                                                            No. 8 8 - 4 3 2
                                IN THE SUPREME COURT OF THE STATE OF MONTANA

                                                                 1989




AMERICAN FEDERAL SAVINGS AND LOAN
ASSOCIATION,
                                          Plaintiff and Respondent,
              -vs-
A. LEE BUCKLAND, THE MONTANA POWER
COMPANY, LES MORRISON, d/b/a CITY
SIGN, EDWARD C. AND MARILYN EBERLY,
et al.,
              Defendants and Appellant.




APPEAL FROM:                              District Court of the First Judicial District,
                                          In and for the County of Lewis & Clark,
                                          The Honorable Thomas Honzel, Presiding Judge.

COUNSEL OF RECORD:
              For Appellant:
                                          Jackson   &   Rice; Gregory A. Jackson, Helena, Montana
              For Respondent:

                                          Alan 1. Joscelyn; Gough, Shanahan, Johnson
                                                ,                                          &    Waterman,
                                          Helena, Montana



                                                                 Submitted on Briefs:   June 1, 1 9 8 9
                                                                    Decided: Allgust 11, 1989

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Mr. Justice William E.   Hunt delivered the Opinion of the
Court.

      A. Lee Buckland, defendant and appellant, appeals from
the foreclosure of a trust indenture on his property entered
in favor of American Federal Savings and Loan Association,
plaintiff and respondent, by the District Court of the First
Judicial District, Lewis and Clark County. American Federal
cross-appeals on the issue of a mechanic's lien entered in
favor of Buckland. We affirm in part and remand for a recal-
culation of amounts due under the trust indenture.
      The issues raised on appeal are:
      1. Whether American Federal improperly carried forward
a mechanic's lien from one property to another.
      2. Whether American Federal breached its duty of good
faith and fair dealing by mismanaging rental property.
      3. Whether the District Court properly found that
American Federal was entitled to foreclosure of its note
secured by a trust indenture on Buckland's property.
      In 1978, Buckland, a real estate broker, purchased an
apartment building on Rodney Street in Helena, Montana, on a
contract for deed.     Buckland refinanced the property by
obtaining a loan with American Federal. Originally, the loan
was secured by a trust indenture on the property for
$35,000.00 but it was later refinanced for $45,000.00.
      In 1981, Buckland hired Blackfoot Electric to rewire
the building. Blackfoot submitted a written bid for the job
at $4,700.00 but raR into unanticipated problems.      Conse-
quently, Blackfoot billed Buckland for over $9,000.00.
Because Buckland did not pay the bill, Blackfoot filed a
mechanic's lien against the property in January of 1982 for
$9,148.74.
      In 1983, Buckland arranged an exchange transaction
involving his Rodney Street property, a Warren Street proper-
ty, also located in Helena, and a fifteen-acre tract portion
of a subdivision located in Lewis and Clark County known as
Sunny Vista. The exchange involved Buckland, as owner of the
Rodney Street property, Thomas Fenton, as the owner of the
Warren Street property, American Federal, as the holder of a
first trust indenture on the Rodney Street property and the
holder of a first trust indenture on the Warren Street prop-
erty, Edward Eberly, as the holder second trust indenture on
the Warren Street property, and Robert King, as the owner of
the Sunny Vista tract.
      However, before the exchange could take place, the
Blackfoot mechanic's lien needed to be settled. Since Ameri-
can Federal held a security interest in Buckland's Rodney
Street property, its approval was necessary to settle the
mechanic's lien and complete the exchange of properties.
Consequently, American Federal acted as pointman, with
Buckland's input, in the mechanic's lien negotiations. The
mechanic's lien was settled for $10,500.00, which totaled
$11,700.00 with interest. Buckland objected to settling the
lien for that amount which included the original $9,148.74
lien plus costs. American Federal paid the settlement and
took assignment of the lien.
      On July 22, 1983, the properties were exchanged and, as
part of the exchange, American Federal loaned Buckland
$11,700.00, the amount paid by American Federal on the me-
chanic's lien, which was secured by a trust indenture on
Buckland's newly acquired property.     The trust indenture,
when added to a previous debt owed American Federal, totaled
$29,700.00.   Further, Buckland's Sunny Vista property was
subject to a trust indenture securing a $29,700.00 debt due
American   Federal; Ruckland assumed responsibility for
Fenton's $9,479.37 debt to Eberly; Buckland took on a third
trust indenture for a $5,000.00 debt he owed to King; and the
mechanic's lien, settled at $10,500.00, was carried forward.
      Subsequently, Buckland traded his Sunny Vista property
for a Billings Avenue duplex located in Helena, valued at
$48,500.00 and owned by Sharon Hubbell.    Hubbell owned the
Billings Avenue property subject to a contract for deed which
was transferred upon the exchange. The holders of the first,
second and third trust indentures against the Sunny Vista
property agreed to transfer their trust indentures to the
Billings Avenue property in order to facilitate the
Buckland-Hubbell exchange.    The mechanic's lien was also
carried forward.   In addition, on August 3, 1983, American
Federal loaned Buckland $4,477.00. The loan was secured by a
fourth trust indenture on the Billings Avenue property.
      Hence, Buckland's Billings Avenue property was subject
to the following trust indentures:
           (1) A first trust indenture of July 22,
           1983, to First Montana Title, as trust-
           ee, and in favor of American Federal
           Savings and Loan Association, as benefi-
           ciary, to secure payment of $29,700.00,
           with interest at 13-112 percent per
           annum, payable - monthly installments.
                           in
          (2) A second trust indenture of July 22,
          1983, to First Montana Title, as trust-
          ee, and in favor of Edward C. and
          Marilyn Eberly, as beneficiaries, to
          secure payment of $9,479.37, with inter-
          est at 11 percent per annum, payable in
          semiannual installments.
           (3) A third trust indenture of July 22,
           1983, to first Montana Title Insurance
           Company, as trustee, and in favor of
           Robert King and Margaret King, as bene-
           ficiaries,   to   secure   payment   of
           $5,000.00, with interest at 10 percent
           Per    annum,     payable    in    annual
           installments.
          (4) A fourth trust indenture, of August
          3, 1983, to First Montana Title Insur-
          ance Company, as trustee, and in favor
          of American Federal Savings and Loan
          Association, as beneficiary, to secure
          payment of $4,477.00, with interest at
          15 percent per annum, payable in October
          1983. The security for this payment was
          "the    proceeds    of    real    estate
          commissions."
The first and fourth trust indentures are the subject of this
dispute.
      Buckland's payments to American Federal under the first
trust indenture (the July note) were $358.60 per month to
begin on August 1, 1983.    The fourth trust indenture (the
August note) was due, in full, in October of 1983. American
Federal notified Buckland by letter that the July and August
notes had gone into default--the July note in September of
1983 and the August note in October of 1983.
      In 1983, Buckland made payments on the July note in the
total amount of $3,644.46.   In January of 1984, Buckland made
only two payments towards the July note--one in the amount of
$291.60 and the other in the amount of $67.00.
      In June of 1984, Buckland moved to Georgia and ar-
ranged for Kelly Patzer to manage the Billings Avenue proper-
ty and remit rents collected to American Federal for
application to the July and August notes owed on the Billings
Avenue property.  On September 24, 1984, American Federal
received a letter from Buckland informing it of Buckland's
instruction to Patzer to bring American Federal the rents,
"to be applied to the loans." On October 29, 1984, American
Federal sent Buckland a letter informing him it was applying
rents received on his account to satisfy the August note
first and then to satisfy the July note.
      In July of 1984, American Federal advanced monies for
the payment of taxes and insurance due on the property.
Early in 1985, Patzer turned management of the Billings
Avenue property over to Steve Schmitz.      Under Schmitz ' s
management, rents were not remitted to American Federal. In
August of 1985, Schmitz turned management of the property
over to American Federal at which time American Federal
advanced monies towards maintenance, utilities and repairs.
At that time, one rental unit was vacant and the other was
four months delinquent. American Federal reduced the rent on
the vacant rental and shortly thereafter found a tenant.
Rents received under American Federal's management were not.
applied to the July note but were documented in a general
ledger non-interest bearing account which totaled $9,734.81
through November 22, 1987 ($1,114.49 of the rents collected
were applied to the August note which was paid off in Septem-
ber of 1985).
      In January of 1986, American Federal commenced foreclo-
sure proceedings on its trust indenture securing the July
1983 note.     Buckland returned to Helena in May of 1986.
American Federal had originally scheduled a trustee's sale
but it was cancelled due to the insistance of Buckland,
Eberly and King.    American Federal settled the claims of
Eberly and King prior to trial but commenced with a judicial
foreclosure in District Court against Buckland.     Buckland
counterclaimed on the issue of breach of American Federal's
duty of good faith and fair dealing.
      On November 23, 1987, the case was tried in the Dis-
trict Court, sitting without a jury. The court's findings of
fact and conclusions of law included the following:
          1. American Federal is entitled to foreclo-
     sure of its security interests in the property but
     was not entitled to a deficiency judgment nor
     attorney fees;
          2. The money paid to satisfy the mechanic's
     lien on the Rodney Street property should not have
     been carried forward to the Billings Avenue
     property;
          3. Buckland did not establish by a prepon-
     derance of the evidence that American Federal
     breached the implied covenant of good faith and
     fair dealing;
          4. Rents received by American Federal begin-
     ning in August of 1985 should not have been put in
     the general ledger account; and
          5. There should be a recalculation of amounts
     due American Federal.
      On April 11, 1988, Buckland filed a post-trial motion
to amend the findings of fact and conclusions of law and a
motion for a new trial. On April 14, 1988, American Federal
filed cross-motions on the same subject matter. The motions
were denied under Rule 59 (dl , M. R.Civ. P. Buckland appeals
and American Federal cross-appeals.
      In Dennis v. Tomahawk Services, Inc. ( ~ o n t .19891, 767
P.2d 346, 347, 46 St.Rep. 69, 70, we provided:
     The standard of review for a civil case for a judge
     sitting without a jury is whether or not the Dis-
     trict Court's findings are clearly erroneous.
     (Citation omitted. )    ...    this Court will not
     substitute its judgment for that of the trial
     court's absent that showing, even where there is
     evidence in the record to support appellant's
     contentions.
      The first issue raised on appeal is whether American
Federal improperly carried forward a mechanic's lien from
Buckland's Rodney Street property to his Billings Avenue
property.
      The July 22, 1983, $29,700.00 note, secured by a trust
indenture, originally applied to Buckland's      Rodney Street
property. The note was transferred to the Sunny Vista prop-
erty and eventually to the Billings Avenue property under a
complicated property exchange.
      Buckland argues, and correctly so, that the $29,700.00
figure was inflated because it included the $10,500.00
($11,700.00 with interest) mechanic's lien which, according
to the Rodney Street closing statement, was paid from the
proceeds of the $65,000.00 sale price received from Fenton on
the Rodney Street property.   (No actual money changed hands
as the transaction was on an exchange basis.) Thus, the July
note need be reduced by the amount of the mechanic's lien
lest American Federal recover twice.
      The second issue raised on appeal is whether American
Federal breached its duty of good faith and fair dealing by
mismanaging the Billings Avenue rental property.     Buckland
contends that for numerous reasons, American Federal breached
its duty as set forth in S 30-1-203, MCA:


     Every contract or duty within this code imposes an
     obligation of good faith in its performance or
     enforcement.
       In June of 1984, Buckland moved to Georgia, leaving
management of the Billings Avenue property in the hands of
Kelly Patzer. Patzer was instructed to remit rents received
to American Federal as payments on Buckland's July and August
notes.   On September 24, 1984, American Federal received a
letter from Buckland which read in part: "I have instructed
Kelly to bring the rent into you to be applied toward the
loans. "
      On October 29, 1984, American sent Buckland a letter
informing him that it was applying rents received. first to
satisfy the August note and next to satisfy the July note.
Ruckland argues that this was a breach of American Federal's
duty of good faith and fair dealing since it had an obliga-
tion to apply rents to July note before the August note. We
disagree.
      The relationship between bank and customer is that of
debtor-creditor.   Under $ 28-1-1106 (2), MCA, when a debtor
owes more than one debt and does not direct the creditor as
to how payment is to be applied, the creditor may apply the
payment to any obligation owing. See also, National Rank of
Montana v. Bingham (1931), 91 Mont. 62, 5 P.2d 554.
      In the present case, Buckland never instructed American
Federal as to which note to apply rents to and he never
objected to the order of application of rents until threat-
ened with foreclosure.      American Federal duly notified
Ruckland of its intention to apply rents as it did and cannot
now be said to have breached its duty of good faith and fair
dealing for doing so.
      Further, in 1985, Patzer turned management of the
Billings Avenue property over to Steve Schmitz who turned
management of the property over to American Federal in August
of 1985.   Buckland argues that when American Federal took
over management it breached its duty of good faith by arbi-
trarily reducing rents and failing to qualify a delinquent
renter for Helena Housing Authority guaranteed payments.
American Federal notes, however, that it reduced rent on a
vacant apartment in order to find a renter and shortly there-
after found one. Further, the record indicates that American
Federal did attempt to qualify the delinquent tenant for the
Helena Housing Authority guaranteed payments but Helena
Housing required Buckland's signature which American Federal
could not obtain due to Buckland's absence from the state.
There was no breach of duty by American Federal on this
contention.
      Buckland also argues that American Federal breached its
duty of good faith by placing payments, which should have
applied to the July note, in a non-interest bearing general
ledger account presently totaling $9,734.81 ($3,092.51 as of
the date the complaint was filed). He argues that interest
on the note accrued at a higher rate because the amount had
not been reduced.
      The trust indenture provided that when the lender is in
possession, rents received shall apply to the cost of manage-
ment and then to the sums secured by the trust indenture.
Instead of applying the sums in this manner, sums were merely
documented in the ledger. Under the terms of the agreement,
American Federal had the authority to apply rents received to
the cost of management. Although American Federal expended
$4,636.95 paying taxes, (not including an additional $433.29
on the first half taxes due in November of 1987), insurance,
maintenance, utilities and repair expenses on the property,
it did not deduct these costs from the general ledger account
as provided for in the trust indenture. On the same note, it
did not so apply the funds toward the interest nor the prin-
cipal owed by Buckland on the July note. American Federal
argues that it let the funds lay dormant in the account
because there were never enough rental receipts at any one
time to pay off interest accrued on the note. While we do
not condone the handling of the funds in the general ledger
account, the evidence under these circumstances is insuffi-
cient to hold that American Federal breached its duty of good
faith on this allegation.
      Buckland also contends that American Federal breached
its duty of good faith and fair dealing in settling the
mechanic's lien for $10,500.00. The original bid for rewir-
ing the Rodney Street building was $4,700.00. Due to unan-
ticipated problems, Blackfoot billed Euckland $9,148.74.
Buckland, who proposed to sell the property, needed American
Federal's approval since it had a security interest therein.
Hence, American Federal negotiated the settlement, with
Buckland's input, for $10,500.00, which included the lien
plus costs. Buckland objected to this amount. However, the
settlement of the lien was necessary before the exchange
could take place since a mechanic's lien is prior to a trust
indenture. See Home Interiors, Inc. v. Hendrickson (1984),
214 Mont. 194, 692 P.2d 1229. Buckland, an experienced real
estate broker, opted to go through with the settlement,
although he found it objectionable, in order to facilitate
the Rodney Street property exchange and admitted that the
settlement was in his own best interests. We cannot, there-
fore, hold that a breach of American Federal's duty on this
contention is founded.
      Buckland did not establish by a preponderance of the
evidence that American Federal breached its duty of good
faith and fair dealing. The evidence is insufficient.
      The last issue raised on appeal is whether American
Federal was entitled to foreclosure of its July 1983 note
secured by a trust indenture on Buckland's Billings Avenue
property.
      As noted, Buckland's Billings Avenue property was
subject to four trust indentures upon transfer.      A first
trust indenture secured the payment of the July note in the
amount of $29,700.00 with interest at 133 percent per annum,
payable in monthly installments at $358.60. Payments were to
begin August 1, 1983.
      On September 2, 1983, American Federal sent Buckland a
letter stating that the loan payment had not been received.
Buckland proceeded to make payments in the total amount of
$3,644.46 for 1983. In January of 1984, Buckland made only
two payments toward the July note--one in the amount of
$291.60 and the other in the amount of $67.00.     No further
payments were made by Buckland toward the July note.
      On April 5, 1984, American Federal once again sent a
letter to Buckland informing him that his loan payment was
delinquent.   On September 19, 1984, American Federal sent
Buckland a letter which broke down amounts due on both the
July and August notes. The letter also stated that American
Federal was willing to work with Buckland on the notes but
required a response by September 30, 1984, or it would pro-
ceed with foreclosure.
      Buckland did respond on September 24, 1984, stating
that rents from his Billings Avenue property were to be
deposited by the current manager of the building, Patzer, and
were to be "applied to the loans."      On October 29, 1984,
American Federal responded that it would first apply the
rents to the August note until paid off and then to the July
note. American Federal added that as long as "rent continues
to come on a regular basis the foreclosure will be held off."
      However, early in 1985, management of the property w a s
turned over to Steve Schmitz.    Under his management, there
were vacancies and problems with remitting rents collected to
American Federal. In August of 1985, Schmitz turned manage-
ment over to American Federal. American Federal applied the
rents first to the August note, which was paid in full in
September of 1985, and the trust indenture was released.
Through November of 1987, American Federal collected rents in
the amount of $9,734.81 which were placed in a non-interest
bearing general ledger account. As noted, the funds could
have been used towards American Federal's costs of managing
the Billings Avenue property but were not.       Although we
disagree with the handling of the funds, the funds, if ap-
plied to the July note, would still have been insufficient to
bring the note current. The foreclosure was proper.
      Neither Buckland in his appeal nor American Federal in
its cross-appeal proved the District Court's findings to he
clearly erroneous. We will not disturb the court's findings.
      A problem remains as to the amount due on the July 1 9 8 3
note.   The note was for $ 2 9 , 7 0 0 . 0 0 which included sums im-
properly carried forward on the Blackfoot mechanic's lien. A
recalculation on the amount due by Buckland is necessary. We
note that when recalculation occurs consideration must be
given to principal, interest, late charges, expenses of
managing the Billings Avenue property, and sums remaining in
the general ledger account.
      Affirmed in part and remanded for a recalculation on
amounts due under the trust indenture.



We Concur:   /
         7   Justice
                         d
