author: JUSTICE GRAY

text:
    MARK STORY d/b/a MARK STORY CONSTRUCTION, Plaintiff, Respondent and Cross-Appellant, v. CITY OF BOZEMAN and NEIL MANN, Defendants, Appellants and Respondents on Cross-Appeal.
    No. 91-632.
    Submitted March 25, 1993.
    Decided June 24, 1993.
    50 St.Rep. 761.
    259 Mont. 207.
    856 P.2d 202.

      For Appellants: J. Robert Planalp and Steve Reida, (both argued), Landoe, Brown, Planalp & Braaksma, Bozeman.
    For Respondent: Gregory O. Morgan (argued), Bozeman.
   JUSTICE GRAY

delivered the Opinion of the Court.

Appellants City of Bozeman and Neil Mann appeal from a final judgment following a jury verdict in the Eighteenth Judicial District, Gallatin County, and from an order denying post-trial motions. Mark Story cross-appeals. We affirm in part and reverse in part.

We phrase the issues as follows:

1) Were the damages awarded against the City for breach of contract and/or breach of the covenant of good faith and fair dealing excessive and speculative or duplicative?

2) Did the District Court err in limiting the City’s cross-examination of Story?

3) Does § 2-9-305(5), MCA (1985), bar Story from recovering against Neil Mann individually?

4) Did the District Court properly instruct the jury?

5) Did the special verdict form comply with Rule 49(a), M.R.Civ.P.?

6) Did the District Court err in permitting retrial of the issues of reformation, defamation and constructive fraud?

This case arises from a dispute over a construction contract between Mark Story Construction (Story) and the City of Bozeman (the City). In the early autumn of 1985, the City distributed bid schedules for the construction of the Durston and Valley View water mains. On Schedule I, the Durston water main, the unit measure for type 2 pipe bedding material was listed as “CY” (cubic yard), the customary unit measure for such material. On Schedule II, the Valley View project, a typographical error listed the unit measure for type 2 pipe bedding material as “CF” (cubic feet). Story bid $25.00 per unit on both schedules. On September 30, 1985, the City awarded Story the construction contract. The engineering firm of Thomas, Dean, and Haskins (TD&H) was awarded the engineering subcontract.

On October 9, 1985, Doug Daniels, the project engineer from TD&H, discovered the typographical error and left a telephone message for Story explaining the error. He followed the message with a letter. The City claims that Story returned Daniels’ call the next day and assured the City that he meant to bid the Schedule II, type 2 pipe bedding material in cubic yards. Story denies this conversation took place. Story signed and returned the contract with “CF” listed as the unit measure of type 2 pipe bedding material on Schedule II. On November 12,1985, the City executed the contract without changing the unit measure.

The minutes of a preconstruction meeting held November 21,1985, do not contain any discussion of the error. Shortly after the meeting, Story began purchasing supplies for the project. When Story received his first pay estimate dated December 20, 1985, the disputed pipe bedding material was listed at $25 per cubic yard. Story crossed this out and wrote in “CF” before returning it to the City. The City recognized that Story had made the change but paid Story under pay estimate #1. Because work had not started, Story had not used any pipe bedding material; consequently, the City did not pay for pipe bedding material at either “CY” or “CF.”

The City then issued a change order to change the contract to read “cubic yards” instead of “cubic feet” for the pipe bedding material in Schedule II. Story refused to sign the change order. Story similarly crossed out “CY” on the second pay estimate dated February 18,1986.

Story began work on the project on March 3,1986, but halted after a week due to wet, muddy conditions. Story worked sporadically and submitted three requests to the City for extensions of time on the contract; the City did not rule on the requests immediately. When he returned the third pay estimate dated April 29, 1986, he attached a signed statement setting forth his position regarding the unit measure of the type 2 pipe bedding material on Schedule II.

On May 9, 1986, a TD&H engineer informed city engineer Neil Mann (Mann) that Story had completed 46% of the work, but 86% of the time on his contract had elapsed. Mann wrote to Story’s bond company, Balboa Insurance Company (Balboa), and relayed this information. Balboa then wrote to Story, referenced Mann’s letter, and encouraged him to finish the project. Story walked off the job on June 9, 1986, with Schedule II nearly finished but Schedule I untouched.

On June 12, 1986, the City granted 23 of the 48 days Story had requested for an extension, and announced its intention to enforce the $450 per day liquidated damages clause of the contract. On June 16, 1986, Balboa canceled Story’s bond. After the City submitted a claim on the bond, Balboa paid out $96,070.50 for completion of the project. Story did not accept the final pay estimate due to the ongoing dispute.

Story filed suit on December 12, 1986, for breach of contract, breach of the covenant of good faith and fair dealing, and defamation. In the first trial, the jury awarded Story $360,000 in tort damages for breach of the covenant and $13,236 in contract damages. In Story v. Bozeman (1990), 242 Mont. 436, 791 P.2d 767, (Story I), we concluded that the special verdict form used was misleading and remanded for a new trial. We also clarified the law regarding the covenant of good faith and fair dealing, concluding that a breach of the covenant is a breach of the contract and that only contract damages are due unless the parties have a special relationship. Story I, 791 P.2d at 775-6.

After remand, Stray amended his complaint to add a claim of intentional interference with contractual relations against Mann. Following the second trial, the jury awarded Story $850,000 in damages for breach of contract and/or breach of the covenant of good faith and fair dealing against the City. It also awarded $100,000 in damages against Mann for intentional interference with contractual relations. In its judgment on the verdict, the District Court assessed interest against both Mann and the City pursuant to § 25-9-205, MCA.

The City then moved for judgment notwithstanding the verdict or, alternatively, for a new trial. The City argued, among other things, that Mann was immune from judgment and that substantial evidence did not support the verdicts against Mann and the City. In its order on post-trial motions, the court amended the final judgment to preclude the accrual of interest against the City if the City paid the judgment within two years, pursuant to § 2-9-317, MCA. The District Court denied all other post-trial motions. This appeal follows.

Were the damages awarded against the City for breach of contract and/or breach of the covenant of good faith and fair dealing excessive and speculative or duplicative?

At the eight-day jury trial, Story presented the following figures concerning the damages claimed:

$111,115 • Loss incurred because of forced sale of equipment
$373,266 • Future lost profits 1986-1996
$230,747 • Amount due on contract with the City
$500,000 • Loss of credit and reputation

Story’s expert economist, Arlen Smith (Smith) testified regarding the first two elements of damages; Story testified regarding the last two elements. The jury awarded Story $850,000 in damages against the City for breach of the contract and/or breach of the covenant of good faith and fair dealing.

The City makes two primary arguments concerning the proof of damages: that the damages claimed were excessive and speculative and that they were duplicative. Regarding its first contention, the City phrases the issue as whether the jury verdict of $850,000 is excessive and speculative, and argues that no evidence supports the verdict. It concedes, however, that evidence of record exists to support the verdict; therefore, we construe the City’s argument to be that the proof of damages on which the jury award was based was speculative and excessive. Story initially responds that the City did not object to the testimony at trial or otherwise adequately preserve either argument for appeal. Accordingly, we focus on this threshold matter.

At trial, Smith testified specifically, and without objection, regarding the amount of damages for lost future profits and loss caused by forced sale of equipment. The District Court also admitted Smith’s two economic reports detailing his analysis of Story’s damages without objection. Story testified regarding his calculation of the amount due on the contract without objection. The City did not mention the issue of speculative damages in its opening or closing arguments, did not raise the issue in its post-trial motions, and did not refer to “speculative or excessive damages” in any colloquies of record with the court.

It is elementary that unless a party urging error has made timely objection to evidence or testimony at the trial level, it will not be considered by this Court on appeal. Sikorski v. Olin (1977), 174 Mont. 107, 113, 568 P.2d 571, 574. In Sikorski, the plaintiff testified to $10,550 in damages, and the jury awarded $10,000. On appeal, the defendant argued, as the City does here, that the proof of damages was speculative and could not form a basis for the jury’s damage award. Sikorski, 568 P.2d at 574. We refused to consider the defendant’s argument, stating:

[w]hile the computations offered may have been subject to the objection that they were speculative in nature, we refuse to consider the matter for the first time on appeal.

Sikorski, 568 P.2d at 574. We face the identical situation here. The City wholly failed to object to the amount of damages presented by Smith and Story. It cannot now claim that Story’s proof of damages was speculative and excessive.

The City claims it adequately preserved its objection by raising the issue of speculative damages for lost future profits in its trial brief. We disagree. The City submitted a combined trial brief and motion in limine prior to trial. In the portion entitled “trial brief— evidentiary issues anticipated,” the City asserted that Smith’s upcoming testimony regarding lost future profits appeared to be speculative. However, the City did not solicit a ruling from the court at any time on the issue of speculative future losses. We conclude, therefore, that including the issue of speculative future losses in its trial brief did not preserve the City’s objection regarding Story’s “excessive and speculative” proof of damages.

If the City had included the issue of speculative future damages in its motion in limine, and the District Court had ruled on the question, the objection would have been adequately preserved. See Barrett v. ASARCO, Inc. (1990), 245 Mont. 196, 205, 799 P.2d 1078, 1083-84. Of course, that preservation only would have applied to Smith’s testimony regarding lost future damages; the City can point to no objection to Smith’s testimony regarding loss incurred from forced sale of equipment or Story’s testimony regarding the amount due on the contract. Nonetheless, the City did not include this issue in its motion in limine and, therefore, it failed to preserve its objection for appeal.

Additionally, the City argues that it preserved its objection for appeal by seeking to exclude Smith’s testimony in its motion in limine and by objecting prior to the start of testimony. However, the City made both of these objections on the basis of surprise because it had received Smith’s updated report only one week before trial. The District Court, prior to testimony, orally overruled the City’s objection, concluding that most of Smith’s information and forthcoming testimony was the same as in the first trial. The City did not appeal this ruling.

