No. 12262 INTHE SUPREME COURT OF THE STATE OF MONTANA 1972

FIRST NATIONAL BANK OF TWIN BRIDGES, Plaintiff and Respondent,

ARTHUR H. §ANT and EDNA SANT, Defendants and Appellants.

Appeal from: District Court of theFifthJudicial District, Honorable Frank E. Blair, Judge presiding. Counsel of Record: For Appellants: Landoe and Gary, Bozeman, Montana, Ronald Olson argued, Bozeman, Montana, For Respondent

### : Chester L. Jones argued, Virginia City, Montana,

Submitted: December 1, 1972 Decided

### : 

# PB?IR~~PER 

### CURIAM: This 

### isan appeal from a judgment entered in the district court of the fifthjudicial district, county of Madison, following trialtothe court sittingwithout a jury. Judgment was rendered infavor of plaintiff First National Bank of Twin Bridges, granting it foreclosure including costs and reasonable attorney fees, against defendants Arthur H. Sant and Edna Sant, who had mortgaged various real and personal property ascollateral for a loan from thebank. Hereinafter, plaintiff 

### willbe referred to as the Bank; defendants 

### willbe referred to as Sant. 

### It appears from the record that on July 9, 1970, Sant owed the Bank a balance due on existingnotes and also owed creditors a considerable amount of money. On that day, Sant signed and entered intoa mortgage with the Bank whereby Sant gave tothe Bank a mortgage on land inMadison County to secure payment of threepromissory notes. The facevalue of the respectivenotes was $17,690.62, $12,968.74, and $2,788.05, with each bearing interest attherate of ten percent per annum. Atthe time the mortgage was executed and thenotes signed, the president of the Bank, Paris Robert, presented to Sant 

### z written plan entitled '"Plan of Paris Robert", forthe disbursement of the funds made available to Sant by virtue of the notes thathad been signed, Sant signed the disbursement plan and itwas mutually agreed the Bank would make the payments tothevarious creditors 

### as per the disbursement schedule. The schedule, plaintiff's exhibit 

### 5, isherein set forth:

### "(Plan of Paris Robert) "~rthur H. 

### Sant Edna Sant "July 9, 

### 1970 Work-out Statement

I,, -la o*>k*$c**$<********** "PAYING: WITH 

### CASH ADVANCES ON NOTES AT TWIN 

### BRIDGES BANK 

### First National Bank of Twin Bridges Renewal of balances: dt 6/17/70 $1000.00 dt 6/16/70 1500.00 dt 8/20/69 4808.09 Interest on above notes: 26.48 $7334.57 Expense to this time: 50.00 $7,384.57 Russell Lepp and/or Continental Oil

### Co. Partialpayment Williams Feed Co. Dillon: OLD 

### $1821.59 

### '70 buys, 1160.00 2,981.59 Peavy co, Manhattan Bal $ 495.74 495,74 Robert Insurance Agency, Whitehall 717 

### 717,OO 1st 

### ~at'l Rank Great Falls-Sprinkler 401.29 Idaho 1stNat

# '1, (Shelly) (Bob Gibbons) Crawler tractor 357,40 Idaho 1st

### ~at'l, Idaho Falls Harvestor potatoe 353.03 Main Note Due 2/5/71 11,690.62 "PAYING,with Notes, owned by: 

### but as subdinated partners in collateral: Continental Qil 

### Co. via Russell Lepp (due 2/5/71) 2,788.05 A.R.Smith: Old note $8240.00 Int. above 728.74 1970 lease 4000,OO $12,968.74 Int. on Renewal from maturity:

New note matures 4/1/71 

# - - -

# -- - -

# -- - 12,968.7b. $33,441.41
"APPROVED FOR DISBURSEMENT 7/9/70

'IS/ 

### Arthur H. 

### Sant Collateral: 2nd Mortgage on RE. 

### Crop & 

### Machinery ~ortgaged via security Agreement, 

### 3Vehicles," Following the signing of the three notes, the mortgage, and the disbursement schedule, allon July 9, 

### 1970, seven checks were writtenby Paris Robert on the "Officer's SpecialAccount" of the First National Bank of Twin Bridges, in these amounts:PAYEE 

