Aetna Life Insurance v. McElvain

No. 85-08
IN THE SUPREME COURT OF THE STATE OF MOIVTANA
1986

AETNA LIFE INSURANCE COMPANY,
a corporation,
Plaintiff and Appellant,

R. J. McELVAIN, JR., et al.,
Defendant and Respondent.

APPEAL FROM: District Court of the Sixteenth Judicial District,
In and for the County of Fallon,
The Honorable Alfred B. Coate, Judge presiding.

COUNSEL OF RECORD:

For Appellant:
Dorsey & Whitney; James Dorsey argued, Minneapolis,
Minnesota

For Respondent:
Huntley & Eakin; Gene Huntley argued, Raker, Montana

--

Submitted: November 6, 1985
Decided: April 22, 1956

Filed: APR 2 2 1986
Mr. Justice 1.
, C. Gulbrandson delivered the Opinion of the
Court.

Aetna Life Insurance Company (Aetna) appeals the lower
court's order in this case origin~lly brought by Aetna to
foreclose on its first mortgage on certain Montana farmland.
The Fallon County District Court ruled that Aetna could
foreclose but held that Aetna had defrauded respondents
Shepherds, the second mortgagees. The court awarded
Shepherds the first $149,821.19 (plus $40,000 for attorney's
fees) from the foreclosure sale of the ranch. This appeal
raises issues of whether a South Dakota district court
judgment collaterally estops Shepherds from successFully
relitigating the issue of Aetna's alleged fraud; whether
Shepherds had actual or constructive notice of the fraudulent
scheme, which precludes them from recovering for fraud;
whether Western Farm Management Company (Western Farm), a
loan broker, was the agent of Aetna and, if so, whether the
fraudulent acts of Western Farm are imputable to Aetna. We
conclude that Shepherds cannot successfully allege fraud on
Aetna's part because the South Dakota judgment collaterally
estops them from relitigating this issue and because
Shepherds had imputed knowledge of the fraudulent scheme.
Thus, we reverse the District Court and remand this case for
the entry of jud.gment in Aetna's favor.
In 1979, Shepherds owned the Box Elder Ranch, which
lies at the juncture of Montana, South Dakota and North
Dakota and includes land in all three states. Shepherds,
desiring to sell the ranch, listed it for sale with Ranch
Mart, a realty agency, and employed Ranch Mart to find a

buyer. In May 1979, McElvains agreed to buy the ranch and
signed a buy/sell agreement. The agreement was contingent
upon McElvains securing financing from Aetna for the
purchase. The total sales price agreed upon was $1,385,000;
$1,235,000 as payment for the ranch and $150,000 as payment
for ranch machinery. Under the agreement, McElvains were to
pay $1,100,000 in cash at the closing after securing a loan
from Aetna in that amount. Shepherds agreed that Aetna would
have the first mortgage (from McElvains) on the ranch with
the understanding that Aetna's loan to McElvains would be for
$1,100,000 and would not exceed that amount. The balance of
the purchase price was to be secured by a second mortgage on
the ranch from McElvains to Shepherds. Shepherds would not
have entered this transaction if they had known that Aetna's
loan to McElvains (and resulting mortgage) would be for an
amount well in excess of $1,100,000.
R.J. McElvain, Jr., one of the prospective buyers of
the ranch, worked for Western Farm. Western Farm was a loan
broker, helping people to arrange loans. R.J. McElvain, Jr.,
sought the help of a fellow Western Farm employee in
arranging financing for McElvains ' purchase of the ranch.
Western Farm agents contacted Shepherds at the ranch to
inspect and appraise the property. Western Farm, through its
agents and McElvains, knew that the agreed upon sales price
was $1,385,000 and that the sale was contingent upon an Aetna
loan to McElvains for $1,100,000.
The mortgage loan application to Aetna, submitted in
McElvains' name through Western Farm, stated that the total
sales price for the ranch was $2,185,000. The application
requested a loan from Aetna of $1,555,000. A forged buy/sell-
agreement was also submitted to Aetna through Western Farm.
Shepherds' s i g n a t u r e s were forged on the agreement. The

agreement s t a t e d t h a . t t h e t o t a l s a l e s p r i c e wa.s $2,185,000.

