No. 84-139 

IN THE SUPREP4E COURT OF TEIE STATE OF MONTANA 

1984 

FIRST FIDELITY BANK, a Banking Corp., 

Plaintiff and Appellant, 

MICHAEL E. MATTHEWS: and LARRY 

MATTHEFJS and SUSAN MATTHEWS , husband 

and wife, 

Defendants and Respondents. 

APPEAL FROM: District Court of the Seventh Judicial District, 

In and for the County of Dawson, 

The Honorable R. C. McDonough, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Cox & Simonton; Dale Cox, Glendive, Montana 

For Respondent: 

Bosch, Kuhr, Dugdale, Martin & Kaze; John Warner, 

Havre, Montana 

Submitted on Briefs: Oct. 25, 1984 

Decided: December 31, 1934 
a 

Hon. John C. Harrison 

Justice, Supreme Court 

Room 414 Justice Building 

215 North Sanders 

Helena, Montana 59620 

CORRECTION. In preparing this opinion for publication, we noted in our verification of titles and 

citations the matters listed below. Corrections have 

been made on our copy of the opinion. 

January 25, 1985 

First Fidelity Bank v. Matthews, No. 84-139, Dec. 31, 1984 

Page 6, line 10 --- 194 Cal.App. 699 should read 194 Cal. 699. 

Page 7, line 4 --- Schultz v. Peake should read Schulz v. Peake. 

Page 9, line 16 --- Haas v. Metro Goldwin Mayer should read Haas v. 

Metro Goldwyn Mayer. 

WEST PUBLISHING COMPANY 

Box 43526 

St. Paul, MN 55164 
Mr. Justice John Conway Harrison delivered the Opinion of the 

Court. 

First Fidelity Rank of Glendive appeals from a judgment 

of the Seventh Judicial District, in and for the County of 

Dawson, State of Montana, to recover on a promissory note and 

to set aside a fraudulent conveyance securing the note's 

payment. 

Michael E. Matthews owned farm lands which were subject 

to a Federal Land Bank of Glasgow mortgage. In February of 

1980, Michael leased the land to his brother, Larry Matthews 

and his wife, Susan and granted them an exclusive option to 

purchase. Larry agreed to purchase the land from Michael for 

$235,958.75. On January 2, 1981, Larry exercised his option 

and paid $18,000 down and executed a promissory note for 

$217,958.75. The terms of the note provided for annual 

installments in the sum of $19,003.82 comrnencinq January 2, 

1982. The promissory note was secured by a mortgage on the 

farm land executed and delivered to Michael by Larry and 

Susan. The following was placed into escrow with First State 

Bank of Malta, hereinafter referred to "escrow agent": 

(i) the promissory note executed by Larry; 

(ii) a warranty deed from Michael to Larry and Susan; 

and 

(iii) a mortgage from Larry and Susan to Michael. 

The promissory note provided for annual installments to 

be made to the escrow agent. The parties directed the escrow 

agent to disburse the annual installments in the following 

manner : 

(1) To make the annual payment on the Federal Land Rank 

of Glasgow mortgage wherein Michael was the mortgagor; and 
(2) to distribute the balance according to the 

instruction received from Michael. 

On February 10, 1.981, First Fidelity Bank made a loan 

to Michael in the sum of $6,614.34. Michael executed a 

promissory note in favor of First Fidelity Bank. As 

collateral for this note, Michael made a written assignment 

to First Fidelity of all monies due from the promissory note 

executed by Larry and held in escrow. Prior to accepting 

this assignment, First Fidelity verified the escrow 

arrangement with the escrow agent. On February 17, 1981, 

Michael executed a second promissory note for $500 to First 

Fidelity. First Fidelity sent a "Notice of Assignment" to 

the escrow agent. The escrow agent acknowledged receipt of 

the notice. First Fidelity did not send the "Assignment" or 

"Notice of Assignment" to Larry. 

On January 2, 1982, Larry paid $15,167.96 which 

represented the first payment due and owing under the 

promissory note executed by Larry. The loan officer for the 

escrow agent contacted Larry regarding the $3,835.86 deficit 

payment. Larry had deducted that sum from his payment to 

recover a debt which Michael owed him. The loan officer also 

informed First Fidelity that the first payment made intcr 

escrow was short. The $15,167.96 was disbursed by paying: 

(i) $13,666.46 to the Federal Land Bank of Glasgow; 

(ii) $15.00 escrow fee; and 

(iii) $1,486.50 to First Fidelity. 

