In re: Duane E. Anderson AND Jeanne C. Anderson ( 2023 )

FILED
JUN 14 2023
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. MT-22-1238-LBC
DUANE E. ANDERSON and JEANNE C.
ANDERSON, Bk. No. 1:21-bk-10115-BP
Debtors.
Adv. No. 1:21-ap-01005-BP
DUANE E. ANDERSON; JEANNE C.
ANDERSON,
Appellants,
v. MEMORANDUM*
STATE OF MONTANA; MONTANA
DEPARTMENT OF NATURAL
RESOURCES AND CONSERVATION,
Appellees.
Appeal from the United States Bankruptcy Court
for the District of Montana
Benjamin P. Hursh, Bankruptcy Judge, Presiding
Before: LAFFERTY, BRAND, and CORBIT, Bankruptcy Judges.
INTRODUCTION
Debtors Duane and Jeanne Anderson appeal the bankruptcy court’s
entry of judgment against them in their adversary proceeding against the
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1
state of Montana and its Department of Natural Resources and
Conservation (jointly referred to as the “DNRC”). The bankruptcy court
considered the Andersons’ and the DNRC’s cross-motions for summary
judgment, and the DNRC’s subsequent follow-up motion for summary
judgment, and ruled that because the Andersons failed to pay the rent
timely on four Montana state land leases (entitled Agricultural & Grazing
Lease of State Lands (the “Leases”)), the DNRC properly terminated the
Leases prepetition. The bankruptcy court also rejected the Andersons’
claims that, notwithstanding their failure to pay the rent timely, the DNRC
breached the contractual covenant of good faith and fair dealing. Because
we discern no error, we AFFIRM.1
FACTS 2
A. Prepetition events
Duane and Jeanne Anderson, Debtors and Plaintiffs in this adversary
proceeding, were parties to the Leases which Mr. Anderson’s grandfather
had obtained decades earlier and which were subsequently transferred to
the Andersons. The combined four leases included 3,104 acres, or roughly
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, “Rule” references are to the Federal Rules of
Bankruptcy Procedure, and “Civil Rule” references are to the Federal Rules of Civil
Procedure.
2 We exercise our discretion to take judicial notice of documents electronically
filed in the underlying bankruptcy case and adversary proceeding. See Atwood v. Chase
Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
1400 acres of grazing land and 1700 acres of agricultural land. 3 Each Lease
form indicated the amount of land covered by the Lease and how much of
that was for grazing purposes. The DNRC managed the Leases for the state
pursuant to Montana Code Ann. § 77-1-301. 4
Beginning in 1997, the Andersons obtained various loans from the
United States Department of Agriculture (“USDA”) and as part of the
loans, pledged the Leases as security for the obligations. The loan
documentation included executed assignments of the Leases which,
according to the parties, were held in escrow to facilitate a USDA
foreclosure on the Leases if necessary. 5 Rocky Mountain Bank, the
Andersons’ bank, also held a lien on the leasehold interests.
Each of the Leases stated:
3
The Andersons were parties to a fifth lease which the parties call the “Cabin
Lease.” The Cabin Lease is not at issue here. The rent on that lease was due on June 10
which explains some of the confusion about when “the rent” was due as discussed
below beginning at page 6. The Cabin Lease was assumed by the Andersons during the
chapter 12 case.
4
Mont. Code Ann. Chapter 1, Part 3, entitled Department of Natural Resources
and Conservation, section 77-1-301 states:
(1) Under the direction of the board, the department has charge of the selecting,
exchange, classification, appraisal, leasing, management, sale, or other disposition of the
state lands. It shall perform such other duties the board directs, the purpose of the
department demands, or the statutes require.
(2) It shall collect and receive all moneys payable to the state through its office as
fees, rentals, royalties, interest, penalties, or payments on mortgages or lands purchased
from the state or derived from any other source. It shall issue a receipt for each cash
payment or whenever requested by the payer.
5 Both parties agree the assignments were being held in escrow.
3
1. ALL GRAZING RENTALS ARE DUE BY MARCH 1 EACH
YEAR AND FAILURE TO PAY BY APRIL 1 AUTOMATICALLY
CANCELS THE ENTIRE LEASE. . .
This was consistent with Montana law which provides in relevant
part, “[i]f the full rental and the $25 penalty are not paid by April 1, the
entire lease is canceled.” 6 Mont. Code Ann. § 77-6-506(1).