This Court will consider on appeal only objections made at trial that are timely and specific. Kizer v. Semitool, Inc. (1991), 251 Mont. 199, 207, 824 P.2d 229, 234. A party complaining of error must stand or fall upon the ground relied upon in the trial court; objections that are urged for the first time on appeal will not be considered by this Court. State Dep’t of Highways v. DeTienne (1985), 218 Mont. 249, 256, 707 P.2d 534, 538. We conclude that the City’s objection to Smith’s testimony on the basis of surprise does not preserve its objection to the speculative and excessive nature of the testimony. Therefore, we decline to address the question.

The City’s second argument regarding Story’s proof of damages is that the $850,000 contract/covenant damages awarded to Story were duplicative. Specifically, the City claims the damages for loss caused by forced sale of equipment duplicate the damages for lost future profits. It also contends that because the first three elements of Story’s proof of damages totalled approximately $715,000, and the jury awarded Story $850,000, the jury apparently awarded approximately $135,000 for loss of credit. According to the City, the amount for loss of credit duplicates the amount for lost future profits.

As detailed above, the City did not object to Smith’s testimony or reports on the basis that the damages he offered were duplicative. The City also did not object to Story’s testimony or exhibits regarding the amount due on the contract, and made only a “relevance” objection to his testimony regarding loss of credit. Nor was the City’s argument that the contract damages are duplicative included in its post-trial motions. This argument is a “new theory of the case” advanced on appeal. Therefore, we decline to consider it. Weaver v. Graybill, et al. (1990), 246 Mont. 175, 179, 803 P.2d 1089, 1092-3; Vandalia Ranch v. Farmers Union Oil & Supply (1986), 221 Mont. 253, 259, 718 P.2d 647, 651.

As a final matter, we note that the City made the following appeal to the jury in closing argument:

And I want you to think particularly about the quality of the expert testimony on damages and Arlen Smith. I’m just going to boldly say that nobody, but nobody could make any real sense out of Arlen Smith’s presentation to you. If you want hundreds of thousands of dollars, you better explain it better than that. And if you really understand something, I think it can be explained simply. And our position with Max Simmons [the City’s expert] is to simply say that we are not going to try to recompute this flawed system that he has. We will show you that he didn’t do it right and you shouldn’t rely upon it. And when it comes to proving somebody’s damages, remember who has the burden to do that. It’s not — we don’t have it as the City or Neil Mann. It’s not our duty to prove Mark Story’s damages. It’s his.

This argument, although properly made to a jury, is entirely distinct from the City’s argument on appeal and, therefore, in no way preserved its present contention that Story’s proof of contract damages was flawed a matter of law. The City’s closing argument addresses the jury’s province, as a fact-finder, to weigh the credibility and reasonableness of Story’s proof of damages. It does not eliminate the City’s duty to object to testimony it now contends was improper. See Moore v. Hardy (1988), 230 Mont. 158, 163, 748 P.2d 477, 481.

We hold that the City did not preserve its objections to Story’s proof of contract damages.

Did the District Court err in limiting the City’s cross-examination of Mark Story?

The City claims it should have been allowed to cross-examine Story regarding his performance on prior jobs. Story contends that the District Court correctly limited the City’s cross-examination of Story when its improper motive of impeaching his character became obvious. After a lengthy in-chambers discussion on the relevance of Story’s past performances, the District Court ruled that the City could question Story about disputes over final payment on two previous jobs, but it could not question him about problems with his performance that were not relevant to Balboa’s cancellation of Story’s bond on the Bozeman job.

On issues of relevance, the trial court has wide discretion and will not be reversed except in cases of manifest abuse of that discretion. Martin v. Laurel Cable TV, Inc. (1985), 215 Mont. 229, 232-3, 696 P.2d 454, 456-7. In making its ruling, the District Court carefully considered the relevance and the prejudicial effect of the testimony sought by the City. We cannot conclude that the District Court’s evidentiary ruling constituted a manifest abuse of discretion.

Does § 2-9-305(5), MCA (1985), bar Story from recovering against Mann individually?

Throughout this litigation, the City relied on § 2-9-305(5), MCA (1985), in arguing that Mann should be dismissed from the action as an individual defendant or, in the alternative, that Story was precluded from recovering against him. Section 2-9-305(5), MCA (1985), reads:

Recovery against a governmental entity under the provisions of parts 1 through 3 of this chapter constitutes a complete bar to any action or recovery of damages by the claimant, by reason of the same subject matter, against the employee whose negligence or wrongful act, error or omission or other actionable conduct gave rise to the claim. In any such action against a governmental entity, the employee whose conduct gave rise to this suit is immune from liability by reasons of the same subject matter if the governmental entity acknowledges or is bound by a judicial determination that the conduct upon which the claim is brought arises out of the course and scope of the employee’s employment, unless the claim constitutes an exclusion provided in (b) through (d) of subsection (6).

In interpreting § 2-9-305(5), MCA (1985), we must give the language its plain meaning. Stansbury v. Lin (Mont. 1993), 848 P.2d 509, 511, 50 St.Rep. 251, 252. The City argues that because it has always taken the position that Mann’s actions in writing the letter to Balboa (the Balboa letter) were within the course and scope of his employment pursuant to the second sentence of § 2-9-305(5), MCA (1985), the District Court should have dismissed Mann as an individual defendant. We disagree.

The first sentence of subsection (5) clearly prohibits an action against a governmental employee based on the same subject matter if recovery has been obtained previously from the governmental entity. Stansbury, 848 P.2d at 511. In Stansbury, the plaintiff settled with the governmental entity and later sued the governmental employee individually. Stansbury, 848 P.2d at 511. We concluded that the settlement constituted a “recovery” from the governmental entity under the statute which barred a later action against the employee. Stansbury, 848 P.2d at 511.

Absent such a recovery from the governmental entity, § 2-9-305(5), MCA(1985), does not bar the filing of an action against the governmental employee. Here, unlike Stansbury, the earliest such “recovery” could be said to exist against the City is at the time of jury verdict. Nothing in § 2-9-305, MCA (1985), provides immunity from suit for Mann under these facts. The question remains, however, whether the statute bars recovery from Mann.

The first sentence of § 2-9-305(5), MCA (1985), provides that recovery against a governmental entity constitutes a complete bar not only to any action but also to any recovery of damages by the claimant, by reason of the same subject matter, against the employee whose actionable conduct gave rise to the claim. Therefore, we examine the pleadings and posture of Story’s case to determine whether the recovery against Mann and the recovery against the City arose from the same subject matter.

Story’s amended complaint contained five counts. Counts I and II set forth Story’s breach of contract and breach of the covenant of good faith and fair dealing claims against the City. Mann’s actions in writing the Balboa letter served as a factual basis for both Counts I and II. In Count V, Story set forth his claim for intentional interference with contractual relations against Mann individually. This claim also was based, in part, on the Balboa letter.

Story continued to present this theory of the case throughout the litigation. In Story’s opening argument, counsel explicitly referred to the Balboa letter as a basis for both the claim against the City and the claim against Mann. In closing argument, counsel argued Story’s claim for breach of the covenant against the City by stating, “was it honest and fair to send the letter to the Balboa Insurance Company?” In explaining the individual claim against Mann, counsel argued:

This is a case where you’ve got an opportunity to say to Neil Mann, “we don’t appreciate your conduct in sending that letter to Balboa Insurance Company and you should be as hable for that injury as the City of Bozeman is.” And by doing that, you will send a message out there to the community. You will tell the community and the people who are government workers here that they have some personal responsibility to be fair and honest, in fact, and they can’t hide behind the fact that they work for the government.

Finally, the jury instructions set forth the elements for breach of contract, breach of the covenant of good faith and fair dealing and vicarious liability, allowing the jury to hold the City responsible for Mann’s actions.

Based on the above presentation of Story’s case, we conclude that the jury likely awarded damages against Mann and the City for the same subject matter — the Balboa letter. Although § 2-9-305(5), MCA, is not a model of clarity, one clear purpose behind the statute is to preclude a claimant from recovering from both the governmental entity and the governmental employee for the same conduct. Story “recovered” from the City for the damages caused by the Balboa letter when the jury rendered its verdict. We conclude the double recovery awarded by the jury is barred by the plain language of § 2-9-305(5), MCA (1985), and on that basis, the separate award of $100,000 against Mann for intentional interference with contractual relations must be stricken from the judgment.

Stoiy asserts that § 2-9-305, MCA (1985), is unconstitutional because it allows the governmental entity to grant an employee immunity from liability merely by acknowledging that the conduct was in the course and scope of the employee’s employment. According to Story, this allows a governmental entity to determine unilaterally if a plaintiff can recover punitive damages and interest on the judgment. He characterizes this as an unconstitutional limitation on the right of recovery.

As detailed earlier, we base our decision to strike the damages against Mann on the first sentence of § 2-9-305(5), MCA (1985), not the second sentence which forms the basis for Story’s argument. Given the structure of the case as presented by Story, the statute bars double recovery for the same subject matter — the Balboa letter; the City’s acknowledgment that Mann acted within the scope of his employment has no effect on this outcome under § 2-9-305(5), MCA (1985). We decline, therefore, to address the effects of the second sentence of § 2-9-305(5), MCA (1985), on a different factual and procedural scenario.

The City also raised other issues on appeal regarding the evidence presented and the instruction given on intentional interference with contractual relations. Because we have determined that § 2-9-305(5), MCA (1985), bars Story from recovering damages against Mann on the record before us, we need not address those issues. For the same reason, we do not reach Story’s cross-appeal relating to the running of interest on the award against Mann.

Did the District Court properly instruct the jury?

The City raises four separate but interrelated issues concerning the instructions given by the District Court. It contends that the District Court erred in instructing the jury on reformation of contract, on actual and constructive fraud, on the covenant of good faith and fair dealing, and on liquidated damages.

