DA 07-0750

IN THE SUPREME COURT OF THE STATE OF MONTANA

2009 MT 86

CYNTHIA R. JOHNSON,

Plaintiff and Appellant,

v.

DISTRICT VII, HUMAN RESOURCES DEVELOPMENT

COUNCIL and FIRST MONTANA TITLE COMPANY

OF BILLINGS,

Defendants and Appellees.

APPEAL FROM: District Court of the Thirteenth Judicial District,

In and For the County of Yellowstone, Cause No. DV-06-0142

Honorable Gregory R. Todd, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Thomas E. Towe, Towe, Ball, Enright, Mackey & Sommerfeld,

Billings, Montana

For Appellees:

Peter T. Stanley, Attorney at Law, Billings, Montana

Submitted on Briefs: January 7, 2009

Decided: March 20, 2009

Filed:

__________________________________________

Clerk

March 20 2009
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Justice Brian Morris delivered the Opinion of the Court.

¶1 Cynthia R.Johnson (Johnson) appealsfroman order ofthe Thirteenth JudicialDistrict

Court, Yellowstone County, that required Johnson to pay District VII, Human Resources

Development Council (HRDC) $16,612.09 in loan principal and interest, attorneyfees, costs,

and accrued interest. Johnson’s appeal requires us to resolve the following issues:

¶2 Whether the District Court correctly converted HRDC’s counterclaim of mutual

mistake to an affirmative defense.

¶3 Whether the District Court properly denied Johnson’s motion for partial summary

judgment.

¶4 Whether the District Court properly granted affirmative relief to HRDC on its

counterclaimof mutual mistake when the court deemed the counterclaimto be an affirmative

defense.

PROCEDURAL AND FACTUAL BACKGROUND

¶5 Johnson applied for a loan with HRDC to purchase an assisted living facility. Denise

Jordan (Jordan), HRDC’sloan officer, processed Johnson’sloan application and determined

that HRDC would require extra security on the loan. Johnson agreed to a second mortgage

on her home and a lien on her business equipment.

¶6 Johnson received a letter from Jordan on February 20, 1998, notifying her that

HRDC’s loan review board had approved the loan at a 13% fixed interest rate. Jordan

prepared all the loan documents including the loan agreement, promissory note (note), and

Montana trust indenture.
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¶7 Johnson and HRDC signed a loan agreement on February 26, 1998. The terms ofthe

agreement included the principal sum of $21,661, for a five-year term with monthly

payments at an interest rate of 13% per annum. Johnson and HRDC also signed the note on

February 26, 1998. The terms of the note included the correct principal sumof $21,661 and

monthly paymentsin the amount of $362.23 forsixty months. The note incorrectly listed an

interest rate of 0.13% per annum. Johnson conveyed her home by issuing a deed of trust on

February 26, 1998, that listed First Montana Title Company (FMTC) as the trustee and

HRDC as the lender.

¶8 Johnson discovered the interest rate error in March 2001 when she applied for a real

estate loan. Johnson testified that she called HRDC about the discrepancy in the loan payoff

amount. Johnson contended that Jordan asked her to sign new loan papers to repay the

$16,000 deficiency at a nine percent interest rate. Johnson understood her balance at that

time to be approximately $8,800.

¶9 Johnson further testified that she had been willing to pay half of the $16,000 on the

grounds that the mistake had not been hers and that she timely had made her monthly

payments. Johnson claimed that Jordan failed to return her telephone calls and that Jordan

eventually referred her to HRDC’s counsel, Peter Stanley (Stanley). Johnson testified that

Stanley informed her that the error was a “scrivener’s error,” a mutual mistake, and thus

Johnson owed the entire $16,000 loan balance.

¶10 Jordan testified that she had discovered the discrepancy in interest rates at

approximately the same time as had Johnson. She immediately contacted Stanley. Jordan
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testified that she had made the mistake in interest rates and monthly calculations due to her

unfamiliarity with HRDC’s newly acquired lending software. She simply had input the

information incorrectly. Jordan denied Johnson’s claim that she had offered Johnson a

change in the loan’sterms. She lacked authority to approve such a change without approval

from the loan committee or HRDC’s executive director. Jordan admitted, however, that she

had been willing to compromise with Johnson on extending the length of the payment and

reducing the interest rate on future payments based on the authority ofthe executive director.

