Farmers State Bank v. Imperial Cattle Co.

No. 85-032
IN THE SUPREME COURT OF THE STATE OF MONTANA
1985

FARMERS STATE BANK OF VICTOR, MONTANA,
a Montana Banking corp.,
Plaintiff and Respondent,

IMPERIAL CATTLE COMPANY, a Montana
Corporation, et al.,
Defendant and Appellant.

APPEAL FROM: District Court of the Twentieth Judicial District,
In and for the County of Lake,
The Honorable Douglas Harkin, Judge presiding.

COUNSEL OF RECORD:

For Appellant:
James A. Manley, St. Ignatius, Montana

For Respondent:
Datsopoulos, MacDonald & Lind; Edward Murphy,
Missoula, Montana

Submitted on Briefs: June 13, 1985
Decided: September 18, 1985

Filed: $k? - ,
Mr. Justice L. C. Gulbrandson delivered the Opinion of the
Coiurt .
Imperial Cattle Company (ICC), Kenneth N. Lillethun and
Norman I. Rock, appellants, appeal a judgment of the Fourth
Judicial District, Lake County, entered in favor of James
Edmiston, respondent, on August 8, 1984. The District Court
concluded that appellants failed to establish their claims of
constructive fraud, breach of fiduciary duty and conversion
against respondent. We affirm.
Respondent and Lillethun first had contact with each
other in 1972 in connection with the sale of silage by
respondent to Lillethun. Late that year or early in 1973
they started to discuss organizing a large-scale dairy
operation. During the course of these conversations,
Lillethun brought Rock into the discussions. Lillethun and
Rock both were experienced in the dairy business.
Respondent, while he knew little about the dairy business,
was an experienced businessman and banker, and owned a ranch
and feed lot near Columbia Falls, Montana.
Respondent formed ICC in 1967 but did not conduct any
business relevant to this action through the corporation
until late February or early March, 1973. At that time, he,
Lillethun and Rock contributed assets to the corporation in
an attempt to construct a dairy operation on his ranch.
Respondent contributed $50,000 in cash. Lillethun and Rock
contributed their milk bases valued at about $48,000 and
$65,000, respectively. Milk base is the amount of grade one
milk, expressed as pounds per day, an individual is permitted
to sell and is essential to a profitable dairy ranch.
Lillethun and Rock agreed to manage the dairy operation and
were to receive a salary until the business began to generate
a profit. Lillethun and respondent were to seek the
financing required to set up the operation at the ranch. All
p a r t i e s agreed t h a t i f t h e p r o j e c t could n o t be p u t t o g e t h e r

by September 1 5 , 1 9 7 3 , t h e y would abandon i t and e a c h would

have t h e i r c o n t r i b u t i o n s r e t u r n e d t o them.

In March 1973, Lillethun acquired cattle for TCC

through a leasing arrangement with the Dolson Company, a

company t h a t had b o u g h t many o f h i s c a t t l e . Rock s o l d many

o f h i s c a t t l e t o Dolson Company and t h e n l e a s e d back t h e same

cattle for ICC. A third person, Searles, also sold his

c a t t l e t o Dolson Company and I C C l e a s e d t h e same h e r d . The

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

cattle, Lillethun's dairy in Lake County, Rock's dairy in

R a v a l l i County, and S e a r l e s ' d a i r y , which was b e i n g l e a s e d i n

R a v a l l i County. Lillethun, Rock and S e a r l e s r e c e i v e d rent

from I C C f o r t h e u s e o f t h e d a i r i e s .

