First Fidelity Bank v. Matthews

No. 8 4 - 1 3 9
IN THE SUPREP4E COURT OF TEIE STATE OF MONTANA
1984

FIRST FIDELITY BANK, a Banking Corp.,

Plaintiff and Appellant,

MICHAEL E. MATTHEWS: and LARRY
MATTHEFJS and SUSAN MATTHEWS , husband
and wife,
Defendants and Respondents.

APPEAL FROM: District Court of the Seventh Judicial District,
In and for the County of Dawson,
The Honorable R. C. McDonough, Judge presiding.

COUNSEL OF RECORD:

For Appellant:
Cox & Simonton; Dale Cox, Glendive, Montana

For Respondent:
Bosch, Kuhr, Dugdale, Martin & Kaze; John Warner,
Havre, Montana

Submitted on Briefs: Oct. 25, 1 9 8 4
Decided: December 31, 1934
a
Hon. John C. Harrison CORRECTION. In preparing this opinion for pub-
Justice, Supreme Court lication, we noted in our verification of titles and
Room 414 Justice Building citations the matters listed below. Corrections have
215 North Sanders been made on our copy of the opinion.
Helena, Montana 59620

January 25, 1985
First Fidelity Bank v. Matthews, No. 84-139, Dec. 31, 1984

Page 6, line 10 --- 194 Cal.App. 699 should read 194 Cal. 699.
Page 7, line 4 --- Schultz v. Peake should read Schulz v. Peake.
Page 9, line 16 --- Haas v. Metro Goldwin Mayer should read Haas v.
Metro Goldwyn Mayer.

WEST PUBLISHING COMPANY
Box 43526
St. Paul, MN 55164
Mr. Justice John Conway Harrison delivered the Opinion of the
Court.

First Fidelity Rank of Glendive appeals from a judgment
of the Seventh Judicial District, in and for the County of
Dawson, State of Montana, to recover on a promissory note and
to set aside a fraudulent conveyance securing the note's
payment.
Michael E. Matthews owned farm lands which were subject
to a Federal Land Bank of Glasgow mortgage. In February of
1980, Michael leased the land to his brother, Larry Matthews
and his wife, Susan and granted them an exclusive option to
purchase. Larry agreed to purchase the land from Michael for
$235,958.75. On January 2, 1981, Larry exercised his option
and paid $18,000 down and executed a promissory note for
$217,958.75. The terms of the note provided for annual
installments in the sum of $19,003.82 comrnencinq January 2,
1982. The promissory note was secured by a mortgage on the
farm land executed and delivered to Michael by Larry and
Susan. The following was placed into escrow with First State
Bank of Malta, hereinafter referred to "escrow agent":
(i) the promissory note executed by Larry;
(ii) a warranty deed from Michael to Larry and Susan;
and
(iii) a mortgage from Larry and Susan to Michael.
The promissory note provided for annual installments to
be made to the escrow agent. The parties directed the escrow
agent to disburse the annual installments in the following
manner :
(1) To make the annual payment on the Federal Land Rank

of Glasgow mortgage wherein Michael was the mortgagor; and
 (2) to distribute the balance according to the
instruction received from Michael.
On February 10, 1.981, First Fidelity Bank made a loan
to Michael in the sum of $6,614.34. Michael executed a
promissory note in favor of First Fidelity Bank. As
collateral for this note, Michael made a written assignment
to First Fidelity of all monies due from the promissory note
executed by Larry and held in escrow. Prior to accepting
this assignment, First Fidelity verified the escrow
arrangement with the escrow agent. On February 17, 1981,
Michael executed a second promissory note for $500 to First
Fidelity. First Fidelity sent a "Notice of Assignment" to
the escrow agent. The escrow agent acknowledged receipt of
the notice. First Fidelity did not send the "Assignment" or
"Notice of Assignment" to Larry.
On January 2, 1982, Larry paid $15,167.96 which
represented the first payment due and owing under the
promissory note executed by Larry. The loan officer for the
escrow agent contacted Larry regarding the $3,835.86 deficit
payment. Larry had deducted that sum from his payment to
recover a debt which Michael owed him. The loan officer also
informed First Fidelity that the first payment made intcr
escrow was short. The $15,167.96 was disbursed by paying:
(i) $13,666.46 to the Federal Land Bank of Glasgow;
(ii) $15.00 escrow fee; and
(iii) $1,486.50 to First Fidelity.
First Fidelity accepted the deficit payment from the escrow
agent without complaint, since the note executed by La.rry
provided for twenty annual installments. The $1,486.50
received by First Fidelity was the only payment received by
First Fidelity on the two notes executed by Michael. First
Fidelity used the $1,486.50 to pay off the $500 note and
a-pplied the balance to the $6,614.34 note. The $6,614.34
became due on February 10, 1982.
In the spring of 1982, Larry and Michael entered into a
separate transaction outside of the escrow to pay off the
indebtedness Larry owed to Michael. On May 25, 1982, Michael
executed a "Satisfaction of Mortgage," satisfying the mortgage
held in escrow. In June, 1982, Larry paid Michael $10,000 to
satisfy Michael's total equity of $76,022.89. Larry received
a 35% discount on the original transaction. The "Satisfaction
of ~ortga~&'was
never delivered to the escrow agent.
On March 31, 1983, First Fidelity brought an action
against Michael Matthews; and Larry and Susan Matthews.
First Fidelity sought recovery on the promissory note
executed by Michael. First Fidelity also alleged the
"Satisfaction of Mortgage" executed by Michael delivered to
Larry and Susan was a fraudulent conveyance intended to
defraud First Fidelity and hinder and delay the collection
due First Fidelity under its note from Michael. A default
judgment was entered against Michael Matthews. Larry and
Susan Matthews defended against the fraudulent conveyance and
counterclaimed for attorney fees and for damages resulting
from First Fidelity's lis pendens claim. Judgment was
entered in favor of Larry and Susan Matthews against First
Fidelity. The trial court also awarded attorney fees and
costs to Larry and Susan Matthews.
The following issues are raised on appeal:
1. Whether there was sufficient evidence that Larry
Matthews had any knowledge of the assignment of the escrow
account as security for Michael Matthew's promissory notes to
First Fidelity.
 2. Whether the account debtor, Larry and the assignor,
Michael, could make a new agreement and termina.te the escrow
account as long as First Fidelity failed to intervene.
3. Whether the agreement between the account debtor,
Larry and the assignor, Michael constituted a transaction
which had the effect of hindering, delaying or defrauding
First Fidelity.
First Fidelity contends the District Court erred by
ruling there was not sufficient proof that Larry Matthews had
any knowledge of the assignment of the escrow account as
security for Michael's notes to First Fidelity.
First Fidelity made two loans to Michael. Accordingly,
Michael executed two promissory notes in favor of First
Fidelity. As security for the note, Michael executed a
written assignment to First Fidelity to all monies due from
the promissory note by Larry held in escrow. Larry testified
that he did not know of the assignment until after he ma.6e
the subsequent agreement with Michael to discharge the debt
and satisfy the mortgagor.
We are confined to determining whether there is
substantial credible evidence to support the District Court's
findings. Cameron v. Cameron (1978), 179 Mont. 219, 227, 587
P.2d 939, 944; In the Matter of the Estate of Latray (1979),
183 Mont. 141, 598 P.2d 619. We hold substantial, credible
evidence supports the District Court's findings that Larry
did not have notice of the assignment.
First Fidelity next argues, since the escrow agent was
given notice of the assignment of Plichael's right to the
monies due from the promissory note by Larry, then such
notice is imputed to Larry.
 Section 28-10-101, MCA, states: "An agent is one who
represents another, called the principal, in dealings with
third persons. Such representation is called agency." The
First State Bank of Malta was the designated escrow agent for
the purpose of representing Larry and Michael, the
principals, in dealing with the Federal Land Bank of Glasgow.
It is well settled that an escrow agent is the agent of both
parties to such a transaction. Ryder v. Young (Cal. 1935) ,
50 P.2d 495. Also see Shreeves v. Pearson (1924), 194
C1-
a.. 699, 230 P. 448. On consummation of the contract
and deposit, the escrow holder is generally considered the
agent by both parties and he owes an obligation to each party
measured by an application of the ordinary principles of
agency. Rianda v. San Renito Title Guarantee Co. (1950), 35
Cal.2d 170, 215 P.2d 25. An agency relationship existed
between Larry and Michael; and the First State escrow holder.
Yowever, it is the scope of this agency relationship which is
at issue.
Section 28-10-102, PCA states, "An agent for a
particular act or transaction is called a special agent. . ."
Both parties agree that the First State escrow holder was a
special agent. The escrow agent was directed to perform two
particular acts. Its first duty was to accept payment from
Larry to see that the Federal Land Bank of Glasgow was paid.
Here, the escrow holder was Larry's agent. When the Federal
Land Bank had its money, the escrow holder ceased to be
Carry ' s agent. The escrow holder's second duty was to
deliver any remainder of the payment according to the
instructions of Michael. At this point, the bank was an
agent to Michael.
 It was incumbent upon First Fidelity to ascertain the
scope of First Bank's escrow agency authority. "A person
dealing with a special agent is bound at his peril to
ascertain the scope of the agency's authority." ~u!
clz
h# v.
Peake (1978), 178 Mont. 261, 583 P.2d 425. In helps v.
Union Central Life Ins. (1937), 105 Mont. 195, 71 P.2d 887,
this Court stated:
"'When one deals with a special agent or
an agent who has only special authority
to act for his principal, he acts at his
peril, for he must acquaint himself with
the strict extent of the agent's
authority and deal with the agent
accordingly. Such third person must
inquire into the extent of the agent's
authority; he is not justified in relying
upon any appearance of authority except
that to which is directly deducible from
the nature of the authority actually
conferred. The reason for this is that
if the power of an agent is special and
limited, it must be strictly pursued and
construed, with the result that neither
the agent nor a third person dealing with
him as such can claim that the agent had
a power which they had not a right to
understand was actually conferred.'"

