No. 80-232
IN THE SUPREME COURT OF THE STATE OF MONTANA
1981
MONTANA NATIONAL BANK, a corp.,
Plaintiff and Respondent,
ROY E. MICHELS,,) JR. , and
SHIRLEY JEAN MICHELS,, and
,
JAMES V. CYBULSKI,
Defendants and Appellants.
Appeal from: District Court of the Fifteenth Judicial District,
In and for the County of Sheridan, The Honorable
M. James Sorte, Judge presiding.
Counsel of Record:
For Appellant:
Jerome Wallander, Froid, Montana
Robert Hurly, Glasgow, Montana
For Respondent:
John R. Hunt, Plentywood, Montana
Submitted on Briefs: November 26, 1980
Decided : MAR 4 - 1 (
9W
Filed: KkR 4 - 1987
Clerk
Mr. J u s t i c e Gene B. D a l y d e l i v e r e d t h e O p i n i o n of t h e C o u r t .
Plaintiff Bank brought this action in the District
Court of the Fifteenth Judicial District of the State of
Montana, i n and for t h e County o f Sheridan, s e e k i n g money
d u e and owing on a p r o m i s s o r y n o t e and s e e k i n g t o s e t a s i d e
and h a v e d e c l a r e d a s f r a u d u l e n t c o n v e y a n c e s two t r a n s f e r s o f
a parcel of land. The D i s t r i c t C o u r t , s i t t i n g without a
jury, found i n f a v o r o f p l a i n t i f f Bank, o r d e r i n g payment by
defendant Roy E. Michels, Jr., and setting aside the
transf ers as fraudulent conveyances. From that judgment
defendants appeal.
On December 11, 1 9 7 3 , d e f e n d a n t Roy E. Michels, Jr.,
e x e c u t e d a p r o m i s s o r y n o t e p a y a b l e t o p l a i n t i f f Bank i n t h e
principal sum of $74,603.65 plus interest thereon at the
r a t e o f 9 p e r c e n t p e r annum from t h e d a t e o f s u c h n o t e . The
d u e d a t e of t h e n o t e was December 11, 1 9 7 4 .
P r i o r t o t h e execution of the note, on S e p t e m b e r 1,
1972, Roy Michels entered into a contract for deed to
p u r c h a s e from H e l e n Hodges a p p r o x i m a t e l y 280 a c r e s o f land
s i t u a t e d i n S h e r i d a n C o u n t y , Montana, f o r a sum o f $ 3 5 , 0 0 0 .
The s u b s e q u e n t t r a n s f e r s o f t h i s p a r c e l a r e t h e s u b j e c t s o f
this litigation.
On December 16, 1974, Roy Michels conveyed and
assigned a l l of his i n t e r e s t i n t h e c o n t r a c t f o r d e e d and
the above-descr ibed real property to his wife, defendant
Shirley Jean Michels, in c o n s i d e r a t i o n of the sum o f one
dollar. A t t h e t i m e of t h i s conveyance, t h e D i s t r i c t Court
found t h e f a i r m a r k e t v a l u e o f t h e p r o p e r t y t o be $ 4 1 , 5 0 8 .
The District Court found that at the time of the
c o n v e y a n c e t o h i s w i f e d e f e n d a n t Roy M i c h e l s owed t h e Bank
t h e t o t a l sum o f $ 8 1 , 5 0 4 . 4 9 , i n c l u d i n g p r i n c i p a l and a c c r u e d
i n t e r e s t , w i t h r e g a r d s t o t h e p r o m i s s o r y n o t e d a t e d December
11, 1 9 7 3 . The c o u r t a l s o found that, as a r e s u l t of the
transfer on December 16, 1974, Roy Michels was rendered
i n s o l v e n t and had a n e g a t i v e n e t w o r t h o f $ 1 1 , 6 6 1 . 9 9 .