A l s o i n March 1973, L i l l e t h u n and r e s p o n d e n t r e f i n a n c e d

some m a c h i n e r y t h r o u g h Western Farm Bureau I n s u r a n c e . They

r e p r e s e n t e d t h e m a c h i n e r y a s b e l o n g i n g t o I C C and t o o k o u t a

loan for $64,500 in the company's name. Respondent

personally guaranteed t h e loan. The p a r t i e s u s e d $28,955.55

o f t h e l o a n p r o c e e d s t o r e p a y PCA t o a v o i d a f o r e c l o s u r e on

respondent's machinery. They u s e d $13,567.62 t o pay o f f an

encumbrance on Lillethun's machinery. $9,000 went to

Lillethun personally. The remainder stayed in the

corporation. Both Lillethun and respondent signed an

a p p r a i s a l s t a t i n g t h e t o t a l c a s h v a l u e o f t h e e q u i p m e n t was

$101,350. R e s p o n d e n t ' s e q u i p m e n t was w o r t h a b o u t $67,850 and

L i l l e t h u n ' s was w o r t h a b o u t $33,500. D u r i n g t h e summer and

f a l l of 1973 c e r t a i n i t e m s o f e q u i p m e n t w e r e t r a d e d i n and

r e p l a c e d w i t h o t h e r i t e m s which w e r e f i n a n c e d t h r o u g h W e s t e r n

Farm Bureau I n s u r a n c e . The e q u i p m e n t , e x c e p t f o r L i l l e t h u n ' s

i t e m s , was l o c a t e d on r e s p o n d e n t ' s l a n d .

L i l l e t h u n and r e s p o n d e n t f i r s t c o n t a c t e d s e v e r a l b a n k s

and lenders in western Montana in an effort to arrange
financing and equipment for the dairy. Later, t h e y made

numerous t r i p s o u t o f s t a t e t o New York, C h i c a g o , S e a t t l e and

other places t o find f i n a n c i a l backing f o r t h e dairy. All

such contacts, made from March t o mid August 1973, proved

fruitless. Respondent p a i d f o r most o f t h e e x p e n s e s f o r t h i s

t r a v e l o u t o f h i s own p o c k e t .

During t h i s s e a r c h f o r f i n a n c i n g , ICC produced milk a t

the three separate locations. Respondent provided silage

valued at $59,584.19 and $36,000-$38,000 in cash. He

w i t h d r e w between $54,990.34 and $57,466.34 a s payment f o r t h e

s i l a g e during t h i s period.

Around August 1973, r e s p o n d e n t c o n c l u d e d t h a t f i n a n c i n g

f o r t h e p r o j e c t was u n l i k e l y and t h a t t h e s e a r c h s h o u l d b e

abandoned. Consequently he t u r n e d a l l ICC records over t o

L i l l e t h u n and Rock. I n a d d i t i o n , s i n c e c h e c k s w r i t t e n on t h e

company a c c o u n t a t Conrad N a t i o n a l Bank w e r e b e i n g r e t u r n e d

"NSF," t h e bank wanted t h e a c c o u n t c l o s e d . Respondent t h e n

withdrew the remaining funds, including the payment for

s i l a g e m e n t i o n e d above. All f u r t h e r banking took p l a c e a t

F a r m e r ' s S t a t e Bank o f V i c t o r .

A f t e r t a k i n g o v e r t h e books, L i l l - e t h u n and Rock made

a l l t h e d e c i s i o n s f o r ICC. They began b o r r o w i n g money from

F a r m e r ' s S t a t e Rank t o m e e t o p e r a t i n g e x p e n s e s . On March 1,

1974, Lillethun and Rock, in their capacity as

vice-presidents for ICC, executed a s e c u r i t y agreement and

n o t e w i t h t h a t bank f o r a b o u t $35,800 and u s e d t h e money t o

p a y off e a r l i e r l o a n s . The e q u i p m e n t t h a t had been r e f i n a n c e d

t h r o u g h Western Farm Bureau I n s u r a n c e was u s e d t o s e c u r e t h e

loan. Lillethun and Rock also personally guaranteed the

note. The s e c u r i t y a g r e e m e n t had a provision s t a t i n g t h a t

t h e s a l e of t h e c o l l a t e r a l constituted default.

On March 4 , 1974, respondent s o l d a l l t h e equipment on

t h e r a n c h , a l o n g w i t h t h e r a n c h , t o H a r r y and Helen J o h n s o n .
He paid Western Farm Bureau Insurance the balance of their
note. None of the remaining proceeds were transferred to ICC
or Farmer's State Bank. Farmer's State Bank brought an
action against ICC, Lillethun, Rock and Johnsons to collect
on its note , and asserted a claim against the respondent and
his wife for conversion of property. The Bank moved for and
was granted summary judgment against all the defendants. On
an appeal to this Court by respondent, we held that
respondent allowed the Bank to rely on his representations
that the equipment belonged to ICC and was estopped from
denying he had converted the property. Farmer's State Bank
of Victor v. Johnson (1980), 188 Mont. 55, 610 P.2d 1172.
Although the judgment was against all the defendants,
respondent eventually paid the note and interest exceeding
$62,000 in total.
Lillethun claimed that respondent stopped payment on a
check for $27,500 which represented a five percent commission
due him on the cattle brought into ICC through the sale-lease
back arrangement with Dolson Company. The check's date,
November 1, 1973, and the amount were typewritten, while
Lillethun's name and respondent's signature were handwritten.
Respondent's checkbook register showed the check issued to
Lillethun on July 16, 1973 but did not indicate an amount.
Lillethun did not present the checks for payment until late
February 1974 when he knew a large sum of money was in
respondent's account. Respondent claimed he signed the check
in blank to cover some travel expenses for Lillethun and that
Lillethun wrongfully inserted the amount. He also claimed
that a commission was initially discussed but the parties
never agreed on it. The District Court found that a five
percent commission was consistent with the nature of the
parties' agreement but that it was an ICC obligation rather
than respondent's personal debt.
 The dairy operation failed in the fall of 1974. The
cattle were turned over to the Dolson Company. Respondent
paid the remaining deficiency by transferring property worth
$45,000 to Dolson Company. The District Court found that
Lillethun and Rock had their milk bases returned to them in
accordance with the earlier agreement of the parties. At
that time, they were not in a position to utilize their milk
bases and consequently lost then because of non-production
for a period established by state regulation.
This case commenced on April 18, 1975 when Farmer's
State Bank of Victor filed an action against K.N. Lillethun,
Joe Rock and ICC to collect on several promissory notes, and
against James and Phillis Edmiston for conversion of the
collateral securing one of the notes, explained above. The
complaint was later amended to name Harry and Helen Johnson
as defendants since they purchased the collateral from the
Edmistons. Lillethun, Rock and ICC filed a cross-claim
against the Edmistons for conversion and for indemnification
for any judgment entered against them. The Johnsons also
filed a cross-cl aim against the Edmiston s for
indemnification. On November 4, 1977, Lillethun, Rock and
ICC filed an amended cross-complaint against the Edmistons
for conversion of the collateral and conversion of money and
Lillethun filed against respondent for stopping payment on
the $27,500 check. They also cross-complained against the
Johnsons.
On January 4, 1984, Lillethun, Rock and ICC sought
leave to file a second amended cross-complaint. This
complaint alleged breach of contract, fraud committed with
respect to that contract, and conspiracy to commit fraud.
The Johnsons' motion to dismiss the claims against them was
granted. This Court allowed the filing of the second amended
cross-compaint against the Edmistons. Edmistons' answer
raised the statute of limitations as a defense to all claims
except conversion of equipment which was alleged in the first
cross-complaint in 1975 and for stopping payment on the check
which was alleged in the first amended cross-complaint filed

Following plaintiff's case-in-chief, the District Court
dismissed the case against Phillis Edmiston. That order is
not being appealed. After the trial on April 11-13, 1984,
the court entered judgment in favor of respondent on all.
claims.
Appellants raise the following issues on appeal:
(1) Did the District Court err in concluding Lillethun

and Rock had not established claims for constructive fraud
and breach of fiduciary duty against respondent?
(2) Did the District Court err in concluding Lillethun
and Rock had not established a claim for conversion against
respondent?
(3) Did the District Court err in not entering
findings or conclusions on ICC's claims against respondent?
(4) Was there substantial credible evidence to support
the District Court's findings?
Respondent raises an additional issue:
(5) Are any or all of appellants' claims barred by

