No. 12262 

IN THE 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 the Fifth Judicial 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 is an appeal from a judgment entered in the district 

court of the fifth judicial district, county of Madison, following 

trial to the court sitting without a jury. Judgment was rendered 

in favor 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 as collateral for a loan from 

the bank. 

Hereinafter, plaintiff will be referred to as the Bank; 

defendants will be referred to as Sant. 

It appears from the record that on July 9, 1970, Sant owed 

the Bank a balance due on existing notes and also owed creditors a 

considerable amount of money. On that day, Sant signed and entered 

into a mortgage with the Bank whereby Sant gave to the Bank a 

mortgage on land in Madison County to secure payment of three promissory notes. The face value of the respective notes was $17,690.62, 

$12,968.74, and $2,788.05, with each bearing interest at the rate 

of ten percent per annum. At the time the mortgage was executed 

and the notes signed, the president of the Bank, Paris Robert, 

presented to Sant z written plan entitled '"Plan of Paris Robert", 

for the disbursement of the funds made available to Sant by virtue 

of the notes that had been signed, Sant signed the disbursement 

plan and it was mutually agreed the Bank would make the payments 

to the various creditors as per the disbursement schedule. The 

schedule, plaintiff's exhibit 5, is herein 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. 

Partial payment 

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 1st Nat ' 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 , 

3 Vehicles," 

Following the signing of the three notes, the mortgage, and 

the disbursement schedule, all on July 9, 1970, seven checks were 

written by Paris Robert on the "Officer's Special Account" 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 1st Mat'l Bank-Shelley ..... 357.40 

Idaho 1st at ' 1 Rank - Idaho Falls. . -353.03 

One additional check was written by Paris Robert on this 

account payable to the order of "Dcposj-t Art Sant Acct" for $70.00. 

This was explained as the difference between the debt to Robert 

Insurance Agency 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 in making the seven disbursements to creditors had certain 

negotiations with three of the creditors without the knowledge or 

consent of Sant. As a result of these negotiations Robert caused 

the following rebates to be 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 

At trial Paris 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 trial court's Eindings of fact did not consider the 

question of whether the three creditors involved in rebates knew 

the Bank had or was in the process of obtaining, secured notes from 

Sant covering the entire amount of the indebtedness nor whether 

they knew Paris Robert was acting without ant's knowledge or 

consent in seeking the rebates. 
One of the three creditors, Russell Lepp, testified that 

at the time he agreed to make the rebate, he felt he was under 

pressure to take what he could get, 

From the record, it appears the notes for $2,788.05 and 

$12,968.74 were held by the Bank and no actual disbursement was 

made to Continental Oil Co, via Russell 1,epp or to A,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 the notes: 

NOTE AMOUNT NOTATION 

$2,788.05 Russell Lepp-Whitehall 

$12,968.74 A.R. Smith Trust 

Paris Robert testified these pencil notations were made by him 

for the purpose of indicating, although the Bank was payee on the 

notes, that they were held in trust for the two persons indicated, 

The findings of fact disclose that none of the three notes 

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 action was 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 to creditors under the largest 

note, Sant contends the Bank as agent breached its ficuciary duty to 

Sant as principal, in seeking and obtaining rebates from three 

creditors, and consequently the Bank is entitled to no relief from 

a court of equity. Second, with regard to the two smaller notes, 

Sant contends these notes were not supported by legal consideration 

and the Bank was not a party in interest, consequently the Bank was 

not entitled to judgment ordering foreclosure, 

The first issue pertains only to the largest of the three 

notes and the disbursements made thereunder. The Bank on appeal 

contends it became Sant's special agent only for the limited purpose 

of disbursing funds to creditors in accordance with the written 
authority Sant gave when he signed the "Plan of Paris Robert". 

In this contention it is correct. 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 full amounts of their respective debts 

and that any prior, contemporaneous, or subsequent action of 

seeking rebates from these creditors was a separate function in 

the interest of the Bank and not related to or in breach 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 creditors were not separate and distinct 

transactions; rather, they were inextricably related parts of the 

same transaction, In light of the total. economic realities of 

the situation then existing between Sant, his creditors, and the 

Bank, the separate and distinct transactions theory propounded by the 

Bank is not supported by the record. 

The fact the ~ank's agency status was of a special or 

limited character has been relied upon by the Bank to support its 

contention that it bore no fiduciary responsibilities to Sant. 

This contention is also erroneous. The fact that an agency relationship is of a limited or special nature does not extinguish 

the fiduciary duty, but rather that fiduciary duty is limited in 

scope and operation to the same degree as the agency to which it 

applies. Virtually any relationship between a principal and agent 

will have 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 1 of this Title, 

the relationship existent between 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 

to act with 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 in accordance with 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 trial court's asis is of Decision1', 

p.2, para. VT, that it reached a similar conclusion but failed 

to pursue it on the ground of lack of a "clear-cut remedy". The 

trial court said: 

"It must be admitted that the transactions amount to 

unorthodox banking. In fact, the bank in entering 

i-nto such transactions without the knowledge or consent of the defendants skated on very thin ice and 

the matter has troubled the Court very greatly, But 

despite its misgivings and in the absence of a clearcut remedy the Court has held the transactions valid 

as between all parties to this action. I I 

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 in transactions which tend 

to bring his personal interest into conflict with 

his obl.igations t o h i s principal, nor should he 

place himself in a position where his interests 

may become antagonistic to those of his principal, 

or speculate in the subject matter of the agency. 