A s a m a t t e r of law t h e D i s t r i c t C o u r t c o n c l u d e d t h a t
t h e conveyance of December 16, 1 9 7 4 , was fraudulent as t o
plaintiff in that i t was made w i t h the actual intent to
delay, d e f r a u d and h i n d e r p l a i n t i f f Bank a s a c r e d i t o r and
i n t h a t i t was made w i t h o u t f a i r c o n s i d e r a t i o n and r e n d e r e d
defendant insolvent. The D i s t r i c t C o u r t h e l d t h a t S h i r l e y
M i c h e l s was n o t a bona f i d e p u r c h a s e r f o r v a l u e w i t h r e s p e c t
t o t h i s c o n v e y a n c e and d e c l a r e d t h e c o n v e y a n c e be s e t a s i d e
as fraudulent.
On F e b r u a r y 19, 1975, S h i r l e y Michels assigned and
conveyed a l l of her interest in the contract f o r deed to
defendant James V. Cybulski, an uncle of defendant Roy
Michels. Roy Michels joined in this conveyance and
assignment t o Cybulski. A t t h e t i m e of t h i s conveyance, the
D i s t r i c t C o u r t found t h a t t h e m a r k e t v a l u e o f t h e l a n d was
$41,508.
The purported consideration for this conveyance
c o n s i s t e d of t h e f o l l o w i n g items: (1) C y b u l s k i assumed t h e
outstanding principal and a c c r u e d i n t e r e s t on t h e e x i s t i n g
c o n t r a c t f o r deed, s u c h sum b e i n g $ 2 5 , 4 8 3 . 3 0 ; ( 2 ) Cybulski
p a i d numerous c r e d i t o r s o f Roy M i c h e l s i n t h e t o t a l amount
of $11,879.26, none o f which was owed by S h i r l e y M i c h e l s ;
and ( 3 ) C y b u l s k i f o r g a v e a n a n t e c e d e n t d e b t owed t o him by
Roy M i c h e l s i n t h e amount o f $ 1 , 2 0 0 .
The District Court found that Roy Michels was
i n d e b t e d t o t h e Bank i n t h e amount o f $ 8 2 , 1 2 9 a t t h e t i m e o f
t h e conveyance t o Cybulski with regards to the promissory
note. The c o u r t a l s o f o u n d t h a t on F e b r u a r y 1 9 , 1 9 7 5 , p r i o r
to the transfer to Cybulski, Michels had a negative net
worth of $ 5 7 , 4 7 8 and a f t e r t h e t r a n s f e r , h e had a n e g a t i v e
n e t worth of a p p r o x i m a t e l y $45,598.
A s a m a t t e r of law, t h e D i s t r i c t Court concluded t h a t
the transfer of February 19, 1975, be set aside as a
fraudulent conveyance in that it was made without fair
c o n s i d e r a t i o n a t a t i m e when d e f e n d a n t M i c h e l s was i n s o l v e n t
and that defendant had the intent to hinder, delay and
d e f r a u d t h e Bank a s a c r e d i t o r . The c o u r t a l s o h e l d that
Cybulski did not have the actual fraudulent intent to
defraud, delay or hinder the Bank as creditor, but as
consideration Cybulski only gave the sum of $25,483.30
because t h e o t h e r items--the c a n c e l l a t i o n of t h e a n t e c e d e n t
d e b t and t h e payment o f creditors--did n o t c o n s i s t of fair
consideration f o r the reason t h a t defendant S h i r l e y Michels,
a s g r a n t o r , was n o t o b l i g a t e d u n d e r t h e i n d e b t e d n e s s p a i d o r
f o r g i v e n by C y b u l s k i .
The District Court set aside the two transfers as
f r a u d u l e n t b a s e d on d e f e n d a n t ' s i n t e n t i o n and i n s o l v e n c y . A
d e t e r m i n a t i o n of defendant 's intention w i l l be d i s p o s i t i v e
of this appeal; therefore, it is unnecessary t o determine
t h e i s s u e of insolvency. The q u e s t i o n and a r g u m e n t s h i n g e
on s u b s t a n t i a l i t y o f e v i d e n c e .