statutes of limitations?
The issues raised by appellants all concern whether the
District Court's findings and judgment were proper.
[They] are presumed correct and will not
be overturned unless the [appellants
meet] the burden of proving with a
preponderance of evidence that they are
wrong. Merely showing the evidence
establishes reasonable grounds for
reaching a different conclusion is
insufficient to reverse the District
Court findings. (Citation omitted. )
Frank L. Pirtz Constr., Inc. v. Hardin Town Pump, Inc. (Mont.
 Appellants contend, as part of their claim for
constructive fraud, that respondent breached his fiduciary
duty by failing to inform them of his true intention to sell
the ranch, causing their greatest damages. Constructive
fraud is "any breach of duty which . . . gains an advantage
to the person in fault . . . by misleading another to his
prejudice." S28-2-406, MCA. The parties presented
conflicting evidence both on whether Lillethun and Rock knew
respondent's ranch was for sale and on respondent's
intentions. Appellants do not seriously dispute the findings
that respondent made his agreed financial contribution, that
he paid other expenses in an effort to find financing and
that he travelled to numerous places to find financing. The
District Court also determined that respondent used his best
efforts to make the dairy operation a success and concluded
that he "exercised diligent good faith efforts" on behalf of
ICC. We find there was substantial evidence for the District
Court to conclude that respondent did not breach any duty and
that, as a result, appellants failed to establish a claim for
constructive fraud.
Appellants rest their second claim, in part, on this
Court's prior holding in Farmer's State Bank, 188 Mont. 55,
610 P.2d 1172. The respondent was estopped from asserting
ownership of the equipment because he allowed the Bank's loan
officers to rely on documents showing ICC owned it. Here,
appellants rather than the Bank are asserting a claim for
conversion. Our holding that respondent led the Bank to act
on a particular belief was based on estoppel and does not
establish that respondent transferred ownership of the
equipment or led appellants to act on that belief. Thus they
must independently establish their claim rather than relying
on the Bank's proof.
 Conversion requires ownership of the property, a right
of possession, and unauthorized dominion over the property by
another resulting in damages. Gebhardt v. D. A. Davidson &

Co. (Mont. 1983), 661 P.2d 855, 858, 40 St.Rep. 521, 524.
Since respondent undisputedly owned the equipment prior to
the activation of ICC, appellants must show respondent
transferred ownership to prove conversion. Possession of
personal property creates a rebuttable presumption of
ownership. Park v. Grady (1922), 62 Mont. 246, 204 P. 382.
Respondent retained possession of the equipment. Nothing in
the record indicates the equipment was ever used at the
locations of the dairy operation. No writing exists between
the parties indicating respondent transferred any title to
ICC even though the parties' contributions of cash and milk
bases were acknowledged in writing by a promissory note and
letters, respectively. Respondent and Lillethun were both
involved in the decision to pay off the earlier loans on the
equipment and so must have discussed the arrangements. The
District Court's finding that Lillethun and respondent both
knew respondent did not intend to transfer ownership of the
equipment, while disputed, was supported by evidence
presented at trial. Without the transfer of ownership, no
claim for conversion exists. We hold that the District Court
properly concluded appellants did not establish a claim for
conversion.
In the third issue, appellants argue that ICC proved a
claim of conversion against respondent in the same manner
Lillethun and Rock established their claims. Since we are
holding respondent never transferred ownership of the
equipment, negating the first element, ICC's claim fails as
well.
Appellants list thirteen specific District Court
findings in the fourth issue and argue they were either
unsupported or not substantially supported by the evidence.
Certain monetary amounts vary slightly from the proof offered
at trial. However the variation in amounts has no affect on
the outcome of the issues. As such it is harmless error not
requiring a reversal of the judgment. Montana Livestock and
Loan Co. v. Stewart (1920), 58 Mont. 221, 190 P. 985.
The remaining findings, although made on conflicting
evidence, have adequate support in the record. We will not
reverse a district court's findings of fact when supported by
the evidence presented at tria 1. Frank L. Pirtz Constr.,
Inc., 692 P.2d at 462.
Respondents raise the statute of limitations 2s an
additional defense. Our holdings on the first four issues
make this issue moot.
The judgment of the District

I

We concur: - 9