Also an agent should not, without a full disclosure 

of the fact to his principal, seek compensation from both parties * * *, 

"~lthough this rule is generally held adopted on 

the ground of public policy, courts have variously held 

1 the theory to be based on 'moral obligation', positive 1 law', plain reason' and a desire to remove from the 

agent all temptation to neglect his principal's interest." 

The particular circumstances and exigencies of this case 

are such that the principle of judicial discretion to grant 

equitable relief gives way to judicial duty to grant it. Equity 

follows the law in application of fiduciary duties. 3 ~orneroy's 

Equity Jurisprudence, 5th Ed,, 3 959, p. 819, states: 

11 Principal and Agent--Generally. Equity regards and 

treats this relation in the same general manner, and 

with nearly the same strictness, as that of trustee 
and beneficiary. The underlying thought i.s that 

an agent should not unite his personal and his 

representative characters in the same transaction; 

and eauitv will not ~ermit him to be exposed to 

temptatioA or brought into a situation &here his 

personal interests conflict with the interests of 

his princi a1 and with the duties he owes to his 

principal .' (Emphasis added). 

Tn Middlefork Cattle Co, v. Todd, 49 Mont. 259, 262, 141 

P. 641, this Court stated: 

I1 Common honesty denies to an agent the right to 

profit at the expense of his principal by chicane and 

misrepresentation. If there are any instances wherein 

the law and justice are out of harmony, this is not 

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 actual cash outlay of 

$9,091.73 under the largest note. The total of the eight checks 

written by 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 are not here holding that an agent cannot deal separately 

if the facts are disclosed. We are holding that here, where the 

principal was charged $50 for expenses of setting the matter up, 

and where the agent was charging interest at ten percent on the 

money loaned, and the agent was secretly negotiating at the same 

time with creditors for other collection fees in the form of 

discounts or rebates, the failure to disclose is a 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 at this point urges that under what he calls the 

"clean hands" doctrine, the acts of the Bank were fraudulent 

and therefore the entire transaction is void; thus Sant would be 

excused from the debt. We keep in mind here that the defense 

was based upon claims of usurious interest rates which were 

abandoned, and the pleadings were deemed amended to conform to the 

proof. The proof in our view is more in the way of accounting, 

It was not tried as a case on fraud, 
However, since the mortgage was based upon the note and since, 

as will hereinafter appear, the other two notes were for moneys 

not due the Bank at all, the security of the mortgage fails. The 

underlying debts, however, do not. 

The second issue pertains to the notes 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 to have standing to sue for foreclosure 

on them? 

From the record it appears no disbursement was made by 

the Bank to Sant, A. R. Smith or Russell Lepp under either note, 

Since the Bank paid no money under these two indenture contracts, 

Sant contends they are not based on any legal consideration, The 

Bank contends that under the statutes and precedent of Montana law 

a prior existing debt can be consideration for a subsequent new 

indenture instrument. The ~ank!s contention is correct and there 

does appear to have been a prior indebtedness of Sant in favor 

of A. R. Smith and Russell Lepp. However for this type of prior 

existing debt to be 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 making the contract and suing on it, 

it is acting in some capacity of trusteeship, agency, or partnership 

for the two parties whose prior credit against Sant formed the 

consideration for the contract. 

Sant contends the Bank was never acting in any capacity 

of joint venture, trusteeship, agency, or partnership for A.R. 

Smith or Russell Lepp in making these two indenture contracts or in 

suing for foreclosure on them. Looking back to the "plan of Paris 

Robert", the caption thereon preceding the listing of the note 

for $2,788.05 and the note for $12,868.74 reads: 

"PAYING, with Notes, owned by: but as subdinated 

partners in collateral:" 
it The words owned by" evidently refers to the Bank, since it is 

the sole payee and had continuous possession of the notes, The 

word I'subdinated" is not to be found in the dictionary, possible 

the intended word was subordinated. "Subdinatedtl appears to be 

I I used as an adjective which 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 is evidenced on the face of the notes, which 

show the Banlc as sole payee. Nor does it appear from the testimony of Paris Robert or Russell Lepp that there was 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 at best, The burden 

of proof to establish the existence of a trust, partnership, joint 

venture, agency or any other such relationship is upon the party 

who claims it, Trusts must be founded on evidence which is unmistakable, clear, satisfactory and convincing. Bender v. Bender, 

144 Mont. 470, 397 P.2d 957; Platts v. Platts, 134 Mont. 474, 334 

P.2d 722. 

In First State Bank v, Mussigbrod, 83 Mont. 68, 271 P, 

695, cited by the Bank, this Court affirmed a foreclosure decree 

in a suit by one of three note owners, where all three notes were 

secured by one mortgage. There, however, the Court did find the 

existence of an express trust between the three note owners. 

In the instant case the Bank is the owner of all the notes; 

A.R, Smith and Russell Lepp own no interest b~hatsoever. Presumably, 

the Bank would turn over the money realized in a foreclosure on 

these notes to the A. R. Smith Estate and to Russell Lepp. However, 

if the Bank chose to keep the money, Smith and Lepp not being 

parties to the notes and not having any express trust, partnership, 

agency, joint venture or other such relationship with the Bank, 

would have no recourse against the Bank. Since there was never 
any release of the indebtedness siven to Sant by either Smith or 

Lepp, their only recourse would 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-ow foreclosure 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 

is not entitled to foreclose on the notes for $2,788.05 and 

$12,968.74. 

The judgment of the district court is vacated and the 

cause is remanded to the district court for further proceedings 

consistent herewith.