Denton v. First Interstate Bank of Commerce

• Decision Date: 22 August 2006
• Docket Number: No. 05-215.,05-215.
• Citation: 142 P.3d 797,2006 MT 193,333 Mont. 169
• Parties: Mark DENTON and Verna R. Denton, Plaintiffs and Appellants, v. FIRST INTERSTATE BANK OF COMMERCE, n/k/a First Interstate Bank, Defendant and Respondent.
• Court: Montana Supreme Court

142 P.3d 797

2006 MT 193

333 Mont. 169

Mark DENTON and Verna R. Denton, Plaintiffs and Appellants, v. FIRST INTERSTATE BANK OF COMMERCE, n/k/a First Interstate Bank, Defendant and Respondent.

No. 05-215.

Supreme Court of Montana.

Submitted on Briefs February 8, 2006.

Decided August 22, 2006.

COPYRIGHT MATERIAL OMITTED

For Appellants: P. Mars Scott, Ryan A. Harrington, P. Mars Scott Law Offices, Missoula, Montana.

For Respondent: David B. Cotner, Datsopoulos, MacDonald & Lind, P.C., Missoula, Montana.

Justice PATRICIA O. COTTER delivered the Opinion of the Court.

¶ 1 Mark Denton (Denton) co-signed a $101,250.00 loan (Denton loan) that the First Interstate Bank (FIB or the Bank) issued to his friend Eric "Ole" Anderson. On his own, Anderson obtained a $260,000.00 Small Business Administration loan (SBA loan) from FIB at the same time. The purpose of both loans was to purchase logging equipment with which Anderson could start a business.

¶ 2 Anderson's business failed and he declared bankruptcy. The Bank repossessed and sold the equipment and applied all of the proceeds to the SBA loan. Thereafter, it sought repayment of the Denton loan from Denton. Denton did not pay. As a result, the Bank initiated proceedings against business property owned by Denton and his wife which secured the loan. Denton then brought an action in the Fourth Judicial District Court, Missoula County, claiming that the purchased logging equipment was collateral for his loan and that FIB had unlawfully converted and impaired that collateral. Following a bench trial, the District Court entered judgment for the Bank. Denton appeals. We affirm.

ISSUES

¶ 3 A restatement of the issues on appeal is:

¶ 4 Did the District Court abuse its discretion by allowing the Bank to amend its proposed findings of fact the day before the trial began?

¶ 5 Did the District Court err in failing to find that the Promissory Note was a contract of adhesion?

¶ 6 Did the District Court err in concluding the Bank did not impair the collateral identified in the Denton loan?

¶ 7 Did the District Court err in ruling that the Bank properly distributed the foreclosure sale proceeds?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 8 In September 1995, Anderson sought a $360,000.00 loan from FIB to purchase logging equipment with which to start his own business. The Bank denied his request, in part because Anderson had no ability to contribute equity to the transaction. FIB explained that the SBA would not loan 100% of the value of a depreciable asset.

¶ 9 Anderson notified his friend Denton, who was a valued FIB customer, that his loan request had been denied. Denton contacted the Bank and offered to co-sign a loan for Anderson.¹ The Bank agreed. Thereafter, FIB divided the loan into two separate loans—the SBA loan for $260,000.00 and the Denton loan for $101,250.00. The Promissory Note Denton and Anderson signed indicated that Denton's mini-warehouse operation would serve as collateral for the Denton loan. However, the Commercial Security Agreement signed by the two men identified the logging equipment to be purchased with the loan proceeds as collateral for the Denton loan. The SBA loan included a general statement that collateral consisted of "all equipment and machinery."

¶ 10 In April 1997, FIB notified Anderson that he was in default under the terms of the SBA loan; it also notified Anderson and Denton that the Denton loan was in default. Shortly thereafter, Anderson filed a Petition for Chapter 13 bankruptcy. Ultimately, in November 1997, Anderson petitioned for a Chapter 7 bankruptcy proceeding. On December 9, 1997, FIB was allowed to sell the logging equipment. The proceeds from the public auction totaled $160,000.00. FIB applied the net amount of $137,870.85 to Anderson's SBA loan. Anderson was granted a complete discharge of indebtedness on March 16, 1998.

¶ 11 In February 1998, FIB requested full repayment ($98,460.39 plus interest) from Denton of the Denton loan. Denton initially acknowledged responsibility for the debt but later refused to pay, maintaining that the Denton loan should have been paid first because he was protected as a "purchase money secured creditor." Although the Bank offered it, Denton refused to agree to a repayment schedule of the Denton loan.

