No. 14822
IN THE SUPREME COURT OF THE STATE OF MONTANA
FARMERS STATE BANK OF VICTOR, MONTANA
a Montana Corporation,
Plaintiff and Respondent,
and
HARRY JOHNSON and HELEN A. JOHNSON,
husband and wife,
JAMES G. EDMISTON and PHILLIS EDMISTON,
husband and wife,
Cross-defendants and Appellants.
Appeal from: District Court of the Fourth Judicial District,
In and for the County of Ravalli.
Honorable E. Gardner Brownlee, Judge presiding.
Counsel of Record:
For Appellants:
Datsopoulos and MacDonald, Missoula, Montana
For Respondent:
Boone, Karlberg & Haddon, Missoula, Montana
Submitted on briefs: February 27, 1980
Decided: -MAY 6 - 1980
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Filed: --
Mr. Chief Justice Frank I. Haswell delivered the opinion of the
Court.
Farmers State Bank brought this action to collect on a
promissory note executed by Imperial Cattle Company (Company).
In addition, the Bank asserted a claim against James and Phillis
Edmiston for conversion of property in which the Bank held a
security interest as security for the note. Following depositions
the Bank moved for summary judgment. The Edmistons did not file
affidavits or briefs in response to the motions. Summary judgment
in favor of the Bank and against all of the defendants was entered.
Only the Edmistons appeal.
The Company was incorporated in 1967 by appellant and two
other individuals not involved in this suit. The Company remained
dormant until defendants Lillethun and Rock became involved and
began engaging in the dairy business in March of 1973. James
Edmiston was president and Rock and Lillethun became vice-presi-
dents of the corporation.
In March, 1973, Edmiston was in financial difficulties
and needed to obtain refinancing of certain items of machinery.
He contacted Western Farm Bureau, and a loan was made for the re-
financing. This loan was taken under the name of the Company
and Western was told that the equipment belonged to the Company.
The Company insured the equipment with the Wyoming Farm Bureau.
The loan was also personally guaranteed by Edmiston.
In May, 1973, the Bank began to loan money to Lillethun.
These loans were secured by milk assignments and were guaranteed
by Rock. According to the depositions the money from the loans
was put into the Company checking account and used to meet Company
expenses such as the payroll and cattle feed. By March 1, 1974,
these loans amounted to $35,600. On that date the Company executed
a note with the Bank for $35,810.79. Rock and Lillethun signed
this new note in their corporate capacity as vice-presidents of
the Company. The money from the new loan was used to pay in
full the Lillethun loans. This note was also personally guaran-
teed by Rock and Lillethun. To secure the note the Company also
executed and delivered to the Bank a security interest in certain
equipment which was in the name of the Company. This was the
same equipment which was covered by the loan made by Western Farm
Bureau and insured by the Wyoming Farm Bureau.
At the same time that the Bank entered into the loan with
the Company, the Bank also required Rock and Lillethun to person-
ally sign a note for the same amount ($35,810.79). The banker
who made the two loans said that the second loan was "to emphasize
that I'm looking to them [Rock and Lillethun] also personally if
Imperial Cattle Company did not pay."
Apparently, Edmiston was not active in the management of
the dairy. This was left to Lillethun and Rock. As to ~dmiston's
knowledge of the loans being made to Lillethun, Edmiston testified
in his deposition as follows:
"Q. And you knew that they had, they were dealing
with the bank as far as getting funds to operate
Imperial Cattle? A. Yes.
"Q. Okay. A. Well, I don't want to give you the
impression that I knew anything about the dealings
of the bank because I did not.
"Q. Without asking you as to knowledge of specific
transactions, I am speaking in general terms. A.
They told me they'd be able to do business with the
Victor Bank.
"Q. And you knew that they had been doing business
with the bank as far as borrowing money for Imperial
Cattle? A. Yes.
"Q. The bank at Victor? A. Yes."
