author: JUSTICE LEAPHART

text:
    JENNIFER TULLY HANSEN and FRANCES TULLY EISENMAN, Plaintiffs and Appellants, v. 75 RANCH COMPANY, a Montana Corporation and PETER R. TULLY, Defendants and Respondents.
    No. 97-249.
    Submitted January 22, 1998.
    Decided April 9, 1998.
    1998 MT 77.
    55 St.Rep. 322.
    957 P.2d 32.
    288 Mont. 310.

      For Appellants: Morris J. Braden (argued); Braden Law Firm, Billings.
    For Respondents: Richard F. Gallagher (argued); Church, Harris, Johnson & Williams, Great Falls.
   JUSTICE LEAPHART

delivered the Opinion of the Court.

¶1 Jennifer Tully Hansen (Jennifer) and Frances Tully Eisenman (Frances) (collectively Minority Shareholders) appeal from the decision of the Fourteenth Judicial District Court, Musselshell County, determining that the Minority Shareholders were equitably estopped from asserting dissenters’rights pursuant to § 35-1-823, MCA, of the Montana Business Corporation Act, that the 75 Ranch Company (Corporation) properly offered to purchase the shares of the Minority Shareholders at a discounted rate, and that Peter Tully (Peter or Majority Shareholder) did not breach his fiduciary duty or act in an oppressive manner warranting relief to the Minority Shareholders pursuant to §§ 35-9-501 to -504, MCA. We reverse and remand.

Background

¶2 Robert R. Tully (Robert) and Joan B. Tully (Joan), the parents of the parties to this action, established a family ranch near Roundup, Montana around 1961. All five of the Tullys’ children worked on the ranch throughout their childhood. In 1980, the Tullys incorporated the 75 Ranch Company as a close corporation hoping to avoid estate and inheritance tax liability. In addition, the Corporation executed a “Stockholders’Agreement” in November 1982 providing a method of transferring the shares of a deceased shareholder and restricting the transfer of shares by shareholders during their lifetime. Robert served as the President of the Corporation. Joan served as Secretary/Treasurer. Robert and Joan together held 25,600 shares, a majority of the stock. Each of the five Tully children held 2,880 shares.

¶3 The record indicates that between 1980 and 1986, the Corporation held informal meetings at family gatherings over the Christmas holidays. Minutes of the meetings were kept and indicate that there was never more than one shareholder absent from a shareholder meeting. After finishing college, Peter became more active in the ranch and served as Vice President on the Board of Directors. In 1986, Joan Tully died and Peter’s wife, Rhonda, succeeded her as Secretary/Treasurer of the Corporation. Beginning in 1987, it appears that the Corporation adhered to corporate formalities even less stringently, continuing to hold its meetings when the family gathered for the holidays and keeping family members apprised of corporate business over the telephone.

¶4 Robert passed away on June 10, 1989. Jennifer and Peter were appointed as co-personal representatives of their father’s estate. During probate of Robert’s estate, the shares were assigned a value of $12.26 per share. Following the estate distribution, Peter owned 51 percent (20,400 of 40,000 shares) of the outstanding shares in the Corporation. Each of Peter’s siblings, including Jennifer and Frances, owned 12.25 percent (4,900 shares). Peter took over as President and Rhonda remained the Secretary/Treasurer.

¶5 Peter and Rhonda lived on the ranch and tended to the day-today operations of the Corporation. They continued the informal corporate management practice. In approximately December 1989, the shareholders discussed the possibility of selling the ranch due to difficulties arising with coal company developments in the area. The record indicates that at this time, Jennifer and her sister Pat Oertli told Peter that since he was the one who lived on the ranch and dealt with the operations, he and Rhonda should decide whether to sell the ranch. However, Jennifer specified that in the event Peter chose to relocate the ranch, she desired to sell her shares in the Corporation since she had no interest in maintaining ownership in a ranch other than the family homestead. At that time, Peter requested that Jennifer wait about a year after the family ranch was sold or exchanged before requesting a buy out of her shares.

¶6 Following the cancellation of certain grazing leases in 1992, Peter and Rhonda started exploring options for disposition of the ranch. Peter retained legal counsel to assist in an exchange of the Montana ranch for a New Mexico ranch. In August 1992, Peter signed and executed an agreement to exchange the properties. The agreement required that the transaction be structured as a like-kind exchange under § 1031 of the Internal Revenue Code to avoid tax consequences. The record reveals that the attorney retained by Peter was not aware that other shareholders would be affected by the exchange and thus did not advise Peter of the need to comply with the procedural notice requirements of the Montana Business Corporation Act.

¶7 On December 31,1992, Peter, in his capacity as President of the Corporation, executed a Contract and Exchange Agreement for the disposition of substantially all of the Montana property. The exchange was closed and completed on January 29, 1993. The selling price of the Montana property was $875,000. The purchase price of the New Mexico property was $850,000. Peter did not provide the Minority Shareholders with notice of the proposed exchange, and did not submit copies of the exchange documents or other relevant information for shareholder approval. Peter, however, asserted that he spoke with several of the Minority Shareholders during the process of exchanging the properties and that during those conversations none of the Minority Shareholders voiced opposition to the proposed exchange.

¶8 In April 1993, Peter received a letter from Jennifer reiterating her desire to sell her shares in the Corporation. In response, Peter contacted the corporate accountant to determine the value of the shares in compliance with the Stockholders’Agreement. In May 1993, Jennifer requested that Peter negotiate the purchase with her attorney. On June 1,1993, Peter made an initial offer of $14.63 per share. This offer was based on a balance sheet dated November 30, 1992; however, a copy of the balance sheet was not provided with the initial offer.

¶9 On October 15, 1993, Jennifer rejected Peter’s initial offer and requested a copy of the balance sheet. Upon receiving the balance sheet and reviewing it for the first time, Jennifer realized that the share valuation applied a 30 percent minority discount. Therefore, by letter dated December 8, 1993, Jennifer sent a counteroffer of $20.90, representing the value of a share without the discount. In addition, Jennifer’s December 8th letter informed Peter that Frances desired a buy out of her shares at the $20.90 valuation. Peter testified that the December 8th letter was his first notice of dissenters’ rights. Not understanding the legal ramifications of dissenters’ rights, Peter consulted an attorney and then responded with a compromise offer of $15.00 per share. The Minority Shareholders rejected Peter’s compromise offer and reasserted their offer of $20.90 per share. Unable to negotiate a resolution, the Minority Shareholders filed suit on March 31, 1995.

¶10 At the District Court, the Minority Shareholders asserted the following causes of action: violation of dissenting shareholders’rights, breach of contract, breach of fiduciary duty, and right to an accounting and appraisal. Peter answered by asserting that the Minority Shareholders consented to and ratified the exchange, and thus were es-topped from asserting dissenters’ rights. Following a bench trial, the District Court entered its Findings of Fact and Conclusions of Law determining that the Minority Shareholders were equitably estopped from asserting dissenters’ rights, that the Corporation properly offered to purchase the minority shares at a discounted rate and that Peter did not breach fiduciary duties or act in an oppressive manner warranting relief pursuant to §§ 35-9-501 to -504, MCA. The following issues are presented on appeal:

¶11 1) Were the Minority Shareholders entitled to statutory notice of dissenters’rights pursuant to § 35-1-831, MCA?

¶12 2) Did the District Court err in concluding that the Minority Shareholders were barred from asserting dissenters’ rights pursuant to the doctrines of waiver and equitable estoppel?

¶13 3) Did the District Court err in valuing the shares at “fair market value” in accordance with the Stockholders’ Agreement?

¶14 4) Did the District Court err in concluding that a minority discount should be applied to the value of the shares?

¶15 5) Did the District Court err in adopting the valuation of the Majority Shareholder’s expert which included a tax discount?

¶16 6) Did the District Court err in concluding that Peter did not breach fiduciary duties or act oppressively in his negotiations with the Minority Shareholders?

¶ 17 7) Is either party entitled to recovery of attorney fees and costs? We address issues 1 and 2, combine issues 3 and 4, address issue 5 and do not reach issues 6 and 7.

Discussion

¶18 As a preliminary matter, Peter asserts that the Minority Shareholders’ claims are barred by the two-year statute of limitations pursuant to § 27-2-211(1), MCA. The Minority Shareholders argue that the three-year period in § 27-2-211(3), MCA, applies to this action. Peter argues that the Minority Shareholders instigated this action seeking to assert rights, not recover a penalty or forfeiture or enforce a liability as § 27-2-211(3), MCA, contemplates. However, we determine that the provision Peter seeks to invoke, § 27-2-211(l)(c), MCA, also contemplates an action upon a liability created by statute. The distinction between the two provisions is that subsection (3) specifically applies to actions against directors or stockholders of a corporation and allows a three-year period rather than the two-year period Peter seeks to invoke.

¶19 The District Court determined that subsection (3) applied to the current action because §§ 35-11-823 to -839, MCA (provisions addressing dissenters’rights) impose obligations on a corporation and its board of directors in the event of the sale or exchange of all or substantially all of the corporate assets. In so concluding, the District Court applied a broad interpretation of “liability” which includes an obligation created by law. We agree with the District Court’s broad interpretation of liability in analyzing § 27-2-211, MCA, and determine that subsection (3), pertaining to directors and stockholders, applies to this case as the Minority Shareholders filed their complaint against Peter in his capacity as the Majority Shareholder and President serving on the board of directors. We affirm the District Court’s finding that the sale/exchange occurred on January 29,1993 and that the Minority Shareholders were within the applicable three-year statutory period of limitations when they filed suit on March 31,1995. We conclude that the Minority Shareholders’ action is not barred by the two-year statute of limitations imposed by § 27-2-2 ll(l)(c), MCA.

