No. 90-058
IN THE SUPREME COURT
1990
In the Matter of the Estate of
EDITH S. HAGGERTY, a/k/a Edith
Haggerty, a/k/a Edith S. Sagunsky,
a/k/a Edith Sagunsky, Deceased.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Larry W. Moran, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
John S. Warren, Schulz, Davis & Warren, Dillon,
Montana
For Respondent:
W. Cecil Jones, Jones & Erb, Dillon, Montana
James J. Screnar, Nash, Guenther, Zimmer & Screnar,
Bozeman, Montana
Submitted: June 7, 1990
Decided: November 20, 1990
Filed:
'Clerk
Justice William E. Hunt, Sr., delivered the opinion of the Court.
Appellant, a legatee to the estate of Edith S. Haggerty,
appeals from two orders, one granting a motion to invalidate a
successorlsagreement between himself and his brother, and, another
denying a motion to offset his brother's inheritance by an
indebtedness of his brother to the estate. We affirm.
The issue before us is whether the District Court of the
Eighteenth Judicial District, Judge Larry Moran presiding, abused
its discretion in denying appellant's motion on the ground that the
issue of the offset had been decided in an earlier motion before
the court, Judge Gary presiding. The parties present the following
issues or arguments relating to the disallowance of an offset by
the court as follows:
1. Is the estate's right to offset Paul Sagunskyls
inheritance against his indebtedness to the estate superior to Judy
Sagunsky's claims as Paul's judgment creditor?
2. Should the District Court have disregarded the corporate
entity of Tipp, Inc. and offset Paul Sagunsky's inheritance against
Tipp's debt owed to the estate?
3. What is the value of Paul Sagunsky's debt to the estate
for offset purposes?
Paul and Judith Sagunsky were married in 1978. During the
marriage, Mrs. Sagunsky lent her husband money for his business,
Halse Motors, Inc., which later became Tipp, Inc. The money came
from a trust set up for the benefit of Mrs. Sagunsky and her two
children after her first husband's death in an airplane accident.
When the Sagunskys were divorced in 1982, the court determined
that Paul owed Mrs. Sagunsky over $50,000. Mrs. Sagunsky obtained
a judgment against Paul for that amount in 1986.
Edith Haggerty died testate December 18, 1987, leaving her
entire estate to her two sons, Paul and Byron Sagunsky. Mrs.
Haggerty's will had been executed April 15, 1977, before her
marriage to Thomas H. Haggerty in 1979 and before any of the
transfers of property in question had been made to Paul in 1983
through 1986. Haggerty served as her personal representative and
is not a legatee. The value of the estate was approximately
$150,000. In May 1988, Mrs. Sagunsky attempted to levy against
Paul's half interest in the estate, but the levy was not paid.
On September 2, 1988, Paul and Bryon entered into a
successors~ agreement. According to the terms of the agreement,
Byron would receive Paul's share of the estate since Paul had
received money from his mother totalling approximately $75,000 plus
a $175,000 secured loan to Paul's business, Tipp, Inc. At the time
of his mother's death, Paul's business was insolvent, and Paul
testified that the corporation was a "non-operating entity."
Mrs. Sagunsky moved to set aside the successors~ agreement,
and on March 16, 1989, a hearing was held. The court invalidated
the agreement and ordered that one-half of the net estate be
distributed to each of the brothers. The court also held that Mrs.
Sagunsky had a valid claim against Paul's half-interest. The court
stated that if Byron wished to further contest the issue, he could
request an additional hearing under the provisions of 5 72-3-912,
MCA, regarding the offset of the debt against the estate.
Byron requested a second hearing. Judge Moran ruled that the
issue had been previously determined in ruling on Mrs. Sagunsky's
motion and denied Byron's motion. From this judgment Byron
appeals.
I
Issue one is whether the District Court abused its discretion
in dismissing Byron Sagunsky's motion.
We must first examine whether the District Court decided the
issue of the offset of Paul Sagunskyls indebtedness to the estate
when it heard the motion brought by Mrs. Sagunsky. On November 1,
1988, Mrs. Sagunsky moved to invalidate the successors~agreement
between Paul and Byron Sagunsky. The brothers had agreed that
Byron would receive Paul's share of the estate because the decedent
had loaned to Paul and his business, Tipp, Inc., amounts in excess
of $250,000.
The court stated that I1[i]t would appear1'that the debts "are
not an offset against Paul Is distributive share. In addition, the
court stated that the offset issue 'lcouldbe declared moot based
upon the findings of the Court hereinafter set forth." We agree
that the conclusions of the court regarding the successors~
agreement were also dispositive of the offset issue.
In reaching its decision regarding the successors~agreement
the court considered several factors: 1) the successors~agreement
was entered into on September 2, 1988, after Mrs. Sagunsky had
filed a claim against the estate on May 27, 1988; 2) the
successors~agreement had the effect of defeating a legitimate debt
owed to Mrs. Sagunsky; 3) the will contained no provision
regarding the amounts advanced to Paul; 4) no contemporaneous
writings with the advances stated that the amounts should be
deducted from Paul's share of the estate; 5) the personal
representative filed an amended inventory declaring the loans to
Paul to be valueless; and 6) Byron and his family received gifts
from his mother, including money for schooling and $16,000 as
successor to a trust fund. The court thereby gave effect to 5 72-
2-515, MCA, which states:
Property which a testator gave in his lifetime to a
person is treated as a satisfaction of a devise to that
person, in whole or in part, only if the will provides
for deduction of the lifetime gift or the testator
declares in a contemporaneous writing that the gift is
to be deducted from the devise or is in satisfaction of
the devise or the devisee acknowledges in writing that
the gift is in satisfaction. For purpose of partial
satisfaction, property given during lifetime is valued
as of the time the devisee came into possession or
enjoyment of the property or as of the time of death of
the testator, whichever occurs first.
The court invalidated the successors1 agreement, treating the
amounts the decedent advanced to Paul as gifts, rather than
advances or loans.
Byron claims that the Uniform Probate Code requires the estate
to offset Paul Sagunskyls inheritance against his indebtedness to
the estate:
The amount of a noncontingent indebtedness of a successor
to the estate if due, or its present value if not due,
shall be offset against the successor s interest; but the
successor has the benefit of any defense which would be
available to him in a direct proceeding for recovery of
the debt.
Section 72-3-912, MCA. This section of the Uniform Probate Code,
now adopted in Montana, is the codification of the common law
"right of retainer." See Matter of Will of Cargill (Minn. App.
1988), 420 N.W.2d 268. The earliest reported case involving this
equitable doctrine was Jeffs v. Wood (1723), 2 P.Wms. 128, 24
Eng.Rep. 668. At that time, the rationale of the right of retainer
was to avoid multiple lawsuits. Later the courts emphasized the
moral and legal obligation of the debtor to pay his debt to the
estate before participating in its distribution. Johnson v.
Huntley (Wash. 1951), 236 P.2d 776, 777.
The Uniform Probate Code does not address the priority of
repayment when the successor owes both the estate and another
creditor, as here. When the Code does not afford guidelines, Itthe
principles of law and equity supplement its provision^.^^ Section
72-1-104, MCA. Most courts have ruled that the right of the estate
to repayment is superior, even though the creditor's claim is
reduced to judgment. Hustad v. Reed (1958), 133 Mont. 211, 219,
321 P.2d 1083, 1088; In re BergmannlsEstate (Fla. App. 1974), 305
So.2d 273; In re Eaton1s Estate (N.Y.A.D. 3 Dept. 1953), 121
N.Y.S.2d 836, 839; Smith v. Citizens National Bank in Okmulgee
(Okla. 1957), 313 P.2d 505, 509.
Mrs. Sagunsky claims that the right of retainer statute does
not apply because the sums in question were gifts, rather than
loans. No doubt exists that the $117,690 transfer to Tipp, Inc.,
evidenced by a promissory note and mortgage, was a loan. However,
the statute specifies that Itthe amount of noncontingent
indebtedness of a successor to the estate" shall be offset.
Section 72-3-912, MCA. (Emphasis added.)
The corporation is a separate and distinct entity and is not
a successor to the estate. See In re Russell's Estate (1936), 102
Mont. 301, 308, 59 P.2d 777, 780 (creditors of corporation cannot
ordinarily assert claims against estate of controlling
shareholder). Tipp, Inc., rather than Paul, owed $117,690 to the
decedent. Since a corporation is not a successor to the estate,
corporate indebtedness is not subject to the right of retainer.
