H.E. Simpson Lumber Co. v. Three Rivers Bank , 372 Mont. 292 ( 2013 )


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  •                                                                                          October 22 2013
    DA 12-0771
    IN THE SUPREME COURT OF THE STATE OF MONTANA
    
    2013 MT 312
    H.E. SIMPSON LUMBER CO.,
    Counter-Claimant, Appellant
    and Cross-Appellee,
    v.
    THREE RIVERS BANK OF MONTANA,
    Counter-Defendant, Appellee
    and Cross-Appellant.
    APPEAL FROM:           District Court of the Eleventh Judicial District,
    In and For the County of Flathead, Cause No. DV 06-341B
    Honorable Katherine R. Curtis, Presiding Judge
    COUNSEL OF RECORD:
    For Appellant:
    Quentin M. Rhoades, Alison Garab; Sullivan, Tabaracci & Rhoades, P.C.;
    Missoula, Montana
    For Appellee:
    Charles E. Hansberry, Isaac M. Kantor; Garlington, Lohn & Robinson,
    PLLP; Missoula, Montana
    Submitted on Briefs: September 18, 2013
    Decided: October 22, 2013
    Filed:
    __________________________________________
    Clerk
    Justice Patricia Cotter delivered the Opinion of the Court.
    ¶1     Three Rivers Bank (Bank) and H.E. Simpson Lumber (Simpson) both had
    business and financial relationships with North End Timber Production, L.L.C. (NET or
    the mill), a now-defunct sawmill in Olney, Montana, formerly owned and operated by
    John and Lee Alt. Approximately five years into its operation, NET experienced serious
    financial difficulties and defaulted on approximately $1,400,000 in loan obligations to the
    Bank and at the same time owed Simpson approximately $893,500.               Subsequently,
    proceedings were initiated in both Bankruptcy Court and the Eleventh Judicial District
    Court. While these cases were pending, a fire destroyed the mill. The Bank recovered
    approximately $980,000 from the mill’s insurance proceeds.         Following a jury trial
    conducted in District Court, the jury, hearing the case between the Bank and Simpson,
    concluded that neither the Bank nor Simpson was entitled to recover damages from the
    other. Simpson appeals. We affirm.
    ISSUES
    ¶2     The dispositive issue on appeal is whether the District Court abused its discretion
    in refusing to admit into evidence a particular letter written by Bank president John King.
    FACTUAL AND PROCEDURAL BACKGROUND
    ¶3     Father and son Lee and John Alt started North End Timber in Olney, Montana, in
    June 2001. NET established its company bank account with Three Rivers Bank and
    obtained its first loan from the Bank during its first month of operation. In accordance
    with standard practices, the Bank secured repayment for this loan (and the 14 subsequent
    loans it would extend during the life of the company) through liens on collateral. The
    2
    Bank also required NET to obtain an insurance policy naming the Bank as a “loss payee,”
    required the Alts to sign personal guarantees for the loan amounts, and had other NET
    customers, including Simpson, execute assignment agreements under which these
    customers when making funds payable to NET, would make them payable to both NET
    and the Bank. The Bank continued to extend loans to NET until April 2006 when NET
    defaulted, owing the Bank approximately $1,400,000.
    ¶4    During 2002, NET and Simpson entered into an arrangement under which
    Simpson would provide NET with operating cash and in return would receive wood to
    sell in Simpson’s lumber facilities. This arrangement remained in place from December
    2002 until January 26, 2006, when the relationship between NET and Simpson
    terminated. During that time more than $6,000,000 in lumber and cash was exchanged
    between NET and Simpson. As noted above, Simpson executed assignment agreements
    with the Bank in March 2003 and again in April 2004, in which it agreed to make any
    advanced funds available to NET payable to both NET and the Bank. For a short period
    of time, Simpson did not strictly adhere to the terms of the 2003 agreement and advanced
    funds to NET without the Bank’s knowledge. However, Simpson later complied with the
    assignment agreements. At the time NET terminated its relationship with Simpson, NET
    owed Simpson approximately $893,500.
    ¶5    In April 2006, the Bank served notices of default on NET and the Alts and
    declared all of NET’s notes immediately due and payable.          The Bank initiated a
    foreclosure action against NET and filed its initial complaint in District Court on April
    26, 2006. It filed an amended complaint on June 13, 2006. Also on June 13, 2006, NET
    3
    filed for Chapter 11 reorganization in Bankruptcy Court. As a secured creditor, the Bank
    immediately filed two claims in Bankruptcy Court in the amounts of $1,324,840 and
    $46,759.73. The foreclosure action in District Court was put on hold by a bankruptcy
    stay.
    ¶6      In August 2006, a fire completely destroyed the mill, and as a result, NET’s
    Chapter 11 proceeding was converted to a Chapter 7 liquidation proceeding. As a senior
    secured creditor, the Bank received $980,000 from insurance proceeds and from minor
    sales of scrap collateral.