R.J. McElvain, J r . , who had worked f o r Western Farm, stated

a t d e p o s i t i o n t h a t t h e f o r g e d b u y / s e l l agreement was s e e n i n

t h e o f f i c e s o f Western Farm. Aetna approved a l o a n i n t h e

t o t a l amount o f $1,555,000. The e f f e c t o f t h e l o a n was t h a t

Aetna would have a f i r s t mortgage f o r $1.,555,000 on a r a n c h

v a l u e d a t a p p r o x i m a t e l y $1,235,000. Thus, Shepherds' second

mortgage for $135,000 was rendered essentially worthless.

O July
n 6, 1979, F c E l v a i n s and Shepherds closed the

s a l e of t h e ranch. McElvains e x e c u t e d a p r o m i s s o r y n o t e t o

Shepherds for $135,000, secured by three separate second

mortgages on ranch property in the three states. The

documents were b a c k d a t e d t o June 2 9 , 1979. The c l o s i n g t o o k

place after Ranch Mart, Shepherds' agent, received notice

that Aetna had approved the loan to McElvains. A t his

d e p o s i t i o n , Wallace Mading, owner o f Ranch Mart, produced a

copy o f a l e t t e r r e c e i v e d by Ranch Mart. The l e t t e r , from

Western Farm t o R.J. McElvain, Jr., stated that t h e Aetna

l o a n had been approved f o r $1,550,000. The l e t t e r was d a t e d

June 7, 1979. Mading s t a t e d a t d e p o s i t i o n t h a t n e i t h e r h e ,

h i s s e c r e t a r y , nor t h e c l o s i n g a g e n t knew when t h e l e t t e r was

r e c e i v e d by Ranch Mart. Ranch Mart r e c e i v e d t h e l e t t e r i n

r e s p o n s e t o i t s r e q u e s t t o Western Farm t o n o t i f y Ranch Mart

of t h e a p p r o v a l o f t h e l o a n . Mading agreed. t h a t , i n t e r m s o f

Ranch M . a r t l s normal p r a c t i c e , Ranch Mart had received the

1 - e t t e r b e f o r e t h e c l o s i n g on J u l y 6 , 1979.

Mading t e s t i f i e d a t d e p o s i t i o n :

... I am s u r e t h a t I was aware t h a t
Aetna L i f e I n s u r a n c e Company was g o i n g t o
be i n a m i l l i o n and a h a l f dollar
 mortgage p o s i t i o n , b u t I d i d n o t know
what all on ... I knew that this
p r o p e r t y was c e r t a . i n l y a p a r t o f it.

Q. You d i d know t h e n t h a t t h e y were
g o i n g t o have a mortgage i n e x c e s s o f a
m i l l i o n and a h a l f d o l l a r s , and t h a t
t h e i r mortgage would be s u p e r i o r t o t h e
second mortgage o f t h e Shepherds?

A. Yes, I am s u r e t h a t I would ha.ve, I
would have been aware o f it j u s t t h e way
you s a i d i t .

Ranch H a r t a p p a r e n t l y d i d n o t t e l l Shepherds a b o u t t h e s i z e

of Aetna's loan t o ~ c E l v a i n s .

O August 2 ,
n 1979, Aetna c l o s e d i t s l o a n t o McElvains

for $1,555,000. McElvains executed t h r e e promissory n o t e s

totaling that amount and three mortga.ges (to secure the

notes) in Aetna's favor. The transaction required three

mortgages and three notes so that a mortgage could be

r e c o r d e d i n e a c h one o f t h e t h r e e s t a t e s i n which t h e r a n c h

is located. These f i r s t mortgages were r e c o r d e d August 2,

1979, i n t h e appropriate o f f i c e of the respective counties

and s t a t e s .

