Title: MONTANA NATIONAL BANK v MICHELS
Citation: N/A
Docket Number: 80-232
State: Montana
Issuer: Montana Supreme Court
Date: March 4, 1981

No. 80-232 IN THE SUPREME COURT OF THE STATE OF MONTANA 1981 MONTANA NATIONAL BANK, a corp., Plaintiff and Respondent, ROY E. MICHELS,,) JR. , and SHIRLEY JEAN MICHELS,, , and JAMES V. CYBULSKI, Defendants and Appellants. Appeal from: District Court of the Fifteenth Judicial District, In and for the County of Sheridan, The Honorable M. James Sorte, Judge presiding. Counsel of Record: For Appellant: Jerome Wallander, Froid, Montana Robert Hurly, Glasgow, Montana For Respondent: John R . Hunt, Plentywood, Montana Submitted on Briefs: November 26, 1980 Decided : MAR 4 - 1 9 ( W Filed: KkR 4 - 1987 Clerk Mr. J u s t i c e Gene B. Daly d e l i v e r e d t h e Opinion of t h e Court. P l a i n t i f f Bank brought t h i s a c t i o n i n t h e D i s t r i c t Court of t h e F i f t e e n t h J u d i c i a l D i s t r i c t of t h e S t a t e of Montana, i n and f o r t h e County of S h e r i d a n , s e e k i n g money due and owing on a promissory n o t e and s e e k i n g t o s e t a s i d e and have d e c l a r e d a s f r a u d u l e n t conveyances two t r a n s f e r s of a p a r c e l of land. The D i s t r i c t C o u r t , s i t t i n g w i t h o u t a j u r y , found i n favor of p l a i n t i f f Bank, o r d e r i n g payment by d e f e n d a n t Roy E . M i c h e l s , J r . , and s e t t i n g a s i d e t h e t r a n s f e r s a s f r a u d u l e n t conveyances. From t h a t judgment d e f e n d a n t s appeal. On December 11, 1973, d e f e n d a n t Roy E. Michels, J r . , executed a promissory n o t e payable t o p l a i n t i f f Bank i n t h e p r i n c i p a l sum of $74,603.65 p l u s i n t e r e s t t h e r e o n a t t h e r a t e of 9 p e r c e n t per annum from t h e d a t e of such note. The due d a t e of t h e n o t e was December 11, 1974. P r i o r t o t h e e x e c u t i o n of t h e n o t e , on September 1, 1972, Roy Michels e n t e r e d i n t o a c o n t r a c t f o r deed t o purchase from Helen Hodges approximately 280 a c r e s of land s i t u a t e d i n Sheridan County, Montana, f o r a sum of $35,000. The subsequent t r a n s f e r s of t h i s p a r c e l a r e t h e s u b j e c t s of t h i s l i t i g a t i o n . On December 1 6 , 1 9 7 4 , Roy M i c h e l s conveyed and a s s i g n e d a l l of h i s i n t e r e s t i n t h e c o n t r a c t f o r deed and t h e above-descr ibed r e a l p r o p e r t y t o h i s w i f e , d e f e n d a n t S h i r l e y J e a n Michels, i n c o n s i d e r a t i o n of t h e sum of one d o l l a r . A t t h e t i m e of t h i s conveyance, t h e D i s t r i c t Court found t h e f a i r market v a l u e of t h e p r o p e r t y t o be $41,508. The D i s t r i c t Court found t h a t a t t h e time of t h e conveyance t o h i s w i f e defendant Roy Michels owed t h e Bank t h e t o t a l sum of $81,504.49, i n c l u d i n g p r i n c i p a l and accrued i n t e r e s t , w i t h r e g a r d s t o t h e promissory n o t e d a t e d December 11, 1973. The c o u r t a l s o found t h a t , a s a r e s u l t of t h e t r a n s f e r on December 16, 1974, Roy Michels was rendered i n s o l v e n t and had a n e g a t i v e n e t worth of $11,661.99. A s a m a t t e r of law t h e D i s t r i c t Court concluded t h a t t h e conveyance of December 1 6 , 1974, was f r a u d u l e