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Full Opinion
No. 91-205
IN THE SUPREME COURT OF THE STATE OF MONTANA
1992
M. E. DAVEY,
Plaintiff and Appellant,
V.
EDWARD M. NESSAN, JOAN E. NESSAN, DONALD E.
DUBEAU and CONNECTICUT MUTUAL LIFE INSURANCE
COMPANY, a Connecticut corporation,
Defendants, Respondents and Appellants,
HORTON B. KOESSLER, as Personal Representative
wpw 9 =?99i$
of the Estate of HORACE H. KOESSLER, Deceased, : 1 ,i.<' cp
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Plaintiff and Appellant, 5yj,\i< 3:- ;t;..;;.,'<Ap,ifi
V.
EDWARD M. NESSAN, DONALD E. DUBEAU, and
CONNECTICUT MUTUAL LIFE INSURANCE COMPANY,
a Connecticut corporation,
Defendants, Respondents and Appellants.
APPEAL FROM: District Court of the Sixteenth Judicial District,
In and for the County of Rosebud,
The Honorable Joe Hegel, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
David A. Veeder, Veeder & Broeder, Billings, Montana
(Davey & Koessler) ; David R. Paoli, Edwards & Paoli,
Billings, Montana (Dubeau)
For Respondents:
W. Anderson Forsythe, Moulton Law Firm, Billings,
Montana (Connecticut Mutual); Vicki W. Dunaway,
Billings, Montana (Nessan)
Submitted on Briefs: December 4, 1991
Filed:
Justice Terry N. Trieweiler delivered the opinion of the Court.
On February 5, 1988, M. E. Davey filed a complaint against
Edward M. Nessan, Joan E. Nessan, Donald E. DuBeau, and Connecticut
Mutual Life Insurance Company in the Sixteenth Judicial District
Court in Rosebud County. On the same day, Horton B. Koessler filed
a complaint in the name of Horace H. Koessler in the same court and
against the same parties, omitting only Mrs. Nessan.* DuBeau and
Nessan answered and asserted a cross-claim against Connecticut
Mutual. On December 29, 1990, the District Court granted summary
judgment for Connecticut Mutual, dismissed all of the claims
against it, and entered judgment in its favor. All of the other
parties appeal. We affirm.
The issue on appeal is whether the District Court erred when
it ruled that all claims against Connecticut Mutual failed due to
the absence of any contractual obligation by Connecticut Mutual to
assume the debts of DuBeau and Nessan.
Davey and Koessler owned contiguous farms adjacent to the
Candee farm in Rosebud County. The Candee property was a dry-land
farm, butthe Davey and Koessler farms had center-pivot irrigation.
DuBeau and Nessan bought the Candee property on a contract for
deed in 1980. DuBeau and Nessan then began planning to buy the
*
Mrs. Nessan was a party to the Davey contract but not the
Koessler contract. Because the claims of Mr. and Mrs. Nessan in
the Davey action are identical to the claims of Mr. Nessan alone in
the Koessler action, references to "Nessan" in this opinion include
the claims of Mrs. Nessan.
2
Davey and Koessler properties under contracts for deed with the
intention of operating all three farms as a unit. Their plan
envisioned relocating the center-pivot irrigation system on the
Davey and Koessler farms to the Candee farm, and replacing it with
a newer lineal irrigation system.
On November 12, 1980, Connecticut Mutual offered to loan
DuBeau and Nessan more than $1.8 million in order to make the
necessary down payments and capital investments. Connecticut
Mutual offered DuBeau and Nessan a favorable interest rate in
exchange for an option to acquire a one-half interest in the
property if the venture proved to be profitable. In turn,
Connecticut Mutual took a security interest in DuBeau's and
Nessan's purchasers' interest in the three contracts for deed.
DuBeau and Nessan accepted Connecticut Mutual's offer.
Thus, in the development of this project DuBeau and Nessan
incurred two different types of indebtedness: (1) their underlying
debts to Candee, Davey, and Koessler on the three contracts for
deed; and (2) their subsequent debt to Connecticut Mutual.
In order to protect its security interest in DuBeau's and
Nessan's purchasers' interest against foreclosure, Connecticut
Mutual insisted on the right to make payments to Candee, Davey, and
Koessler in the event of default by DuBeau and Nessan. DuBeau and
Nessan subsequently entered into written agreements to this effect
with Davey and Koessler. Specifically, Davey and Koessler granted
3
Connecticut Mutual the right, "at its election and without
obligation," to cure any default by DuBeau and Nessan.