### AMOUNT Russell Lepp ........,........e..e$ 5,000.00 Williams Feed Co....,...... 

# ...... 2,981.59 Peavy Co........... 

# ........,.,..,. 495.74 Robert Ins. Agency

# ................ 647.00 1st Mat'l Bank-Great Falls.....,.. 401.29 Idaho 

### 1stMat'l Bank-Shelley

# ..... 357.40 Idaho 

### 1st

### at

## '1Rank

# -Idaho Falls.

# .-353.03 

### One additionalcheckwas writtenby Paris Robert on this account payable to the order of "Dcposj-t Art Sant Acct" for $70.00. This was explained as the differencebetween the debt toRobert InsuranceAgency of Whitehall in the amount of $717.00 listed in the "Plan of Paris Robert" and the check actually written to Robert Insurance Agency of $647.00. The trial court's Eindings of fact indicate that Paris Robert inmaking the seven disbursements tocreditorshad certain negotiations with three of the creditorswithout the knowledge or consent of Sant. As a result of these negotiations Robert caused the following rebates tobe made to the Bank: CREDITOR AMOUNT % OF PAYMENT Russell Lepp $750.00 15% Williams Feed Co, 364.32 20% Peavy Company 100.00 20% $19214.32 AttrialParis Robert testified that the negotiations with these three creditors concerning the rebates were simultaneous with those with Sant regarding the loan. He did admit, however, that they were not revealed to Sant. The trialcourt's Eindings of fact didnot consider the question of whether the three creditors involved inrebates knew the Bank had orwas in theprocess of obtaining, secured notes from Sant covering the entire amount of the indebtedness nor whether they knew Paris Robert was actingwithout 

### ant's knowledge or consent in seeking the rebates.One of the three creditors, Russell Lepp, testified that atthe time he agreed to make the rebate, he felthe was under pressure to take what he could get, From the record, it appears thenotes for $2,788.05 and $12,968.74 were held by the Bank and no actual disbursementwas made toContinental OilCo, via Russell 1,epp or toA,R. Smith, both of whom were listed as corresponding creditors to these notes

on the "plan of Paris R,obertl'. These pencil notations appear on the right hand margins of thenotes: NOTE AMOUNT NOTATION $2,788.05 Russell Lepp-Whitehall $12,968.74 A.R. Smith Trust Paris Robert testified these pencil notationswere made by him for the purpose of indicating, although the Bank was payee on the notes, that they were held intrust for the two persons indicated, The findings of fact disclose that none of the threenotes

was paid on the due date. At the time this foreclosure action was brought the only payments which had been made were $1,542.86 for interest and $27.64 on the principal. A.R. Smith died prior to commencement of the trial. After the actionwas commenced, an additional $2,600 was credited to the principal of the $2,788.05 note. Two assignments of error are presented on appeal. First, regarding the disbursements made tocreditors under the largest note, Sant contends the Bank as agent breached itsficuciary duty to Sant as principal, in seeking and obtaining rebates from three creditors, and consequently theBank is entitled tono relief from

a court of equity. Second, with regard to the two smallernotes, Sant contends these notes were not supported by legal consideration and the Bank was not a party ininterest, consequently the Bank was not entitled tojudgment ordering foreclosure, The first issue pertains only to the largest of the three notes and the disbursements made thereunder. The Bank on appeal contends itbecame Sant's special agent only for the limited purpose of disbursing funds to creditors inaccordancewith thewrittenauthority Sant gave when he signed the "Plan of Paris Robert". In this contention it iscorrect. The Bank then contends the duties of this limited or special agency were carried out and discharged when the Bank's president wrote the checks to the

seven creditors for the fullamounts of their respective debts and that any prior, contemporaneous, or subsequent action of seekingrebates from these creditorswas a separate function in the interest of the Bank and not related toor inbreach of its special agency duties to Sant. In this contention, it is in

error. The granting of the loan, the payment of the creditors under the "Plan of Paris Robert", and the taking of "rebates"

11 or expenses" from the creditorswere not separate and distinct transactions; rather, they were inextricably related parts of the

same transaction, In light of the total.economic realities of the situationthen existingbetween Sant, his creditors, and the Bank, the separate and distinct transactions theory propounded by the Bank isnot supported by therecord. The fact the ~ank's agency statuswas of a special or limited characterhas been relied upon by the Bank to support 

### its contention that it bore no fiduciaryresponsibilities to Sant. This contention 

### is also erroneous. The fact that an agency relationship isof 

### a limited or specialnature does not extinguish the fiduciary duty, but rather that fiduciary duty 

### is limited in scope and operation to the same degree as the agency towhich it applies. Virtually any relationship between a principal and agent 

### willhave some limitation in the degree of authority and scope of purpose, 3 

### C.J.S. Agency § 138, states the general rule: "As has been pointed out in !j 1of this Title, the relationship existentbetween principal and agent is a fiduciary one, demanding conditions of trust and confidence, Accordingly, in all transactions concerning or affecting the subject matter of his agency,it 

### is the duty of the agent toactwith the utmost good faith and loyalty for the furtherance and advancement of the interests of the principal.