When examining whether certain jury instructions were properly given or refused, we must consider the jury instructions in their entirety and in connection with other instructions given and the evidence introduced at trial. Feller v. Fox (1989), 237 Mont. 150, 156, 772 P.2d 842, 846. Moreover, refusal of a proposed instruction does not prejudice a party if the subject matter of the instruction is not applicable to the facts or not supported by the evidence introduced at trial. Webcor Electronics v. Home Electronics (1988), 231 Mont. 377, 381, 754 P.2d 491, 493. Keeping these principles in mind, we set forth each argument in greater detail and examine each in turn. REFORMATION OF CONTRACT

The City argues that the District Court erred both in refusing its offered instruction on reformation of contract, and in giving the instruction offered by Story on that subject. The City’s proposed instruction was a recitation of § 28-2-1611, MCA, Montana’s reformation statute, which permits reformation for fraud, mutual mistake, or mistake of one party known or suspected by the other party (unilateral mistake). Story contends that the instruction was properly refused because the City did not present sufficient evidence to submit “reformation based on fraud or unilateral mistake” to the jury.

Section 28-2-1611, MCA, specifies unilateral mistake as the “mistake of one party while the other at the time knew or suspected.” In interpreting § 17-901, R.C.M. (1947), (the identical predecessor to § 28-2-1611, MCA), we stated that the right to reform a contract for unilateral mistake does not he for the party who knew of the mistake in the contract; rather, it belongs to the aggrieved party who is laboring under a mistake known or suspected by the other party. Schillinger v. Huber (1958), 133 Mont. 80, 85, 320 P.2d 346, 348. We apply those principles to the City’s evidence.

The City asserts that the following facts support its claim for unilateral mistake:

• Story signed the contract knowing it contained the typographical error;
• Story knew the City had identified the documents as being in error; and
• Story signed anyway and claimed there was no mistake.

Throughout the litigation, the City has consistently asserted that “our basis for the reformation claim is the typographical error; Story knew or should have known it was supposed to read CY.”

The City’s argument regarding unilateral mistake is flawed. The City knew of the typographical error when it executed the contract. Doug Daniels testified that he discovered the mistake on October 9; the City executed the contract on November 12, knowing it read “CF” instead of “CY.” As such, the City cannot claim that it was laboring under a mistake that the contract read “CY.” Pursuant to Schillinger, the party who knows of the mistake cannot seek to reform the contract based on unilateral mistake. Because the law of unilateral mistake does not apply to the City’s evidence, we conclude that the City was not entitled to an instruction for reformation based on unilateral mistake. See Webcor, 754 P.2d at 493.

The City’s proposed instruction also allowed for reformation based on fraud. The City maintains on appeal that “fraud by Story was a primary theory of the City’s case;” yet it does not cite any authority regarding fraud or even describe which representation of Story’s constitutes the basis for this theory. As best we can glean from the City’s arguments, it asserts that Story’s alleged statement to Doug Daniels that “he intended to bid cubic yards” forms the basis for its claim of fraud.

In this regard, we note that on appeal, the City asserts that “Story fraudulently stated that it [the typographical error] would not be a problem.” We find no evidence of record to support this assertion. Story’s testimony does not support it. Doug Daniels testified in this trial, the first trial, and his deposition only that Story told him that “he intended to bid cubic yards.” Furthermore, Daniels testified that it was his own impression from the phone call that it would not be necessary to change the contract and that the typographical error had been resolved; he did not testify that Story stated that the error would not be a problem. Therefore, taking the City’s evidence as true for purposes of our analysis, the only basis for its fraud claim is Story’s representation that he “intended to bid cubic yards.”

A district court need not instruct on fraud unless a question of fact is raised on each of the nine elements. First Bank (N.A.)-Billings v. Clark (1989), 236 Mont. 195, 201, 771 P.2d 84, 88. The nine elements of fraud are:

1. A representation;
2. Falsity of the representation;
3. Materiality of the representation;
4. The speaker’s knowledge of the falsity of the representation or ignorance of its truth;
5. The speaker’s intent that it be relied upon;
6. The hearer’s ignorance of the falsity of the representation;
7. The hearer’s reliance on the representation;
8. The hearer’s right to rely on the representation; and
9. Consequent and proximate injury caused by the reliance on the representation.

Wiberg v. 17 Bar, Inc. (1990), 241 Mont. 490, 496, 788 P.2d 292, 295. Here, the City failed to establish a prima facie case of fraud; at very least, evidence regarding elements 4, 5,7, and 8 is completely lacking in the record. As such, we conclude that the City was not entitled to an instruction for reformation based on fraud.

Based on our determinations that the City did not present sufficient evidence to warrant an instruction on reformation based on either unilateral mistake or fraud, we conclude that the District Court did not err in refusing the City’s proposed instruction.

The City also argues that the District Court erred in giving Story’s proposed instruction for reformation of contract based on mutual mistake. That instruction read:

A contract may be reformed where the party seeking reformation has established by clear, convincing and satisfactory proof that:
1. There was a prior understanding of the parties;
2. The parties executed a written contract;
3. Somewhere and sometime between the understanding reached and the actual creation of the written instrument, a mistake occurs in reducing to writing the agreement both parties intended;
4. The mistake relates to something contemplated by the parties;
5. The mistake is mutual; and
6. The correction sought is that the executed instrument does not reflect the actual and true understanding of the parties.
If you find all the above factors and you find that the Defendant did not acquiesce in the price, you may reform the contract to express the true understanding of the parties.

The City’s main contention regarding this instruction is that it did not allow reformation for unilateral mistake or fraud. We have determined that the City was not entitled to an instruction for reformation based on unilateral mistake or fraud. Mutual mistake is the remaining statutory basis for reformation and the instruction correctly identifies the factors required to reform a contract based on mutual mistake. See McSweyn v. Musselshell County (1981), 193 Mont. 525, 531, 632 P.2d 1095, 1098.

The City additionally argues that the instruction given required a higher burden of proof than is required by our cases. It claims that the proper standard of proof is a preponderance of the evidence, citing Reilly v. Maw (1965), 146 Mont. 145, 405 P.2d 440. We disagree. Reilly concerned an actual fraud claim for damages, and the standard for overcoming the presumption that someone acted in good faith is a preponderance of the evidence. Reilly, 405 P.2d at 445. However, a party urging reformation of a contract must overcome a stronger presumption that the writing contains the final agreement of the parties and expresses their real purpose and intent. Voyta v. Clonts (1958), 134 Mont. 156, 166-7, 328 P.2d 655, 661; McSweyn, 632 P.2d at 1099. The correct standard for reformation is clear, convincing, and satisfactory proof. McSweyn, 632 P.2d at 1099.

In sum, we conclude that the District Court properly refused the City’s proposed instruction because it had not presented sufficient evidence to support its theories of unilateral mistake and fraud as a basis for reformation of contract. Additionally, the instruction given by the District Court on reformation correctly stated Montana law and, thus, was properly given.

ACTUAL AND CONSTRUCTIVE FRAUD

The City also argues that the District Court erred in refusing its proposed instruction Nos. 15, 26, 27 and 28, which concerned the City’s claims of actual and constructive fraud. The District Court directed a verdict for Story on the City’s fraud claims at the close of testimony. It did not instruct the jury regarding these claims.

If the party claiming actual fraud does not present a prima facie case on the nine elements of fraud, a directed verdict is proper. McGregor v. Cushman / Mommer (1986), 220 Mont. 98, 104, 714 P.2d 536, 540. We concluded above that the City did not present a prima facie case of fraud. Therefore, the District Court did not err in directing a verdict against the City on actual fraud.

The City also disputes the District Court’s refusal of its instruction on constructive fraud, which was a recitation of § 28-2-406, MCA:

Constructive fraud consists in:
(1) any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault or anyone claiming under him by misleading another to his prejudice or to the prejudice of anyone claiming under him; or
(2) any such act or omission as the law especially declares to be fraudulent, without respect to actual fraud.

The City has failed to prove or even assert the existence of any breach of a duty gaining an advantage to Story or any act or omission declared fraudulent by law, as required by § 28-2-406, MCA. The City failed to establish a prima facie case of constructive fraud and, therefore, was not entitled to an instruction on that subject. See Wiberg, 788 P.2d at 295.

We hold that the District Court did not err in refusing the City’s proposed instruction Nos. 15,26,27 and 28 on actual and constructive fraud.

MUTUAL BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING

In answering Story’s amended complaint, the City counterclaimed for breach of contract and breach of the covenant of good faith and fair dealing against Story. It based this counterclaim on its assertion that Story used fraud and deceit to capitalize on the typographical error. The City argues that the District Court erred in refusing its proposed instruction on the mutual breach of the duty of good faith and fair dealing, which stated:

If both parties have breached the implied covenant of good faith and fair dealing, neither can recover on it.

The City cites the case of Los Angeles Coliseum Comm’n v. N.F.L. (9th Cir. 1986), 791 F.2d 1356, in support of its instruction.

In Barrett v. ASARCO, Inc. (1988), 234 Mont. 229, 238, 763 P.2d 27, 33, we relied on the Ninth Circuit Court of Appeals’ decision in Los Angeles Coliseum in determining that the covenant of good faith and fair dealing was a “two-way’ street. Barrett, 763 P.2d at 32. We stated that, in the employment context, an employee who breaches his or her duty of good faith and fair dealing may not then complain of unfair dealing by the employer. However, we quoted the Ninth Circuit’s caveat in Los Angeles Coliseum that this rule has a narrow application, and stated:

We emphasize that our ruling does not embrace a broad rule whereby any two breaches of the implied good faith promise by opposing contracting parties constitute “offsetting penalties” which cancel each other out; our ruling applies only to factual contexts such as the present one, where both breaches concerned the same issue and occurred during one episode of the contractual relationship.

Barrett, 763 P.2d at 33 (emphasis added). Neither Los Angeles Coliseum nor Barrett supports the broad statement of law offered by the City in its proposed instruction.

We conclude, therefore, that the District Court did not err in refusing the Citys proposed instruction on mutual breach of the covenant of good faith and fair dealing.

LIQUIDATED DAMAGES

The City asserts that the District Court erred in refusing to instruct the jury on its claim of liquidated damages. James Wysocki, Bozeman City Manager, testified that the contract between Story and the City contained a $450 per day liquidated damages clause. He further testified that, because the job was finished 87 days later than provided in the contract, the City assessed $39,150 against Story pursuant to the clause. At the close of evidence, the District Court granted Storys motion for a directed verdict on liquidated damages and refused to instruct the jury on the issue.

