Unpublished Disposition, 925 F.2d 1470 (9th Cir. 1989)

MEMORANDUM^* 

Appellants Jess and Jerry Knerr ("Knerrs") appeal the district court's grant of appellee Federal Land Bank of Spokane's ("FLB") motion for summary judgment. We affirm.

I. Facts and Proceedings.

On April 6, 1988, the Knerrs entered into a contract for a one year lease of certain farmland in Montana. The lessor and owner of the property is FLB. The lease included the following provision:

During the term of this lease agreement, the Lessees are granted a right of first refusal to purchase the leased premises.... In the event the Lessor shall receive a bona fide offer to purchase the demised premises during the term of this lease, and the offer to purchase shall be satisfactory to the Lessor, the Lessor shall give the Lessees the privilege of purchasing the premises at the price and on the terms of the offer so made provided they qualify financially. This privilege shall be given by a notice, in writing, sent to the Lessees at the demised premises by registered mail, requiring Lessees to accept the offer in writing and to sign a suitable contract to purchase the demised premises within a period of 30 days after the mailing of the notice.

In a letter dated November 29, 1988, FLB's Senior Credit Officer, John Gates ("Gates") notified the Knerrs that the FLB had accepted an offer from a third party ("third party offer") to purchase the roperty and that the Knerrs had 30 days to exercise their right of first refusal should they choose to do so. The third party offer stated that it was " [s]ubject to Buyers qualifications as to financial condition and repayment capacity. These must meet Sellers approval in Sellers sole discretion."

In a letter to FLB dated December 19, 1988, the Knerr's attorney, Robert Johnson ("Johnson"), "suggest [ed that FLB] has not in fact received a bona fide offer" because the third party had not qualified financially.

The following day a proposed "Land Purchase Agreement" was hand delivered by Knerrs to Gates. The FLB agrees that the terms of the Land Purchase Agreement are identical to the terms set forth in the November 29, 1988, notice. The copy of the Agreement reviewed by the district court includes the following statement handwritten across the document: "REJECTED NOT QUALIFIED FOR FINANCING 12-29-88 DISCUSSED ORALLY WITH KNERRS."

On December 30, 1988, Johnson hand delivered to Gates a letter and "formal tender of performance." The tender included the terms of the third party offer and included a check in the amount of $66,728.34. This is the amount of the down payment stated in the offer less the amount of the rent payments paid to FLB.

In a letter to Johnson dated January 5, 1989, Gates responded to Johnson's December 19, 1988, letter. The letter agreed with Johnson's suggestion that the Knerrs' first right of refusal had not arisen because the potential buyers did not qualify for financing. The Knerrs' check and tender of performance was returned.

On January 27, 1989, Johnson hand delivered another letter and "second tender of performance." In a letter dated February 2, 1989, Gates again stated that the Knerrs' right of refusal had not arisen. The letter also asserted that even if the right of first refusal had arisen, their attempted exercise of that right failed because they did not meet a condition of the third party's offer, i.e., approval of the buyer's financial condition by the seller.

II. Discussion.

A. Breach of Contract.

The Lease Agreement between FLB and the Knerrs granted to the Knerrs "a right of first refusal to purchase the leased premises" subject to several conditions. Two of these conditions are conditions precedent to the right arising. First, FLB must receive a bona fide offer. Second, the offer must be "satisfactory to [FLB]." When these two conditions are fulfilled FLB is obligated to notify the Knerrs of "the privilege of purchasing the premises." The November 29, 1988, letter indicates that the conditions precedent to the Knerrs' ability to exercise their right of first refusal had been fulfilled and provides the notice FLB was obligated to give under the lease provision.¹ 

Once the Knerrs' were notified that their right of first refusal had arisen, the Knerrs had the right to purchase the property (and FLB had the duty to deliver the property) if three additional conditions were fulfilled. The Knerrs must (1) purchase the property at the price and on the terms of the third party offer, (2) qualify financially, and (3) sign a suitable contract within thirty days from the date the letter was mailed.