Standard of Review

¶20 The parties to this action seek to invoke this Court’s equitable jurisdiction. Section 3-2-204(5), MCA, in combination with Rule 52(a), M.R.Civ. P., control this Court’s standard for reviewing equitable cases and require that findings of fact be upheld unless they are clearly erroneous. McCann Ranch, Inc. v. Quigley-McCann (1996), 276 Mont. 205, 208, 915 P.2d 239, 241. However, we determine that the issues presented in this appeal are legal in nature. Thus, we must review the District Court’s conclusions of law to determine whether the court’s interpretation of the law is correct. Carbon County v. Union Reserve Coal Co., Inc. (1995), 271 Mont. 459, 469, 898 P.2d 680, 686.

I

¶21 1) Were the Minority Shareholders entitled to statutory notice of dissenters’ rights pursuant to § 35-1-831, MCA?

¶22 Peter asserts that the Stockholders’ Agreement should control the Corporation’s purchase of the Minority Shareholders’ shares. In determining the rights and duties of the parties, the District Court agreed with Peter and applied the provisions of the Stockholders’ Agreement. Section 35-9-301, MCA, allows shareholders in a close corporation to enter agreements determining their rights and obligations to each other and to the corporation. In close corporations, such as 75 Ranch, shareholders’ agreements restricting the manner in which shareholders may dispose of their shares are quite common. The Stockholders’ Agreement in this case indicates that the document was designed to restrict the transfer of shares by shareholders during their lifetime, to provide for a procedure for the purchase of the shares of a deceased shareholder and “generally to agree regarding the disposition of stock of the Corporation on various contingencies.” The provisions of the Stockholders’ Agreement, however, do not contemplate an exchange transaction such as occurred in this case, or any other “fundamental change” in the corporate form (e.g., merger or share exchange) that would give rise to dissenters’ rights. Therefore, we determine that the Stockholders’ Agreement does not control the resolution of this litigation. Rather, the provisions of the Montana Business Corporation Act apply.

¶23 The Montana Business Corporation Act was derived from the Model Business Corporation Act and its provisions virtually mirror those of the Model Act. The comments to the Model Act explain that the remedy provided by dissenters’ rights statutes enables shareholders who object to extraordinary corporate transactions to dissentfrom the corporate action and to require the corporation to buy their shares at fair value. 3 Model Bus. Corp. Act Annotated § 13.01 at 13-8 (3d ed. 1995 Supp). The United States Supreme Court explained in Voeller v. Neilston Warehouse Co. (1941), 311 U.S. 531, 535 n.6, 61 S.Ct. 376, 377 n.6, 85 L.Ed. 322, 326 n.6, that

[a]t common law, unanimous shareholder consent was a prerequisite to fundamental changes in the corporation. This made it possible for an arbitrary minority to establish a nuisance value for its shares by refusal to co-operate. To meet the situation, legislatures authorized the making of changes by majority vote. This, however, opened the door to victimization of the minority. To solve the dilemma, statutes permitting a dissenting minority to recover the appraised value of its shares were widely adopted.

More recent versions of this remedy allow a dissenting shareholder to “demand that the corporation buy back his shares at fair value if the corporation takes an action which fundamentally alters the character of the shareholder’s investment.” Waters v. Double L, Inc. (Idaho App. 1987), 755 P.2d 1294, 1297 (citation omitted).

¶24 The Montana Business Corporation Act, at § 35-1-823, MCA, addresses a corporation’s selling, leasing, exchanging or otherwise disposing of all or substantially all of its property otherwise than in the regular course of business. However, for such a transaction to be authorized, the statute requires that the board of directors shall first recommend the proposed transaction to the shareholders, and the shareholders entitled to vote shall approve the transaction. The corporation must notify the shareholders of the proposed shareholder meeting and that the purpose of the meeting is to consider the sale, lease, exchange or disposition of the property. The notice should be accompanied by a description of the transaction. If a proposed corporate action creating dissenters’ rights is submitted to a vote at a shareholders’ meeting, the notice must also state that the shareholders are entitled to assert dissenters’ rights. Section 35-1-829, MCA. Furthermore, § 35-1-827, MCA, provides that upon the consummation of a sale or exchange of all or substantially all of the property of the corporation other than in the usual course of business, a shareholder is entitled to dissent from the corporate action and obtain payment of the fair value of the shareholder’s shares.

¶25 Section 35-1-829(2) applies when a corporation takes an action creating dissenters’ rights without a vote of the shareholders. In such a case, the corporation must give written notification to all shareholders entitled to assert dissenters’ rights that the action was taken and must send them the dissenters’ notice no later than 10 days after the corporate action was taken. Subsection (2) is an acknowledgment by the legislature that some corporate actions resulting in a fundamental change need not be presented, or simply are not presented, for a vote. 3 Model Bus. Corp. Act § 13.20 Official Comment at 13-44, 45. The consequence of such fundamental change, however, is the same as an action where a vote is taken in that shareholders may, after the fact, assert dissenters’ rights as a remedy.

¶26 The parties concede that Peter, acting as President of the Corporation, exchanged substantially all of the property of the Corporation other than in the ordinary course of business. This transaction gave rise to dissenters’ rights under the Montana Business Corporation Act. Peter, however, did not, in compliance with § 35-1-823, MCA, notify each shareholder of the proposed exchange or hold a shareholders’ meeting to allow the shareholders to vote on the proposed exchange. Most importantly, Peter did not, in compliance with §§ 35-1-829 and -831, MCA, give the shareholders notice of dissenters’ rights before or within 10 days after the exchange.

¶27 In his defense, Peter asserts that in the course of negotiating the New Mexico transaction he discussed the exchange with the Minority Shareholders over the telephone. Peter asserts that the Minority Shareholders did not voice opposition to the exchange. In addition, Peter testified that he believed that since corporate matters had always been conducted informally, the usual manner of conducting business would be sufficient for the exchange. Peter asserts that even though the exchange was handled by the Corporation’s retained counsel, it was not until he received the December 8, 1993 letter (nearly one year after the exchange) from the Minority Shareholders’ counsel that he was informed of dissenters’ rights. Finally, Peter asserts that by “acquiescing or consenting to, and participating in the informal operation of 75 Ranch for many years, the minority shareholders waived their rights to strict enforcement of corporate statutory rights and requirements and it would be inequitable to allow their strict assertion now.”

¶28 The District Court agreed with Peter’s acquiescence theory and determined that the Minority Shareholders’ failure to object during the exchange transaction amounted to consent which equitably estopped them from asserting dissenters’ rights. The District Court held that “[a] shareholder is not entitled to assert dissenting rights when he/she is in favor of the transaction” (citing § 35-1-830(l)(b), MCA). Jennifer asserts, however, that she informed Peter that in the event the family homestead was exchanged for another ranch, she was not interested in remaining a shareholder. In addition, the Minority Shareholders argue that the proposed exchange was never presented for their vote at a shareholders’ meeting; therefore, § 35-l-830(l)(b), MCA, which bars dissenters’ rights in the event a shareholder votes in favor of the proposed corporate action, does not apply in this instance. Moreover, because the Minority Shareholders were never given notice of their right to dissent, they could not possibly have knowingly waived such rights.

¶29 Section 35-1-830(1)(b), MCA, cited by the District Court as authority barring the Minority Shareholders’ right to notice of dissenters’ rights, states that “[i]f proposed corporate action creating dissenters’ rights ... is submitted to a vote at a shareholders’ meeting, a shareholder who wishes to assert dissenters’ rights ... may not vote his shares in favor of the proposed action.” We determine, however, that if the action is never presented for a vote, as in this case, § 35-l-830(1)(b) cannot be invoked to later bar minority shareholders from asserting their rights. The Minority Shareholders were not given an opportunity to vote regarding the exchange nor were they notified of their right to dissent from the Corporate exchange; therefore, we determine that the Minority Shareholders could not knowingly waive their right to assert dissenters’ rights in the manner contemplated by § 35-1-830, MCA. The District Court’s conclusion that § 35-l-830(1)(b), MCA, barred the Minority Shareholders from asserting dissenters’ rights, in light of their failure to expressly object to Peter’s actions, is incorrect as a matter of law. We determine that the Minority Shareholders were entitled to statutory notice of dissenters’ rights pursuant to § 35-1-831, MCA.

II

¶30 2) Did the District Court err in concluding that the Minority Shareholders were barred from asserting dissenters’ rights pursuant to the doctrines of waiver and equitable estoppel?

¶31 The District Court found that “[b]ecause of the disclosures and other findings ... the objection of Jennifer and Frances to the exchange, as asserted in their exercise of dissenters’ rights, is a fact which was either known by them or which can necessarily be imputed to them to have existed prior to the exchange.” However, waiver is the voluntary, intentional relinquishment of a known right, which will be declared only when the party clearly manifests such an intention. McGregor v. Mommer (1986), 220 Mont. 98, 110, 714 P.2d 536, 543. The presence of voluntariness and the requisite intent are necessarily questions of fact. McGregor, 714 P.2d at 544.

¶32 The District Court found that the Minority Shareholders knew of their objection to the exchange and thus their failure to expressly object resulted in waiver. We disagree. Before the exchange took place, Jennifer stated that she did not want an interest in a ranch other than the family homestead. More importantly, we determined above that the Minority Shareholders were entitled to notice of the sale and of their right to dissent under the Montana Business Corporation Act. In the absence of a notice of sale and right to dissent, it cannot be said that the Minority Shareholders knowingly and voluntarily waived their rights. Finally, the Minority Shareholders did not clearly manifest an intent to waive their right to dissent. The District Court erred in concluding that, as a result of their silence, the Minority Shareholders waived their right to dissent.

¶33 In order to assert equitable estoppel as a defense, Peter must establish the following essential elements:

(1) there must be conduct, acts, language, or silence amounting to a representation or concealment of material facts; (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 with the expectation, that it will be acted upon by the other party, or under the circumstances that it is both natural and probable that it will be so acted upon; (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 manner as to change his position for the worse.