## " (Emphasis added),Tn the instant case, the subject matter of the agency
was of a special limited nature, i.e, making disbursements to creditors designated under and inaccordancewith the "Plan of Paris Robert". We find the Bank did not "act with the utmost good faith and loyalty for the furtherance and advancement of the interests of the principal" Sant. It would appear from the trialcourt's 

### asis is of Decision1', p.2, para. 

### VT, that it reached a similar conclusionbut failed topursue it on the ground of lack of a "clear-cut remedy". The trialcourt said: "It must be admitted that the transactions amount to unorthodox banking. In fact, thebank inentering i-ntosuch transactionswithout the knowledge or consent of the defendants skated on very thin ice and the matter has troubled the Court very greatly, But despite 

### itsmisgivings and in the absence of a clearcut remedy the Court has held the transactions valid asbetween allparties to this action.II 3 C.J.S. Agency 

### 5 139, elaborates further on the nature of duties imposed by this relationship: "An agent should not, without the knowledge of his principal, engage intransactionswhich tend tobringhis personal interest into conflictwith his obl.igations t o h i sprincipal, nor should he place himself in a position where his interests may become antagonistic to those of hisprincipal, or speculate in the subject matter of the agency. Also an agent should not, without a fulldisclosure of the fact tohis principal, seek compensation from both parties

# ***,

"~lthough thisrule isgenerallyheld adopted on the ground of public policy, courts have variouslyheld 1 the theory tobe based on 'moral obligation', positive 1 law', plain reason' and a desire toremove from the agent alltemptation toneglect hisprincipal's interest."

The particular circumstances and exigencies of this case

are such that the principle of judicial discretion togrant equitablerelief givesway tojudicial duty togrant it. Equity follows the law in application of fiduciary duties. 

### 3 ~orneroy's Equity Jurisprudence, 5th Ed,, 

### 3 959, p. 819, states:

11Principal and Agent--Generally. Equity regards and treats thisrelation in the same general manner, and with nearly the same strictness, as that of trusteeand beneficiary. The underlying thought i.s that an agent should not unite his personal and his representative characters in the same transaction; and eauitvwillnot ~ermit him tobe exposed to temptatioA or brought into a situation&herehis personal interests conflict with the interests of his princi a1and with the dutieshe owes tohis principal

# .' (Emphasis added). Tn Middlefork Cattle Co, 

### v. Todd, 49 Mont. 259, 262, 141 P. 641, this Court stated:

I1

Common honesty denies toan agent the right to profit atthe expense of his principalby chicane and misrepresentation. If there are any instanceswherein the law and justice are out of harmony, this isnot one of them, for the courts are of one opinion in declaring that the unfaithful agent under such circumstances should be made to disgorge the amount of the profit so wrongfully realized." Here, the Bank, in fact, made an actualcash outlay of $9,091.73 under the largest note. The total of the eight checks writtenby the Bank was $10,306.05, subtracting the $1,214.32 in rebates leaves $9,091.73. The remainder of $7,384.57 of the note is a renewal of a preexisting debt. We arenot here holding that an agent cannot deal separately if the facts are disclosed. We areholding that here, where the principal was charged $50 for expenses of setting the matter up, and where the agent was charging interest atten percent on the money loaned, and the agent was secretlynegotiating at the same time with creditors for other collection fees in the form of discounts orrebates, the failure to disclose isa breach of duty owing between the agent and his principal, Therefore we hold as to the note for $17,690.62, Sant

was entitled to a credit for the amount of $1,214.32, the rebates mentioned heretofore. Sant atthis point urges that under what he calls the "clean hands" doctrine, the acts of the Bank were fraudulent and therefore the entire transaction isvoid; thus Sant would be excused from the debt. We keep inmind here that the defense

was based upon claims of usurious interest rateswhich were abandoned, and the pleadings were deemed amended to conform to the proof. The proof inour view ismore in the way of accounting, It was not tried as a case on fraud,However, since themortgage was based upon thenote and since,

