MONTANA NATIONAL BANK v MICHELS

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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: Decided : Filed: KkR 4 - 1987 Clerk November 26, 1980 MAR 4 - 1 ( 9W 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 Court of Bank brought the Fifteenth Montana, i n and for this Judicial action in District t h e County o f of Sheridan, the District the State of 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 jury, 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 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 transf ers Roy as Michels, E. fraudulent Jr., and conveyances. setting From aside that the 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 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 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 1972, the note, Roy a Michels entered into on S e p t e m b e r 1, contract for deed 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 to 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 assigned the December a l l of his above-descr ibed Shirley dollar. 16, 1974, Roy Michels conveyed and 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 real Jean Michels, A t t h e t i m e of in property to his c o n s i d e r a t i o n of wife, the defendant sum o f one 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 . transfer The c o u r t on a l s o found 16, December that, Roy 1974, as a r e s u l t of Michels was the 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 t h e conveyance of plaintiff delay, in 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 December that 16, 1 9 7 4 , was i t was made w i t h the fraudulent as t o actual intent to 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 conveyed a l l of defendant James Michels. Roy 19, 1975, her interest V. Cybulski, Michels S h i r l e y Michels assigned in the an joined contract uncle in this of f o r deed to defendant Roy conveyance and A t t h e t i m e of t h i s conveyance, assignment t o Cybulski. and 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 the t h e l a n d was $41,508. The purported c o n s i s t e d of consideration t h e f o l l o w i n g items: outstanding principal c o n t r a c t f o r deed, and a c c r u e d for this conveyance (1) C y b u l s k i assumed t h e i n t e r e s t on t h e e x i s t i n g 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 and $11,879.26, none o f which was owed by S h i r l e y M i c h e l s ; ( 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 note. to t o Cybulski with regards to the promissory 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 the transfer worth of to Cybulski, Michels had $ 5 7 , 4 7 8 and a f t e r t h e t r a n s f e r , a negative net 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 the transfer fraudulent of law, t h e D i s t r i c t Court concluded t h a t February conveyance 19, in 1975, that it be was set made aside as without a 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 d e f r a u d t h e Bank a s a c r e d i t o r . Cybulski did defraud, delay consideration not have or hinder Cybulski because t h e o t h e r the only d e b t and t h e payment o f fraudulent Bank gave items--the hinder, delay The c o u r t a l s o h e l d actual the to as the of that intent creditor, sum and to but as $25,483.30 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 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 of therefore, this appeal; t h e i s s u e of insolvency. be d i s p o s i t i v e it is unnecessary t o determine 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, made and MCA, every obligation provides: "Every conveyance 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 I t does evidence. Fraud c o n c e a l s i t s e l f . 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 I t is l i g h t , because its deeds a r e e v i l . ' 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 As the l i g h t e n s it from b e g i n n i n g t o end. 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 Uniform fraudulent Fraudulent Conveyance 371, ( 1 9 3 5 ) , 3 Cal.2d 363 A.2d 384, Act t h e meaning o f may be the established by C o n t i n e n t a l Bank v . Marcus ( 1 9 7 6 ) , circumstantial evidence. 242 P a . S u p e r . intent within 1 3 1 8 ; s e e a l s o , F r o s s v . Wotton 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 even creditors, though the there law i n f e r s may be no or supplies the direct evidence intent, 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. We determine have if previously a conveyance used 612. "badges of fraud" to is f r a u d u l e n t and s h o u l d be s e t aside. P.2d I n Humbird v . Arnet ( 1 9 3 5 ) , 99 Mont. 499, 512, 44 756, 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 They a r e s a i d denominate ' b a d g e s of f r a u 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 is a transaction surrounded by them 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 debtor's entire estate, the transferee, secrecy or of the the hurried transferor, conveyance, the transfer of the 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 pendency tra.nsaction, of litigation, insolvency or indebtedness 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 . It from threat method 37 Am.Jur.2d departure or the usual 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. 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 . many o c c a s i o n s the relation business between dealings concerned. 213 P. that a Keller between and them Flanagan wife with where respect to creditors are 144, 158, ( 1 9 2 3 ) , 66 Mont. 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 222, 225. means f o r court cannot s c r u t i n i z e too closely husband v. T h i s C o u r t h a s s a i d on 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 , suspicion. Lambrecht v. if n o t indeed 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. course, the grantor and a g r a n t e e Hale v. fact that Belgrade Co. such relationship is n o t o f (1925), itself 75 exists 491. Of between a badge of Mont. 99, 242 a fraud. 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 value of on the a p p r a i s a l s given land at M i c h e l s was $ 4 1 , 5 0 8 . consideration. time the However, W e have at trial long of t h e f a i r market conveyance to Shirley s h e p a i d o n l y one d o l l a r recognized 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. inadequacy 115. of 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. 264 P. in 393, 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 Michels the was time of indebted a p p r o x i m a t e l y $80,000. other l i a b i l i t i e s . the to conveyance plaintiff to in his the wife, Roy amount of 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 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 M i c h e l s , however, consummated land represents a substantial asset. 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 conveyance t o h i s wife. In i t was n o t fact, 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 the above facts surrounding i n l i g h t of and the this bears no logical the However, 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 , conveyance of explanation h i s death. transaction relationship to the events which a c t u a l l y o c c u r r e d . hold We 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 hinder, intent on the part of Roy Michels, Jr., to 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 . W e 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 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 . l i q u i d a t i o n of a s s e t s and v i c e p r e s i d e n t of t h e Bank discuss Michels' A t t h i s meeting, bankruptcy were d i s c u s s e d . testified The 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 without notifying Michels conveyed property t h i s meeting, the and Bank, Roy in t h e uncle of previously, 19, and interests a f t e r only four stated As all Cybulski, This transaction occurred negotiations. defendants assigned t o defendant on F e b r u a r y 1975, Shirley the real Roy M i c h e l s . or f i v e days of 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. L e g g e t t ( 6 t h C i r . 1 9 6 1 ) , 292 F.2d 914, 82 S.Ct. 1 9 4 , 7 L.Ed.2d 1 9 7 7 ) , 566 P.2d United States v. 4 2 3 , c e r t . d e n i e d 368 U.S. 1 3 1 , r e h . d e n i e d 82 S . C t . 476, 4 4 1 ; M a t t e r o f E s t a t e o f Reed (Wyo. 9 7 9 , 7 L.Ed.2d 368 U.S. See 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 market the value consideration, time of of the conveyance land Cybulski was (1) to Cybulski, $41,508. assumed As the the fair purported 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 t i m e of t r i a l ; which $19,577.73 was actually paid at the ( 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, indebtedness paid or was not obligated f o r g i v e n by C y b u l s k i . Cramer ( 1 9 5 2 ) , 39 C a l . 2 d 3 2 1 , 245 P.2d We 1975, for hold that the inadequate the S e e Hansen v . 1059. s e c r e t conveyance of consideration, under while February 19, 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. Jr., Michels, 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&,, -''\\.I4 \, Justices I I \

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