On March 17, 2020, the DNRC sent a certified letter, addressed to
Duane E. Anderson at a post office box address in Scobey, Montana,
notifying him that rent due for “the grazing portion of the lease” was late
and warning him that the Leases would be cancelled unless the payment
was received by April 1, 2020 (the “Late Rent Notice Letter”). Jeanne
Anderson accepted the letter and signed the mail certification form without
noting the date received.
On March 26, 2020, the Governor of Montana, Steve Bullock, issued
to “Montanans; all officers and agencies of the State of Montana,” a
“Directive Implementing Executive Orders 2-2020 and 3-2020 providing
measures to stay at home and designating certain essential functions” (the
“Stay-at-Home Order”). The Stay-at-Home Order noted at the outset that a
“state of emergency exists in Montana due to the global outbreak of
COVID-19 Novel Coronavirus.” It mandated that “individuals may leave
their home or residence only to perform [certain] Essential Activities. . .” It
6
The Leases also state that “agricultural rentals” are due on November 15 and if
not paid by December 31, “the entire lease is canceled.”
4
decreed further that “[a]ll businesses and operations in the State, except
Essential Businesses and Operations as defined below, are required to
cease all activities within the State except Minimum Basic Operations . . .“
One Essential Business exception was “businesses . . . that provide . . .
products or services critical to food and livestock production.” The order
“categorically exempted” “state government employees.”
On March 30, 2020, the Andersons mailed a check to the DNRC,
signed by Duane Anderson, for $6,771.20, the amount demanded in the
Late Rent Notice Letter. The DNRC acknowledged receiving the check on
April 2, 2020. However, as there was only $63.90 in the account at the time,
Rocky Mountain Bank returned it for insufficient funds.
The DNRC subsequently notified the Andersons by certified letter
dated April 21, 2020 that the Leases were cancelled based on the failure to
pay the rent but gave them until May 8, 2020 to reinstate the Leases by
paying the past due rent plus a penalty of “one times the rental rate” for a
total of $13,342.40 (the “Reinstatement Letter”). The Reinstatement Letter
noted that Mont. Code Ann. § 77-6-506(1) gave authority to the DNRC to
reinstate the Leases “upon payment of the rental, plus a penalty per lease
of up to three times the annual rental.” The Andersons assert that they did
not receive the Reinstatement Letter until the May 8 deadline had passed.
But they concede that they did not make that payment.
5
The Andersons were thereafter notified by letter dated June 9, 2020
that the Leases were cancelled as of April 1, 2020 (the “Cancellation Notice
Letter”).
From the Late Rent Notice Letter on March 17, 2020 to mid-June 2020,
confusion abounded according to the Andersons, which resulted in the rent
payment not being made. For example, as the Andersons relate,7
• During this period, Mr. Anderson was convalescing from
chemotherapy treatments for cancer. One day after issuance of
the Stay-at-Home Order, he moved from his family home in
Scobey, Montana to the farmhouse on the Cabin Lease
property.
• The Andersons expected Rocky Mountain Bank to clear the
check, even though their account had insufficient funds,
because it had done so in the past on a number of occasions.
This is confirmed by an Affidavit of bank Vice President Tyler
Young. Mr. Young stated that he was at home and not at the
bank when the check was presented. He would have permitted
the check to clear had he been there.
7 The facts below come from an Affidavit Mr. Anderson filed with his complaint
in state court, and from emails included in a package of exhibits filed with a pleading
entitled Plaintiff’s Exhibit and Witness List for Hearing Scheduled for January 4, 2022.
The exhibits were not supported by any declarations.
6
• The Reinstatement Letter was sent to the USDA office in Scobey
Montana. But that office was closed due to the Stay-at-Home
Order.
• The Reinstatement Letter was not actually reviewed by the
Andersons, or Rocky Mountain Bank until the May 8 deadline
had passed.
• On May 7, 2020, Britney Cornwell from a USDA affiliate sent an
email to DNRC employee Heather Noel inquiring about
whether the Leases were current. Ms. Noel responded that
they were not and included a copy of the Reinstatement Letter.
Ms. Noel further erroneously advised Ms. Cornwall that the
Andersons had until June 10th to “submit full payment”
apparently confusing the deadline for paying rent due on the
Cabin Lease with the deadline for the rent due on the grazing
Leases.