    ¶7      The Bank’s foreclosure action in District Court was revived in February 2008,
    after which Simpson filed an answer to the Bank’s complaint. In March 2008, Simpson
    filed a counterclaim against the Bank asserting that the Bank interfered with its
    contractual and business relations with NET, committed constructive fraud, and was
    equitably estopped from asserting its claims against Simpson. Simpson sought to recover
    from the Bank up to $850,000 it had loaned to NET but was unable to recover due to the
    bankruptcy and subsequent fire. In response to Simpson’s counterclaim, the Bank filed a
    second amended complaint alleging, among other things, that Simpson breached two
    assignment agreements it had executed at the Bank’s behest.
    ¶8      Simpson also filed a cross-claim against the Alts, as guarantors. When the Alts
    failed to answer or otherwise respond to Simpson’s cross-claim, Simpson requested a
    default judgment. The District Court entered the requested judgments on June 11, 2009,
    and declared John and Lee Alt each individually and jointly liable to Simpson for
    $893,525.06. Simpson attempted to execute on these judgments without success.
    4
    ¶9     By 2010, many issues were resolved through motions for summary judgment and
    several parties were dismissed from the litigation. This left the Bank, the Alts and
    Simpson as parties, and only three issues for the jury to decide: Simpson’s claim for
    equitable estoppel, the Bank’s claims against Simpson pertaining to the assignment
    agreements, and whether the Bank had mitigated its damages under the assignment
    agreements.
    ¶10    Simpson’s estoppel claim was based upon Simpson’s allegation that King had
    repeatedly assured Simpson’s CEO, Dick Hammett, that the Bank would continue
    lending the mill funds for its long-term operation if Simpson would continue to advance
    funds for its short-term operation. There are no records of these assurances and King
    strongly denied making them. In an effort to establish that King was not a credible
    witness and his denial should not be believed, Simpson sought to introduce into evidence
    a March 2004 letter that King sent to the Board of Directors of Northwestern Business
    Center (or Center or the business center) encouraging the Center to provide capital in the
    form of loans to NET. It appears that Simpson discovered the existence of this letter
    sometime during the course of the litigation. In the letter, King advised the Board that
    NET was a viable business operation at the time and that despite its debt, including
    $98,000 owed to Simpson, the Center should not reject the investment. Simpson claimed
    that the letter contained misinformation about the financial well-being of NET,
    understated NET’s debts, and overstated management’s ability to continue operating the
    mill as a viable entity. In other words, Simpson claimed King lied to the Center in an
    effort to get the business center to advance requested funds.
    5
    ¶11    On September 27, 2010, the Bank filed motions in limine seeking, among other
    things, to exclude the March 2004 King letter from evidence. The parties agreed to allow
    a Special Master to resolve the motions in limine, and on December 1, 2010, the Special
    Master concluded that King’s letter to the Center should be excluded unless Simpson
    could show it was aware of the letter at the time it was written and relied upon it.
    Otherwise, the Special Master concluded, the letter was irrelevant and related to a
    collateral matter; therefore, it should be excluded from evidence.
    ¶12    The court conducted a jury trial from September 26 - 30, 2011. The jury rendered
    a verdict in which the Bank prevailed on its claim against Simpson under the 2003
    assignment. The jury, however, determined the Bank failed to mitigate its damages and
    therefore awarded it no damages for this claim. The jury also found against the Bank on
    its claim under the 2004 assignment and it found against Simpson on its estoppel claim.
    It awarded no damages to either party.
    ¶13    Simpson appeals.
    STANDARD OF REVIEW
    ¶14    We review a district court’s decision on the admissibility of evidence for an abuse
    of discretion. A district court has broad discretion in determining whether evidence is
    relevant and admissible.      It abuses its discretion when it acts arbitrarily without
    employment of conscientious judgment or so exceeds the bounds of reason as to work a
    substantial injustice. Wheaton v. Bradford, 
    2013 MT 121
    , ¶ 13, 
    370 Mont. 93
    , 
    300 P.3d 1162
     (internal citations omitted).
    6
    DISCUSSION
    ¶15    Did the District Court abuse its discretion when it refused to admit into evidence a
    particular letter written by Bank president John King?
    ¶16    Simpson claims that at various times beginning in 2003, Bank President King
    made promises to Simpson that if Simpson would continue to provide short-term funding
    to the mill, the Bank would continue providing long-term funding and would use
    Simpson’s short-term funding to keep the mill operating. Simpson claims the Bank broke
    this promise and consequently the Bank should be held liable for the losses Simpson
