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No. 97-718

IN THE SUPREME COURT OF THE STATE OF MONTANA

1998 MT 219

CITY OF CUT BANK, STATE OF MONTANA,

Plaintiff and Appellant,

v.

TOM PATRICK CONSTRUCTION, INC.,

Defendant and Respondent.

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APPEAL FROM: District Court of the Ninth Judicial District,

In and for the County of Glacier,

The Honorable Marc G. Buyske, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Robert G. Olson; Frisbee, Moore & Olson, Cut Bank, Montana

For Respondent:

Brian Lilletvedt; Bosch, Kuhr, Dugdale, Martin & Kaze, Havre, Montana

Submitted on Briefs: May 28, 1998

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Decided: September 3, 1998

Filed:

__________________________________________

Clerk

Justice W. William Leaphart delivered the Opinion of the Court.

¶ City of Cut Bank (Cut Bank) appeals from the decision of the Ninth Judicial 

District Court, Glacier County, dismissing with prejudice Cut Bank's complaint 

based upon the United States Supreme Court's decision in Doctor's Associates, Inc. v. 

Casarotto (1996), 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902 (Casarotto). More 

specifically, the District Court determined that the transaction between Cut Bank 

and Tom Patrick Construction (Tom Patrick), which is the basis of the current 

action, involved interstate commerce and thus must be arbitrated pursuant to the 

Federal Arbitration Act (FAA). We reverse and remand.

Factual and Procedural Background

¶ Cut Bank entered into a construction contract with Tom Patrick on November 16, 1993. The 

contract required Tom Patrick to replace a water line in Bum Coulee, construct an access road 

and stabilize the surrounding coulee and ditch areas. Tom Patrick completed the first two stages--

replacing the water line and constructing the access road. Cut Bank, however, contends that the 

riprap materials used by Tom Patrick in the stabilization stage of the construction were 

insufficient to complete the project to specifications. 

¶ Cut Bank made several requests that Tom Patrick complete the project in accordance with the 

contract but eventually hired the services of another contractor to complete the project according 

to specifications. Completion of the project was more costly than the original contract price. Cut 

Bank refused to the make final payment due to Tom Patrick under the contract and refused to 

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surrender Tom Patrick's bond and performance bond. 

¶ As a result, Tom Patrick served Cut Bank with a notice of intent to arbitrate the dispute. Cut 

Bank objected to arbitration proceedings, asserting that no valid contract for arbitration existed 

because the construction contract did not comply with § 27-5-114(4), MCA (1993), which required 

that notice that a contract is subject to arbitration be typed in underlined capital letters on the 

front page of the contract. Cut Bank filed a complaint in District Court seeking a stay of 

arbitration. Tom Patrick dismissed the arbitration proceedings and requested that the District 

Court stay further proceedings pending the resolution of the challenge to § 27-5-114, MCA, in 

Casarotto. The District Court granted the stay.

¶ The United States Supreme Court issued its decision in Casarotto (1996), 517 U.S. 681, 116 S.Ct. 

1652, 134 L.Ed.2d 902, determining that § 27-5-114(4), MCA, was preempted by the FAA. 

Thereafter, Tom Patrick moved to dismiss Cut Bank's complaint for failure to state a cause of 

action. Cut Bank responded that the FAA was not applicable to the construction contract because 

the contract did not involve interstate commerce. The District Court, citing Casarotto, dismissed 

Cut Bank's complaint with prejudice. Cut Bank appeals to this Court presenting three issues for 

review. We determine that the issue of whether the complaint alleges an underlying contract 

involving interstate commerce is dispositive and therefore do not reach the remaining issues.

Standard of Review

¶ Our standard of review of district court rulings on motions to dismiss under Rule 12(b)(6), M.R.

Civ.P., is set forth in Willson v. Taylor (1981), 194 Mont. 123, 634 P.2d 1180:

A complaint should not be dismissed for failure to state a claim unless it appears 

beyond doubt that the plaintiff can prove no set of facts in support of his claim which 

would entitle him to relief. A motion to dismiss under Rule 12(b)(6), M.R.Civ.P., has 

the effect of admitting all well-pleaded allegations in the complaint. In considering 

the motion, the complaint is construed in the light most favorable to the plaintiff, and 

all allegations of fact contained therein are taken as true. 

