA which 

provides : 

"Obligation of good faith. Every contract or duty 

within this code imposes an obligation of good 

faith in its performance or enforcement." 

The Uniform Commercial Code, from which the quoted 

section comes, applies to the type of transaction here at 

issue. Appellants further rely upon section 30-1-208, MCA 

which provides: 
"Option to accelerate at will. A term providing 

that one party or his sucessor in interest may 

accelerate payment or performance or require 

collateral or additional collateral 'at will' or 

'when he deems himself insecure' or in words of 

similar import shall be construed to mean that he 

shall have power to do so only if he in good fa.ith 

believes that the prospect of payment or 

performance is impaired. The burden of 

establishing lack of good faith is on the party 

against whom the power has been exercised." 

The obligations owing under these sections of the 

Uniform Commercial Code were submitted to the jury with 

proper instructions. The special verdict contained, among 

others, the following interrogatories: 

"2. Did First National- Bank breach its obligation 

of good faith to the Twomblys by accelerating the 

maturity of the promissory note? If you (sic) 

answer is 'yes', proceed to Number 3. If your 

answer is 'no', proceed to Number 4. 

Yes 10 No 1 

"4 . Did First National Bank make false 

representations to the Twomblys prior to the 

maturity of the note? If your answer is 'yes', 

proceed to Number 5. If your answer is 'no', 

proceed to Number 7. 

Yes 12 No 0 " 

This case presents a rather unique fact situation. The 

issues which would form the basis for an award of punitive 

damages were submitted to the jury and resolved in favor of 

the appellants. However, the issue of punitive damages was 

not submitted to the jury and the jury was not permitted to 

make an award. 

In viewing the evidence in a light most favora-ble to the 

appellants, which for purpose of this appeal we must do, a 

jury issue was created on whether the Bank breached, its 

statutory obligation to exercise good faith. The jury in 

this case found that respondent Bank breached its obligation 

to act in good faith and further that it made false 

representations to the Twomblys. Under the circumstances the 
only remaining question is whether appellants are entitled to 

punitive damages. 

When the duty to exercise good faith is imposed by law 

rather than the contract itself, as in Gates v. Life of 

Montana Insurance Company (Mont. 19831, 40 St-ReP- 12871 668 

P.2d 213, the breach of that duty is tortious. Therefore, 

punitive damages are recoverable if the Bank's conduct is 

sufficiently culpable. 

Punitive damages are recoverable under section 27-1-221, 

MCA, where malice, oppression, or fraud is shown. F7e 

recently defined malice, for these purposes, as: 

"When a person knows or has reason to know of facts 

which create a high degree of risk of harm to the 

substantial interests of another, and either 

deliberately proceeds to act in conscious disregard 

of or indifference to that risk, or recklessly 

proceeds in unreasonable disregard of or 

indifference to that risk, his conduct meets the 

standard of willful, wanton, and/or reckless to 

which the law of this State will allow imposition 

of punitive damages on the basis of presumed malice .... " Owens v. Parker Drilling Co. (Mont. 

1984), 41 St.Rep. 66, 69, 676 P.2d 162. 

VJe further defined oppression in Owens, supra, as 

including acts which constitute an abuse of power. 41 

Viewing the facts in a light most favorable to the 

appellants, the jury could find that the respondent Bank 

acted in reckless disregard of the appel-lants' rights. Such 

a finding could result in the imposition of punitive damages 

based upon malice. Furthermore, such a finding, given the 

Bank's relationship to its debtor, could justify an exemplary 

imposition for oppression. Finally the jury found that 

respondent Eank misrepresented facts which could spring the 

"fraud" basis for a punitive award. 

We find that the trial court erred in refusing to submit 

punitive damages to this jury. The remand is for a new trial 
on punitive damages only as the jury has already found 

liability. The Bank has not cross-appealed contesting 

compensatory damages and this issue need not be retried. 

The trial court awarded attorney's fees to the Bank as 

"prevailing party." In doing so the court erred. This Court 

recently held in E.C.A. Environmental Management Services, 

Inc. v. Toenyes, et al. (Mont. 1984), 41 St.Rep. 388, 393, 

679 P.2d 213, that, "The party that survives an action 

involving a counterclaim, setoff, refund or penalty with a 

net judgment should generally be considered the successful or 

prevailing party." 

The awa-rd of attorney's fees in favor of respondent Rank 

is vacated. The case is remanded for a trial on the issue of 

punitive damages only in accordance with the views herein 

expressed. 

We concur: 

=%&lL d.94 

Chief Justice 

- - 

Justices 

Mr. Justice L. C. Gulbrandson, dissenting. 

I respectfully dissent. I would affirm the rulings 

of the trial judge.