n t a s t o p l a i n t i f f i n t h a t it was made w i t h t h e a c t u a l i n t e n t t o d e l a y , d e f r a u d and h i n d e r p l a i n t i f f Bank a s a c r e d i t o r and i n t h a t it was made w i t h o u t f a i r c o n s i d e r a t i o n and rendered d e f e n d a n t i n s o l v e n t . The D i s t r i c t Court h e l d t h a t S h i r l e y Michels was n o t a bona f i d e p u r c h a s e r f o r v a l u e w i t h r e s p e c t t o t h i s conveyance and d e c l a r e d t h e conveyance be set a s i d e a s f r a u d u l e n t . On February 19, 1975, S h i r l e y Michels a s s i g n e d and conveyed a l l of her i n t e r e s t i n t h e c o n t r a c t f o r deed t o d e f e n d a n t James V. Cybulski, an u n c l e of d e f e n d a n t Roy M i c h e l s . Roy M i c h e l s j o i n e d i n t h i s c o n v e y a n c e and assignment t o Cybulski. A t t h e time of t h i s conveyance, t h e D i s t r i c t Court found t h a t t h e market v a l u e of t h e land was $41,508. The p u r p o r t e d c o n s i d e r a t i o n f o r t h i s c o n v e y a n c e c o n s i s t e d of t h e f o l l o w i n g items: (1) Cybulski assumed t h e o u t s t a n d i n g p r i n c i p a l and accrued i n t e r e s t on t h e e x i s t i n g c o n t r a c t f o r deed, such sum being $25,483.30; ( 2 ) Cybulski paid numerous c r e d i t o r s of Roy Michels i n t h e t o t a l amount of $11,879.26, none of which was owed by S h i r l e y Michels; and ( 3 ) Cybulski f o r g a v e an a n t e c e d e n t d e b t owed t o him by Roy Michels i n t h e amount of $1,200. The D i s t r i c t C o u r t f o u n d t h a t Roy M i c h e l s was indebted t o t h e Bank i n t h e amount of $82,129 a t t h e time of t h e conveyance t o Cybulski w i t h r e g a r d s t o t h e promissory n o t e . The c o u r t a l s o found t h a t on February 19, 1975, p r i o r t o t h e t r a n s f e r t o Cybulski, Michels had a n e g a t i v e n e t worth of $57,478 and a f t e r t h e t r a n s f e r , he had a n e g a t i v e n e t worth of approximately $45,598. A s a m a t t e r of law, t h e D i s t r i c t Court concluded t h a t t h e t r a n s f e r of February 1 9 , 1975, be s e t a s i d e a s a f r a u d u l e n t conveyance i n t h a t it was made w i t h o u t f a i r c o n s i d e r a t i o n a t a time when d e f e n d a n t Michels was i n s o l v e n t and t h a t d e f e n d a n t had t h e i n t e n t t o h i n d e r , d e l a y and d e f r a u d t h e Bank a s a c r e d i t o r . The c o u r t a l s o h e l d t h a t Cybulski d i d n o t have t h e a c t u a l f r a u d u l e n t i n t e n t t o d e f r a u d , d e l a y o r h i n d e r t h e Bank a s c r e d i t o r , b u t a s c o n s i d e r a t i o n Cybulski o n l y gave t h e sum of $25,483.30 because t h e o t h e r items--the c a n c e l l a t i o n of t h e a n t e c e d e n t d e b t and t h e payment of c r e d i t o r s - - d i d n o t c o n s i s t of f a i r c o n s i d e r a t i o n f o r t h e reason t h a t d e f e n d a n t S h i r l e y Michels, a s g r a n t o r , was n o t o b l i g a t e d under t h e i n d e b t e d n e s s p a i d o r f o r g i v e n by Cybulski. The D i s t r i c t Court s e t a s i d e t h e two t r a n s f e r s a s f r a u d u l e n t based on d e f e n d a n t ' s i n t e n t i o n and insolvency. A d e t e r m i n a t i o n of d e f e n d a n t ' s i n t e n t i o n w i l l be d i s p o s