Willson, 194 Mont. at 126, 634 P.2d at 1182 (citations omitted). The District Court's determination 

that Cut Bank's complaint failed to state a claim is a conclusion of law. Our standard of review of 

the trial court's conclusions of law is whether the tribunal's interpretation of the law is correct. 

Steer, Inc. v. Department of Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.

Discussion

¶ Congress, in enacting the FAA, sought to foreclose state legislative attempts to 

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undercut the enforceability of arbitration agreements. The United States Supreme 

Court has explained that § 2 of the FAA reflects a strong national policy favoring 

arbitration agreements. Perry v. Thomas (1987), 482 U.S. 483, 107 S.Ct. 2520, 96 L.

Ed.2d 426. As a result of this strong policy, agreements to arbitrate will be upheld 

under the FAA unless the agreement is not part of a contract evidencing interstate 

commerce or is revocable "upon such grounds as exist at law or in equity for the 

revocation of any contract." 9 U.S.C. § 2. 

¶ Recognizing that many contracts provide little warning to parties that a contract is 

subject to arbitration, the Montana legislature enacted § 27-5-114(4), MCA. That 

section required that notice that a contract was subject to arbitration be printed in 

capitalized underlined print on the front of the contract. In so providing, the 

legislature sought to ensure that parties to a contract were aware, when they signed a 

contract subject to an arbitration clause, that they were waiving their constitutional 

right to access the courts. The legislature sought to prevent parties from waiving that 

right without their full knowledge.

¶ Specifically, § 27-5-114(4), MCA, stated that "notice that a contract is subject to 

arbitration pursuant to this chapter shall be typed in underlined capital letters on the 

first page of the contract; and unless such notice is displayed thereon, the contract 

may not be subject to arbitration." This section (since repealed) was in effect in 

November 1993, at the time that Cut Bank entered into the construction contract 

with Tom Patrick. The construction contract did not comply with the notice 

requirement of § 27-5-114(4), MCA. Rather, Section 16.1, located in the Standard 

General Conditions on page 110 of the Contract Documents, stated that "[a]ll claims, 

disputes and other matters in question between [Cut Bank] and [Tom Patrick] 

arising out of or relating to the Contract Documents or the breach thereof . . . will be 

decided by arbitration . . . ." At the District Court, Cut Bank contended that this 

provision does not comply with the requirements of § 27-5-114(4), MCA, therefore 

that the agreement to arbitrate is not enforceable. Tom Patrick, on the other hand, 

maintained that this action is controlled by the United States Supreme Court's 

decision in Casarotto. 

¶ The United States Supreme Court, in Casarotto, held that Montana's first-page 

notice requirement found at § 27-5-114(4), MCA, conflicted with the FAA and was 

therefore preempted by the federal law. Specifically, the Supreme Court explained 

that "[c]ourts may not . . . invalidate arbitration agreements under state laws 

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applicable only to arbitration provisions." Casarotto, 116 S.Ct. at 1656. Instead, the 

arbitration provisions must be treated like any other contract and may only be 

invalidated "upon such grounds as exist at law or in equity for the revocation of any 

contract." 9 U.S.C. § 2.

¶ Cut Bank asserts that this action is distinguishable from Casarotto because the 

transaction in this case does not involve interstate commerce. Specifically, Cut Bank 

maintains that this case is purely local, that it does not involve interstate commerce, 

and therefore that the FAA does not apply. Accordingly, the sole issue presented to 

this Court is whether the complaint alleges a contract involving interstate commerce, 

thereby invoking the FAA, or whether the contract is purely local and outside the 

purview of the FAA.

¶ The District Court stated, in its order dismissing Cut Bank's complaint, that "from 

a review of the undisputed facts, . . . this matter . . . involve[s] interstate commerce." 

As explained above, a motion to dismiss the complaint for failure to state a claim has 

the effect of admitting all well-pleaded allegations in the complaint. The complaint is 

construed in the light most favorable to the plaintiff and all allegations of fact 

contained in the complaint are taken as true. Willson, 194 Mont. at 126, 634 P.2d at 

1182. 