DuBeau and Nessan immediately experienced cash flow problems
with the project. DuBeau and Nessan had to borrow more money from
Connecticut Mutual in order to make the 1982 payments on the
underlying contracts for deed. This happened again in 1983. Later
in 1983, DuBeau and Nessan advised Connecticut Mutual that the cash
flow situation was not improving and that they intended to default
on both the land contracts and their contract with Connecticut
Mutual.
DuBeau and Nessan offered Connecticut Mutual a deed in lieu of
foreclosure but Connecticut Mutual insisted on judicial
foreclosure. On April 23, 1984, DuBeau and Nessan signed a
settlement agreement with Connecticut Mutual in which they agreed
to foreclosure by default. Connecticut Mutual waived its right to
a deficiency judgment. The settlement agreement did not provide
for any assumption by Connecticut Mutual of DuBeauls and Nessan's
debt on the three underlying contracts for deed. Connecticut
Mutual bought the property at the foreclosure sale on September 12,
1984. On November 6, 1984, DuBeau and Nessan gave Connecticut
Mutual a quitclaim deed to their remaining interest in the three
parcels of land.
Connecticut Mutual made payments on the underlying contracts
for deed until July 1987, when it notified Davey and Koessler that
it intended to tender the property back to them. Davey and
4
Koessler accepted possession and then filed the present lawsuit
against DuBeau, Nessan, and Connecticut Mutual.
Davey and Koessler alleged that Connecticut Mutual had assumed
the debt of DuBeau and Nessan. They based this theory on the
allegations that: (1) the quitclaim deed amounted to an assignment
of all of DuBeau's and Nessan's right, title, and interest in the
property; and (2) Connecticut Mutual's conduct in making payments
on the contracts for deed from 1984 through 1987 indicated its
intent to assume the underlying debt. Davey and Koessler asserted
that by failing to in fact assume the debt, Connecticut Mutual
breached its contract and also breached the implied covenant of
good faith and fair dealing.
DuBeau and Nessan asserted cross-claims against Connecticut
Mutual in which they, too, sought to hold it liable for the
underlying debt on the contracts for deed. DuBeau and Nessan based
these cross-claims on the allegation that Connecticut Mutual had
intended to acquire outright ownership of the property from the
very beginning of the operation and that the negotiations leading
up to the 1984 settlement agreement had, therefore, contemplated
that Connecticut Mutual would be assuming the underlying debt on
the three contracts for deed. DuBeau and Nessan asserted that
these facts supported actions for breach of contract and breach of
the implied covenant of good faith and fair dealing.
Connecticut Mutual moved for summary judgment on all of the
claims against it. It argued that it acquired only an equity
5
interest at the foreclosure sale, that the quitclaim was
inoperative to transfer DuBeau's and Nessan's underlying debt, and
that the parol evidence rule barred any evidence about the
negotiations leading up to the 1984 settlement agreement. The
District Court granted summary judgment for Connecticut Mutual on
all of the claims against it. All of the other parties appeal from
this summary judgment order.
The issue on appeal is whether the District Court erred when
it ruled that all claims against Connecticut Mutual failed due to
the absence of any contractual obligation by Connecticut Mutual to
assume the debts of DuBeau and Nessan. Because the appellants take
very similar positions on appeal, we discuss the Davey and Koessler
claims together with the DuBeau and Nessan claims.
I
THE BREACH OF CONTRACT ACTIONS
All of the appellants argue that Connecticut Mutual assumed a
contractual duty to make payments on the underlying contracts for
deed, either by virtue of the quitclaim deed from DuBeau and Nessan
or by virtue of Connecticut Mutual's conduct in making those
payments from 1984 to 1987. They concede that Connecticut Mutual
never expressly agreed in writing to assume the underlying debt.
In order to succeed, then, they must show that in some other way
Connecticut Mutual assumed the contractual obligations of DuBeau
and Nessan.
6
An "assignmentg1of contractual rights is not the same as an
'(assumption" of contractual obligations. All of the parties agree
that generally "[tlhe assignee of an executory contract does not,
merely by accepting the assignment, or by succeeding to the
property subject to the contract, assume the obligations imposed by
the contract on the assignor." Thompson v Liizcolri Nat. Life his. Co.