Shepherds recorded the three second mortgages as

follows: on November 29, 1979, i n F a l l o n County, Montana; on

November 30, 1979, i n Bowman County, North Dakota; and on

December 3, 1979, i n Harding County, South Dakota. These

mortgages e x p l i c i t l y r e c i t e d t h a t t h e y were subordinate t o

Aetna's first mortgages. On January 24, 1980, Shepherds

filed a satisfaction of mortgage for each of the three

mortgages given to Shepherds by McElvains, although the

underlying debt had not been paid. Shepherds filed the

s a t i s f a c t i o n s of mortgage on t h e r e q u e s t o f their realtor,

Wallace Mading. R.onald Shepherd testified that Mading's

r e a s o n f o r t h i s was t h a t Shepherds had m i s t a k e n l y f i l e d t h e i r
mortgages ahead of Aetna and "they had to have it reversed."
This reasoning apparently reflects that (I) part of Aetna's
loan to McElvains was not to be disbursed until on or before
February 28, 1980 (Shepherds' mortgages having been recorded
in November and December of 1979); and (2) Aetna sought to
amend its mortgages to show this disbursement (although this
was not shown at trial). In any event, Shepherds filed three
satisfactions of mortgage and then, in March 1980, filed
three new second mortgages (otherwise identical to their
prior mortgages) on the ranch land in the three states.
These new second mortgages also explicitly recited that they
were junior and subordinate to Aetna's first mortgage.
McElvains were in default under the terms of the second
mortgage as soon as the first payment became due. Upon
McElvains' default on the second mortgage to Shepherds,
Shepherds foreclosed the mortgage on the Montana property and

purchased the Montana property at a sheriff's sale.
Shepherds' received a sheriff's deed to this property after
the period of redemption had passed.
McElvains also defaulted on the three senior mortgages
to Aetna. On July 10, 1981, Aetna filed this foreclosure
action in Montana District Court, Fallon County, on the
Montana mortgage. In August 1981, Aetna filed a foreclosure
action in South Dakota on the South Dakota mortgage. Aetna
filed a similar action in North Dakota on the North Dakota
property. The North Dakota court entered summary judgment by
default against Shepherds in October 1983. In July 1984, the
North Dakota Supreme Court dismissed Shepherds' appeal of the
summary judgment order.
 In the South Dakota action, Shepherds raised a defense
alleging that Western Farm was the agent of Aetna and, as
such, induced Shepherds to sell the ranch through fraudulent
misrepresentations that Aetna would loan McElvains $1,100,000
and take a mortgage for that amount. Shepherds asserted that
because Aetna loaned McElvains $1,555,000 and got a first
mortgage in that amount, when the value of the ranch was
substantially less than the amount of the first mortgage,
Aetna fraudulently rendered Shepherds' second mortgage
valueless. Shepherds also claimed that Western Farm
defrauded them by submitting a forged buy/sell agreement to
Aetna which inflated the true sales price and caused Aetna to
make an inflated loan and take an inflated mortgage on the
ranch. Thus, Shepherds' second mortgage was rendered
valueless. Shepherds based their defense on the contention
that Western Farm was an agent of Aetna and its fraud should
be imputed to Aetna.
On September 20, 1983, the South Dakota district court
issued a memorandum decision finding that there was no merit
to Shepherds' allegations of fraud. The court held that:
(I) Ranch Mart acted at all relevant times as the exclusive
agent of Shepherds; (2) Shepherds, through their agent Ranch
Mart, had actual knowledge of Aetna's loan commitment to
Shepherds prior to accepting the second mortgage from
McElvains on June 29, 1979; (3) Shepherds had constructive
knowledge of the amount of Aetna's mortgage as of August 2,
1979, when it was recorded, and prior to Shepherds'
recordation of their second mortgage; and (4) Shepherds '
second mortgage states the priority of Aetna's first
mortgage, which precludes Shepherds from denying the
existence and priority of the first mortgage as a matter of
law. The South Dakota court issued its findings of fact and
conclusions of law on December 5, 1983, repeating the above
findings. The court granted summary judgment to Aetna on
December 5, 1983. The South Dakota Supreme Court affirmed
this decision in February 1985 stating that:
We conclude that Shepherds had both
actual and constructive notice of the
amount of the loan and the extent of the
mortgage, thus precluding any reliance on
fraud or misrepresentations. Therefore,
the trial court did not err in its grant
of summary judgment.
Aetna Life Ins. Co. v. McElvain (S.D. 1985), 363 N.W.2d 186,

