Yellowstone Conference of United Methodist Church v. D.A. Davidson, Inc.

• Decision Date: 10 September 1987
• Docket Number: No. 86-458,86-458
• Citation: 44 St.Rep. 1528,741 P.2d 794,228 Mont. 288
• Parties: YELLOWSTONE CONFERENCE OF the UNITED METHODIST CHURCH, Plaintiff and Appellant, v. D.A. DAVIDSON, INC., Larry Dover, Warren Drew and Dick Hughes, Defendants and Respondents.
• Court: Montana Supreme Court

Page 794

741 P.2d 794

228 Mont. 288

YELLOWSTONE CONFERENCE OF the UNITED METHODIST CHURCH Plaintiff and Appellant, v. D.A. DAVIDSON, INC., Larry Dover, Warren Drew and Dick Hughes, Defendants and Respondents.

No. 86-458.

Supreme Court of Montana.

Submitted May 28, 1987.

Decided Sept. 10, 1987.

Paterson, Marsillo, Tornabene & Schuyler; Charles J. Tornabene (argued), Missoula, for plaintiff and appellant.

Mulroney, Delaney & Scott; Dexter L. Delaney (argued), Milodragovich, Dale & Dye; Lon J. Dale, Missoula, for D.A. Davidson, Dover and Hughes.

David Rodli, (argued), Missoula, for Drew.

TURNAGE, Chief Justice.

Plaintiff Yellowstone Conference of the United Methodist Church (Church) appeals an order of the Fourth Judicial District, Missoula County, dismissing its claim following presentation of the Church's case, for failure to file the claim within the required time period. We affirm.

The following issues are raised on appeal:

1. Did the District Court abuse its discretion when the court denied the Church's motion to amend its complaint?

2. Did the District Court err when it held that Sec. 27-2-204(1), MCA, barred the Church's cause of action?

3. Did the District Court abuse its discretion when it failed to specifically separate its findings of fact and conclusions of law?

Plaintiff and appellant Church, a Montana corporation, maintained financial accounts with funds received from local Methodist church donations. Donations received by the Church were disbursed to fund various Methodist church programs, including the clergymen's pension fund. The Church's monthly balance in these accounts varied greatly, fluctuating between $20,000 and $300,000. Annually, $200,000 to $500,000 flowed through the Church's accounts.

Defendant Larry Dover was hired in 1969 as the Church's treasurer. Dover's duties included bookkeeping, payment of bills and a general responsibility for the Church's financial accounting. At the time Dover became the Church's treasurer, he was employed as a loan officer by Midland National Bank. Dover had worked for In 1971, Dover invested with D.A. Davidson $20,000 of the Church's funds. Dover testified that he wanted to become a "hero" by investing the Church's money in stocks and securities and thereby increasing the Church's pension funds. Later, Dover opened a $20,000 account under the name of "CB Radio Club of America."

Midland since 1955. Dover later moved to Missoula and became employed by First Bank Southside. Dover kept the Church funds invested at First Bank Southside. In 1970 and 1971, Dover's annual income was between $10,000 and $11,000.

From 1972 to 1975, defendant Warren Drew was D.A. Davidson's account representative. Drew never requested Church authorization from Dover to invest Church funds. Drew encouraged Dover to invest in "speculative stocks." In 1974, 50 percent of the Church's portfolio was invested in speculative stock. In 1977, Dover personally loaned Drew $10,000 that Dover had wrongfully taken from the Church.

In July 1976, defendant Richard Hughes became D.A. Davidson's account representative. Hughes maintained the Church's high investment ratio of speculative stock. In 1976 Dover invested $40,000 into a Missoula subdivision project located on Grant Creek. Additionally, Dover opened an account with D.A. Davidson for each of his three children. His children's investment of Church funds totaled approximately $30,000.

In 1974, Dover requested the Council of Finance and Administration (COFA) to pass resolution granting Dover authority to "sell some stocks." Reverend Hugh Herbert, Chairman of COFA, signed approximately twenty stock authorization forms. In January 1978, Dover contacted Reverend Hugh Herbert and again requested that Herbert, as chairman of COFA, give approval authorizing Dover to invest Church funds in stocks and securities. Reverend Herbert granted Dover's request and Dover invested additional Church funds.

From 1971 to 1978, the Church employed the accounting firm of Galusha, Higgins, and Galusha to annually review the Church's finances. Following the audit, the Galusha firm customarily presented its findings to Dover. Dover passed the audit information on to COFA. Dover did not present the audit itself, but rather gave general information concerning the Church's financial condition. In June 1978, Dover failed to present an audit statement to COFA at the annual meeting. Dover assured Reverend Herbert and Bishop Wheatley, and the members of COFA that the audit statement would be forthcoming. Dover also spoke with Reverend Herbert on numerous occasions during 1978. Dover told Herbert the Church was experiencing financial difficulties but assured Herbert by year's end, "[T]his would all be straightened out."

In December 1978, Dover contacted Herbert and stated the Church was facing serious financial problems "due to the poor stock market." Herbert then contacted Bishop Wheatley and, the new chairman of COFA, Reverend Wilbur Whanger on or about December 15, 1978. Herbert notified them of Dover's improprieties and the resulting financial problems. In January 1979, COFA met to discuss the Church's financial problems. At that time, Dover told COFA that he had both invested and wrongfully taken Church funds. Additionally, Dover told COFA that many of the Church's investments had failed. As a result of the January 1979 COFA meeting, Dover was terminated as the Church's treasurer. Dover later pleaded guilty to felony theft, Sec. 45-6-301(1)(a), MCA.

Appellant Church claims that D.A. Davidson, and agents Drew and Hughes acted negligently and fraudulently in handling the Church's investments. The Church contends that respondents: (1) failed to require proper authorization to invest Church funds; (2) invested a large proportion of Church funds into volatile and speculative stocks in violation of recognized investment procedures; and (3) frequently changed or "churned" the Church's investments to increase brokerage fees. As a result, the Church lost in excess of $109,000 in stock market investments and in excess of $62,000 in brokerage fees.

Appellant Church filed its original complaint on January 12, 1982, for negligence, a tort which is governed by statute of limitations set forth in Sec. 27-2-204(1), MCA. The District Court found, in its April 29, 1986, amended order:

[T]hat plaintiff [Church] knew in 1979 that Dover had been taking funds and the last conversion had occurred on December 7, 1977. In December 1978, plaintiff knew that some of the money entrusted to Dover had been converted according to the loss report received by plaintiff's insurance carrier and admitted into evidence at trial.

The court's April 18, 1986, opinion and order dismissed the Church's complaint against all defendants.

Appellant Church, two weeks prior to trial and more than four years after filing the original complaint, filed a pretrial order by which the Church proposed to amend its complaint. The Church generally alleged securities fraud claiming D.A. Davidson and its agents Drew and Hughes violated the following laws and rules:

1) Securities Act of Montana;

2) Securities and Exchange Act of 1934;

3) Securities Act of 1933;

4) National Association of Securities Dealers Rule of Fair Practice;

5) Rule of the Board of Governors of the Pacific Stock Exchange, Inc.;

6) Midwest Stock Exchange Rules;

7) Montana Uniform Management of Institutional Funds Act; and

8) Montana Consumer Protection Act.

The court held that the Church, by including these claims of statutory violation, was "[S]eeking to amend its original action, expanding the previous negligence action into an action for securities fraud, one couched in the broadest terms."

ISSUE I

Did the court abuse its discretion when it denied appellant's pretrial motion to amend the pleadings?

The standard of review employed by this Court when reviewing a District Court's denial of a motion to amend the pleadings is whether the District Court abused its discretion. Betor v. Chevalier (1948), 121 Mont. 337, 193 P.2d 374, 378.

Rule 15(a), M.R.Civ.P., provides, "[A] party may amend his pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires ..."

In Prentice Lumber Co. v. Hukill (1972), 161 Mont. 8, 17, 504 P.2d 277, 282, citing Foman v. Davis (1962), 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222, 226, we held it is error, in the absence of any declared or apparent reason, for a District Court to deny leave to amend the complaint.

... In the absence of any apparent or declared reason--such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of the amendment, etc.--the leave sought should, as the rules require, be "freely given." ... [Emphasis added.]

Prentice Lumber, 161 Mont. at 17, 504 P.2d at 282.

In the case at bar, plaintiff Church, two weeks prior to trial and more than four years after filing the original complaint attempted to amend the pleadings. The Church sought to introduce a securities fraud cause of action in addition to its negligence claim. The District Court found that plaintiff was attempting to introduce a wholly different cause of action. Secondly, the court found plaintiff was attempting to extend the three-year statute of limitations, Sec. 27-2-204(1), MCA, by amending its complaint to include securities fraud. Finally, the court found the Church's accounting audit and evidence gathered through discovery served to place the Church on notice of its cause of action.

In McGuire v. Nelson (1973), 162 Mont. 37, 42, 508 P.2d 558, 560, we held it was an abuse of discretion to grant an amendment to the pleadings on the eve of trial, when the amendment constituted a different cause of action. The Church's amended

complaint, offered after four...