No. 88-205
IN THE SUPREME COURT OF THE STATE OF MONTANA
1989
ROBERT 0' CONNOR,
Plaintiff and Appellant,
-vs-
J. R. LEWIS, E. A. ATKINSON and
RIVERSIDE INVESTMENT,
Defendants and Respondents.
APPEAL FROM: ~istrictCourt of the Fourteenth Judicial District,
In and for the County of Musselshell,
The Honorable Peter Rapkoch, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Bruce E. Lee, ~illings,Montana
For Respondent:
Karl G. Knuchel; Knuchel & McGregor, Livingston,
Montana
Submitted on Briefs: June 30, 1989
Decided: J U ~ Y 5 , 1989
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Mr. Justice L. C. Gulbrandson delivered the Opinion of the
Court.
The plaintiff, Robert OIConnor, brought an action based
upon a contract seeking $55,000 plus interest from the
defendants, J.R. Lewis, E.A. Atkinson, and Riverside
Investment. Plaintiff also sought to foreclose on an alleged
equitable mortgage on the MN Ranch or, in the alternative, to
set aside the transfer of the MN Ranch as fraudulent upon
creditors. The District Court of the Fourteenth Judicial
District, Musselshell County, found in part that plaintiff
held no security or equitable interest in the MN Ranch and
that the transfer of the MN Ranch was not fraudulent as to
creditors. Plaintiff appeals. We affirm.
The following two issues are presented for review:
1. Did the District Court err in finding that the
plaintiff did not hold an equitable mortgage nor a vendor
lien in the MN Ranch?
2. Did the District Court err in finding that the
transfer of the MN Ranch from one defendant to another was
not fraudulent as to creditors?
In 1979, J.R. Lewis, the defendant, and Robert
O1Connor, the plaintiff and the half-nephew of Lewis, joined
together in an effort to develop a housing project in Decker,
Montana. The understanding between the two parties was that
Lewis would provide the money for the project and 0' Connor
would draft plans, confer with public authorities, and hire
and supervise contractors and laborers. Both parties also
understood that any profits from the development project
would be divided between them. The parties established a
joint checking account in which Lewis would deposit the
necessary money to fund the housing project. Initially, the
parties lived on and operated from the Murphy Ranch that
Lewis was purchasing.
The housing development project eventually failed, yet
O'Connor remained on the ranch and acted as a ranch hand.
Lewis eventually realized that he was about to lose the
Murphy Ranch and therefore instructed O'Connor to locate and
purchase another ranch smaller in size in which he could move
his livestock and equipment. OIConnor negotiated and
ultimately purchased the MN Ranch with funds provided by
Lewis. Lewis did not enter into any of the conferences or
negotiations regarding the purchase of the MN Ranch. Without
informing Lewis, O'Connor instructed the real estate agent to
put his name on the deed to the MN Ranch. Lewis was not
immediately aware of this action by O'Connor.
O'Connor eventually moved all of Lewis's livestock and
equipment to the new location. Lewis was not present at the
MN Ranch much of the time, either because of illness or
because of his business venture in Alaska. In the meantime,
O'Connor proceeded to improve the MN Ranch. He designed and
arranged for the construction of fences, water and sewer
lines, corrals, a shop building, a small office building, a
horse barn and a house. OIConnor issued checks for these
expenditures from the joint bank account funded by Lewis.
In May, 1984, Lewis and OIConnor disagreed over
personal matters and the status of the MN Ranch. In an effort
to resolve their disputes, Lewis and O'Connor met in the
Musselshell County Courthouse on May 14, 1984 and negotiated
and executed a document titled "Agreement to Settle Dispute."
The Agreement provided that Lewis would pay O'Connor $20,000
at the execution of the agreement, $30,000 on or before June
5, 1984, and $25,000 at a time not expressly stated in the
Agreement. In consideration for the payment, OIConnor
executed and delivered to Lewis a quitclaim deed to the MN
Ranch. Shortly thereafter, Lewis deeded the MN Ranch to E.A.
Atkinson. Atkinson, now the wife of Lewis, recorded the deed
on the same day, May 14, 1984.
Lewis paid O'Connor the $20,000 at the execution of the
agreement, but did not pay the remaining $55,000 as agreed
upon and as specified in the "Agreement to Settle Dispute."
O'Connor therefore brought an action against the defendants
seeking the remaining amount due, and seeking to foreclose on
an alleged equitable mortgage or vendor lien on the MN Ranch,
or in the alternative to set aside the transfer of the MN
Ranch from Lewis to Atkinson as fraudulent to creditors. In
its March 13, 1988 judgment, the District Court ordered Lewis
to pay the principal sum of $55,000 together with interest of
six percent per annum from May 14, 1984 to October 1, 1985
and the rate of ten percent per annum from October 1, 1985
and until paid. The District Court also ordered Lewis to pay
the costs of the suit in the amount of $1,673.20. The
District Court found that OIConnor did not have an equitable
mortgage in the MN Ranch nor did Lewis transfer the MN Ranch
for the purpose of defrauding creditors. OIConnor appeals
the District Court's findings regarding the equitable
mortgage and the transfer of the MN Ranch.
The first issue raised on appeal is whether the
District Court erred in finding that OIConnor did not hold an
equitable mortgage nor a vendor lien in the MN Ranch.
0'Connor argues that the quitclaim deed and the
"Agreement to Settle Dispute," when construed together,
constitute a bungled lay attempt at creating a mortgage at
law. O'Connor then argues that while the documents do not
constitute a mortgage as required by the statute, § 71-1-107,
MCA, they nonetheless constitute an equitable mortgage. We
disagree.
The quitclaim deed, dated May 14, 1984, states that in
consideration for the sum of ten and no/100 dollars ($10.00),
Robert O'Connor conveys, remises, releases and forever
quitclaims unto J.R. Lewis and to his heirs, and assigns all
right, title and interest in and to the subject real estate
situated in Musselshell County, Montana. The pertinent
portions of the "Agreement to Settle Dispute" states that
the parties agree to the following
statement setting out the mutual promises
and obligations thereto:
1. Conditioned specifically on the
performance of Lewis set forth below,
O'Connor shall quit claim all his right,
title, and interest without warranty to
the . .. [MN Ranch] located in
Musselshell County, Montana . . ..
This quit claim also applies to chattels
and articles of personal property . . ..
The agreement further specified that Lewis shall pay O'Connor
a total of $75,000, $20,000 at the execution of the
agreement, $30,000 on or before June 5, 1984, and $25,000 at
a time not expressly stated in the agreement. This agreement
was also dated May 14, 1984.
The nature of the transaction between O'Connor and
Lewis depends upon the parties' intent at the time the
documents were executed. In establishing this intent, the
courts first must examine both the documents and the
circumstances surrounding the execution of the documents.
Boysun v. Boysun (1962), 140 Mont. 85, 88, 368 P.2d 439, 440.
O'Connor argues that the language "[clonditioned specifically
on the performance of Lewis set forth below, O'Connor shall
quit claim all his right, title, and interest without
warranty to Lewis . . .." is a reservation by O'Connor or a
grant by Lewis of security. The transaction that occurred
between the parties and the circumstances surrounding the
transaction do not warrant such a conclusion.
The record is undisputed that O'Connor negotiated and
purchased the MN Ranch in response to Lewis's request and
with money provided by Lewis. The record also shows that
O'Connor directed the real estate agent to put the title of
the MN Ranch in his name without Lewis's permission. Lewis
was thus not immediately aware of this action by O'Connor.
The record also clearly shows that a disagreement arose
between Lewis and O'Connor over personal matters and over the
status of the MN Ranch which prompted them to execute the
"Agreement to Settle Dispute."
The facts outlined above, contrary to O'Connor's
assertions, do not give O'Connor a security in the MN Ranch
in the form of an equitable mortgage. While this Court
recognizes equitable mortgages, - - Bermes v. Sylling
see, e.g.,
(1978), 179 Mont. 448, 587 P.2d 377; Amsterdam Lumber, Inc.
v. Dyksterhouse (1978), 179 Mont. 133, 586 P.2d 705, the
facts in this case do not warrant the application of this
doctrine. An equitable lien, or equitable mortgage, will be
invoked by the courts when an intended security interest
proves defective. The application of this doctrine therefore
prevents the lender from suffering an inequitable loss.
Amsterdam Lumber, Inc., 179 Mont. at 140, 586 P.2d at 709.
However, written evidence must exist which indicates that the
grantor's intent was to subject the real property to a
security interest in favor of a lender.
Amsterdam Lumber, Inc., 179 Mont. at 140, 586 P.2d at 709.
