Lawrence v. Clepper

No. 93-285
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993

VIRGINIA LAWRENCE,
Plaintiff and Respondent,
v.
MICHAEL H. CLEPPER, Personal
Representative of the Estates of D E C 2 2 1993
JANE RAY TAYLOR and FRANK M. TAYLOR, , (PA q..,;
-/##!&L
Defendant and Appellant. CLERK OF SUPREMECOURT
STATE OF MOcLTRNA

APPEAL FROM: District Court of the Twenty-first Judicial
District, In and for the County of Ravalli
The Honorable Douglas G. Harkin, Judge presiding.

COUNSEL OF RECORD:
For Appellant:
Harold V. Dye, Milodragovich, Dale & Dye,
Missoula, Montana
For Respondent:
J. Robert Planalp and Calvin L. Braaksma,
Landoe, Brown, Planalp & Braaksma,
Bozeman, Montana

Submitted on ~riefs: November 5, 1993
Decided: December 22, 1993
Filed:
Justice Terry N. Trieweiler delivered the opinion of the Court.
Plaintiff Virginia Lawrence brought this claim for restitution
from the estate of Jane R. Taylor and Frank M. Taylor in the
District Court for the Twenty-first Judicial District in Ravalli
County. The District Court concluded that prior to their deaths,
Taylors received money belonging to Lawrence as constructive
trustees, and that under the equitable theory of unjust enrichment,
she was entitled to restitution. The District Court entered
judgment in Lawrence's favor in the amount of $130,816.63, together
with prejudgment interest from October 10, 1990. Michael Clepper,
personal representative of Taylors' estates (defendant), appeals.
We reverse the judgment of the District Court.
The issues raised by defendant on appeal are:
1. Did the District Court err when it found that Taylors
possessed a state of mind which defeated their claim that they were
innocent transferees of plaintiff's property?
2. Is a person who receives property in exchange for an
antecedent debt an innocent purchaser for value under Montana law?
FACTUAL BACKGROUND
During April and May of 1990, Frank and Jane Taylor
transferred $85,108.63 from Frank's retirement account, and $37,900
from their personal savings, to Kenneth Holm who held himself out
as an investment counselor in California under the business name,
Income Financial Advisor.
In the summer of 1990, Mr. Taylor, who was a retired dentist,
and Mrs. Taylor moved to Victor, Montana. They bought a home next
to Jack Stark, who is an attorney and banker employed at the
Farmers State Bank in Victor. However, Mr. Stark first met the
Taylors when they made an appointment to see him at the bank on
July 30, 1990. On that occasion, they brought with them a document
which evidenced the money they had supposedly invested through
Holm, and told Stark that they wanted their money back because they
had plans to invest it elsewhere. The document that they brought
into Stark's office was not in evidence at trial. However, from
his memory, Stark recalled that it documented the amount of money
Taylors had invested through Holm and indicated that they were
entitled to have it returned to them on the condition that they
provide Holm with 30 days' notice.
During their meeting with Stark on July 30, the three of them
composed a letter to Holm in which Taylors requested that their
money be returned.
Plaintiff Virginia Lawrence and her husband had invested money
through Holm from 1987 through October 10, 1990. Mrs. Lawrence's
husband died on April 28, 1990, and left assets in a trust for the
purpose of making payments on the couple's home so that Mrs.
Lawrence could continue to reside at that home. However, due to
unspecified problems with the administration of the estate, several
mortgage payments were missed.
In early September, shortly after 30 days from the time Holm
was notified that Taylors wanted their money back, Holm approached
Lawrence and suggested that she secure her home with an additional
mortgage; that he invest the proceeds from that loan; and that,