.
(1943), 114 Mont. 521, 527-28, 138 P.2d 951, 954. The parties
disagree about whether an assignment actually occurred in this
transaction; Connecticut Mutual argues that neither the foreclosure
sale nor the quitclaim deed operated as an assignment. Because
this case comes to us on appeal from an order of summary judgment
we assume, without deciding, that an assignment occurred. We turn
to the question of whether there was also an assumption.
The appellants argue that although an assumption must
typically be expressed, in the proper circumstances it may be
implied by the conduct of the parties. They cite the following
language in Thompson :
The dissent perforce admits the undeniable rule that
the assignment of a contract does not ordinarily operate
to cast the contract liabilities upon the assignee in the
absence of an assumption thereof by him. The dissent
further says, what is obvious, that the assignee may
assume the assignor's liabilities, that under certain
circumstances and conduct the law will imvlv such
assumvtion, and that he may not enforce the contract
without performing its terms. [Emphasis added.]
Thompson, 1 3 8 P.2d at 955-56.
7
In Thompson, the buyer's estate sued the seller's assignee for
damages resulting from the assignee's conveyance of the subject
property to a third party without protecting the original buyer's
rights. The instrument of assignment was silent on the question of
assumption of liabilities. The buyer argued that the assignee's
conduct gave rise to an assumption by implication. Thomp.~oiz, 138
P.2d at 953-54.
The majority of this Court, after stressing the general rule
that the assignee is not bound in the absence of an express
assumption, Thompson, 138 P.2d at 954, suggested that in the
appropriate case an assumption might arise by implication, Tliompsoit ,
138 P.2d 956. However, the majority concluded that under the facts
of that case no implied assumption had occurred. Thompsorz, 138 P.2d
at 956. Thus, the suggestion in that case that an assignee may
assume contractual obligations by implication was purely dicra. We
have never applied it in subsequent real estate cases to find an
assumption of the assignor's contractual liabilities.
The appellants also cite Massey-Fergusoiz Credit Corporarioit v. Brown
(1977), 173 Mont. 253, 567 P.2d 440, for the proposition that an
assumption of contractual duties may be implied. Massey-Fe~~soiz
was
not a real estate case: it involved a sale of goods that was
subject to Article 9 of the Uniform Commercial Code. That
distinction is significant.
8
The American Law Institute has recognized that real estate
transactions are qualitatively different from other transactions:
(2) Unless the language or the circumstances indicate
the contrary, the acceptance by an assignee of ..
. an
assignment operates as a promise to the assignor to
perform the assignor's unperformed duties, and the
obligor of the assigned rights is an intended beneficiary
of the promise.
Caveat: The Institute expresses no opinion as to whether
the rule stated in Subsection (2) applies to an
assiqnment bv a purchaser of his riqhts under a contract
for the sale of land. [Emphasis added.]
Restatement (Second) of Contracts 5 328 (1979). Professor
Williston explained the difference as follows:
It must be conceded, however, that at least in
regard to contracts for the sale of land the great
majority of decisions strongly take the position that the
assignee of the purchaser does not become bound to the
vendor for the price in the absence of an express
assumption of the duty in his contract with the assignor.
The analogy to the transfer of mortgaged land has
doubtless been influential. [Emphasis added.]
3 Samuel Williston, A Treatise on the Law of Contracts 5 418A at
109 (Walter H . E . Jaeger, ed., 3d ed. 1960).
The Wisconsin Supreme Court elaborated on this rule in Peterson
v. Johnson (1972), 201 N.W.2d 507. The court said:
The cases which analyze the foundations for the rule
base their holding on the lack of contractual privity
between the vendor and the assignee of the vendee's
interest. In the case of a bare assignment, there is
privity of estate between the vendor and the assignee but
not of contract. The obligation to pay is not a covenant
running with the land. It is a personal obligation based
on contract and enforceable only against those who have
a contractual obligation to pay the purchase price.
In order for an assignee [of a land contract] to be
personally liable for a deficiency judgment, it is
9
necessary either that he negotiate a contract directly
with the vendor, producing a novation, or that he enter
into an express aqreement with the purchaser assuming the
contractual obligation to pay. Under the second
alternative, while there would be no privity of contract
with the vendor in the common law sense, the assignee
would be liable to the vendor under the third-party
beneficiary theory.