First Fidelity accepted the deficit payment from the escrow 

agent without complaint, since the note executed by La.rry 

provided for twenty annual installments. The $1,486.50 

received by First Fidelity was the only payment received by 

First Fidelity on the two notes executed by Michael. First 
Fidelity used the $1,486.50 to pay off the $500 note and 

a-pplied the balance to the $6,614.34 note. The $6,614.34 

became due on February 10, 1982. 

In the spring of 1982, Larry and Michael entered into a 

separate transaction outside of the escrow to pay off the 

indebtedness Larry owed to Michael. On May 25, 1982, Michael 

executed a "Satisfaction of Mortgage," satisfying the mortgage 

held in escrow. In June, 1982, Larry paid Michael $10,000 to 

satisfy Michael's total equity of $76,022.89. Larry received 

a 35% discount on the original transaction. The "Satisfaction 

of ~ortga~&'was never delivered to the escrow agent. 

On March 31, 1983, First Fidelity brought an action 

against Michael Matthews; and Larry and Susan Matthews. 

First Fidelity sought recovery on the promissory note 

executed by Michael. First Fidelity also alleged the 

"Satisfaction of Mortgage" executed by Michael delivered to 

Larry and Susan was a fraudulent conveyance intended to 

defraud First Fidelity and hinder and delay the collection 

due First Fidelity under its note from Michael. A default 

judgment was entered against Michael Matthews. Larry and 

Susan Matthews defended against the fraudulent conveyance and 

counterclaimed for attorney fees and for damages resulting 

from First Fidelity's lis pendens claim. Judgment was 

entered in favor of Larry and Susan Matthews against First 

Fidelity. The trial court also awarded attorney fees and 

costs to Larry and Susan Matthews. 

The following issues are raised on appeal: 

1. Whether there was sufficient evidence that Larry 

Matthews had any knowledge of the assignment of the escrow 

account as security for Michael Matthew's promissory notes to 

First Fidelity. 
2. Whether the account debtor, Larry and the assignor, 

Michael, could make a new agreement and termina.te the escrow 

account as long as First Fidelity failed to intervene. 

3. Whether the agreement between the account debtor, 

Larry and the assignor, Michael constituted a transaction 

which had the effect of hindering, delaying or defrauding 

First Fidelity. 

First Fidelity contends the District Court erred by 

ruling there was not sufficient proof that Larry Matthews had 

any knowledge of the assignment of the escrow account as 

security for Michael's notes to First Fidelity. 

First Fidelity made two loans to Michael. Accordingly, 

Michael executed two promissory notes in favor of First 

Fidelity. As security for the note, Michael executed a 

written assignment to First Fidelity to all monies due from 

the promissory note by Larry held in escrow. Larry testified 

that he did not know of the assignment until after he ma.6e 

the subsequent agreement with Michael to discharge the debt 

and satisfy the mortgagor. 

We are confined to determining whether there is 

substantial credible evidence to support the District Court's 

findings. Cameron v. Cameron (1978), 179 Mont. 219, 227, 587 

P.2d 939, 944; In the Matter of the Estate of Latray (1979), 

183 Mont. 141, 598 P.2d 619. We hold substantial, credible 

evidence supports the District Court's findings that Larry 

did not have notice of the assignment. 

First Fidelity next argues, since the escrow agent was 

given notice of the assignment of Plichael's right to the 

monies due from the promissory note by Larry, then such 

notice is imputed to Larry. 
Section 28-10-101, MCA, states: "An agent is one who 

represents another, called the principal, in dealings with 

third persons. Such representation is called agency." The 

First State Bank of Malta was the designated escrow agent for 

the purpose of representing Larry and Michael, the 

principals, in dealing with the Federal Land Bank of Glasgow. 

It is well settled that an escrow agent is the agent of both 

parties to such a transaction. Ryder v. Young (Cal. 1935) , 

50 P.2d 495. Also see Shreeves v. Pearson (1924), 194 

Ca1.-. 699, 230 P. 448. On consummation of the contract 

and deposit, the escrow holder is generally considered the 

agent by both parties and he owes an obligation to each party 

measured by an application of the ordinary principles of 

agency. Rianda v. San Renito Title Guarantee Co. (1950) , 35 

Cal.2d 170, 215 P.2d 25. An agency relationship existed 

between Larry and Michael; and the First State escrow holder. 

Yowever, it is the scope of this agency relationship which is 

at issue. 

Section 28-10-102, PCA states, "An agent for a 

particular act or transaction is called a special agent. . ." 

Both parties agree that the First State escrow holder was a 

special agent. The escrow agent was directed to perform two 

particular acts. Its first duty was to accept payment from 

Larry to see that the Federal Land Bank of Glasgow was paid. 