• On May 26, 2020, Ms. Cornwell inquired again by email of Ms.
Noel about the status of the rent and advised that the USDA
would be paying the past due rent before June 10, 2020. Ms.
Noel responded on June 1, 2020 that the payment was received
that day again confusing the Cabin Lease and the grazing
Leases.
• On May 28, 2020, Ms. Cornwell requested an update by email
to DNRC employee Matthew Poole, commenting that the
7
USDA would have paid the rent for the Leases had they
received the notice re reinstatement. She noted that Ms. Noel
whom she had previously communicated with was apparently
not the right person to deal with on the Lease administration.
• On June 2, 2020, Tyler Young at Rocky Mountain Bank
contacted Amanda Taylor at the DNRC by email about the
status, asking “[i]s there anything the bank can do to make
sure [the Leases] get paid and not terminated?” Ms. Taylor
responded that the person to speak to was Kelly Motichka, the
DNRC Bureau Chief. Mr. Young sent two more emails to Ms.
Motichka on June 5 and June 11 but apparently received no
response.
• Mr. Anderson claimed that he first became aware that his check
bounced and the DNRC had offered reinstatement terms on
June 4, 2020. That is the day he drove from the farmhouse to
Scobey and picked up the mail.
• On June 9, 2020, Ms. Motichka sent the Andersons the
Cancellation Letter notifying them that the Leases were
cancelled as of April 1, 2020.
B. The state court litigation
On March 18, 2021, the Andersons filed a complaint in the Montana
First Judicial District Court asserting four causes of action: breach of
contract, tortious breach of the implied covenant of good faith and fair
8
dealing, injunctive relief, and declaratory relief. The DNRC responded with
a motion to dismiss the tort action on the basis that the Andersons could
not assert a tort against the state without first following a claims process
based on the Montana Tort Claims Act. Ultimately, the Andersons did not
oppose the motion and consented to entry of an order dismissing that
cause of action. However, the complaint was not amended thereafter.
C. Removal of the state court litigation to the bankruptcy court and
the first motions for summary judgment
On October 26, 2021, the Andersons filed their chapter 12 petition.8
They then removed the state court litigation to the bankruptcy court.
1. The Andersons’ motion for partial summary judgment
On January 14, 2022, the Andersons filed a motion for partial
summary judgment seeking a ruling from the bankruptcy court that the
DNRC breached the Leases because the “lease payment[s] w[ere] not due
under the plain language of their contracts until November 15, 2020.”
In their motion, the Andersons argued first, that under subsequent
lease “addendums,” called Conservation Reserve Program Cash Lease
Agreements (the “Cash Lease Agreements”), the Leases were modified to
provide that the rent was to be paid on November 15th of each year. They
argued that the Cash Lease Agreements’ language, “the annual cash rental
payment” (which was due on November 15th), included the “grazing rent”
payment required under the Leases.
8
The Andersons’ chapter 12 plan was confirmed by the bankruptcy court by
9
The Andersons further argued that Mont. Code Ann. § 77-6-506(1),
modified the Leases making the grazing rent payment due on December 31
of each year. That code section, entitled “Date when rental due--penalty--
cancellation for nonpayment” provides in part that “[i]f the United States is
the lessee of state lands for grazing purposes, the rental is payable at the
end of each year of the lease.” The next sentence of the same section states,
“[t]he rental . . . , with the exception of a lease that involves the United
States as the lessee, is due and payable before March 1.” The Andersons
argued that based on their assignments of the Leases to the USDA, the
United States “stepped into the shoes of the lessees of state land” and
became the lessee thereby triggering Mont. Code Ann. § 77-6-506(1). They
further argued that the United States was at least “involved . . . as the
lessee” and therefore the rent was not due until “the end of the lease year.”
The DNRC timely opposed the motion. As to the Cash Lease
Agreements, the DNRC argued that those were separate independent
agreements whereby the Andersons “enrolled the [Leases] into the USDA
Conservation Reserve Program (“CRP”) as part of the State Acres for
Wildlife Enhancement Pheasant Winter Cover Program” which required
the Andersons to pay supplemental rent for acreage that was converted to
CRP. That rent was the annual cash rental payment required under the
Cash Lease Agreements and had nothing to do with other rental payments
required to be paid under the Leases.
order entered on January 31, 2023.
