Powder River County Bank v. Arness-McGriffin Coal Co. ( 1987 )

No. 86-177
IN THE SUPREME COURT OF THE STATE OF MONTANA
POWDER R.IVER COUNTY BANK,
Plaintiff, Counter-Defendant and
Respondent,
-vs-
ARNESS-McGRIFFIN COAL COMPANY, a Colorado
Corporation, and SAM K. ARNESS,
Defendants, Counter-Plaintiffs and
Appellants.
POWDER RIVER COUNTY BANK,
Plaintiff, Counter-Defendant,
-vs-
SAM K. ARNESS,
Defendant, Counter-Plaintiff.
APPEAL FROM: District Court of the Sixteenth Judicial District,
In and for the County of Powder River,
The Honorable Alfred Coate, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Cate Law Firm; Jerome J. Cate argued, Billings,
Montana
For Respondent :
Lucas & Monaghan; Thomas Monaghan argued, Miles City,
Montana
Submitted: O c t o b e r 21, 1986
Decided: February 19, 1987
Filed: FEB 1 9 1987
Mr. Justice L. C. Gulbrandson delivered the Opinion of the
Court.
Sam Arness appeals a Powder River County District Court
order granting summary judgment to the Powder River County
Bank (the Bank) on Arness' four counterclaims against the
Bank. The sole issue on appeal is whether the court erred in
dismissing appellant's counterclaims on the basis that those
claims arose out of, and were dependent upon, an illegal loan
agreement. We affirm.
Beginning at least in 1980, the Bank made various loans
to appellant personally and to several businesses with whom
appellant was affiliated. Appellant personally guaranteed
the loans made to the businesses (Arness-McGriffin Coal Co.,
Eastmont Forest Products, and Arness-Anderson Corp.). In
April 1982, the Bank filed two separate complaints to collect
amounts due on the loans. One complaint named appellant
alone as the defendant and sought to collect approximately
$691,000 allegedly due on the loans. The other complaint
named appellant and Arness-McGriffin Coal Co.
(Arness-McGriffin) as defendants and sought to collect
approximately $234,000 allegedly due on the loans. In July
1982, the defendants in both actions filed answers to the
complaints and denied the Bank's claims. In August 1982, the
Bank, Arness and Arness-McGriffin entered into a loan
agreement which provided that the Bank would take no action
to prosecute the two civil actions for one month; that the
Bank would dismiss both actions with prejudice upon the
satisfaction of certain conditions precedent; that Arness and
Arness-McGriffin acknowledged that they were indebted to the
Bank for over one million dollars; that the Bank agreed to
renew the indebtedness and to loan additional funds to Arness
and Arness-McGriffin; and that Arness and Arness-McGriffin
would execute two promissory notes and secure the notes with
diverse assets.
On September 14, 1982, the Montana State Department of
Commerce issued a "Notice Of Charges And Hearing And.
Temporary Cease And Desist" directed to the Bank. This order
stated in pertinent part:
[tlhe Department ... alleges
3. The Bank and its management have
engaged and are continuing to engage in
unsafe and unsound banking practices as
are evidenced in the charges which
follow.
4. Disclosures made in the examination
of the Bank by the personnel of the
Federal Reserve Bank of Minnesota during
the period of August 30 through September
10, 1982 indicate that the Bank is in an
unsound condition and is not in
compliance with the laws of the state of
Montana to the following extent:
d. Unsecured loans and overdrafts
extended to Arness-Anderson, Inc. exceed
the legal lending limit of the Bank
pursuant to section 32-1-432, MCA
($240,000) and have been in excess of
this amount since before the August 31,
1981 examination of the Bank by the
Federal Reserve Bank of Minnesota and as
disclosed in the March 15, 1982
examination by the state of Montana;
e. Unsecured loans and overdrafts
extended to Eastmont Forest Products,
Inc. and its subsidiary, Northern
Cheyenne Forest Products, Inc., have
exceeded the legal lending limit since
before the August 31, 1981 examination of
the Bank by the Federal Reserve Bank of
Minnesota;
f. The April 8, 1982 letter of
transmittal of the state of Montana
examination dated March 15, 1982 included
a directive, given under the authority of
section 31-1-432, MCA to reduce the total
loans to Sam Arness and his interests to
$480,000. The Bank has not complied with
this directive;
g. The Department has reasonable cause
to believe that the Bank may be
considering a further extension of credit
to Sam Arness and his interests in a
substantial amount which would be a
further violation of section 32-1-432,
MCA and the Bank's lending limit as well
as a violation of the April 8, 1982
letter of transmittal;
1. The Bank is ordered to cease and
desist in advancing any additional funds
or loans to Sam Arness and all his
business or corporate interests;
2. The Bank is ordered to cease its
noncompliance with the April 8, 1982
directive by disposing of all loans to
Sam Arness and his appropriate interests
which exceed $480,000;
Section 32-1-432 (1)(a), MCA, states:
The total loans to a person, partnership,
or corporation by a bank, including loans
to a partnership and to the several
members thereof, shall at no time exceed
20% of the amount of the unimpaired
capital and surplus of that bank.
In October 1982, the defendants in both actions
(appellant alone in one action and appellant and
Arness-McGriffin in the other) filed amended answers to the
complaints. In October 1983, the defendants again filed
amended answers in both actions. The answers in both actions
denied that the amounts sued upon were due, set up the August
1982 loan agreement as an affirmative defense, and
counterclaimed against the Bank for breach of the loan
agreement. The October 1982 answers pray for specific
performance of the loan agreement or, in the alternative, for
damages. The October 1983 answers simply ask for damages.