i t i v e of t h i s appeal; t h e r e f o r e , it is unnecessary t o determine t h e i s s u e of insolvency. The q u e s t i o n and arguments h i n g e on s u b s t a n t i a l i t y of evidence. S e c t i o n 31-2-314, MCA, p r o v i d e s : "Every conveyance made and every o b l i g a t i o n i n c u r r e d w i t h a c t u a l i n t e n t , a s d i s t i n g u i s h e d from i n t e n t presumed i n law, t o h i n d e r , d e l a y , o r d e f r a u d e i t h e r p r e s e n t or f u t u r e c r e d i t o r s is f r a u d u l e n t a s t o both p r e s e n t and f u t u r e c r e d i t o r s . " The d i f f i c u l t y i n e s t a b l i s h i n g a c o n v e y a n c e a s f r a u d u l e n t was c h a r a c t e r i z e d by J u s t i c e DeWitt i n Merchants' N a t i o n a l Bank v. Greenhood ( 1 8 9 5 ) , 16 Mont. 395, 4 1 P. 250, i n t h e following manner: " F r a u d c a n n o t o f t e n be p r o v e n by d i r e c t evidence. Fraud c o n c e a l s i t s e l f . I t does n o t move upon t h e s u r f a c e i n s t r a i g h t l i n e s . I t goes i n devious ways. W e may w i t h d i f f i - c u l t y know 'whence it cometh and whither it goeth. ' I t ' l o v e t h d a r k n e s s r a t h e r t h a n l i g h t , because its deeds a r e e v i l . ' I t is r a r e l y t h a t w e can l a y our hand upon it i n its going. W e a r e more l i k e l y t o d i s c o v e r it a t its d e s t i n a t i o n , b e f o r e we know t h a t it has s t a r t e d upon its s i n u o u s c o u r s e . When we s o d i s c o v e r it, t h e s e a r c h l i g h t of a j u d i c i a l i n v e s t i g a t i o n goes back over its t r a i l and l i g h t e n s it from beginning t o end. A s t h e woodsman f o l l o w s h i s game by s l i g h t indica- t i o n s , a s a b r o k e n t w i g o r a d i s p l a c e d p e b b l e , s o f r a u d may become a p p a r e n t by i n n u m e r a b l e c i r c u m s t a n c e s , i n d i v i d u a l l y t r i v a l . . b u t i n t h e i r mass ' c o n f i r m a t i o n s t r o n g a s p r o o f s of h o l y writ."' 41 P. a t 259. Actual f r a u d u l e n t i n t e n t w i t h i n t h e meaning of t h e Uniform Fraudulent Conveyance Act may be e s t a b l i s h e d by c i r c u m s t a n t i a l evidence. C o n t i n e n t a l Bank v. Marcus ( 1 9 7 6 ) , 242 Pa.Super. 371, 363 A.2d 1318; s e e a l s o , F r o s s v. Wotton ( 1 9 3 5 ) , 3 Cal.2d 384, 44 P.2d 350. Where t h e e f f e c t of a p a r t i c u l a r t r a n s a c t i o n w i t h a d e b t o r is t o h i n d e r , d e l a y o r d e f r a u d c r e d i t o r s , t h e law i n f e r s o r s u p p l i e s t h e i n t e n t , e v e n t h o u g h t h e r e may b e no d i r e c t e v i d e n c e o f a d i s h o n o r a b l e motive b u t , on t h e c o n t r a r y , an a c t u a l , h o n e s t , b u t m i s t a k e n , motive e x i s t s . N a t i o n a l Bank of Anaconda v. Yegen ( 1 9 2 8 ) , 83 Mont. 265, 271 P. 612. W e have p r e v i o u s l y u s e d " b a d g e s o f f r a u d " t o determine i f a conveyance is f r a u d u l e n t and should be set a s i d e . I n Humbird v. Arnet ( 1 9 3 5 ) , 99 Mont. 499, 512, 44 P.2d 756, 761, we s t a t e d : "Fraud i n c a s e s where it is sought t o s e t a s i d e f r a u d u l e n t c o n v e y a n c e s , and t h e r e b y reach a s s e t s on behalf of t h e c r e d i t o r o r o t h e r person claiming t o be e n t i t l e d t o such a s s e t s , is o r d i n a r i l y i n d i c a t e d and ad judged by t h e presence of what t h e law h a s come t o denominate 'badges of f r a u d . ' They a r e s a i d t o b e f a c t s which t h r o w s u s p i c i o n on a t r a n s a c t i o n , and which c a l l f o r a n e x p l a n a t i o n . I t has been s a i d t h a t t h e y a r e i n f e r e n c e s drawn by e x p e r i e n c e from t h e customary conduct of mankind, and t h a t t h e y a f f o r d grounds of i n f e r e n c e from which t h e c o u r t or j u r y a r e a u t h o r i z e d t o conclude t h a t a t r a n s a c t i o n s u r r o u n d e d by them i s f r a u d u l e n t . More simply s t a t e d , t h e y a r e s i g n s or marks of f r a u d . They do n o t of themselves o r per s e c o n s t i t u t e f r a u d , b u t t h e y a r e f a c t s having a tendency t o show t h e e x i s t e n c e of f r a u d , although t h e i r v a l u e a s evidence is r e l a t i v e n o t a b s o l u t e . They a r e n o t u s u a l l y c o n c l u s i v e p r o o f ; t h e y a r e open t o e x p l a n a t i o n . They may b e a l m o s t c o n c l u s i v e , o r t h e y may f u r n i s h merely a r e a s o n a b l e i n f e r e n c e of f r a u d , according t o t h e weight t o which t h e y may be e n t i t l e d from t h e i r i n t r i n s i c c h a r a c t e r and t h e s p e c i a l circumstances a t t e n d i n g t h e c a s e . Of t e n a s i n g l e one of them may e s t a b l i s h and stamp a t r a n s a c t i o n a s f r a u d u l e n t . When, however, s e v e r a l a r e found i n t h e same t r a n s a c t i o n , s t r o n g , c l e a r evidence w i l l be r e q u i r e d t o r e p e l t h e c o n c l u s i o n of f r a u d u l e n t i n t e n t 1 1 . . . The g e n e r a l l y recognized badges of f r a u d a r e t h e l a c k of c o n s i d e r a t i o n f o r t h e conveyance, t h e t r a n s f e r of t h e d e b t o r ' s e n t i r e e s t a t e , r e l a t i o n s h i p between t r a n s f e r o r and t h e t r a n s f e r e e , t h e p e n d e n c y o r t h r e a t o f l i t i g a t i o n , s e c r e c y o r h u r r i e d t r a . n s a c t i o n , insolvency o r i n d e b t e d n e s s of t h e t r a n s f e r o r , d e p a r t u r e from t h e u s u a l method of b u s i n e s s , t h e r e t e n t i o n by t h e d e b t o r of p o s s e s s i o n of t h e p r o p e r t y , and t h e r e s e r v a t i o n of b e n e f i t t o t h e t r a n s f e r o r . 37 Am.Jur.2d F r a u d u l e n t Conveyances, S 10 a t 701. I t is undisputed t h a t on December 1 6 , 1974, t h e d a t e of t h e p r o p e r t y conveyance from Roy t o S h i r l e y Michels, t h e two p a r t i e s were l e g a l l y married. T h i s Court h a s s a i d on many o c c a s i o n s t h a t a c o u r t cannot s c r u t i n i z e t o o c l o s e l y t h e r e l a t i o n between husband and w i f e w i t h r e s p e c t t o b u s i n e s s d e a l i n g s b e t w e e n them where c r e d i t o r s a r e concerned. K e l l e r v. Flanagan ( 1 9 2 3 ) , 66 Mont. 1 4 4 , 158, 213 P. 222, 225. The m a r i t a l r e l a t i o n is o f t e n a convenient means f o r t h e p e r p e t r a t i o n of a f r a u d , and when c l a i m s of i n d e b t e d n e s s a r e made between husband and w i f e , t h e y must be s u b j e c t e d t o t h e most s e a r c h i n g examination, i f n o t indeed s u s p i c i o n . Lambrecht v. P a t t e n ( 