Case Title: FIRST NATL BANK v SANT

Citation: 

Docket Number: 

State: montana

Court: Montana Supreme Court

Date: 1973-02-16T00:00:00Z

Document:
No. 12262 I N T H E S U P R E M E C O U R T O F THE STATE O F MONTANA 1972 FIRST N A T I O N A L BANK O F TWIN BRIDGES, P l a i n t i f f and Respondent, A R T H U R H. §ANT and EDNA SANT, Defendants and Appellants. Appeal from: D i s t r i c t Court of t h e F i f t h J u d i c i a l D i s t r i c t , Honorable Frank E. B l a i r , Judge presiding. Counsel of Record: For Appellants : Landoe and Gary, Bozeman, Montana, Ronald Olson argued, Bozeman, Montana, For Respondent : Chester L. Jones argued, Virginia City, Montana, Submitted: December 1, 1972 Decided : P B ? I R ~ ~ PER CURIAM: This i s an appeal from a judgment entered i n t h e d i s t r i c t court of the f i f t h j u d i c i a l d i s t r i c t , county of Madison, following t r i a l t o the court s i t t i n g without a jury. Judgment w a s rendered i n favor of p l a i n t i f f F i r s t National Bank of Twin Bridges, granting it foreclosure including c o s t s and reasonable attorney fees, against defendants Arthur H. Sant and Edna Sant, who had mortgaged various r e a l and personal property a s c o l l a t e r a l f o r a loan from the bank. Hereinafter, p l a i n t i f f w i l l be referred t o a s the Bank; defendants w i l l be referred t o a s Sant. It appears from the record t h a t on July 9, 1970, Sant owed the Bank a balance due on existing notes and a l s o owed c r e d i t o r s a considerable amount of money. O n t h a t day, Sant signed and entered i n t o a mortgage with the Bank whereby Sant gave t o the Bank a mortgage on land i n Madison County t o secure payment of three promis- sory notes. The face value of the respective notes was $17,690.62, $12,968.74, and $2,788.05, with each bearing i n t e r e s t a t t h e r a t e of ten percent per annum. A t the time the mortgage was executed and t h e notes signed, the president of t h e Bank, Paris Robert, presented t o Sant z w r i t t e n plan e n t i t l e d '"Plan of Paris Robert", f o r the disbursement of the funds made available t o Sant by v i r t u e of the notes t h a t had been signed, Sant signed the disbursement plan and it was mutually agreed the Bank would make the payments t o t h e various c r e d i t o r s as per the disbursement schedule. The schedule, p l a i n t i f f ' s exhibit 5, i s herein set forth: "(Plan of Paris Robert) " ~ r t h u r H. Sant Edna Sant "July 9 , 1970 Work-out Statement I , , -la o * > k * $ c * * $ < * * * * * * * * * * "PAYING: WITH C A S H A D V A N C E S ON NOTES AT TWIN BRIDGES BANK F i r s t National Bank of Twin Bridges Renewal of balances: d t 6/17/70 $1000.00 d t 6/16/70 1500.00 d t 8/20/69 4808.09 I n t e r e s t on above notes: 26.48 $7334.57 Expense t o t h i s time: 50.00 $7,384.57 Russell Lepp and/or Continental O i l Co. P a r t i a l payment Williams Feed Co. Dillon: OLD $1821.59 '70 buys, 1160.00 2,981.59 Peavy co, Manhattan Bal $ 495.74 495,74 Robert Insurance Agency, Whitehall 717 7 1 7 , O O 1st ~ a t ' l Rank Great Falls-Sprinkler 401.29 Idaho 1 s t Nat ' 1, (Shelly) (Bob Gibbons) Crawler t r a c t o r 357,40 Idaho 1st ~ a t ' l , Idaho F a l l s Harvestor potatoe 353.03 Main Note Due 2/5/71 11,690.62 "PAYING, with Notes, owned by: but a s subdinated partners i n c o l l a t e r a l : Continental Qil Co. via Russell Lepp (due 2/5/71) 2,788.05 A.R.Smith: Old note $8240.00 I n t . above 728.74 1970 lease 4000,OO $12,968.74 Int. on Renewal from maturity: N e w note matures 4/1/71 - - - - - - - - - - 12,968.7b. $33,441.41 "APPROVED F O R DISBURSEMENT 7/9/70 ' I S / Arthur H. Sant Collateral: 2nd Mortgage on RE. Crop & Machinery ~ o r t g a g e d v i a security Agreement , 3 Vehicles," Following the signing of the three notes, the mortgage, and the disbursement schedule, a l l on July 9 , 1970, seven checks were written by Paris Robert on the "Officer's Special Account" of the F i r s t National Bank of Twin Bridges, i n these amounts: P A Y E E AMOUNT Russell Lepp . . . . . . . . , . . . . . . . . e . . e $ 5,000.00 Williams Feed Co....,...... ...... 2,981.59 Peavy Co........... ........,.,..,. 495.74 Robert Ins. Agency ................ 