No. 86-177 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

POWDER R.IVER COUNTY BANK, 

Plaintiff, Counter-Defendant and 

Respondent, 

-vsARNESS-McGRIFFIN COAL COMPANY, a Colorado 

Corporation, and SAM K. ARNESS, 

Defendants, Counter-Plaintiffs and 

Appellants. 

POWDER RIVER COUNTY BANK, 

Plaintiff, Counter-Defendant, 

-vsSAM K. ARNESS, 

Defendant, Counter-Plaintiff. 

APPEAL FROM: District Court of the Sixteenth Judicial District, 

In and for the County of Powder River, 

The Honorable Alfred Coate, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Cate Law Firm; Jerome J. Cate argued, Billings, 

Montana 

For Respondent : 

Lucas & Monaghan; Thomas Monaghan argued, Miles City, 

Montana 

Submitted: October 21, 1986 

Decided: February 19, 1987 

Filed: FEB 19 1987 
Mr. Justice L. C. Gulbrandson delivered the Opinion of the 

Court. 

Sam Arness appeals a Powder River County District Court 

order granting summary judgment to the Powder River County 

Bank (the Bank) on Arness' four counterclaims against the 

Bank. The sole issue on appeal is whether the court erred in 

dismissing appellant's counterclaims on the basis that those 

claims arose out of, and were dependent upon, an illegal loan 

agreement. We affirm. 

Beginning at least in 1980, the Bank made various loans 

to appellant personally and to several businesses with whom 

appellant was affiliated. Appellant personally guaranteed 

the loans made to the businesses (Arness-McGriffin Coal Co., 

Eastmont Forest Products, and Arness-Anderson Corp.). In 

April 1982, the Bank filed two separate complaints to collect 

amounts due on the loans. One complaint named appellant 

alone as the defendant and sought to collect approximately 

$691,000 allegedly due on the loans. The other complaint 

named appellant and Arness-McGriffin Coal Co. 

(Arness-McGrif fin) as defendants and sought to collect 

approximately $234,000 allegedly due on the loans. In July 

1982, the defendants in both actions filed answers to the 

complaints and denied the Bank's claims. In August 1982, the 

Bank, Arness and Arness-McGriffin entered into a loan 

agreement which provided that the Bank would take no action 

to prosecute the two civil actions for one month; that the 

Bank would dismiss both actions with prejudice upon the 

satisfaction of certain conditions precedent; that Arness and 

Arness-McGriffin acknowledged that they were indebted to the 

Bank for over one million dollars; that the Bank agreed to 

renew the indebtedness and to loan additional funds to Arness 

and Arness-McGriffin; and that Arness and Arness-McGriffin 
would execute two promissory notes and secure the notes with 

diverse assets. 

On September 14, 1982, the Montana State Department of 

Commerce issued a "Notice Of Charges And Hearing And. 

Temporary Cease And Desist" directed to the Bank. This order 

stated in pertinent part: 

[tlhe Department . . . alleges 

3. The Bank and its management have 

engaged and are continuing to engage in 

unsafe and unsound banking practices as 

are evidenced in the charges which 

follow. 

4. Disclosures made in the examination 

of the Bank by the personnel of the 

Federal Reserve Bank of Minnesota during 

the period of August 30 through September 

10, 1982 indicate that the Bank is in an 

unsound condition and is not in 

compliance with the laws of the state of 

Montana to the following extent: 

d. Unsecured loans and overdrafts 

extended to Arness-Anderson, Inc. exceed 

the legal lending limit of the Bank 

pursuant to section 32-1-432, MCA 

($240,000) and have been in excess of 

this amount since before the August 31, 

1981 examination of the Bank by the 

Federal Reserve Bank of Minnesota and as 

disclosed in the March 15, 1982 

examination by the state of Montana; 

e. Unsecured loans and overdrafts 

extended to Eastmont Forest Products, 

Inc. and its subsidiary, Northern 

Cheyenne Forest Products, Inc., have 

exceeded the legal lending limit since 

before the August 31, 1981 examination of 

the Bank by the Federal Reserve Bank of 

Minnesota; 
f. The April 8, 1982 letter of 

transmittal of the state of Montana 

examination dated March 15, 1982 included 

a directive, given under the authority of 

section 31-1-432, MCA to reduce the total 

loans to Sam Arness and his interests to 

$480,000. The Bank has not complied with 

this directive; 

g. The Department has reasonable cause 

to believe that the Bank may be 

considering a further extension of credit 

to Sam Arness and his interests in a 

substantial amount which would be a 

further violation of section 32-1-432, 

MCA and the Bank's lending limit as well 

as a violation of the April 8, 1982 

letter of transmittal; 

1. The Bank is ordered to cease and 

desist in advancing any additional funds 

or loans to Sam Arness and all his 

business or corporate interests; 

2. The Bank is ordered to cease its 

noncompliance with the April 8, 1982 

directive by disposing of all loans to 

Sam Arness and his appropriate interests 

which exceed $480,000; 

Section 32-1-432 (1) (a), MCA, states: 

The total loans to a person, partnership, 

or corporation by a bank, including loans 

to a partnership and to the several 

members thereof, shall at no time exceed 

20% of the amount of the unimpaired 

capital and surplus of that bank. 

In October 1982, the defendants in both actions 

(appellant alone in one action and appellant and 

Arness-McGriffin in the other) filed amended answers to the 

complaints. In October 1983, the defendants again filed 
amended answers in both actions. The answers in both actions 

denied that the amounts sued upon were due, set up the August 

1982 loan agreement as an affirmative defense, and 

counterclaimed against the Bank for breach of the loan 

agreement. The October 1982 answers pray for specific 

performance of the loan agreement or, in the alternative, for 

damages. The October 1983 answers simply ask for damages. 