Aetna's foreclosure action on the Montana portion of

Box Elder Ranch went to trial December 7, 1983. As a defense

to the action, Shepherds again raised the issue of fraud.
Shepherds alleged that Aetna, through its agents, knew of the
fraud practiced upon Shepherds; the fraud being the
representations made to Shepherds that Aetna's loan to
McElvains would not exceed $1,100,000.
At trial on December 7, 1983, Aetna introduced into
evidence the South Dakota judgment from December 5, 1983, and
the other South Dakota court documents. Aetna argued that
the South Dakota judgment was res judicata as to Shepherds'
defense of fraud.
The Montana District Court, in its judgment of October
29, 1984, conceded that Shepherds pleaded affirmative
defenses in the foreign court foreclosure actions which were
"essentially the same as the affirmative defenses they have
pleaded in this action." (Emphasis added.) The Montana
court acknowledged that the South Dakota court entered
judgment on the merits. The Montana court apparently
rejected the res judicata effect of the foreign judgment
because the judqment was on appeal.
The Montana trial court ruled that: (1) Shepherds
were defrauded by R.J. McElvain, Jr., and other employees of
Western Farm in that Shepherds1 second mortgage was rendered
valueless; (2) McElvain and Western Farm were the agents of
Aetna; (3) therefore, Aetna defrauded Shepherds; (4) Ranch
Mart, Shepherds' agent, did not have notice of the size of
the Aetna loan before the closing of the ranch sale;
(5) even if Ranch Mart had notice, that notice would not be
imputed to Shepherds under these circumstances because Aetna
did not exercise good faith; and (6) Shepherds1

constructive notice of Aetnals prior recorded mortgage could
not relieve Aetna of responsibility for its fraudulent acts.
The court ruled that Aetna was entitled to foreclose its
mortgage but imposed a lien in Shepherds' favor, superior to
Aetna's, on the ranch. The amount of the lien was the unpaid
balance McElvains owed to Shepherds on the sale of the ranch,
with interest, plus $40,000 as attorney's fees. This appeal
followed.
The first issue is whether the trial court erred in
failing to give collateral estoppel effect to the South
Dakota judgment. Aetna asserts that the South Dakota
decision, holding that Aetna did not defraud Shepherds, is
entitled to full faith and credit in Montana and conclusively
defeats the fraud allegations. This issue raises only
questions of law and, therefore, the standard of review is
clear. This Court is not bound by the determinations of the
trial court on questions of lew and we are free to draw our
own conclusions from the evidence presented. Sharp v.
Hoerner Waldorf Corporation (1978), 178 Mont. 419, 584 P.2d