as

### willhereinafter appear, the other two noteswere formoneys not due the Bank atall, the security of the mortgage fails. The underlying debts, however, do not. The second issue pertains to thenotes for $2,788.05 and $12,968,74 given by Sant to the Bank under the "plan of Paris Robert", The sub-issues are: (a) Was there legal consideration to support these indenture contracts? (b) Was the Bank a real party in interest so as tohave standing tosue for foreclosure

on them? From therecord it appears no disbursementwas made by the Bank to Sant, A. R. Smith or Russell Lepp under eithernote, Since the Bank paid no money under these two indenture contracts, Sant contends they arenot based on any legal consideration, The Bank contends that under the statutes and precedent of Montana law

a prior existingdebt can be consideration fora subsequent new indenture instrument. The ~ank!scontention iscorrect and there does appear tohave been a prior indebtedness of Sant infavor of A. R. Smith and Russell Lepp. However for this type of prior existing debt tobe valid as consideration, it must be between the parties to the contract. The Bank cannot rely on prior existing debt to third parties as consideration for an indenture contract between it and Sant, unless in makingthe contract and suing on it, it 

### is actingin some capacity of trusteeship, agency, or partnership for the two partieswhose prior credit against Sant formed the consideration for the contract. Sant contends the Bank was never acting inany capacity of joint venture, trusteeship, agency, orpartnership forA.R. Smith or Russell Lepp inmaking these two indenture contracts or in suing for foreclosure on them. Looking back to the "plan of Paris Robert", the caption thereon preceding the listingof the note for $2,788.05 and thenote for $12,868.74 reads: "PAYING, with Notes, owned by: but as subdinated

partners incollateral:"it The words owned by" evidently refers to the Bank, since it 

### is the solepayee and had continuous possession of the notes, The word I'subdinated" isnot tobe found in the dictionary, possible the intended word was subordinated. "Subdinatedtlappears tobe

I I used as an adjectivewhich modifies the noun partnerst1, This then would indicate that A. R. Smith, Russell Lepp and the Bank

were in some kind of a partnership concerning these two notes. No such relationship isevidenced on the face of the notes, which show the Banlc as solepayee. Nor does it appear from the testimony of Paris Robert or Russell Lepp that therewas any express written or oral agreement between A, R, Smith and the Bank nor between Russell Lepp and the Bank creating a partnership, agency

or trust. There are only the pencil notations in the margins of the notes and the explanation given of them by Robert, The binding effect of these notations 

### is questionable atbest, The burden of proof to establish the existence of a trust, partnership, joint venture, agency or any other such relationship isupon the party who claims it, Trusts must be founded on evidence which 

### is unmistakable, clear, satisfactoryand convincing. Bender v. Bender, 144Mont. 470, 397 P.2d 957; Plattsv. Platts, 134Mont. 474, 334 P.2d 722. In First StateBank v, Mussigbrod, 83Mont. 68, 271 P, 

### 695, citedby the Bank, this Court affirmed a foreclosure decree ina suitby one of threenote owners, where allthreenotes were secured by one mortgage. There, however, the Court did find the existence of 

### an express trustbetween the threenote owners. In the instant case the Bank 

### is the owner of allthenotes; A.R, Smith and Russell Lepp own no interestb~hatsoever. Presumably, the Bank would turn over the money realized ina foreclosure on these notes to theA. R. Smith Estate and toRussell Lepp. However, ifthe Bank chose tokeep the money, Smith and Lepp not being parties to thenotes and not having any express trust, partnership, agency, joint venture or other such relationshipwith the Bank, would have no recourse against the Bank. Since therewas neverany release of the indebtedness siven to Sant by either Smith or Lepp, their only recoursewould be against Sant on the original debt, We find that it would be contrary to law and would ill

serve the ends of justice and equity to all-owforeclosure under these circumstances, We hold therefore, regarding the note for $2,788.05 and the note for $12,968,74, that they were not supported by legal consideration between parties to them and that portion of the lien of the mortgage which secures them should be released. This holding does not affect any preexisting or present debt between $ant and Smith, or Sant and Lepp. Summarizing the holding of the Court as it concerns all three notes between Sant and the Bank: Sant is entitled to credit in the amount of $1,214.32 on the note for $17,690.62. The Bank isnot entitled to foreclose on thenotes for $2,788.05 and $12,968.74. The judgment of the district court isvacated and the

cause isremanded to the districtcourt for further proceedings consistent herewith.