No. 05-565 IN THE SUPREME COURT OF THE STATE OF MONTANA 2006 MT 236

PRECISION THEATRICAL EFFECTS, INC., a Montana corporation, and RUSSELL R. NICKEL, an individual, Plaintiffs and Appellants,

v. UNITED BANKS, N.A., formerly known as UNITED BANK OF COLUMBUS, N.A., Defendant and Respondent.

APPEAL FROM: The District Court of the Twenty-Second Judicial District, In and For the County of Stillwater, Cause No. DV-2003-21, Honorable Blair Jones, Presiding Judge COUNSEL OF RECORD: For Appellants: W. Scott Green, Patten, Pete rman, Bekkedahl & Green, PLLC, Billings, Montana Paul G. Matt, Attorney at Law, Billings, Montana For Respondent: Michael G. Alterowitz, Timot hy B. Strauch, and Kelton D. Olney, Alterowitz, Strauch & Olne y, P.C., Missoula, Montana
Submitted on Briefs: June 1, 2006 Decided: September 19, 2006 Filed:

__________________________________________ Clerk2 Justice W. William Leaphart delive red the Opinion of the Court. ¶1 Precision Theatrical Effects, Inc. (“PTE”), and Russell R. Nickel, in his individual capacity, filed a complaint in the Twenty-Second Judicial Di strict Court alleging three counts against United Banks, N.A. (“Unite d”). United moved for summary judgment on all issues, while PTE and Nickel moved fo r partial summary ju dgment. The court granted summary judgment to United on all thre e issues and denied plaintiffs’ motion. ¶2 We restate the issues as follows: ¶3 1. Did the District Court err in concludi ng, as a matter of law, that since PTE and Nickel defaulted on the bank loans, United did not commit breach of contract in freezing PTE’s bank accounts? ¶4 2. Did the District Court err in gran ting summary judgment on the question of whether United breached the imp lied covenant of good faith and fair dealing as a matter of law? ¶5 3. Did the District Court err in determin ing that no fiduciar y relationship existed between the plaintiffs and United? ¶6 We reverse in part and affirm in part. BACKGROUND ¶7 PTE, a business that manufactured explos ive pyrotechnic materials, and Nickel, the company’s former majority owner and president, began a business relationship with United in 1997. As of April 2000, PTE had five loans in g ood standing with United. The3 total due on the combined PTE loans amounted to $170,420.50; Nickel also owed United an additional $41,164.66 on a separate loan. 1 At the time, the loan s were secured by the following collateral: $1 10,000 held by United, $374,000 of accounts receivable, and $1,254,000 in assets. The loans were gove rned by promissory notes and security agreements which provided that PTE and Nickel would be in default if they “do or fail to do something which causes [United] to belie ve that [United] will have difficulty collecting the amount [owed].” ¶8 On November 8, 1999, United put a hol d on all of PTE’s accounts after law enforcement raided Nickel’s residence and P TE’s business premises. On April 11, 2000, Nickel was arrested in Stillwat er County, Montana, and charged with nine felony counts related to possession, manufacture and sale of dangerous drugs. In order to conduct its business involving pyrotechnics, PTE was requi red to have a license from the Bureau of Alcohol, Tobacco and Firearms (ATF). The co rporation’s ATF license was in Nickel’s name at the time of his arrest. Federal law prohibits anyone who engages in the business of importing, manufacturing, or dealing in explosive material to operate without a license. 18 U.S.C. § 842(a)(1) (2000). The law also precludes any licensee, while under felony indictment, from shippi ng or transporting any explosiv e in interstate or foreign commerce or to receive or possess any explos ive which has been shipped or transported in interstate or foreign commerc e. 18 U.S.C. § 842(i)(1) (2000).