The Knerrs assert these were fulfilled by delivery of the Land Purchase Agreement on December 20, 1988. The third party offer, as described in the attachment to the November 29, 1988, letter, included the statement: "Subject to Buyer's qualifications as to financial condition and repayment capacity. These must meet Sellers approval in Sellers sole discretion." Because the Knerrs must purchase the property "at the price and on the terms of the [third party] offer," they are similarly subject to this requirement. The Knerrs did not satisfy the condition because FLB rejected the Knerrs' proposed land purchase agreement on the grounds the Knerrs did not qualify financially.

The Knerrs also did not satisfy the second condition to exercising the right of first refusal: that they qualify financially. The Knerrs argue that summary judgment is inappropriate because of evidence they provided of an April, 1988, operating loan; evidence that they made their lease payments regularly; the condition creates an illusory promise; and they were qualified financially as a matter of law.

The approval of a one year $51,260 operating loan in April, 1988, by a different lending institution, and evidence that the Knerrs regularly made their lease payments, may be relevant in a credit review but is not determinative of the question of whether they qualified financially for a $342,000 loan from FLB to purchase the property eight months later. This evidence was properly disregarded by the district court in considering the summary judgment motion.

The Knerrs argue that the factors applied by FLB in determining financial qualification made qualification impossible and the condition therefore illusory. Gates testified that the determination of whether the Knerrs were qualified financially was based upon "five credit factors." These include evaluating the past management of the property, the individual's repayment history, and credit risk. Gates testified that the Knerrs' did not, under these factors, have a sufficient "track record." When asked, " [h]ow long do you think a track record should exist?" Gates answered, "I think at leas [t] three years."

The Knerrs argue that basing the determination of financial qualification on a three year track record made financial qualification impossible for them and rendered the right of first refusal illusory. Although it may have been difficult for the Knerrs to qualify for financing, it was not impossible. Gates repeatedly testified that three years was a guideline, not a requirement. Regardless of the FLB criterion, it appears that if the Knerrs had obtained a co-signer or financing for the loan elsewhere they would have qualified for financing. Although "qualified financially" is somewhat undefined, the most reasonable interpretation is that the borrower must qualify for financing under the criterion generally applied by the lender. FLB claims that the Knerrs financial condition was analyzed under the bank's generally applied criterion and this is supported by the record. The Knerrs criticize the criterion but do not provide evidence sufficient to create a genuine issue that they qualified for financing under FLB's criterion and did not seek financing from any other institution.

The Knerrs also argue that they were qualified for financing as a matter of law when FLB informed them of their right of first refusal in the November 29, 1988, letter. The November 29, 1988, letter provides no basis for this assertion, however, and this argument is without merit.

The December 19, 1988, letter is in effect an inquiry regarding the status of the Knerrs' rights and has no effect on the legal relations between the Knerrs and FLB. The January 5, 1989, letter responding to this inquiry similarly has no legal effect.

The December 30, 1988, "tender of performance" fails to satisfy the conditions placed on the Knerrs' exercise of their right of first refusal for the same reasons the delivery of the Land Purchase Agreement fails. The "second tender of performance" dated January 27, 1989, similarly fails to fulfill the conditions precedent to the exercise of the Knerrs' right under the lease.

FLB's duty to deliver the property was conditioned upon the Knerrs qualifying financially. FLB submitted substantial deposition testimony that the Knerrs' proposal to purchase the property, which included payments on a principal amount of $342,000 over twenty-five years, was considered according to the criteria generally applied to requests for financing. The Knerrs provided no material evidence to rebut this evidence. The record thus indicates there is no genuine issue of material fact as to the Knerrs' breach of contract claim and the district court's decision on this claim is affirmed.