1 8 9 5 ) , 1 5 Mont. 260, 38 P. 1063; Koopman v. Mansolf ( 1 9 1 5 ) , 51 Mont. 48, 149 P. 491. Of c o u r s e , t h e f a c t t h a t such r e l a t i o n s h i p e x i s t s between a g r a n t o r and a g r a n t e e is n o t of i t s e l f a badge of f r a u d . Hale v. Belgrade Co. ( 1 9 2 5 ) , 75 Mont. 99, 242 P. 425; H a r r i s o n v. R i d d e l l ( 1 9 2 2 ) , 64 Mont. 466, 210 P. 460. Based on a p p r a i s a l s given a t t r i a l t h e f a i r market v a l u e of t h e land a t t h e t i m e of conveyance t o S h i r l e y Michels was $41,508. However, s h e p a i d o n l y one d o l l a r i n c o n s i d e r a t i o n . W e h a v e l o n g r e c o g n i z e d i n a d e q u a c y o f c o n s i d e r a t i o n a s a badge of f r a u d . Dick v. King ( 1 9 2 7 ) , 80 Mont. 40, 257 P. 1022; Roman v. A l b e r t ( 1 9 2 8 ) , 81 Mont. 393, 264 P. 115. I n Bump on F r a u d u l e n t Conveyances ( 4 t h E d . ) , S 57, we f i n d t h i s language: "To j u s t i f y an i n f e r e n c e of f r a u d from t h e i n a d e q u a c y o f t h e p r i c e a l o n e , t h e c o n s i d e r a t i o n must be so c l e a r l y below t h e market v a l u e a s t o s t r i k e t h e understanding a t once w i t h t h e c o n v i c t i o n t h a t such a s a l e never could have been made i n good f a i t h . " A t t h e time of t h e conveyance t o h i s w i f e , Roy M i c h e l s was i n d e b t e d t o p l a i n t i f f i n t h e amount o f approximately $80,000. T h i s d e b t was i n a d d i t i o n t o v a r i o u s o t h e r l i a b i l i t i e s . I n f i n a n c i a l s t a t e m e n t s submitted t o t h e Bank by Roy Michels, t h e s u b j e c t land r e p r e s e n t s a s u b s t a n t i a l a s s e t . Michels, however, f a i l e d t o n o t i f y t h e Bank of a planned o r consummated conveyance t o h i s wife. I n f a c t , it was n o t u n t i l February 17, 1975, t h a t p l a i n t i f f Bank l e a r n e d of t h e conveyance through its own i n v e s t i g a t i o n s . A f t e r t h e conveyance, Roy Michels r e t a i n e d p o s s e s s i o n of t h e land. H i s e x p l a n a t i o n of t h e t r a n s f e r was t h a t it was f o r e s t a t e planning purposes and t o p r o v i d e s e c u r i t y f o r h i s w i f e i n t h e e v e n t of h i s d e a t h . However, i n l i g h t of t h e a b o v e f a c t s s u r r o u n d i n g t h e t r a n s a c t i o n and t h e conveyance of t h e l a n d t o Cybulski two months l a t e r , t h i s e x p l a n a t i o n b e a r s no l o g i c a l r e l a t i o n s h i p t o t h e e v e n t s which a c t u a l l y occurred. W e h o l d t h e f o r e g o i n g e v i d e n c e s u b s t a n t i a t e s a f i n d i n g t h a t t h e conveyance of December 1 6 , 1974, was made w i t h a c t u a l i n t e n t on t h e p a r t of Roy Michels, J r . , t o h i n d e r , defraud and d e l a y p l a i n t i f f Bank a s a c r e d i t o r . W e a l s o a g r e e with t h e D i s t r i c t Court t h a t S h i r l e y Michels was n o t a bona f i d e purchaser f o r v a l u e and t h a t t h e Bank is e n t i t l e d t o have t h e conveyance d e c l a r e d f r a u d u l e n t and s e t a s i d e . On February 17, 1975, d e f e n d a n t Roy Michels and h i s a t t o r n e y m e t w i t h Bank o f f i c i a l s t o d i s c u s s M i c h e l s ' f i n a n c i a l problems and p o s s i b l e s o l u t i o n s . A t t h i s meeting, l