10
As to the assignments of the Leases to the United States, the DNRC
argued that the assignments had no legal effect on the Leases. The
assignments were solely between the Andersons and the USDA and were
being held in escrow in the event that the USDA foreclosed at some point.
The DNRC asserted that there had been no foreclosure and that “[t]he
assignment forms were not dated, signed or approved by DNRC.” Further,
the plain language in each of the Leases mandated that any assignment
was not effective until it was signed by the Director of the DNRC. Hence
there were no assignments; the United States was not a lessee under the
Leases.
The Andersons replied by repeating their arguments in their motion.
They argued that DNRC regulations do not require that the assignments be
approved by it, citing Admin. R. Mont. § 36.25.222, which states that
“assignments recorded for loan securitization purposes become effective
upon recordation/perfection.” An assignment “placed into escrow,” must
be “filed with the department.” Id. They argued that even if the
assignments failed to make the United States a lessee, they were enough to
make the United States “involved as a lessee.” The Andersons did not
define the term “involved as a lessee.”
2. The DNRC’s cross-motion for summary judgment
The DNRC responded to the Andersons’ motion for summary
judgment with a short cross-motion for summary judgment asking the
bankruptcy court to find that it properly cancelled the Leases, and
11
repeating their opposition to the Andersons’ motion. The Andersons’
opposed the DNRC cross-motion largely repeating the facts and arguments
in their own summary judgment motion.
3. The bankruptcy court ruling on the initial motions
The bankruptcy court did not conduct a hearing on the two motions;
it entered its written memorandum on June 1, 2022. As to the Andersons’
motion, the bankruptcy court agreed with the DNRC that the documents
were not ambiguous and required that the rent be paid no later than April
1. If not so paid, the Leases were cancelled.
The bankruptcy court noted that the plain language in paragraph 1 of
the Cash Lease Agreements stated that “the annual cash amount for
including State lands in the CRP program, set forth herein, is owed by the
Lessee to the State, in addition to all other payments set forth in the Lease
Document, including but not limited to grazing and crop share payments.”
Paragraph 2 provided that “the CPR acreage will be cash leased at the rate
of $23.60 per CRP acre . . .” The bankruptcy court found that the language
in paragraph 9 that “the Lessee understands that the annual cash rental
payment will be due and payable on or before November 15th of each year”
cannot be construed to modify the plain terms of the Leases as to when the
grazing rent was due.
The bankruptcy court further ruled that the United States was not a
lessee of the lands because the assignments were not approved by the
Director of the DNRC, citing Admin. R. Mont. § 36.25.222. The regulation
12
states in plain language, “[u]ntil the assignment becomes effective, the
Department will consider the lessee listed above to be the lessee for all
purposes.”
As to the DNRC’s cross-motion for summary judgment, the
bankruptcy court granted the motion to the extent it requested a finding
that the grazing rent was due no later than April 1 based on the
unambiguous language in the Leases and related documents. But the court
denied the motion as to whether DNRC properly cancelled the Leases.
D. The DNRC second motion for summary judgment
In June 2022, the DNRC filed a second motion for summary judgment
seeking a ruling in its favor as to the remaining Anderson claims,
specifically the breach of contract and declaratory relief claims, and
requested a finding that the Leases were in fact appropriately cancelled.
The motion focused on two arguments: first, that its decision to cancel the
Leases was not arbitrary or capricious because the Leases “were
automatically cancelled as a matter of law,” under Mont. Code Ann. § 77-6-
506(1). Second, that tender of a check with insufficient funds to cover the
amount of the check was not payment of the rent citing United States Nat.
Bank of Red Lodge v. Shupak, 54 Mont. 542, 172 P. 324, 326 (1918) (“Giving a
worthless check does not pay a debt”).
After filing the second motion, the DNRC moved for an order staying
any further discovery until the DNRC’s second motion could be heard. The
Andersons opposed the motion arguing that they had the right to conduct
13
discovery under Civil Rule 56(d) and that discovery was necessary. They
conceded that “[t]he lion’s share of the document production has been
completed” but asserted that depositions were essential “to presenting the
complete record pertinent to Defendants’ pending motion for summary
judgment.” The bankruptcy court issued the requested stay.