    experienced when the mill closed. No one else was present when King purportedly made
    these promises to Simpson’s president, Dick Hammett. Hammett testified that Simpson
    relied upon King’s promises to its detriment. King denies he ever made such promises to
    Hammett and contends he was without the authority to do so.
    ¶17    Without any proof of King’s promises to Hammett, Simpson attempted to discredit
    King’s veracity by seeking to have the letter King wrote to the business center in 2004
    admitted into evidence. Simpson claims this letter shows that King made untruthful
    statements to the Center about the financial health of the mill; therefore, the jury could
    have concluded that King also made untruthful assurances to Simpson. Simpson claims
    the letter is relevant because it undermines the presumption “that a witness speaks the
    truth” by establishing that the witness made prior inconsistent statements. It asserts that
    the letter bears directly on King’s credibility. Lastly, Simpson maintains the Bank failed
    to establish that it was unfairly prejudiced by the letter’s admission into evidence. For
    these reasons, Simpson argues the District Court abused its discretion when it refused to
    7
    admit King’s letter into evidence. It maintains that had the letter been admitted into
    evidence, the outcome of its counter-claim for equitable estoppel would have been
    different.
    ¶18      As noted above, on September 29, 2010, the parties stipulated to the appointment
    of a Special Master to resolve various issues including motions in limine filed by the
    parties. On December 1, 2010, the Special Master issued his ruling and concluded
    among other things that the Bank president’s letter to Northwest Business Center (1) did
    not establish a “pattern of conduct” that would support Simpson’s estoppel claim, (2) was
    irrelevant, and (3) was related to a collateral matter.       During the trial, Simpson
    nonetheless attempted to question the Bank president about his written representations to
    Northwest Business Center pertaining to the financial health of NET. However, the
    District Court precluded this line of questioning.
    ¶19      Simpson relies on § 26-1-302, MCA, which states that “[a] witness is presumed to
    speak the truth.” The statute provides that this presumption may be controverted in a
    number of ways, including evidence of “inconsistent statements” by the witness.
    Simpson claims King’s letter to the Center is an “inconsistent statement.” It also opines
    that under M. R. Evid. 401 and 403 (Rules 401 and 403), “evidence bearing upon the
    credibility of a witness” is relevant and “can only be excluded if its probative value is
    ‘substantially outweighed’ by the danger of unfair prejudice . . . under [Rule 403].”
    Simpson maintains that the content of King’s letter establishes his lack of credibility and
    allows Simpson to satisfy the six elements for its equitable estoppel claim as set forth
    below.
    8
    ¶20      As we have frequently explained:
    Estoppel is a principle of equity. Equity will grant relief sought when in
    view of all the circumstances to deny it would permit one of the parties to
    suffer a gross wrong at the hands of the other party who brought about the
    condition. Estoppel is not favored and will only be sustained upon clear
    and convincing evidence.
    Dagel v. Great Falls, 
    250 Mont. 224
    , 235, 
    819 P.2d 186
    , 193 (1991) (citing Kenneth D.
    Collins Agency v. Hagerott, 
    211 Mont. 303
    , 310, 
    684 P.2d 487
    , 490 (1984) (internal
    ellipses omitted)). Simpson claims that it is inequitable that it should suffer financial
    losses based upon its relationship with NET when the Bank knew about NET’s
    difficulties and failed to tell Simpson about them, misleading it with false assurances.
    Simpson argues that the evidence of a lie to the business center constitutes support for its
    contention that King lied to Simpson too.
    ¶21      We first address Simpson’s argument that the letter would support its equitable
    estoppel claim. In Dagel, we set forth the six elements that define an equitable estoppel
    claim:
    1. the existence of conduct, acts, language, or silence amounting to a
    representation or a concealment of a material fact;
    2. these facts must be known to the party estopped at the time of his
    conduct, or at least the circumstances must be such that knowledge of
    them is necessarily imputed to him;
    3. the truth concerning these facts must be unknown to the other party
    claiming the benefit of the estoppel at the time it was acted upon by
    him;
    4. the conduct must be done with the intention, or at least the expectation,
    that it will be acted upon by the other party, or under circumstances both
    natural and probable that it will be so acted upon;
    9
    5. the conduct must be relied upon by the other party and, thus relying, he
    must be led to act upon it; and
    6. he must in fact act upon it in such a manner as to change his position for
    the worse.
    Dagel, 250 Mont. at 234-35, 819 P.2d at 192-93. See also Elk Park Ranch v. Park Co.,
    