The United States Constitution provides that "Full
Faith and Credit shall be given in each State .to the public
Acts, Records, and judicial Proceedings of every other
State: " U. S. Const., art. IV, S 1. The federal statutory
codification of this constitutional guarantee, 28 U.S.C.
s 1738, requires that,
... Acts, records and judicial
proceedings ...
shall have the same
full faith and credit in every court
within the United States ...
as they
have by law or usage in the courts of
such State ...
from which they are
taken.
Finally, Montana law provides:
The effect of a judicial record of a
sister state is the same in this state as
in the state where it was made, except
that it can only be enforced here by an
action or special proceeding ...
Section 26-3-203, MCA.
The Fallon County District Court apparently declined
full faith and credit to the South Dakota judgment because
that decision, at the time of the Montana trial, was on
appeal- to the South Dakota Supreme Court. That approach
ignores the fact that, in South Dakota, a judgment on appeal
can have collateral estoppel. or res judicata effect. See,
e.g., Black Hills Jewelry Mfg. v. Felco ~ e w e l 1nd. (s.D.
1983), 336 N.W. 2d 153, 157 ("The doctrine of res judicata
serves as claim preclusion to prevent relitigation of an
issue actually litigated or which could have been properly
raised and determined in a prior action . . . Of course, the
earlier court must have had jurisdiction and its decision
must must be final and unreversed." (citations omitted));
Arcon Const. v. South Dakota Dept. of Transp. (S.D. 1985),
365 N.W.2d 866, 868 ("There must, however, be a
final unreversed judgment or decree of a court of competent
jurisdiction before the doctrines of res judicata, collateral
estoppel, or issue preclusion apply" (citations omitted;
emphasis added)) . The rule consistently declared by the
United States Supreme Court is that, "'the judgment of a
state court should have the same credit, validity, and
effect, in every other court of the United States, which it
had in the state where it was pronounced.'" (Citations
omitted.) Underwriters Assur. Co. v. N.C. Guaranty Assn.
(1982), 455 U.S. 691, 704, 102 S.Ct. 1357, 1365, 71 L.Ed.2d
558, 570. Given that the South Dakota judgment, although on
appeal, would be entitled to collateral estoppel effect in
South Dakota, that judgment is entitled to the same effect in
Montana if the other requirements for collateral estoppel are
met.
In Fontana, the test to determine the applicability of
collateral estoppel is a three part inquiry:
" (1) Was the issue decided in the prior
adjudication identical with the one
presented in the action in
question? (2) Was there a final
judgment on the merits? (3) Was the
party against whom the plea is asserted a
party or in privity with a party to the
prior adjudication?"
In Re Marriage of Stout (Mont. 1985), 701 P.2d 729, 733-734,
42 St.Rep. 856, 861, quoting Aetna Life and Casualty
Insurance Company v. Johnson (Mont. 1984), 673 P.2d 1277,
1279, 41 St.Rep. 40, 42. At the trial court 1-evel, Aetna
introduced into evidence the South Dakota district court
judgment, findings of fact and conclusions of law, memorandum
decision, and pleadings. These documents show that the
second and third requirements of the collateral estoppel test
are undoubtedly met. In the prior South Dakota adjudication,
there was a final judgment on the merits of the fraud issue
and the party in this action is identical to the party there.
The only real question then is whether the remaining
requirement of the test is met; i.e. whether the issue
decided in the South Dakota action is identical to the issue
here.
After evaluating and comparing the pleadings, evidence
and circumstances of the South Dakota action and the case at
bar, we make the following observations. Both cases arise
from the sale of one ranch, which sale, although requiring
the use of three mortgages and three notes, was conducted as
one transaction. The misrepresentations which Shepherds
complained of in South Dakota are exactly those
misrepresentations which they complain of in the instant
case. In this regard, we note that Shepherds' answer (in
which they raised the fraud defense) to the South Dakota
complaint is an identical, word for word copy of their
amended answer in the Montana action. We also note that the
Montana trial court agreed that Shepherds raised essentially
the same defenses in Montana as they had raised in South
Dakota. The South Dakota judgment and Supreme Court decision
rely on much of the same, crucial evidence that was admitted
in the Montana action. The foreign court looked at the exact
same evidence as the Montana court in determining whether
Shepherds had actual or constructive notice of the fraudulent
scheme. We conclude that the issue resolved in South Dakota,
whether Shepherds' actual and constructive notice of the
fraudulent scheme defeated their fraud defense, is identical
to the issue presented in the instant case. Therefore, we
hold that the South Dakota judgment is entitled to full faith
and credit in Montana and that judgment collaterally estops
Shepherds from successfully raising their fraud defense.
Shepherds argue that giving the South Dakota judgment
full faith and credit in Montana impermissibly invests the
foreign court with in rem jurisdiction over Montana real
property. This argument is without merit. Given in personam
jurisdiction, a court may adjudicate the rights and equities
of parties in reference to real property in a foreign
jurisdiction. That is not an impermissible exercise of in
rem jurisdiction. A court may - act directly upon the
not
title to real property in a foreign jurisdiction. In Gammon
v. Gammon (Mont. 1984), 684 P.2d 1081, 41 St.Rep. 1161, Mr.
Justice Weber made that distinction abundantly clear. In
Gammon, this Court refused to enforce that part of an Oregon
divorce decree which purported to directly transfer Montana
property. The Court - enforce the Oregon decree insofar as
did
it determined the equities of the parties in the Montana
land. Here, conceding full faith and credit to the South
Dakota judgment would honor the foreign court's determination
of the rights and equities between the parties but would not
impermissibly allow the foreign court to a.ct directly upon
the title to Montana real property.
An alternative ground for our holding in this case
arises from our resolution of the second issue addressed
here. This issue requires a two part inquiry: (1) Did
Shepherds have imputed notice of the fraudulent scheme? and
(2) If so, does such n o t i c e d e f e a t t h e i r c l a i m o f fraud?