Peterson, 201 N.W.2d at 509.
We agree that there can be no implied assumption of
contractual liabilities in real estate transactions. Because of
the complexity of these transactions, the large amounts of money
that are typically involved, and the customary presumption that the
only obligations are those which have been expressed, a rule that
would permit the inadvertent assumption of debt is inappropriate.
The appellants have conceded that Connecticut Mutual did not
expressly assume the underlying debt, and we reject their theory
that an assumption may arise by implication. Thus, we conclude as
a matter of law that Connecticut Mutual had no contractual
obligation to continue to make payments on the underlying contracts
for deed.
We hold that the District Court did not err when it granted
summary judgment to Connecticut Mutual on all of the breach of
contract claims lodged against it.
I1
THE BAD FAITH ACTIONS
The appellants also pled bad faith claims against Connecticut
Mutual. Under Storyv. CityofBozeman (1990), 242 Mont. 436, 450-51, 791
10
P.2d 767, 775-76, bad faith is actionable in an ordinary contract
action. However, we have already concluded that there was no
contract between Davey-Koessler and Connecticut Mutual. Therefore,
there was no implied covenant of good faith and fair dealing
between Davey-Koessler and Connecticut Mutual, and accordingly no
action for breach of the covenant.
DuBeau and Nessan, however, did have a contract with
Connecticut Mutual in the form of the 1984 settlement agreement.
They cite Nicholson v United Pacific Insurance Co. (1985), 2 19 Mont. 32, 42,
.
710 P.2d 1342, 1348, for the proposition that a person breaches the
implied covenant of good faith and fair dealing by acting
"arbitrarily, capriciously, or unreasonably." A majority of this
Court overruled that aspect of Nicholson in Story, when it held that
the conduct required by the implied covenant of good faith and fair
dealing is "honesty in fact and the observance of reasonable
commercial standards of fair dealing in the trade." Story, 791 P.2d
at 775. However, the Dubeau-Nessan bad faith claim fails under
either standard.
Connecticut Mutual did not breach the implied covenant. It
told DuBeau and Nessan it was considerinq taking a deed in lieu of
foreclosure but then decided to proceed with strict judicial
foreclosure. Although DuBeau and Nessan have complained of
Connecticut Mutual's failure to advise them specifically that it
had rejected their offer of a deed in lieu of foreclosure, its
11
insistence on strict judicial foreclosure and the terms of the 1984
settlement agreement itself was sufficient to indicate to DuBeau
and Nessan that Connecticut Mutual would not be acquiring the
property outright.
As the District Court explained in its memorandum and order:
It is obvious that at the time the purchase transaction
was put together everyone thought that land values would
continue to rise. Everyone was concentrating on the
upside potential; no one was looking at the downside
potential, except, perhaps the Connecticut Mutual legal
department. Instead of becoming an owner in the real
estate, Connecticut Mutual took an option. It never
exercised the option. Instead of taking a deed in lieu,
it foreclosed on DuBeau-Nessan's purchaser's interest and
protected its interest in the subject real estate by
making payments, until such time as it became apparent
that it was throwing good money after bad and it would
never recoup its investment. When the bottom fell out of
the real estate market, and Connecticut Mutual walked
away, it lost a large amount of money - its original
investment, the substantial improvements to the property,
as well as the annual payments it made for several years
on the property. It had, however, done everything it
could to protect itself against incurring further losses.
It should be noted that DuBeau and Nessan were
experienced, sophisticated agricultural real estate
professionals and investors. They, as well as the other
parties to this lawsuit, entered into these transactions
upon advice of counsel. It is clear that what happened
in this case is that no one anticipated the sudden drop
in the prices of agricultural land and everyone got
caught short. The way the transaction was structured,
Connecticut Mutual could legally walk away without
incurring further losses.
We agree. Connecticut Mutual merely took advantage of the
structure of the transaction as established by an agreement DuBeau
and Nessan executed while represented by counsel. This conduct
violated neither the Niclzolsoii "arbitrary, capricious, or
unreasonable" standard, nor the Story "dishonesty or commercial
12
unreasonableness" standard, and therefore, did not constitute bad
faith.
We hold that the District Court did not err when it granted
summary judgment on all of the bad faith claims lodged against it.
The order and judgment of the District Court are affirmed.
We concur:
13