Lillethun testified in his deposition that he was sure
that Edmiston knew of the loans and that Edrniston knew the money
was being used to operate the Company " . . . because this had been
the pattern of our operation from the . . . beginning." Rock test-
ified to the same effect.
Rock and Lillethun executed the $35,810 corporate note
and the security agreement pursuant to a corporate resolution
of the Company. This resolution, adopted on March 6, 1973, pro-
vided in part:
"Be it further resolved that the President,
Vice-president, and the Secretary-Treasurer or
any two of them shall be authorized and empowered
to act in the name of the corporation and execute
and deliver any note, mortgages, leases, security
agreements, or other instruments evidencing indebted-
ness for money so borrowed."
The security agreement which secured the note had a pro-
vision which stated that the sale of the collateral constituted
a default. Before any action to collect on the note was commenced
Edmiston sold some of the secured equipment. The proceeds of the
sale were not transferred to the Company or to the Bank.
The sole issue which this case presents is whether the
District Court erred in entering summary judgment against the
Edmistons.
This Court in Anderson v. Applebury (1977), 173 Mont. 411,
567 P.2d 951, made the following observations:
"The principles governing summary judgment under
Rule 56 (c), M. R Civ. P. , were recently detailed in
.
Harland v. Anderson, 169 Mont. 447, 548 P.2d 613.
Summary judgment is proper if the pleadings, depo-
sitions, answers to interrogatories, and admissions
on file show there is no genuine issue of material
fact and the movant is entitled to judgment as a
matter of law. The initial burden of establishing
the absence of any genuine issue of material fact
is upon the movant. The party opposing the motion
will be afforded the benefit of all reasonable
inferences which may be drawn from his offered
proof. Mally v. Asanovich, 149 Mont. 99, 423 P.2d
294; Johnson v. St. Patrick's Hospital, 148 Mont.
125, 417 P.2d 469. However, where the record be-
fore the court discloses no genuine issue of material
fact, the burden shifts to the party opposing the
Rule 56(c) motion to come forward with proof estab-
lishing such a genuine factual issue. Harland v .
Anderson, supra; Rickard v. Paradis, 167 Mont. 450,
539 P.2d 718; Barich v. Ottenstror, 170 Mont. 38,
550 P.2d 395." 173 Mont. at 414-15.
his Court is still guided by the principles enunciated in Anderson.
The Edrnistons contend that a material question of fact
exists as to the authority of Lillethun and Rock to sign the note
in their corporate capacity. This contention is based on the
argument that the corporate resolution, cited above, does not
allow two vice-presidents to sign such a note. The Edmistons
argue that the resolution requires either the president or the
secretary-treasurer, if not both, to be parties to any borrowing
that the Company might engage in.
This contention is actually a legal argument. The
material facts are not disputed. The resolution was in effect
at the time the loan was made and Rock and Lillethun, as vice-
presidents, signed the note. Whether they were parties capable
of contracting, under these facts, is a legal question.
Section 1-4-101, MCA, states, in part:
"In the construction of an instrument, the office
of the judge is simply to ascertain and declare
what is in terms or in substance contained therein,
not to insert what has been omitted or to omit what
. . ."
has been inserted
The resolution states " . . . that the President, Vice-
president, and the Secretary-Treasurer or any two of them . . ."
are empowered to act in the name of the Company. This language
indicates that corporate officers from at least two of the three
above-designated titles must sign the note or the security agree-
ment. In other words, either the President or the Secretary-
Treasurer or both of them would have to join the vice-presidents
in any action taken pursuant to this resolution.
The question of whether the Company is bound by the note
and security agreement, however, does not end with a finding that
the resolution did not permit Lillethun and Rock to act on these
matters. In Edwards v. Plains Light & Water Co. (1914), 49 Mont.
535, 143 P. 962, this Court had occasion to consider whether a
corporation could be bound by the corporation president's contracts
when the contract was outside of the president's authority.