S e c t i o n 31-2-314, MCA, provides: "Every conveyance
made and every obligation incurred with actual intent, as
d i s t i n g u i s h e d from i n t e n t presumed i n l a w , t o h i n d e r , d e l a y ,
o r d e f r a u d e i t h e r p r e s e n t o r f u t u r e c r e d i t o r s is f r a u d u l e n t
a s t o b o t h p r e s e n t and f u t u r e c r e d i t o r s . "
The difficulty in establishing a conveyance as
f r a u d u l e n t was c h a r a c t e r i z e d by J u s t i c e DeWitt i n M e r c h a n t s '
N a t i o n a l Bank v . Greenhood ( 1 8 9 5 ) , 1 6 Mont. 395, 4 1 P. 250,
i n t h e f o l l o w i n g manner:
" F r a u d c a n n o t o f t e n b e p r o v e n by d i r e c t
evidence. Fraud c o n c e a l s i t s e l f . I t does
n o t move upon t h e s u r f a c e i n s t r a i g h t l i n e s .
I t g o e s i n d e v i o u s ways. W may w i t h d i f f i -
e
c u l t y know 'whence i t cometh and w h i t h e r i t
goeth. ' I t 'loveth darkness rather than
l i g h t , because its deeds a r e e v i l . ' I t is
r a r e l y t h a t w e c a n l a y o u r hand upon i t i n
i t s g o i n g . W a r e more l i k e l y t o d i s c o v e r i t
e
a t i t s d e s t i n a t i o n , b e f o r e we know t h a t i t
h a s s t a r t e d upon i t s s i n u o u s c o u r s e . When we
so discover it, the s e a r c h l i g h t of a j u d i c i a l
i n v e s t i g a t i o n g o e s back o v e r i t s t r a i l and
l i g h t e n s it from b e g i n n i n g t o end. As the
woodsman f o l l o w s h i s game by s l i g h t i n d i c a -
t i o n s , a s a broken twig o r a d i s p l a c e d
p e b b l e , s o f r a u d may b e c o m e a p p a r e n t by
innumerable circumstances, individually
trival . . b u t i n t h e i r mass ' c o n f i r m a t i o n
s t r o n g a s p r o o f s of holy writ."' 4 1 P. a t
259.
Actual fraudulent intent within t h e meaning o f the
Uniform Fraudulent Conveyance Act may be established by
circumstantial evidence. C o n t i n e n t a l Bank v . Marcus ( 1 9 7 6 ) ,
242 P a . S u p e r . 371, 363 A.2d 1 3 1 8 ; s e e a l s o , F r o s s v . Wotton
( 1 9 3 5 ) , 3 Cal.2d 384, 44 P.2d 350. Where t h e e f f e c t o f a
p a r t i c u l a r t r a n s a c t i o n w i t h a d e b t o r is t o h i n d e r , d e l a y o r
defraud creditors, the law i n f e r s or supplies the intent,
even though there may be no direct evidence of a
d i s h o n o r a b l e m o t i v e b u t , on t h e c o n t r a r y , a n a c t u a l , h o n e s t ,
b u t mistaken, motive e x i s t s . N a t i o n a l Bank o f Anaconda v .
Yegen ( 1 9 2 8 ) , 83 Mont. 2 6 5 , 271 P. 612.
