No. 93-285 IN THE SUPREME COURT OF THE STATE OF MONTANA 1993

VIRGINIA LAWRENCE, Plaintiff and Respondent, v. MICHAEL H. CLEPPER, Personal Representative of the Estates of 

### DEC22

### 1993 JANE RAY TAYLOR and FRANK M. TAYLOR, , 

## (PA

# q..,; -/##!&L Defendant and Appellant. CLERKOFSUPREME COURT STATEOF MOcLTRNA

APPEAL FROM: District Court of the Twenty-first Judicial District, In and for the County of Ravalli The Honorable Douglas G. Harkin,Judgepresiding.

COUNSEL OF RECORD: For Appellant: Harold 

### V. Dye,Milodragovich, Dale & Dye, Missoula,Montana For Respondent: J. Robert Planalp and Calvin L. Braaksma, Landoe, Brown, Planalp & Braaksma, Bozeman,Montana

Filed: Submitted on ~riefs: November 5, 1993 Decided: December 22, 1993Justice Terry N. Trieweiler delivered the opinion of the Court. Plaintiff Virginia Lawrence brought thisclaim for restitution from the estate of Jane 

### R. Taylor and Frank M. Taylor in the District Court for the Twenty-first Judicial District in Ravalli County. The District Court concluded that prior to their deaths, Taylors received money belonging to Lawrence as constructive trustees,and thatunder theequitable theory ofunjust enrichment, she was entitled to restitution. The District Court entered judgment inLawrence's favor in theamount of $130,816.63, together with prejudgment interest fromOctober 10, 1990. Michael Clepper, personal representative of Taylors' estates (defendant),appeals. We reverse the judgment of the District Court. The issues raised by defendant on appeal are: 1. Did the District Court err when it found that Taylors possessed a state ofmind which defeated their claim that theywere innocent transferees of plaintiff's property? 2. Is a person who receives property in exchange for an antecedent debt an innocent purchaser forvalue under Montana law? FACTUAL BACKGROUND During April and May of 1990, Frank and Jane Taylor transferred $85,108.63 fromFrank'sretirementaccount,and $37,900 from their personal savings, to Kenneth Holm who held himself out

as an investment counselor in California under the business name, Income Financial Advisor. 

### In the summer of 1990, Mr. Taylor, who was a retired dentist, and Mrs. Taylormoved to Victor,Montana. They bought a home nextto Jack Stark, who is an attorney and banker employed at the Farmers State Bank in Victor. However, Mr. Stark first met the Taylors when they made an appointment to see him at the bank on July 30, 1990. On that occasion,theybrought with thema document which evidenced the money they had supposedly invested through Holm,and told Stark that they wanted theirmoney back because they had plans to invest it elsewhere. The document that they brought into Stark's office was not in evidence at trial. However, from his memory, Stark recalled that it documented the amount of money Taylors had invested through Holm and indicated that they were entitled to have it returned to them on the condition that they provide Holm with 30 days' notice. During theirmeeting with Stark on July 30, the three of them composed 

### a letter to Holm in which Taylors requested that their money be returned. PlaintiffVirginia Lawrenceand her husbandhad investedmoney through Holm from 1987 through October 10, 1990. Mrs. Lawrence's husband died onApril 28, 1990, and left assets in a trust for the purpose of making payments on the couple's home so that Mrs. Lawrence could continue to reside at that home. However, due to unspecified problems with the administrationof the estate, several mortgage payments were missed. In early September, shortly after 30 days from the time Holm

was notified that Taylorswanted theirmoney back, Holm approached Lawrence and suggested that she secure her home with an additional mortgage; that he invest the proceeds from that loan; and that, 3combined with what she had already invested through him, he would pay her sufficient amounts each month to make her loan payments until the problems with her husband's estate could be resolved. His explanationwas that the second mortgage would be a short term loan which could be paid off once the estate problems were resolved. According to Lawrence's testimony, she was at first reluctanttodo so,but when theproblems with her husband's estate continued, she changed her mind. Holm made arrangements to obtain a loan for Lawrence from a southern California bank in the amount of $215,000. After paying fees and closing costs, she realized $198,015.50. When the loan proceeds were distributed to her, Lawrence and Holm went from the bank where the loan was obtained to a second bank where the loan proceeds were converted to a cashier's check made payable to Holm. She instructed Holm to invest her money in the commodities future market and asked that the investments be backed by treasury bonds. This transfer occurred on October 10, 1990.Officials fromHolm'sbank testified that on that samedatehe deposited $198,015.50 in his account, and that the following day,

on October 11, he instructed the bank to wire $91,615.63 to Frank Taylor's retirement accountat a Denver bank, and $39,201to Frank and JaneTaylor's personal account at Western Federal Savings Bank in Missoula. Those same officials said that had it not been for the deposit made by Holm on October 10, there would have been no funds in his account with which Holm could have made the wiretransfers to Taylors. The wire transfers to Taylors were in satisfaction of thedemand letter theyhad sent toHolm onJuly 30, 1990. As part of his arrangement with Lawrence, Holm had agreed to make her mortgage payments for the next 12 months. However, the November mortgage payment was late, and the December payment was first late,and thenreturned because therewere insufficientfunds to cover it. When she tried to contact Holm to find out the reason for the latepayments, shehad difficulty reachinghim,and finally consulted an attorney, who attempted to recover the amounts shehad invested with Holm, but was unsuccessful. She then consulted a district attorney in California,who advised her that eleven other people had been similarly victimized by Holm. She filed a complaint against him with the Commodities Future Trading Commission and recovered judgment against Holm in the amount of $411,000on thegrounds that Holm obtainedmoney fromherby fraud. However, at the time of trial, Holm's whereabouts were unknown. Jane and Frank Taylor died on March 30, 1991. Michael H. Clepper is the personal representative of their estates. On December 18, 1991, Lawrence filed this complaint in which she contended that the money shepaid to Holm on October 10, 1990,

was obtained by fraud and deception and was illegally transferred to Taylorswithout her permission. She alleged that Taylorswere
aware of the sourceof the fundsthey received,and therefore,they

were unjustly enriched at her expense. For that reason, shealleged that the court should impose a constructivetrust for her benefit on the funds obtained by Holm and transferred to Taylors. In response to Lawrence's complaint, defendant denied that Taylors had any knowledge that the money which was repaid by Holm

was obtained improperly, and as an affirmative defense, alleged that Taylors were bona fide transferees for value. Both parties moved for summary judgment. In support of his motion, defendant offered uncontradicted evidence that prior to July 30, 1990, Taylors had invested $123,008.63 with Kenneth Holm, doing business as Income Financial ~dvisor, and that that amount, together with interest, iswhat he repaid them on October 11. Based on that evidence, defendant arguedthatTaylors were transferees forvalue without knowledgeof Holm's fraudulent activities,and therefore, that Lawrence was not entitled to restitution from them based on the law of constructive trusts. In turn, Lawrence offered evidence that the money obtained fraudulently fromherby Holmwas traceable toTaylors. Sheargued that she was entitled to summary judgment because there was no evidence thatTaylors werewithout notice ofHolm's wrongdoing, and furthermore, that they provided nothing of value to Holm in exchange for the amounts that he returned to them. The District Court denied both motions for summary judgment based on its conclusionthat there was a questionof factregarding the extent of knowledge that Taylors had about the source of thefunds which were returned to them, and that neither party had offered sufficient evidence regarding this factual issue. This case went to trial without a jury before the District Court on October 28, 1992. The only witnesses who testified at trial were Virginia Lawrence and Jack Stark. The testimony of Birdie Risen, a bank official at Holm's bank in Carlsbad, California,was offered by deposition. After considering the evidence, the District Court made factual findings and a conclusion of law which are the basis for defendant's appeal. The District Court found that Taylorswent to

see an attorney on July 30, 1990, because they were anxious and worried about their investments, and that their anxiety, concern, and distrust of Holm continued after they demanded return of their money, aswas evidenced by repeated telephone calls to him between the dates of September 10 and October 11, 1990. The District Court also found that Taylors did not consider Holm their debtor and did not give anything of value to Holm in exchange for the money that he transferred to them on October 11. The court finally found, assuming Taylors were creditors of Holm, that the October 11 transfer to them was for an antecedent debt, and therefore,without consideration. The District Court concluded that,based on Taylors' apparent anxiety, suspicion,and distrust of Holm, they did not qualify as bona fide purchasers. It also concluded that because nothing of value wasprovided toHolm in exchange for the money he returned toTaylors, they were not bona fide purchasers for value as a matter of law. Based on other findings, the District Court impressed a constructive trust on the assets of Taylors' estates,based on the theory of unjust enrichment, and ordered that the amount paid to themby Holm on October 11be repaid to Lawrence with interest from the date of October 10, 1990. Defendant moved, pursuant to Rule 59, M.R.Civ.P., for a new trial, or in the alternative, that the District Court amend its findingsand conclusions. Thatmotion

was denied. Defendant appeals from the judgment entered by the District Court in favor of Lawrence,and from the District Court's denial of his post-trial motion. Thebases fordefendant'sappeal are that the District Court1 s findings regarding Taylors' state of mind are unsupported by evidence, and therefore, clearly erroneous,and that the District Court erred as amatter of lawwhen it concluded that Taylors could not be innocent transferees forvalue because no considerationwas paid to Holm for the money that he transferred to them. DISCUSSION We have long recognized in Montana that in transactions betweentwo parties, theprinciples of equity sometimesmandate the imposition of involuntary trusts. In Eckart v.Hubbard (1979), 184 Mont. 320, 325, 602 P.2d 988, 991,we recognized that: Involuntary trusts may be created, for example,when a court implies or presumes an intent to create a trust or simplydeclares,employing theprinciplesof equity, that the trust shall be said to exist. Nothing else is required.Based upon the statutory scheme that was in effect at that time, we held that: Constructive trusts spring from fraud, mistake, undue influence, the violation of a trust, or other wrongful acts. Platt[s], [I34Mont. 474, 480, 334 P.2d 722, 7273. Constructive trusts occur where the parties have expressedno intent to create a trust,nor does the court presume that any intent existed. Rather, the court creates the trust to work an equitable result. Bogert [onTrusts, 5th ed.], 5 71, p. 263. 

### Eckart, 602 P.2d at 991. In 1989, Montana enacted a new trust code found at Chapters 33-36 of Title 72 of theMontana Code Annotated. Section 72-33-219, MCA, of that code provides for "constructive trustsu under the following circumstances: A constructive trust arises when a person holding title to property is subject to an equitable duty to convey it to another on the ground that the person holding title would be unjustly enriched ifhe werepermitted to retain it. In Montana, therefore, the equitable creation of a constructive trust is dependentupon,and related to, the equitable principle of unjust enrichment. The creation of a constructive trust need not be limited to the person who obtained property by fraud or deception from another. If that property is transferred by thewrongdoer to a third partywho would be unjustly enriched if he or she was allowed to keep it, a constructive trust can be created to prevent such unjust enrichment. The notion of unjust enrichment of a third party usually involves the issue of notice to that party regarding the manner in which the property wasoriginally acquired such that allowing the thirdparty to keep the property would be inequitable or unjust. The phrase "unjust enrichment" is used in law to characterize the result or effect of a failure to make restitution of, or for, property or benefits received under such circumstances as to give rise to a legal or equitable obligation to account therefore. It is 

### a general principle,underlyingvarious legaldoctrinesand remedies, that one person should not be permitted unjustly to enrichhimself at the expense of another,but should be required tomake restitutionof or forproperty orbenefits received, retained,or appropriated, where it is just and equitable that such restitution be made, and where such action involves no violation or frustration of law or opposition to public policy, either directly or indirectly.



# . . . However, although unjust enrichment is often referred to or regarded as a ground for restitution, it is perhaps more accurate to regard it as a prerequisite, for usually there can be no restitution without unjust enrichment. It is defined as the unjust retention of a benefit to the loss of another,or the retentionof money orproperty of another againstthe fundamental principles of justice or equity and good conscience. A person is enriched if he has received abenefit, andhe is unjustly enriched if retention of the benefit would be unjust. Unjust enrichment of a person occurs when he has and retains money or benefits which in justice and equity belong to another.



# .. . It is said tobe fundamental that for aperson tobe entitled to restitution,he must shownot only that there was unjust enrichment, but also that the person sought tobe chargedhad wrongfully secured abenefit,or had passively received one which it would be unconscionable for him to retain. 66 Am. Jur. 2d Restitutionand

### ImpliedContracts 33 3-4 (1973 )

# . For these reasons, courts of equity have not allowed restitution from third parties who came into possession of another's property innocently, even though that property wasoriginally obtainedby fraud or mistake. Therefore, Restatementof the Law of Restitution, 5 13 (1937) provides that: A person who has entered into a transaction with another under such circumstances that, because of a mistake, he would be entitled to restitution from the other, (a) is not entitled to restitution from a third person who has received title to or a legal interest in the subject matter either from the other or from the transferor at the direction of the other, and has given value therefor without notice of the circumstances 

## . 

# . . . Commenta to 

### 5 13 makes clear that the same principle applies to property obtained by fraud. Section 172 of Restatement of the Law of Restitution discusses the situation of innocent third-party transferees where, as here, the issue is the impositionof a constructive trust. That section provides: (1) Where aperson acquirestitle toproperty under such circumstances that otherwise he would hold it upon a constructive trust or subject to an equitable lien,he does not so hold it if he gives value for the property without notice of such circumstances. (2) In the Restatement of this Subject such a transferee is called a bona fide purchaser. The reason for the rule established by 5 172 is illustrated in Comrnenta to the same section where it states that: The principle that a person who innocently has acquired the title to property for which he has paid value is under no duty to restore it to one who would be entitled to reclaim it if he had not been innocent or had not paid value therefor, is of wide application,being a limitationupon the principle that a person who has been wrongfully deprived of his property is entitled to restitution. The cruestion 

### in such cases is which of two innocent persons should suffera losswhichmust be borneby one of them. Theprinciplewhich is appliedby courts of equity is that they will not throw the loss upon a person who has innocently acquired title to property for value. The bona fide purchaser is not only entitled to retain the property free of trust, but he is under no personal liability for its value. This principle is most frequently applied to the situation where a person holds property subject to a constructive trust and transfers it to a person who pays value without notice of the facts which gave rise to the constructive trust; inwhich casea constructive trust is cut off. The situation arises, for example, where a person obtains Drowertv bv fraud and transfers the propertv to a Dersonwho pavsvalue without notice of the fraud. [Emphasisadded]. Restatement of the Law of Restitution, 5 172,Cornmenfa (1937). With thatbackground,we address the issues raised on appeal.

1. Did the District Court err when it found that Taylors possessed a state of mind which defeated their claim that theywere innocent transferees of plaintiff's property? It isundisputed thatHolm obtained Lawrence's moneyby fraud. Under that circumstance, he held the money, subject to a constructive trust, for Lawrence's benefit. If the property, however, was transferred to Taylors for value, and if they had no notice of the circumstanceswhich gave rise to the trust, the trust is cut off. This first issue relates towhether therewas evidence fromwhich the District Court could find that Taylorshad notice of Holm's conduct which gave rise to the trust. The District Court made no specific finding that Taylors had notice of Holm's fraudulent conduct. Instead, the District Court simply found that Taylors were anxious about their investment andwere suspicious and distrustful of Holm. From those findings, the District Court concluded that they did not possess a state of mind which would qualify them as innocent transferees. It is correct that if Taylors were aware of facts which should have caused further investigation,and if that investigationwould have led to knowledge of Holm's conduct,then they are chargedwith notice. Section 174 of Restatement of the Law of Restitution provides that I'[e]xcept in the case of the holder of a negotiable instrument, a person has notice of facts giving rise to a constructive trust 

### if he knows the facts or should know them." (Emphasisadded). Itwas presumably the District Court's conclusion that based

on Taylorslmistrust of Holm and the temporary difficulty theyhad obtaining their money, they should have known that the money was obtained by inappropriatemeans. On appeal, defendant argues that there is no need to decide whether distrust or anxiety equates with notice because there was

no evidence that Taylors were anxious or distrustful of Holm. Lawrence, on the other hand, responds that the District Court's findings in that regard were supported by substantial evidence, and offers the following examples: 1. Taylorslattorney, Stark, distrusted Holm; 2. During a telephone conversation between Holm and Mrs. Taylor,Holm asked if she did not trust him: 3. Taylorsmade numerous telephone calls to Holm during the month prior to the return of their money;4. The mere fact that Taylors sought the return of their money several months after investing it with Holm, suggests that they did not trust him. Because of the trial court's unique opportunity to resolve issues of fact,wewill defer to a DistrictCourt's findings unless they are clearly erroneous. However, findings which are not supported by substantial credible evidence are clearly erroneous. InterstateProductioltCredit Association

### v.DeSaye (1991)

## , 2 5 0Mont

# . 320

### , 820 P.2 d 1285.In this case, defendant's contention that Taylors were innocent transferees was an affirmative defense pursuant to Rule 8(c), M.R.Civ.P., and defendant, therefore,had the burden of producing evidence in support of that defense. Section 26-1-401, MCA. That burden was made difficult by the fact that by the time of trial both of the Taylors were deceased. However, in meeting that burden, defendant had a right to rely on relevant statutory presumptions. Section 26-1-602, MCA, sets forth 

### a number of disputable presumptions. Itprovides that: All other presumptions are lldisputable presumptionsNand may be controvertedby other evidence. The followingare of that kind:



# . . (7) latter.



# . . (19 regular. Money paid by one to another was due the

.ivate transactions have been fair and

14These statutory presumptions satisfied defendant'sburden of proof in support of its affirmative defense, and are conclusive unless controverted by other evidence. Aspointed outpreviously,the onlywitnesses who testified in this case were Lawrence, an official from Holm's bank in California, and Jack Stark, Taylors' attorney. Neither Birdie Risen, the bank official, nor Lawrence, had ever met Taylors, and neither offered any testimony about the extent of Taylors' knowledge of Holm's activities. Neither did Stark, who assisted Taylors in their effort to obtain the return of their money and saw them occasionally as neighbors, offer any evidence to indicate that they had notice of Holm's activity or a reason to further investigate his activity. In fact,he testified that Taylors never expressed frustrationwith Holm, nor did he get the impressionthat they were frustrated with him. Although he personally harbored some suspicion of Holm based

onhis experience as abanker,he did not express that suspicion to Taylors, and in fact, testified that his suspicion was lessened when he learned that Holm had previously returned $60,000 to Taylors' bank which had been mistakenly sent to Holm. Stark testified that if Taylors had reasons for seeking the return of theirmoney fromHolm, other than a preference to put it into local investments,he was unaware of those reasons. Although Holm did call Mrs. Taylor after receiving the letter that was sent

on July 30, and did question whether they trusted him, Stark madeit clear that itwas Holmwho raised the issue of trust and that it

was never mentioned by Mr. or Mrs. Taylor. In fact,Stark testified that after sendingtheJuly 30 letter requesting return of Taylors' money, the subject of its returndid not come up again in his conversations with his neighbors until sometime inNovember,when out of curiosity,he inquired about the money and was advised by Taylors that they had received it. However, at no time did they indicate to him that they were relieved at the return of their investment. Stark testified that afterhis initialmeeting withTaylors in his office,and after the letter was sent thatwasproduced at that meeting, Taylorsdid not seekany further advice from him about the return of their money, and during none of his informal conversations with Taylors after that date did they express any concern to him about their transactions with Holm. In summary,Stark testified that at no time during any of his conversations with Taylors about Holm was the term or subject of distrust ever mentioned. It is true that findings of fact can be based on reasonable inferences. However, [a]n inferencemust be founded: (1) on a fact legally proved; and (2) on such a deduction from that fact as is warrantedby a considerationof theusualpropensities or passions of men, theparticular propensities or passions of the person whose act is in question, the course of business, or the course of nature. Section 26-1-502, MCA.

### In its findings, the District Court found that Taylors were anxious, suspicious, and distrustful from the fact that their attorney had an initial distrust of Holm, and from the fact that Holm raised the issueof trustwhen Taylors requested the returnof their money. The District Court also found distrust based on numerous telephone calls fromTaylors to Holm during the period of time that they were attemptingto secure the return of theirmoney. However,most of these telephone calls lasted for no more than one minute, the longest was for fiveminutes, and there isno record of what was discussed, or whether Holm was even reached during these telephone calls. Furthermore, Stark's distrust of Holm is irrelevant if it was not communicated to Taylors. Based on our review of the record, we conclude that the inferences relied on by the District Court do not amount to substantial evidence that Taylors had notice of Holm's fraudulent activity, or reason to suspect that the money he returned to them was obtained by fraudulent activity. Therefore, we conclude that the District Court erredwhen it found that Taylorsdid not possess

a state of mind which qualified them as innocent transferees of Lawrence's property. 11. 

### Is a person who receives property in exchange for an antecedent debt an innocent purchaser forvalue under Montana law? The District Court concluded that Taylors could not be innocent transferees for value because, at most, they established an antecedent debt which did not constitute "value." On 

### appeal,

17defendant contends,based onRestatement of the Law of Restitution, that an antecedent debt is sufficient to establish "value,"and that that rule should be adopted in Montana. Lawrence contends thatourprior decisions regarding bona fide purchasers requirethe exchange of new consideration in order to establish '*value." Our standard for reviewing legal conclusions of a District Court is to determine whether they are correct. InreMam'ageofBumk

(Mont.1993), 852 P.2d 616, 619, 50 St. Rep. 525, 526. Lawrence cites our early decision in Montana Electric Companyv. NorthernValleyMiningCompany (1915),51Mont. 266, 153 P. 1017, for the proposition that to establish bona fide purchaser status "new" consideration is required. It is true that inMontanaElectricCompany, 153 P. at 1018, we set forth the rule as follows: A bonafide purchaser is defined tobe "onewho at the time of his purchase advances a new consideration, surrenders some security,or does someotheract which leaveshim in aworseposition ifhispurchase shouldbe set aside,and purchases in the honest belief that his vendor had a right to sell,withoutnotice,actual or constructive,of any adverse rights, claims, interest, or equities of others inand to theproperty sold." [Citationomitted]. However, it is important to observe that in that case the nature of considerationprovidedwas not the issue. The aboverule was simply set forth without analysis or further discussion regarding its merits. Defendant, on the other hand, suggests that we adopt 5 173 from Restatement of the Law of Restitution,which defines '%slue"

as follows:(2) Except in the case of a transfer by an express trustee,a transfer of property other than an interest in land in satisfactionof or as security forapre-existing debt or other obligation is a transfer for value. In this case, defendant contends that Holm had a prior obligation to repay the money that was invested with him upon 30 daysfnotice of Taylorsfrequest that he do so, and therefore, when he repaid that amount the antecedent obligation satisfied the requirement that the transfer be for tlvalue." We conclude that the definition of "value" set forth in Restatement of the Law of Restitution 5 173 (1937) is more consistentwith the equitablepurpose of the "innocent transferee" defense,and therefore,adopt that rule in this and in future cases which involve issues of constructive trusts and innocent transferees. The question in cases such as this is which of two innocent persons "should suffer a losswhich must be borne by one of them." That is the issue which the "bona fide purchasertfdefense was established to address. We conclude that a purchaser is no less innocent and that his or her loss would be no less significant if the property they acquired was in exchange for a previous obligation or debt than if the property was acquired in exchange for new consideration. The net effect or damage to the innocent purchaser or transferee is the same. Therefore, under equity, the result must be the same.For these reasons,we conclude that the District Court erred when it held that Taylors had not provided "value" to Holm in exchange for the money that he wired to them. Based on our conclusion that there is no evidence in this record that Taylorshad notice of any wrongful conduct on the part of Holm, and that the money they received fromhim was transferred for "value," we conclude that the judgment of the District Court must be reversed. This case is remanded to the District Court for entry of judgment for defendant.

I We concur:

,/" Chief Jdstice