¶11 Jordan further testified that Johnson made her last payment of $362.23 on March 5,

2003, leaving an outstanding loan balance of $11,066.44. Jordan calculated the 13%interest

rate on that balance from March 5, 2003, through January 8, 2007, to yield an accrued

interest amount of $5,545.65. Jordan thus calculated $16,612.09 as the total loan amount

due. Jordan acknowledged that she was unaware of any demands by HRDC upon Johnsonto

pay any interest after her last payment.

¶12 Johnson requested both FTMC and HRDC to release the lien on her home about two

years after her final payment. FTMC refused. FTMC required a reconveyance request from

HRDC and proof that Johnson had satisfied the loan. HRDC refused to request a

reconveyance or release the trust indenture mortgage on Johnson’s home until Johnson

repaid the full amount of the loan.

¶13 Johnson filed a complaint for damages on February 10, 2006, based upon HRDC’s

failure to reconvey her property and other actual damages arising from the lost potential to

purchase and sell another piece of property due to the encumbrance on her property. HRDC
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denied Johnson’s entitlement to damages and filed a counterclaimin which it alleged mutual

mistake. HRDC claimed that Johnson knew of the clerical error in the note and sought

payment of the note’s full amount and allowable attorney fees and costs.

¶14 Johnson moved for partial summary judgment on the issue of HRDC’s liability.

Johnson argued that the court should enforce the note’s plain language. Johnson further

asserted that the two-year statute of limitations had run on HRDC’s mutual mistake

counterclaim. HRDC asserted that the 0.13% interest was a “scrivener’s error” and that the

court may correct a mutual mistake made in the preparation of a legal document. HRDC

argued that the longer eight-year statute of limitations for action on a written document

should apply to its counterclaim.

¶15 The District Court denied Johnson’s motion for partial summary judgment. The court

determined that HRDC improperly had designated its claim of “mutual mistake” as a

counterclaim. The court determined instead that the alleged “mutual mistake” constituted an

affirmative defense for which no statute of limitations applied.

¶16 The District Court held a trial on January 8, 2007. The court determined that Johnson

knew before applying for the loan that HRDC offered a 13% interest rate. The court opined

that Johnson’s claim of 0.13% interest rate conflicted with the nature of HRDC -- to offer

fundsto high-risk borrowers. The court further determined that Johnson had signed the loan

agreement and that she had accepted the 13% interest rate. As a result, the court concluded

that Johnson knew, or suspected, that the rate offered on the note mistakenly listed the

interest rate at 0.13%.
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¶17 The court ruled that Johnson’s loan remained due and owing and therefore Johnson

suffered no actual damages from HRDC’s refusal to release the Montana trust indenture

from her property. The court proceeded to revise the note pursuant to § 28-2-1611, MCA.

This statute allows a revision when a party has committed a unilateral mistake that the other

party knew, or suspected, at the time of contracting. The court concluded that 13% per

annumover the five-year termofthe loan constituted the appropriate interest rate to be listed

on all documents involved in the transaction. The court held Johnson to be liable for the

unpaid balance of $16,612.09. The court recognized that the note allowed HRDC to collect

attorney fees and costs. The court’sjudgment included an award of $6,075 in attorney fees,

$115 in costs, plus interest to HRDC. Johnson appeals.

STANDARD OF REVIEW

¶18 We review de novo the District Court’s decision to convert HRDC’s counterclaimto

an affirmative defense. Yellowstone County v. Drew, 2007 MT 130, ¶ 11, 337 Mont. 346,

160 P.3d 557. We review for correctness the district court’s application of the statute of

limitations. Wing v. State ex rel. Dept. of Transp., 2007 MT 72, ¶ 9, 336 Mont. 423, 155

P.3d 1224.

DISCUSSION

¶19 The unorthodox procedural history in the District Court continues on appeal asHRDC

failed to file a brief. We must decide this mattersolely on Johnson’s brief and our review of

the District Court record. As a result, the Court has been forced to look to legal authorities

far beyond those presented by the parties to reach the correct result in this matter.
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¶20 Whether the District Court correctly converted HRDC’s counterclaim of mutual 

mistake to an affirmative defense.