We have previously used "badges of fraud" to
determine if a conveyance is f r a u d u l e n t and s h o u l d be s e t
aside. I n Humbird v . Arnet ( 1 9 3 5 ) , 99 Mont. 499, 512, 44
P.2d 756, 761, we s t a t e d :
" F r a u d i n c a s e s where i t i s s o u g h t t o s e t
a s i d e f r a u d u l e n t c o n v e y a n c e s , and t h e r e b y
r e a c h a s s e t s on b e h a l f o f t h e c r e d i t o r o r
o t h e r p e r s o n c l a i m i n g t o be e n t i t l e d t o s u c h
a s s e t s , is o r d i n a r i l y i n d i c a t e d and ad j u d g e d
by t h e p r e s e n c e o f what t h e law h a s come t o
denominate ' b a d g e s of f r a u d . ' They a r e s a i d
t o be f a c t s which throw s u s p i c i o n on a
transaction, and which call for an
e x p l a n a t i o n . I t h a s been s a i d t h a t t h e y a r e
i n f e r e n c e s drawn by e x p e r i e n c e from t h e
c u s t o m a r y c o n d u c t o f mankind, and t h a t t h e y
a f f o r d g r o u n d s o f i n f e r e n c e from which t h e
c o u r t or j u r y a r e a u t h o r i z e d t o conclude t h a t
a transaction surrounded by them is
fraudulent. More s i m p l y s t a t e d , t h e y a r e
s i g n s o r marks o f f r a u d . They d o n o t o f
themselves or per s e c o n s t i t u t e f r a u d , b u t
t h e y a r e f a c t s h a v i n g a t e n d e n c y t o show t h e
e x i s t e n c e of f r a u d , although t h e i r v a l u e a s
e v i d e n c e is r e l a t i v e n o t a b s o l u t e . They a r e
n o t u s u a l l y c o n c l u s i v e p r o o f ; t h e y a r e open
to explanation. They may be almost
c o n c l u s i v e , o r t h e y may f u r n i s h m e r e l y a
r e a s o n a b l e i n f e r e n c e of f r a u d , a c c o r d i n g t o
t h e w e i g h t t o which t h e y may be e n t i t l e d f r o m
t h e i r i n t r i n s i c c h a r a c t e r and t h e s p e c i a l
circumstances attending t h e case. Of t e n a
s i n g l e one o f them may e s t a b l i s h and s t a m p a
transaction as fraudulent. When, however,
s e v e r a l a r e f o u n d i n t h e same t r a n s a c t i o n ,
s t r o n g , c l e a r e v i d e n c e w i l l be r e q u i r e d t o
r e p e l t h e conclusion of f r a u d u l e n t i n t e n t
... 11
The g e n e r a l l y r e c o g n i z e d b a d g e s o f f r a u d a r e t h e l a c k
of consideration for the conveyance, the transfer of the
debtor's entire estate, r e l a t i o n s h i p b e t w e e n t r a n s f e r o r and
the transferee, the pendency or threat of litigation,
secrecy or hurried tra.nsaction, insolvency or indebtedness
of the transferor, departure from the usual method of
business, t h e r e t e n t i o n by t h e d e b t o r o f p o s s e s s i o n o f the
property, and t h e r e s e r v a t i o n o f b e n e f i t t o t h e t r a n s f e r o r .
37 Am.Jur.2d F r a u d u l e n t C o n v e y a n c e s , S 1 0 a t 701.
It i s u n d i s p u t e d t h a t on December 1 6 , 1 9 7 4 , t h e d a t e
o f t h e p r o p e r t y c o n v e y a n c e from Roy t o S h i r l e y M i c h e l s , the
two p a r t i e s were l e g a l l y m a r r i e d . T h i s C o u r t h a s s a i d on
many o c c a s i o n s that a court cannot s c r u t i n i z e too closely
the relation between husband and wife with respect to
business dealings between them where creditors are
concerned. Keller v. Flanagan ( 1 9 2 3 ) , 66 Mont. 144, 158,
213 P. 222, 225. The m a r i t a l r e l a t i o n i s o f t e n a c o n v e n i e n t
means f o r t h e p e r p e t r a t i o n of a fraud, and when c l a i m s o f
i n d e b t e d n e s s a r e made b e t w e e n husband and w i f e , t h e y m u s t be
s u b j e c t e d t o t h e most s e a r c h i n g e x a m i n a t i o n , if n o t indeed
suspicion. Lambrecht v. P a t t e n ( 1 8 9 5 ) , 1 5 Mont. 260, 38 P.
1 0 6 3 ; Koopman v. Mansolf ( 1 9 1 5 ) , 5 1 Mont. 48, 149 P. 491. Of
course, the fact that such relationship exists between a
grantor and a g r a n t e e is n o t o f itself a badge of fraud.