Dagel v. City of Great Falls (1991), 250 Mont. 224, 234-35, 819 P.2d 186, 192-93. We have held that § 26-1-601, MCA, must be considered when analyzing equitable estoppel. Section 26-1-601 provides a list of conclusive presumptions and includes:

(1) the truth of a declaration, act, or omission of a party, as against that party in any litigation arising out of such declaration, act, or omission, whenever he has, by such declaration, act, or omission, intentionally led another to believe a particular thing true and to act upon such belief[.]

We further explained in Dagel that “ ‘[e]stoppel 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, 819 P.2d at 193 (quoting Kenneth D. Collins Agency v. Hagerott (1984), 211 Mont. 303, 310, 684 P.2d 487, 490).

¶34 The District Court concluded that the conduct, acts, language and silence of Jennifer and Frances amounted to representations of approval of the exchange and concealment of objection. These representations of approval rather than objection are a material fact. In completing the exchange, 75 Ranch and Peter relied upon the conduct, acts, language and silence of Jennifer and Frances. Because of this reliance, their position has changed for the worse. In short, the District Court concluded that the Minority Shareholders, by failing to expressly object to the exchange by the Corporation, waived their right to dissent and should be estopped from asserting dissenters’ rights.

¶35 However, we have held that “estoppel ‘has no application where the omissions of the party claiming estoppel brought about the problem.’ ” McGregor, 714 P.2d at 544 (quoting Carroccia v. Todd (1980), 189 Mont. 172, 177-78, 615 P.2d 225, 228; First Sec. Bank of Bozeman v. Goddard (1979), 181 Mont. 407, 593 P.2d 1040). We determine that Peter’s failure to provide the Minority Shareholders with notice of the proposed exchange and an opportunity to dissent prevents Peter from claiming estoppel as it was his omission that gave rise to Jennifer and Frances’ silence. We hold that the District Court erred in concluding that the Minority Shareholders were barred from asserting dissenters’ rights pursuant to the doctrines of waiver and equitable estoppel.

Ill

¶36 3) Did the District Court err in valuing the shares at “fair market value” in accordance with the Stockholders’ Agreement?

¶37 4) Did the District Court err in concluding that a minority discount should be applied to the value of the shares?

¶38 The District Court, concluding that the rights, status, and legal relationship of the parties is determined by contract, namely the Stockholders’ Agreement, held that the express written terms of the Stockholders’ Agreement set the purchase price for the shares at “fair market value.” The court further determined that, based on McCann Ranch and In re Marriage of Jorgenson (1979), 180 Mont. 294, 590 P.2d 606, the application of a minority discount is allowed when determining “fair market value” under a Stockholders’ Agreement. However, in McCann Ranch, the shareholder did not assert dissenters’ rights or institute proceedings to challenge McCann Ranch’s failure to notify her of dissenters’ rights. The action was instituted by the corporation solely for the purpose of establishing the value of her stock. McCann Ranch, 915 P.2d at 242. In addition, the district court in McCann Ranch found that a minority discount was appropriate based on the methodology recommended by the shareholder’s expert. McCann Ranch, 915 P.2d at 243. Furthermore, Marriage of Jorgenson is distinguishable in that this Court was presented with the issue of fairness of a property distribution in a dissolution of marriage. The minority discount in Marriage of Jorgenson was applied to the market value of the shares in accordance with a shareholders’ agreement, not as a result of a transaction giving rise to dissenters’ rights. Marriage of Jorgenson, 590 P.2d at 610.

¶39 The Minority Shareholders in this case requested relief pursuant to the dissenters’ rights provisions of the Montana Business Corporation Act. Section 35-l-827(1)(c), MCA, states that “[a] shareholder is entitled to dissent from and obtain payment of the fair value of the shareholder’s shares in the event of... consummation of a sale or exchange of all or substantially all of the property of the corporation other than in the regular course of business ....” Section 35-1-826(4), MCA, defines “fair value” with respect to dissenters’ shares as “the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects ....” Because we have determined that the Montana Business Corporation Act controls, we further conclude that the Minority Shareholders are entitled to “fair value” in accordance with the statutes, rather than “fair market value” as provided in the Stockholders’ Agreement.

¶40 In McCann Ranch, we held that nothing in § 35-1-826(4), MCA, prohibits consideration of a minority shareholder’s lack of control and lack of marketability for minority shares when establishing “fair value.” McCann Ranch, 915 P.2d at 242-43. We further reasoned that “[a] discount for a minority interest is appropriate when the minority shareholder has no ability to control salaries, dividends, profit distributions and day-to-day corporate operations.” McCann Ranch, 915 P.2d at 243 (citations omitted). However, the majority of courts addressing the issue of minority discounts has held that discounts should not be taken when determining fair value of minority shares sold to another shareholder or to the corporation. See John J. Oitzinger, Fair Price and Fair Play Under the Montana Business Corporation Act, 58 Mont. L. Rev. 407, 420 n.82 (1997). These courts clarify that discounts at the shareholder level are inherently unfair to the minority shareholder who did not pick the timing of the transaction and is not in the position of a willing seller. Thus, these courts hold that a dissenting shareholder’s position should be the equivalent of what it would have been had the fundamental change not occurred. Moreover, they reason that valuing the shares at less than their proportionate share of the corporation’s fair value produces a transfer of wealth from the minority shareholder to the shareholders in control. Oitzinger, 58 Mont. L. Rev. 420-21 (citing In re McLoon Oil Co. (Me. 1989), 565 A.2d 997, 1005). We find the policies expressed by these courts compelling and therefore overrule our decision in McCann Ranch to the extent that it holds that a minority discount is appropriate when calculating “fair value” for the sale of a minority shareholder’s shares in a closely-held corporation to a majority shareholder or to the corporation.

¶41 Applying a discount is inappropriate when the shareholder is selling her shares to a majority shareholder or to the corporation. The sale differs from a sale to a third party and, thus, different interests must be recognized. When selling to a third party, the value of the shares is either the same as or less than it was in the hands of the transferor because the third party gains no right to control or manage the corporation. However, a sale to a majority shareholder or to the corporation simply consolidates or increases the interests of those already in control. Therefore, requiring the application of a minority discount when selling to an “insider” would result in a windfall to the transferee. This is particularly true since the transferring shareholder would expect that the shares would have at least the same value in her hands as in the hands of the transferee. See Steven C. Bahls, Resolving Shareholder Dissention: Selection of the Appropriate Equitable Remedy, J. Corp. L. 285, 302 (Winter 1990). In short, “a minority discount recognizes that controlling shares are worth more in the market than are noncontrolling shares....” Shear v. Gabovitch (Mass. App. Ct. 1997), 685 N.E.2d 1168, 1187 (citation omitted). Since there is no “market” involved in an inside transfer of shares, the minority discount should not be applied.

¶42 Moreover, we recognize that the dissenters’ rights provisions of the Model Business Corporation Act, as adopted by the Montana legislature, were fashioned as a legislative remedy for minority shareholders who find their interests threatened by significant corporate changes. See 3 Model Bus. Corp. Act § 13.01 at 13-8 (discussing the historical background of dissenters’rights). The dissenters’rights provisions protect the minority shareholders by allowing them to obtain payment of fair value for their shares. Based on this policy, many courts realize that applying discounts when valuing the shares of a dissenting shareholder destroys the legislative intent to protect the minority shareholder’s right to dissent. MT Properties, Inc. v. CMC Real Estate Corp. (Minn. App. 1992), 481 N.W.2d 383, 387 (noting that courts in Delaware, Rhode Island, Iowa, Missouri, Maine, California, Colorado and Oregon are among those rejecting minority discounts for the reason that discounts defeat legislation enacted to protect the minority’s right to dissent); see also Charland v. Country View Golf Club, Inc. (R.I. 1991), 588 A.2d 609; Christopher Vaeth, Annotation, Propriety of Applying Minority Discount to Value of Shares Purchased by Corporation or its Shareholders from Minority Shareholders, 13 A.L.R. 5th 840 (1993).

¶43 We conclude that the Minority Shareholders are entitled to fair value pursuant to § 35-1-827, MCA. Fair value means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects. Section 35-1-826(4), MCA. We further conclude that application of a minority discount is inappropriate when minority shareholders in a close corporation sell their shares to the corporation or majority shareholders in a situation controlled by the dissenters’ rights statute. We hold that the District Court erred in concluding that a discount applied to the minority shares. We remand to the District Court for a valuation of the shares’ fair value without the application of a minority discount.

¶44 Further, since we hold that the Montana Business Corporation Act controls, we direct the District Court to reconsider the Minority Shareholders’ request for appointment of an appraiser pursuant to § 35-1-838, MCA. That provision allows the District Court to appoint one or more appraisers to receive evidence and recommend a decision on the question of fair value. Section 35-1-838(4), MCA.

IV

¶45 5) Did the District Court err in adopting the valuation of the Majority Shareholder’s expert which included a tax discount?

¶46 As courts have noted, the determination of “fair value” is an “inexact science” and its application has generated a large, disparate body of case law. See Kaiser v. Kaiser (N.D. 1996), 555 N.W.2d 585, 587; Robblee v. Robblee (Wash. 1992), 841 P.2d 1289. We note that most courts, in valuing the shares of a dissenting shareholder based on fair value, recognize three approaches: asset value, market value and earnings value. Asset value concentrates on the real worth of the corporate assets and can be determined by valuing the corporation upon a liquidation or by valuing the corporation as a going concern. Market value refers to valuation of the shares on the basis of the price for which a willing buyer would pay a willing seller. Earnings value relates to the earning capacity of the corporation and is usually arrived at by averaging earnings over a number of years. Brown v. Hedahl’s-Q B & R, Inc. (N.D. 1971), 185 N.W.2d 249; see generally Ferdinand S. Tinio, Annotation, Valuation of Stock of Dissenting Stockholders in Case of Consolidation or Merger of Corporation, Sale of its Assets, or the Like, 48 A.L.R. 3d 430 (1973 & Supp. 1997). On remand, we note that courts have discretion to consider a number of factors including, but not limited to, the methods of valuation explained above.