¶ 12 On May 26, 1998, FIB prepared and filed a Notice of Sale of Denton's real property that served as collateral for the Denton loan. On July 15, 1998, Denton initiated the underlying action, seeking declaratory relief and a ruling that his loan took priority over the SBA loan. Eventually, on March 26, 2002, the District Court determined that Denton was a debtor, not a creditor, and therefore was not entitled to protection as a purchase money secured creditor. While a determination of creditor/debtor status was the only issue presented to the District Court by Denton, the court nonetheless identified, among others not relevant to this appeal, an additional issue to be tried, i.e., whether FIB had impaired the logging equipment collateral by failing to inform Denton that the SBA held the first lien and rights to the proceeds from the sale of this equipment in the event of a default.

¶ 13 A bench trial was held on December 2 and 3, 2003. On December 15, 2003, the District Court issued its Findings of Fact, Conclusions of Law and Judgment. The court found that Denton knew at the time he signed the Promissory Note that, in the event Anderson defaulted and the Bank repossessed the collateral, the sale proceeds would be applied first to the SBA loan and thereafter, if any proceeds remained, to the Denton loan. Moreover, the court found that under the express terms of the promissory agreement signed by Denton, the Bank had the right to release Anderson from liability and to release or impair the collateral.

¶ 14 The District Court further concluded that the Bank had not impaired the collateral. However, the court continued that Denton 1) failed to meet his burden of proof establishing impairment; 2) consented to the structure of the loan granting the SBA loan a first lien on the collateral; and 3) waived the defense of impairment by signing a promissory agreement that expressly allowed impairment. Additionally, the court determined that FIB did not fail to comply with any applicable laws pertaining to disposing of collateral and had met all the requirements of the Uniform Commercial Code (UCC). The court also held that because Denton had no ownership interest in the collateral, he had no basis for his theory of conversion. Lastly, the court awarded attorney fees to the Bank.

¶ 15 Denton filed a timely appeal.

¶ 16 Additional facts will be discussed as needed for our analysis.

STANDARD OF REVIEW

¶ 17 The granting or denial of a motion to amend a pleading is a discretionary ruling. State Highway Commission v. Schmidt, 148 Mont. 316, 318, 420 P.2d 153, 155. We review such a ruling for an abuse of discretion. State v. Abe, 1998 MT 206, ¶ 28, 290 Mont. 393, ¶ 28, 965 P.2d 882, ¶ 28 (citations omitted).

¶ 18 We apply a clearly erroneous standard using a three-part test to review a district court's findings of fact. First, we review the record to determine if the findings are supported by substantial evidence; second, if the findings are supported by substantial evidence, we will determine if the trial court has misapprehended the effect of the evidence; and third, if substantial evidence exists and the effect of the evidence has not been misapprehended, the Court may still conclude that a finding is clearly erroneous when a review of the record leaves the Court with the definite and firm conviction that a mistake has been made. We review a district court's conclusions of law to determine whether the district court correctly interpreted the applicable law. Fiedler v. Fiedler, 266 Mont. 133, 137, 879 P.2d 675, 678 (1994) (citations omitted).

¶ 19 Our standard of review of a trial court's order granting or denying attorney fees and costs is whether the court abused its discretion. Somont Oil Co. v. A & G Drilling, Inc., 2006 MT 90, ¶ 25, 332 Mont. 56, ¶ 25, 137 P.3d 536, ¶ 25 (citation omitted).

DISCUSSION

ISSUE ONE

¶ 20 Did the District Court abuse its discretion by allowing the Bank to amend its proposed findings of fact the day before the trial began?

¶ 21 In accordance with the District Court's Scheduling Order, both parties filed proposed findings of fact and conclusions of law by November 25, 2003, one week before trial. FIB failed to include in its November 25 original proposed findings reference to the "General Provisions" language in the Promissory Note which expressly stated that the Bank may "release any party . . . or collateral; or impair, fail to realize upon or perfect [FIB's] security interest in the collateral; and take any other action deemed necessary by [FIB] without the consent of or notice to anyone." On December 1, the day before the trial began, the Bank filed amended proposed findings of fact and conclusions of law which specifically referenced these General Provisions, and concluded that by signing the Promissory Note, Denton had consented to the General Provisions and waived defenses based on impairment.

¶ 22 At the start of the trial, Denton moved to quash the Bank's amended proposed findings and conclusions on the ground that the filing was untimely. Denton also requested that he be allowed to amend his findings in the event the District Court accepted the Bank's amended proposed findings and conclusions. The court allowed the Bank's amended findings to be received and instructed Denton to file his amended pleading by close of trial. On December 3, Denton filed his Objection and Response to [FIB's] Amended Proposed Findings and his own Proposed Amended Findings of Fact, Conclusions of Law and Judgment.

¶ 23 Denton maintains on appeal that the District Court erred by allowing the Bank to amend its proposed findings and conclusions the night before trial. He claims...