Hale v. Belgrade Co. (1925), 75 Mont. 99, 242 P. 425;
H a r r i s o n v . R i d d e l l ( 1 9 2 2 ) , 64 Mont. 4 6 6 , 210 P. 460.
Based on a p p r a i s a l s given at trial t h e f a i r market
value of the land at the time of conveyance to Shirley
M i c h e l s was $ 4 1 , 5 0 8 . However, s h e p a i d o n l y one d o l l a r in
consideration. We have long recognized inadequacy of
c o n s i d e r a t i o n a s a badge o f f r a u d . Dick v. King ( 1 9 2 7 ) , 80
Mont. 40, 257 P. 1 0 2 2 ; Roman v . A l b e r t ( 1 9 2 8 ) , 8 1 Mont. 393,
264 P. 115. I n Bump on F r a u d u l e n t C o n v e y a n c e s ( 4 t h E d . ) , S
5 7 , we f i n d t h i s l a n g u a g e :
"To j u s t i f y a n i n f e r e n c e o f f r a u d f r o m t h e
inadequacy of the price alone, the
c o n s i d e r a t i o n m u s t be s o c l e a r l y below t h e
market value a s t o s t r i k e t h e understanding
a t once w i t h t h e c o n v i c t i o n t h a t s u c h a s a l e
n e v e r c o u l d h a v e b e e n made i n good f a i t h . "
At the time of the conveyance to his wife, Roy
Michels was indebted to plaintiff in the amount of
a p p r o x i m a t e l y $80,000. T h i s d e b t was i n a d d i t i o n t o v a r i o u s
other l i a b i l i t i e s .
I n f i n a n c i a l s t a t e m e n t s s u b m i t t e d t o t h e Bank by Roy
Michels, the subject land represents a substantial asset.
M i c h e l s , however, f a i l e d t o n o t i f y t h e Bank o f a p l a n n e d o r
consummated conveyance t o h i s wife. In fact, i t was n o t
u n t i l F e b r u a r y 1 7 , 1 9 7 5 , t h a t p l a i n t i f f Bank l e a r n e d o f t h e
c o n v e y a n c e t h r o u g h i t s own i n v e s t i g a t i o n s .
A f t e r t h e c o n v e y a n c e , Roy M i c h e l s r e t a i n e d p o s s e s s i o n
of the land. H i s e x p l a n a t i o n of t h e t r a n s f e r was t h a t it
was f o r e s t a t e p l a n n i n g p u r p o s e s and t o p r o v i d e s e c u r i t y f o r
h i s wife i n t h e event of h i s death. However, i n l i g h t of
the above facts surrounding the transaction and the
conveyance of t h e l a n d t o C y b u l s k i two m o n t h s l a t e r , this
explanation bears no logical relationship to the events
which a c t u a l l y o c c u r r e d .
We hold the foregoing evidence substantiates a
f i n d i n g t h a t t h e c o n v e y a n c e o f December 1 6 , 1 9 7 4 , was made
with actual intent on the part of Roy Michels, Jr., to
hinder, d e f r a u d and d e l a y p l a i n t i f f Bank a s a c r e d i t o r . We
a l s o a g r e e w i t h t h e D i s t r i c t C o u r t t h a t S h i r l e y M i c h e l s was
not a bona f i d e purchaser f o r v a l u e and t h a t t h e Bank is
e n t i t l e d t o h a v e t h e c o n v e y a n c e d e c l a r e d f r a u d u l e n t and s e t
aside.
On F e b r u a r y 1 7 , 1 9 7 5 , d e f e n d a n t Roy M i c h e l s and h i s
attorney met with Bank officials to discuss Michels'
f i n a n c i a l p r o b l e m s and p o s s i b l e s o l u t i o n s . A t t h i s meeting,
l i q u i d a t i o n of a s s e t s and bankruptcy were d i s c u s s e d . The
v i c e p r e s i d e n t of t h e Bank testified t h a t t h e m e e t i n g was
t h e f i r s t t i m e t h e Bank l e a r n e d o f t h e c o n v e y a n c e f r o m Roy
to Shirley Michels. A t that time defendant promised
o f f i c i a l s t h a t he would n o t t r a n s f e r t h e l a n d f o r a p e r i o d
of ninety days.
Two d a y s a f t e r t h i s meeting, on F e b r u a r y 19, 1975,
without notifying the Bank, defendants Roy and Shirley
Michels conveyed and assigned all interests in the real
property t o defendant Cybulski, t h e uncle of Roy M i c h e l s .
This transaction occurred a f t e r only four or f i v e days of
negotiations. As stated previously, secret or hurried
t r a n s a c t i o n s o r t r a n s a c t i o n s made u n d e r t h r e a t o f l i t i g a t i o n
are considered badges of fraud. See United States v.
L e g g e t t ( 6 t h C i r . 1 9 6 1 ) , 292 F.2d 4 2 3 , c e r t . d e n i e d 368 U.S.
914, 82 S.Ct. 1 9 4 , 7 L.Ed.2d 1 3 1 , r e h . d e n i e d 82 S . C t . 476,
368 U.S. 9 7 9 , 7 L.Ed.2d 4 4 1 ; M a t t e r o f E s t a t e o f Reed (Wyo.
1 9 7 7 ) , 566 P.2d 587.
I t i s u n d i s p u t e d t h a t on F e b r u a r y 1 9 , 1 9 7 5 , d e f e n d a n t
Roy M i c h e l s owed t h e Bank o v e r $ 8 2 , 0 0 0 , with regards t o the
p r o m i s s o r y n o t e d a t e d December 11, 1 9 7 3 . D e f e n d a n t was a l s o
i n d e b t e d t o numerous o t h e r c r e d i t o r s a t t h a t t i m e .
Once again, after the conveyance t o Cybulski, both
Roy and S h i r l e y M i c h e l s r e t a i n e d p o s s e s s i o n and l i v e d on t h e
p r o p e r t y w i t h o u t p a y i n g any r e n t .
A t the time of conveyance to Cybulski, the fair
market value of the land was $41,508. As purported
consideration, Cybulski (1) assumed the outstanding
p r i n c i p a l and i n t e r e s t on t h e c o n t r a c t f o r d e e d a m o u n t i n g t o
$25,483.30, of which $19,577.73 was actually paid at the
t i m e of t r i a l ; ( 2 ) p a i d numerous c r e d i t o r s o f Roy M i c h e l s i n
t h e amount o f $ 1 1 , 8 7 9 . 2 6 ; and ( 3 ) f o r g a v e a n a n t e c e d e n t d e b t
owed t o him by d e f e n d a n t i n t h e amount o f $ 1 , 2 0 0 . W e agree
w i t h t h e t r i a l c o u r t t h a t t h e l a s t two i t e m s g i v e n d i d n o t
c o n s i s t of v a l i d c o n s i d e r a t i o n f o r t h e r e a s o n t h a t S h i r l e y
Michels, as grantor, was not obligated under the
indebtedness paid or f o r g i v e n by C y b u l s k i . S e e Hansen v .
Cramer ( 1 9 5 2 ) , 39 C a l . 2 d 3 2 1 , 245 P.2d 1059.
We hold that the s e c r e t conveyance of February 19,
1975, for inadequate consideration, while defendant was
i n d e b t e d t o t h e Bank and u n d e r t h e t h r e a t o f b a n k r u p t c y , was
made w i t h t h e a c t u a l i n t e n t on t h e p a r t o f Roy E. Michels,
Jr., t o d e f r a u d , h i n d e r and d e l a y t h e Bank a s c r e d i t o r , a n d ,
t h e r e f o r e , must be s e t a s i d e a s a f r a u d u l e n t conveyance.
The j u d g m e n t o f t h e D i s t r i c t C o u r t i s a f f i r m e d .
Justice
W concur:
e
I .
v: &I&,,
4
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\, I
Justices \
I