No. 14202 INTHE SUPREMECOWOFTIE STATE OFMINTANA 1979

bKlIWANAASSOCIATIONOF CREDIT 

## -, a corporation, Plaintiffand Respondent,

-vsHERGEIiT et al.

### , Defendants andAppellants.

Appeal frcan: District Court of theThirteenth JudicialDistrict, HonorableCharlesLuedke, Judgepresiding. Counsel ofWrd: ForAppellants: GaryWilcox argued, Billings,MDntana ForRespondent: FredDuganargued,Billings, Mntana

submitted: mch 22, 1979 Decided:

## APR26 1979Mr. Chief Justice Frank 

### I. Haswell delivered the Opinion of the Court. Defendant appeals from a judgment rendered by the District Court,Yellowstone County, sittingwithout a jury, that plaintiff may proceed to levy execution against certain mining equipment, title to which the court concluded was held by defendantElmer Hergert as involuntary trustee forMontana Mining and Development Company,now defunct, a corporation of which Hergertwas a director. In the fall of 1973, one JamesM. "Mike"Morgan and several investors, including defendant-appellant, Elmer Hergert, joined together for the purpose of forming a mining venture. Morgan owned a lease onmining property near Virginia City,Montana. The lease and the actualworking of the mine were to be Morgan's contribution to the venture, while the other parties

were to invest capital. Appellant Hergert contributed a total of $30,000; a check for $15,000 on October 31, 1973,and another check for the same amount two and one-half months later on January 14, 1974. The other investors contributed much smaller

sums. The initial structure of the venture was such that each investor received for his investment a percentage interest in the lease owned by Mike Morgan. On November 1, 1973,Morgan used some of the invested capital to make a $5,000 down payment on a piece of equipment known as a trornmel, or washing plant, for use in themining operation. The remaining balance on the trommelwas to be paid in two major installments,with a $6,000payment due in 60days and the remaining balance of $11,000 due in late spring of 1974. In February 1974 themining venture was incorporated as "MontanaMining & DevelopmentCo." A bank account was opened in the corporate name, into which the invested fundswere deposited. No formalities of incorporation other than the filing of articles, however, were ever complied with; no bylaws wereadopted,nomeetings held, no stock certificates issued. ~ppellant Hergert's name appeared in the articles of incorporation

as a director of the corporation,but he never performed any functions in that capacity or received any salary or dividends. The actual operation of themine was conducted by Mike Morgan and his father. Itwas they who purchased themining equipment and incurred the expenses of the venture, and only they were authorized to write checks on the corporation's account. No transfer to the corporation of the lease owned by Mike Morgan, and supposedly divided into percentages among the investors, was ever made. A meeting of the investors in the venture was held on November 14, 1974. Themeeting revealed that the Morgans had been less than efficient in operating themine. They had accumulated substantial past due indebtedness and had failed to make thepayments on the trommel. The trommel was to be repossessed the next day. To avoid this eventuality, itwas agreed that appellant Hergertwould obtain a loan and pay off the balance on the trommel. Hergert contacted his banker and was informed that he could borrow the necessary funds only if title to the trommel would be in his individual name. The loanwas made and appellant paid the balance due on the trommel of $12,000plus $682 interest, receiving in return a bill of sale reflecting that he was its individual owner. The originalpurchase price of the trommel was $22,000. At the time Hergert took title in his individual name, $9,940 had been paid towards that purchase price; $5,000by Mike Morgan