647.00 1st Mat'l Bank-Great Falls.....,.. 401.29 Idaho 1st Mat'l Bank-Shelley ..... 357.40 Idaho 1st at ' 1 Rank - Idaho Falls. . -353.03 One additional check was w r i t t e n by Paris Robert on t h i s account payable t o the order of "Dcposj-t A r t Sant Acct" f o r $70.00. This was explained a s the difference between the debt t o Robert Insurance Agency of Whitehall i n t h e amount of $717.00 l i s t e d i n the "Plan of Paris Robert" and the check a c t u a l l y w r i t t e n t o Robert Insurance Agency of $647.00. The t r i a l c o u r t ' s Eindings of f a c t indicate t h a t Paris Robert i n making the seven disbursements t o c r e d i t o r s had certain negotiations with three of the c r e d i t o r s without the knowledge or consent of Sant. A s a r e s u l t of these negotiations Robert caused the following rebates t o be made t o the Bank: CREDITOR AMOUNT % O F P A Y M E N T Russell Lepp $750.00 15% Williams Feed Co, 364.32 20% Peavy Company 100.00 20% $19214.32 A t t r i a l Paris Robert t e s t i f i e d t h a t the negotiations with these three creditors concerning the rebates were simultaneous with those with Sant regarding the loan. He did admit, however, t h a t they were not revealed t o Sant. The t r i a l court's Eindings of f a c t did not consider the question of whether t h e three c r e d i t o r s involved i n rebates knew the Bank had o r w a s i n t h e process of obtaining, secured notes from Sant covering the e n t i r e amount of t h e indebtedness nor whether they knew Paris Robert was acting without ant's knowledge o r consent i n seeking the rebates. One of the three c r e d i t o r s , Russell Lepp, t e s t i f i e d t h a t a t the time he agreed t o make the rebate, he f e l t he was under pressure t o take what he could g e t , From the record, it appears the notes f o r $2,788.05 and $12,968.74 were held by the Bank and no a c t u a l disbursement was made t o Continental O i l Co, v i a Russell 1,epp or t o A,R. Smith, both of whom were l i s t e d a s corresponding c r e d i t o r s t o these notes on the "plan of Paris R,obertl'. These pencil notations appear on the r i g h t hand margins of t h e notes: NOTE AMOUNT NOTATION $2,788.05 Russell Lepp-Whitehall $12,968.74 A.R. Smith Trust Paris Robert t e s t i f i e d these pencil notations were made by him f o r the purpose of indicating, although the Bank was payee on the notes, t h a t they were held i n t r u s t f o r the two persons indicated, The findings of f a c t disclose t h a t none of the three notes was paid on the due date. A t the time t h i s foreclosure action was brought the only payments which had been made were $1,542.86 f o r i n t e r e s t and $27.64 on the principal. A.R. Smith died p r i o r t o commencement of the t r i a l . After the action was commenced, an additional $2,600 was credited t o the principal of the $2,788.05 note. Two assignments of e r r o r a r e presented on appeal. F i r s t , regarding the disbursements made t o c r e d i t o r s under the l a r g e s t note, Sant contends the Bank a s agent breached i t s ficuciary duty t o Sant a s principal, i n seeking and obtaining rebates from three c r e d i t o r s , and consequently t h e Bank i s e n t i t l e d t o no r e l i e f from a court of equity. Second, with regard t o the two smaller notes, Sant contends these notes were not supported by l e g a l consideration and the Bank was not a party i n i n t e r e s t , consequently the Bank was not e n t i t l e d t o judgment ordering foreclosure, The f i r s t issue pertains only t o the largest of the three notes and the disbursements made thereunder. The Bank on appeal contends it became Sant's special agent only f o r t h e limited purpose of disbursing funds t o c r e d i t o r s i n accordance with the written authority Sant gave when he signed the "Plan of Paris Robert". I n t h i s contention it i s correct. The Bank then contends the d u t i e s of t h i s limited o r special agency were c a r r i e d out and discharged when the Bank's president wrote the checks t o the seven c r e d i t o r s f o r the f u l l amounts of t h e i r respective debts and t h a t any p r i o r , contemporaneous, o r subsequent action of seeking rebates from these c r e d i t o r s was a separate function i n the i n t e r e s t of the Bank and not r e l a t e d t o o r i n breach of i t s special agency d u t i e s t o Sant. I n t h i s contention, it i s i n e r r o r . The granting of the loan, the payment of the c r e d i t o r s under the "Plan of Paris Robert", and the taking of "rebates" 11 o r expenses" from the c r e d i t o r s were not separate and d i s t i n c t transactions; r a t h e r , they were inextricably r e l a t e d p a r t s of the same transaction, In l i g h t of the total. economic r e a l i t i e s of the s i t u a t i o n then e x i s t i n g between Sant, h i s c r e d i t o r s , and t h e Bank, the separate and d i s t i n c t transactions theory propounded by the Bank i s not supported by the record. The f a c t the ~ a n k ' s agency s t a t u s was of a special o r limited character has been r e l i e d upon by t h e Bank t o support i t s contention t h a t it bore no fiduciary r e s p o n s i b i l i t i e s t o Sant. This contention i s a l s o erroneous. The f a c t t h a t an agency re- lationship i s of a limited o r special nature does not extinguish the fiduciary duty, but r a t h e r t h a t fiduciary duty i s limited i n scope and operation t o the same degree a s the agency t o which it applies. Virtually any relationship between a principal and agent w i l l have some limitation i n the degree of authority and scope of purpose, 3 C.J.S. Agency § 138, s t a t e s t h e general r u l e : "As has been pointed out i n ! j 1 of t h i s T i t l e , the relationship e x i s t e n t between principal and agent is a fiduciary one, demanding conditions of t r u s t and confidence, Accordingly, i n a l l transactions concerning o r a f f e c t i n g the subject matter of h i s agency,it i s the duty of the agent t o a c t with the utmost good f a i t h and loyalty f o r the furtherance and advancement of the i n t e r e s t s of the principal. " (Emphasis added), Tn the instant case, the subject matter of the agency was of a special limited nature, i . e , making disbursements t o c r e d i t o r s designated under and i n accordance with the "Plan of Paris Robert". W e find the Bank did not "act with the utmost good f a i t h and loyalty f o r the furtherance and advancement of the i n t e r e s t s of the principal" Sant. It would appear from the t r i a l c o u r t ' s asis is of Decision1', p.2, para. VT, t h a t it reached a similar conclusion but f a i l e d t o pursue it on the ground of lack of a "clear-cut remedy". The t r i a l court said: "It must be admitted t h a t the transactions amount t o unorthodox banking. I n f a c t , the bank i n entering i-nto such transactions without the knowledge or con- sent of the defendants skated on very t h i n i c e and the matter has troubled the Court very greatly, But despite i t s misgivings and i n the absence of a clear- cut remedy the Court has held the transactions v a l i d a s between a l l p a r t i e s t o t h i s action. I I 3 C.J.S. Agency 5 139, elaborates further on the nature of duties imposed by t h i s relationship: "An agent should not, without the knowledge of h i s principal, engage i n transactions which tend t o bring h i s personal i n t e r e s t i n t o c o n f l i c t with h i s obl.igations t o h i s principal, nor should he place himself i n a position where h i s i n t e r e s t s may become antagonistic t o those of h i s principal, o r speculate i n the subject matter of the agency. Also an agent should not, without a f u l l disclosure of the f a c t t o h i s principal, seek compensation from both p a r t i e s * * *, " ~ l t h o u g h t h i s r u l e i s generally held adopted on the ground of public policy, courts have variously held 1 the theory t o be based on 'moral obligation', positive 1 law', plain reason' and a desire t o remove from the agent a l l temptation t o neglect h i s p r i n c i p a l ' s interest." The p a r t i c u l a r circumstances and exigencies of t h i s case are such t h a t the principle of j u d i c i a l discretion t o grant equitable r e l i e f gives way t o j u d i c i a l duty t o grant it. Equity follows the law i n application of fiduciary duties. 