3
combined with what she had already invested through him, he would
pay her sufficient amounts each month to make her loan payments
until the problems with her husband's estate could be resolved.
His explanation was that the second mortgage would be a short term
loan which could be paid off once the estate problems were
resolved. According to Lawrence's testimony, she was at first
reluctant to do so, but when the problems with her husband's estate
continued, she changed her mind.
Holm made arrangements to obtain a loan for Lawrence from a
southern California bank in the amount of $215,000. After paying
fees and closing costs, she realized $198,015.50.
When the loan proceeds were distributed to her, Lawrence and
Holm went from the bank where the loan was obtained to a second
bank where the loan proceeds were converted to a cashier's check
made payable to Holm. She instructed Holm to invest her money in
the commodities future market and asked that the investments be
backed by treasury bonds. This transfer occurred on October 10,
1990.
Officials from Holm's bank testified that on that same date he
deposited $198,015.50 in his account, and that the following day,
on October 11, he instructed the bank to wire $91,615.63 to Frank
Taylor's retirement account at a Denver bank, and $39,201 to Frank
and Jane Taylor's personal account at Western Federal Savings Bank
in Missoula. Those same officials said that had it not been for
the deposit made by Holm on October 10, there would have been no
funds in his account with which Holm could have made the wire
transfers to Taylors. The wire transfers to Taylors were in
satisfaction of the demand letter they had sent to Holm on July 30,
1990.
As part of his arrangement with Lawrence, Holm had agreed to
make her mortgage payments for the next 12 months. However, the
November mortgage payment was late, and the December payment was
first late, and then returned because there were insufficient funds
to cover it. When she tried to contact Holm to find out the reason
for the late payments, she had difficulty reaching him, and finally
consulted an attorney, who attempted to recover the amounts she had
invested with Holm, but was unsuccessful. She then consulted a
district attorney in California, who advised her that eleven other
people had been similarly victimized by Holm. She filed a
complaint against him with the Commodities Future Trading
Commission and recovered judgment against Holm in the amount of
$411,000 on the grounds that Holm obtained money from her by fraud.
However, at the time of trial, Holm's whereabouts were unknown.
Jane and Frank Taylor died on March 30, 1991. Michael H.
Clepper is the personal representative of their estates.
On December 18, 1991, Lawrence filed this complaint in which
she contended that the money she paid to Holm on October 10, 1990,
was obtained by fraud and deception and was illegally transferred
to Taylors without her permission. She alleged that Taylors were
aware of the source of the funds they received, and therefore, they
were unjustly enriched at her expense. For that reason, she
alleged that the court should impose a constructive trust for her
benefit on the funds obtained by Holm and transferred to Taylors.
In response to Lawrence's complaint, defendant denied that
Taylors had any knowledge that the money which was repaid by Holm
was obtained improperly, and as an affirmative defense, alleged
that Taylors were bona fide transferees for value.
Both parties moved for summary judgment.
In support of his motion, defendant offered uncontradicted
evidence that prior to July 30, 1990, Taylors had invested
$123,008.63 with Kenneth Holm, doing business as Income Financial
~dvisor,and that that amount, together with interest, is what he
repaid them on October 11. Based on that evidence, defendant
arguedthat Taylors were transferees for value without knowledge of
Holm's fraudulent activities, and therefore, that Lawrence was not
entitled to restitution from them based on the law of constructive
trusts.
In turn, Lawrence offered evidence that the money obtained
fraudulently from her by Holm was traceable to Taylors. She argued
that she was entitled to summary judgment because there was no
evidence that Taylors were without notice of Holm's wrongdoing, and
furthermore, that they provided nothing of value to Holm in
exchange for the amounts that he returned to them.
The District Court denied both motions for summary judgment
based on its conclusion that there was a question of fact regarding
the extent of knowledge that Taylors had about the source of the
funds which were returned to them, and that neither party had
offered sufficient evidence regarding this factual issue.
This case went to trial without a jury before the District
Court on October 28, 1992. The only witnesses who testified at
trial were Virginia Lawrence and Jack Stark. The testimony of
Birdie Risen, a bank official at Holm's bank in Carlsbad,
California, was offered by deposition.
After considering the evidence, the District Court made
factual findings and a conclusion of law which are the basis for
defendant's appeal. The District Court found that Taylors went to
see an attorney on July 30, 1990, because they were anxious and
worried about their investments, and that their anxiety, concern,
and distrust of Holm continued after they demanded return of their
money, as was evidenced by repeated telephone calls to him between
the dates of September 10 and October 11, 1990.
The District Court also found that Taylors did not consider
Holm their debtor and did not give anything of value to Holm in
exchange for the money that he transferred to them on October 11.
The court finally found, assuming Taylors were creditors of Holm,
that the October 11 transfer to them was for an antecedent debt,
and therefore, without consideration.
The District Court concluded that, based on Taylors' apparent
anxiety, suspicion, and distrust of Holm, they did not qualify as
bona fide purchasers. It also concluded that because nothing of
value was provided to Holm in exchange for the money he returned to
Taylors, they were not bona fide purchasers for value as a matter
of law.
Based on other findings, the District Court impressed a
constructive trust on the assets of Taylors' estates, based on the
theory of unjust enrichment, and ordered that the amount paid to
them by Holm on October 11 be repaid to Lawrence with interest from
the date of October 10, 1990. Defendant moved, pursuant to
Rule 59, M.R.Civ.P., for a new trial, or in the alternative, that
the District Court amend its findings and conclusions. That motion
was denied. Defendant appeals from the judgment entered by the
District Court in favor of Lawrence, and from the District Court's
denial of his post-trial motion.
The bases for defendant's appeal are that the District Court1s
findings regarding Taylors' state of mind are unsupported by
evidence, and therefore, clearly erroneous, and that the District
Court erred as a matter of law when it concluded that Taylors could
not be innocent transferees for value because no consideration was
paid to Holm for the money that he transferred to them.
DISCUSSION
We have long recognized in Montana that in transactions
between two parties, the principles of equity sometimes mandate the
imposition of involuntary trusts. In Eckart v. Hubbard (1979), 184