The foregoing rules are firmly established in this
jurisdiction. Barrett v. McHatti-e (1936), 102 Mont. 473, 59
P.2d 794; Benema v. Union Central Life Ins. Co. (1933), 94
Kont. 138, 21 P.2d 69; Moore v. Skyles (1905), 33 Mont. 135,

First Fidelity was unaware that the escrow agent's
power to act for Larry was limited. The record shows that
First Fidelity had no idea what authority the escrow holder
had until after the first payment was made a year later.
Moreover, the escrow agent had no duty to inform First
Fidelity of the transaction. The escrow holder only was
obligated to strictly adhere to the instructions as provided
in the escrow agreement. Other jurisdictions have
universally followed this policy of Limited agency.
Blackburn v. McCoy (Calif. 1934), 37 ~ . 2 d153; Nelson v.
~shton-Jenkins Co. (Utah 1925), 242 P. 408. We hold the
notice of the assignment to the escrow holder, First State
Bank of Malta, was not imputed to Larry.
First Fidelity next argues because there was an
effective assignment from Michael to First Fidelity of an
account debt, the account debtor, Larry and the assignor,
Michael, could not reach a new agreement whereby the debt
assigned was extinguished.
Michael assigned the monies due under a promissory note
from Larry to First Fidelity to secure a loan. This
constituted a secured transaction. The rights of the parties
to an assignment of money due form a. promissory note when
given to secure a debt is governed by Chapter IX of the
Uniform Commercial Code. Section 30-9-102, MCA is Montana's
incorporation of this section.
Of particular significance to this case is section
30-9-318(3), MCA, which provides in part:
"The account debtor is authorized to pay
the assignor until the account debt.or
receives notification that the amount due
or to become due has been assigned and
that payment is to be made to the
assignee. A notification which does not
reasonably identify the rights assigned
is ineffective. If requested by the
account debtor, the assignee must
seasonably furnish reasonable proof that
the assignment has been made, and unless
he does so the account debtor may pay the
assignor."
Other courts have interpreted the requirements of this
section in order to make an assignment effective against the
account debtor. The Fifth Circuit Court of Appeals has
stated:
 ". . . in order for there to he an
effective assignment under 5 9-318 (3),
the account debtor must be notified of
two things. First, he must receive
notice that the 'amount due or to become
due has been assigned. ' Second, the
account debtor must also be notified
that 'payment is to be made to the
assignee.' See, First National Bank of
Rio Arriba v. Mountain States Telephone
and Telegraph Co., 91 N.M. 126, 571 P.2d
118 (1977); First National Bank of East
St. Louis v. Board of Education, District
No. 189, 68 Ill.App.3d 21, 24 I11.Dec
670, 385 N.E.2d 811 (1979) Haas v.
.I1