This Court said:
" ... It is well settled, however, that when
the corporation entrusts to its president the
active management of its business, he may bind the
corporation by contracts which are within the scope
of the powers of the corporation, and which are
necessary or proper or usually made in the conduct
of its business. (Citations omitted.) The fact
that he is permitted by the board of directors to
occupy the position of such an agent, carries with
it the implication that he has been clothed by it
with all the powers necessary to enable him to carry
forward the ordinary business of the corporation;
and when, as in this case, the board of directors,
the members of which hold all the shares, either by
direct action evidenced by a by-law or a resolution,
or by continued acquiescence, authorizes or permits
the president to exercise all its powers and functions,
the board itself remaining entirely inactive, he be-
comes, for the time being, the board of directors,
with all the powers it possesses, and the corporation
cannot thereafter question the validity of any act
done by him within the scope of its legal powers."
49 Mont. at 545.
This principle has been explained by the Supreme Court
of Delaware in Mulco Products v. Black (1956), 50 Del. 246, 127
A.2d 851, as follows:
" ... even if authority were lacking yet if the
corporation received and retained the fruits of
the loan it is estopped to deny authority in Welch
to borrow the money. This principle is settled
beyond question." 127 A.2d at 856.
The facts of the instant case lend themselves to this rule of law.
Edmiston had allowed Lillethun and Rock to operate the dairy bus-
iness. Practically from the day the business was started the vice-
presidents were required to borrow money on a short term basis.
They borrowed money from the Bank for the Company at least ten
times in the year preceding the March 1, 1974 note and these loans
were secured by corporate milk assignments. This money was put
directly into the Company's checking account and used to pay Com-
pany obligations. The $35,810 corporate note executed on March 1,
1974, was used as a mechanism to consolidate the previous loans and to
provide additional security for the Bank. As noted above, ~dmiston
knew that the vice-presidents were borrowing money from the Bank
for the Company. He might not have known all of the details but
he c not now interpose a defense based on the corporate resolu-
e=_
t
.
v. Northern Pacific Ry. Co. (1926). 78 Mont. 40, 252 P. 313.
tion./ As is stated in 2 Fletcher Cyc Corp. (~erm.Ed.) S773:
"A private corporation by accepting and retaining
the fruits or benefits of an unauthorized contract
or other transaction made or entered into by one
of its officers thereby ratifies it and will be
estopped to deny its validity and binding effect,
unless the contract or transaction is in violation
of some positive law or well-settled rule of public
policy. "
The Edmistons next contend that there exists a genuine
issue of a material fact on whether the note of March 1, 1974,
was for a valuable consideration. On that date a second note
for the same amount was signed by Rock and Lillethun in their
personal capacity. This was a device used by the bank to have
additional security for the loan. The note signed by Rock and
Lillethun in their personal capacity was not processed by the
Bank and was never put on the Bank's books as an obligation.
The Edmistons contend that the presence of two notes creates
a material fact as to which note was supported by valuable con-
sideration. The Bank is only suing on the first note, signed by
Rock and Lillethun in their corporate capacity. This note was
issued by the Bank, to the Company, in order to cover the prior
debts of Rock and Lillethun. Because the second note is not being
sued upon, whether it is supported by valuable consideration need
not be decided at this time. It is only the first note that need
be considered here.
Section 28-2-801, MCA, provides:
"Any benefit conferred or agreed to be conferred
upon the promisor by any other person, to which
the promisor is not lawfully entitled, or any
prejudice suffered or agreed to be suffered by
such person, other than such as he is at the time
of consent lawfully bound to suffer, as an induce-
ment to the promisor is a good consideration for a
promise. "
Section 28-2-802, MCA, provides:
"An existing legal obligation resting upon the
promisor, a moral obligation originating in some
benefit conferred upon the promisor, or prejudice
suffered by the promisee is also a good consider-
ation for a promise to an extent corresponding
with the extent of the obligation, but no further
or otherwise."
This Court has said that a prior debt is sufficient to
constitute consideration. S-W Company v. Schwenk (1977), 173
Mont. 481, 568 P.2d 145, 148. In the present case, the note
represented an accumulation of previous loans borrowed by Lille-
thun and Rock for Company purposes. This represents sufficient
consideration and does not present a material issue of fact.
The Edmistons next contend that there is an issue of fact
presented as to whether the assets listed in the security agree-
ment were owned by the Company, and whether the Bank acted justi-
fiably and in good faith in regard to its belief concerning the
ownership of the assets listed in the security agreement. These
assets, which served as collateral, had been treated by Edmiston
as though they were corporate property. The Company listed these
assets in a financial statement that reflected the loan from
Western Farm Bureau as a liability. These assets were also in-
sured by the Company. The Bank officer who made the loan relied
upon these documents as expressions of Company ownership and the
security agreement was based upon these documents.
Section 26-1-601(3), MCA, states:
" .. . whenever a party has, by his own declar-
ation, act, or omission, intentionally and deliber-
ately led another to believe a particular thing
true and to act upon such belief, he cannot in any
litigation arising out of such declaration, act,
or omission be permitted to falsify it .. ."
This is a conclusive presumption by statute. As a matter of law
Edmiston may not allege that the Company did not own the property.
Edmiston allowed the Bank to rely on the documents; consequently
no material issue of fact is presented in this regard.
Finally, the Edmistons contend that there is a genuine
question of material fact as to whether the Edmistons may be
held individually liable for a corporate debt. The pleadings
in this case show that the Bank was suing the Company on the
note, and they were suing Rock and Lillethun as endorsers and
guarantors of the note. The claim against the Edmistons was
based on conversion. The claim, in other words, is not based
upon Edmiston's status as a shareholder. Under circumstances
other than those presented by this case, the issue could be
framed as follows: Is the Bank entitled to recover against the
Edmistons as a matter of law on a conversion theory? In the
present case, however, we decline to reach this issue. We hold
that the Edmistons are estopped from defending against the Bank's
conversion action.
As noted above, section 26-1-601(3), MCA, prevents a
party from denying any intentional act which has led another to
believe a particular thing and to act upon that belief. The prede-
cessor to this statute was considered in Waddell v. School Dist.
No. 2 (1925), 74 Mont. 91, 96, 238 P. 884, and this Court said
that the statute gives the basic principle of equitable estoppel.
In Hustad v. Reed (1958), 133 Mont. 211, 223, 321 P.2d 1083, this
Court said:
II I !I . . . The
following six essential elements
have been held necessary to constitute an equit-
able 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 said 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 such 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.
6. He must in fact act upon it in such a manner as to
change his position for the worse; in other words, he
must so act that he would suffer a loss if he were com-
pelled to surrender or forego or alter what he has done
by reason of the first party being permitted to repudiate
his conduct and to assert rights inconsistent with it.'"'
[I17 Mont. 255, 161 P.2d 640.1"
Edmiston, although claiming to own the equipment
personally, knew it was listed as an asset of the Company on
financial statements and other documents. Edmiston knew that
Lillethun and Rock were borrowing from the Bank for Company
purposes. Edmiston should have known that the Company documents
which listed the equipment as assets were being used to secure
loans from the Bank. At the very least, he created a situation
where the Bank had a right to believe that the equipment was
Company property, The Bank officer who made the loan based the
security agreement on the Company documents which listed the equip-
ment as Company assets. This indicates that he believed that the
Company did own the property.
Under these facts, the Edmistons are estopped from denying
that they converted the property. By allowing others to rely on
the documents which purported to show Company ownership of the
property, the Edmistons' cannot now assert that they are the true
owners. Consequently, they will not be allowed to say that they
did not convert the property.
Affirmed.
Chief Justice
We concur:
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tices