At issue, then, are the other approximately $80,000 in bank
drafts made out to Paul during the period from 1983 to 1986. As
noted above, the court treated these amounts as gifts, although
Paul and Mr. Haggerty testified that they were loans. The test is
whether the parties considered these transfers to be binding
obligations. See In re Tarbell's Estate (N.Y. Sur. 1950), 99
N.Y.S.2d 902. In the Tarbell case the widow of the decedent
claimed that a promissory note, executed by her son to her, which
she later endorsed to her husband, should be offset against the
son's legacy. The transfer from the widow to the decedent of the
note, which was void because of the statute of limitations, was
made for business or tax reasons. The court found that no binding
obligation existed between the decedent and the son where the only
evidence of the debt was an entry made in the decedent's account
book. The court stated that If[t]he entry made in his book of
account is not a written agreement, sisned by him [the decedent]."
Tarbell, 99 N.Y.S.2d at 907.
In this case, while the $80,000 in bank drafts were noted as
loans in records kept by the decedent, Mr. Haggerty and Paul
testified that no demand had ever been made for the sums. No
promissory notes or agreements were signed, and Paul did not
attempt to repay the sums. In his testimony, Mr. Haggerty agreed
that the decedent knew the likelihood of repayment was not very
great and did not seriously expect repayment from Paul.
An obligation arises either from the contract of the parties
or by operation of law. Section 28-1-102, MCA. In Montana, all
contracts may be oral except as prohibited by statute. Section 28-
2-901, MCA; Keil v. Glacier Park, Inc. (1980), 188 Mont. 455, 460,
614 P.2d 502, 505. However, a contract cannot be created when
performance is entirely optional with the promisor. Gray v.
American Express Co. (1984), 743 F. 2d 10, 19 ; Restatement (Second)
of Contracts $j 77 comment a (1979). Thus, Paul did not have a
binding obligation to repay the loans.
Further, a close relationship between the parties, such as a
husband-wife or parent-child relationship, gives rise to a
presumption that the transfer is a gift. Detra v. Bartoletti
(1967), 150 Mont. 210, 217, 433 P.2d 485, 488. Here the parent-
child relationship and the absence of evidence of a binding
obligation, as well as inter vivos gifts to the other devisee,
Byron, and his family, support a finding that the transfers to Paul
were gifts. In addition, Byron received $16,000 as successor to
a trust fund after his mother's death. The evidence supports the
District Court and we will not overturn the court's orders
regarding probate of an estate absent clear abuse of discretion.
In re Estate of Nelson (Mont. 1990), 794 P.2d 677, 679, 47 St.Rep.
1218, 1221.
Since the court in ruling on Mrs. Sagunsky's motion found the
transfers to be gifts, rather than advances or loans, the decision
is also dispositive of the issue concerning the offset of Paul's
filindebtednessu the estate pursuant to the right of retainer
to
statute, 9 72-3-912, MCA. We affirm the District Court's dismissal
of Bryon Sagunsky's motion on the ground that the issue had been
previously decided in the ruling on Mrs. Sagunsky's motion.
I1
The second issue is whether the District Court should have
disregarded the corporate entity of Tipp, Inc. and offset Paul
Sagunsky's inheritance against Tipp's debt owed to the estate.
We need not discuss this issue because of our holdings above.
The third issue is the value of Paul Sagunsky's debt to the
estate for offset purposes.
Mrs. Sagunsky argues that the value of Paul Is personal debt
to the estate for offset purposes should be the same as the value
of the debt for inventory purposes. Since we have affirmed the
District Court's decision that the inter vivos transfers to Paul
should not be offset, we need not consider this argument.
However, we note that the value the personal representative
must use for estate inventory purposes is the "fair market value
as of the date of the decedent Is death. It Section 72-3-610 (2), MCA.
The right of retainer statute, 5 72-3-912, MCA, on the other
hand, does not call for the fair market value of the debt to be
deducted, but instead mandates that the llamountM the successor^ s
of
indebtedness be deducted from his share or, if the indebtedness is
not due, its "present value.It To hold that a past due
uncollectible debt is to be valued at fair market value for
purposes of offset against the indebted successor~sshare of the
estate would render the offset provision, 5 72-3-912, MCA,
meaningless.
In many cases, the debt of the successor to the estate will
be uncollectible and thus valueless. That a debt cannot be
collected does not mean, if a binding obligation between the
decedent and the successor exists, that the amount of the debt
should not be offset as the statute demands. Therefore, a
situation may arise where a debt is given different values for the
estate inventory and the offset provisions of 5 72-3-912, MCA.
The judgment of the District Court is affirmed.
chief Justice