Mont. 320, 325, 602 P.2d 988, 991, we recognized that:
Involuntary trusts may be created, for example, when a
court implies or presumes an intent to create a trust or
simply declares, employing the principles of equity, that
the trust shall be said to exist. Nothing else is
required.
 Based upon the statutory scheme that was in effect at that
time, we held that:
Constructive trusts spring from fraud, mistake, undue
influence, the violation of a trust, or other wrongful
acts. Platt[s], [I34 Mont. 474, 480, 334 P.2d 722, 7273.
Constructive trusts occur where the parties have
expressed no intent to create a trust, nor does the court
presume that any intent existed. Rather, the court
creates the trust to work an equitable result. Bogert
[on Trusts, 5th ed.], 5 71, p. 263.
Eckart, 602 P.2d at 991.
In 1989, Montana enacted a new trust code found at
Chapters 33-36 of Title 72 of the Montana Code Annotated. Section
72-33-219, MCA, of that code provides for "constructive trustsu
under the following circumstances:
A constructive trust arises when a person holding title
to property is subject to an equitable duty to convey it
to another on the ground that the person holding title
would be unjustly enriched if he were permitted to retain
it.
In Montana, therefore, the equitable creation of a
constructive trust is dependent upon, and related to, the equitable
principle of unjust enrichment. The creation of a constructive
trust need not be limited to the person who obtained property by
fraud or deception from another. If that property is transferred
by the wrongdoer to a third party who would be unjustly enriched if
he or she was allowed to keep it, a constructive trust can be
created to prevent such unjust enrichment. The notion of unjust
enrichment of a third party usually involves the issue of notice to
that party regarding the manner in which the property was
originally acquired such that allowing the third party to keep the
property would be inequitable or unjust.
The phrase "unjust enrichment" is used in law to
characterize the result or effect of a failure to make
restitution of, or for, property or benefits received
under such circumstances as to give rise to a legal or
equitable obligation to account therefore. It is a
general principle, underlying various legal doctrines and
remedies, that one person should not be permitted
unjustly to enrich himself at the expense of another, but
should be required to make restitution of or for property
or benefits received, retained, or appropriated, where it
is just and equitable that such restitution be made, and
where such action involves no violation or frustration of
law or opposition to public policy, either directly or
indirectly.
... However, although unjust enrichment is often
referred to or regarded as a ground for restitution, it
is perhaps more accurate to regard it as a prerequisite,
for usually there can be no restitution without unjust
enrichment. It is defined as the unjust retention of a
benefit to the loss of another, or the retention of money
or property of another against the fundamental principles
of justice or equity and good conscience. A person is
enriched if he has received a benefit, and he is unjustly
enriched if retention of the benefit would be unjust.
Unjust enrichment of a person occurs when he has and
retains money or benefits which in justice and equity
belong to another.