The City correctly asserts that, in Morgen & Osgood Constr. Co. v. Big Sky of Montana (1976), 171 Mont. 268, 557 P.2d 1017, this Court upheld a liquidated damages clause in a construction contract. It then asks us to reject the burden set forth in Morgen for a party seeking to recover under such a clause — implicitly conceding that it did not meet that burden — in favor of a different standard from a landlord-tenant case. We decline to do so.

In Montana, liquidated damages clauses in contracts are generally prima facie void. Section 28-2-721(1), MCA; Morgen, 557 P.2d at 1019; Weber v. Rivera (1992), 255 Mont. 195, 200, 841 P.2d 534, 537, 49 St.Rep. 969, 971. We have previously explained that to come within the statutory exception to this rule, facts must be alleged and proved that the damages would be extremely difficult or impracticable to ascertain and that the damages assessed are a reasonable estimate of the probable damages or are reasonably proportionate to the actual damages sustained at the time of the breach. Morgen, 557 P.2d at 1020-1; Weber, 841 P.2d at 537. The party seeking to enforce the liquidated damages clause carries the burden of proving these factors. Morgen, 557 P.2d at 1020.

Wysocki was the only witness who testified for the City regarding the liquidated damages clause. He did not testify that damages would be difficult to ascertain or that the $450 per day penalty was a reasonable estimate of the damages actually suffered by the City. We conclude, therefore, that the City did not meet its burden under Morgen and the District Court correctly refused to instruct the jury on liquidated damages.

Did the special verdict form comply with Rule 49(a), M.R.Civ.R?

The special verdict form, as completed by the jury, read as follows:
1. Did the City of Bozeman breach the contract with Mark Story and/or breach the covenant of good faith and fair dealing.
Yes_XNo_
2. If yes, what are Mark Story’s damages against the City of Bozeman. $850.000
3. Did Neil Mann interfere with Mark Story’s contractual relations with Balboa Insurance Company.
Yes X_No_
4. If yes, what are Mark Story’s damages against Neil Mann. 8100.000
5. Did Mark Story breach the contract with the City of Bozeman and/or breach the covenant of good faith and fair dealing.
YesXNo_
6. If yes, what are the City of Bozeman’s damages, ife8.035.fi3

This Court uses a three-part standard to determine the adequacy of a special verdict form under Rule 49(a), M.R.Civ.R:

1) whether, when read as a whole and in conjunction with the general charge, the interrogatories adequately presented the contested issues to the jury;
2) whether the submission of the issues to the jury was fair; and
3) whether the ultimate questions of fact were clearly submitted to the jury.

Kinjerski v. Lamey (1981), 194 Mont. 38, 41, 635 P.2d 566, 568.

The City contends that the District Court violated Rule 49(a), M.R.Civ.R, because the special verdict form did not include the issues of fraud and unilateral mistake, the City’s primary theories for reformation of the contract. We have determined that the City did not present sufficient evidence to warrant an instruction on unilateral mistake or fraud. If the evidence does not support a claim, the district court should not allow a jury to consider the claim on a special verdict form. R.H. Grover, Inc. v. Flynn Ins. Co. (1989), 238 Mont. 278, 284, 777 P.2d 338, 341.

Applying the Kinjerski test, we conclude that the special verdict form, when combined with the jury instructions, adequately presented the contested issues to the jury. The jury was able to consider the City’s reformation argument -under Instruction No. 14, which stated:

The Defendants assert that the Plaintiff should not be compensated under Schedule II, Item No. 1, Type 2 Pipe Bedding in Place

at $25 per cubic foot because the contract should be reformed. Further, Instruction No. 15, which was set forth in our discussion of the preceding issue, explicitly provided for reformation based on mutual mistake. The jury had the opportunity to consider the City’s theory that both parties intended to bid “CY’ and could have adjusted the damages awarded accordingly. Lastly, the ultimate question of whether either party had breached the contract or the covenant of good faith and fair dealing was presented to the jury.

We hold that the special verdict form did not violate Rule 49(a), M.R.Civ.R

Did the District Court err in permitting retrial of the issues of reformation, defamation and constructive fraud?

Prior to trial, the City moved for summary judgment on its claims of reformation and contract damages, claiming that those issues were determined conclusively in the first trial. It also moved for summary judgment on Story’s claims of constructive fraud by the City and defamation. The District Court denied the City’s motion. The court allowed Story to present evidence on his claims of defamation and constructive fraud against the City, which the City now claims unduly prejudiced the jury. The City asserts that because this Court’s opinion in Story I does not address the issues of constructive fraud, defamation and reformation, the District Court erred in permitting Story to retry them. We disagree.

In Story I we stated:

The City of Bozeman appeals a jury verdict against it.... We reverse and remand for retrial .... Story has raised several issues on cross-appeal, none of which we need discuss because of our grant of a new trial.

Story, 791 P.2d at 769, 776-7.

When a new trial is granted, the parties are returned to the position they occupied before the trial. O’Brien v. Great Northern R.R. Co. (1966), 148 Mont. 429, 441, 421 P.2d 710, 716. Ajudgment of the supreme court ordering a new trial opens anew all questions in the case. Mattock v. Goughner (1893), 13 Mont. 300, 301, 34 P. 36, 36. In Zavarelli v. Might (1989), 239 Mont. 120, 125-6, 779 P.2d 489, 493, we remanded for further proceedings, and explained:

On remand, the trial court may consider or decide any matters left open by the appellate court, and is free to make any order or direction in further progress of the case, not inconsistent with the decision of the appellate court, as to any question not presented or settled by such decision. The issues are generally open on a retrial when a case is reversed and remanded for further proceedings. If the mandate speaks only in the light of the special facts found, the trial court is at liberty to proceed in all other respects in the matter, that, according to its judgment, justice may require.

Although in Zavarelli we did not specifically remand for a new trial, as we did in Story I, the rationale expressed is equally applicable to the case before us. In Story I, we remanded for a new trial; we did not “save” certain correct portions of the judgment or remand with limiting instructions. The City appealed from the district court judgment in Story I; its current argument is particularly incongruous in light of the City’s broad closing request in its appellate brief in Story I that the judgment entered against the City be set aside and a new trial ordered.

We conclude that the District Court did not err in permitting retrial of the issues of constructive fraud, defamation and reformation.

Affirmed in part, reversed in part, and remanded for entry of a modified judgment striking the $100,000 award against Neil Maim.

CHIEF JUSTICE TURNAGE and JUSTICES TRIEWEILER, HUNT, HARRISON, McDONOUGH, and WEBER concur.


source: Caselaw Access Project

license: Public Domain

text:
    A. EVANS KEPHART, a/k/a ALVIN EVANS KEPHART, THE ESTATE OF JOHN W. KEPHART, JR., Deceased, Plaintiffs and Appellants, v. MARTIN E. PORTMANN and HELEN OCILE PORTMANN, husband and wife, Defendants, Respondents and Cross-Appellants.
    No. 92-454.
    Submitted on Briefs February 4, 1993.
    Decided June 29, 1993.
    50 St.Rep. 771.
    259 Mont. 232.
    855 P.2d 120.

      For Appellants: Calvin L. Braaksma, Landoe, Brown, Planalp & Braaksma, Bozeman.
    For Respondents: Thomas M. White, Morrow, Sedivy & Bennett, Bozeman.
   JUSTICE GRAY

delivered the Opinion of the Court.

A. Evans Kephart and the Estate of John W. Kephart, Jr., (Kepharts) appeal from a judgment of the Eighteenth Judicial District Court, Gallatin County, determining that Martin and Helen Portmann (Portmanns) possess a ditch easement over and across the Kepharts’ property. The Portmanns cross-appeal the order of the District Court denying them costs and attorney’s fees associated with their defense of this action. We affirm in part and reverse in part. We address the following issues:

1. Did the District Court err in concluding that the Portmanns have a ditch easement over and across the Kepharts’ property?
2. Did the District Court err in concluding that the Portmanns have a secondary easement to enter, inspect, repair and maintain the “Murray Ditch”?
3. Did the District Court err in failing to award costs and attorney’s fees to the Portmanns for the defense of this action? The parties own contiguous parcels of land in Gallatin County,

Montana. Both parties use their respective lands for agricultural purposes and require water for irrigation and stock. The parties’ water rights previously were determined and are not at issue in this case.

Denny Creek is a stream in Gallatin County which flows in a northeasterly direction. As far back as the early 1900s, various property owners in the vicinity tapped Denny Creek in order to utilize its waters on their respective lands. In some instances, property owners whose land did not border Denny Creek constructed ditches, or used the ditches of others, to transport water across the riparian lands of another.

Such was the case in 1926 when L.A. Murray, the Portmanns’ predecessor in interest, began to rim Denny Creek water to his property through an old irrigation ditch over the lands of the Kepharts’ predecessor in interest, Conrad M. Wenderoth. L.A. Murray also enlarged and improved the ditch, resulting in an increased capacity to carry water. This ditch became known as the “Murray Ditch” in a 1937 adjudication of water rights of certain parties utilizing Denny Creek (1937 Decree), including L.A. Murray.

In addition to granting water rights to L.A. Murray and others, the 1937 Decree divested Conrad M. Wenderoth of any right to appropriate the waters of Denny Creek. Also in 1937, the Wenderoth property was conveyed to the Kepharts. In 1965, the District Court issued a Judgment and Decree in Cause No. 10558, adjudicating Wenderoth’s defaulted water rights in favor of the Kepharts with a 1938 priority date.

The Kepharts’ water rights were for irrigation of the Wenderoth property acquired by them in 1937. The water was to be diverted from Denny Creek through the “Murray Ditch.” Although the court in Cause No. 10558 referred to the ditch as the “Portmann-Kephart Ditch,” it is clear from the court’s description that this ditch was in fact the “Murray Ditch.” For a number of years, both parties utilized the “Murray Ditch” to transport water from Denny Creek to their respective lands, seemingly without substantial conflict.

In 1988, Martin Portmann entered onto the Kepharts’property with a backhoe to clean and maintain the ditch. He again entered onto the Kepharts’ property in 1990 and removed metal culverts, replacing them with wooden diversions and measuring devices. He also placed a rail fence around the wooden diversions and measuring devices to prevent the Kepharts’ cattle from damaging these improvements.

Following Portmann’s actions, the Kepharts filed suit complaining that the Portmanns improperly dug and enlarged the “Murray Ditch.” The Kepharts sought a judgment requiring the Portmanns to install check devices in the ditch and proper measuring devices at the point of their diversion from Denny Creek. They also sought to enjoin the Portmanns from interfering with the “Murray Ditch” and its diversion structures, and sought damages, costs, and attorney’s fees.

After a bench trial, the District Court concluded that the 1937 Decree created an easement for the benefit of the Portmanns to transport water to their property though the “Murray Ditch.” The court also concluded that the Portmanns had a secondary easement to reasonably enter, inspect, repair, and maintain the “Murray Ditch” and its diversions and measuring devices. Each party was to pay its own costs, fees and expenses.

I

Did the District Court err in concluding that the Portmanns have a ditch easement over and across the Kepharts’ property?

The Kepharts assert that the District Court erred in concluding that the 1937 Decree created a ditch right in favor of L.A. Murray, the Portmanns’ predecessor in interest. They argue that the 1937 Decree merely adjudicated water rights and did not create ditch rights in L.A. Murray.

We affirm the result reached by the District Court in this case. Where the result reached by a district court is correct, it will be upheld on appeal regardless of the reasons given for it. Rath v. St. Labre Indian School (1991), 249 Mont. 433, 439, 816 P.2d 1061, 1064. Therefore, based upon a 1960 Irrigation Ditch Agreement (Agreement) between the parties, rather than the 1937 Decree, we affirm the District Court’s determination that the Portmanns have a ditch right in the “Murray Ditch.”

In the Agreement, the Kepharts specifically acknowledged the existence of the Portmanns’ ditch right to conduct Denny Creek water to the Portmann property. Given the known use of the “Murray Ditch” before and after the entry of the 1937 Decree, the acts of the Portmanns since 1954 in consistently using, cleaning, and maintaining the “Murray Ditch,” and the terms of the 1960 Agreement itself, the only reasonable interpretation of the Agreement is that the Kepharts affirmatively recognized that the Portmanns had a superior ditch right in the “Murray Ditch.”

We do not agree with the Kepharts’ contention that the Agreement is void for lack of consideration on the part of the Portmanns. The parties made mutual agreements. The Kepharts obtained the Portmanns’ agreement to their use of the ditch and the Portmanns obtained the Kepharts’ agreement not to interfere with their water rights or superior ditch rights. In addition, the parties promised to share equally the costs of ditch maintenance and the construction and maintenance costs of a headgate at Denny Creek. “Mutual promises alone are enough to support valid consideration.” Rudio v. Yellowstone Merchandising Corp. (1982), 200 Mont. 537, 544, 652 P.2d 1163, 1167 (citations omitted). Similarly, we do not agree with the Kepharts’ contention that the Agreement was merely a revocable license granted by them to the Portmanns. It was the Kepharts who sought the Agreement and gained the primary benefit from it.

As a result of Kepharts’ clear acknowledgement of the Portmanns’ superior ditch right in the Agreement, they are estopped from now challenging the existence of the Portmanns’ ditch right. We recently clarified the elements of equitable estoppel in Dagel v. City of Great Falls (1991), 250 Mont. 224, 819 P.2d 186. In Dagel, we readopted the six essential elements necessary to constitute an equitable estoppel:

(1) there must be conduct, acts, language, or silence amounting to a representation or a 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 a manner as to change his position for the worse.

Dagel, 819 P.2d at 192-93.

In this case, the required elements have been met. First, the Kepharts represented to the Portmanns that the Portmanns had a superior right in the “Murray Ditch.” Second, by virtue of the language of the Agreement, it is evident that the Kepharts knew of the existence of the Portmanns’ superior ditch right. Third, the truth concerning the recognition of the ditch right, namely that almost thirty years later, the Kepharts would deny the existence of the Portmanns’ ditch right, was unknown to the Portmanns at the time they entered into the Agreement.

Fourth, the Kepharts’ conduct in acknowledging the Portmanns’ ditch right clearly was intended to be acted upon by the Portmanns in allowing the Kepharts to use the ditch and continuing to utilize the ditch themselves without interference. Fifth, the Portmanns relied, and were led to act, upon the Kepharts’ conduct. Finally, the Portmanns did act upon the Kepharts’ conduct in maintaining the ditch by expending money and labor, and by allowing the Kepharts to transport water through the ditch. These actions served to change the Portmanns’ position for the worse.

We conclude that the Kepharts are estopped from denying the existence of the Portmanns’ ditch right and, on that basis, we need not determine the origin of the easement. The District Court did not err in concluding that the Portmanns have a ditch right in the “Murray Ditch.”

II

Did the District Court err in concluding that the Portmanns have a secondary easement to enter, inspect, repair and maintain the “Murray Ditch”?

Based upon its conclusion that the Portmanns are owners of an easement in the “Murray Ditch,” the District Court also concluded that they have a necessary secondary easement to reasonably enter, inspect, repair and maintain the ditch. In reviewing a District Court’s conclusion of law, we determine whether the interpretation of law is correct. Steer, Inc. v. Department of Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.

Pursuant to § 70-17-112(1), MCA, “[a] person with a canal or ditch easement has a secondary easement to enter, inspect, repair, and maintain a canal or ditch.” Because the Portmanns have a ditch right in the “Murray Ditch,” we hold that the District Court did not err in concluding the Portmanns have a secondary easement.

III

Did the District Court err in failing to award costs and attorney’s fees to the Portmanns for the defense of this action?

In their cross-appeal, the Portmanns argue that, because the District Court determined they had an easement, they were the prevailing party and entitled to costs and reasonable attorney’s fees under § 70-17-112(5), MCA. They rely on Sharon v. Hayden (1990), 246 Mont. 186, 803 P.2d 1083.

The pertinent subsections of § 70-17-112, MCA, provide:

(1) A person with a canal or ditch easement has a secondary easement to enter, inspect, repair, and maintain a canal or ditch.
(2) No person may encroach upon or otherwise impair any easement for a canal or ditch used for irrigation or any other lawful domestic or commercial purpose, including carrying return water.
(5) If a legal action is brought to enforce the provisions of this section, the prevailing party is entitled to costs and reasonable attorney’s fees.

Section 70-17-112, MCA.

In Sharon, the defendants prevailed under both subsections (1) and (2) of § 70-17-112, MCA. They obtained adjudication of their secondary easement and a determination that the plaintiff had impaired and encroached on their ditch easement. As a result, we held that they were the prevailing party and entitled to costs and attorney’s fees under § 70-17-112, MCA.

In the case before us, the Portmanns had a ditch right which was specifically acknowledged and recognized by the Kepharts in 1960. When they exercised their secondary easement rights to enter, repair and maintain the ditch pursuant to § 70-17-112(1), MCA, they ultimately were forced into court by the Kepharts to defend the existence of the ditch right and corresponding secondary easement. On these facts, we conclude that the Kepharts’ lawsuit constituted an impairment of the Portmanns’ easement under § 70-17-112(2), MCA. Because the Portmanns are the prevailing party here, we hold that the District Court erred in failing to award them costs and attorney’s fees for the defense of this action.

Affirmed in part, reversed in part and remanded for determination of costs and attorney’s fees under § 70-17-112(5), MCA.

JUSTICES HARRISON, HUNT, McDONOUGH and WEBER concur.


text:
    MAJORIE IHLER, VICTOR FOURWINDS, JOEL JOHNSON, KAREN HALLBERG, TOM BRANSTETTER, DANINE ROSE, SHARON GREGOR, CHARLES KIMBALL, DAVID MALINGO, BELINDA KITTLE, BYRON MYERS, and THERESA WHISENNAND, Plaintiffs, Respondents, and Cross-Appellants v. CURT CHISHOLM, DIRECTOR OF THE DEPARTMENT OF INSTITUTIONS FOR THE STATE OF MONTANA, CARROLL SOUTH, INDIVIDUALLY AND AS PAST DIRECTOR OF THE DEPARTMENT OF INSTITUTIONS FOR THE STATE OF MONTANA, JANE EDWARDS, SUPERINTENDENT OF MONTANA STATE HOSPITAL AND THE STATE OF MONTANA, Defendants, Appellants, and Respondents on Cross-Appeal.
    No. 92-563.
    Submitted on Briefs April 30, 1993.
    Decided June 29, 1993.
    50 St.Rep. 775.
    259 Mont. 240.
    855 P.2d 1009.

      For Defendants and Appellants: P. Keith Keller, Keller, Reynolds, Drake, Johnson & Gillespie; Joseph P. Mazurek, Attorney General, Kimberly A. Kradolfer, Assistant Atty. General; James B. Obie, Dept, of Institutions; and Bill Gianoulias, Tort Claims Division, Helena.

      For Plaintiffs and Respondents: Jeffrey T. Renz, Legal Director, American Civil Liberties Union of Montana, Billings; Leonard Rubenstein and Ira Burnim, Mental Health Law Project, Washington, D.C.; Allen Smith, Mental Disabilities Board; Andrea Olsen and Mary Gallagher, Mental Health Protection and Advocacy, Warm Springs; Helen Hershkoff and Victor Bolden, American Civil Liberties Union Foundation, New York, New York; James H. Goetz, Goetz, Madden & Dunn, Bozeman; and W. William Leaphart, Helena.
   JUSTICE GRAY

delivered the Opinion of the Court.

Appellants Chisholm, et al., appeal from findings of fact, conclusions of law and order of the First Judicial District, Lewis and Clark County, awarding attorneys’fees. Respondents Ihler, et al., cross-appeal from the same judgment. We reverse and remand.

The dispositive issue on appeal is whether the District Court erred in computing the award of attorneys’ fees.

The parties are before this Court appealing only the award of attorneys’ fees which followed lengthy and complex civil rights litigation. Accordingly, only a brief recitation of the facts surrounding the actual litigation is necessary.

On May 16, 1988, twelve patients (the Patients) of the Montana State Hospital at Warm Springs filed a class action against Curt Chisholm, Director of the Department of Institutions, Carroll South, past Director of the Department of Institutions, Jane Edwards, Superintendent of the Hospital and the State of Montana (collectively, the Hospital). The Patients sought damages and injunctive relief for civil rights violations under state and federal law.

The District Court bifurcated the issue of damages from the injunctive portion of the case; the damages issue settled. Abench trial on the injunctive relief began on May 6,1991, and lasted three weeks. During trial, the court heard thirty-five witnesses, toured the hospital and admitted over 100 exhibits.

In its final order issued September 26, 1991, the District Court determined that the Patients primarily had challenged the following three areas of hospital operation:

• the use of seclusion and restraint against patients
• the condition and treatment of patients at the Xanthopoulus Treatment Facility (the forensic unit)
• the adequacy and number of professional staff.

Although the District Court concluded that the Hospital had made great strides in improving the conditions during the three years after the lawsuit was filed, deficiencies nonetheless remained that had the effect of depriving the Patients of their civil rights. The court concluded that the Hospital was deficient in its use of seclusion and restraint and in keeping patients in the forensic unit long after they should have been transferred to a less restrictive environment. It also concluded that the Hospital had given inadequate treatment and therapy in the forensic unit and employed insufficient numbers of clinical staff. The court then ordered the Hospital to correct the deficiencies and submit a report demonstrating compliance within three months of the order.

Following entry of the District Court’s decision and order, the Patients moved for attorneys’ fees and expenses in the amount of $2,071,856.61 pursuant to 42 U.S.C. § 1988, the Civil Rights Attorney’s Fees Awards Act of 1976. On April 20, 1992, the court entered an interim order awarding the Patients $415,950.74. The District Court issued findings of fact and conclusions of law to support the interim order on August 13, 1992.

The District Court first determined the reasonable hourly rates for ten attorneys that had represented the Patients during the litigation; the rates ranged from $75 per hour to $110 per hour. In making this determination, the court concluded that the Patients had not established that out-of-state counsel was necessary and based its rates on Montana standards. The court then found that the Patients had significantly overstaffed the case with counsel, and reduced each attorney’s compensable hours by varying percentages due to duplication and excessive travel time. The District Court also excluded all hours of attorney Mary Gallagher (Gallagher) for the period she was employed by the State of Montana.

By multiplying the reasonable hourly rates by the reasonable compensable hours, the District Court reached the “lodestar” attorneys’ fees amount. The “lodestar” expression was adopted by the United States Supreme Court as the correct method for calculating attorneys’ fees under federal fee-shifting statutes; it consists of the multiplication of a reasonable hourly rate by the number of hours reasonably expended on the litigation. See Audit Services, Inc. v. Frontier-West, Inc. (1992), 252 Mont. 142, 153, 827 P.2d 1242, 1250.

The District Court then reduced the lodestar amount by 25% based on its finding that the Patients did not prevail on many of the issues in their original complaint and had achieved limited success on the issues narrowed for trial. Lastly, the District Court declined to increase the lodestar by 150% for “risk of contingency,” as requested by the Patients. Instead, the court concluded that the Patients had failed to show that no Montana attorneys would have taken the case, but did show that Montana attorneys are at least reluctant to accept civil rights cases without the prospect of an enhanced fee. Based on that conclusion, the District Court increased the lodestar amount by 50% for risk of contingency. The court also awarded the Patients their attorneys’ fees incurred in preparing the motion for fees and their costs for the lawsuit. Entry of judgment was filed on September 1,1992.

The Patients then moved to amend the order on attorneys’ fees, contending that the District Court should have allowed the hourly rates of the out-of-state attorneys instead of increasing the lodestar by 50% for contingency. In the Hospital’s response to the motion, it also urged the District Court to reconsider its order due to the recent United States Supreme Court decision in City of Burlington v. Dague (1992), 505 U.S._, 112 S.Ct. 2638, 120 L.Ed.2d 449, which held that enhancement of attorneys’ fees awards for contingency was not permitted under federal fee-shifting statutes. The District Court denied the motion to amend without explanation on October 7, 1992. Both parties appeal.

Did the District Court err in computing attorneys’ fees?

The Hospital contends that the District Court erred in its computation of attorneys’ fees by refusing to reconsider its order in light of Dague. Neither party disputes the applicability of Dague to the present case, and we agree that a change in the law between the trial court decision and the appellate decision requires the appellate court to apply the new law. Haines Pipeline Constr., Inc. v. Montana Power Co. (1991), 251 Mont. 422, 433, 830 P.2d 1230, 1238. Further, the Patients cross-appeal several issues regarding the District Court’s computation of the attorneys’ fees award. As the majority of the Patients’ concerns will be resolved based on our discussion of Dague, we initially examine Dague’s effect on the award of attorneys’ fees in this case.

In Dague, the plaintiff prevailed in a suit under the Solid Waste Disposal Act, which allows the substantially prevailing party to recover attorneys’ fees under 42 U.S.C. § 6972(e). In computing the award of attorneys’ fees, the federal district court determined the lodestar amount by multiplying the reasonable hours expended by the reasonable hourly rate. It then concluded that a 25% contingency enhancement of the lodestar amount was appropriate, stating:

[the plaintiff’s] risk of not prevailing was substantial and that absent an opportunity for enhancement, [the plaintiff] would have faced substantial difficulty in obtaining counsel of reasonable skill and competence in this complicated field of law.

Dague, 505 U.S. at_, 112 S.Ct. at 2640, 120 L.Ed.2d at 455. The Second Circuit Court of Appeals affirmed.

The United States Supreme Court first explained that there is a “strong presumption” that an award of attorneys’ fees figured using the lodestar approach, without any adjustments, is a reasonable fee. Dague, 505 U.S. at_, 112 S.Ct. at 2641, 120 L.Ed.2d at 456. The Supreme Court then concluded that contingency enhancement would likely duplicate, in substantial part, factors already subsumed in the lodestar.

The Supreme Court reasoned that the risk of contingency in a particular case depends on (1) the legal and factual merits of the claim and (2) the difficulty in establishing those merits. Dague, 505 U.S. at _, 112 S.Ct. at 2641, 120 L.Ed.2d at 456. According to the Supreme Court, the first factor is not reflected in the lodestar and should play no part in the calculation of attorneys’ fees. The second factor, however, is ordinarily reflected in the lodestar — either in the higher number of hours expended to overcome the difficulty or in the higher hourly rate of the attorney skilled and experienced enough to do so. Dague, 505 U.S. at_, 112 S.Ct. at 2641, 120 L.Ed.2d at 456. The Court concluded that taking into account the difficulty of the case again through contingency enhancement resulted in double-counting. Dague, 505 U.S. at_, 112 S.Ct. at 2641, 120 L.Ed.2d at 457. On that basis, the United States Supreme Court held that enhancement for contingency was not permitted under the fee-shifting statute of the Solid Waste Disposal Act. Dague, 505 U.S. at_, 112 S.Ct. at 2643-4, 120 L.Ed.2d at 459.

Although Bague’s analysis involved 42 U.S.C. § 6972(e), the Supreme Court specifically referred to 42 U.S.C. § 1988, the fee-shifting statute at issue here. Dague, 505 U.S. at_, 112 S.Ct. at 2641, 120 L.Ed.2d at 456. Furthermore, the Ninth Circuit Court of Appeals has since applied Bague in a civil rights context, and concluded that the typical federal fee-shifting statutes do not allow for upward adjustments of a lodestar amount for contingency. Davis v. City and County of San Francisco (9th Cir. 1992), 976 F.2d 1536, 1549. Therefore, we apply the Supreme Court’s Bague analysis to the present case.

Given the Supreme Court’s mandate in Hague, we conclude that the District Court erred in enhancing the Patients’ award of attorneys’ fees by 50% for contingency and remand with instructions to delete this increase from the lodestar amount. Further, as stated in Hague, some accounting for the risk of contingency is normally figured into the computation of the lodestar, by either greater hours claimed or higher hourly wages. In this case, we cannot determine if the District Court would have reached the same reasonable hourly rates and reasonable compensable hours if it had not subsequently increased the lodestar amount by 50% for contingency. On remand, therefore, the District Court should recompute the lodestar amount — the reasonable hourly rates multiplied by the reasonable compensable hours — in light of the principles set forth in Hague.

Because of our remand, we need not discuss the issues raised by the Patients regarding hourly rates and compensable hours. However, the Patients raise two additional concerns which are not affected by our remand for recalculation of the lodestar. First, the Patients argue that the District Court erred in subsequently reducing the lodestar by 25% due to lack of success at trial. They assert that the District Court improperly “counted claims” instead of looking at the overall results obtained by the Patients.

We will not reverse a district court’s computation of attorneys’ fees under the lodestar approach absent an abuse of discretion. Audit Services, 827 P.2d at 1250-1, citing Hensley v. Eckerhart (1983), 461 U.S. 424, 437, 103 S.Ct. 1933, 1941, 76 L.Ed.2d 40, 52. The “results obtained” by the prevailing party is an important factor to consider when determining whether a full compensatory fee is warranted. See Audit Services, 827 P.2d at 1250. For example, if a party has obtained excellent results, counsel should recover a full compensatory fee. On the other hand, if a party has achieved limited success, a full compensatory fee may be excessive even where the claims were interrelated. Audit Services, 827 P.2d at 1250, citing Hensley, 461 U.S. at 435-6, 103 S.Ct. at 1940-1, 76 L.Ed.2d at 52. In its discretion, the district court may attempt to identify specific hours that should be eliminated or may simply reduce the lodestar to account for limited success. Hensley, 461 U.S. at 436-7, 103 S.Ct. at 1941, 76 L.Ed.2d at 52.

Here, the District Court determined that the Patients achieved limited success at trial due in part to the improvements made by the Hospital subsequent to the filing of the complaint. While the court recognized the Patients’ assertion that the lawsuit served as a catalyst for the changes, it also determined that the Patients were unsuccessful in two significant areas: their assertion of a constitutional right to treatment in the community and claims relating to the physical environment of both the old and new forensic units. The court concluded, therefore, that a fully compensatory fee would be excessive and reduced the lodestar by 25%. As Hensley specifically allows for a downward adjustment of the lodestar for limited success, we find no abuse of discretion in the District Court’s analysis and subsequent 25% reduction of the lodestar.