The lower court answered both of these questions in the

negative, r u l i n g t h a t Shepherds d i d n o t have n o t i c e imputed

t o them t h r o u g h Ranch Mart, and even i f Shepherds had s u c h

n o t i c e , t h a t would n o t " s e r v e a s a s h i e l d f o r u n f a i r d e a l i n g

by" Aetna.

This Cou-rt w i l l not disturb findings of fact and

conclusions of law t h a . t a r e based on s u b s t a n t i a l , credible

evidence.

[We] w i l l view t h e e v i d e n c e i n t h e l i g h t
most f a v o r a b l e t o t h e p r e v a i l i n g p a r t y
and w i l l n o t o v e r t u r n t h e f i n d i n g s and
c o n c l u s i o n s based on such e v i d e n c e u n l e s s
there is a clear preponderance of
e v i d e n c e a g a i n s t them.

Napier v. Adkison (Mont. 19841, 678 P.2d 1143, 1144, 41

St.Rep. 619A, c i t i n g Cameron v. Cameron ( 1 9 7 8 ) , 179 Mont.

Ranch Mart, the realty agency, was indisputably the

a g e n t o f Shepherds. The e v i d e n c e i n t r o d u c e d a t t r i a l showed

t h a t Ranch Mart ha.d n o t i c e , b e f o r e t h e consummation o f t h e

sale, of the size of the Aetna loan and resulting first

mortgage. Wallace Mading, t h e owner o f Ranch Mart, t e s t i f i e d

by d e p o s i t i o n . Mading produced a l e t t e r r e c e i v e d by Ranch

Mart which s t a t e d t h a t t h e Aetna l o a n had been approved f o r

$1,550,000. The l e t t e r was d a t e d J u n e 7 , 1979, and Mading

agreed t h a t Ranch Mart had r e c e i v e d t h e letter before t h e

c l o s i n g o f t h e r a n c h s a l e on J u l y 6 , 1979. Although Mad-ing

d e n i e d t h a t h e knew t h e c o n t e n t s o f t h e l e t t e r p r i o r t o t h e

c l o s i n g , he t e s t i f i e d t h a t :
I am s u r e t h a t I was aware t h a t Aetna
L i f e I n s u r a n c e Company was g o i n g t o be i n
a. m i l l i o n and a h a l f d o l l a r mortgage
p o s i t i o n , b u t I d i d n o t know what a l l on
 ... I knew that this property was
certainly a part of it.
Q. You did know then that they were
going to have a mortgage in excess of a
million and a half dollars, and that
their mortgage would be superior to the
second mortgage of the Shepherds?
A. Yes, I am sure that I would have, I
would have been aware of it just the way
you said it.
Thus, Ranch Mart had notice of the size of the A.etna loan and
resulting first mortgage. This notice is imputed to
Shepherds under S 28-10-604, MCA, which provides:
As against a principal, both principal
and agent are deemed to have notice of
whatever either has notice of and ought,
in good faith and the exercise of
ordinary care and diligence, to
communicate to the other.
Mading, knowing that Aetna's first mortgage on the land
should have been $1,100,000, should have communicated to
Shepherds the actual amount ($1,555,000) of Aetna's first
mortgage. Therefore, we hold that Shepherds had imputed
notice of the actual amount of the first mortgage prior to
their closing the sale.
Contrary to the lower court's ruling, the imputed
knowledge of Shepherds defeats their claim of fraud. The
rule in Montana is that,
When it appears that a party, who claims
to have been deceived to his prejudice,
has investiaated for himself or that the
means were at hand to ascertain the truth
. .. of any representations made to him,
his reliance upon such representations
made to him, however false they may have
been, affords no ground of complaint.
(Citations omitted. ) (Emphasis in
original.)
Turley v. Turley (Mont. 1982), 649 P.2d 434, 439, 39 St.Rep.
1336, 1343; citing, among others, Van Ettinger v. Pappin
(1978), 180 Mont. 1, 588 P.2d 988, 994. The means were at
hand for Shepherds to ascertain the truth of the false
representations and they cannot, as a matter of law, rely on
those representations in claiming fraud. Shepherds' fraud
defense is therefore defeated, as the hearer's reliance on
the representation and the hearer's right to rely on the
representation are critical. elements of a prima facie showing
of fraud. Turley, 649 P.2d at 438.
We hold that the lower court erred in ruling that Aet.na
defrauded Shepherds. We do not consider the issues of
whether Western Farm, the loan broker, was the agent of Aetna
or whether the fraudulent acts of Western Farm are imputable
to Aetna. We reverse the District Court and remand this
cause for the entry of an unqualified judgment in Aetna's
-;7