¶21 The District Court relied upon M. R. Civ. P. 8(c) to support its decision to convert 

HRDC’s mutual mistake counterclaimto an affirmative defense. Rule 8(c) permitsa courtto

consider a mistakenly designated counterclaim to be an affirmative defense “if justice so

requires.” The court determined that justice required it to treat HRDC’s mutual mistake

counterclaim as an affirmative defense to avoid applying the two-year statute of limitations

set forth in § 27-2-203, MCA, to HRDC’s mutual mistake counterclaim.

¶22 Section 27-2-203, MCA, provides for a two-year period for the initiation of an action

for relief on the grounds offraud or mistake. The cause of action accrues upon discovery by

the aggrieved party ofthe factsthat constitute the fraud or mistake. Section 27-2-203,MCA.

In D’Agostino v. Swanson, 240 Mont 435, 784 P.2d 919 (1990), the purchasers of real

property brought an action to reform or rescind a property contract based on mistake. We

determined that mutual mistake was the essence of the action and applied the two-year

statute of limitations pertaining to actions seeking relief on the ground of mutual mistake.

D’Agostino, 240 Mont. at 442, 784 P.2d at 923. Similarly, in Naftco Leasing Ltd. v. Finalco,

Inc., 254 Mont. 89, 92-93, 835 P.2d 728, 730-31 (1992), the plaintiffs filed an action to

reformlease agreements based upon a mutual mistake discovered more than five years after

executing the lease agreements. This Court cited D’Agostino and affirmed that § 27-2-203,

MCA, barred the plaintiff’s action.
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¶23 HRDC isthe aggrieved party in this case. Its counterclaimalleged a mutual mistake.

The question arises, therefore, when HRDC learned ofthe mistake. The parties executed the

loan agreement and note on February 26, 1998. The loan agreement provided a 13% interest

rate. The promissory note and accompanying payment coupons provided a 0.13% interest

rate. Johnson and Jordan testified that they separately discovered the mistake in March

2001. Stanley acknowledged the mistake in writing on July 20, 2001, and informed Johnson

that approximately $16,000 remained due. Thus, HRDC discovered the mutual mistake no

later than July 20, 2001. The two-year period prescribed in § 27-2-203, MCA, would have

expired in 2003. D’Agostino, 240 Mont. at 442, 784 P.2d at 923. HRDC waited until March

27, 2006, to file its counterclaim based upon mutual mistake. The two-year limitations

period contained in § 27-2-203, MCA, would have barred HRDC’s counterclaim.

D’Agostino, 240 Mont. at 442, 784 P.2d at 923.

¶24 The court deemed application of this two-year limitation period to constitute an

undeserved windfall to Johnson in light of its conclusion that Johnson knew, orshould have

known, that the 13% interest rate set forth in the loan agreement applied. The court further

pointed to the fact that HRDC exists to provide loans to high risk borrowers. These high

risks naturally correspond to a higher interest rate as reflected in the 13% rate in the loan

agreement.

¶25 M. R. Civ. P 8(c) providesthat “[i]n pleading to a preceding pleading, a party shallset

forth affirmatively . . . any other matter constituting an avoidance or affirmative defense.”

Rule 8(c) derives from “the same principles of fairness and notice which require a plaintiffto
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set forth the basis of the [plaintiff's claim] . . . .” Brown v. Ehlert, 255 Mont. 140, 146, 841

P.2d 510, 514 (1992). Rule 8(c) is not absolute, however, as the court retains discretion to

allow a defendant to amend pursuant to the terms of M. R. Civ. P. 15, as determined by our

holding in Keller v. Dooling, 248 Mont. 535, 542, 813 P.2d 437, 441 (1991).

¶26 M. R. Civ. P. 15(a) provides that “leave [to amend]shall be freely given when justice

so requires.” Rule 15(a) favors allowing amendments, but a trial court may justify denyinga

motion to amend on the grounds of “undue prejudice to the opposing party.” Lindey’s v.

Professional Consultants, 244 Mont. 238, 242, 797 P.2d 920, 923 (1990). We agree with the

District Court that justice required the amendment of HRDC’s time barred counterclaim to

an affirmative defense.

¶27 Johnson entered the loan agreement with the understanding that she would be required

to repay the principal over a five-year period at a 13% interest rate. She signed the loan

agreement that accurately reflected the 13% interest rate. She learned of the mistaken

interest rate on the promissory note in 2001, before she had completed repayment of the

loan. We cannot say that Johnson would suffer undue prejudice under these circumstances

fromthe District Court’s decision to amend HRDC’s counterclaimto an affirmativedefense.

¶28 Whether the District Court properly denied Johnson’s motion for partial summary

judgment.

¶29 Johnson premised her motion for partial summary judgment on the grounds that the

statute of limitations had expired on HRDC’s mutual mistake counterclaim. Our

determination that the District Court correctly amended HRDC’s counterclaim to an
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affirmative defense also confirms the correctness of the District Court’s decision to deny

Johnson’s motion for partial summary judgment on the issue of liability.

¶30 Whether the District Court properly granted affirmative relief to HRDC on its

counterclaim of mutual mistake when the court deemed the counterclaim to be an affirmative

defense.

¶31 Our conclusion that the District Court properly concluded that the interests ofjustice

required it to convert HRDC’s counterclaim to an affirmative defense raises the question of

whether HRDC could use this affirmative defense as a vehicle to recover damages against

Johnson. HRDC filed a counterclaim to reform the note to reflect a 13% interest rate based

on a “scrivener’s error.”

¶32 Our general rule requiresthat a counterclaim, cross-claim, or third-partycomplaintfor

affirmative relief must comply with the applicable statute of limitations. State ex rel.

Egeland v. City Council, 245 Mont. 484, 490, 803 P.2d 609, 613 (1990). We exempt from

the statute oflimitations a defensive claimwhere the defendant attemptsto offset the amount

that a plaintiff can recover,such as by recoupment, contribution, or indemnity. Egeland,245

Mont. at 490, 803 P.2d at 613. HRDC’s “affirmative defense” of a mutual mistake goeswell

beyond a defensive claim.

¶33 HRDC’s mutual mistake counterclaim, as alleged in its answer, sought an award of

the entire unpaid balance on Johnson’s loan. HRDC’s answer included a claim for “payment

of the balance due on the promissory note plus allowable attorney’s fees and costs.” Thus

HRDC’s counterclaimcomported with the general rule that a counterclaimpresents a cause
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of action that seeks affirmative relief. Estate of Webster, 920 S.W.2d 600, 606 (Mo. App.

W.D. 1996); Haven Federal Sav. & Loan v. Kirian, 579 So. 2d 730, 733 (Fla. 1991).

¶34 This counterclaimsuffered from HRDC’s failure to raise it within the two-yearperiod

for the initiation of an action for relief on the grounds of fraud or mistake. Section 27-2-203,

MCA. The District Court correctly converted HRDC’s counterclaim to an affirmative

defense. In doing so, however, the District Court cannot convert the counterclaim to an

affirmative defense that seeks affirmative relief with bumping against the two-yearstatuteof

limitations set forth in § 27-2-203, MCA. Egeland, 245 Mont. at 490, 803 P.2d at 613. An

affirmative defense properly seeks to defeat or avoid the other party’s cause of action.

Webster, 920 S.W.2d at 606; Haven Federal Sav. & Loan, 579 So. 2d at 733.

¶35 The District Court premised its award to HRDC of the unpaid balance of the loan on

the “affirmative defense” of mutual mistake. Our decision in Egeland and § 27-2-203,

MCA, precludes this outcome. HRDC can recover nothing beyond Johnson’slast payment

of March 5, 2003, as § 27-2-203, MCA, bars any further attempts by HRDC to recover. We

therefore reverse this portion of the District Court’s ruling. Conversely, Johnson is entitled

to reconveyance of her property in light of HRDC’s inability to collect any additional

payments under this loan.