B. Implied Covenant of Good Faith and Fair Dealing.

The district court found that because there had been no breach of contract there could be no breach of the implied covenant of good faith and fair dealing.²  Subsequently, the Supreme Court of Montana decided Story v. City of Bozeman, 242 Mont. 436, 791 P.2d 767 (1990). Story held that "every contract, regardless of type, contains an implied covenant of good faith and fair dealing.... [B]reach of an express contractual term is not a prerequisite to breach of the implied covenant." 791 P.2d at 775. The standard of good faith and fair dealing is "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." Id. (quoting Mont.Code Ann. Sec. 28-1-211).

The Knerrs clearest argument that this standard was breached is that FLB initially stated that the Knerrs' right of first refusal had arisen and then "changed its mind," stating that the right had never arisen. This change, however, was prompted by the suggestion of the Knerrs' attorney. Although FLB properly should have rejected the suggestion, its agreement with the Knerrs' attorney does not create a genuine issue of bad faith under Montana law. We have reviewed the record and find no material evidence of bad faith at any stage of the transaction. FLB properly notified the Knerrs of their right to purchase the property and considered their requests for financing according to the factors generally applied.

Although the district court did not directly address the merits of the implied good faith and fair dealing claim, reviewing the summary judgment decision de novo, and applying the standard as expressed in Story, we find that no genuine issue of material fact remains and that summary judgment is appropriate.

C. Fraud.

The Knerrs argue that there are material issues of fact regarding their claim of fraud which permit them to present them to a jury. This argument is based on two assertions. First, that FLB committed fraud by giving the false impression that the Knerrs could potentially purchase the property when according to the standards applied by Gates such purchase was impossible. As discussed above, however, FLB in no way prohibited the Knerrs from purchasing the property, but merely declined to provide the financing for the purchase.

Second, the Knerrs argue that Gates inserted language into the terms and conditions of the November 29, 1988 letter which do not appear in the lease agreement. The terms and conditions described in the November 29, 1988, letter are those of the third party offer. The terms of the third party offer are in no way limited by language in the lease. Describing the terms of the third party offer in the notice of the right of first refusal arising cannot be fraudulent, where those were the terms the Knerrs had to meet under their lease agreement.

D. Breach of Fiduciary Duty.

The Knerrs argue that FLB breached its fiduciary duty toward them. The standard for determining if a fiduciary duty exists between a bank and a creditor is stated in Coles Dept. Store v. First Bank (N.A.) Billings, 240 Mont. 226, 783 P.2d 932 (1989):

"A fiduciary relationship exists between a bank and its debtor only if special circumstances indicate exclusive and repeated dealings with the Bank. Pulse v. North American Land Title Co. of Montana (1985), 218 Mont. 275, 707 P.2d 1105, 42 St.Rep. 1578. This Court has recently interpreted the Pulse case as requiring a bank to act as a financial advisor in some capacity, other than that common in the usual arms-length debtor/creditor relationship, in addition to requiring a long history of dealings with the bank, to establish a fiduciary relationship. Simmons v. Jenkins (Mont.1988), 750 P.2d 1067, 1070, 45 St.Rep. 328, 331."

783 P.2d at 934 (quoting First Bank (N.A.) Billings v. Clark, 771 P.2d 84, 92 (Mont.1989)). The Knerrs argue that a "special relationship" exists between them and FLB. The facts described by the Knerrs in support of this argument do not constitute evidence of financial advising or a long history of dealings with the bank. The district court's summary judgment on this question is affirmed.

III. Conclusion.

The exercise of the Knerrs' right of first refusal was subject to several conditions precedent, including purchasing the property on the terms of the third party offer and qualifying financially. Because the Knerrs provided no material evidence to rebut FLB's initial showing that the Knerrs failed to qualify financially, summary judgment was appropriate on the Knerrs' breach of contract claim.

The Knerrs similarly failed to produce any material evidence of a breach of an implied covenant of good faith and fair dealing or fraud. There is also no material evidence showing FLB owed a fiduciary duty toward the Knerrs. The district court's grant of summary judgment on these claims is affirmed.

AFFIRMED.