Here, the escrow holder was Larry's agent. When the Federal 

Land Bank had its money, the escrow holder ceased to be 

Carry ' s agent. The escrow holder's second duty was to 

deliver any remainder of the payment according to the 

instructions of Michael. At this point, the bank was an 

agent to Michael. 
It was incumbent upon First Fidelity to ascertain the 

scope of First Bank's escrow agency authority. "A person 

dealing with a special agent is bound at his peril to 

ascertain the scope of the agency's authority." ~chul#!z v. 

Peake (1978), 178 Mont. 261, 583 P.2d 425. In helps v. 

Union Central Life Ins. (1937), 105 Mont. 195, 71 P.2d 887, 

this Court stated: 

"'When one deals with a special agent or 

an agent who has only special authority 

to act for his principal, he acts at his 

peril, for he must acquaint himself with 

the strict extent of the agent's 

authority and deal with the agent 

accordingly. Such third person must 

inquire into the extent of the agent's 

authority; he is not justified in relying 

upon any appearance of authority except 

that to which is directly deducible from 

the nature of the authority actually 

conferred. The reason for this is that 

if the power of an agent is special and 

limited, it must be strictly pursued and 

construed, with the result that neither 

the agent nor a third person dealing with 

him as such can claim that the agent had 

a power which they had not a right to 

understand was actually conferred.'" 

The foregoing rules are firmly established in this 

jurisdiction. Barrett v. McHatti-e (1936), 102 Mont. 473, 59 

P.2d 794; Benema v. Union Central Life Ins. Co. (1933), 94 

Kont. 138, 21 P.2d 69; Moore v. Skyles (1905), 33 Mont. 135, 

First Fidelity was unaware that the escrow agent's 

power to act for Larry was limited. The record shows that 

First Fidelity had no idea what authority the escrow holder 

had until after the first payment was made a year later. 

Moreover, the escrow agent had no duty to inform First 

Fidelity of the transaction. The escrow holder only was 

obligated to strictly adhere to the instructions as provided 

in the escrow agreement. Other jurisdictions have 
universally followed this policy of Limited agency. 

Blackburn v. McCoy (Calif. 1934), 37 ~.2d 153; Nelson v. 

~shton-Jenkins Co. (Utah 1925), 242 P. 408. We hold the 

notice of the assignment to the escrow holder, First State 

Bank of Malta, was not imputed to Larry. 

First Fidelity next argues because there was an 

effective assignment from Michael to First Fidelity of an 

account debt, the account debtor, Larry and the assignor, 

Michael, could not reach a new agreement whereby the debt 

assigned was extinguished. 

Michael assigned the monies due under a promissory note 

from Larry to First Fidelity to secure a loan. This 

constituted a secured transaction. The rights of the parties 

to an assignment of money due form a. promissory note when 

given to secure a debt is governed by Chapter IX of the 

Uniform Commercial Code. Section 30-9-102, MCA is Montana's 

incorporation of this section. 

Of particular significance to this case is section 

30-9-318(3), MCA, which provides in part: 

"The account debtor is authorized to pay 

the assignor until the account debt.or 

receives notification that the amount due 

or to become due has been assigned and 

that payment is to be made to the 

assignee. A notification which does not 

reasonably identify the rights assigned 

is ineffective. If requested by the 

account debtor, the assignee must 

seasonably furnish reasonable proof that 

the assignment has been made, and unless 

he does so the account debtor may pay the 

assignor." 

Other courts have interpreted the requirements of this 

section in order to make an assignment effective against the 

account debtor. The Fifth Circuit Court of Appeals has 

stated: 
". . . in order for there to he an 

effective assignment under 5 9-318 (3), 

the account debtor must be notified of 

two things. First, he must receive 

notice that the 'amount due or to become 

due has been assigned. ' Second, the 

account debtor must also be notified 

that 'payment is to be made to the 

assignee.' See, First National Bank of 

Rio Arriba v. Mountain States Telephone 

and Telegraph Co., 91 N.M. 126, 571 P.2d 

118 (1977); First National Bank of East 

St. Louis v. Board of Education, District 

No. 189, 68 Ill.App.3d 21, 24 I11.Dec 

670, 385 N.E.2d 811 (1979) .I1 Haas v. 

Metro Gold n Mayer (5th Cir. 1980), 617 

F.2d 1136,?139. 