1 The loans to PTE includ ed: No. 489 owing $17,767.84; No. 350 owing $119,163.17; No. 173 owin g $13,604.41; No. 73 owing $8,546.57; No. 228 owing $11,338.51. The loan to Nickel was No. 763 owing $41,164.66.4 ¶9 United learned of Nickel’s a rrest on the day it occurred. Even thou gh PTE’s and Nickel’s loans were current, United placed a hold on PTE’s acco unts from April 11, 2000, until April 28, 20 00. While the loan contracts di d not specify “accounts freezing” as a remedy, the agreements did provide fo r setoff. United, however, chose to freeze the accounts, rather than setoff existing loan obligations. During the time PTE’s and Nickel’s accounts remained frozen, several of their checks were returned despite the fact that funds existed to pay the checks. ¶10 Also on the same day as his arrest, Nickel’s wife petitioned for divorce and requested a temporary restraining order barring the transfer, concealment or disposal of marital property. Consequen tly, at some point between Ap ril 11 and April 18, 2000, Nickel had $39,499.48 of PTE Europe BV f unds transferred into his divorce attorney’s

trust account. ¶11 On April 18, 2000, about a week after Nick el’s arrest, United sent PTE and Nickel notices that they were in de fault on their loans for the fo llowing reasons: Nickel was 90 percent stockholder and held th e federal license required to operate the business; Nickel was barred from having contact with PTE beca use of pending criminal charges; ATF advised United that the criminal charges placed Nickel’s ATF license in jeopardy; Nickel’s wife filed for divorce and Nickel’s parents (as landlords) threatened to evict the corporation; and Nickel moved $39,499.4 8 from PTE accounts receivable into his divorce attorney’s trust acco unt without advising United or seeking its consent.5 Ultimately United chose not to pu rsue the April 18, 2000, notic es of default, and instead decided to work with PTE’s counsel to resolve matters. By April 28, 2000, United and PTE reached a conditional agreement whereby United would release PTE funds, allowing the business to continue operating. Alth ough a memorandum agreement specifying the terms of the agreement was prepared, neither party apparently signed it. ¶12 Since Nickel’s arrest prohibited him fro m having contact with any PTE employee, Nickel assigned control of the business to his wife. A couple of weeks later, after determining that his wife had failed to adequa tely manage the corporation, Nickel orally turned control over to his fa ther, Dennis Nickel. On May 27, 2000, Dennis blocked the road leading to PTE, thus denying access to employees. That same day, Nickel sent an official letter to his father terminating his wife and appointing Dennis as PTE’s manager. In June 2000, Dennis inform ed United that he had sold PTE equipment, even though United had not requested such a sale. On June 5, 2000, Unite d asked for assurances that PTE would reopen and resume no rmal operating procedures. Te n days later, on June 15, 2000, United issued a second set of default notices, setting forth the same bases as the April 18 notice, along with th e following additional grounds: ATF advised that Nickel had failed to comply with AT F regulations and therefore revocation proceedings would be initiated; United had been told that equipment was sold for the purpose of shutting down the business, but Nickel refused to disclose the location of the equipment or identities of the purchasers; Nickel’s order viol ated court orders; PTE failed to provide an6 accounting of accounts receivable; PTE employ ees were prevented from working and essential operating equipment had been sold ; and PTE’s landlord evicted the business because it failed to negotiate a lease. On July 10, 2000, United in formed PTE’s counsel that it would commence foreclosure proceedings if it did not receive au thorization to pick up collateral. Thereafter, United agreed to postpone the commencement of foreclosure proceedings. On November 29, 2000, United filed suit to fo reclose on four of the six loans. ¶13 On June 2, 2003, PTE an d Nickel filed a complaint setting forth the following causes of action against United: (I) “on June 2, 2000, and thereafte r [United breached its contract with PTE and Nickel by committing] acts and omissions outside of the accepted commercial banking practices to deprive [PTE an d Nickel] of the benefit of their contract with [United]”; (II) “after Apr il 11, 2000, [PTE and Nickel] and [United] entered into a contract involving a special relationship [and] on or about June 2, 2000, [United] breached its contractual implie d covenant of good faith and fair dea ling with [PTE and Nickel] based on their special relationship” ; and (III) “after April 11, 2000, [United] committed acts which influenced PTE’s business