on November 1, 1973 (prior to incorporation) from the funds invested by Hergert, and $3,500 in cash and $1,440 in gold by the corporation during the year 1974. Among the obligations incurred by Morgan in the operation of the mine was one for the purchase of equipment from Tri-StateEquipment, Inc. Thiswas amatured obligation,due and payable, at the time "ownership" of the trommel was assumed by Hergert. When Montana Mining and DevelopmentCo. failed to meet this obligation, the account was assigned for collection to respondent, Montana Association of Credit Management. A complaint demanding judgment on the account in the sum of $4,494.47 was filed in the District Court on March 11, 1975. Judgment by default was entered in favor of Montana Association of Credit Management on April 9, 1975, for $4,583.28, the amount due plus interest. To satisfy the default judgment, Montana Association of Credit Management attempted under a writ of execution to attach theproperty of Montana Mining and Development Company. Themining company was insolvent and the only piece of equipment of any significant value used in its operations was the trommel. When respondent served notice of attachment under execution on the trommel, however, Hergert denied that the insolvent corporation had any interest in it. Hemaintained that the bill of sale issued to him in his individual name when he had paid off the balance due on the trommel was conclusive that it was not an asset of the corporation and could not be attached to satisfy the corporate debts. On December 30, 1976,a complaint was filed in the District Court, Yellowstone County, by respondentMontana Association of Credit Management in an attempt to free the trommel for attachment. The complaintnamed both the corporation and Elmer Hergert, individually and as involuntary trustee for the corporation, as defendants. Itwas framed as two "claims",predicated on two separatealthough interrelated theories. The first "claim"alleged that the other investorshad agreed that Hergertwas to take title to the trommel in the name of the corporation, or in his own name in trust for the corporation,but not individually. Thus, it was argued, Hergert wasin violation of his fiduciary duty as a director in denying any interest of the corporation in the trommel. The second "claim" alleged that the transfer to Hergert of the title to the trommel "rendered the Defendant corporation insolvent,was given without adequate or fair consideration, and in bad faith with respect to the Defendant corporationon the part of the Defendant Hergert." No statutory authority was cited in the complaint,but the language quoted from the second claim is taken from section 29-104,R.C.M. 1947,now section 31-2-311MCA, of the Uniform Fraudulent Conveyance Act (UFCA). The single prayer for relief encompassing the two "claims" requested, in pertinent part: "1. That the Defendant,Montana Mining & Development Co., be adjudged to be the owner of and entitled to possession of the

[trommel]

# . .

# . "2. That the Defendant, Elmer Hergert,be declared to hold the same in trust for said Defendant. "3. That it be adjudicated herein that Plaintiff holds

a valid lien by attachmentupon said property. "4. That the Defendant,Elmer Hergert,be required to execute a proper instrumentof transfer of the legal title to said property to the Defendant corporation,and that both Defendants be required to surrender possession of said property to the Sheriff of the County of Madison, State of Montana, subject to Writ of Execution levy and sale

# . . ."
On March 1, 1977,Hergert filed an answer to the complaint, specifically denying the allegations and praying that it be dismissed. No responsivepleading was ever filed on behalf of the corporation and defaultwas entered against it. Trial of the claims against Hergert was had onAugust 16, 1977before Judge Charles Luedke. Extensive findings of fact and conclusionsof lawwere subsequently entered concluding, insummary, that the transfer of the trommel to Hergertby the corporationwas voidable with respect to plaintiff because it

was made without fair consideration at a time when the corporationwas insolvent and was therefore in bad faith as to the creditors of the corporation as a matter of law. From the judgment subsequently entered ordering that plaintiff may proceed to levy execution on the trommel, this appeal has been brought.We find this appeal tobe entirely without merit. Because there are severalmatters of some consequence raised by appellantwhich we discuss further below,we will not go so far

as to say the appeal is frivolous. The simple fact is,however, that here an insolvent corporation transferred its only major asset to appellant for approximately half of the asset's value. Seen from another perspective, appellant took title in his own

name to a piece of property in which the corporationhad more than $9,000 equity and gave the corporationnothing for that equity. The result of the transaction was that the rights of creditorswho had relied on the responsibility of the corporation and itsmanagement in extending credit to themwere infringed. This is clearly a proper case to disregard or set aside the conveyance as fraudulent under the UFCA. Becauseplaintifftscomplaint stated one of its claims in terms of an involuntary trust arising in Hergert for violating his fiduciary obligations as a director of the corporation, much of the argument in appellant's brief is directed to the applicability on these circumstances of section 86-210, R.C.M. 1947,now section 72-20-111MCA, the statute concerning involuntary trusts. It is clear from the District Court's findings and conclusions, however, that the casewas decided on the basis of the Uniform Fraudulent Conveyance Act (UFCA)rather than on the involuntary trust theory. Therefore, appellant's argumentsin this regard are superfluousand will not be rebutted herein. The issueswemust address to properly resolve this appeal are as follows: 1. Whether Montana Association of Credit Management