¶ Cut Bank's complaint alleges that it is a municipal corporation created and existing 

pursuant to the laws of the State of Montana, that Tom Patrick is a corporation 

organized and doing business in Montana, and that the contract entered into by the 

parties involved work to be performed in Montana. Since the District Court's order 

does not specify the basis for its conclusion that the matter involved interstate 

commerce, we cannot determine the District Court's underlying rationale. In any 

event, we review a district court's conclusions of law to determine whether the court 

correctly interpreted the law. A review of the complaint, when viewed in the light 

most favorable to Cut Bank, reveals that the construction contract as alleged in the 

complaint was a local transaction that did not involve interstate commerce. The 

District Court incorrectly dismissed Cut Bank's complaint pursuant to Casarotto. 

¶ Pursuant to the Commerce Clause of the United States Constitution, Congress has 

the power to regulate commerce among the states. U.S. Const. art. I, § 3. In United 

States v. Lopez (1995), 514 U.S. 549, 115 S.Ct. 1624, 131 L.Ed.2d 626, the United 

States Supreme Court explained that there are three broad categories of activities 

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that Congress can regulate pursuant to its commerce power: the use of channels of 

interstate commerce, the regulation and protection of the instrumentalities of 

interstate commerce, and those activities having a substantial relation to interstate 

commerce. Lopez, 514 U.S. at 558-59. The construction contract at issue in this case 

does not entail use of the channels of interstate commerce nor regulation and 

protection of the instrumentalities of interstate commerce. Thus, unless the contract 

has a substantial relation to interstate commerce, it is not regulated by federal law.

¶ The Court in Lopez further clarified that, with respect to the third category, the 

proper test for determining whether an activity has a substantial relation to 

interstate commerce requires an analysis of whether the regulated activity 

"substantially affects" interstate commerce. Lopez, 514 U.S. at 559. The Court 

explained that there are no precise formulations; rather, the question of 

congressional power under the Commerce Clause is "necessarily one of degree." 

Lopez, 514 U.S. at 566-67. In determining the degree of power Congress sought to 

exercise over a particular activity, the Supreme Court looks to the language of the 

congressional act. Most statutes passed by Congress which seek authority pursuant 

to its Commerce power include a jurisdictional element prescribing such power. The 

jurisdictional element found in § 2 of the FAA, which was absent from the relevant 

statute in Lopez, ensures a case by case inquiry of whether the activity is one 

"involving [interstate] commerce." 9 U.S.C. § 2.

¶ Specifically, the jurisdictional element of § 2 of the FAA allows Congress to 

regulate contracts "evidencing a transaction involving commerce." 9 U.S.C. § 2. In 

Allied-Bruce Terminex Co. v. Dobson (1995), 513 U.S. 265, 115 S.Ct. 834, 130 L.

Ed.2d 753, the Supreme Court concluded "that the word 'involving' is broad and is 

indeed the functional equivalent of the word 'affecting.' " Allied-Bruce, 513 U.S. at 

273-74. As a result, the Supreme Court determined that in enacting the FAA, 

Congress intended to exercise its powers under the Commerce Clause to the fullest. 

Allied-Bruce, 513 U.S. at 277. 

¶ In addition, in Allied-Bruce, the Supreme Court clarified that in determining 

whether a particular transaction falls within the ambit of § 2 of the FAA, the 

transaction must "in fact" involve interstate commerce. Allied-Bruce, 513 U.S. at 

281. In so holding, the Supreme Court specifically rejected a test that focused on the 

understanding of the parties that a transaction involves interstate commerce. AlliedBruce, 513 U.S. at 281. The parties in Allied-Bruce did not contest that the 

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transaction in that case in fact involved interstate commerce. Likewise, in Casarotto, 

the parties did not contest that the franchise agreement involved interstate 

commerce. See Casarotto v. Lombardi (1995), 274 Mont. 3, 8, 901 P.2d 596, 598 

(indicating that we assumed in that decision that the transaction with which we were 

concerned involved interstate commerce). In the case at bar, however, the central 

issue is whether the construction contract involved interstate commerce.