¶47 The District Court was presented with two experts regarding the value of the Minority Shareholders’ shares. The Minority Shareholders’ expert, Watts, appears to have advocated the earnings value method of valuation. On the other hand, Gilbert, expert for Peter and the Corporation, advocated the liquidation method of assessing asset value. The District Court determined that the evidence most credible in establishing “fair market value” was the testimony of Gilbert. On appeal, Peter asserts that “[a] sale, as contemplated under the asset approach, gives rise to a tax liability....” However, courts have noted that unless the corporation is undergoing an actual liquidation, the liquidation method is not an appropriate method of valuing shares of a dissenting shareholder. See Cede & Co. v. Technicolor, Inc. (Del. 1996), 684 A.2d 289 (failure to value the company as a going concern may result in an understatement of fair value); Friedman v. Beway Realty Corp. (N.Y. 1995), 661 N.E.2d 972 (the fair value of a dissenter’s shares is to be determined on their worth in a going concern, not in liquidation); Rapid-American Corp. v. Harris (Del. 1992), 603 A.2d 796 (it is axiomatic that in a statutory appraisal proceeding, the dissenting shareholders are entitled to receive fair value representing their proportionate interest in a going concern); Elk Yarn Mills v. 514 Shares of Common Stock (Tenn. 1987), 742 S.W.2d 638 (holding that the corporation is a going concern and the dissenting shareholders are entitled to a valuation of their shares on that basis and noting that the overwhelming weight of authority approves the valuation of the assets of the corporation as a going concern). Specifically, the Supreme Court of Delaware has explained that “the dissenter in an appraisal action is entitled to receive a proportionate share of fair value in the going concern on the date of the [action giving rise to dissenters’ rights], rather than value that is determined on a liquidated basis.” Cede & Co., 684 A.2d at 298 (citations omitted).

¶48 On remand, the District Court must determine “fair value” as opposed to “fair market value.” In deciding whether to assess costs of the exchange or apply a tax discount in the “fair value” analysis, the court must bear in mind that “fair value,” as explained above, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects. Thus, if costs are incurred after effectuation of the exchange, those costs should not be assessed against the dissenting shareholders. Likewise, as to applying a tax discount, in cases arising under appraisal statutes, courts have recognized that “ordinarily when dissenting stock is accorded net asset value, that value is to be determined by considering the corporation as a going concern and not as if it is undergoing liquidation.” Tinio, 48 A.L.R. 3d at 465.

¶49 Because we determine that the Minority Shareholders are entitled to “fair value” pursuant to the dissenters’ rights statute, we do not reach the issue of whether the Majority Shareholder acted in an oppressive maimer that breached fiduciary duties which could entitle the Minority Shareholders to fair value pursuant to §§ 35-9-501 and -503, MCA. In addition, we leave to the District Court the determination of whether to assess court costs and attorney fees pursuant to § 35-1-839, MCA. We reverse and remand to the District Court for a determination of the “fair value” of the Minority Shareholders’ shares and other relevant matters in accordance with this opinion.

CHIEF JUSTICE TURNAGE, JUSTICES NELSON, GRAY, HUNT, REGNIER and TRIEWEILER concur.


source: Caselaw Access Project

author: JUSTICE NELSON JUSTICE TRIEWEILER

license: Public Domain

text:
    STATE OF MONTANA, Plaintiff and Respondent, v. ALEXANDER FREDRICK MacKINNON, Defendant and Appellant.
    No. 96-463.
    Submitted on Briefs July 2, 1997.
    Decided April 9, 1998.
    1998 MT 78.
    55 St.Rep. 331.
    957 P.2d 23.
    288 Mont. 329.

      For Appellant: Margaret L. Borg, Marcia M. Jacobson, Public Defender Office, Missoula.
    For Respondent: Joseph P. Mazurek, Attorney General, John Paulson, Assistant Attorney General, Helena; Robert L. “Dusty” Deschamps III, Missoula County Attorney, Karen Townsend, Deputy Missoula County Attorney, Missoula.
   JUSTICE NELSON

delivered the Opinion of the Court.

¶1 This is an appeal from the Fourth Judicial District Court, Missoula County. On October 17, 1995, a jury found Defendant Alexander MacKinnon (MacKinnon) guilty of felony sexual assault of his step-daughter, M.G. On March 29, 1996, the District Court entered judgment against MacKinnon. From this judgment and certain evidentiary rulings, MacKinnon appeals. We affirm.

¶2 We restate the following issues raised on appeal:

¶3 1. Did the District Court abuse its discretion by allowing the State to present testimony concerning MacKinnon’s statements which he made on July 16, 1995, in the presence of the victim, M.G., M.G.’s mother and his ex-wife, Monica, as well as two church members, John and Coleen Contos?

¶4 2. Did the District Court abuse its discretion by riding that MacKinnon’s ex-wife, Monica, could not be cross-examined about prior sexual abuse of herself and her daughter, M.G.?

FACTUAL AND PROCEDURAL BACKGROUND

¶5 On May 1, 1995, an Information was filed with the Fourth Judicial District Court, Missoula County, charging MacKinnon with committing the offense of felony sexual assault, in violation of § 45-5-502, MCA (1993). The Information alleged that, in a continuing course of conduct over the previous four years, MacKinnon had knowingly subjected his nine-year-old step-daughter, M.G., to sexual contact without consent by rubbing her breasts and vaginal area. On May 10, 1995, MacKinnon pleaded not guilty to the charge, thereafter, a trial date was set to begin October 13, 1995. On May 22, 1995, M.G.’s mother, Monica, and MacKinnon were divorced.

¶6 In April 1995, Monica became active in the Missoula Christian Church (the Church) and became a member in June 1995. Thereafter, MacKinnon also became active in the Church, but he did not become a member until October 1995. The Church was formed in August 1994 in Missoula, Montana, as a branch of the same church located in Denver, Colorado. John Contos, Coleen Contos and Ken Edwards, witnesses in this action, moved to Missoula from Denver to help form the church and all have responsibilities within the church as group leaders. However, the Church is headed by an ordained minster who conducts church services and is licensed to perform marriages. As a part of its Bible-based teachings, the Church allows its members to confess their sins to one another, but no church member has the authority to formally forgive sins. Rather, the Church believes forgiveness only comes from God.

¶7 On July 16, 1995, after an evening church service conducted in a Missoula restaurant, which both Monica and MacKinnon had attended, Monica and M.G. encountered MacKinnon in the parking lot. An argument ensued concerning visitation of Monica’s and MacKinnon’s two boys. Thereafter, MacKinnon began talking to M.G. and apologizing to her, apparently to set things right with her so she would not have to testify at court proceedings. Concerned with the nature of this conversation, Monica suggested that they continue the conversation inside the restaurant in the presence of John and Coleen Contos. As a result of Monica’s suggestion, the conversation continued in the back of the lobby area of the restaurant with everyone sitting on chairs. Subsequently, on August 21,1995, a second conversation took place at the home of John Contos involving MacKinnon, Monica, John Contos and Ken Edwards.

¶8 On October 12,1995, the State filed a memorandum in support of the use of statements made by MacKinnon in both the July 16,1995 and the August 21,1995 conversations. In response, MacKinnon filed a motion in limine and a motion to suppress concerning these statements and a related document. On October 13, 1995, prior to commencing jury selection, the District Court heard testimony and argument concerning these motions, and, thereafter, granted MacKinnon’s motion to suppress the document and his August 21, 1995 statements, but allowed testimony concerning his July 16, 1995 statements.

¶9 On October 16, 1995, a jury trial was held. During a break in the trial and outside the presence of the jury, the State moved the District Court to prevent MacKinnon from cross-examining Monica or M.G. concerning two prior incidents of sexual abuse, one involving sexual abuse of Monica by a family member when she was a child and the other involving sexual abuse of M.G. by her natural father when she was an infant. The State argued that testimony as to these two matters should not be allowed because this evidence would not be probative of Monica’s truthfulness and would be prejudicial and confusing to the jury. MacKinnon pointed out that, as agreed, he did not question M.G. as to these matters. However, MacKinnon argued that he was entitled to cross-examine Monica as to these matters under the confrontation clause of the federal and Montana constitutions to prove her lack of credibility by revealing any possible motive, prejudice or bias that Monica might have.

¶10 The District Court ruled that under Rules 403 and 608, M.R.Evid., MacKinnon could not cross-examine Monica as to these two matters to establish her motivation because there was no contradictory statement to tie into and because even if this evidence had some probative value it was greatly outweighed by its prejudicial effect. However, the court ruled that MacKinnon could present expert testimony concerning matters of child sexual abuse to assist the jury in evaluating M.G.’s testimony. Furthermore, the court agreed that MacKinnon could argue in closing as to Monica’s motive, bias, and prejudice based on other facts in evidence, such as M.G.’s reluctance to testify and Monica’s desire to divorce MacKinnon. MacKinnon chose not to present expert testimony and called no witnesses before resting his case. However, in closing argument, MacKinnon did point out the family’s troubled situation, Monica’s haste to report M.G.’s disclosures to the police as well as her haste to divorce MacKinnon.

¶11 On October 17, 1995, the jury returned a verdict of guilty to the charge of felony sexual assault against MacKinnon. Thereafter, the District Court conducted a sentencing hearing on March 6, 1996, and deferred MacKinnon’s imposition of sentence for six years, placing MacKinnon on probation subject to certain conditions. The District Court entered its written judgment on March 29, 1996. From this judgment and certain evidentiary rulings, MacKinnon appeals.

