No. 88-205 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1989 

ROBERT 0 ' CONNOR, 

Plaintiff and Appellant, 

-vsJ. R. LEWIS, E. A. ATKINSON and 

RIVERSIDE INVESTMENT, 

Defendants and Respondents. 

APPEAL FROM: ~istrict Court of the Fourteenth Judicial District, 

In and for the County of Musselshell, 

The Honorable Peter Rapkoch, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Bruce E. Lee, ~illings, Montana 

For Respondent: 

Karl G. Knuchel; Knuchel & McGregor, Livingston, 

Montana 

Submitted on Briefs: June 30, 1989 

Decided: JU~Y 25, 1989 
Mr. Justice L. C. Gulbrandson delivered the Opinion of the 

Court. 

The plaintiff, Robert OIConnor, brought an action based 

upon a contract seeking $55,000 plus interest from the 

defendants, J.R. Lewis, E.A. Atkinson, and Riverside 

Investment. Plaintiff also sought to foreclose on an alleged 

equitable mortgage on the MN Ranch or, in the alternative, to 

set aside the transfer of the MN Ranch as fraudulent upon 

creditors. The District Court of the Fourteenth Judicial 

District, Musselshell County, found in part that plaintiff 

held no security or equitable interest in the MN Ranch and 

that the transfer of the MN Ranch was not fraudulent as to 

creditors. Plaintiff appeals. We affirm. 

The following two issues are presented for review: 

1. Did the District Court err in finding that the 

plaintiff did not hold an equitable mortgage nor a vendor 

lien in the MN Ranch? 

2. Did the District Court err in finding that the 

transfer of the MN Ranch from one defendant to another was 

not fraudulent as to creditors? 

In 1979, J.R. Lewis, the defendant, and Robert 

O1Connor, the plaintiff and the half-nephew of Lewis, joined 

together in an effort to develop a housing project in Decker, 

Montana. The understanding between the two parties was that 

Lewis would provide the money for the project and 0' Connor 

would draft plans, confer with public authorities, and hire 

and supervise contractors and laborers. Both parties also 

understood that any profits from the development project 

would be divided between them. The parties established a 

joint checking account in which Lewis would deposit the 

necessary money to fund the housing project. Initially, the 
parties lived on and operated from the Murphy Ranch that 

Lewis was purchasing. 

The housing development project eventually failed, yet 

O'Connor remained on the ranch and acted as a ranch hand. 

Lewis eventually realized that he was about to lose the 

Murphy Ranch and therefore instructed O'Connor to locate and 

purchase another ranch smaller in size in which he could move 

his livestock and equipment. OIConnor negotiated and 

ultimately purchased the MN Ranch with funds provided by 

Lewis. Lewis did not enter into any of the conferences or 

negotiations regarding the purchase of the MN Ranch. Without 

informing Lewis, O'Connor instructed the real estate agent to 

put his name on the deed to the MN Ranch. Lewis was not 

immediately aware of this action by O'Connor. 

O'Connor eventually moved all of Lewis's livestock and 

equipment to the new location. Lewis was not present at the 

MN Ranch much of the time, either because of illness or 

because of his business venture in Alaska. In the meantime, 

O'Connor proceeded to improve the MN Ranch. He designed and 

arranged for the construction of fences, water and sewer 

lines, corrals, a shop building, a small office building, a 

horse barn and a house. OIConnor issued checks for these 

expenditures from the joint bank account funded by Lewis. 

In May, 1984, Lewis and OIConnor disagreed over 

personal matters and the status of the MN Ranch. In an effort 

to resolve their disputes, Lewis and O'Connor met in the 

Musselshell County Courthouse on May 14, 1984 and negotiated 

and executed a document titled "Agreement to Settle Dispute." 

The Agreement provided that Lewis would pay O'Connor $20,000 

at the execution of the agreement, $30,000 on or before June 

5, 1984, and $25,000 at a time not expressly stated in the 

Agreement. In consideration for the payment, OIConnor 

executed and delivered to Lewis a quitclaim deed to the MN 
Ranch. Shortly thereafter, Lewis deeded the MN Ranch to E.A. 

Atkinson. Atkinson, now the wife of Lewis, recorded the deed 

on the same day, May 14, 1984. 

Lewis paid O'Connor the $20,000 at the execution of the 

agreement, but did not pay the remaining $55,000 as agreed 

upon and as specified in the "Agreement to Settle Dispute." 

O'Connor therefore brought an action against the defendants 

seeking the remaining amount due, and seeking to foreclose on 

an alleged equitable mortgage or vendor lien on the MN Ranch, 

or in the alternative to set aside the transfer of the MN 

Ranch from Lewis to Atkinson as fraudulent to creditors. In 

its March 13, 1988 judgment, the District Court ordered Lewis 

to pay the principal sum of $55,000 together with interest of 

six percent per annum from May 14, 1984 to October 1, 1985 

and the rate of ten percent per annum from October 1, 1985 

and until paid. The District Court also ordered Lewis to pay 

the costs of the suit in the amount of $1,673.20. The 

District Court found that OIConnor did not have an equitable 

mortgage in the MN Ranch nor did Lewis transfer the MN Ranch 

for the purpose of defrauding creditors. OIConnor appeals 

the District Court's findings regarding the equitable 

mortgage and the transfer of the MN Ranch. 

The first issue raised on appeal is whether the 

District Court erred in finding that OIConnor did not hold an 

equitable mortgage nor a vendor lien in the MN Ranch. 

0' Connor argues that the quitclaim deed and the 

"Agreement to Settle Dispute," when construed together, 

constitute a bungled lay attempt at creating a mortgage at 

law. O'Connor then argues that while the documents do not 

constitute a mortgage as required by the statute, § 71-1-107, 

MCA, they nonetheless constitute an equitable mortgage. We 

disagree. 
The quitclaim deed, dated May 14, 1984, states that in 

consideration for the sum of ten and no/100 dollars ($10.00), 

Robert O'Connor conveys, remises, releases and forever 

quitclaims unto J.R. Lewis and to his heirs, and assigns all 

right, title and interest in and to the subject real estate 

situated in Musselshell County, Montana. The pertinent 

portions of the "Agreement to Settle Dispute" states that 

the parties agree to the following 

statement setting out the mutual promises 

and obligations thereto: 

1. Conditioned specifically on the 

performance of Lewis set forth below, 

O'Connor shall quit claim all his right, 

title, and interest without warranty to 

the . . . [MN Ranch] located in 

Musselshell County, Montana . . .. 

This quit claim also applies to chattels 

and articles of personal property . . .. 

The agreement further specified that Lewis shall pay O'Connor 

a total of $75,000, $20,000 at the execution of the 

agreement, $30,000 on or before June 5, 1984, and $25,000 at 

a time not expressly stated in the agreement. This agreement 

was also dated May 14, 1984. 

The nature of the transaction between O'Connor and 

Lewis depends upon the parties' intent at the time the 

documents were executed. In establishing this intent, the 

courts first must examine both the documents and the 

circumstances surrounding the execution of the documents. 

Boysun v. Boysun (1962), 140 Mont. 85, 88, 368 P.2d 439, 440. 

O'Connor argues that the language "[clonditioned specifically 

on the performance of Lewis set forth below, O'Connor shall 

quit claim all his right, title, and interest without 

warranty to Lewis . . .. " is a reservation by O'Connor or a 

grant by Lewis of security. The transaction that occurred 
between the parties and the circumstances surrounding the 

transaction do not warrant such a conclusion. 

The record is undisputed that O'Connor negotiated and 

purchased the MN Ranch in response to Lewis's request and 

with money provided by Lewis. The record also shows that 

O'Connor directed the real estate agent to put the title of 

the MN Ranch in his name without Lewis's permission. Lewis 

was thus not immediately aware of this action by O'Connor. 

The record also clearly shows that a disagreement arose 

between Lewis and O'Connor over personal matters and over the 

status of the MN Ranch which prompted them to execute the 

"Agreement to Settle Dispute." 

The facts outlined above, contrary to O'Connor's 

assertions, do not give O'Connor a security in the MN Ranch 

in the form of an equitable mortgage. While this Court 

recognizes equitable mortgages, - see, - e.g., Bermes v. Sylling 

(1978), 179 Mont. 448, 587 P.2d 377; Amsterdam Lumber, Inc. 

v. Dyksterhouse (1978), 179 Mont. 133, 586 P.2d 705, the 

facts in this case do not warrant the application of this 

doctrine. An equitable lien, or equitable mortgage, will be 

invoked by the courts when an intended security interest 

proves defective. The application of this doctrine therefore 

prevents the lender from suffering an inequitable loss. 

Amsterdam Lumber, Inc., 179 Mont. at 140, 586 P.2d at 709. 

However, written evidence must exist which indicates that the 

grantor's intent was to subject the real property to a 

security interest in favor of a lender. 

Amsterdam Lumber, Inc., 179 Mont. at 140, 586 P.2d at 709. 

In the present case, the undisputed facts indicate that 

the parties' intent behind the execution of the documents was 

to settle a dispute between them, hence the title of the 

document "Agreement to Settle Dispute." Although O'Connor 

agrees that this set of facts is not the typical situation in 
which a court would invoke an equitable mortgage, he 

nonetheless attempts to argue that the "ideology" behind an 

equitable mortgage should be applied in this case. We cannot 

agree. The purpose behind an equitable mortgage is to 

prevent an inequitable outcome. In light of the documents 

and the surrounding circumstances, an inequity has not 

resulted in this case. Further, the facts do not suggest 

that the parties ever intended to invest a security interest 

in O'Connor. On the contrary, the facts indicate that 

neither a sale nor a mortgage was intended by the parties, 

but instead a contract that settled the disputes between the 

parties. Therefore, as the District Court correctly stated, 

the only question remaining is whether the "Agreement to 

Settle Dispute" is valid. 

In determining that the Agreement was valid, the 

District Court found that the Agreement contained an offer, 

an acceptance, consideration and that neither party was 

incompetent nor acting under undue influence. The District 

Court therefore concluded that the Agreement was a binding 

and valid contract. The evidence clearly supports the 

District Court's findings and conclusions. We therefore hold 

that the District Court did not err in determining that a 

valid contract existed and that OIConnor did not hold an 

equitable mortgage in the MN Ranch. 

Plaintiff also attempts to argue that if this Court 

determines that an equitable mortgage did not exist, then it 

should nonetheless find that an equitable lien arises by 

virtue of $ 71-3-1301, MCA. Notwithstanding the inherent 

problem with OIConnor's argument--an "equitable" lien arising 

by virtue of a statute--O'Connorls vendor lien argument also 

fails for the same reason as outlined above. The transaction 

involved in this case involves neither a sale nor a mortgage, 

but merely an agreement to settle a dispute. Thus we hold 
that the District Court did not err in finding that O'Connor 

held no security interest whatsoever in the MN Ranch. 

The second issue raised on appeal is whether the 

District Court erred in finding that the transfer of the MN 

Ranch from one defendant to another was not fraudulent as to 

creditors. 

O'Connor argues that the District Court erred when it 

found that the transfer of the MN Ranch from Lewis to 

Atkinson was not fraudulent. Specifically, OtConnor argues 

that the District Court erroneously relied upon S 31-2-311, 

MCA, instead of 5 31-2-314, MCA, and therefore the District 

Court failed to determine whether Lewis conveyed the MN Ranch 

with the intent to defraud creditors. 

Section 31-2-311, MCA, states that " [el very conveyance 

made . . . by a person who is or will be thereby rendered 

insolvent is fraudulent as to creditors without regard to his 

actual intent if the conveyance is made . . . without a fair 

consideration." The District Court found that O'Connor did 

not demonstrate that the "transfer was made for the purpose, 

or had the effect, of rendering the Defendant J.R. Lewis 

insolvent." The record clearly supports this finding. 

O'Connor does not dispute this finding, but instead argues 

that the District Court erroneously applied S 31-2-311, MCA, 

to this case in lieu of S 31-2-314, MCA. 

Section 31-2-314, MCA, states that " [el very conveyance 

made . . . with actual intent, as distinguished from intent 

presumed in law, to hinder, delay or defraud either present 

or future creditors is fraudulent as to both present and 

future creditors." O'Connor then argues that the evidence 

indicates that Lewis had actual intent "to hinder, delay, or 

defraud" creditors. We disagree. 

O'Connor correctly notes that actual fraudulent intent 

may be established by circumstantial evidence. Montana Nat'l 
Bank v. Michels (Mont. 1981), 631 P.2d 1260, 1262-63, 38 

St.Rep. 334, 337. OIConnor then relies upon the "badges of 

fraud," which this Court has previously applied when 

determining whether a conveyance is fraudulent and therefore 

whether it should be set aside. These "badges of fraud" 

include lack of consideration for the conveyance, transfer of 

the debtor's estate, relationship between transferor and 

transferee, pendency or threat of litigation, secrecy or 

hurried transaction, 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 to the transferor. 

Montana Nat'l Bank, 631 P.2d at 1263, 38 St.Rep. at 337. 

However, we must emphasize that these "badges of fraud," if 

found, do not necessarily constitute fraud per se, but 

instead merely afford grounds of inference from which the 

court or jury are authorized to conclude that a transaction 

surrounded by them is fraudulent. Montana Nat'l Bank, 631 

P.2d at 1263, 38 St.Rep. at 337 (citing Humbird v. Arnet 

(1935), 99 Mont. 499, 512, 44 P.2d 756, 761). Despite 

OIConnorls assertions that the majority of these badges are 

met in this case, the record supports the findings and 

conclusions of the District Court that Lewis did not convey 

the MN Ranch with the intent to defrau 

therefore affirm the District Court. 

Affirmed. 

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