i q u i d a t i o n of a s s e t s and bankruptcy were d i s c u s s e d . The v i c e p r e s i d e n t of t h e Bank t e s t i f i e d t h a t t h e meeting was t h e f i r s t t i m e t h e Bank l e a r n e d o f t h e conveyance from Roy t o S h i r l e y M i c h e l s . A t t h a t t i m e d e f e n d a n t p r o m i s e d o f f i c i a l s t h a t he would n o t t r a n s f e r t h e l a n d f o r a p e r i o d o f n i n e t y days. Two days a f t e r t h i s meeting, on February 19, 1975, w i t h o u t n o t i f y i n g t h e Bank, d e f e n d a n t s Roy and S h i r l e y Michels conveyed and a s s i g n e d a l l i n t e r e s t s i n t h e r e a l p r o p e r t y t o defendant Cybulski, t h e u n c l e of Roy Michels. T h i s t r a n s a c t i o n occurred a f t e r o n l y f o u r o r f i v e d a y s of n e g o t i a t i o n s . A s s t a t e d p r e v i o u s l y , s e c r e t o r h u r r i e d t r a n s a c t i o n s or t r a n s a c t i o n s made under t h r e a t of l i t i g a t i o n a r e c o n s i d e r e d badges of f r a u d . See United S t a t e s v. L e g g e t t ( 6 t h C i r . 1 9 6 1 ) , 292 F.2d 423, c e r t . denied 368 U.S. 914, 82 S.Ct. 194, 7 L.Ed.2d 131, r e h . d e n i e d 82 S.Ct. 476, 368 U.S. 979, 7 L.Ed.2d 4 4 1 ; Matter of E s t a t e of Reed (Wyo. 1 9 7 7 ) , 566 P.2d 587. I t is undisputed t h a t on February 19, 1975, d e f e n d a n t Roy Michels owed t h e Bank over $82,000, w i t h r e g a r d s t o t h e promissory n o t e d a t e d December 11, 1973. Defendant was a l s o indebted t o numerous o t h e r c r e d i t o r s a t t h a t time. Once a g a i n , a f t e r t h e conveyance t o Cybulski, both Roy and S h i r l e y Michels r e t a i n e d p o s s e s s i o n and l i v e d on t h e p r o p e r t y without paying any r e n t . A t t h e t i m e of conveyance t o Cybulski, t h e f a i r m a r k e t v a l u e o f t h e l a n d was $ 4 1 , 5 0 8 . A s p u r p o r t e d c o n s i d e r a t i o n , C y b u l s k i (1) assumed t h e o u t s t a n d i n g p r i n c i p a l and i n t e r e s t on t h e c o n t r a c t f o r deed amounting t o $25,483.30, of which $19,577.73 was a c t u a l l y p a i d a t t h e time of t r i a l ; ( 2 ) p a i d numerous c r e d i t o r s of Roy Michels i n t h e amount of $11,879.26; and ( 3 ) f o r g a v e an a n t e c e d e n t d e b t owed t o him by d e f e n d a n t i n t h e amount of $1,200. W e a g r e e w i t h t h e t r i a l c o u r t t h a t t h e l a s t two items g i v e n d i d n o t c o n s i s t of v a l i d c o n s i d e r a t i o n f o r t h e reason t h a t S h i r l e y M i c h e l s , a s g r a n t o r , was n o t o b l i g a t e d u n d e r t h e i n d e b t e d n e s s p a i d o r f o r g i v e n by Cybulski. See Hansen v. Cramer ( 1 9 5 2 ) , 39 Cal.2d 321, 245 P.2d 1059. W e hold t h a t t h e s e c r e t conveyance of February 1 9 , 1975, f o r i n a d e q u a t e c o n s i d e r a t i o n , w h i l e d e f e n d a n t was indebted t o t h e Bank and under t h e t h r e a t of bankruptcy, was made w i t h t h e a c t u a l i n t e n t on t h e p a r t o f Roy E. Michels, J r . , t o d e f r a u d , h i n d e r and d e l a y t h e Bank a s c r e d i t o r , and, t h e r e f o r e , must be s e t a s i d e a s a f r a u d u l e n t conveyance. The judgment of t h e D i s t r i c t Court is a f f i r m e d . J u s t i c e W e concur: I . v: -''\\.I- 4 &I&,, , \ J u s t i c e s \ I I