STANDARD OF REVIEW

¶12 Both issues MacKinnon raises on appeal concern the District Court’s evidentiary rulings made during his trial. We review a district court’s evidentiary rulings to determine whether the district court abused its discretion. State v. Anderson (1996), 275 Mont. 344, 347, 912 P.2d 801, 803 (citing State v. Pace (1995), 272 Mont. 464, 466, 901 P.2d 557, 559). A district court has broad discretion to determine whether evidence is relevant and admissible. Anderson, 275 Mont. at 347, 912 P.2d at 803. Therefore, absent a showing of abuse of discretion, we will not overturn a court’s evidentiary determination. Anderson, 275 Mont. at 347, 912 P.2d at 803.

DISCUSSION

¶13 At the outset, we note that MacKinnon’s appellate brief contains numerous assertions and exhibits which are not supported by or contained in the District Court record on appeal. Specifically, MacKinnon includes in his appendix to his appellate brief: Exhibit A (a motion and proposed order to dismiss this action prepared by the State but which was never filed); Exhibit B (a letter written by the State to Monica explaining the reason for dismissal); Exhibit D (a transcript of a taped interview with M.G. conducted by the Missoula County Sheriff’s Department); and Exhibit E (a photocopy of the cover of the book titled “Gilly’s Secret” along with a letter from Rashel Jeffrey, M.S.W., A.C.S.W., stating she loaned this book to M.G.). However, these documents (B, D and E) were not introduced as exhibits during trial and are not a part of the District Court record. Furthermore, although Exhibit F (a sexual offender evaluation) is referenced in the District Court’s minute entries of February 14, 1996, and March 6,1996, it is not included in the District Court record and the transcript of the sentencing hearing conducted on March 6, 1996, was not included with the trial transcript on appeal either.

¶14 Additionally, in his appellate brief, MacKinnon makes assertions concerning the book, “Gilly’s Secret,” which M.G. may have read, the results of two polygraph examinations, the sexual offender evaluation, Monica’s motives at the time of the July conversation, MacKinnon’s motivations and state of mind, and contacts between MacKinnon and Monica. None of these assertions are supported by the record. As the State points out, MacKinnon did not testify at the trial or sentencing hearing, and evidence concerning these assertions was not offered or received.

¶15 We continue to condemn this practice and again “remind counsel that parties on appeal are bound by the record and may not add additional matters in briefs or appendices.” State v. Hatfield (1993), 256 Mont. 340, 344, 846 P.2d 1025, 1028 (citing State v. Puzio (1979), 182 Mont. 163, 164, 595 P.2d 1163, 1164). We will not tolerate an attempt to introduce extraneous information into the proceedings. State v. Hall (1983), 203 Mont. 528, 540, 662 P.2d 1306, 1312 (citing Farmers State Bank of Conrad v. Iverson and Bouma (1973), 162 Mont. 130, 509 P.2d 839). Consequently, we review the following two issues concerning the District Court’s evidentiary rulings based only upon the evidence contained in the District Court record.

¶ 16 1. Did the District Court abuse its discretion by allowing the State to present testimony concerning MacKinnon’s statements which he made on July 16,1995, in the presence of the victim, M.G., M.G.’s mother and his ex-wife, Monica, as well as two church members, John and Coleen Contos?

¶17 During pretrial proceedings on October 12, 1995, the State filed a memorandum in support of the use of certain statements made by MacKinnon in a July 16, 1995 conversation involving himself, Monica, M.G., and John and Coleen Contos and statements made by MacKinnon in an August 21, 1995 conversation involving himself, Monica, John Contos and Ken Edwards. In turn, MacKinnon filed a motion in limine and a motion to suppress regarding these same statements as well as a related document. On October 13,1995, prior to jury selection, the District Court heard testimony and argument concerning the admissibility of the July and August statements under Montana’s clergy-penitent privilege, § 26-1-804, MCA.

¶ 18 Specifically, the District Court heard testimony concerning the status of John Contos, Coleen Contos and Ken Edwards within the Missoula Christian Church, the structure and discipline of the Church, as well as the circumstances surrounding the July and August conversations. Thereafter, the District Court granted MacKinnon’s motion to suppress the document. However, while the District Court also denied admission of statements made by MacKinnon during the August conversation, the court ruled that Monica, M.G., John Contos and Coleen Contos could testify as to statements made by MacKinnon during the July conversation.

¶19 On appeal, MacKinnon argues that the District Court abused its discretion when it allowed Monica, M.G., John Contos and Coleen Contos to testify about statements he made during the July conversation. He asserts that testimony given by John and Coleen Contos was inadmissible under § 26-1-804, MCA, because the Contoses, in their professional character as clergy persons, and in the course of discipline enjoined by the Church, heard him confess the crime with which he had been charged two months previously. Additionally, MacKinnon asserts that Monica and M.G. should not have been allowed to testify about his statements because the July conversation was analogous to compromise negotiations and conciliation counseling. Furthermore, MacKinnon contends that because of the religious setting, he trusted that his statements would be kept confidential. Ultimately, MacKinnon claims that Monica coerced and tricked him into confessing.

¶20 Section 26-1-804, MCA, provides:

Confessions made to member of clergy. A clergyman or priest cannot, without the consent of the person making the confession, be examined as to any confession made to him in his professional character in the course of discipline enjoined by the church to which he belongs.

¶21 Enacted in 1867, § 26-1-804, MCA, was left unchanged by the adoption of the Montana Rules of Evidence. See Commission Comments to Article V: Privileges, M.R.Evid. Despite this statute’s long history, we are presented for the first time with an issue involving its application. In considering the application of this statute, we note that the United States Supreme Court has explained:

Testimonial exclusionary rules and privileges contravene the fundamental principle that “ ‘the public ... has a right to every man’s evidence.’ ” As such, they must be strictly construed and accepted “only to the very limited extent that permitting a refusal to testify or excluding relevant evidence has a public good transcending the normally predominant principle of utilizing all rational means for ascertaining truth.”

Trammel v. United States (1980), 445 U.S. 40, 50, 100 S.Ct. 906, 912, 63 L.Ed.2d 186, 195 (citations omitted). Additionally, we note that interpretations in other jurisdictions of clergy-penitent statutes similar to § 26-1-804, MCA, have varied. See e.g. State v. Buss (Wash.App.Div. 1 1995), 887 P.2d 920, and Scott v. Hammock (Utah 1994), 870 P.2d 947.

¶22 The Washington Court of Appeals, in Buss, addressed the issue of whether a defendant’s incriminating statements made to a non-ordained Catholic church counselor during a counseling session were privileged under Washington’s statutory clergy-penitent privilege. Narrowly interpreting their clergy-penitent statute, the court explained that non-ordained church counselors are not “clergy” within the statute. The court further explained that the terms “confession” or “course of discipline” only include the sacrament of confession authorized by a particular church discipline. Because the church counselor was not a clergy member and the counseling session did not amount to a confession, the court held that the privilege did not apply. Buss, 887 P.2d at 923-24.

¶23 In contrast, the Utah Supreme Court, in Scott, broadly interpreted their statutory clergy-penitent privilege holding that the privilege applied to non-penitential communications between lay persons and clergy if the communications were “made in confidence and for the purpose of seeking or receiving religious guidance, admonishment, or advice and that the cleric was acting in his or her religious role pursuant to the practice and discipline of the church.” Scott, 870 P.2d at 956. In Scott, the court held that the privilege did apply because the communications between the defendant and his bishop pertained to the defendant’s moral conduct, were intended to be confidential, and the bishop was acting in his role as cleric. Scott, 870 P.2d at 956.

¶24 Notwithstanding that testimonial exclusionary rules and privileges are strictly construed and accepted, Trammel, 445 U.S. at 50, 100 S.Ct. at 912, 63 L.Ed.2d at 195, under the federal First Amendment and under Article II, Section 5 of the Montana Constitution, all persons are guaranteed the free exercise of their religious beliefs and all religions are guaranteed governmental neutrality. See, for example, Torasco v. Watkins (1961), 367 U.S. 488, 495, 81 S.Ct. 1680, 1683-84, 6 L.Ed.2d 982, 987; and Rasmussen v. Bennett (1987), 228 Mont. 106, 111-12, 741 P.2d 755, 758-59. Thus, in order to minimize the risk that § 26-1-804, MCA, might be discriminatorily applied because of differing judicial perceptions of a given church’s practices or religious doctrine, and in order to least interfere with the federal and Montana constitutional protections of religious freedom referred to above, we conclude that Utah’s broader interpretation of the clergy-penitent privilege as set forth in Scott, 870 P.2d 947, is the better view, and we adopt that approach.

¶25 Notwithstanding, even under this broad interpretation of the statute, we conclude that, because the clergy-penitent privilege was not implicated, the District Court did not abuse its discretion when it required John and Coleen Contos to testify about statements MacKinnon made during the July conversation. First of all, it appears that the District Court assumed that John and Coleen Contos were “clergy persons” for the purposes of MacKinnon’s claim of privilege. Secondly, however, accepting that premise as true, the other facts surrounding the July conversation indicate that any statements MacKinnon made were not directed at John and Coleen Contos in their “professional character,” that is, in their capacities as clerics or in their religious roles and “in the course of discipline enjoined,” that is, pursuant to the practice and discipline of the Church. To the contrary, the evidence demonstrates that MacKinnon was not making a confession to the Cantoses for the purpose of receiving forgiveness or for spiritual or religious counseling, guidance, admonishment or advice. Therefore, § 26-1-804, MCA, did not preclude testimony concerning the July conversation because the statute was never implicated.

¶26 The July conversation, which took place over two months after MacKinnon was charged with felony sexual assault and six weeks after he and Monica divorced, was only a continuation of MacKinnon’s conversation with Monica and M.G. which began after evening church services outside the presence of John and Coleen Contos in the parking lot of a Missoula restaurant. Because Monica felt uncomfortable facing MacKinnon by herself as he attempted to set things right with M.G., she asked MacKinnon to continue their conversation inside the restaurant and she also asked John and Coleen Contos, without explaining the subject of their conversation, to serve as facilitators while she, MacKinnon and M.G. talked. At Monica’s request, their conversation continued in the back of the lobby area of the restaurant, a public place, with everyone sitting on chairs. No representations of confidentiality were made during their conversation.

¶27 Even assuming that John and Coleen Contos were clergy persons in the church, nothing in the record suggests that they were acting as ministers or counselors at the time they facilitated the July conversation. MacKinnon, not yet a church member at the time of the July conversation, had not previously sought spiritual advice or counseling from either John or Coleen Contos. Further, MacKinnon did not ask to meet with John and Coleen Contos for the purpose of confession or for religious guidance, counseling, admonishment or advice. Rather, Monica requested that John and Coleen Contos be present during the July conversation, but only to serve as facilitators. Moreover, during the July conversation, MacKinnon did not ask for, and the Contoses did not give, any spiritual advice or forgiveness. No prayers were given and nothing was said about forgiveness. Rather, MacKinnon volunteered his statements without apparent encouragement in order to set things right with his step-daughter, M.G., so that she would not have to testify at court proceedings. In this regard, MacKinnon’s statements were directed at Monica and M.G., not the Contoses. Finally, MacKinnon had no reasonable expectation that his statements would be held in confidence. MacKinnon did not seek and the Contoses did not make any representations of confidentiality. Instead, MacKinnon made his statements in a public place to his ex-wife and step-daughter in the presence of the Contoses.

¶28 Furthermore, we agree with the State that the District Court did not abuse its discretion when it allowed Monica and M.G. to testify about statements MacKinnon made during the July conversation. Contrary to MacKinnon’s arguments, this conversation was not analogous to compromise negotiations or conciliation counseling, and, therefore, was not confidential. First, MacKinnon made his statements to his former wife and step-daughter in the back of the restaurant lobby, a public place, and no representations of confidentiality were made. Additionally, John and Coleen Contos testified that when the July conversation took place they both knew that Monica and MacKinnon were divorced and that they did not advise Monica or MacKinnon about the resumption of their marriage; they did not offer any spiritual advice or counseling; and they did not suggest any further course of action. As such, MacKinnon’s analogies to compromise negotiations and conciliation do not accurately reflect the substance and tenor of the July conversation. Because MacKinnon did not testify, there is no evidence as to his motives for engaging in the conversation nor any evidence as to his state of mind or his expectations of confidentiality. In short, no evidence suggests that MacKinnon had any reasonable expectation that his statements would be held in confidence. Finally, contrary to MacKinnon’s assertions, no evidence presented shows that Monica in any way coerced or tricked MacKinnon into confessing for the purpose of gaining evidence for the State.

¶29 Having carefully considered the evidence in the record, we conclude that § 26-1-804, MCA, is not implicated in this case. Furthermore, we conclude that the July conversation was not confidential in nature. Accordingly, we hold that the District Court did not abuse its discretion when it allowed testimony concerning statements MacKinnon made during the July 16, 1995 conversation.

¶30 2. Did the District Court abuse its discretion by ruling that MacKinnon’s ex-wife, Monica, could not be cross-examined about prior sexual abuse of herself and her daughter, M.G.?

¶31 MacKinnon argues that the District Court abused its discretion when it ruled that MacKinnon could not cross-examine his ex-wife, Monica, about two prior incidents of sexual abuse, one involving sexual abuse of Monica by a family member when she was a child and the other involving sexual abuse of M.G. by her natural father when she was an infant. MacKinnon does not contend that Monica lied; rather, he simply contends that Monica’s personal problems may have affected her perception of M.G.’s initial statements that MacKinnon had touched her in inappropriate places and caused Monica to overreact. As such, MacKinnon argues this evidence of Monica’s personal problems would show her bias, prejudice and motive to testify. Furthermore, MacKinnon maintains that he was entitled to this testimony under the compulsory process and confrontation clauses of the federal and Montana constitutions.

¶32 The State argues that the District Court properly limited the cross-examination of Monica by prohibiting inquiry into these two prior unrelated incidents of sexual abuse involving Monica and M.G. Specifically, the State asserts that the court properly prohibited inquiry into the prior unrelated incident of sexual abuse against M.G. when she was an infant pursuant to Montana’s rape shield statute, § 45-5-511(2), MCA. Furthermore, the State contends that on the basis of Rules 401, 403 and 608(b), M.R.Evid., the court properly prohibited inquiry into the prior unrelated incident of sexual abuse against Monica when she was a child. We agree.

¶33 We have previously explained:

The defendant’s right to confront and cross-examine an adverse witness is grounded in the Sixth Amendment to the United States Constitution, and Article II, Section 24, of the Montana Constitution. However, limiting the scope of cross-examination does not necessarily violate a defendant’s right to confront an adverse witness. A trial court has broad discretion to limit the scope of cross-examination to those issues it determines are relevant to the trial.

State v. Sullivan (1994), 266 Mont. 313, 323, 880 P.2d 829, 836 (citing Sloan v. State (1989), 236 Mont. 100, 104-05, 768 P.2d 1365, 1368, and United States v. Kennedy (9th Cir. 1983), 714 F.2d 968, 973, cert. denied, 465 U.S. 1034, 104 S.Ct. 1305, 79 L.Ed.2d 704 (1984)).

¶34 Montana’s rape shield statute, § 45-5-511(2), MCA, prohibits introduction of evidence concerning the victim’s prior sexual conduct, with certain exceptions:

No evidence concerning the sexual conduct of the victim is admissible in prosecutions under this part except evidence of the victim’s past sexual conduct with the offender or evidence of specific instances of the victim’s sexual activity to show the origin of semen, pregnancy, or disease which is at issue in the prosecution.

¶35 Inadmissible evidence concerning the past sexual conduct of a victim includes prior sexual abuse. State v. Weeks (1995), 270 Mont. 63, 89, 891 P.2d 477, 493. “The purpose of the rape shield statute is to prevent the trial from becoming a trial of the victim.” Weeks, 270 Mont. at 89, 891 P.2d at 493. Yet, we must balance the victim’s protection under the rape shield statute against the defendant’s right to confront witnesses. Weeks, 270 Mont. at 89, 891 P.2d at 493. We have held that a defendant’s right of confrontation is not violated by the exclusion of evidence concerning the victim’s prior sexual abuse committed by other individuals unless the victim’s accusations of prior abuse are proven to be false. Weeks, 270 Mont. at 89, 891 P.2d at 493; State v. Van Pelt (1991), 247 Mont. 99, 805 P.2d 549.

“If the charges are true or reasonably true, then evidence of the charges is inadmissible, mainly because of its prejudicial effect,... but certainly because of its irrelevance to the instant proceeding. ... Furthermore, evidence of prior charges which have not been adjudicated to be true or false; i.e., which may be true or false is also inadmissible, primarily because its introduction circumvents the interest in preserving the integrity of the trial and preventing it from becoming a trial of the victim... (reception of evidence which may be true or false allows circumvention of laws designed to protect legitimate interests of [the] victim). These limitations do not infringe upon a defendant’s right to confrontation. (Citations omitted; emphasis in original.)”

Van Pelt, 247 Mont. at 104, 805 P.2d at 552-53 (quoting State v. Anderson (1984), 211 Mont. 272, 284-85, 686 P.2d 193, 200).

¶36 Here, the District Court properly concluded that evidence of M.G.’s prior unrelated incident of sexual abuse was inadmissible. Neither of the two statutory exceptions applies in this case. Furthermore, it was not shown that M.G. made any false accusations concerning her prior unrelated incident of sexual abuse. Nor could M.G. have testified about this incident of sexual abuse because at the time it occurred she was only an infant. Accordingly, we hold that the District Court correctly ruled that MacKinnon could not cross-examine Monica concerning M.G.’s prior unrelated incident of sexual abuse.

¶37 Montana’s rape shield statute does not apply to other witnesses, and, therefore, would not prohibit MacKinnon from cross-examining Monica about the prior incident of sexual abuse when she was a child. We have stated that “[a] witness’s credibility may be attacked through cross-examination to reveal possible biases, prejudices, or ulterior motives if they relate directly to issues or personalities in the case at hand.” State v. Short (1985), 217 Mont. 62, 67, 702 P.2d 979, 982. In this regard, Rule 401, M.R.Evid., provides that relevant evidence may include evidence of a witness’s credibility. However, Rule 401, M.R.Evid., also states that relevant evidence is any evidence which tends to make the existence of any fact of consequence to the determination of the action more or less probable than without the evidence.

¶38 Here, MacKinnon argues that Monica would have reacted differently to M.G.’s disclosures if the two prior incidents of sexual abuse had not occurred. Specifically, MacKinnon contends that Monica might have made more detailed inquires into what happened and might have taken M.G. to an expert before she rushed to call the authorities within minutes of talking with M.G. However, we conclude that the causes of Monica’s reaction to M.G.’s disclosures are not facts of consequence in determining MacKinnon’s guilt. See State v. Rendon (1995), 273 Mont. 303, 307-08, 903 P.2d 183, 185-86 (district court did not abuse its discretion in excluding testimony concerning the antagonistic relationship between a testifying witness, the assault victim’s mother, and the defendant, which was designed to attack the witness’s credibility, as irrelevant to the issue of defendant’s guilt). As such these incidents are irrelevant and the District Court properly excluded them. Furthermore, we find no fault with Monica’s initial reporting of M.G.’s disclosures to the police who conducted an investigation and determined that the child’s statements were credible.

¶39 Additionally, Rule 608, M.R.Evid., prohibits attacks on a witness’s general character and credibility through specific instances of conduct, and Rule 403, M.R.Evid., allows a court to exclude relevant evidence if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. Here, MacKinnon wanted to cross-examine Monica about prior unrelated incidents of sexual abuse — one involving herself when she was a child and the other involving M.G. when she was an infant. We agree with the State that, on the basis of Rules 608 and 403, M.R.Evid., testimony concerning these prior incidents of sexual abuse would not be probative of Monica’s truthfulness, but rather would constitute an attack on her general character and credibility; would create unfair prejudice against Monica; and would confuse the issues for the jury. See State v. Passama (1993), 261 Mont. 338, 341-42, 863 P.2d 378, 379-80 (district court did not abuse its discretion in prohibiting the defendant from cross-examining the victim’s brother about prior instances of sexual misconduct because its prejudicial value outweighed its probative value). Accordingly, we hold that the District Court did not abuse its discretion when it prohibited MacKinnon from cross-examining Momea about these two prior unrelated incidents of sexual assault.