The Andersons thereafter opposed the second motion for summary
judgment repeating much of their argument from the previous motions,
and further arguing that there were material disputed facts “as to whether
[DNRC’s] failure to make reasonable payment accommodations during the
COVID-19 pandemic constitutes a breach of the duty of good faith and fair
dealing.”9 They argued that the DNRC’s conduct violated the contractual
implied covenant of good faith and fair dealing.
The DNRC replied by arguing that a claim for breach of the implied
covenant was not pled by the Andersons in their complaint and the
arguments should be rejected on that basis.
After oral argument, the bankruptcy court entered its memorandum
of decision on November 28, 2022, ruling that the Leases were properly
cancelled for non-payment of the rent pursuant to the plain language of the
9
They also argued that a Directive issued by the Montana Governor on March
30, 2020, at the outset of the Covid pandemic, in effect, modified the Leases by
temporarily limiting certain evictions. The bankruptcy court rejected that argument
because the Directive applied to residential evictions only. The Andersons have not
included this argument in their opening brief, and it is waived.
14
Leases and Mont. Code Ann. § 77-6-506(1), and therefore the Andersons
have no interest in the Leases.
In its memorandum of decision, the bankruptcy court did not
comment more than in a cursory fashion about the alleged material
disputed facts asserted by the Andersons. It focused on the Andersons’
failure to plead a claim for breach of the contractual implied covenant of
good faith and fair dealing in the complaint. It noted that “[t]he only
explicit references to the covenant of good faith and fair dealing in the
operative complaint are found at paragraph 63” which was a single
sentence stating “[e]very contract, regardless of type, contains an implied
covenant of good faith and fair dealing.” The bankruptcy court
acknowledged that under Montana law, every contract includes an implied
covenant of good faith and fair dealing which requires honesty in fact and
the observance of reasonable commercial standards of fair dealing in the
trade citing Mont. Code Ann. § 28-1-211. But the bankruptcy court
disagreed with the Andersons that the facts alleged in the complaint put
the DNRC on sufficient notice that they were seeking damages for breach
of the implied covenant separate and apart from breach of contract. It said
that other than the allegations in the section entitled Tortious Breach of the
Implied Covenant of Good Faith and Fair Dealing which was dismissed,
the complaint does not allege dishonesty or unreasonableness, only that the
DNRC’s conduct deviated from the contract. The bankruptcy court noted
15
also that the Andersons had ample opportunity to amend the complaint
and did not.
The bankruptcy court added that even if the claim was properly pled,
the implied covenant cannot modify the plain language of contracts and
state law. It stated that “[i]mplied terms ‘should never be read to vary
express terms.’ Hence, under Montana law, [i]mplied contractual
provisions ‘will not be applied where . . . express provisions govern,’”
citing Tvedt v. Farmers Ins. Group of Cos, 321 Mont. 263, 273, 91 P.3d 1, 8
(Mont. 2004).
The bankruptcy court added that even if Tvedt did not apply, the
Andersons’ version of the facts did not lead to a conclusion that the DNRC
acted dishonestly or unreasonably, noting that it offered the Andersons an
opportunity to reinstate the Leases.
The bankruptcy court entered its order on November 28, 2022. This
appeal was timely filed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(1) and (b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
Did the bankruptcy court err in denying the Andersons’ motion for
summary judgment and in granting the two DNRC motions for summary
judgment?
16
STANDARDS OF REVIEW
We review the bankruptcy court's grant of summary judgment de
novo. Johnson v. Nielson (In re Slatkin), 525 F.3d 805, 810 (9th Cir. 2008)
(citation omitted). The bankruptcy court’s interpretation of a statute is a
pure issue of law which is also reviewed de novo. Connell v. Lima Corp., 988
F.3d 1089, 1097 (9th Cir. 2021).
"De novo review requires that we consider a matter anew, as if no
decision had been made previously." Francis v. Wallace (In re Francis), 505
B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted). When we review a
matter de novo, we give no deference to the bankruptcy court’s decision.
Id.An order staying discovery is reviewed for an abuse of discretion.
Little v. City of Seattle, 863 F.2d 681, 685 (9th Cir. 1988) (citations omitted).