and advised an d consulted with PTE . . . [and] such acts by [United] are proof of sp ecial circumstances between the parties and gave rise to fiduciary responsi bilities” which United breached. ¶14 The dissent argues that PTE and Nickel’s claims would not have survived a motion to dismiss on the pleadings because they did not specifically allege that United7 lacked “honesty in fact” in declaring a default and freezing PTE’s bank accounts. PTE and Nickel did allege, however, that United breached the imp lied covenant of good faith and fair dealing when it declared a default and froze all of PTE’s and Nickel’s bank accounts. Under notice pleading, this is su fficient to bring into play the statutory definition of “good faith” as meaning “honesty in fact in the co nduct or transaction concerned.” Section 30-1-201(19), MCA (1999). See Kunst v. Pass , 1998 MT 71, ¶¶ 35- 36, 288 Mont. 264, ¶¶ 35-36, 957 P.2d 1, ¶¶ 35-36 (complaint’s reference to the Landlord and Tenant Act sufficient to give notice of possible attorney fees provided for under the Act). In addition, a complaint should not be dismissed unless it appears certain that the plaintiff will be unable to recover under any set of facts which coul d be proven in support of his claim. Kleinhesselink v. Chevron, U.S.A. , 277 Mont. 158, 161, 920 P.2d 108, 110 (1996). ¶15 United moved for summary judgment conte nding that the terms of the security agreements stated that PTE an d Nickel would be in default if they “do or fail to do something which causes [United] to believe that [United] will have difficulty in collecting the amount [PTE an d Nickel] owe . . . .” Acco rding to United, undisputed material facts show that PTE and Nickel enga ged in actions that caused United to believe it would have difficulty collecting on the loan s. Such actions included the nine felony counts charged against Nicke l; the chance PTE’s ATF license would be revoked because it was in Nickel’s name; the moving of $ 39,499.48 from PTE’s accounts into the trust8 account of Nickel’s divorce a ttorney without advising Un ited or seeking its consent; closing the road to the corporation; and the sale of collateral to unidentified purchasers for an undisclosed amount. Based on the foregoing, United argued that it had legitimate reasons to believe that its ability to co llect on the loans had been jeopardized and therefore, by the terms of the security agreements, PTE and Nickel were in default. United noted that instead of seeking immediat e acceleration and foreclosure, it attempted to workout an agreem ent with PTE and Nickel and only when that failed did it send second notices of default and seek to foreclose. ¶16 United further argued that it had not br eached the contract because PTE and Nickel could not establish that United failed to act with “honesty in f act” or that it did not observe reasonable commercial standards, as mandated by Montana law. United asserted that it acted reasonably in light of PTE’s and Nickel’s contractual defaults. United also argued that it did not breach the implied covenant of good faith and fair dealing in tort, as alleged, because no “special relationship” existed between United and PTE and Nickel, as required by law. Finally, United noted th at a fiduciary relationship between a bank and a customer only exists under special circumstances where there are exclusive and repeated dealings with the same bank, which did not exist in this case. ¶17 In response, PTE and Nickel moved for partial summary judgment on the issue of breach of contract, asserting that United brea ched the covenant of good faith when it froze the accounts without lega l authority and caused PTE da mage as a result. More9 specifically, PTE and Nickel argued that they did not default on thei r loans and even if they had, nothing in the loan documents allowed United to freeze the accounts. ¶18 The District Court granted summary judgm ent to United, concluding that it had “substantial reason to believe” that Nickel’s AT F license was at risk of being revoked and therefore its declaration of default was “reason able and allowable” u nder the terms of the agreements since United believed, in good faith , that it might have difficulty collecting on the loans. The court further concluded that because United had the right to setoff PTE’s and Nickel’s accounts, it also had the right to take the “far less onerous” action of freezing the accounts. The court dismissed Count I, held that Counts II and III failed as a matter of law, and denied PTE and Nickel ’s motion for partial summary judgment. ¶19 PTE and Nickel now appeal, asking this Cour t to reverse the District Court’s order granting summary judgment. STANDARD OF REVIEW ¶20 This Court’s review of a district c ourt’s grant of summary judgment is de novo