Metro Gold n Mayer (5th Cir. 1980), 617
F.2d 1136,?139.
First Fidelity argues the account debtor, Larry
received notice of the assignment. First Fidelity claims a
copy of the assignment and a notice of assignment was sent to
the escrow agent. As a result, notice to the agent is
imputed to the principal. First Fidelity also contends the
account debtor, Larry, was notified that the balance of the
payment was to be made to First Fidelity. However, Larry
claims the U.C.C. provides even if the account debtor, Larry
had notice of the assignment, he can continue to pay the
assignor, Michael, as long as the assignee, First Fidelity
permits him to do so. Section 9-318 of the Uniform
Commercial Code provides:
"The account debtor is authorized to pay
the assignor until the account debtor
receives notification that the amount due
or to become due has been assigned and
that payment is to made to the assignee.
A notification which does not reasonably
identify the rights assigned is
ineffective. If requested by the account
debtor, the assignee must reasonably
furnish reasonable proof that the
assignment has been made and unless he
does so the account debtor may pay the
assignor."
We find the situation the draftsmen of the code were
referring to is before us. The purpose for the provision
requiring notice that "payment is to be made to the assignee"
is to allow for commercial situations where accounts are used
as collateral to secure a loan repayment. The borrower, in
the instant case, Michael retained the right to collect the
account and the assignee, First Fidelity's right of
collection would ripen only upon default of the borrower,
Michael. Such a transaction is referred to as an "indirect
collection. " 4R Anderson, Uniform Commercial Code.
Therefore, subject to this indirect collection situation, the
account debtor, Larry, could not be expected to pay the
assignee until he had been instructed. Furthermore, First
Fidelity was aware of the $3,835.96 deduction from the
payment Larry had made to Michael. This amount was not paid
to First Fidelity. The First State Bank escrow holder
informed First Fidelity that the short payment was the result
of a prior dealing between Michael and Larry on the escrow
note. First Fidelity made no objection to the payment made
to Michael and the debtor, Larry was entitled to continue to
pay the assignor, Michael.. We therefore uphold the District
Court's conclusions that the payor and payee could make a new
agreement and terminate the escrow account as long as third
parties do not intervene.
First Fidelity raises as its last issue for appeal the
"Satisfaction of Mortgage" executed by Michael and delivered
to Larry and Susan. First Fidelity argues the settlement of
the debt constituted a fraudulent conveyance which hindered
and delayed the collection due First Fidelity under its note
from Michael. First Fidelity contends that circumstantial
evidence permits an inference of the defendant's intent to
defraud First Fidelity. First Fidelity strongly argues due
to the relationship between Michael and Larry; the $10,000
paid on a note for $217,958.75, among other factors,
established "badges of fraud."
First Fidelity primarily relies on a decision rendered
by this Court in 1981, Montana Nat. Rank v. Michels (Mont.
1981), 631 P.2d 1260, 38 St.Rep. 334. There, a creditor bank
sued a debtor husband and wife to set aside a fraudulent
conveyance. The husband conveyed to his wife all of his
interest in a contract for deed for the sum of one dollar.
At the time of the conveyance the husband owed the bank
$81,504.49. The district court set aside the conveyance.
The district court was affirmed. Montana - - is
Nat. Bank
clearly distinguishable from the case at bar. Here, the
District Court ruled the evidence did not support a finding
of fraud. The District Court held there was not sufficient
proof that Larry had any knowledge of the assignment of the
paid escrow account as security for Michael's notes to First
Fidelity. Larry Matthews testified that he "Got to computing
it out. "
(i) Michael's land was subject to a debt to the
Federal Land Bank of Malta in the amount of $499,000 over
thirty-five years.
(ii) Larry bought the land and was to pay Michael
$380,000 over twenty years. Larry's payments were to be used
to pay the Land Bank first so that the debt would not go into
default.
(iii) After Larry's payments to Michael were completed,
there would still be fifteen years of payments to be made to
the Land Bank. Even though Michael was obligated to make the
payments, he would have no means to do so and Larry would
have no security to see that he did.
Larry contends a change in arrangement was necessary or
else he had to default. Under these circumstances, Michael
accepted the $10,000 payment and Larry took over the Land
Bank payment. The District Court found that Larry Matthews
had dealt in good faith, paid his obligations in full and was
not responsible for the debts of Michael Matthews. We hold
the evidence did not support a finding of fraud.
The judgment of the District Court is affirmed. This
case is remanded to the District Court for a hearing on
attorney fees and costs for the trial and appeal.

We concur:

74.-.0-$,@6d
Chief Justice
4,