No. 14202
IN THE SUPREME C O W OF TIE STATE OF MINTANA
1979
bKlIWANA ASSOCIATION OF CREDIT
-
, a corporation,
Plaintiff and Respondent,
-vs-
HERGEIiT et al. ,
Defendants and Appellants.
Appeal frcan: District Court of the Thirteenth Judicial District,
Honorable Charles Luedke, Judge presiding.
Counsel of W r d :
For Appellants:
Gary Wilcox argued, Billings, MDntana
For Respondent:
Fred Dugan argued, Billings, Mntana
submitted: mh 22, 1979
c
Decided: APR 26 1979
Mr. Chief Justice Frank I Haswell delivered the Opinion of
.
the Court.
Defendant appeals from a judgment rendered by the Dis-
trict Court, Yellowstone County, sitting without a jury, that
plaintiff may proceed to levy execution against certain mining
equipment, title to which the court concluded was held by de-
fendant Elmer Hergert as involuntary trustee for Montana Mining
and Development Company, now defunct, a corporation of which
Hergert was a director.
In the fall of 1973, one James M. "Mike" Morgan and
several investors, including defendant-appellant, Elmer Hergert,
joined together for the purpose of forming a mining venture.
Morgan owned a lease on mining property near Virginia City, Mon-
tana. The lease and the actual working of the mine were to be
Morgan's contribution to the venture, while the other parties
were to invest capital. Appellant Hergert contributed a total
of $30,000; a check for $15,000 on October 31, 1973, and another
check for the same amount two and one-half months later on Jan-
uary 14, 1974. The other investors contributed much smaller
sums. The initial structure of the venture was such that each
investor received for his investment a percentage interest in
the lease owned by Mike Morgan.
On November 1, 1973, Morgan used some of the invested
capital to make a $5,000 down payment on a piece of equipment
known as a trornmel, or washing plant, for use in the mining oper-
ation. The remaining balance on the trommel was to be paid in
two major installments, with a $6,000 payment due in 60 days and
the remaining balance of $11,000 due in late spring of 1974.
In February 1974 the mining venture was incorporated as
"Montana Mining & Development Co." A bank account was opened
in the corporate name, into which the invested funds were de-
posited. No formalities of incorporation other than the filing
of articles, however, were ever complied with; no bylaws were
adopted, no meetings held, no stock certificates issued. ~ppel-
lant Hergert's name appeared in the articles of incorporation
as a director of the corporation, but he never performed any
functions in that capacity or received any salary or dividends.
The actual operation of the mine was conducted by Mike
Morgan and his father. It was they who purchased the mining
equipment and incurred the expenses of the venture, and only
they were authorized to write checks on the corporation's ac-
count. No transfer to the corporation of the lease owned by
Mike Morgan, and supposedly divided into percentages among the
investors, was ever made.
A meeting of the investors in the venture was held on
November 14, 1974. The meeting revealed that the Morgans had
been less than efficient in operating the mine. They had accumu-
lated substantial past due indebtedness and had failed to make
the payments on the trommel. The trommel was to be repossessed
the next day. To avoid this eventuality, it was agreed that appel-
lant Hergert would obtain a loan and pay off the balance on the
trommel. Hergert contacted his banker and was informed that he
could borrow the necessary funds only if title to the trommel
would be in his individual name. The loan was made and appellant
paid the balance due on the trommel of $12,000 plus $682 interest,
receiving in return a bill of sale reflecting that he was its in-
dividual owner.
The original purchase price of the trommel was $22,000.
At the time Hergert took title in his individual name, $9,940
had been paid towards that purchase price; $5,000 by Mike Morgan
on November 1, 1973 (prior to incorporation) from the funds
invested by Hergert, and $3,500 in cash and $1,440 in gold by
the corporation during the year 1974.
Among the obligations incurred by Morgan in the operation
of the mine was one for the purchase of equipment from Tri-State
Equipment, Inc. This was a matured obligation, due and payable,
at the time "ownership" of the trommel was assumed by Hergert.
When Montana Mining and Development Co. failed to meet this obli-
gation, the account was assigned for collection to respondent,
Montana Association of Credit Management. A complaint demand-
ing judgment on the account in the sum of $4,494.47 was filed in
the District Court on March 11, 1975. Judgment by default was
entered in favor of Montana Association of Credit Management on
April 9, 1975, for $4,583.28, the amount due plus interest.