To determine whether the bankruptcy court has abused its discretion, we
conduct a two-step inquiry: (1) we review de novo whether the bankruptcy
court "identified the correct legal rule to apply to the relief requested" and
(2) if it did, we consider whether the bankruptcy court's application of the
legal standard was illogical, implausible, or without support in inferences
that may be drawn from the facts in the record. United States v. Hinkson, 585
F.3d 1247, 1262-63 & n.21 (9th Cir. 2009) (en banc).
17
DISCUSSION
A. The bankruptcy court did not err in finding on summary judgment
that the last day for payment of the grazing Leases was April 1.
1. Legal standard for motion for summary judgment under Civil
Rule 56
Summary judgment may be granted by the trial court "if the
pleadings, the discovery and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and that the
movant is entitled to judgment as a matter of law." Civil Rule 56(a), as
incorporated by Rule 7056; Barboza v. New Form, Inc. (In re Barboza), 545
F.3d 702, 707 (9th Cir. 2008). A trial court may not weigh the evidence in
resolving such motions, but rather must determine only whether a material
factual dispute remains for trial. Covey v. Hollydale Mobilehome Estates, 116
F.3d 830, 834 (9th Cir. 1997). Only disputes over facts that might affect the
outcome of the lawsuit may defeat a summary judgment motion. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). If the evidence is such that a
reasonable jury could return a verdict for the nonmoving party, then the
dispute over a material fact is genuine. Id.
2. The bankruptcy court did not err in ruling that the due date
for the rent was April 1, 2020.
Construction and interpretation of a contract is a question of law,
Whary v. Plum Creek Timberlands, L.P., 374 Mont. 266, 269, 320 P.3d 973, 976
(Mont. 2014), which we review de novo. Our review of the Leases, the Cash
Lease Agreements, the assignments, the referenced Montana state law and
18
regulations, leads us to agree with the bankruptcy court’s determination
that the grazing rent was due no later than April 1, 2020. The Andersons
concede the full payment was not timely (or ever) made nor were the
conditions to the offer by the DNRC to reinstate the then cancelled Leases
met.
As the bankruptcy court noted, “[a]nalysis of a contract begins with
its plain language. Mont. Code Ann. § 28-3-401. That means, ‘where the
language of an agreement is clear and unambiguous, and as a result,
susceptible to only one interpretation, the court’s duty is to apply the
language as written.’” Rich v. Ellingson, 340 Mont. 285, 291, 174 P.3d 491,
495 (Mont. 2007).
We agree with the bankruptcy court’s rejection of the Andersons’
three arguments that the DNRC breached the Leases.
First, the plain language of the Cash Lease Agreements is clear and
unambiguous. The rent required to be paid in that one-page contract was
for enrollment into the CRP, and nothing else. The document states that the
rent is in addition to the rent to be paid under the grazing and agricultural
leases. There is no ambiguity. The Andersons’ argument that the parties
intended to modify the Leases when entering into the Cash Lease
Agreements is belied by the plain language of the two documents.
Second, the Andersons’ argument that the United States was in fact a
lessee under the Leases because of the assignments is misplaced. The
Leases were not modified by the Montana legislature in Mont. Code Ann. §
1977-6-506(1). The United States was not a lessee of the 3,000 plus acres based
again on the plain language of the Leases. The assignments at most were
agreements intended by the United States and the Andersons to take effect
at some unspecified later time if, and when, the United States actually
foreclosed on its collateral, the Leases. The fact that the assignments were
recorded, were or were not “effective,” and gave inchoate rights to the
United States under its agreements with the Andersons did not make the
United States a lessee of the lands.
Third, the Andersons’ argument that even if the United States is not
the lessee, the United States is involved as the lessee, must also fail. They
would have us read the statute to say that it applies anytime the United
States is involved in some way in a lease rather than is “involved as a
lessee.” They offer no authority that this was the intent of the Montana
legislature. And our research has uncovered nothing that would support
the Andersons’ argument. The Andersons’ position would lead to a
conclusion that anytime the United States obtains a security interest in a
lease of Montana land, the United States is “involved as a lessee,” thereby
modifying the plain language of a written contract. We require
unambiguous Montana authority before we can accept the Andersons’
arguments on this issue.
3. The bankruptcy court did not err by determining that breach
of the contractual implied covenant of good faith and fair
dealing was not properly pled, and even if properly pled, the
implied covenant was not breached.
20
a. The complaint, as amended by removal of the tortious
breach of the contractual implied covenant of good faith
and fair dealing claim, did not give the DNRC fair
notice that the Andersons intended to continue with a
claim for contractual breach of the implied covenant.
The bankruptcy court made few comments on the various
purportedly material facts argued by the Andersons to support their
position that the DNRC breached the implied covenant of good faith and
fair dealing. Instead, the bankruptcy court focused on their failure to plead
that claim for relief in their complaint either at the outset or by
amendment, especially after they conceded that they could not proceed
with the tortious breach and permitted that claim to be dismissed by the
state court. The bankruptcy found that breach of contract and contractual
breach of the implied covenant were “[distinct] theories . . . and represent
different claims requiring different proof.” It reasoned that not only was
the implied covenant claim not pled but that “[n]othing in the Verified
Complaint could be characterized as fairly providing notice that the
Andersons were asserting a claim for contractual breach of the implied
covenant of good faith and fair dealing sufficient that DNRC could prepare
a responsive pleading.”
The bankruptcy court acknowledged the existence of the implied
covenant under Montana law citing Story v. City of Bozeman, 242 Mont. 436,
450, 791 P.2d 767, 775 (1990), overruled in part on other grounds, Arrowhead
Sch. Dist. No. 75 v. Klyap, 318 Mont. 103, 79 P.3d 250 (2003). In Story, the
21
Montana Supreme Court ruled that in Montana, every contract includes the
implied covenant of good faith and fair dealing, which requires honesty in
fact and the observance of reasonable commercial standards of fair dealing
in the trade, citing Mont. Code Ann. § 28-1-211. Story noted that “[w]hen
one party uses discretion conferred by the contract to act dishonestly or to
act outside of accepted commercial practices to deprive the other party of
the benefit of the contract, the contract is breached. In the great majority of
ordinary contracts, a breach of the covenant is only a breach of the contract
and only contract damages are due.” Story, 242 Mont. at 450.
The Andersons argued to the bankruptcy court and before this Panel
that even if breach of the contractual implied covenant and breach of
contract were separate claims, they need not be pled separately in the
complaint citing Civil Rule 8(d)10 which states in part that two or more
“statements of a claim” may be made in a single count. They argue that
“numerous allegations” put the DNRC on sufficient notice that they were
being sued for, at a minimum, dishonesty and/or acts outside of accepted
10
Civil Rule 8(d) states:
(d) Pleading to Be Concise and Direct; Alternative Statements; Inconsistency.
(1) In General. Each allegation must be simple, concise, and direct. No technical
form is required.
(2) Alternative Statements of a Claim or Defense. A party may set out 2 or more
statements of a claim or defense alternatively or hypothetically, either in a single count
or defense or in separate ones. If a party makes alternative statements, the pleading is
sufficient if any one of them is sufficient.
(3) Inconsistent Claims or Defenses. A party may state as many separate claims
or defenses as it has, regardless of consistency.
22
commercial practices and thus the contractual breach of the implied
covenant.
In any event, we agree with the bankruptcy court that the operative
complaint did not give the DNRC sufficient notice of the Andersons’
claims. As the Supreme Court stated, “the Rules require [] a short and plain
statement of the claim that will give the defendant fair notice of what the
plaintiff's claim is and the grounds upon which it rests.” Conley v. Gibson,
355 U.S. 41, 47 (1957), abrogated on other grounds by Bell Atlantic Corp. v.
Twombly, 550 U.S. 544 (2007). The Andersons’ admission and consent to
dismissal of the original claim for tortious breach of the implied covenant
removed from the complaint the position that conduct outside and beyond
the terms of the contracts was part of their claim. A reasonable reader of
the complaint after that dismissal would likely assume that the facts
alleging bad deeds extraneous to the terms of the contract were no longer
relevant. Permitting the Andersons to proceed on what is, at a minimum,
primarily a technical difference between what they dismissed and what
they are now arguing is not authorized by Civil Rule 8(d).
We agree that not only did the complaint, what was left of it, not give
the DNRC fair notice of the Andersons’ claim and the grounds upon which
it rested, but misled them into believing that the dispute from that point
did not include claims for breach of the implied covenant in any sense. We
agree that the Andersons should have amended the complaint at that point
23
(or some time promptly thereafter) to give the DNRC reasonable notice as
is required.
b. Even if the claim was properly pled and the Andersons’
alleged facts are true, the implied covenant claim must
fail.
The bankruptcy court added that even if the claim was properly pled,
Montana law provides that the implied covenant may not be read to vary
the express terms of the contract. Tvedt, 321 Mont. at 273, 91 P.3d at 8. The
bankruptcy court reasoned that the payment was required no later than
April 1 and when it was not made, the lease was “cancelled” automatically.
In Tvedt, the plaintiff was an insurance agent for Farmers Insurance.
After 22-23 years, Farmers terminated him “without cause.” The written
contract between them provided that the plaintiff could be terminated on
30-days notice without cause. The Montana Supreme Court affirmed the
grant of summary judgment in favor of the defendant as to the breach of
the implied covenant claim. It stated, “[w]e are aware of no reported case
in which a court has held the covenant of good faith may be read to
prohibit a party from doing that which is expressly permitted by an
agreement.” Id. “Thus, under Montana law, implied contractual provisions
will not be applied where, as here, express provisions govern.” Id.
c. Even if the claim was properly pled, and the Andersons’
alleged facts are true, the implied covenant was not breached.
Finally, the bankruptcy court determined that even if the claim was
properly pled, and assuming that the facts as the Andersons allege are true,
24
the covenant was not breached. We agree. Jeppeson v. State of Montana, 205
Mont. 282, 667 P.2d 428 (Mont. 1983), presented facts similar to the
Andersons’ case. Mr. Jeppeson had a lease with Montana, breached the
lease and ultimately lost it. He accused the state of failing to cooperate with
an assignment to a third party which would have helped him save the
property. The Montana Supreme Court agreed that there were no facts
showing that the government did anything intentionally wrong. Abuse
must:
not merely [be] an error in judgment, but perversity of
will, prejudice, passion, or moral delinquency [citations
omitted], but it does not necessarily imply wrong-doing or a
breach of trust, or import bad faith [citations omitted]; it
conveys, rather, the idea of acting beyond the limit of discretion
[citations omitted]. . .
Id at 291.
The DNRC offered to reinstate the Leases on payment of the past due
rent along with the statutory penalty. Even assuming that the Andersons
did not receive the Reinstatement Letter until the time to reinstate had
passed, the DNRC sent the letter to the address it had. There are no
allegations that the DNRC knew that Mr. Anderson had moved his family
to another location and did not check his mail for the two-month period.
While the DNRC may at most have given mixed signals about the status of
the lease payments and refused to accept late payments after the
reinstatement offer was not met, there are no facts which establish that this
conduct was dishonest, unreasonable or not in good faith and consistent
25
with reasonable commercial practices. The pandemic led to disruption of
nearly all businesses and governmental practices but the DNRC did not
unreasonably use the pandemic disruption or take advantage of it to do
things designed to give it an unfair advantage over the Andersons.
4. The bankruptcy court did not err by staying discovery, thus
preventing the Andersons from conducting discovery,
pending the outcome of the DNRC second motion for
summary judgment.
The Andersons argue that they had the right to conduct discovery in
the adversary proceeding and the bankruptcy court erred in taking that
right away from them. They argue that they would have taken various
depositions and possibly obtained facts to support their positions but the
bankruptcy court improperly prevented them from doing so. The
Andersons argue that the bankruptcy court abused its discretion in staying
discovery, but do not argue that the bankruptcy court failed to identify the
correct legal rule. They argue that the court’s application of the rule was
illogical and without support in inferences that may be drawn from the
facts in the record. We disagree.
Civil Rule 56(d) provides a right to discovery before a court rules on
a summary judgment motion if the nonmoving party “cannot present facts
essential to justify its opposition.” In Jarvis v. Regan, 833 F.2d 149, 155 (9th
Cir.1987), the Ninth Circuit affirmed that the district court did not abuse its
discretion in denying discovery when the complaint did not raise factual
issues requiring discovery to resolve. As we agree with the bankruptcy
26
court that, irrespective of the facts, the Andersons cannot proceed with a
claim for relief for breach of the contractual implied covenant of good faith
and fair dealing, and that the Andersons breached the contract as a matter
of law, any additional facts that might be uncovered by discovery would
not have changed the result and therefore were unnecessary.
CONCLUSION
For the reasons set forth above, we AFFIRM.
27