¶36 We also must reverse the District Court’s award of attorney fees and costsin favor of

HRDC. The court awarded attorney fees and costs to HRDC as the prevailing party in

recovering the unpaid balance of Johnson’s loan. The District Court erroneously awarded
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this unpaid balance to HRDC. The award of the attorney fees and costs associated with

recovering this unpaid balance cannot stand.

¶37 We remand to the District Court for entry of judgment in favor of HRDC on

Johnson’s claim for damages. We further remand for entry of an order by the District Court

that HRDC issue a deed of reconveyance of Johnson’s property to allow FMTC to release

the deed oftrust. The District Court furthershould order each party to bear its own fees and

costs.

/S/ BRIAN MORRIS

We Concur:

/S/ W. WILLIAM LEAPHART

/S/ JOHN WARNER

/S/ JIM RICE

Justice James C. Nelson, concurring in part and dissenting in part.

¶38 I concur with the result of the Court’s Opinion under Issue 3—i.e., that HRDC is

precluded by § 27-2-203, MCA, from requiring Johnson to pay anything beyond her last

payment of March 5, 2003, and that HRDC is barred from any further collection efforts.

Opinion, ¶ 35. I respectfully dissent, however, from the Court’s decision on Issues 1 and 2—
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respectively, whether the District Court correctly converted HRDC’s counterclaimofmutual

mistake to an affirmative defense, and whether the District Court properly denied Johnson’s

motion for partial summary judgment.

¶39 As a preliminary matter, it is necessary to point out that HRDC did not botherto file a

response brief in this appeal, even despite two granted requests for extensions of time in

which to do so. Where an appellee does not appear by brief or argument, this Court will take 

the appellant’s versions and positions as being correct if they are supported by the record.

Alden v. Board of Zoning Commrs., 165 Mont. 364, 365, 528 P.2d 1320, 1320 (1974). Here, 

Johnson’s positions are well-supported by the record and should be taken as correct.

¶40 First, HRDC was aware ofthe “scrivener’s error” in the promissory note no laterthan

July 2001, but HRDC did not file its claim based on mutual mistake until March 2006, well

beyond the two-year period of limitations prescribed by § 27-2-203, MCA.

¶41 Second, HRDC’s “counterclaim” was just that: a counterclaim. HRDC set forth a

claim for relief: payment of the balance due on the note. This constitutes a counterclaim,

not an affirmative defense. See M. R. Civ. P. 8(a) (“A pleading which sets forth a claim for

relief, whether an original claim, counterclaim, cross-claim or third-party claim,shall contain

(1) a short and plain statement of the claim showing that the pleader is entitled to relief, and 

(2) a demand for judgment for the relief the pleader seeks.”). Indeed, the Court so holds:

HRDC’s mutual mistake counterclaim, as alleged in its answer, 

sought an award of the entire unpaid balance on Johnson’s loan. HRDC’s 

answer included a claim for “payment of the balance due on the promissory 

note plus allowable attorney’s fees and costs.” Thus HRDC’s counterclaim

comported with the general rule that a counterclaim presents a cause of
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action that seeks affirmative relief.

Opinion, ¶ 33.

¶42 Third, up until the District Court, entirely of its own accord, declared HRDC’s

counterclaim to be something other than it is, both Johnson and HRDC framed their 

respective arguments based on their shared understanding that HRDC’s “counterclaim” was, 

in fact, a counterclaim. That’s why HRDC presented an argument in its brief opposing 

Johnson’s motion for partial summary judgment that its “claim” for reformation of the note 

pursuant to § 28-2-1611, MCA, was not barred by the statute of limitations—an argument 

that would have been unnecessary had HRDC’s counterclaim actually been, in substance, an 

affirmative defense.

¶43 Fourth, § 27-2-203, MCA, states: “The period prescribed for the commencement of

an action for relief on the ground of. . . mistake is within 2 years, the cause of action in such

case not to be deemed to have accrued until the discovery by the aggrieved party of the facts 

constituting the . . . mistake.” Accordingly, HRDC’s counterclaim was time-barred (see

Opinion, ¶¶ 23, 35), and Johnson was entitled to judgment in her favor.

¶44 To avoid this legally correct (but apparently unpalatable) result, the District Court 

decided in its September 1, 2006 Memorandum and Order Denying Plaintiff’s Motion for 

Partial Summary Judgment to treat HRDC’s counterclaim as an affirmative defense. As

grounds for this, the court cited M. R. Civ. P. 8(c), which states: “When a party has

mistakenly designated a defense as a counterclaim . . . , the court on terms, if justice so

requires, shall treat the pleading as if there had been a proper designation.” Evidently, the
15

court believed that justice required it to re-designate HRDC’s counterclaim as an affirmative 

defense because Johnson otherwise would receive an “undeserved windfall.” Opinion, ¶ 24.

This Court agrees, citing not only Rule 8(c), but also Rule 15(a), which states that a party

may amend its pleading by leave of court and that leave “shall be freely given when justice 

so requires.” Opinion, ¶¶ 25-26.

¶45 There are two obvious problems with this approach. First, HRDC, who was

represented by counsel throughout the proceedings in the District Court, never sought leave

to amend its pleading. Nor did HRDC ask the District Court to convert its counterclaiminto

an affirmative defense. Second, and most importantly, a counterclaim may not be

re-designated or amended to be an affirmative defense if it is not, in fact, an affirmative 

defense. Again, Rule 8(c) states when a party has “mistakenly designated” a defense as a

counterclaim, the court shall treat the pleading as if there had been a proper designation, if

justice so requires. Here, HRDC’s counterclaim was not “mistakenly designated.” It was, in 

fact, a claim for relief. Thus, there is no basis in law or in fact for treating it as an 

affirmative defense under Rule 8(c) or amending HRDC’s pleading (sua sponte) to state an

affirmative defense, rather than a counterclaim, under Rule 15(a).

¶46 It is difficult to understand the Court’s holdings under Issues 1 and 2, given that the

Court essentially agrees with all of the foregoing points. Specifically, in its analysis under

Issue 3, the Court states that “the District Court cannot convert the counterclaim to an

affirmative defense that seeks affirmative relief with bumping against the two-yearstatuteof

limitations set forth in § 27-2-203, MCA.” Opinion, ¶ 34. But ifthe “counterclaim” were in
16

fact an “affirmative defense,” then the statute of limitations set forth in § 27-2-203, MCA, 

would not apply. By its terms, this statute applies to a “cause of action.” See § 27-2-203,

MCA. Thus, by applying this statute to the case at hand, the Court is tacitly conceding that

HRDC’s counterclaim is, in fact, a “cause of action,” not an affirmative defense.

¶47 Ultimately, what the Court does here is (1) call HRDC’s counterclaim an “affirmative 

defense” for purposes of ruling against Johnson regarding the terms of the note and then (2) 

treat HRDC’s counterclaim as a “cause of action” for purposes of ruling against HRDC

regarding the unpaid balance ofthe note. While thisresult may seem fair or equitable under

the circumstances, it is legally untenable.

¶48 In this case, the trial court decided that “justice” required it—sua sponte—to bail out

HRDC from its own mistakes, sloppy document preparation, and hard-line business

practices. I simply cannot agree that this is a proper function of a district court. HRDC 

either chose to take no action, or simply neglected to do so, when it became aware that the 

promissory note contained a glaring mistake. It was not the District Court’s role to rescue 

HRDC by interceding, sua sponte, on that party’s behalf during the course of this litigation.

HRDC is a corporation which is in the business of making loans. It caused its own

problems. If HRDC is an “aggrieved” party, as the Court asserts in ¶ 23, it is so because of

its own actions or inaction, not anything Johnson did or failed to do.

¶49 Given the above, I concur in the result the Court reaches under Issue 3, but I dissent 

from the Court’s holdings under Issues 1 and 2. I would hold that Johnson was entitled to

partial summary judgment on the issue ofliability. Accordingly, I would reverse the District
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Court’s Memorandum and Order Denying Plaintiff’s Motion for Partial Summary Judgment 

and remand for further proceedings. In addition, I would award Johnson her attorney’s fees

and costs asthe prevailing party at trial and on appeal, and I would order the computation of

those on remand.

¶50 I concur and dissent.

/S/ JAMES C. NELSON

Justice Patricia O. Cotter joins the concurrence and dissent of Justice James C. Nelson.

/S/ PATRICIA COTTER