favor . ,/

We concur:

C t

ef Justfce f/

Justices
Mr. J u s t i c e John 6. Sheehy, d i s s e n t i n g :

I dissent.

The m a j o r i t y o p i n i o n p r o c e e d s on two p r e m i s e s : that the

ShepherdsYraud claim against Aetna is precluded by

c o l l a t e r a l e s t o p p e l by r e a s o n o f t h e South Dakota d e c i s i o n ;

and a l t e r n a t i v e l y , t h a t Shepherds' a g e n t had a c t u a l n o t i c e o f

the fraudulent scheme and therefore Shepherds had imputed

n o t i c e o f t h e scheme.

W e s h o u l d n o t e x t e n d f u l l f a i t h and c r e d i t t o t h e South

Daltota decision in this case for two reasons: 1) South

Dakota's opinion a s t o t h e operation of a r e l e a s e i s a g a i n s t

t h e p u b l i c pol-icy o f t h i s s t a t e ; end 2 ) i t i s n o t c l e a r from

the South Dakota decision t h a t the precise issue of fraud

r a i s e d by t h e Shepherds was c o n s i d e r e d by t h e South Dakota

court.

South Dakota denied the Shepherds' claim of fraud

a g a i n s t Aetna on two g r o u n d s , t h a t t h e i r a g e n t had n o t i c e o f

the fraudulent act, and that the release given by the

Shepherds to McElvains operated to relieve Aetna of any

fraudulent claim from the Shepherds. As to the second

ground, a t l e a s t e q u a l w e i g h t was g i v e n by South Dakota t o

i t s determination t h a t the r e l e a s e and s a t i s f a c t i o n by t h e

Shepherds o p e r a t e d t o merge S h e p h e r d s ' mortgage l i e n i n t h e

title and thereby precluded any claim of the Shepherds

a g a i n s t Aetna on t h e grounds o f f r a u d .

However, the release gi-ven by the Shepherds to the

XcElvains i n r e t u r n f o r a q u i t c l a i m deed on t h e South Dakota

land expressly released: only the McElvains and expressly

provided t h a t " [n]o o t h e r persons, firms, o r e n t i t i e s other
than those expressly mentioned above are in any way released
by this document."
It has been the law in this state since Rlack v. Martin
(1930), 88 Mont. 256, 292 P. 577, that a plaintiff may
release a joint tortfeasor and still preserve a cause of
action against another joint tortfeasor if there is language
to that effect in the written release. See also McCloskey v.
Porter (1973), 161 Mont. 307, 506 P.2d 845.
When the law enunciated by a court of a sister state is
against the public policy of the forum state, the decision of
the court of the sister state is not entitled to full faith
and credit. In In Re Anderson's Estate (1948), 121 Mont.
515, 524, 194 P.2d 621, 626, we stated:

Unless the public policy - - state would prevent
of the
the recognition - - decree - -
of the or such recogllition
would be injurious - - -
to the best interests - -
of the
state wemust recognize the force and effect of the
decrees of our sister states ...
..
(Emphasis
added. )
Further, contrary to what is said in the majorjty
opinion, it cannot be determined from the South Dakota
opinion what was Shepherds' precise claim of fraud against
Aetna. There is no mention in the South Dakota opinion that
Aetna's agent, McElvain, forged a buy-sell agreement to show
a sales price of $2,185,000 instead of the true agreement of
$1,385,000. Knowledge of the true nature of NcElvain's fraud
is necessary to determine whether the knowledge acquired by
Ranch Mart and imputed to the Shepherds hy both the South
Dakota Court and this Court constitutes notice that fraud was
afoot. Both South Dakota and this Court decide that point
against the Shepherds by a selective reading of the testimony
of Kading, the Ranch Hart agent. The full pertinent
testimony of Mading foLLows:
 A. I wasn't that aware of the amounts, Mr.
Huntley. If McElvain was borrowing a million five
hundred thousand dollars, it. wasn' t-readily obvious
to me as to what he was going to do with it. He
- in the process of improvinq -- - -
was- - the land, and also
had properties - - -
of h E own, - - - -did not know how
and I - -
- - - - - in with a million five hundred thousand
that tied
dollars.
Q. I am sure that is the case, hut is it your
testimony that you did not know that Aetna Life
Insurance Company was going to be in a first
mortgage position on this property with a mortgage
in excess of a million and a half dollars? A.
State your question one more time.
Q. Okay. Maybe it would be just as handy if I
read it back. I think
repeated by reporter.)
...
A.
(Last question
That is not my
testimony. I am sure that I was aware that Aetna
Life Insurance Company was going to be in a million
and a half dollar mortgage position, but I did not
know what all on [sic] is what I am telling you.
Q. Okay. A. (Continuing.) I knew that this
property was certainly a part of it.
Q. You did know then that they were going to have
a mortgage in excess of a million and a half
dollars, and that their mortgage would be superior
to the second mortgage of the Shepherds? A. Yes,
I am sure that T would have, I would have been
aware of it just the way you said it.
Q. And when were you a.ware of that? A. I don't
know that I was blatantly aware of it at any time,
Mr. Huntley. It wasn't a glaring thing in that the
YcElvains, we knew were in a position of improving
the property, and, you know, we did not know even
to what extent they had improved it by the time
that we closed the agreement. We also knew that
the money to be advanced on it was evidently being
advanced in different stages, or at least we had
been told that.

Q. - - you - - -
Well, did ever tell the Shepherds, or
one of them, - - Aetna position was
either - - - that the
going & be first mortgage - - excess - -
of in of a
millionn- - - half dollars? A. No, .
a'd a 7
&s

. Would you explain why you did not tell them
that? A. -was not our business - - - them
It - - - to tell
that, - - -we did - -know-
- in that - - not - what all the funds
were being --
used for. (Emphasis added.)
The full testimony of Mading puts a quite different
light on his knowledge of the amount of the mortgage, and the
reasons why he did not convey the information to the
Shepherds.
While I accede that the recorded documents constituted
constructive notice to the Shepherds of the contents of the
mortgages, yet the circumstances of the recording in this
case led to the ability of McElvain to deceive the Shepherds.
The mortga.ges were recorded in three different states, in
three different amounts in such manner that if the Shepherds
went to the three different courthouses, they could determine
the total amount but not otherwise. The Fallon County
mortgage was for $664,000; the Harding County, South Dakota
mortgage was for $751,000 and the Bowman County, North Dakota
mortgage was for $140,000. This circumstance of separate
recording of the instruments has made it possible for Aetna's
agent, McElvain, to hide the true total amount of the
mortgages against the Shepherds' property.
Under these circumstances, I would agree with the
District Court and hold that the Shepherds lien was entitled
to preference ahead of Aetna on the Montana property and
affirm the District Court. n

Justice '
6

1 joln in the dissent of Mr. Justice John C. Sheeny.

I join in the dissent of Mr. Justice John C. Sheehy.