In the present case, the undisputed facts indicate that
the parties' intent behind the execution of the documents was
to settle a dispute between them, hence the title of the
document "Agreement to Settle Dispute." Although O'Connor
agrees that this set of facts is not the typical situation in
which a court would invoke an equitable mortgage, he
nonetheless attempts to argue that the "ideology" behind an
equitable mortgage should be applied in this case. We cannot
agree. The purpose behind an equitable mortgage is to
prevent an inequitable outcome. In light of the documents
and the surrounding circumstances, an inequity has not
resulted in this case. Further, the facts do not suggest
that the parties ever intended to invest a security interest
in O'Connor. On the contrary, the facts indicate that
neither a sale nor a mortgage was intended by the parties,
but instead a contract that settled the disputes between the
parties. Therefore, as the District Court correctly stated,
the only question remaining is whether the "Agreement to
Settle Dispute" is valid.
In determining that the Agreement was valid, the
District Court found that the Agreement contained an offer,
an acceptance, consideration and that neither party was
incompetent nor acting under undue influence. The District
Court therefore concluded that the Agreement was a binding
and valid contract. The evidence clearly supports the
District Court's findings and conclusions. We therefore hold
that the District Court did not err in determining that a
valid contract existed and that OIConnor did not hold an
equitable mortgage in the MN Ranch.
Plaintiff also attempts to argue that if this Court
determines that an equitable mortgage did not exist, then it
should nonetheless find that an equitable lien arises by
virtue of $ 71-3-1301, MCA. Notwithstanding the inherent
problem with OIConnor's argument--an "equitable" lien arising
by virtue of a statute--O'Connorls vendor lien argument also
fails for the same reason as outlined above. The transaction
involved in this case involves neither a sale nor a mortgage,
but merely an agreement to settle a dispute. Thus we hold
that the District Court did not err in finding that O'Connor
held no security interest whatsoever in the MN Ranch.
The second issue raised on appeal is whether the
District Court erred in finding that the transfer of the MN
Ranch from one defendant to another was not fraudulent as to
creditors.
O'Connor argues that the District Court erred when it
found that the transfer of the MN Ranch from Lewis to
Atkinson was not fraudulent. Specifically, OtConnor argues
that the District Court erroneously relied upon S 31-2-311,
MCA, instead of 5 31-2-314, MCA, and therefore the District
Court failed to determine whether Lewis conveyed the MN Ranch
with the intent to defraud creditors.
Section 31-2-311, MCA, states that " [elvery conveyance
made ... by a person who is or will be thereby rendered
insolvent is fraudulent as to creditors without regard to his
actual intent if the conveyance is made ... without a fair
consideration." The District Court found that O'Connor did
not demonstrate that the "transfer was made for the purpose,
or had the effect, of rendering the Defendant J.R. Lewis
insolvent." The record clearly supports this finding.
O'Connor does not dispute this finding, but instead argues
that the District Court erroneously applied S 31-2-311, MCA,
to this case in lieu of S 31-2-314, MCA.
Section 31-2-314, MCA, states that " [elvery conveyance
made .. . with actual intent, as distinguished from intent
presumed in law, to hinder, delay or defraud either present
or future creditors is fraudulent as to both present and
future creditors." O'Connor then argues that the evidence
indicates that Lewis had actual intent "to hinder, delay, or
defraud" creditors. We disagree.
O'Connor correctly notes that actual fraudulent intent
may be established by circumstantial evidence. Montana Nat'l
Bank v. Michels (Mont. 1981), 631 P.2d 1260, 1262-63, 38
St.Rep. 334, 337. OIConnor then relies upon the "badges of
fraud," which this Court has previously applied when
determining whether a conveyance is fraudulent and therefore
whether it should be set aside. These "badges of fraud"
include lack of consideration for the conveyance, transfer of
the debtor's estate, relationship between transferor and
transferee, pendency or threat of litigation, secrecy or
hurried transaction, insolvency or indebtedness of the
transferor, departure from the usual method of business, the
retention by the debtor of possession of the property, and
the reservation of benefit to the transferor.
Montana Nat'l Bank, 631 P.2d at 1263, 38 St.Rep. at 337.
However, we must emphasize that these "badges of fraud," if
found, do not necessarily constitute fraud per se, but
instead merely afford grounds of inference from which the
court or jury are authorized to conclude that a transaction
surrounded by them is fraudulent. Montana Nat'l Bank, 631
P.2d at 1263, 38 St.Rep. at 337 (citing Humbird v. Arnet
(1935), 99 Mont. 499, 512, 44 P.2d 756, 761). Despite
OIConnorlsassertions that the majority of these badges are
met in this case, the record supports the findings and
conclusions of the District Court that Lewis did not convey
the MN Ranch with the intent to defrau
therefore affirm the District Court.
Affirmed.
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