¶40 Finally, the District Court’s ruling did not violate MacKinnon’s rights under the compulsory process and confrontation clauses of the Montana and federal constitutions. The District Court’s ruling was narrow in scope and effect. The court simply restricted MacKinnon from cross-examining Monica about two specific instances of prior unrelated sexual abuse — one involving M.G. when she was an infant and another involving Monica when she was a child. Otherwise, the court did not restrict MacKinnon’s cross-examination of Monica concerning the marital strife within Monica and MacKinnon’s marriage or her desire to end their marriage, and the court did not impose any other limitation upon cross-examination. Furthermore, the court allowed MacKinnon to present closing arguments concerning Monica’s motive, bias or prejudice based on evidence in the record. Under Rule 611, M.R.Evid., the District Court is given considerable discretion in exercising control over interrogation of witnesses. Accordingly, we hold that the District Court properly exercised its discretion when it limited MacKinnon’s cross-examination of Monica.

¶41 Affirmed.

CHIEF JUSTICE TURNAGE and JUSTICE GRAY concur.

JUSTICE TRIEWEILER

specially concurring.

¶42 I concur with the majority’s discussion and conclusion related to Issue 1.

¶43 I specially concur with the majority’s conclusion related to Issue 2. Although I agree that the district court has broad discretion to limit the scope of cross-examination and that, based on the specific facts in this case, that discretion was not abused, I do not agree with all that is said in the majority’s discussion pertaining to Issue 2. In particular, I do not want to infer that, as applied to other circumstances, Montana’s rape shield statute, found at § 45-5-511(2), MCA, might not violate state and federal constitutional rights to cross-examine adverse witnesses. Furthermore,' while I agree that the District Court had the discretion to admit or exclude cross-examination of Monica, I do not agree with the inference in the majority opinion that it would have been error for the District Court to allow such examination. I conclude that Monica’s past experiences which may have affected her perception of events were relevant to her credibility and could properly have been admitted. However, I also conclude that the District Court could properly have determined that the probative value of that line of questioning was outweighed by the prejudicial effect and, therefore, had a proper basis for exercising its discretion to exclude the evidence.

¶44 For these reasons, I specially concur with the majority opinion.

JUSTICE HUNT joins in the foregoing concurring opinion.


author: JUSTICE REGNIER

text:
    JAMES R. RATCHYE and MARY ANN RATCHYE; MARC A. LIECHTI and MARCEEN L. LIETCHTI; WAYNE L. STEVENS and DIANE M. STEVENS, individually and as officers and directors of TROUTBECK RISE HOMEOWNERS ASSOCIATION; and TROUTBECK RISE HOMEOWNERS ASSOCIATION, INC., a Montana corporation, Plaintiffs and Respondents, v. GERALD B. LUCAS and TROUTBECK LAND DEVELOPMENT COMPANY, a Montana corporation, Defendants and Appellants.
    No. 97-537.
    Submitted on Briefs December 23, 1997.
    Decided April 23, 1998.
    1998 MT 87.
    55 St.Rep. 354.
    957 P.2d 1128.
    288 Mont. 345.

      For Appellants: John E. Bohyer and Fred Simpson, Jr.; Phillips & Bohyer, P.C.; Missoula.
    For Respondents: Randall S. Ogle; Ogle & Worm, PLLP; Kalispell.
   JUSTICE REGNIER

delivered the opinion of the Court.

¶1 On July 16, 1997, plaintiffs filed a motion seeking specific performance of a settlement agreement, or, in the alternative, an order requiring arbitration pursuant to the Montana Uniform Arbitration Act. After a hearing, the District Court entered an order granting the plaintiffs specific performance rather than ordering the parties to submit to arbitration. Troutbeck Land Development Company and Gerald B. Lucas appeal. We reverse and remand.

¶2 The following issues are presented on appeal:

¶3 1. Did the District Court err by denying the defendants’ request to submit to arbitration?

¶4 2. In an arbitration under the settlement agreement, do the Commercial Arbitration Rules of the American Arbitration Association or the Montana Uniform Arbitration Act apply?

FACTUAL AND PROCEDURAL BACKGROUND

¶5 Respondents are homeowners and officers and directors of the Troutbeck Rise Homeowners Association, Inc. (hereinafter “homeowners association” or TRHA). Their homes are located in the Trout-beck Rise subdivision near Lakeside, Montana. The subdivision was developed in the 1970s by the appellants in this case, Troutbeck Land Development Company and Gerald B. Lucas (hereinafter “developers” or TLDC).

¶6 When the subdivision was approved by government officials, the developers were required to complete a water system for the subdivision, which included two water holding tanks and two wells. Both parties dispute whether the developers adequately completed the water system for the subdivision. The homeowners association contends that the existing water system is inadequate to meet the needs of the subdivision’s households.

¶7 On September 21, 1995, the homeowners association filed a complaint in the Eleventh Judicial District Court, Flathead County, seeking to compel the developers to complete the water system as designed and approved in the 1970s. The developers denied the allegations of the complaint based on their contention that the water system was complete as built.

¶8 Before trial, on October 17, 1996, the parties entered into a settlement agreement. The parties also executed an addendum to the settlement agreement on November 25, 1996. The settlement agreement establishes a procedure to assure that the water system of the subdivision was completed on or before July 1, 1998. Under the agreement, the developers are required to complete the second well and storage tank. The developers are also required to develop a road called the “Skookum Road connection,” subject to the approval of state and local government officials. The agreement further provides that the developers must post a performance bond or letter of credit at some time if the water system and road is not completed and approved by July 1, 1997. Finally, the agreement provides that any dispute regarding the agreement would be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association.

¶9 By July 1, 1997, the water system was not completed. The homeowners association requested that the developers post the required performance bond or letter of credit. However, the developers declined to do so. The developers contend that although they have not completed the system and road, they are not required to post the bond or letter of credit until July 1, 1998.

¶10 Subsequently, on July 16, 1997, the homeowners association filed a motion to enforce settlement agreement in the District Court. The homeowners association requested that the court order specific performance of the settlement agreement by requiring the developers to post a performance bond or letter of credit pursuant to Paragraph 4 of the settlement agreement, or, in the alternative, for an order requiring arbitration pursuant to the Montana Uniform Arbitration Act rather than as established in the settlement agreement. The developers responded, arguing that the court should compel the parties to arbitrate under the Commercial Arbitration Rules of the American Arbitration Association. The developers also opposed the homeowners association’s request for specific performance.

¶11 On September 9,1997, the District Court entered an order and rationale requiring the developers to post a bond or letter of credit in the amount of $335,715 on or before September 18, 1997. The court also denied the parties’ application to compel arbitration on the grounds that the agreement is clear and “there is ... no need for the attendant delay and additional expense which would be required to submit this issue to arbitration.”

¶12 On September 17,1997, the developers filed a notice of appeal. On September 26, 1997, the homeowners association filed a motion to dismiss the developers’ appeal with this Court, arguing, first, that the District Court’s order was correct in requiring specific performance and not appealable because the homeowners association never refused to arbitrate the dispute and, second, that the order is not a final judgment from which an appeal is appropriate. On October 7, 1997, this Court issued an order denying the homeowners association’s request to dismiss the appeal, concluding that the District Court did deny arbitration and that under § 27-5-324, MCA, the order is appealable. The developers now appeal from the September 8, 1997, order and rationale of the District Court.

ISSUE 1

¶13 Did the District Court err by denying the defendants’ request to submit to arbitration?

¶14 We review a district court’s conclusion of law regarding arbitrability to determine whether it is correct. Missoula County High School Educ. Ass’n v. Board of Trustees, Missoula County High Schools (1993), 259 Mont. 438, 442, 857 P.2d 696, 698. When a court is asked to compel arbitration of a dispute, the threshold inquiry should be whether the parties agreed to arbitrate. Van Ness Townhouses v. Mar Industries Corp. (9th Cir. 1988), 862 F.2d 754, 756. The rationale for such an inquiry comes from the fact that “arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” Tracer Research Corp. v. National Environmental Services Co. (9th Cir. 1994), 42 F.3d 1292, 1294 (quoting United Steelworkers v. Warrior & Gulf Navigation Co. (1960), 363 U.S. 574, 582, 80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409, 1417).

¶15 In this case, both the developers and the homeowners association argue about the meaning of certain provisions of the settlement agreement. The pertinent sections of the settlement agreement for this Court’s discussion provide:

4. If the water system is not completed and approved by July 1, 1997, TLDC and Gerald B. Lucas (hereinafter Lucas) agree to post a performance bond or an approved letter of credit in the sum of $335,715.00, in favor of the TLDC and the Troutbeck Rise Homeowners Association (hereinafter TRHA), as security for completion of the water system for Troutbeck Rise Subdivision, Phases I and II, and approval by appropriate state and local officials, on or before July 1, 1998. ... Only TLDC may take draws against said performance bond or letter of credit prior to July 1, 1998, upon approval of the above referenced engineering certification committee, and only TRHA may take draws against said performance bond or letter of credit, after July, 1, 1998, upon approval of the above referenced engineering certification committee if the water system is not completed, approved and certified by the above referenced engineering certification committee and appropriate state and local officials by July 1, 1998.
12. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Arbitration shall be conducted by a panel of three (3) arbitrators, one arbitrator appointed by each of the parties hereto, and the third arbitrator appointed by the first two arbitrators so appointed.
14. No remedy referred to in this Agreement is intended to be exclusive, but shall be cumulative and in addition to any other remedy referred to herein or otherwise available to either party at law or in equity. Either party shall have the remedy of specific performance of this Agreement.