was a proper party to the action. 2. Whether the attached property which is the subject of this suitwas a corporate asset. 3. Whether therewas sufficient evidencepresented to support a finding of constructive fraud under the Uniform Frauulent ConveyanceAct. 4. Whether the District Court was correct in its finding that less than fair considerationwas paid for the trommel. Hergert argues that plaintiff was not a proper party to the action because itwas not a creditor of the corporationbut merely an assignee of Tri-State Equipment Company. The validity of the instrument by which Tri-State Equipment Company assigned its claim againstMontana Mining & Development to plaintiff Company for collectionwas not questioned by appellant. All that is necessary to constitute a plaintiff the "real party in interest" within terms of a statute authorizing him to sue is that he be vested with legal title, and hence an assignee of a cause of action for collectionmay sue. Rae v. Cameron (1941), 112 Mont. 159, 114 P.2d 1060; Washington Water Power Co. v. Morgan Electric Co. (1968), 152Mont. 126, 448 P.2d 683. The issue of whether the trommelwas a corporate asset merely goes to the sufficiency of the evidence to support the court's finding to that effect. Hergert contends that the tromme1 was not a corporate asset because it was purchased some three months prior to incorporation, with funds supplied by him. He further argues that the only evidence at trial that the trommel

was a corporate assetwas an unaudited balance sheet prepared byMike Morgan and supported only by Morgan's self-serving testimony. Respondent rebuts these contentionsby pointing out that Hergert's funds were invested in the venture, not in the trommel, and that substantialpayments on the trommel were made after incorporationwith funds drawn from the corporatebank account and with gold produced by the corporationutilizing the trommel in the corporate enterprise. "The standard of review in

a nonjury case is simply to determine if there is substantial evidence to support the findings of the trial court. This Court will not reverse such findings of fact unless there is a clear preponderance of evidence against the findings." Hayden v. Snowden (1978), Mont

# . , 576 P.2d 1115, 1117, 35 St.Rep. 367, 369, citing Merritt v. Merritt (1974),165Mont. 172, 177, 526 P.2d 1375. 

### " 

# . .

# . the credibilityand weight given to the witness, especially where the evidence is conflicting, is a matter for the District Court's determination in a nonjury case." Olson v. Carter (1977), Mont. 

### , 572 P.2d 1238, 1240, 34 St.Rep. 1539, 1541, citingMiller v. Fox (1977), Mont

# . I 571 P.2d 804, 34 St.Rep. 1367. We find no error. The remaining two issues of whether therewas sufficient evidence to support a finding of constructive fraud under the UFCA and whether the District Court correctly found that Hergert had not paid fair consideration for the trommel are interrelated and will be addressed together. Prefatorily,we note that appellant's arguments,both in his brief and during oral presentation, relied on a line of authority represented by Polk v. Polk (1972), 210 Kan. 107, 499 P.2d 1142, for the proposition that constructive fraud can only be foundwhere certain "badgesof fraud", such as intent to hinder, delay, or defraud creditors, or cooperation between a grantor and grantee to that end, are present. Polk did not arise under the UFCA and has no bearing on this case. The UFCA declares certain conveyances to be fraudulent regardlessof the presence or absence of any actual intent to defraud. 37 Am Jur 2d Fraudulent Conveyances S3. Montana has adopted the UFCA as Title 29,Chapter 1, R.C.M. 1947,now Title 31,Chapter 2,Part 3,MCA. Section 29- 104,R.C.M. 1947,now section 31-2-311 MCA, provides: "Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulentas to creditors without regard to his actual intent if the conveyance ismade or the obligation is incurred without a fair consideration." It isbeyond dispute that a corporation is a "person" within themeaning of the UFCA. SeeVol. 7A Uniform Laws Annotated, Fraudulent Conveyance Act 54 Note 32. Thus, the only questions the DistrictCourt faced in reaching its conclusion here were whether Montana Mining & Development Company was insolvent at the time Hergert took title to the trommel in his

own name or was rendered insolvent thereby,and whether the conveyance to Hergert wasmade without fair consideration. In a trial memorandum submitted to the District Court in conjunctionwith this action,Hergert admits that the corporation