3 ~orneroy's Equity Jurisprudence, 5th Ed,, 3 959, p. 819, s t a t e s : 11 Principal and Agent--Generally. Equity regards and t r e a t s t h i s r e l a t i o n i n the same general manner, and with nearly the same s t r i c t n e s s , a s t h a t of t r u s t e e and beneficiary. The underlying thought i.s t h a t an agent should not unite h i s personal and h i s representative characters i n the same transaction; and eauitv w i l l not ~ e r m i t him t o be exposed t o temptatioA or brought i n t o a s i t u a t i o n &here h i s personal i n t e r e s t s c o n f l i c t with the i n t e r e s t s of h i s p r i n c i a 1 and with the duties he owes t o h i s p r i n c i p a l .' (Emphasis added). Tn Middlefork C a t t l e Co, v. Todd, 49 Mont. 259, 262, 141 P. 641, t h i s Court stated: I 1 Common honesty denies t o an agent the r i g h t t o p r o f i t a t the expense of h i s principal by chicane and misrepresentation. I f there a r e any instances wherein the law and j u s t i c e a r e out of harmony, t h i s i s not one of them, f o r the courts a r e of one opinion in declaring t h a t the unfaithful agent under such circum- stances should be made t o disgorge the amount of the p r o f i t so wrongfully realized." Here, the Bank, i n f a c t , made an a c t u a l cash outlay of $9,091.73 under the l a r g e s t note. The t o t a l of the eight checks w r i t t e n by the Bank w a s $10,306.05, subtracting the $1,214.32 i n rebates leaves $9,091.73. The remainder of $7,384.57 of the note i s a renewal of a preexisting debt. W e a r e not here holding t h a t an agent cannot deal separately i f the f a c t s a r e disclosed. W e a r e holding t h a t here, where the principal was charged $50 f o r expenses of s e t t i n g the matter up, and where the agent was charging i n t e r e s t a t ten percent on the money loaned, and the agent was s e c r e t l y negotiating a t the same time with c r e d i t o r s f o r other collection fees i n the form of discounts o r rebates, the f a i l u r e t o disclose i s a breach of duty owing between the agent and h i s principal, Therefore we hold a s t o the note f o r $17,690.62, Sant was e n t i t l e d t o a c r e d i t f o r the amount of $1,214.32, the rebates mentioned heretofore. Sant a t t h i s point urges t h a t under what he c a l l s the "clean hands" doctrine, the a c t s of the Bank w e r e fraudulent and therefore the e n t i r e transaction is void; thus Sant would be excused from the debt. W e keep i n mind here t h a t the defense was based upon claims of usurious i n t e r e s t r a t e s which were abandoned, and the pleadings were deemed amended t o conform t o the proof. The proof i n our view i s more i n the way of accounting, It was not t r i e d a s a case on fraud, However, since t h e mortgage was based upon the note and since, a s w i l l hereinafter appear, the other two notes were f o r moneys not due the Bank a t a l l , the security of the mortgage f a i l s . The underlying debts, however, do not. The second i s s u e pertains t o the notes f o r $2,788.05 and $12,968,74 given by Sant t o the Bank under t h e "plan of Paris Robert", The sub-issues are: (a) Was there l e g a l consideration t o support these indenture contracts? (b) Was the Bank a r e a l party i n i n t e r e s t so a s t o have standing t o sue f o r foreclosure on them? From the record it appears no disbursement was made by the Bank t o Sant, A. R. Smith o r Russell Lepp under e i t h e r note, Since the Bank paid no money under these two indenture contracts, Sant contends they a r e not based on any l e g a l consideration, The Bank contends t h a t under the s t a t u t e s and precedent of Montana law a p r i o r e x i s t i n g debt can be consideration f o r a subsequent new indenture instrument. The ~ank!s contention i s correct and there does appear t o have been a p r i o r indebtedness of Sant i n favor of A. R. Smith and Russell Lepp. However f o r t h i s type of p r i o r e x i s t i n g debt t o be v a l i d a s consideration, it must be between the p a r t i e s t o t h e contract. The Bank cannot r e l y on p r i o r existing debt t o t h i r d p a r t i e s a s consideration f o r an indenture contract between it and Sant, unless i n making the contract and suing on it, it is a c t i n g i n some capacity of trusteeship, agency, o r partnership f o r the two p a r t i e s whose p r i o r c r e d i t against Sant formed the consideration f o r the contract. Sant contends the Bank was never acting i n any capacity of j o i n t venture, trusteeship, agency, o r partnership f o r A.R. Smith o r Russell Lepp i n making these two indenture contracts or i n suing f o r foreclosure on them. Looking back t o the "plan of Paris Robert", the caption thereon preceding the l i s t i n g of the note f o r $2,788.05 and the note f o r $12,868.74 reads: "PAYING, with Notes, owned by: but a s subdinated partners i n c o l l a t e r a l : " i t The words owned by" evidently r e f e r s t o the Bank, since it i s the sole payee and had continuous possession of the notes, The word I'subdinated" i s not t o be found i n the dictionary, possible the intended word was subordinated. "Subdinatedtl appears t o be I I used a s an adjective which modifies the noun partnerst1, This then would indicate t h a t A. R. Smith, Russell Lepp and the Bank were i n some kind of a partnership concerning these two notes. N o such relationship i s evidenced on the face of the notes, which show the Banlc a s sole payee. Nor does it appear from the t e s t i - mony of Paris Robert o r Russell Lepp t h a t there was any express written o r o r a l agreement between A, R, Smith and the Bank nor between Russell Lepp and the Bank creating a partnership, agency or t r u s t . There a r e only the pencil notations i n the margins of the notes and the explanation given of them by Robert, The binding e f f e c t of these notations i s questionable a t b e s t , The burden of proof t o e s t a b l i s h the existence of a t r u s t , partnership, j o i n t venture, agency or any other such relationship i s upon the party who claims i t , Trusts must be founded on evidence which is un- mistakable, c l e a r , s a t i s f a c t o r y and convincing. Bender v. Bender, 144 Mont. 470, 397 P.2d 957; P l a t t s v. P l a t t s , 134 Mont. 474, 334 P.2d 722. I n F i r s t S t a t e Bank v, Mussigbrod, 83 Mont. 68, 271 P, 695, c i t e d by the Bank, t h i s Court affirmed a foreclosure decree i n a s u i t by one of three note owners, where a l l t h r e e notes were secured by one mortgage. There, however, the Court did find the existence of an express t r u s t between the three note owners. I n t h e i n s t a n t case the Bank is the owner of a l l the notes; A.R, Smith and Russell Lepp own no i n t e r e s t b~hatsoever. Presumably, the Bank would turn over the money realized i n a foreclosure on these notes t o the A. R. Smith Estate and t o Russell Lepp. However, if the Bank chose t o keep the money, Smith and Lepp not being p a r t i e s t o the notes and not having any express t r u s t , partnership, agency, j o i n t venture or other such relationship with the Bank, would have no recourse against the Bank. Since there was never any release of the indebtedness siven to Sant by e i t h e r Smith or Lepp, t h e i r only recourse would be against Sant on t h e o r i g i n a l debt, W e find t h a t it would be contrary t o law and would ill serve the ends of j u s t i c e and equity t o all-ow foreclosure under these circumstances, W e hold therefore, regarding the note f o r $2,788.05 and the note f o r $12,968,74, t h a t they were not supported by l e g a l consideration between p a r t i e s t o them and t h a t portion of the l i e n of the mortgage which secures them should be released. This holding does not a f f e c t any preexisting o r present debt between $ant and Smith, o r Sant and Lepp. Summarizing the holding of the Court a s it concerns a l l three notes between Sant and the Bank: Sant i s e n t i t l e d t o c r e d i t in the amount of $1,214.32 on the note f o r $17,690.62. The Bank i s not e n t i t l e d t o foreclose on the notes f o r $2,788.05 and $12,968.74. The judgment of the d i s t r i c t court i s vacated and the cause i s remanded t o the d i s t r i c t court f o r further proceedings consistent herewith.