Second, the Patients argue that the District Court erred in denying recovery for Gallagher’s attorney’s fees while she was employed by the State of Montana. In its findings and conclusions, the District Court concluded that because Gallagher was a State employee from 1987 through April of 1991, the Patients could not recover attorney’s fees for her work during that period from the State. The Patients assert that the court’s conclusion and resulting reduction in the attorneys’ fees award was an abuse of discretion. We agree.

The District Court’s initial assertion that Gallagher was “employed by the State” for the specified period is not at all clear-cut. The Montana Advocacy Program (MAP) received a federally funded grant from the National Institute of Mental Health, which was administered through the Montana Mental Disabilities Board of Visitors (the Board), a state agency. Under the agreement between MAP and the Board, the Board agreed to maintain an attorney at the Hospital; this position was filled by Gallagher. Therefore, although the State of Montana disbursed Gallagher’s wages, funding was provided by MAP, through its federal grant. We conclude, however, that as a matter of law, the source of Gallagher’s wages is irrelevant in determining recoverable attorney’s fees.

It is well settled that Congress intended legal service programs to receive fees under 42 U.S.C. § 1988. Shadis v. Beal (3d. Cir. 1982), 685 F.2d 824, 830. It is also clear that Congress contemplated that states and state officials would often be the targets of civil rights actions and intended that attorneys’ fees be collected from the funds of the state agency. Shadis, 685 F.2d at 830. In Shadis, the state argued that because it funded the legal services program that represented the prevailing party, it would be unfair to make the state “pay twice.” The Third Circuit Court of Appeals characterized that argument as a rhetorical ploy, and stated:

The Commonwealth does not pay “twice” when it violates someone’s civil rights and is then forced to pay attorneys’ fees. It pays only once — as a violator of civil rights. Its role as a provider of public services is distinct from its role as a defendant in a civil rights case and has no bearing on the question of reimbursing individual citizens for individual wrong brought against them.

Shadis, 685 F.2d at 833. Addressing an identical argument, the Ninth Circuit Court of Appeals concluded that the issue of “fairness” had been resolved by Congress, because awards of attorneys’ fees to state-funded legal services organizations were contemplated by Congress and serve the purpose for which the Act was adopted. Dennis v. Chang (9th Cir. 1980), 611 F.2d 1302, 1307.

In the present case, the District Court concluded that Gallagher was a state employee and, therefore, was not entitled to an award of attorney’s fees from the State. The fact that Gallagher’s wages were disbursed through the State or paid by public funds is irrelevant in determining whether an award for attorneys’ fees is proper. Leeds v. Watson (9th Cir. 1980), 630 F.2d 674, 677. Because the District Court inappropriately relied on the source of Gallagher’s wages in its decision to deny attorney’s fees for the period she worked for the State, we reverse that conclusion and on remand, direct the court’s attention to the cases cited herein.

In sum, we remand for redetermination of the lodestar amount in light of the United States Supreme Court’s decision in Dague. Although we conclude that the District Court did not err in reducing the lodestar by 25% for the Patients’ limited success, we conclude that the District Court abused its discretion in denying recovery of Gallagher’s attorney’s fees for the period she was employed by the State.

Reversed and remanded for further proceedings consistent with this opinion.

CHIEF JUSTICE TURNAGE, JUSTICES TRIEWEILER, HUNT and WEBER concur.


author: JUSTICE HARRISON

text:
    CHARLES W. OWEN, Plaintiff and Respondent, v. RICHARD M. OSTRUM, Defendant and Appellant.
    No. 93-039.
    Submitted on Briefs May 20, 1993.
    Decided June 29, 1993.
    50 St.Rep. 779.
    259 Mont. 249.
    855 P.2d 1015.

      For Defendant and Appellant: T. Thomas Singer, Moulton, Bellingham, Longo & Mather, Billings.

      For Plaintiff and Respondent: Kenneth D. Tolliver, Jeffrey Hunness, Wright, Tolliver & Guthals, Billings.
   JUSTICE HARRISON

delivered the Opinion of the Court.

Richard M. Ostrum (Ostrum) appeals from judgment, decree of foreclosure, and deficiency judgment entered by the Thirteenth Judicial District Court, Stillwater County. Ostrum’s former partner, Charles W. Owen (Owen) brought the action to collect a debt and foreclose a security interest in shares of stock pledged as security for the debt. We affirm.

In 1958, Ostrum purchased a cattle ranch near Fishtail, Montana, in Stillwater County. He operated this ranch with his wife as a family corporation until 1977, when Owen invested in it, receiving shares equal to 49 percent of the corporate stock. During the next ten years, the ranch expanded, purchasing land or leasing other land owned by Owen, and the corporation began breeding and selling purebred Angus cattle. Owen paid the costs of expansion through loans and capital investments, in exchange for which he received corporate stock. Ostrum lived on the ranch and managed it until June 1989.

In 1979, Owen and Ostrum formed a partnership called Gold Block Angus. By 1987, Owen owned a 94 percent interest in the partnership, and Ostrum, a six percent interest. In December 1987, Gold Block Angus had assets valued for tax purposes at $2,601,091 and total liabilities of $4,751,072, excluding accrued interest. The partnership owed approximately $3.7 million to Owen and entities owned by Owen. Owen and Ostrum decided to recapitalize Gold Block Angus by writing off approximately $2.4 million of the partnership’s debt to Owen and incorporating as Gold Block, Inc. Ostrum’s six-percent share of the capitalized liability was $144,000. As he had no funds for this capital contribution, Owen loaned him $144,000.

In exchange for the $144,000 loan, Ostrum signed a promissory note and a security agreement. The security agreement stated that Ostrum and Owen had agreed to transfer their interests in Gold Block Angus, a partnership, to Gold Block, Inc., a Montana corporation, in exchange for shares in the corporation. “In connection with [that] agreement,” the document says, Owen loaned Ostrum $144,000 and Ostrum granted Owen a security interest in 1,200 shares of Gold Block, Inc. The security agreement described the loan as “evidenced by that certain Promissory Note dated December 31, 1987, which is payable on demand and which bears interest at the rate of 9.5 percent per annum.”

In June 1989, Owen announced that he intended to liquidate Gold Block, Inc., and that Ostrum’s employment as manager was terminated to facilitate the liquidation. Ostrum left the ranch, but Owen completed only a partial liquidation and continued to operate the ranch.

Ayear later, on June 14,1990, Owen sent Ostrum a demand letter, stating that if Ostrum did not pay the $144,000 debt or negotiate a repayment plan in fifteen days, action might be taken to realize on the security by public or private sale of Ostrum’s 1,200 shares. Ostrum made no payment, and Owen filed a complaint on August 9, 1990, seeking judgment in the amount of $179,306 and foreclosure of the security interest.

Ostrum moved to dismiss the complaint for failure to state a claim upon which relief can be granted, on the grounds that Owen had not alleged execution or delivery of the promissory note and had not attached a copy of it to his complaint. Judge Fillner denied this motion, having determined that Ostrum owed a debt pursuant to the security agreement, and that the promissory note therefore was irrelevant, but Ostrum continued to deny that he had signed a note. In his answer to the complaint, Ostrum asserted that Owen could not prove that a note was executed or that he was the holder of a note, and that Owen had given no consideration for the alleged debt.

Owen moved for partial summary judgment in August 1991, asking the court to determine that Ostrum owed a valid debt and that Owen had an enforceable security interest, and to determine the amount of the debt. Ostrum argued in response that summary judgment was improper because there were factual issues as to the existence of the promissory note and as to whether Owen was the holder of the note. He also contended that the only consideration he received for his loan was his stock in Gold Block, Inc., and that by tendering this stock he had satisfied the debt. If his 1,200 shares were not worth $144,000, Ostrum argued, then their actual value should be determined at trial.

Judge Speare, then presiding over the District Court in Stillwater County, granted partial summary judgment in favor of Owen. He determined that no genuine issue of material fact existed as to whether Ostrum owed Owen $144,000 or as to whether Owen had a valid security interest in Ostrum’s 1,200 shares of Gold Block, Inc. stock, and that Ostrum had received consideration for the loan in the form of reduction of the partnership’s debt.

The court entered judgment and issued a decree of foreclosure, dated August 29,1991, ordering that Owen recover $194,032.80; that his security interest in Ostrum’s 1,200 shares of Gold Block, Inc. stock be foreclosed; that the shares be sold at public sale; and that Ostrum pay any deficiency remaining after the sale. In his order, Judge Speare stated that he assumed the promissory note never existed.

In September 1991, Owen moved for approval of the sale of collateral, proposing to sell it by first publishing a notice in the Stillwater County News and the Billings Gazette for ten days prior to the sale, and then holding a public auction on the front steps of the Stillwater County courthouse, probably on November 8, 1991. A financial disclosure statement would be furnished to prospective buyers. The District Court declined to rule on this motion, stating that it already had ordered a public sale of the collateral and that Owen could proceed.

Ostrum filed a memorandum and affidavit opposing the proposed sale on the grounds that it was not commercially reasonable. As there is no market for a minority interest in a closely held corporation, Ostrum argued, full value for his stock could not be obtained through a public sale.

Ostrum also pointed out that Owen’s proposed financial disclosure statement undervalued Gold Block, Inc.’s assets and did not include the proceeds of recent land and cattle sales. The statement showed a negative net worth for the corporation. According to Ostrum, it had a positive net worth when he was managing it, but under Owen’s management the net worth declined by $1 million.

A public sale was held on December 18, 1991, according to plan, and Owen bought the 1,200 shares for $15,000. No other buyers appeared. Owen then moved for award of attorney’s fees and determination of deficiency judgment. Ostrum, opposing the motion, again argued that the sale was not commercially reasonable and that Owen therefore was not entitled to a deficiency judgment.

