No. 90-058 IN THE SUPREME COURT1990

In the Matter of the Estate of EDITH S. HAGGERTY, a/k/a Edith Haggerty, a/k/a Edith S. Sagunsky, a/k/a Edith Sagunsky, Deceased.

APPEAL FROM: DistrictCourt of theEighteenthJudicial District, In and for the County of Gallatin, The Honorable Larry W. Moran, Judge presiding.

COUNSEL OF RECORD: ForAppellant: John S. Warren, Schulz, Davis & Warren, Dillon, Montana For Respondent: W. Cecil Jones, Jones & Erb, Dillon,Montana JamesJ. Screnar,Nash, Guenther,Zimmer & Screnar, Bozeman,Montana

Filed: Submitted: June 7, 1990 Decided: November 20, 1990

'ClerkJusticeWilliam 

### E. Hunt, Sr., delivered the opinion of the Court. Appellant, a legatee to the estate of Edith S. Haggerty, appeals from two orders, one granting a motion to invalidate a successorls agreementbetween himselfandhisbrother, and,another denying a motion to offset his brother's inheritance by an indebtedness of his brother to the estate. We affirm. The issue before us is whether the District Court of the Eighteenth Judicial District,Judge Larry Moran presiding, abused itsdiscretion indenying appellant'smotion on theground that the issue of the offset had been decided in an earlier motion before the court,JudgeGarypresiding. Thepartiespresent the following issues or arguments relating to the disallowance of an offset by the court as follows: 1. Is the estate's right to offset Paul Sagunskyls inheritance againsthis indebtednesstotheestate superiortoJudy Sagunsky's claims as Paul's judgment creditor? 2. Should the District Court have disregarded the corporate entity of Tipp, Inc. and offset Paul Sagunsky's inheritance against Tipp's debt owed to the estate? 3. What is the value of Paul Sagunsky's debt to the estate for offset purposes? Paul and Judith Sagunsky were married in 1978. During the marriage, Mrs. Sagunsky lent her husband money for his business, Halse Motors, Inc., which laterbecame Tipp, Inc. The money came from a trust set up for the benefit of Mrs. Sagunsky and her two children after her first husband's death in an airplane accident.When theSagunskysweredivorced in 1982,thecourtdetermined that Paul owedMrs. Sagunsky over $50,000. Mrs. Sagunsky obtained a judgment against Paul for that amount in 1986. Edith Haggerty died testate December 18, 1987, leaving her entire estate to her two sons, Paul and Byron Sagunsky. Mrs. Haggerty's will had been executed April 15, 1977, before her marriage to Thomas H. Haggerty in 1979 and before any of the transfers of property in question had been made to Paul in 1983 through 1986. Haggerty served as her personal representative and is not a legatee. The value of the estate was approximately $150,000. In May 1988, Mrs. Sagunsky attempted to levy against Paul's half interest in the estate, but the levywas not paid. On September 2, 1988, Paul and Bryon entered into a
successors~agreement. According to the terms of the agreement, Byron would receive Paul's share of the estate since Paul had receivedmoney fromhismother totalling approximately $75,000plus a $175,000secured loanto Paul's business,Tipp, Inc. At the time of his mother's death, Paul's business was insolvent, and Paul testified that the corporationwas a "non-operating entity." Mrs. Sagunsky moved to set aside the successors~agreement, and on March 16, 1989, a hearing was held. The court invalidated the agreement and ordered that one-half of the net estate be distributedto each of thebrothers. The court alsoheld thatMrs. Sagunskyhad avalid claim against Paul's half-interest. The court stated that if Byron wished to further contest the issue,he could request 

### an additional hearing under the provisions of 5 72-3-912, MCA, regarding the offset of the debt against the estate.Byron requested a second hearing. JudgeMoran ruled that the issue had been previously determined in ruling on Mrs. Sagunsky's motion and denied Byron's motion. From this judgment Byron appeals. I Issue one iswhether the District Court abused itsdiscretion in dismissing Byron Sagunsky'smotion. We must first examine whether the District Court decided the issue of the offset of Paul Sagunskyls indebtedness to the estate when it heard themotion broughtby Mrs. Sagunsky. On November 1, 1988,Mrs. Sagunskymoved to invalidate the successors~agreement between Paul and Byron Sagunsky. The brothers had agreed that Byron would receivePaul's shareof theestate because thedecedent had loaned to Paul and his business, Tipp, Inc., amounts in excess of $250,000. The court stated that I1[i]twould appear1'that thedebts "are not an offset against PaulIsdistributive share. Inaddition, the court stated that the offset issue 'lcould be declared moot based upon the findings of the Court hereinafter set forth." We agree that the conclusions of the court regarding the successors~ agreement were also dispositive of the offset issue. In reaching its decision regarding the successors~agreement the courtconsidered several factors: 1) the successors~ agreement

was entered into on September 2, 1988, after Mrs. Sagunsky had filed a claim against the estate on May 27, 1988; 2) the

successors~ agreementhad theeffect of defeating

### a legitimate debt owed to Mrs. Sagunsky; 3) the will contained no provisionregarding the amounts advanced to Paul; 4) no contemporaneous writings with the advances stated that the amounts should be deducted from Paul's share of the estate; 5) the personal representative filed an amended inventory declaring the loans to Paul to be valueless; and 6) Byron and his family received gifts from his mother, including money for schooling and $16,000 as successor to a trust fund. The court thereby gave effect to 5 72- 2-515,MCA, which states: Property which a testator gave in his lifetime to a person is treated as a satisfaction of a devise to that person, in whole or in part, only if the will provides for deduction of the lifetime gift or the testator declares in a contemporaneouswriting that the gift is to be deducted from the devise or is in satisfaction of the devise or the devisee acknowledges in writing that the gift is in satisfaction. For purpose of partial satisfaction, property given during lifetime is valued as of the time the devisee came into possession or enjoyment of the property or as of the time of death of the testator,whichever occurs first. The court invalidated the successors1agreement, treating the amounts the decedent advanced to Paul as gifts, rather than advances or loans. Byron claimsthat theUniformProbate Code requirestheestate to offset Paul Sagunskylsinheritance against his indebtedness to the estate: Theamount of anoncontingent indebtednessof a successor to the estate if due, or its present value if not due, shallbe offsetagainstthe successor s interest; but the successor has the benefit of any defense which would be available to him in a direct proceeding for recovery of the debt. Section 72-3-912,MCA. This section of theUniform Probate Code,

now adopted in Montana, is the codification of the common law"right of retainer." See Matter of Will of Cargill (Minn. App. 1988), 420N.W.2d 268. The earliest reported case involving this equitable doctrine was Jeffs 

### v. Wood (1723), 2 P.Wms. 128, 24 Eng.Rep. 668. At that time, therationale of theright of retainer

was to avoid multiple lawsuits. Later the courts emphasized the moral and legal obligation of the debtor to pay his debt to the estate before participating in its distribution. Johnson v. Huntley (Wash. 1951), 236 P.2d 776, 777. The Uniform Probate Code does not address the priority of repayment when the successor owes both the estate and another creditor,as here. When the Code does not afford guidelines, Itthe principles of law and equity supplement its

### provision^.^^ Section 72-1-104,MCA. Most courts have ruled that theright of the estate to repayment is superior, even though the creditor's claim is reduced to judgment. Hustad v. Reed (1958), 133 Mont. 211, 219, 321 P.2d 1083, 1088; In re BergmannlsEstate (Fla. App. 1974), 305 So.2d 273; In re Eaton1sEstate (N.Y.A.D. 3 Dept. 1953), 121 N.Y.S.2d 836, 839; Smith v. Citizens National Bank in Okmulgee

(Okla. 1957), 313 P.2d 505, 509. Mrs. Sagunsky claims that the right of retainer statute does not apply because the sums in question were gifts, rather than loans. No doubt exists that the $117,690 transfer to Tipp, Inc., evidenced by a promissory note andmortgage,was a loan. However, the statute specifies that Itthe amount of noncontingent indebtedness of a successor to the estate" shall be offset. Section 72-3-912,MCA. (Emphasisadded.)The corporation is a separate and distinct entity and is not

a successor to the estate. See In reRussell's Estate (1936), 102 Mont. 301, 308, 59 P.2d 777, 780 (creditorsof corporation cannot ordinarily assert claims against estate of controlling shareholder). Tipp, Inc., rather than Paul, owed $117,690 to the decedent. Since a corporation is not a successor to the estate, corporate indebtedness is not subject to the right of retainer. At issue, then, are the other approximately $80,000 in bank drafts made out to Paul during the period from 1983 to 1986. As noted above, the court treated these amounts as gifts, although Paul and Mr. Haggerty testified that theywere loans. The test is whether the parties considered these transfers to be binding obligations. See In re Tarbell's Estate (N.Y. Sur. 1950), 99 N.Y.S.2d 902. In the Tarbell case the widow of the decedent claimed that a promissory note, executed by her son to her,which she later endorsed to her husband, should be offset against the son's legacy. The transfer from thewidow to the decedent of the note, which was void because of the statute of limitations, was made for business or tax reasons. The court found that no binding obligation existed between thedecedent and the son where the only evidence of the debt was an entry made in the decedent's account book. The court stated that If[t]he entry made in his book of account is not awritten agreement, sisnedby him [thedecedent]." Tarbell, 99N.Y.S.2d at 907. In this case,while the $80,000 in bank drafts were noted as loans in records kept by the decedent, Mr. Haggerty and Paul testified that no demand had ever been made for the sums. Nopromissory notes or agreements were signed, and Paul did not attempt to repay the sums. Inhis testimony,Mr. Haggerty agreed that the decedent knew the likelihood of repayment was not very great and did not seriously expect repayment from Paul. An obligation arises either from the contract of the parties

or by operation of law. Section 28-1-102, MCA. In Montana, all contractsmay be oral exceptasprohibitedby statute. Section28- 2-901,MCA; Keil 

### v. Glacier Park, Inc. (1980), 188Mont. 455, 460, 614 P.2d 502, 505. However, a contract cannot be created when performance is entirely optional with the promisor. Gray v. American Express Co. (1984)

### ,743 F.2d 10,19; Restatement (Second) of Contracts $j 77 comment a (1979). Thus, Paul did not have a binding obligation to repay the loans. Further, a close relationship between the parties, such as a husband-wife or parent-child relationship, gives rise to a presumption that the transfer is a gift. Detra v. Bartoletti

(1967), 150 Mont. 210, 217, 433 P.2d 485, 488. Here the parentchild relationship and the absence of evidence of a binding obligation, as well as inter vivos gifts to the other devisee, Byron,andhis family, supporta findingthat the transfers to Paul

were gifts. In addition, Byron received $16,000 as successor to a trust fund afterhis mother's death. The evidence supports the District Court and we will not overturn the court's orders regarding probate of an estate absent clear abuse of discretion. 

### In re Estate of Nelson (Mont. 1990), 794 P.2d 677, 679, 47 St.Rep. 1218, 1221.Since the court in ruling onMrs. Sagunsky'smotion found the transferstobe gifts, rather than advances or loans, the decision is also dispositive of the issue concerning the offset of Paul's filindebtednessu to the estate pursuant to the right of retainer statute, 

### 9 72-3-912,MCA. We affirmtheDistrictCourt's dismissal of Bryon Sagunsky's motion on the ground that the issue had been previously decided in the ruling on Mrs. Sagunsky'smotion. I1 The second issue is whether the District Court should have disregarded the corporate entity of Tipp, Inc. and offset Paul Sagunsky's inheritance against Tipp's debt owed to the estate. We need not discuss this issue because of ourholdings above.

The third issue is the value of Paul Sagunsky's debt to the estate for offset purposes. Mrs. Sagunsky argues that the value of PaulIs personal debt to the estate for offset purposes should be the same as the value of the debt for inventory purposes. Since we have affirmed the District Court's decision that the inter vivos transfers to Paul should not be offset,we need not consider this argument. However, we note that the value the personal representative must use for estate inventory purposes is the "fair market value

as of thedate of thedecedentIsdeath.It Section 72-3-610(2)

### ,MCA. The right of retainer statute, 5 72-3-912,MCA, on the other hand, does not call for the fair market value of the debt to be deducted, but insteadmandates thatthe llamountM of thesuccessor^s indebtednessbe deducted from his share or, if the indebtedness isnot due, its "present value.It To hold that a past due uncollectible debt is to be valued at fair market value for purposes of offset against the indebted successor~s share of the estate would render the offset provision, 5 72-3-912, MCA, meaningless. In many cases, the debt of the successor to the estate will be uncollectible and thus valueless. That a debt cannot be collected does not mean, if a binding obligation between the decedent and the successor exists, that the amount of the debt should not be offset as the statute demands. Therefore, a situationmay arise where a debt is given differentvalues for the estate inventory and the offset provisions of 5 72-3-912,MCA. The judgment of the District Court is affirmed.

chief Justice