To satisfy the default judgment, Montana Association of
Credit Management attempted under a writ of execution to attach
the property of Montana Mining and Development Company. The min-
ing company was insolvent and the only piece of equipment of any
significant value used in its operations was the trommel. When
respondent served notice of attachment under execution on the
trommel, however, Hergert denied that the insolvent corporation
had any interest in it. He maintained that the bill of sale
issued to him in his individual name when he had paid off the
balance due on the trommel was conclusive that it was not an
asset of the corporation and could not be attached to satisfy the
corporate debts.
On December 30, 1976, a complaint was filed in the District
Court, Yellowstone County, by respondent Montana Association of
Credit Management in an attempt to free the trommel for attach-
ment. The complaint named both the corporation and Elmer Hergert,
individually and as involuntary trustee for the corporation, as
defendants. It was framed as two "claims", predicated on two
separate although interrelated theories.
The first "claim" alleged that the other investors had
agreed that Hergert was to take title to the trommel in the name
of the corporation, or in his own name in trust for the corpor-
ation, but not individually. Thus, it was argued, Hergert was
in violation of his fiduciary duty as a director in denying
any interest of the corporation in the trommel. The second
"claim" alleged that the transfer to Hergert of the title to
the trommel "rendered the Defendant corporation insolvent, was
given without adequate or fair consideration, and in bad faith
with respect to the Defendant corporation on the part of the
Defendant Hergert." No statutory authority was cited in the
complaint, but the language quoted from the second claim is taken
from section 29-104, R.C.M. 1947, now section 31-2-311 MCA, of
the Uniform Fraudulent Conveyance Act (UFCA).
The single prayer for relief encompassing the two "claims"
requested, in pertinent part:
"1. That the Defendant, Montana Mining & Development Co.,
be adjudged to be the owner of and entitled to possession of the
[trommel] ...
"2. That the Defendant, Elmer Hergert, be declared to
hold the same in trust for said Defendant.
"3. That it be adjudicated herein that Plaintiff holds
a valid lien by attachment upon said property.
"4. That the Defendant, Elmer Hergert, be required to
execute a proper instrument of transfer of the legal title to
said property to the Defendant corporation, and that both Defen-
dants be required to surrender possession of said property to the
Sheriff of the County of Madison, State of Montana, subject to
Writ of Execution levy and sale . . ."
On March 1, 1977, Hergert filed an answer to the complaint,
specifically denying the allegations and praying that it be dis-
missed. No responsive pleading was ever filed on behalf of the
corporation and default was entered against it.
Trial of the claims against Hergert was had on August
16, 1977 before Judge Charles Luedke. Extensive findings of fact
and conclusions of law were subsequently entered concluding, in
summary, that the transfer of the trommel to Hergert by the
corporation was voidable with respect to plaintiff because it
was made without fair consideration at a time when the corpor-
ation was insolvent and was therefore in bad faith as to the
creditors of the corporation as a matter of law. From the
judgment subsequently entered ordering that plaintiff may pro-
ceed to levy execution on the trommel, this appeal has been
brought.
We find this appeal to be entirely without merit. Be-
cause there are several matters of some consequence raised by
appellant which we discuss further below, we will not go so far
as to say the appeal is frivolous. The simple fact is, however,
that here an insolvent corporation transferred its only major
asset to appellant for approximately half of the asset's value.
Seen from another perspective, appellant took title in his own
name to a piece of property in which the corporation had more
than $9,000 equity and gave the corporation nothing for that
equity. The result of the transaction was that the rights of
creditors who had relied on the responsibility of the corpora-
tion and its management in extending credit to them were in-
fringed. This is clearly a proper case to disregard or set aside
the conveyance as fraudulent under the UFCA.
Because plaintiffts complaint stated one of its claims
in terms of an involuntary trust arising in Hergert for violat-
ing his fiduciary obligations as a director of the corporation,
much of the argument in appellant's brief is directed to the
applicability on these circumstances of section 86-210, R.C.M.
1947, now section 72-20-111 MCA, the statute concerning involun-
tary trusts. It is clear from the District Court's findings
and conclusions, however, that the case was decided on the basis
of the Uniform Fraudulent Conveyance Act (UFCA) rather than on
the involuntary trust theory. Therefore, appellant's arguments
in this regard are superfluous and will not be rebutted herein.
The issues we must address to properly resolve this
appeal are as follows:
1. Whether Montana Association of Credit Management
was a proper party to the action.