First Fidelity argues the account debtor, Larry 

received notice of the assignment. First Fidelity claims a 

copy of the assignment and a notice of assignment was sent to 

the escrow agent. As a result, notice to the agent is 

imputed to the principal. First Fidelity also contends the 

account debtor, Larry, was notified that the balance of the 

payment was to be made to First Fidelity. However, Larry 

claims the U.C.C. provides even if the account debtor, Larry 

had notice of the assignment, he can continue to pay the 

assignor, Michael, as long as the assignee, First Fidelity 

permits him to do so. Section 9-318 of the Uniform 

Commercial Code provides: 

"The account debtor is authorized to pay 

the assignor until the account debtor 

receives notification that the amount due 

or to become due has been assigned and 

that payment is to made to the assignee. 

A notification which does not reasonably 

identify the rights assigned is 

ineffective. If requested by the account 

debtor, the assignee must reasonably 

furnish reasonable proof that the 

assignment has been made and unless he 

does so the account debtor may pay the 

assignor." 

We find the situation the draftsmen of the code were 

referring to is before us. The purpose for the provision 
requiring notice that "payment is to be made to the assignee" 

is to allow for commercial situations where accounts are used 

as collateral to secure a loan repayment. The borrower, in 

the instant case, Michael retained the right to collect the 

account and the assignee, First Fidelity's right of 

collection would ripen only upon default of the borrower, 

Michael. Such a transaction is referred to as an "indirect 

collection. " 4R Anderson, Uniform Commercial Code. 

Therefore, subject to this indirect collection situation, the 

account debtor, Larry, could not be expected to pay the 

assignee until he had been instructed. Furthermore, First 

Fidelity was aware of the $3,835.96 deduction from the 

payment Larry had made to Michael. This amount was not paid 

to First Fidelity. The First State Bank escrow holder 

informed First Fidelity that the short payment was the result 

of a prior dealing between Michael and Larry on the escrow 

note. First Fidelity made no objection to the payment made 

to Michael and the debtor, Larry was entitled to continue to 

pay the assignor, Michael.. We therefore uphold the District 

Court's conclusions that the payor and payee could make a new 

agreement and terminate the escrow account as long as third 

parties do not intervene. 

First Fidelity raises as its last issue for appeal the 

"Satisfaction of Mortgage" executed by Michael and delivered 

to Larry and Susan. First Fidelity argues the settlement of 

the debt constituted a fraudulent conveyance which hindered 

and delayed the collection due First Fidelity under its note 

from Michael. First Fidelity contends that circumstantial 

evidence permits an inference of the defendant's intent to 

defraud First Fidelity. First Fidelity strongly argues due 

to the relationship between Michael and Larry; the $10,000 
paid on a note for $217,958.75, among other factors, 

established "badges of fraud." 

First Fidelity primarily relies on a decision rendered 

by this Court in 1981, Montana Nat. Rank v. Michels (Mont. 

1981), 631 P.2d 1260, 38 St.Rep. 334. There, a creditor bank 

sued a debtor husband and wife to set aside a fraudulent 

conveyance. The husband conveyed to his wife all of his 

interest in a contract for deed for the sum of one dollar. 

At the time of the conveyance the husband owed the bank 

$81,504.49. The district court set aside the conveyance. 

The district court was affirmed. Montana -- Nat. Bank is 

clearly distinguishable from the case at bar. Here, the 

District Court ruled the evidence did not support a finding 

of fraud. The District Court held there was not sufficient 

proof that Larry had any knowledge of the assignment of the 

paid escrow account as security for Michael's notes to First 

Fidelity. Larry Matthews testified that he "Got to computing 

it out. " 

(i) Michael's land was subject to a debt to the 

Federal Land Bank of Malta in the amount of $499,000 over 

thirty-f ive years. 

(ii) Larry bought the land and was to pay Michael 

$380,000 over twenty years. Larry's payments were to be used 

to pay the Land Bank first so that the debt would not go into 

default. 

(iii) After Larry's payments to Michael were completed, 

there would still be fifteen years of payments to be made to 

the Land Bank. Even though Michael was obligated to make the 

payments, he would have no means to do so and Larry would 

have no security to see that he did. 

Larry contends a change in arrangement was necessary or 

else he had to default. Under these circumstances, Michael 
accepted the $10,000 payment and Larry took over the Land 

Bank payment. The District Court found that Larry Matthews 

had dealt in good faith, paid his obligations in full and was 

not responsible for the debts of Michael Matthews. We hold 

the evidence did not support a finding of fraud. 

The judgment of the District Court is affirmed. This 

case is remanded to the District Court for a hearing on 

attorney fees and costs for the trial and appeal. 

We concur: 

Chief 

74.-.0-$,@6d 

Justice 4,