. Our evaluation is the same as that of the tria l court. We apply the criteria contained in M. R. Civ. P. 56. According to this ru le, the moving party mu st establish both the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. If this is accomplished, th e burden then shifts to the non-movi ng party to prove, by more than mere denial and speculation, that a genuine issue does exist. If the court determines that no genuine issues of fact exist, the court must determine whether the10 moving party is entitled to ju dgment as a matter of law. Gliko v. Permann , 2006 MT 30, ¶ 12, 331 Mont. 112, ¶ 12, 130 P.3d 155, ¶ 12. DISCUSSION ¶21 1. Did the District Court err in conclu ding, as a matter of law, that since PTE and Nickel defaulted on the bank loans, Unit ed did not commit breach of contract in freezing PTE’s bank accounts? ¶22 The District Court dismissed Count I of PTE and Nickel’s complaint, which alleged that United committed breach of contract. The court, citing Montana Bank of Circle v. Meyers & Son , 236 Mont. 236, 245 P. 2d 1209 (1989), conc luded that PTE and Nickel were barred from making such a clai m because they committed the initial breach of contract by defaulting on their loans. In reaching this decision, the court noted that provisions in the security ag reements clearly stated that PTE and Nickel would be in default if anything happened to cause Unit ed to “believe” it w ould have “difficulty collecting” on the loans. The District C ourt reasoned that sinc e PTE operated under Nickel’s ATF license and federal law prohi bits any licensee from conducting business involving explosives while un der felony indictment, United had “substantial reason to believe . . . that there was real potential for a revocation of Nickel’s license at the time of his arrest.” The court thus concluded that “uncontested facts” showed that PTE and Nickel defaulted on their loans. We disagree.11 ¶23 The contract language states that PTE and Nickel would be in default if “anything . . . happens that causes [Unite d] to believe that [it would] have difficulty collecting the amount [owed].” Certainly, uncontested facts show that United knew of Nickel’s arrest, as well as the federal laws surrounding pyrotechnic sales and licensing. It does not automatically follow, ho wever, that no genuine issues of ma terial fact exist as to whether United, based on the contract language, had cause “to belie ve that [it would] have difficulty collecting.” This provision must be read in conjunction with § 30-1-203, MCA, 2 and § 30-1-208, MCA (1999), 3 which impose an obligation of “good faith” in the enforcement of a contract provision. The issue as to whether United breached the contract hinges upon a determination of whet her its belief that it would have difficulty collecting the amount due from PTE and Nickel was a good faith belief and whether it acted with honesty in fact when it invo ked a remedy (freezing of bank accounts) not provided for in the contract. “[T]he breach of a duty of good faith is a question of fact not susceptible to summary judgment.” Dobrocke v. City of Columbia Falls , 2000 MT 179, ¶ 51, 300 Mont. 348, ¶ 51, 8 P.3d 71, ¶ 51 (overrul ed on other grounds) (quoting

2 Section 30-1-203, MCA, provides that “[e]ve ry contract or duty within this code imposes an obligation of good faith in its performance or enforcement.”

3 Section 30-1-208, MCA (1999), provides: A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral “at will” or “w hen he deems himself inse cure” or in words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired. The burden of establishi ng lack of good faith is on the party against whom the power has been exercised.12 Simmons v. Jenkins , 230 Mont. 429, 435, 750 P.2d 1067, 1071 (1988)). Thus, given that the total due on the combined loans amounted to approxim ately $211,585 when United froze PTE’s and Nickel’s accounts, and United had collateral in the form of $110,000 cash in the bank, $374,000 of ac counts receivable, and $1,254, 000 in assets, it is for the factfinder to determine whether United ha d a good faith belief that it would have difficulty collecting the money owed on the outst anding loans. The District Court erred in determining on summary judgment that P TE and Nickel defaulted on their loans. ¶24 In the alternative, PTE and Nickel argue that, even assuming ar guendo that they were in default, United committed breach of contract when it froze PTE’s and Nickel’s accounts because such a remedy is not explicitly provided fo r in the loan agreements. The District Court determined that “because the bank had th e right to setoff [under the contracts] the entire amount of the debts agai nst the accounts held with the bank, it also had the right to freeze the accounts.” We conclude, however, that there remains a question of fact as to whether United, wh en it froze the accounts, despite its arguably secure position and in the absence of specific contractual authority to do so, acted with “honesty in fact in the tr ansaction concerned.” ¶25 Since there are genuine issues of material fact as to whether United acted in good faith in declaring a default a nd in freezing the bank account s, we reverse the District Court’s grant of summary judgment dismissing PTE and Nickel’s alle gations of breach of

contract.13 ¶26 2. Did the District Court err in gran ting summary judgment on the question of whether United breached th e implied covenant of good faith and fair dealing as a matter of law? ¶27 Given our conclusion that there is a questio n of fact as to United’s good faith in declaring a default and freezing bank accounts, it follows that the District Court also erred in granting summary judgment on Count II, breach of the implie d covenant of good faith and fair dealing in tort. The covenant of good faith only becomes an issue if the trier of fact first determines th at United breached its contract. See Montana Bank of Circle , 236 Mont. at 245, 769 P.2d at 1214 (because the bank had not breached the underlying contract, this Court held that it could not rule that the bank acted unreasonably and in bad faith). We therefore reverse th e District Court’s order granting summary judgment on Count II. ¶28 3. Did the District Court err in determ ining that no fidu ciary relationship existed between the plaintiffs an d United as a matter of law? ¶29 In Montana, the relationship between a bank and its customer is generally described as that of debtor and creditor, and does not give rise to fiduciary responsibilities. A limited exception to th is rule exists, however, when special circumstances thrust a bank be yond the role of a simple cr editor and into the role of advisor. Lachenmaier v. First Bank Systems, Inc. , 246 Mont. 26, 33, 803 P.2d 614, 618 (1990).14 ¶30 PTE and Nickel argue that the court erred in granti ng summary judgment on Count III because the record shows genuine issues of material fact exist as to whether they had a “special relationship” with Unit ed, giving rise to a fi duciary duty. More specifically, PTE and Nickel contend that si nce United controlled th e checking accounts (which it froze), caused some checks to be return ed, and then chose which checks to honor, a special relationship existed. ¶31 This Court recently reaffirmed in Gliko , ¶ 24, that “whether a fiduciary duty exists between two parties is a question of law, not fact, and it may be resolved on summary judgment when no genuine issues of material fact remain. Likewise, whether a ‘special relationship’ exists between two parties such as would give rise to a fiduciary duty is a question of law, not fact, for th e relationship and the duty are two sides of the same coin.” We also noted that since a “special relati onship” does not normally exist in dealings between a bank and its customer, the court ma y have to make a fact-intensive inquiry. Gliko , ¶ 24. Importantly, however, while the circ umstances of the particular relationship are factual and disputes over material fa cts will preclude summary judgment, “the conclusion drawn by a court from undisputed fa cts is one of law, not of fact.” Gliko , ¶ 24. ¶32 In this case, PTE and Nickel argue that United’s actions improperly influenced the internal affairs of PTE and that United took on an advisory position following the events of April 11, 2000. United, on the other hand, contends that there were no special circumstances, that PTE and Nickel had independent counsel, and that there was no15 evidence that United had exclusive dealings with PTE and Nickel. While the legal import of these facts may be in dispute, the facts themselves are not. Thus, the District Court did not err in concluding, by way of summary judgment, that no special relationship or fiduciary duty existed. CONCLUSION ¶33 We reverse the District Court’s summary judgment ruling as to Counts I and II, and affirm on Count III.