2. Whether the attached property which is the subject
of this suit was a corporate asset.
3. Whether there was sufficient evidence presented to
support a finding of constructive fraud under the Uniform Frau-
ulent Conveyance Act.
4. Whether the District Court was correct in its find-
ing that less than fair consideration was paid for the trommel.
Hergert argues that plaintiff was not a proper party to
the action because it was not a creditor of the corporation but
merely an assignee of Tri-State Equipment Company. The validity
of the instrument by which Tri-State Equipment Company assigned
its claim against Montana Mining & Development to plaintiff
Company for collection was not questioned by appellant. All that
is necessary to constitute a plaintiff the "real party in inter-
est" within terms of a statute authorizing him to sue is that
he be vested with legal title, and hence an assignee of a cause
of action for collection may sue. Rae v. Cameron (1941), 112
Mont. 159, 114 P.2d 1060; Washington Water Power Co. v. Morgan
Electric Co. (1968), 152 Mont. 126, 448 P.2d 683.
The issue of whether the trommel was a corporate asset
merely goes to the sufficiency of the evidence to support the
court's finding to that effect. Hergert contends that the trom-
me1 was not a corporate asset because it was purchased some three
months prior to incorporation, with funds supplied by him. He
further argues that the only evidence at trial that the trommel
was a corporate asset was an unaudited balance sheet prepared by
Mike Morgan and supported only by Morgan's self-serving testi-
mony. Respondent rebuts these contentions by pointing out that
Hergert's funds were invested in the venture, not in the trom-
mel, and that substantial payments on the trommel were made
after incorporation with funds drawn from the corporate bank
account and with gold produced by the corporation utilizing the
trommel in the corporate enterprise. "The standard of review in
a nonjury case is simply to determine if there is substantial
evidence to support the findings of the trial court. This Court
will not reverse such findings of fact unless there is a clear
preponderance of evidence against the findings." Hayden v.
Snowden (1978), Mont . , 576 P.2d 1115, 1117, 35 St.Rep.
367, 369, citing Merritt v. Merritt (1974), 165 Mont. 172, 177,
526 P.2d 1375. " . . . the credibility and weight given to the
witness, especially where the evidence is conflicting, is a
matter for the District Court's determination in a nonjury case."
Olson v. Carter (1977), Mont. , 572 P.2d 1238, 1240, 34
St.Rep. 1539, 1541, citing Miller v. Fox (1977), Mont . I
571 P.2d 804, 34 St.Rep. 1367. We find no error.
The remaining two issues of whether there was sufficient
evidence to support a finding of constructive fraud under the
UFCA and whether the District Court correctly found that Hergert
had not paid fair consideration for the trommel are interrelated
and will be addressed together. Prefatorily, we note that appel-
lant's arguments, both in his brief and during oral presentation,
relied on a line of authority represented by Polk v. Polk (1972),
210 Kan. 107, 499 P.2d 1142, for the proposition that construc-
tive fraud can only be found where certain "badges of fraud",
such as intent to hinder, delay, or defraud creditors, or cooper-
ation between a grantor and grantee to that end, are present.
Polk did not arise under the UFCA and has no bearing on this case.
The UFCA declares certain conveyances to be fraudulent regardless
of the presence or absence of any actual intent to defraud. 37
Am Jur 2d Fraudulent Conveyances S3.
Montana has adopted the UFCA as Title 29, Chapter 1,
R.C.M. 1947, now Title 31, Chapter 2, Part 3, MCA. Section 29-
104, R.C.M. 1947, now section 31-2-311 MCA, provides:
"Every conveyance made and every obligation
incurred by a person who is or will be thereby
rendered insolvent is fraudulent as to creditors
without regard to his actual intent if the con-
veyance is made or the obligation is incurred
without a fair consideration."
It is beyond dispute that a corporation is a "person"
within the meaning of the UFCA. See Vol. 7A Uniform Laws
Annotated, Fraudulent Conveyance Act 54 Note 32. Thus, the only
questions the District Court faced in reaching its conclusion
here were whether Montana Mining & Development Company was in-
solvent at the time Hergert took title to the trommel in his
own name or was rendered insolvent thereby, and whether the con-
veyance to Hergert was made without fair consideration.
In a trial memorandum submitted to the District Court in
conjunction with this action, Hergert admits that the corporation
was insolvent at the time he "purchased" the trommel. Trial
Memorandum of Elmer Hergert, p. 6, line 6-7. There is therefore
no issue as to sufficiency of the evidence in that regard.
As to the issue of fair consideration, the UFCA provides:
"Fair consideration is given for property, or
obligation,
"(a) When in exchange for such property, or obli-
gation, as a fair equivalent therefore, and in
good faith, property is conveyed or an antecedent
debt is satisfied, or
"(b) When such property, or obligation is received
in good faith to secure a present advance or
antecedent debt in amount not disproportionately
small as compared with the value of the property
or obligation obtained." Section 29-103, R.C.M.
1947, now section 31-2-303 MCA.
Hergert directs our attention to White v. Nollmeyer
(1968), 151 Mont. 387, 443 P.2d 873, where we said that the test
to be applied to determine fair consideration for purposes of
the UFCA is "whether the disparity between the true value of
the property transferred and the price paid is so great as to
shock the conscience and strike the understanding at once with
the conviction that such transfer never could have been made
in good faith." Nollmeyer, 151 Mont. at 406, 443 P.2d at 883.
This language in Nollmeyer is taken from Hart-Parr Co. v. Schafer
(1925), 73 Mont. 429, 236 P. 675, and applies to the phrase
"adequate consideration" in relation to an alleged fraudulent
conveyance under the law in existence prior to enactment of the
UFCA. It sets a much more stringent standard for finding a lack
of fair consideration under the UFCA than do the authorities
generally, and we hereby repudiate it.
Under the UFCA:
"What is 'fair consideration' must, of course
be determined on the facts and circumstances of
each particular case, and the question must be
determined from the standpoint of creditors. A
'fair consideration' may be defined generally as
one which fairly represents the value of the
property transferred, and as against creditors, a
consideration that is merely good and valuable
will not support a conveyance which will render
the grantor insolvent. In general, the test of
what constitutes a fair consideration would seem to
be whether or not the conveyance renders the debtor
execution proof ... It is also essential that the
consideration be not only fair, but that it pass
into insolvent's estate." 37 C.J.S. Fraudulent
Conveyances S140.
Applying these standards to the circumstances present
here, it is apparent to us that the District Court was correct
in its conclusion that Hergert did not give fair consideration
when he assumed ownership of the trommel in his own name. In
order to determine fair consideration, however, "the value of
the property on the date of the transfer is the critical date
against which the validity of the transfer must be tested." 37
Am Jur 2d Fraudulent Conveyances S18. The District Court's find-
ings in this case did not include a specific finding of the
value of the trommel on the date Hergert assumed ownership.
Respondent contends that even in the absence of such a specific
finding, the surrounding circumstances were sufficient to support
the conclusion that less than fair consideration was paid be-
cause at the time Hergert paid $12,000 and took title to the
trommel in his own name, only a year had passed from the time
its original purchase price was set at $22,000. Hergert, on the
other hand, argues that without a specific finding of the value
of the trommel on the date of the transfer to him, the court had
no basis to determine whether or not the consideration paid was
"fair". He contends that the District Court's failure to make
such a specific finding requires reversal, and cites Bailey v.
Leeper (1956), 142 Cal.App.2d 460, 298 P.2d 684, in support of
that contention. Hergert has misconstrued Bailey; the case stands
for just the opposite principle. In a suit to set aside a fraud-
ulent conveyance, where the disparity between value received and
obligations assumed is so great that the trial court would and
should have made the same decision, failure to make a specific
finding of the value of the property transferred as of the date
of the transfer is not reversible error. Bailey v. Leeper, supra.
We hold that the circumstances present here fall within this rule.
Section 29-109, R.C.M. 1947, now section 31-2-321 MCA,
provides in pertinent part:
"(1) Where a conveyance or obligation is fraud-
ulent as to a creditor, such creditor, when his
claim has matured, may as against any person ex-
cept a purchaser for fair consideration without
knowledge of the fraud at the time of the purchase
or one who has derived title immediately or med-
iately from such a purchaser:
"(a) have the conveyance set aside or obligation
annulled to the extent necessary to satisfy his
claim; or
"(b) disregard the conveyance and attach or levy
execution upon the property conveyed."
The judgment entered here by the District Court ordered that
plaintiff may proceed to levy execution against the trommel.
This is a remedy clearly within paragraph (1)(b) above. The
District Court has properly applied the UFCA in all respects.
The judgment appealed from is affirmed.
Chief Justice
We concur: