### No. 80-232 INTHE SUPREMECOURTOF THE STATEOF MONTANA 1981

MONTANANATIONAL BANK, a corp., Plaintiffand Respondent,

ROY 

### E. MICHELS,,)JR.

## ,and SHIRLEYJEANMICHELS,, , 

### and JAMES

### V. CYBULSKI, DefendantsandAppellants.

Appeal from: DistrictCourtof the Fifteenth Judicial District, Inand for the Countyof Sheridan,The Honorable M. James Sorte,Judgepresiding.

Counsel of Record: ForAppellant: Jerome Wallander, Froid,Montana Robert Hurly, Glasgow,Montana

For Respondent: John R. Hunt, Plentywood,Montana

Submittedon Briefs: November 26, 

### 1980 Decided: 

## MAR4

# -19(W

Filed: 

## KkR4- 

## 1987

ClerkMr. JusticeGene B. Daly delivered theOpinion of theCourt. Plaintiff Bank brought this action in the District Court of the Fifteenth Judicial District of the State of Montana, in and for the County of Sheridan, seeking money due and owing on a promissory note and seeking to set aside and have declared asfraudulent conveyancestwo transfersof

a parcel of land. The District Court, sitting without a jury, found in favor of plaintiff Bank, ordering payment by defendant Roy E. Michels, Jr., and setting aside the transfers as fraudulent conveyances. From that judgment defendants appeal. On December 11, 1973, defendant Roy E. Michels, Jr., executed a promissory note payable toplaintiff Bank in the principal sum of $74,603.65 plus interest thereon at the rateof 9percent per annum from thedateof such note. The due dateof the notewas December 

### 11, 1974. Prior to the execution of the note, on September 1, 1972, Roy Michels entered into a contract for deed to purchase from Helen Hodges approximately 280 acres of land situated in Sheridan County, Montana, for a sum of $35,000. The subsequent transfers of thisparcel are the subjectsof thislitigation. On December 16, 1974, Roy Michels conveyed and assigned all of his interest in the contract for deed and the above-described real property to his wife, defendant Shirley Jean Michels, in consideration of the sum of one dollar. Atthe 

### timeof this conveyance, the District Court found the fairmarket value of theproperty tobe $41,508. The District Court found that at the time of theconveyance to his wife defendant Roy Michels owed the Bank the total sum of $81,504.49, includingprincipal and accrued interest, with regards tothepromissory note dated December 11, 1973. The court also found that, as a result of the transfer on December 16, 1974, Roy Michels was rendered insolvent and had a negative networth of $11,661.99. As a matter of law the District Court concluded that the conveyance of December 16, 1974, was fraudulent as to plaintiff in that 

### it was made with the actual intent to delay, defraud and hinder plaintiff Bank as a creditor and in that it was made without fair consideration and rendered defendant insolvent. The District Court held that Shirley Michelswas not a bona fidepurchaser for valuewith respect to this conveyance and declared the conveyance be 

### set aside

asfraudulent. On February 19, 1975, Shirley Michels assigned and conveyed all of her interest in the contract for deed to defendant James V. Cybulski, an uncle of defendant Roy Michels. Roy Michels joined in this conveyance and assignment toCybulski. Atthetime of thisconveyance, the District Court found that the market value of the land was $41,508. The purported consideration for this conveyance consisted of the following 

### items: (1)Cybulski assumed the outstanding principal and accrued interest on the existing contract for deed, such sum being $25,483.30; (2)Cybulski paid numerous creditors of Roy Michels in the total amount of $11,879.26, none of which was owed by Shirley Michels; and (3)Cybulski forgave an antecedent debt owed to him by Roy Michels inthe amount of $1,200.The District Court found that Roy Michels was indebted totheBank in the amount of $82,129 atthe time of the conveyance to Cybulski with regards to the promissory note. The court alsofound that on February 19, 1975, prior to the transfer to Cybulski, Michels had a negative net worth of $57,478 and after the transfer, he had a negative networth of approximately $45,598. As amatter of law, theDistrictCourt concluded that the transfer of February 19, 1975, be set aside as a fraudulent conveyance in that it was made without fair considerationata timewhen defendantMichelswas insolvent and that defendant had the intent to hinder, delay and defraud the Bank as a creditor. The court also held that Cybulski did not have the actual fraudulent intent to defraud, delay or hinder the Bank as creditor, but as consideration Cybulski only gave the sum of $25,483.30 because the other items--the cancellation of the antecedent debt and the payment of creditors--did not consist of fair considerationfor the reason thatdefendant ShirleyMichels,

asgrantor, was not obligated under the indebtednesspaid or forgivenby Cybulski. The District Court set aside the two transfers as fraudulentbased on defendant's intention and insolvency. A determination of defendant

### 's intention will be dispositive of this appeal; therefore, 

### it 

### is unnecessary to determine the issue of insolvency. The question and arguments hinge

on substantialityof evidence. Section 31-2-314, MCA, provides: "Every conveyance made and every obligation incurred with actual intent, as distinguished from intentpresumed inlaw, tohinder, delay,or defraud either present or future creditors 

### is fraudulent

astoboth present and futurecreditors." The difficulty in establishing a conveyance as fraudulentwas characterized by JusticeDeWitt inMerchants' National Bank v. Greenhood (1895), 16Mont. 395, 41P. 250, inthe followingmanner: "Fraud cannot often be proven by direct evidence. Fraud conceals itself. It does not move upon the surface in straight lines. It goes in devious ways. 

### We may with difficulty know 'whence 

### it cometh and whither 

### it goeth.

### ' It 

### 'loveth darkness rather than light, because 

### its deeds are evil.' It 

### is rarely that 

### we can lay our hand upon it in 

### itsgoing. We aremore likelytodiscover 

### it at 

### its destination, before we know that 

### it has startedupon 

### its sinuous course. When we sodiscover 

### it, the searchlightof ajudicial investigation goes back over 

### its trail and lightens 

### it from beginning to end. As the woodsman follows his game by slight indications, as a broken twig or a displaced pebble, so fraud may become apparent by innumerable circumstances, individually trival 

# . . but in their mass 'confirmation strong as proofs of holy writ."' 41 P. at 259. Actual fraudulent intent within the meaning of the Uniform Fraudulent Conveyance Act may be established by circumstantialevidence. Continental Bank v. Marcus (1976), 242 Pa.Super. 371, 363 A.2d 1318; see also, Fross v. Wotton (1935), 3 Cal.2d 384, 44 P.2d 350. Where the effect of a particular transaction with a debtor 

### is tohinder, delay or defraud creditors, the law infers or supplies the intent,

even though there may be no direct evidence of a dishonorablemotive but, on the contrary, an actual, honest, but mistaken, motive exists. National Bank of Anaconda v. Yegen (1928),83Mont. 265, 271P. 612. We have previously used "badges of fraud" to determine if a conveyance 

### is fraudulent and should be 

### setaside. In Humbird v. Arnet (1935), 99 Mont. 499, 512, 44 P.2d 756, 761, we stated: "Fraud in cases where it 

### is sought to set aside fraudulent conveyances, and thereby reach assets on behalf of the creditor or other person claiming to be entitled to such assets, 

### is ordinarily indicated and adjudged by the presence of what the law has come to denominate 'badges of fraud.

## ' They are said to be facts which throw suspicion on a transaction, and which call for an explanation. It has been said that they are inferences drawn by experience from the customary conduct of mankind, and that they afford grounds of inference from which the court orjury areauthorized toconclude that a transaction surrounded by them 

### is fraudulent. More simply stated, they are signs or marks of fraud. They do not of themselves or per se constitute fraud, but they are factshaving a tendency to show the existence of fraud, although their value as evidence 

### is relative not absolute. They are not usually conclusive proof; they are open to explanation. They may be almost conclusive, or they may furnish merely a reasonable inference of fraud, according to theweight towhich theymay be entitledfrom their intrinsic character and the special circumstances attending the case. Often a singleone of them may establish and stamp a transaction as fraudulent. When, however, several are found in the same transaction, strong, clear evidence will be required to repel the conclusion of fraudulent intent 11 

# ... The generallyrecognized badges of fraud are the lack of consideration for the conveyance, the transfer of the debtor's entire estate, relationship between transferor and the transferee, the pendency or threat of litigation, secrecy or hurried tra.nsaction, insolvency or indebtedness of the transferor, departure from the usual method of business, the retention by the debtor of possession of the property, and the reservation of benefit tothe transferor. 37 Am.Jur.2d FraudulentConveyances, 

### S 10 at701. It 

### is undisputed that on December 16, 1974, the date of the property conveyance from Roy to ShirleyMichels, thetwo parties were legally married. This Court has said on many occasions that a court cannot scrutinize too closely the relation between husband and wife with respect to business dealings between them where creditors are concerned. Keller v. Flanagan (1923), 66 Mont. 

### 144, 158, 213 P. 222, 225. Themarital relation 

### isoftena convenient

means for the perpetration of a fraud, and when claims of indebtedness aremade between husband and wife, theymust be subjected to the most searching examination, if not indeed suspicion. Lambrecht v. Patten (1895), 15Mont. 260, 38 P. 1063; Koopman v. Mansolf (1915), 51Mont. 48, 149 P. 491. Of course, the fact that such relationship exists between a grantor and a grantee 

### is not of itself a badge of fraud. Hale v. Belgrade Co. (1925), 75 Mont. 99, 242 P. 425; Harrison v. Riddell (1922),64 Mont. 466, 210 P. 460. Based on appraisals given at trial the fair market value of the land at the 

### time of conveyance to Shirley Michels was $41,508. However, she paid only one dollar in consideration. We have long recognized inadequacy of consideration asa badge of fraud. Dick v. King (1927), 80 Mont. 40, 257 P. 1022; Roman v. Albert (1928),81Mont. 393, 264 P. 115. InBump onFraudulent Conveyances (4thEd.), 

### S 57, we find this language: "To justify an inference of fraud from the inadequacy of the price alone, the consideration must be so clearly below the market value as to strike the understanding atonce with the conviction that such a sale never could have beenmade ingood faith." At the time of the conveyance to his wife, Roy Michels was indebted to plaintiff in the amount of approximately $80,000. This debtwas inaddition tovarious other liabilities.

### In financial statements submitted tothe Bank by Roy Michels, the subject land represents a substantial asset. Michels, however, failed tonotify theBank of a planned or consummated conveyance to his wife. In fact, it was not until February 17, 1975, that plaintiff Bank learned of the conveyance through 

### itsown investigations. After the conveyance, Roy Michels retained possession of the land. His 

### explanation of the transfer was that it

was for estateplanning purposes and toprovide security for his wife in the event of his death. However, in light of the above facts surrounding the transaction and the conveyance of the land to Cybulski two months later, this explanation bears no logical relationship to the events which actuallyoccurred. We 

### hold the foregoing evidence substantiates a finding that the conveyance of December 16, 1974, was made with actual intent on the part of Roy Michels, Jr., to hinder, defraud and delayplaintiff Bank asa creditor. We also agreewith the DistrictCourt that ShirleyMichels was not a bona fide purchaser for value and that the Bank 

### is entitled tohave the conveyance declared fraudulent and set aside. On February 17, 1975, defendant Roy Michels and his attorney 

### met with Bank officials to discuss Michels' financial problems and possible solutions. At

### thismeeting, liquidation of assets and bankruptcy were discussed. The vice president of the Bank testified that the meeting was the first time 

### the Bank learned of the conveyance from Roy to Shirley Michels. At 

### that 

### time defendant promised officials that he would not transfer the land for a periodof ninetydays. Two days after this meeting, on February 19, 1975, without notifying the Bank, defendants Roy and Shirley Michels conveyed and assigned all interests in the real property to defendant Cybulski, the uncle of Roy Michels. This transaction occurred after only four or five days of negotiations. As stated previously, secret or hurried transactionsor transactions made under threat of litigation

are considered badges of fraud. See United States v. Leggett (6thCir. 1961),292 F.2d 423, cert. denied 368 U.S. 914, 82 S.Ct. 194, 7L.Ed.2d 131, reh. denied 82 S.Ct. 476, 368 U.S. 979, 7L.Ed.2d 

### 441; Matter of Estate of Reed (Wyo. 1977), 566 P.2d 587. It 

### is undisputed thaton February 19, 1975, defendant Roy Michels owed the Bank over $82,000, with regards tothe promissory note dated December 

### 11, 1973. Defendant was also indebted tonumerous other creditors atthattime. Once again, after the conveyance to Cybulski, both Roy and ShirleyMichels retained possession and livedon the property without paying any rent. At the 

### time of conveyance to Cybulski, the fair market value of the land was $41,508. As purported consideration, Cybulski 

### (1) assumed the outstanding principal and interest on the contract for deed amounting to $25,483.30, of which $19,577.73 was actually paid at the time of trial; (2)paid numerous creditorsof Roy Michels in the amount of $11,879.26; and (3)forgave an antecedent debt owed tohim by defendant in the amount of $1,200. We agree with the trial court that the lasttwo items given did not consist of valid consideration for the reason that ShirleyMichels, as grantor, was not obligated under the indebtedness paid or forgiven by Cybulski. See Hansen v. Cramer (1952),39 Cal.2d 321, 245 P.2d 1059. We hold that the secret conveyance of February 19, 1975, for inadequate consideration, while defendant was indebted totheBank and under thethreatof bankruptcy, was made with the actual intent on the part of Roy E. Michels, Jr., todefraud, hinder and delaytheBank ascreditor, and, therefore, must be setasideasa fraudulentconveyance. Thejudgment of theDistrictCourt 

### is affirmed.

Justice

We concur:

I. 

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