... It is said to be fundamental that for a person
to be entitled to restitution, he must show not only that
there was unjust enrichment, but also that the person
sought to be charged had wrongfully secured a benefit, or
had passively received one which it would be
unconscionable for him to retain.

66 Am. Jur. 2d Restitution and I p i d Contracts 3 3
mle 3-4 (1973) .
For these reasons, courts of equity have not allowed
restitution from third parties who came into possession of
another's property innocently, even though that property was
originally obtained by fraud or mistake. Therefore, Restatement of
the Law of Restitution, 5 13 (1937) provides that:
A person who has entered into a transaction with
another under such circumstances that, because of a
mistake, he would be entitled to restitution from the
other,
(a) is not entitled to restitution from a third
person who has received title to or a legal
interest in the subject matter either from the
other or from the transferor at the direction
of the other, and has given value therefor
without notice of the circumstances . ...
Comment a to 5 13 makes clear that the same principle applies to

property obtained by fraud.
Section 172 of Restatement of the Law of Restitution discusses
the situation of innocent third-party transferees where, as here,
the issue is the imposition of a constructive trust. That section
provides:

(1) Where a person acquires title to property under
such circumstances that otherwise he would hold it upon
a constructive trust or subject to an equitable lien, he
does not so hold it if he gives value for the property
without notice of such circumstances.
(2) In the Restatement of this Subject such a
transferee is called a bona fide purchaser.
The reason for the rule established by 5 172 is illustrated in
Comrnenta to the same section where it states that:

The principle that a person who innocently has
acquired the title to property for which he has paid
value is under no duty to restore it to one who would be
entitled to reclaim it if he had not been innocent or had
not paid value therefor, is of wide application, being a
limitation upon the principle that a person who has been
wrongfully deprived of his property is entitled to
restitution. The cruestion in such cases is which of two
innocent persons should suffer a loss which must be borne
 by one of them. The principle which is applied by courts
of equity is that they will not throw the loss upon a
person who has innocently acquired title to property for
value. The bona fide purchaser is not only entitled to
retain the property free of trust, but he is under no
personal liability for its value.
This principle is most frequently applied to the
situation where a person holds property subject to a
constructive trust and transfers it to a person who pays
value without notice of the facts which gave rise to the
constructive trust; in which case a constructive trust is
cut off. The situation arises, for example, where a
person obtains Drowertv bv fraud and transfers the
propertv to a Derson who pavs value without notice of the
fraud. [Emphasis added].
Restatement of the Law of Restitution, 5 172, Cornmenfa (1937).

With that background, we address the issues raised on appeal.
1.

Did the District Court err when it found that Taylors
possessed a state of mind which defeated their claim that they were
innocent transferees of plaintiff's property?
It is undisputed that Holm obtained Lawrence's money by fraud.
Under that circumstance, he held the money, subject to a
constructive trust, for Lawrence's benefit. If the property,
however, was transferred to Taylors for value, and if they had no
notice of the circumstances which gave rise to the trust, the trust
is cut off. This first issue relates to whether there was evidence
from which the District Court could find that Taylors had notice of
Holm's conduct which gave rise to the trust.
The District Court made no specific finding that Taylors had
notice of Holm's fraudulent conduct. Instead, the District Court
simply found that Taylors were anxious about their investment and
were suspicious and distrustful of Holm. From those findings, the
District Court concluded that they did not possess a state of mind
which would qualify them as innocent transferees.
It is correct that if Taylors were aware of facts which should
have caused further investigation, and if that investigation would
have led to knowledge of Holm's conduct, then they are charged with
notice. Section 174 of Restatement of the Law of Restitution
provides that I'[e]xcept in the case of the holder of a negotiable
instrument, a person has notice of facts giving rise to a
constructive trust if he knows the facts or should know them."
(Emphasis added).
It was presumably the District Court's conclusion that based
on Taylorsl mistrust of Holm and the temporary difficulty they had
obtaining their money, they should have known that the money was
obtained by inappropriate means.
On appeal, defendant argues that there is no need to decide
whether distrust or anxiety equates with notice because there was
no evidence that Taylors were anxious or distrustful of Holm.
Lawrence, on the other hand, responds that the District
Court's findings in that regard were supported by substantial
evidence, and offers the following examples:
1. Taylorsl attorney, Stark, distrusted Holm;
2. During a telephone conversation between Holm and Mrs.
Taylor, Holm asked if she did not trust him:
3. Taylors made numerous telephone calls to Holm during the
month prior to the return of their money;
 4. The mere fact that Taylors sought the return of their
money several months after investing it with Holm, suggests that
they did not trust him.
Because of the trial court's unique opportunity to resolve
issues of fact, we will defer to a District Court's findings unless
they are clearly erroneous. However, findings which are not
supported by substantial credible evidence are clearly erroneous.
Interstate Productiolt CreditAssociation v. DeSaye ( 1991) , 250 Mont . 3 20, 820 P .2d
1285.

In this case, defendant's contention that Taylors were
innocent transferees was an affirmative defense pursuant to
Rule 8(c), M.R.Civ.P., and defendant, therefore, had the burden of
producing evidence in support of that defense. Section 26-1-401,
MCA. That burden was made difficult by the fact that by the time
of trial both of the Taylors were deceased. However, in meeting
that burden, defendant had a right to rely on relevant statutory
presumptions.
Section 26-1-602, MCA, sets forth a number of disputable
presumptions. It provides that:
All other presumptions are lldisputablepresumptionsN and
may be controverted by other evidence. The following are
of that kind:
..
( 7 ) Money paid by one to another was due the
latter.
..
(19 .ivate transactions have been fair and
regular.
14
 These statutory presumptions satisfied defendant's burden of
proof in support of its affirmative defense, and are conclusive
unless controverted by other evidence.
As pointed out previously, the only witnesses who testified in
this case were Lawrence, an official from Holm's bank in
California, and Jack Stark, Taylors' attorney. Neither Birdie
Risen, the bank official, nor Lawrence, had ever met Taylors, and
neither offered any testimony about the extent of Taylors'
knowledge of Holm's activities.
Neither did Stark, who assisted Taylors in their effort to
obtain the return of their money and saw them occasionally as
neighbors, offer any evidence to indicate that they had notice of
Holm's activity or a reason to further investigate his activity.
In fact, he testified that Taylors never expressed frustration with
Holm, nor did he get the impression that they were frustrated with
him. Although he personally harbored some suspicion of Holm based
on his experience as a banker, he did not express that suspicion to
Taylors, and in fact, testified that his suspicion was lessened
when he learned that Holm had previously returned $60,000 to
Taylors' bank which had been mistakenly sent to Holm.
Stark testified that if Taylors had reasons for seeking the
return of their money from Holm, other than a preference to put it
into local investments, he was unaware of those reasons. Although
Holm did call Mrs. Taylor after receiving the letter that was sent
on July 30, and did question whether they trusted him, Stark made
it clear that it was Holm who raised the issue of trust and that it
was never mentioned by Mr. or Mrs. Taylor.
In fact, Stark testified that after sending the July 30 letter
requesting return of Taylors' money, the subject of its return did
not come up again in his conversations with his neighbors until
sometime in November, when out of curiosity, he inquired about the
money and was advised by Taylors that they had received it.
However, at no time did they indicate to him that they were
relieved at the return of their investment.
Stark testified that after his initial meeting with Taylors in
his office, and after the letter was sent that was produced at that
meeting, Taylors did not seek any further advice from him about the
return of their money, and during none of his informal
conversations with Taylors after that date did they express any
concern to him about their transactions with Holm.
In summary, Stark testified that at no time during any of his
conversations with Taylors about Holm was the term or subject of
distrust ever mentioned.
It is true that findings of fact can be based on reasonable
inferences. However,
[a]n inference must be founded:
(1) on a fact legally proved; and
(2) on such a deduction from that fact as is
warranted by a consideration of the usual propensities or
passions of men, the particular propensities or passions
of the person whose act is in question, the course of
business, or the course of nature.
Section 26-1-502, MCA.
 In its findings, the District Court found that Taylors were
anxious, suspicious, and distrustful from the fact that their
attorney had an initial distrust of Holm, and from the fact that
Holm raised the issue of trust when Taylors requested the return of
their money. The District Court also found distrust based on
numerous telephone calls from Taylors to Holm during the period of
time that they were attempting to secure the return of their money.
However, most of these telephone calls lasted for no more than one
minute, the longest was for five minutes, and there is no record of
what was discussed, or whether Holm was even reached during these
telephone calls. Furthermore, Stark's distrust of Holm is
irrelevant if it was not communicated to Taylors.
Based on our review of the record, we conclude that the
inferences relied on by the District Court do not amount to
substantial evidence that Taylors had notice of Holm's fraudulent
activity, or reason to suspect that the money he returned to them
was obtained by fraudulent activity. Therefore, we conclude that
the District Court erred when it found that Taylors did not possess
a state of mind which qualified them as innocent transferees of
Lawrence's property.
11.

