Shiplet v. First Sec. Bank of Livingston, Inc.

• Decision Date: 27 September 1988
• Docket Number: No. 88-141,88-141
• Citation: 234 Mont. 166,762 P.2d 242,45 St.Rep. 1816
• Parties: , 8 UCC Rep.Serv.2d 890 Robert SHIPLET and Jacqueline Shiplet, Plaintiffs and Appellants, v. FIRST SECURITY BANK OF LIVINGSTON, INC., a Montana corporation, Defendant and Respondent.
• Court: Montana Supreme Court

Page 242

762 P.2d 242

234 Mont. 166, 8 UCC Rep.Serv.2d 890

Robert SHIPLET and Jacqueline Shiplet, Plaintiffs and Appellants, v. FIRST SECURITY BANK OF LIVINGSTON, INC., a Montana corporation, Defendant and Respondent.

No. 88-141.

Supreme Court of Montana.

Submitted on Briefs Aug. 11, 1988.

Decided Sept. 27, 1988.

Terry Schaplow, Morrow, Sedivy & Bennett, Bozeman, for plaintiffs and appellants.

Joe Swindlehurst, Huppert & Swindlehurst, Livingston, Sid Thomas, Moulton Law Firm, Billings, for defendant and respondent.

McDONOUGH, Justice.

Robert and Jacqueline Shiplet (Shiplets) appeal from the order of the District Court of the Sixth Judicial District, Park County, granting summary judgment in favor of First Security Bank of Livingston (Bank). We affirm.

The Shiplets present one issue for review:

Did the District Court err in granting the Bank summary judgment on all counts of the complaint?

A complete statement of the facts would be very lengthy. However, an outline of relevant events will provide sufficient background and more detail will be given where required. The Shiplets operate a ranch south of Livingston. They have done business with the Bank for a number of years, entering into various loan agreements in the course of their ranching operations. In 1978, the Shiplets sought further financing for their ranch from the Bank in the form of a $350,000 loan.

The Bank indicated that it could not make the loan unless a guaranty could be arranged through the Farmers Home Administration (FmHA). The Bank then submitted a Request for Guarantee [sic] to FmHA, which listed a "Line of Credit Ceiling" of $350,000, an interest rate of 10%, and a term of five years. The Contract of Guarantee [sic] issued by FmHA upon its approval of the application listed no terms particular to the Shiplets' loan other than the $350,000 credit ceiling.

Once the guaranty was obtained, the Bank and the Shiplets executed a one-year promissory note for $350,000 at an interest rate of 10%. The Shiplets were not able to repay the total principal and interest due after one year, and in 1979 they executed a new one-year note. This began a cycle of notes, most of which were issued for six-month terms. The principal and interest still outstanding as each note came due were carried over to the new note.

When the 1978 note came due and it appeared that another note would be necessary, the Bank contacted FmHA and asked whether the terms of the guaranty would prohibit the Bank from raising the rate of interest on the loan to reflect the overall rise in interest rates taking place at that time. The FmHA replied that according to its attorneys, such a rate increase was permissible. The 1979 note carried an interest rate of 11.75%. The interest rate on subsequent notes fluctuated as the prime lending rate rose and fell, reaching a peak of 21 1/2% in 1981.

The FmHA guaranty expired in 1984, at which time payments from the Shiplets on their loan were in arrears. The FmHA decided that the Bank would have to continue the Shiplets' loan without a guaranty or present a plan of liquidation. In February of that year, the Shiplets and their attorney began meeting with Bank officials to determine what could be done to resolve the situation. Negotiations resulted in execution of a $400,000 note and a new, seven-year FmHA guaranty. The conditions attached to the new guaranty included complete repayment of interest and operating credit at the end of each year, and liquidation of some Shiplet real estate holdings in order to repay $338,000 of the loan. When this final note reached maturity on September 28, 1985, approximately $348,000 remained outstanding.

In October of 1985, the Shiplets filed suit against the Bank based on the increased interest charged on the post-1978 notes. They alleged breach of contract, breach of third-party-beneficiary contract, bad faith, fraud, negligent infliction of emotional distress, breach of fiduciary duty and economic duress. On January 21, 1988, the District Court issued an order granting the Bank's motion for summary judgment as to all thirteen counts enumerated in the Shiplets' complaint. This appeal followed.

In order for summary judgment to issue, the moving party must show there is no genuine issue as to facts that are material in light of the substantive principles entitling that party to judgment as a matter of law. If the moving party meets this burden, the non-moving party then has the burden of showing a genuine issue of material fact. These standards also apply to this Court when reviewing the grant or denial of summary judgment. Frigon v. Morrison-Maierle, Inc. (Mont.1988) 760 P.2d 57, 45 St.Rep. 1344, and cases cited therein.

I.

The first count of the Shiplets' complaint alleged breach of contract. They argued the Bank represented to them that the application form for the guaranty was a contract between the Bank and the Shiplets for a five-year loan at an annual interest rate of 10%. Shiplets alleged the Bank breached this contract by raising the rate of interest charged on the loan above 10%.

The District Court held this count failed for a number of reasons, including the application was not a contract between the Bank and the Shiplets. The court ruled the contract between the two parties was evidenced by the 1978 promissory note for a term of one year at 10%, and any oral representations made by the Bank prior to the signing of that note merged with the note's terms.

On appeal, the Shiplets direct two arguments at the District Court's holding. First, they argue Weinberg v. Farmers State Bank of Worden (Mont.1988), 752 P.2d 719, 45 St.Rep. 391, is controlling in this case. According to the Shiplets, this Court held in Weinberg such a contract existed in a fact situation very similar to this case. In Weinberg, the farm operators alleged a seven-year loan agreement at an interest rate of 9 1/2%. However, in that case both parties had signed a promissory note which on its face listed a seven-year term and a 9 1/2% interest rate.

The only writing in this case containing the terms alleged by the Shiplets is the application for guaranty. That document was signed only by the Bank's agent, and was directed to the FmHA. The FmHA and the Bank later executed a separate contract of guaranty once the application had been approved. The application was not a contract between the Bank and the Shiplets.

As to any oral representations by the Bank that the application was in fact a contract, the District Court quoted language from our decision in First National Montana Bank of Missoula v. McGuiness (Mont.1985), 705 P.2d 579, 42 St.Rep. 1288:

[E]vidence of prior oral agreements is not admissible for the purpose of altering subsequent written agreements dealing with the same subject, and that the prior oral agreements and the written agreement will merge into the subsequent written agreement unless they are distinct and can stand independently of one another.

705 P.2d at 584. Under the doctrine of merger as enunciated in McGuiness, any oral representations made by the Bank merged with the terms of the note, which then represented the contract reached between these two parties.

The Shiplets second argument is that an exception to the doctrine of merger exists for evidence of an oral agreement introduced in order to establish fraud. As will be discussed more fully below, any such evidence would be barred by the two-year statute of limitations for fraud-related torts found at Sec. 27-2-203, MCA. The District Court was correct in granting summary judgment on this count.

II.

The Shiplets' second count alleged breach of a third-party-beneficiary contract. They argued they are third-party beneficiaries of the guaranty contract between the Bank and the FmHA. On appeal, the Shiplets argue Weinberg is controlling on this issue as well. They assert this Court found a third-party-beneficiary contract in Weinberg, rejecting the argument that the guaranty contract was strictly between the bank and the FmHA. Again, the distinguishing factor of the promissory note in Weinberg is overlooked in the Shiplets' argument.

In Weinberg, the guaranty contract was not held to be a third-party-beneficiary contract as such. The bank in that case argued under the parol evidence rule found at Sec. 28-2-905, MCA, the note was evidence only of the initial advances made to the Weinbergs, which had been repaid. The Weinbergs alleged the note was evidence of an agreement for a line of credit lasting seven years. We held the parol evidence rule did not apply, because the Weinbergs were not attempting to vary the terms of the note. They were instead basing their argument on terms found on the note's face. We therefore applied Sec. 28-3-402, MCA, which allows evidence of the circumstances under which an agreement is made in order to explain, but not modify, its terms.

The guaranty contract in Weinberg was one piece of evidence showing the circumstances surrounding the execution of the note. The documents used in procuring the guaranty and the bank's subsequent actions in reliance on the guaranty contract all pertained to what the bank and the Weinbergs had in mind when they executed the note.

Unlike Weinberg, the Shiplets are not seeking to enforce the terms of their note with the Bank. Instead, they seek to enforce the guaranty contract itself. The District Court's citation to the South Dakota Supreme Court decision in Swier v. Norwest Bank (S.D.1987), 409 N.W.2d 121, is persuasive. The loan in that case was an FmHA emergency livestock loan, the same kind of loan involved in this case. Such loans are governed by regulations found at 7 CFR Secs. 1980.201 et seq., which do not prohibit a bank from raising the interest rate charged on a loan during the life of the guaranty. Before raising the rate it charged the Shiplets, the Bank contacted the FmHA to find out if this would violate the guaranty contract, and was told correctly that it...