/S/ W. WILLIAM LEAPHART

We concur:

/S/ KARLA M. GRAY /S/ PATRICIA COTTER /S/ JAMES C. NELSON /S/ BRIAN MORRIS

Justice Jim Rice dissenting in pa rt and concurring in part. ¶34 Under Issue 1, the Court erroneously concludes that there was a genuine issue of material fact regarding whether United ha d a good faith belief that it would have difficulty collecting on its loans. I agree that the question of whether a duty of good faith was breached is generally reserved to the trier of fact. However, that general principle16 does not relieve PTE and Nickel from the obligation of alleging facts sufficient to establish that United did not act in “good faith,” as that term is defined under the applicable statute. In the su mmary judgment context, evidence of such facts must also be offered. Plaintiffs failed to do either. Indeed, their claim would not have survived a motion to dismiss on the pleadings. ¶35 The Court correctly cites § 30-1-208, MC A (1999), which requires that United must have “in good faith believe[d] that th e prospect of payment or performance [was] impaired.” The definition of good faith applicable to this case is the 1999 version of § 30-1-201(19), MCA, and reads as follows: “‘Good faith’ means honesty in fact in the conduct or transaction concerned.” (Emphasis a dded.) In their District Court arguments, the parties used the definiti on of good faith under § 28-1 -211, MCA, which references honesty and the observance of reasonable comme rcial standards, and reads similarly to the UCC definition in Title 30—as it was am ended in 2005. Howe ver, the relevant events occurred prior to the 20 05 amendment, and the District Court correctly recognized that the Title 30 definition of good faith, prior to the 2005 amendment, applied. ¶36 Thus, for PTE and Nickel to survive Unite d’s summary judgment motion, they had to allege (and offer eviden ce) that, not only did United have insufficient “reason to believe” its collection efforts would be impa ired, but that United lacked good faith because it was dishonest in its asserted belief that the plaintiffs’ prospects for repayment were impaired. PTE and Nick el never alleged such dishonesty, but instead alleged in17 their complaint that United “committed acts and omissions outside of the accepted commercial banking practices” and argued in su mmary judgment that United “did not act according to reasonable commercial standards of fair dealing.” These claims are made under the Title 28 standard, not the applicable Title 30 standard. By failing to allege dishonesty with respect to their good faith cl aim as required by the controlling statute, PTE and Nickel failed to state a claim upon which relief could be granted, and it should fail as a matter of law. As we recently held: Pursuant to Rule 8(a), M.R.Civ.P., a complaint must put a defendant on notice of the facts that the plaintiff intends to prove; the facts must disclose the elements necessary to make the cl aim; and the compla int must demand judgment for the relief so ught by the plaintiff. Kunst v. Pass , 1998 MT 71, ¶ 35, 288 Mont. 264, ¶ 35, 957 P.2d 1, ¶ 35. Wise v. CNH Am., LLC , 2006 MT 194, ¶ 8, 333 Mont. 181, ¶ 8, ___ P.3d. __ _, ¶ 8. Here, the complaint failed to either allege dishones ty or provide any kind of indication of the facts which would be offered in support of such a claim. Thus, the pleading requirements we applied in Wise were not satisfied here. ¶37 The District Court held similarly, but focu sed on the lack of evidence, concluding that “Plaintiffs cannot prove a lack of hone sty in fact relative to United Banks’ decision to declare a default.” This conclusion was ba sed upon the proper de finition of good faith and a correct assessment of Plaintiffs ’ failure of proof. I would affirm.18 ¶38 In view of my position under Issue 1 th at United did not breach the contract, I would also affirm the District Court’s im position of summary judgment on Issue 2. I concur with Court’s disposition of Issue 3. /S/ JIM RICE

Justice John Warner joins in the dissenting and concurring opinion of Justice Rice.

/S/ JOHN WARNER