    282 Mont. 154
    , 165, 
    935 P.2d 1131
    , 1137-38 (1997). We expressly noted in Elk Park
    that if any one of these elements was not present, the theory of equitable estoppel cannot
    be invoked. Elk Park, 282 Mont. at 166, 935 P.2d at 1138.
    ¶22    We conclude that the King letter could not assist Simpson in its efforts to satisfy
    the elements of an equitable estoppel claim. As the foregoing test requires, the party to
    be estopped must make a claim or representation to the other party with the intention at
    the time of his conduct that the representation will be acted upon by that other party.
    Dagel, 250 Mont. at 234-35, 819 P.2d at 192-93. Further, the other party must rely upon
    the representation to his detriment.    Here, it is undisputed that the King letter and
    representations were made to Northwest Business Center in 2004, and not to Simpson. It
    is also undisputed that Simpson did not know of the letter in 2004, nor did it ever rebut
    the Special Master’s determination that the letter should be excluded unless Simpson
    could show it was aware of the letter at the time it was written and relied upon it.
    Simpson is therefore unable to demonstrate that it relied upon the representations set
    forth in King’s letter to its detriment. This being so, the letter in question could not lay
    the groundwork for a judgment in Simpson’s favor on its equitable estoppel claim.
    ¶23    In light of the foregoing, the only remaining basis for the admission of the letter
    was the contention that its contents could establish that King could be untruthful, and
    10
    therefore provide grounds for impeaching him. The Special Master determined that the
    letter could not be used for purposes of impeachment because it related to a “collateral
    matter.” Given that the letter was written in 2004 to a company that was not even a party
    to this litigation, we conclude that the District Court did not err in adopting the Special
    Master’s conclusions in this regard. We reiterate that it is within the discretion of the
    District Court to exclude otherwise potentially relevant evidence if its probative value is
    substantially outweighed by the danger of confusion of the issues or a waste of time.
    Rule 403. The letter did relate to a collateral matter, and the District Court therefore did
    not abuse its discretion in excluding it from evidence.
    ¶24    Finally, we note that the Bank filed a cross-appeal, arguing that the District Court
    erred in submitting Simpson’s equitable estoppel claim to the jury. Because we resolve
    this matter in favor of the Bank on direct appeal, we do not reach the cross-appeal.
    CONCLUSION
    ¶25    For the foregoing reasons, we affirm the District Court’s ruling excluding King’s
    letter to Northwest Business Center from the evidence presented to the jury.
    /S/ PATRICIA COTTER
    We concur:
    /S/ MICHAEL E WHEAT
    /S/ BRIAN MORRIS
    /S/ BETH BAKER
    /S/ JIM RICE
    11
    

Document Info

Docket Number: DA 12-0771

Citation Numbers: 2013 MT 312, 372 Mont. 292, 311 P.3d 795, 2013 WL 5727549, 2013 Mont. LEXIS 434

Judges: Cotter, Wheat, Morris, Baker, Rice

Filed Date: 10/22/2013

Precedential Status: Precedential

Modified Date: 11/11/2024