Is a person who receives property in exchange for an
antecedent debt an innocent purchaser for value under Montana law?
The District Court concluded that Taylors could not be
innocent transferees for value because, at most, they established
an antecedent debt which did not constitute "value." On appeal,

17
defendant contends, based on Restatement of the Law of Restitution,
that an antecedent debt is sufficient to establish "value," and
that that rule should be adopted in Montana. Lawrence contends
that our prior decisions regarding bona fide purchasers require the
exchange of new consideration in order to establish '*value."
Our standard for reviewing legal conclusions of a District
Court is to determine whether they are correct. In re Mam'age ofBumk

(Mont. 1993), 852 P.2d 616, 619, 50 St. Rep. 525, 526.
Lawrence cites our early decision in Montana Electric Company v.

Northern ValleyMiningCompany (1915), 51 Mont. 266, 153 P. 1017, for the

proposition that to establish bona fide purchaser status "new"
consideration is required. It is true that in Montana Electric Company,

153 P. at 1018, we set forth the rule as follows:
A bonafide purchaser is defined to be "one who at the time
of his purchase advances a new consideration, surrenders
some security, or does some other act which leaves him in
a worse position if his purchase should be set aside, and
purchases in the honest belief that his vendor had a
right to sell, without notice, actual or constructive, of
any adverse rights, claims, interest, or equities of
others in and to the property sold." [Citation omitted].
However, it is important to observe that in that case the
nature of consideration provided was not the issue. The above rule
was simply set forth without analysis or further discussion
regarding its merits.
Defendant, on the other hand, suggests that we adopt 5 173
from Restatement of the Law of Restitution, which defines '%slue"
as follows:
 (2) Except in the case of a transfer by an express
trustee, a transfer of property other than an interest in
land in satisfaction of or as security for a pre-existing
debt or other obligation is a transfer for value.
In this case, defendant contends that Holm had a prior
obligation to repay the money that was invested with him upon
30 daysf notice of Taylorsf request that he do so, and therefore,

when he repaid that amount the antecedent obligation satisfied the
requirement that the transfer be for tlvalue."
We conclude that the definition of "value" set forth in
Restatement of the Law of Restitution 5 173 (1937) is more

consistent with the equitable purpose of the "innocent transferee"
defense, and therefore, adopt that rule in this and in future cases
which involve issues of constructive trusts and innocent
transferees.
The question in cases such as this is which of two innocent
persons "should suffer a loss which must be borne by one of them."
That is the issue which the "bona fide purchasertfdefense was
established to address. We conclude that a purchaser is no less
innocent and that his or her loss would be no less significant if
the property they acquired was in exchange for a previous
obligation or debt than if the property was acquired in exchange
for new consideration. The net effect or damage to the innocent
purchaser or transferee is the same. Therefore, under equity, the
result must be the same.
 For these reasons, we conclude that the District Court erred
when it held that Taylors had not provided "value" to Holm in
exchange for the money that he wired to them.
Based on our conclusion that there is no evidence in this
record that Taylors had notice of any wrongful conduct on the part
of Holm, and that the money they received from him was transferred
for "value," we conclude that the judgment of the District Court
must be reversed.
This case is remanded to the District Court for entry of
judgment for defendant.

I
We concur:

, "
/
Chief Jdstice