¶ Cut Bank maintains, as it did in its complaint, that it is a municipal corporation 

created and existing pursuant to the laws of the State of Montana. Tom Patrick is a 

corporation chartered in the State of Montana with its principal place of business in 

Havre, Hill County, Montana. Delta Engineering, the other main party to the 

construction contract, is an engineering firm organized in Montana with its principal 

place of business in Great Falls, Cascade County, Montana. The construction 

contract called for work to be performed in Bum Coulee, Montana. All phases of the 

construction were to occur within the confines of Glacier County, Montana.

¶ In support of its argument that the construction contract involved interstate 

commerce, Tom Patrick maintains that it was required per the contract to purchase 

liability insurance which it obtained from Safeco at its area office in Spokane, 

Washington. In addition, Tom Patrick contends that it purchased performance and 

payment bonds from National American Insurance Co., located in Boulder, 

Colorado. Finally, Tom Patrick states that it purchased materials out of state for 

delivery to Montana.

¶ Tom Patrick's contentions all raise matters outside of the pleadings. In dismissing 

the complaint, the court was responding to Tom Patrick's motion to dismiss for 

failure to state a claim upon which relief could be granted under Rule 12(b), M.R.Civ.

P. There is no indication in the record that the District Court gave notice that it 

would consider matters outside the pleadings, thereby converting the Rule 12 motion 

to a Rule 56 motion for summary judgment. Accordingly, we accept the court's order 

at face value; that is, that it concluded, based upon the allegations in the complaint 

and on the information in the attached documents, that the transaction involved 

interstate commerce and thus the United States Supreme Court's holding in 

Casarotto was controlling. In ruling on a Rule 12 motion to dismiss, the only relevant 

document is the complaint and any documents it incorporates by reference. Although 

the attached contract documents required Tom Patrick to purchase insurance and 

bonds, neither the complaint nor the attached contracts required Tom Patrick to 

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purchase bonds or insurance out of state. As to the purchase of materials out of state, 

that too is a matter outside the pleadings. Furthermore, we must assume that the 

court's decision was not premised on this assertion of fact since it was not 

undisputed. Cut Bank contends that the materials were purchased from Montana 

firms and transported by a Montana trucking firm. Even if the court had converted 

the motion to a Rule 56 motion and considered matters outside the pleadings, it could 

not issue a summary judgment based upon such disputed facts. 

¶ This case was in the pleading stage with only a complaint filed. The District Court 

order, dismissing Cut Bank's complaint for failure to state a claim, presents no 

analysis or reasoning in support of its conclusion that this action involves interstate 

commerce. This Court, after reviewing the pleadings and briefs before it, concludes 

that the construction contract as alleged in the complaint was a local transaction, not 

involving interstate commerce, and therefore we hold that the District Court erred 

when, relying on Casarotto, it dismissed the complaint for failure to state a claim 

under Rule 12, M.R.Civ.P. We reverse and remand.

/S/ W. WILLIAM LEAPHART

We concur:

/S/ J. A. TURNAGE

/S/ JAMES C. NELSON

/S/ TERRY N. TRIEWEILER

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Justice Karla M. Gray, specially concurring.

¶ I concur in the entirety of the Court's opinion on the narrow issue of whether the District Court 

erred in dismissing Cut Bank's complaint, pursuant to Rule 12(b)(6), M.R.Civ.P., for failure to 

state a claim. I write separately to briefly address another matter raised by Tom Patrick.

¶ In addition to its contentions on the Rule 12(b)(6) issue addressed by the Court, Tom Patrick 

argues that Cut Bank should be bound by the contract it prepared, which requires submission of 

disputes to arbitration. The Court does not address this argument, and properly so, since the issue 

before us involves only Rule 12(b)(6) and, in resolving that issue, we look only to the allegations of 

the complaint. The question of whether Cut Bank can be held to the provisions of the contract it 

purportedly prepared and presented to Tom Patrick for execution simply does not fall within the 

issue presently before us and, therefore, that question is premature at this time. In my view, Tom 

Patrick can still raise that question via an affirmative defense, a motion for summary judgment or 

in some other context on remand.

/S/ KARLA M. GRAY

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