¶16 The developers argue that the District Court erred in ordering specific performance and not granting the parties’ application to compel arbitration under the settlement agreement. The developers assert that the court was without power to order specific performance because the settlement agreement in Paragraph 12 specifically provided for arbitration. The developers contend that a court may refuse to enforce a settlement agreement only under certain grounds available at law or equity which are sufficient to revoke a contract. See § 27-5-114(2), MCA. Moreover, the developers argue that the court’s refusal to order arbitration was not based on sufficient grounds and must be reversed.

¶17 The homeowners association counters that, under Paragraph 14 of the settlement agreement, the court could order specific performance of the agreement rather than compel the parties to submit to arbitration. The homeowners association argues that the settlement agreement indicates that all available remedies could be pursued by either party and that, in this particular instance, they were seeking specific performance, which is specifically included as a remedy under Paragraph 14 of the settlement agreement. In this case, where the parties do not dispute whether the water system was completed on time, the settlement agreement is clear, allowing the homeowners association the remedy of specific performance without having to first go through arbitration. Therefore, according to the homeowners, the District Court was correct in ordering the developers to post a performance bond or letter of credit.

¶ 18 In its order, the District Court stated that both parties acknowledge that, as of July 1, 1997, “the plans and specifications for the Troutbeck Rise water system have not been approved by the State of Montana and the water system has not yet been completed.” The court then pointed out that under Paragraph 4 of the settlement agreement, “it is clear that a performance bond is required on July 1, 1997, if the water system was not completed.” The court determined that the intent of the parties could by ascertained by the language of the settlement agreement. The court concluded by ruling that:

The language in the instant contract (the Settlement Agreement) is clear on its face that the parties intended to require a performance bond or approved letter of credit in the sum of $335,715.00 to be posted by July 1, 1997, if the water system was not completed by July 1,1997, and there is, accordingly, no need for the attendant delay and additional expense which would be required to submit this issue to arbitration.

¶19 Settlement agreements requiring arbitration of disputes are enforceable in Montana, as are any other contracts. See Chor v. Piper, Jaffray & Hopwood, Inc. (1993), 261 Mont. 143, 148, 862 P.2d 26, 29. Under § 27-5-114, MCA, a written agreement to submit any controversy to arbitration is valid and enforceable except on the grounds that exist at law or in equity for the revocation of a contract. Furthermore, when a party moves for arbitration under a valid agreement as described by § 27-5-114, MCA, and the opposing party refuses to arbitrate, a district court must order the parties to proceed with arbitration. Section 27-5-115, MCA.

¶20 The homeowners association contends that, in this case, it did not deny the existence of an agreement to arbitrate or refuse to arbitrate, rather, they moved the District Court for a motion to enforce the settlement agreement to either order specific performance or compel the parties to arbitrate. The homeowners association notes that the developers did not file a motion to compel arbitration pursuant to § 27-5-115, MCA, in the proceeding before the District Court. The homeowners association states that the District Court was correct in not ordering the parties to arbitrate because the settlement agreement was clear that under Paragraph 14, the remedy of specific performance was available, providing authority for the court to order the developers to post a bond without requiring the parties to submit to arbitration.

¶21 However, in its motion to dismiss the appeal filed with this Court, the homeowners association made the same argument that neither party made an application to compel arbitration before the District Court nor did the homeowners association refuse to arbitrate. In an order issued October 7,1997, this Court rejected that argument and stated that:

[T]he effect of the district court’s order was to deny the parties’ application for an order compelling arbitration. While neither party refused, per se, to arbitrate as required by § 27-1-115(1), MCA, there was, nevertheless, a dispute as to what rules would govern the arbitration, thus necessitating the intervention of the district court to decide this issue and order arbitration.

¶22 Although the District Court was aware that the parties disagreed over the interpretation of Paragraph 4, it ruled that under the language of the settlement agreement it was clear that the developers were required to post a bond on July 1, 1997, if the water system was not completed. The court noted that under the settlement agreement the intention of the parties in requiring the bond then was clear, therefore, there was no need to submit the issue to arbitration because of its “attendant delay and additional expense.” However, these reasons are not sufficient grounds for the court to set aside the arbitration provision in Paragraph 12.

¶23 Under Paragraph 12 of the settlement agreement “any controversy or claim arising out of this agreement shall be settled by arbitration.” The homeowners association contends that there is no dispute or controversy under the settlement agreement because the parties agree that completion of the water system as defined in the settlement agreement has not been achieved by July 1, 1997. However, the underlying issue in this case is whether, under Paragraph 4 of the settlement agreement, the developers were required to post a performance bond or letter of credit on July 1,1997, or if they have until July 1,1998, to post a performance bond or letter of credit. This Court determines that this disagreement between the parties is a controversy that arises from the settlement agreement itself. Although the settlement agreement did, indeed, contemplate the remedy of specific performance, this was not an alternative to arbitration, but a remedy available to the arbitrators when interpreting and enforcing the settlement agreement.

¶24 As stated above, an agreement to submit any controversy to arbitration is valid and enforceable except on the grounds that exist at law or in equity for the revocation of a contract. Section 27-5-114, MCA. A court may rescind a written contract under circumstances such as mistake, duress, menace, fraud, undue influence, failure of consideration, void consideration, or lack of consent of the parties. See §§ 28-2-1714(1) and -1711, MCA. Also, a court may set aside a contract that is unlawful or which prejudices the public interest. See § 28-2-1714(2) and (3), MCA. In this case, none of the parties allege that any of these grounds exist to void the arbitration clause. Moreover, we conclude that the court’s reasons for not ordering arbitration because of the clarity of the settlement agreement and the inherent delay and expense of arbitration are not valid under § 27-5-114, MCA.

¶25 Furthermore, under § 27-5-115(5), MCA, a motion to compel parties to arbitrate “may not be refused on the ground that the claim in issue lacks merit or good faith or because no fault or grounds for the claim sought to be arbitrated have been shown.” We determine that once the District Court realized that the parties had a dispute concerning the agreement, it could not ignore the arbitration provision in Paragraph 12 and proceed to decide the dispute. Instead, the court should have ordered the parties to arbitrate the dispute as they agreed.

¶26 We conclude that in ordering the developers to post a bond, the District Court exceeded its authority under § 27-5-115(5), MCA. By deciding that the developers violated Paragraph 4 of the settlement agreement, the court undertook to consider and decide the merits of the dispute between the parties. A district court may not decide the merits of a case when a valid agreement requires the parties to a dispute to submit to arbitration.

¶27 We hold that the arbitration clause in Paragraph 12 of the settlement agreement between the developers and the homeowners association is binding and enforceable. We determine that the dispute between the developers and the homeowners association regarding the interpretation of Paragraph 4 is a controversy arising out of the settlement agreement that must be settled in arbitration rather than by the District Court.

¶28 Therefore, we conclude that the District Court erred in ordering the developers to post a performance bond or letter of credit rather than ordering the parties to submit to arbitration under Paragraph 12 of the settlement agreement.

ISSUE 2

¶29 In an arbitration under the settlement agreement, do the Commercial Arbitration Rules of the American Arbitration Association or the Montana Uniform Arbitration Act apply?

¶30 In reversing the District Court’s order, thereby requiring the parties to submit to arbitration, this Court must now determine what rules would apply in arbitration between the parties. The developers contend that under the plain language of the settlement agreement, the Commercial Arbitration Rules of the American Arbitration Association should apply. Paragraph 12 of the settlement agreement states that “any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association.”

¶31 The homeowners association counters that should arbitration be necessary, it should be required pursuant to the Montana Uniform Arbitration Act. As the homeowners association points out, the notice provision on the front page of the settlement agreement states: “THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO TITLE 27, CHAPTER 5, MONTANA CODE ANNOTATED.” Moreover, the homeowners association contends that should arbitration be required, it would be far more efficient and expeditious to proceed under the Montana Uniform Arbitration. Act rather than proceeding under Commercial Arbitration Rules of the American Arbitration Association.

¶32 At the time the settlement agreement was drafted, the notice provision was required under § 27-5-114(4), MCA (1995). This provision was required to be placed on the front page of the settlement agreement in order for the agreement to comply with Montana law. By the inclusion of this clause on a settlement agreement or contract, the statute did not mandate that an arbitration proceed pursuant to the rules established under the Montana Uniform Arbitration Act. Instead, its purpose was to merely notify parties that the agreement contained an arbitration clause. After the parties executed the settlement agreement, § 27-5-114(4), MCA (1995), was found to be preempted by federal law and declared invalid. See Doctor’s Associates, Inc. v. Casarotto (1996), 517 U.S. 681, 116 S. Ct. 1652, 134 L. Ed. 2d. 902. Subsequently, the statute was repealed by the Montana Legislature in 1997.

¶33 Paragraph 12 of the settlement agreement specifically provides that the parties would arbitrate any controversy or claim pursuant to the Commercial Arbitration Rules of the American Arbitration Association. If the language of a contract is clear and explicit, then that language governs its interpretation. See § 28-3-401, MCA. The fact that the homeowners association now claims that an arbitration proceeding under the American Arbitration Association rules is less efficient, slower, or more expensive than an arbitration proceeding under the Montana Uniform Arbitration Act is immaterial. In this case, under Paragraph 12 of the settlement agreement, both the homeowners association and the developers bargained for and agreed that the Commercial Arbitration Rules of the American Arbitration Association would apply.

¶34 Therefore, we conclude the parties should arbitrate their dispute pursuant to the Commercial Arbitration Rules of the American Arbitration Association.

¶35 Reversed and remanded for further proceedings consistent with this opinion.

CHIEF JUSTICE TURNAGE, JUSTICES GRAY, LEAPHART and HUNT concur.