After a hearing on February 3, 1992, at which counsel reviewed the history of the case for Judge Baugh, the proceedings were delayed to allow further briefing on the issue of commercial reasonableness. Counsel then reviewed corporate financial records at the offices of Gold Block, Inc., and its accountant. On February 13, 1992, they found among the Gold Block, Inc. files a photocopy of the original promissory note, signed by Ostrum on December 31, 1987. This discovery was reported to the court, prompting a motion from Ostrum, who pointed out that the original note was still missing and requested indemnification to protect him from additional claims on the same note. Ostrum also asked the court to reconsider summary judgment and to require Owen to “meet his burden of proof’ regarding ownership of the original note.

The hearing that began on February 3 was completed on August 25,1992. Judge Baugh issued findings of fact, conclusions of law, and an order on September 8, 1992. He concluded that he was not authorized to act as an appellate court with regard to Judge Speare’s grant of summary judgment; that the discovery of the promissory note changed nothing, as the judgment was based on a debt owed, not on the lost note; and that the parties’ conflicting testimony on the value of Gold Block, Inc. assets and liabilities, market trends, and possible corporate mismanagement had revealed nothing to support a determination that the bid price of $15,000 was unreasonable.

Concluding that the method, manner, time, place, and terms of the stock sale were commercially reasonable, Judge Baugh issued a deficiency judgment in the amount of $194,032.80, pursuant to the August 1991 decree of foreclosure, less $15,000 — the proceeds of the sale — plus attorney’s fees in the sum of $11,709.92, costs in the sum of $175.55, expenses of the sale of the collateral in the sum of $3,114.53, and interest from August 29, 1991 to September 8, 1992, in the sum of $18,841.74, for a total judgment of $212,874.54.

Two issues are raised on appeal:

1. Whether the District Court erred in granting summary judgment on a debt memorialized in a promissory note, in the absence of the original promissory note and without requiring the creditor to post security.
2. Whether the District Court erred in concluding that the sale of the collateral was commercially reasonable and that Owen therefore was entitled to a deficiency judgment.

I

Did the District Court err in granting summaryjudgment on a debt memorialized in a promissory note, in the absence of the original promissory note and without requiring the creditor to post security?

All three of the judges who were responsible for this case in District Court concluded that Ostrum’s debt to Owen was established by the security agreement and that the promissory note, if it existed at all, was irrelevant. Ostrum contends that on the contrary, the debt was created by the note. Before he signed the note, he argues, he might have had an obligation to make a capital contribution to Gold Block, Inc., but the amount due, the rate of interest, and the repayment terms were to be found only in the promissory note. He asks this Court to reverse the District Court’s rulings on this point because the District Court relied on the terms of the note in determining the amount of the judgment.

The first ruling on this point was made in 1990 by Judge Fillner, who denied Ostrum’s motion to dismiss Owen’s complaint for failure to state a claim upon which relief can be granted. Amotion to dismiss a complaint under Rule 12(b)(6), M.R.Civ.R, may be granted only if it appears beyond any doubt that the plaintiff can prove no set of facts that would entitle him to relief. Contway v. Camp (1989), 236 Mont. 169, 173, 768 P.2d 1377, 1380. Taking Owen’s allegations to be true, which meant accepting the parties’ security agreement as evidence of Ostrum’s debt, Judge Fillner properly denied the motion.

Judge Speare ruled on this issue in 1991, in his order granting Owen’s motion for summary judgment. He found that Ostrum had signed a security agreement that acknowledged his debt to Owen and that Ostrum stated in his deposition that he owed Owen $144,000; therefore, Judge Speare concluded, “there is no genuine issue of material fact that Ostrum owes Owen $144,000.”

Finally, Judge Baugh reiterated his predecessors’ conclusion that Owen had sued on a debt, not on a promissory note, and refused to reconsider summary judgment when Ostrum asked the court to do so in 1992.

Part of Ostrum’s rationale for asking the court to reconsider summary judgment was his alleged need for indemnification pursuant to § 30-3-804, MCA (1989). This need did not arise until February 1992, when the parties’ lawyers found the photocopy of the signed note. Until then, Ostrum had maintained that no note existed.

Section 30-3-804, MCA (repealed in 1991) authorized but did not compel the court to require security indemnifying an obligor against loss by reason of further claims on a lost, destroyed, or stolen instrument. Owen testified that he had not indorsed the note. As the note was payable only to Owen, it could not be negotiated without a forged indorsement. We conclude that Judge Baugh did not abuse his discretion in refusing to order Owen to post security.

Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Rule 56(c), M.R.Civ.P. The initial burden of demonstrating the absence of a genuine issue of material fact lies with the moving party. Ravalli County Bank v. Gasvoda (1992), 253 Mont. 399, 401, 833 P.2d 1042, 1043. Once the moving party has met that burden, the party opposing summary judgment must establish that a genuine issue of material fact exists. Peschel v. Jones (1988), 232 Mont. 516, 521, 760 P.2d 51, 54. Any inference that can reasonably be drawn from the offered proof must be evaluated in favor of the party opposing summary judgment. First National Bank in Eureka v. Giles (1987), 225 Mont. 467, 733 P.2d 357.

Whether an issue of fact is material depends on the applicable statutes. Giles, 733 P.2d at 358. In Giles, we reversed the district court’s summary judgment because the court had applied § 30-3-304, MCA, without resolving the threshold issue of whether the defendant in fact had authority to indorse her husband’s Veterans’ Administration disability checks. Here, the District Court applied § 30-3-804, MCA (1989), which refers to missing negotiable instruments; no threshold factual issue existed because both parties agreed that the original promissory note was missing.

Section 30-3-804, MCA (1989), provides that the owner of a missing instrument may recover upon proof of (1) ownership, (2) the facts that prevent production of the instrument, and (3) the terms of the instrument. Here, proof of ownership and of the terms of the note was supplied in the parties’ security agreement, which was attached to Owen’s complaint. Owen testified that the original note was lost, and provided a photocopy. We hold that Owen met his burden of proof as to the validity of Ostrum’s debt, and that he was entitled to judgment as a matter of law.

II

Did the District Court err in concluding that the sale of the collateral was commercially reasonable and that Owen therefore was entitled to a deficiency judgment?

Ostrum argues that a public auction is not a commercially reasonable sale of a minority interest in a closely held corporation, because there is no market for a minority interest in a closely held corporation. He points out that Judge Baugh reached the same conclusion, during the February 1992 hearing, but nevertheless concluded that Owen had met his burden of establishing that the method, manner, time, place and terms of the stock sale were commercially reasonable.

Section 30-9-504(3)(a), MCA, sets forth the requirements for disposition of collateral after default:

Disposition of the collateral may be by public or private proceedings .... Sale or other disposition may be as a unit or in parcels and at any time and place and on any terms, but every aspect of the disposition including the method, manner, time, place, and terms must be commercially reasonable.

Ostrum contends that a public auction is not an appropriate method of disposing of a minority interest in a closely held corporation, as the stock is unlikely to be valuable to anyone other than the majority shareholder. Judge Baugh said much the same thing in his order, but he concluded, nevertheless, that the sale was not commercially unreasonable.

Ostrum objected to the sale but did not suggest an alternative method, maimer, time, or place. He complained that the corporation had been undervalued for purposes of the sale, but he did not attempt to establish an alternative value, nor did he demonstrate to the court’s satisfaction that the $15,000 price paid by Owen for Ostrum’s shares was not “fair market value.” On appeal, Ostrum argues that $15,000 was not a fair price for the shares and that the value of his stock in January 1988, allegedly $144,000, was the best measure of its value in November 1991.

We addressed sale price as a factor in assessing the commercially reasonable disposition of collateral in a 1983 case that bears some resemblance to this one. Dulan v. Montana National Bank of Roundup (1983), 203 Mont. 177, 661 P.2d 28. The appellant, Dulan, pledged the stock of his incorporated photography business as collateral for a loan from the bank. Before renewing the promissory note a year later, he sold the corporation to a third party and placed the stock in escrow. The renewal note was secured by assignment of the buyer’s note to Dulan. When the buyer defaulted, the bank demanded payment of the balance due on Dulan’s original loan. Dulan did not make the payment, and the bank sold the stock, after notice to Dulan, to the buyer for the balance due on Dulan’s note. This was only $1,500, a fraction of the $8,500 still due under Dulan’s contract with the buyer.

Dulan challenged the sale of the stock on the grounds that the price was not commercially reasonable. He claimed that the corporation’s assets had been valued at $22,280 the year before the sale, though testimony also was offered to show that the value had declined after the buyer took over the business. The district court concluded, and we affirmed, that Dulan did not meet his burden of establishing that the stock was worth more than $1,500.

Here, Ostrum offered numerous estimates of the value of Gold Block, Inc. assets, particularly its land and registered cattle, but he did not provide an estimate of fair market value of the stock or bid on it himself. The District Court decided that in view of the negative net worth shown on the financial disclosure statement and the fact that only six percent of the shares were being offered, $15,000 was a reasonable price.

We hold that the District Court did not abuse its discretion in accepting the bid price in the absence of evidence as to the fair market value of the shares. See Carpenters-Employers Retirement Trust Fund v. Galleria Partnership (1991), 250 Mont. 175, 819 P.2d 158 (district court did not abuse its discretion in disregarding an estimated value of the defendant’s real property which was not an appraisal, but merely a “probable approach” based on data submitted by a certified appraiser).

This Court has limited or barred recovery of a deficiency judgment in cases where the secured party did not meet the notice requirement of § 30-9-504(3), MCA. See Ottersen v. Rubick (1990), 246 Mont. 93, 803 P.2d 1066, and the cases cited therein. Here, in contrast, the secured party — Owen — mailed notice of the time, place, and manner of sale to Ostrum ten days before the date of the sale, and in addition published notices in the Stillwater County News and the Billings Gazette. Notice of public sale was posted in four locations in Stillwater County seven days prior to sale.

We hold that the District Court did not err in concluding that the sale of Ostrum’s 1,200 shares of Gold Block, Inc. stock was commercially reasonable, and that Owen therefore was entitled to a deficiency iudgment.

Affirmed.

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