In November 1983, the Bank filed a reply to the affirmative 

defense and alleged four affirmative defenses to the 

counterclaim. In August 1984, Arness and Arness-McGriffin 

filed a second (actually third) amended answer and 

counterclaim consolidating both cases into one pleading. 

This answer reiterates the allegations of the previous 

answers and adds three new counterclaims. These new 

counterclaims, plus the one previously alleged, are (1) for 

breach of the loan agreement, (2) that the Bank's 

"repudiation of the subject contract constituted bad faith 

and unfair dealing in a commercial context" giving rise to a 

cause of action in tort, (3) for intentional infliction of 

emotional distress in that the Bank's actions "in repudiating 

the contract were outrageous in nature", and (4) the fourth 

counterclaim realleges the allegations of the first three 

counterclaims and further claims that the Bank acted 

maliciously, oppressively and in wanton disregard of 

appellant's rights. 

In February 1985, the Bank moved for summary judgment 

on all of the counterclaims of appellant and 

Arness-McGriffin. In moving for summary judgment on the 

counterclaims, the Rank relied solely on one affirmative 

defense, i.e., that the counterclaims were barred because 

they arose out of an illegal loan agreement. The District 

Court agreed with the Bank's contention and, in March 1986, 
the court granted summary judgment to the Bank on the 

counterclaims. This appeal followed. 

The standard of review is clear. Summary 

judgment is only proper under Rule 56(c), 

M.R.Civ.P., where the record discloses 

that no genuine issue of material fact 

exists and the moving party is entitled 

to judgment as a matter of law. 

Mutual Service Cas. Ins. Co. v. McGehee (Mont. 1985), 711 

P.2d 826, 827, 42 St.Rep. 2038, 2039-2040. Summary judgment 

was properly granted here as there was no disputed issue of 

material fact. The Commerce Department's notice to the Bank 

conclusively established, and appellant does not dispute, the 

determinative fact in this case. That fact is that the loan 

agreement is an illegal contract. 

The Commerce Department's notice established that the 

loan agreement authorized loans in excess of the Bank's legal 

lending limit. The agreement was contrary to an express 

provision of law, § 32-1-432, MCA, (cited above). Therefore, 

that agreement was unlawful under § 28-2-701, MCA, and void 

under § 28-2-603, MCA. 

Given that the contract was illegal, appellant cannot 

successfully pursue a counterclaim depending on and arising 

out of the contract. That is exactly what appellant 

attempts. Recently, this Court reaffirmed the rule that: 

"No principle of law is better settled 

than that a party to an illegal contract 

cannot come into a court of law and ask 

to have his illegal objects carried out, 

nor can he set up a case in which he must 

necessarily disclose an illegal purpose 

as the groundwork of his claim . . . The 

law, in short, will not aid either party 

to an illegal agreement. It leaves the 

parties where it finds them. Therefore 

neither a court of law nor a court of 

equity will aid the one in enforcins it, 

o; g&e damages for a breach of it_, or 
set it aside at the suit of the other, 

or, when the agreement -- has been executed 

- in whole or in L 

~art 2 

bv - the .-- ~avment 

of money or the transfer of other 

roperty, lend its aid to recover it 

Eack. I' (Citations omitted. ) (~m~hasE . * 

in original.) 

McPartlin v. Fransen (1982), 199 Mont. 143, 146-147, 648 P.2d 

729, 730-731, quoting McManus v. Fulton (1929), 85 Mont. 170, 

182-183, 278 P. 126, 131. Appellant's own language in the 

counterclaims demonstrates he seeks damages for an alleged 

breach of the illegal agreement. Count I is for breach of 

contract. Counts I1 and I11 both rely on the Bank's alleged 

"repudiation of the contract." Count IV realleges the 

previous allegations and labels the conduct malicious, 

oppressive and in wanton disregard of appellant's rights. 

Under the rule cited in McPartlin, the District Court 

properly granted summary judgment to the Bank on appellant's 

counterclaims. 

Appellant argues that he is not in pari delicto 

(equally at fault) in comparison to the Bank and that he 

should therefore be allowed to pursue his claims. Montana 

cases have established that under certain circumstances a 

plaintiff may pursue a claim based on an illegal contract 

where the plaintiff is not in pari delicto. See Clifford v. 

Great Falls Gas Co. (1923), 68 Mont. 300, 216 P. 114; Carroll 

v. Beardon (1963), 142 Mont. 40, 381 P.2d 295. Both the 

Clifford case and the Carroll case are limited to very 

particular situations and specific illegal contracts. 

Neither of those decisions are applicable to the case at bar. 

Courts and commentators agree that public policy plays 

a large role in deciding whether a plaintiff can enforce, sue 

on, or collect sums paid on an illegal contract. See, e.g., 
Jackson Purchase, Etc. v. Local Union 816, Etc. (6th ~ir. 

1981), 646 F.2d 264; Golberg v. Sanglier (Wash. 1982), 639 

P.2d 1347; 6A A. Corbin, Corbin on Contracts, S 1533, p. 809 

(1962). In this case, the legislature has articulated a 

public policy under S 32-1-432, MCA, that the depositors of a 

bank should be protected. To allow appellant to pursue his 

claims against the Bank would circumvent that public policy. 

We find that public policy militates against allowing 

appellant to pursue his claims. Given that policy and the 

McPartlin decision, we hold that the District Court correctly 

granted summary judgment. 

Affirmed. 

I 

Justices 

Mr. Justice John C. Sheehy: 

I dissent. 

Justice /