No. 03-164
IN THE SUPREME COURT OF THE STATE OF MONTANA
2004 MT 97
ELMER L. COWAN, M. PAULINE COWAN
and TWILA M. SMITH,
Plaintiffs and Appellants,
v.
KATHY C. COWAN, a/k/a KATHY
COUCHOIS and DAN and KELLEY FLOYD,
Defendants and Respondents.
APPEAL FROM: District Court of the Twenty-First Judicial District,
In and For the County of Ravalli, Cause No. DV-02-236,
Honorable Ed McLean, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
G. Patrick Hagestad and Perry J. Schneider, Milodragovich, Dale,
Steinbrenner & Binney, Missoula, Montana
For Respondents:
Evonne Smith Wells, Attorney at Law, Missoula, Montana (K. Cowan)
David T. Markette, Attorney at Law, Hamilton, Montana (Floyds)
Submitted on Briefs: July 10, 2003
Decided: April 20, 2004
Filed:
__________________________________________
Clerk
Justice W. William Leaphart delivered the Opinion of the Court.
¶1 The issue on appeal is whether the District Court’s dismissal of the Cowans’ and
Twila’s complaint was incorrect as a matter of law? We affirm.
Factual and Procedural Background
¶2 Elmer and Pauline Cowan (the Cowans) are the parents of Twila Smith (Twila) and
Arden Cowan (Arden). Arden was married to Kathy Cowan (Kathy). Kathy and Arden
separated in 2000 and eventually divorced after approximately eleven years of marriage. The
Cowans contend that they transferred certain property to Kathy as trustee for the care of their
son Arden who is disabled from polio. The District Court dismissed their complaint in which
they challenged Kathy’s ownership and proposed sale of the property to Dan and Kelley
Floyd (the Floyds).
¶3 In the dissolution proceedings, the court (Judge Larson) awarded Kathy the land at
issue, approximately 170 acres located in Ravalli County. Judge Larson decided that the
parties’ antenuptial agreement was not enforceable because there was no meeting of minds
regarding what the agreement meant. Noting that Arden had attempted to insulate the
property from the child support dispute he was having with his former wife by disclaiming
any interest in the property, the court cited the equitable principle of unclean hands and the
doctrine of judicial estoppel and concluded that he was estopped from subsequently claiming
an interest in that same property. Kauffman-Harmon v. Kauffman, 2001 MT 238, 307 Mont.
45, 36 P.3d 408. Judge Larson observed that to give validity to such a scheme would violate
the public policy of encouraging and facilitating child support payments. Since Arden’s
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parents had gifted the property to Kathy during the marriage, the court awarded the property
to Kathy.
¶4 Subsequent to the dissolution proceedings, the Cowans filed a complaint for
declaratory relief, seeking to have the District Court determine the Cowans’ and Twila’s
ownership rights in the property and whether an express, constructive, or resulting trust
existed. They also requested a temporary restraining order prohibiting the sale of the
property until the court issued a declaratory judgment. Attached to their complaint for
declaratory relief were a warranty deed, a document describing the property, Kathy’s will
(dated March 9, 1991), a document Kathy signed granting Arden general power of attorney,
a handwritten, undated document signed by the Cowans that stated the Cowans were
transferring property to Kathy for Arden’s support and maintenance, and the Findings of Fact
and Conclusions of Law and Decree of Dissolution of Arden’s and Kathy’s marriage.
¶5 When Judge Larson did not act to prohibit the sale, the Floyds purchased the property
from Kathy. The sale was completed, and the Floyds are now the record owners of the
property. Kathy and the Floyds both moved to dismiss the Cowans’ complaint for
declaratory judgment and preliminary injunctive relief. The court (Judge McLean) granted
the Floyds’ motion to dismiss because they had purchased the property under the protection
of a court order after this Court declined to issue a writ of supervisory control stopping the
sale. The District Court also stated that the Cowans’ and Twila’s request for a temporary
restraining order and preliminary injunction was moot because the sale to the Floyds was
completed under Judge Larson’s direction in the dissolution proceeding. Kathy’s motion for
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dismissal was similarly granted because the court determined, based upon the complaint, the
answer, and the attached documents, that neither the Cowans nor Twila had any enforceable
ownership interests in the property at issue.
¶6 The court examined the complaint and attached documents and determined that the
deed to Kathy contained no restrictions or conditions granting Twila an ownership interest.
Similarly, the court concluded that when the Cowans deeded the property to Kathy, they did
not reserve any ownership interest to themselves. The court concluded that the Cowans and
Twila had no enforceable legal ownership interests in their own right to the disputed
property. Any rights that they arguably had were dependent upon Arden’s equitable interest
which was duly adjudicated in the dissolution action. The court noted that the property
distribution in the dissolution proceeding could be challenged on appeal in that matter but
could not “be relitigated in this action under the guise that the [Cowans and Twila] have
separate and distinct legally enforceable ownership interests in the property.” The court
awarded the Floyds and Kathy statutory costs of suit and denied their request for attorneys’
fees. We recently affirmed the order in the dissolution proceeding in Cowan v. Cowan, 2004
MT 68, 320 Mont. 332, ___ P.3d ___.
¶7 On appeal, the Cowans and Twila contend the court’s dismissal of their complaint
was incorrect as a matter of law. They claim to have alleged facts sufficient to support a
finding that the Cowans were trustors of a trust created for Arden’s benefit and that Twila
is a successor trustee and/or beneficiary of the trust. They contend that, based on these
alleged facts, they stated a claim for declaratory judgment as to the existence of a trust. They
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assert that their property interests are separate and distinct from Arden’s rights in the
property. They also point out that Arden is not a party to this current action.
¶8 The Cowans and Twila claim it was error for the District Court to make a factual
determination that the handwritten document the Cowans executed was insufficient to create
a legally enforceable ownership in the property. The Cowans and Twila allege that the court
failed to apply the appropriate standard for reviewing a motion to dismiss because it did not
take all factual allegations as true. They contend that if all their allegations are taken as true
and all facts viewed in the light most favorable to them, they clearly set forth facts sufficient
to establish that the property was held in trust and therefore the proceeds from the sale of
the property should likewise be held in trust for Arden’s benefit.
Discussion
¶9 Whether the District Court’s dismissal of the Cowans’ and Twila’s complaint was
incorrect as a matter of law?
¶10 We review a district court’s ruling on a motion to dismiss pursuant to Rule 12(b)(6),
M.R.Civ.P., de novo. Powell v. Salvation Army (1997), 287 Mont. 99, 102, 951 P.2d 1352,
1354. “This Court reviews an appeal from a district court’s order granting a motion to
dismiss based on the sufficiency of the complaint.” Powell, 287 Mont. at 102, 951 P.2d at
1354 (citation omitted). The determination that a complaint fails to state a claim is a
conclusion of law that we review to determine whether the court’s interpretation of the law
is correct. City of Cut Bank v. Tom Patrick Const., Inc.,1998 MT 219, ¶ 6, 290 Mont. 470,
¶ 6, 963 P.2d 1283, ¶ 6. We have previously stated that
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[a] complaint should not be dismissed for failure to state a claim unless it
appears beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief. A motion to dismiss under Rule
12(b)(6), M.R.Civ.P., has the effect of admitting all well-pleaded allegations
in the complaint. In considering the motion, the complaint is construed in the
light most favorable to the plaintiff, and all allegations of fact contained
therein are taken as true.
Powell, 287 Mont. at 102, 951 P.2d at 1354 (citation omitted).
¶11 The only relevant document when considering a motion to dismiss is the complaint
and any documents it incorporates by reference. City of Cut Bank, ¶ 20. The mere fact that
documents are attached to a complaint does not automatically require that the motion to
dismiss be converted into a Rule 56 motion for summary judgment. City of Cut Bank, ¶ 20.
We have previously upheld a Rule 12(b)(6) motion to dismiss when the trial court based its
decision upon a complaint and information contained in attached documents. City of Cut
Bank, ¶ 20 (the court considered the complaint as well as the attached contract documents).
¶12 The Cowans allege that the District Court considered matters outside the pleadings
and thus the court should have given notice to the parties that the motion was being
converted to a Rule 56 motion for summary judgment with all sides afforded an opportunity
to fully brief the issues as such.
¶13 We find no indication that the court considered matters outside the record. City of Cut
Bank, ¶ 20. We accept at face value the court’s order that it was ruling on motions to dismiss
and that the court’s order was based upon the allegations in the complaint and based on the
information in the attached documents. City of Cut Bank, ¶ 20.
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¶14 The Cowans allege if all facts they have alleged are taken as true, they clearly stated
a claim entitling them to relief and the court erred in dismissing their complaint. However,
the Cowans are incorrect as to what the court must take as true. Facts must be viewed in a
light most favorable to the plaintiff, however, the court is under no duty to take as true legal
conclusions or allegations that have no factual basis or are contrary to what has already been
adjudicated. Powell, 287 Mont. at 102, 951 P.2d at 1354. In the dissolution matter, Judge
Larson noted that Arden had repeatedly and previously testified that he had no interest in the
properties; thus the court concluded that Arden’s claim of a beneficial interest in the property
via a constructive trust must fail as Arden had unclean hands and was barred by judicial
estoppel.
¶15 “The fundamental purpose of judicial estoppel is to protect the integrity of the judicial
system and thus to estop a party from playing ‘fast and loose’ with the court system.”
Kauffman-Harmon v. Kauffman, 2001 MT 238, ¶ 15, 307 Mont. 45, ¶ 15, 36 P.3d 408, ¶ 15.
“[T]he doctrine of judicial estoppel binds a party to his or her judicial declarations, and
precludes a party from taking a position inconsistent with previously made declarations in
a subsequent action or proceeding.” Kauffman-Harmon, ¶ 15. In Kauffman-Harmon, we
examined the doctrine of judicial estoppel as it applies to resulting and constructive trusts.
In that case, we determined that when Dr. Kauffman claimed in a previous legal action that
he had no interest in certain assets that he had transferred to a corporation, he was barred
from claiming an interest in the assets in a subsequent proceeding. Kauffman-Harmon, ¶ 17.
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¶16 The court also determined that the equitable doctrine of unclean hands barred Arden’s
interest in the property. This doctrine “provides that ‘parties must not expect relief in equity,
unless they come into court with clean hands.’” Kauffman-Harmon, ¶ 19. Under this
doctrine, we have stated that we “will not aid one who has caused title to his or her property
to be transferred to another for the purpose of defrauding creditors.” Kauffman-Harmon, ¶
22.
¶17 In ruling on the motions to dismiss the Cowans’ and Twila’s complaint, Judge
McLean was not bound to assume (as alleged in the complaint) that the property was held
in trust for Arden’s benefit. We have reviewed the sufficiency of the complaint including
the attached documents. Powell, 287 Mont. at 102, 951 P.2d at 1354. We determine that the
court’s interpretation of the law is correct. City of Cut Bank, ¶ 6. The District Court
correctly applied the applicable standard for ruling on a motion to dismiss. Powell, 287
Mont. at 102, 951 P.2d at 1354. The record supports the court’s determination that Arden’s
interest in the property had already been adjudicated and that judgment, in turn, extinguished
any derivative claim that his parents and sister may have had. The complaint and the
attached documents support the court’s granting of the motions to dismiss. City of Cut Bank,
¶ 20. We affirm.
/S/ W. WILLIAM LEAPHART
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We concur:
/S/ KARLA M. GRAY
/S/ JOHN WARNER
/S/ PATRICIA O. COTTER
/S/ JIM REGNIER
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Justice Jim Rice dissenting.
¶18 I dissent.
¶19 The District Court granted Kathy’s motion to dismiss on the following grounds:
[T]he deed language contains no legally enforceable ownership rights reserved
by Arden’s parents. Furthermore, the deed language contains no conditions
or restrictions under which Arden’s sister, Twila, can claim an ownership
interest. Accordingly, Arden’s parents and Twila have no enforceable legal
ownership interests in their own right to the property. Rather the rights they
seek to enforce arise solely out of Arden’s equitable interest . . . .
This is an erroneous statement of the law in several respects.
¶20 First, the Cowans’ complaint raises a trust issue, not a property ownership issue. The
absence of deed language referencing a trust is not dispositive of the issue of whether a trust
was created by the parties’ actions. A trust may be created by “a transfer of property by the
owner during the owner’s lifetime to another person as trustee,” § 72-33-201(2), MCA, and
may also be created by “an enforceable promise to create a trust” at a future time. Sections
72-33-201(5) and 72-33-209, MCA. Thus, the question is not whether the language within
a property transfer document, here a deed, references a trust, but whether there is any
evidence which “manifests an intention to create a trust,” § 72-33-202, MCA, including
evidence outside of the property transfer document itself. Obviously, a trust, once created,
can receive various properties without the necessity of the property transfer documents
reiterating the trust purpose.
¶21 Here, it is alleged in the Cowans’ complaint that discussions between the Cowans and
Kathy led to an agreement to create a trust; that, pursuant to the agreement, the Cowans
created a handwritten trust document and gratuitously transferred the property to Kathy; and
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that Kathy, also pursuant to the agreement, executed a Will and Power of Attorney in
Arden’s favor. These allegations address the issue of whether a trust was properly
manifested and created, and therefore, the District Court’s dismissal of the action based
solely upon the language of the deed was reversible error.
¶22 Further, the District Court erred in concluding that the Cowans’ interest arose “solely
out of Arden’s interest.” As trustors, the Cowans have a separate and independent interest
in the property. Section 72-33-216, MCA, provides that where “the owner of property
gratuitously transfers it . . . but the trust fails, the transferee holds the trust estate as a
resulting trust for the transferor . . . .” Here, in accordance with Judge Larson’s order in
Arden and Kathy’s dissolution proceeding, which was affirmed by this Court, the trust has
failed. Consequently, the Cowans’ complaint alleges that, pursuant to statute, a resulting
trust has been created.
¶23 However, the Court essentially holds, in ¶ 14, that the dissolution decree is res
judicata of Kathy’s ownership of the property. However, that is error. “For res judicata to
lie . . . the parties or their privies must be the same” and “the issues must be the same . . . .”
Lee v. Musselshell County, 2004 MT 64, ¶ 20, 320 Mont. 294, ¶ 20, ___ P.3d ___, ¶ 20. The
property ownership issues as between Kathy and Arden were resolved in the dissolution
proceeding, but the trust-related issues as between Kathy and the Cowans were not
determined therein, and should not be avoided by a dismissal on the pleadings.
¶24 I would reverse and remand for further proceedings.
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/S/ JIM RICE
Justice James C. Nelson joins in the dissent of Justice Rice.
/S/ JAMES C. NELSON
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