In November 1983, the Bank filed a reply to the affirmative
defense and alleged four affirmative defenses to the
counterclaim. In August 1984, Arness and Arness-McGriffin
filed a second (actually third) amended answer and
counterclaim consolidating both cases into one pleading.
This answer reiterates the allegations of the previous
answers and adds three new counterclaims. These new
counterclaims, plus the one previously alleged, are (1) for
breach of the loan agreement, (2) that the Bank's
"repudiation of the subject contract constituted bad faith
and unfair dealing in a commercial context" giving rise to a
cause of action in tort, (3) for intentional infliction of
emotional distress in that the Bank's actions "in repudiating
the contract were outrageous in nature", and (4) the fourth
counterclaim realleges the allegations of the first three
counterclaims and further claims that the Bank acted
maliciously, oppressively and in wanton disregard of
appellant's rights.
In February 1985, the Bank moved for summary judgment
on all of the counterclaims of appellant and
Arness-McGriffin. In moving for summary judgment on the
counterclaims, the Rank relied solely on one affirmative
defense, i.e., that the counterclaims were barred because
they arose out of an illegal loan agreement. The District
Court agreed with the Bank's contention and, in March 1986,
the court granted summary judgment to the Bank on the
counterclaims. This appeal followed.
The standard of review is clear. Summary
judgment is only proper under Rule 56(c),
M.R.Civ.P., where the record discloses
that no genuine issue of material fact
exists and the moving party is entitled
to judgment as a matter of law.
Mutual Service Cas. Ins. Co. v. McGehee (Mont. 1985), 711
P.2d 826, 827, 42 St.Rep. 2038, 2039-2040. Summary judgment
was properly granted here as there was no disputed issue of
material fact. The Commerce Department's notice to the Bank
conclusively established, and appellant does not dispute, the
determinative fact in this case. That fact is that the loan
agreement is an illegal contract.
The Commerce Department's notice established that the
loan agreement authorized loans in excess of the Bank's legal
lending limit. The agreement was contrary to an express
provision of law, § 32-1-432, MCA, (cited above). Therefore,
that agreement was unlawful under § 28-2-701, MCA, and void
under § 28-2-603, MCA.
Given that the contract was illegal, appellant cannot
successfully pursue a counterclaim depending on and arising
out of the contract. That is exactly what appellant
attempts. Recently, this Court reaffirmed the rule that:
"No principle of law is better settled
than that a party to an illegal contract
cannot come into a court of law and ask
to have his illegal objects carried out,
nor can he set up a case in which he must
necessarily disclose an illegal purpose
as the groundwork of his claim ... The
law, in short, will not aid either party
to an illegal agreement. It leaves the
parties where it finds them. Therefore
neither a court of law nor a court of
equity will aid the one in enforcins it,
o ge
; & damages for a breach of it_, or
set it aside at the suit of the other,
or, when the agreement - - executed
has been
in whole or in ~ a r t bv - .~avment
- L 2
the - -
of money or the transfer of other
roperty, lend its aid to recover it
Eack. I
' (Citations omitted. ) ( ~* m ~ h a s E
.
in original.)
McPartlin v. Fransen (1982), 199 Mont. 143, 146-147, 648 P.2d
729, 730-731, quoting McManus v. Fulton (1929), 85 Mont. 170,
182-183, 278 P. 126, 131. Appellant's own language in the
counterclaims demonstrates he seeks damages for an alleged
breach of the illegal agreement. Count I is for breach of
contract. Counts I1 and I11 both rely on the Bank's alleged
"repudiation of the contract." Count IV realleges the
previous allegations and labels the conduct malicious,
oppressive and in wanton disregard of appellant's rights.
Under the rule cited in McPartlin, the District Court
properly granted summary judgment to the Bank on appellant's
counterclaims.
Appellant argues that he is not in pari delicto
(equally at fault) in comparison to the Bank and that he
should therefore be allowed to pursue his claims. Montana
cases have established that under certain circumstances a
plaintiff may pursue a claim based on an illegal contract
where the plaintiff is not in pari delicto. See Clifford v.
Great Falls Gas Co. (1923), 68 Mont. 300, 216 P. 114; Carroll
v. Beardon (1963), 142 Mont. 40, 381 P.2d 295. Both the
Clifford case and the Carroll case are limited to very
particular situations and specific illegal contracts.
Neither of those decisions are applicable to the case at bar.
Courts and commentators agree that public policy plays
a large role in deciding whether a plaintiff can enforce, sue
on, or collect sums paid on an illegal contract. See, e.g.,
Jackson Purchase, Etc. v. Local Union 816, Etc. (6th ~ i r .
1981), 646 F.2d 264; Golberg v. Sanglier (Wash. 1982), 639
P.2d 1347; 6A A. Corbin, Corbin on Contracts, S 1533, p. 809
(1962). In this case, the legislature has articulated a
public policy under S 32-1-432, MCA, that the depositors of a
bank should be protected. To allow appellant to pursue his
claims against the Bank would circumvent that public policy.
We find that public policy militates against allowing
appellant to pursue his claims. Given that policy and the
McPartlin decision, we hold that the District Court correctly
granted summary judgment.
Affirmed.
I
Justices
Mr. Justice John C. Sheehy:
I dissent.
Justice /