was insolvent at the time he "purchased" the trommel. Trial Memorandum of Elmer Hergert,p. 6, line 6-7. There is therefore

no issue as to sufficiency of the evidence in that regard. As to the issue of fair consideration, the UFCA provides: "Fair consideration is given for property, or obligation, "(a) When in exchange for suchproperty, or obligation,as a fair equivalent therefore, and in good faith,property is conveyed or an antecedent debt is satisfied, or "(b) When suchproperty, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as comparedwith the value of the property or obligation obtained." Section 29-103,R.C.M. 1947,now section 31-2-303MCA. Hergert directs our attention to White v. Nollmeyer (1968), 151Mont. 387, 443 P.2d 873,where we said that the testto be applied to determine fair consideration for purposes of the UFCA is "whether the disparity between the true value of the property transferred and the price paid is so great as to shock the conscience and strike the understanding at oncewith the conviction that such transfer never could have been made in good faith." Nollmeyer, 151Mont. at 406, 443 P.2d at 883. This language in Nollmeyer is taken from Hart-Parr Co. v. Schafer

(1925),73 Mont. 429, 236 P. 675,and applies to the phrase "adequate consideration" in relation to an alleged fraudulent conveyanceunder the law in existence prior to enactment of the UFCA. It sets amuch more stringent standard for finding a lack of fair consideration under the UFCA than do the authorities generally, and we hereby repudiate it. Under the UFCA: "What is 'fair consideration'must, of course be determined on the facts and circumstances of each particular case, and the questionmust be determined from the standpoint of creditors. A

'fair consideration' may be defined generally as onewhich fairly represents the value of the property transferred,and as against creditors, a consideration that ismerely good and valuable will not support a conveyancewhich will render the grantor insolvent. In general, the test of what constitutesa fair considerationwould seem to be whether or not the conveyance renders the debtor executionproof 

# .. . It is also essential that the consideration be not only fair,but that itpass into insolvent's estate." 37 C.J.S. Fraudulent Conveyances S140. Applying these standardsto the circumstancespresent here, it is apparent to us that the District Court was correct in its conclusion thatHergert did not give fair consideration when he assumed ownership of the trommel in his own name. In order to determine fair consideration, however, "the value of the property on the date of the transfer is the critical date againstwhich the validity of the transfer must be tested." 37 Am Jur 2d Fraudulent Conveyances S18. The District Court's findings in this case did not include a specific finding of the value of the trommel on the date Hergert assumed ownership.Respondent contends that even in the absence of such a specific finding, the surrounding circumstanceswere sufficient to support the conclusion that less than fair considerationwas paid because at the time Hergertpaid $12,000 and took title to the trommel in his own name, only a year had passed from the time its originalpurchase price was set at $22,000. Hergert,on the other hand, argues that without a specific finding of the value of the trommel on the date of the transfer to him, the court had

no basis to determine whether or not the considerationpaid was "fair". He contends that the District Court's failure tomake such a specific finding requires reversal,and cites Bailey v. Leeper (1956), 142 Cal.App.2d 460, 298 P.2d 684, in support of that contention. Hergert has misconstrued Bailey; the case stands for just the oppositeprinciple. In a suit to set aside a fraudulent conveyance, where the disparity between value received and obligations assumed is so great that the trial courtwould and should have made the same decision, failure tomake a specific finding of thevalue of the property transferred as of the date of the transfer is not reversible error. Bailey v. Leeper, supra. We hold that the circumstancespresent here fall within this rule. Section 29-109,R.C.M. 1947,now section 31-2-321 MCA, provides in pertinent part: "(1) Where a conveyance or obligation is fraudulent as to a creditor, such creditor,when his claim has matured,may as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase or onewho has derived title immediately or mediately from such a purchaser: "(a)have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim;or "(b) disregard the conveyance and attach or levy execution upon the property conveyed." The judgment entered here by the District Court ordered that plaintiff may proceed to levy execution against the trommel.This is a remedy clearly within paragraph (1)(b)above. The District Court has properly applied the UFCA in all respects. The judgment appealed from is affirmed.

Chief Justice

We concur: