Court Opinion

ID: 5172874
Source: CourtListenerOpinion
Date Created: 2022-01-02 05:09:10.371787+00
Date Added: 2024-06-11T08:26:09.814613
License: Public Domain

BAKES, Justice,
dissenting:
The majority’s affirmance of the trial court’s conclusion that the Andruses acted as a gratuitous surety in mortgaging their farm and that they can now escape liability based either upon a failure of consideration or upon the bank’s breach of some duty of disclosure is clearly erroneous. In my view, the Andruses are bound, at least to the extent of their mortgaged property, as principals, although they may have some right of setoff attributable to the manner in which the bank disbursed the loan proceeds.
There are at least two bases upon which it can be shown that the trial court erred in characterizing the Andruses as a gratuitous surety. Both are premised upon the rule that one obligated to repay a loan is a principal, and not a surety, if the lender contracted to disburse the proceeds of the loan for the obligor’s benefit. See A. Stearns, The Law of Suretyship § 1.4 (5th ed. J. Elder 1951).
In mortgaging their land, the Andruses obligated themselves to the extent of their property to repay a loan. To decide whether they were obligated as principals or as sureties, we must determine whether the lender agreed to disburse funds for their benefit. As the majority acknowledges, the Andruses and Muirbrook entered into a joint business venture in the spring of 1974. The trial court found that “[t]he . joint venture came in need of funds for their enterprise . . . [and] application was made by Muirbrook Farms, Inc., to the defendant Zion’s First National Bank of Ogden for a loan in the amount of $250,-000.” The court further found that the bank agreed to make the loan if the Andruses would secure it with a mortgage on their land in Idaho. The record before us contains a letter from the Andruses to the bank. It reads in part as follows:
“[We] hereby request that you make a loan of $250,000 to Muirbrook Farms, Inc. which loan is to be secured by a Second Mortgage on our farm. . . . [We] have a joint venture agreement with Muirbrook Farms, Inc. which is to be known as MACLAC, and our consideration for executing the mortgage . will be our participation in proceeds with Muirbrook Farms, Inc. in and through MACLAC joint venture.”
It is clear from the foregoing that the Andruses agreed to mortgage their land in order to further the interests of the MAC-LAC joint venture. Muirbrook had an existing line of credit with the bank which was in default. The bank had refused to refinance Muirbrook without additional collateral, and all of the parties acknowledged that when the Andruses agreed to put up that collateral a substantial portion of the loan proceeds was earmarked for the refi*728nancing of Muirbrook’s pre-existing indebtedness. As the majority acknowledges, Muirbrook’s own solvency was imperiled, and the Andruses certainly understood that MACLAC’s future was inseparable from Muirbrook’s. Thus, as the Andruses stated in their letter, funds disbursed for Muir-brook’s benefit likewise inured to the Andruses’ benefit, since the Andruses had a direct interest in ensuring MACLAC’s continued operation. This alone is reason enough to conclude that the Andruses received a benefit from the refinancing and thus were principals.
However, there is a more compelling reason that both the trial court and now the majority have erred in casting the Andruses as sureties. The trial court found that the bank led the Andruses to believe that $20,-000 of the loan proceeds would be placed at their disposal as operating capital for the MACLAC joint venture. Although the bank executed no writing to that effect, the majority uncritically accepts the trial court’s finding.1 Yet, even while it posits that the Andruses bargained to receive $20,000 in cash from the proceeds of the loan, the majority clings to its view that the Andruses were gratuitous sureties — obviously two inconsistent positions. As indicated earlier, one who bargains and obligates himself to repay a loan is a principal and not a surety, if the lender contracted to disburse the proceeds of the loan for the obligor’s benefit. See A. Stearns, supra, § 1.4. The majority’s affirmance of the trial court’s conclusion that the Andruses were gratuitous sureties, and its simultaneous affirmance of the finding that the bank never paid the Andruses the $20,000 that it allegedly agreed to pay out of the loan proceeds, are two totally inconsistent positions which cannot be reconciled.
Both the majority and the trial court have made much of the fact that the bank apparently did not tender $20,000 directly to the Andruses or directly to MACLAC. The trial court seems to have believed that the bank breached a duty of disclosure that it owed to the Andruses in their capacity as gratuitous sureties by failing to advise them that it would not place $20,000 at their immediate disposal. As has been demonstrated above, the Andruses were not sureties at all, gratuitous or otherwise,2 and *729therefore the bank owed them no special duty of disclosure.
Furthermore, it cannot be said on the record before us that the bank is guilty of fraud. The trial court concluded that the bank misled the Andruses concerning the $20,000. However, the court did not specifically find that the bank was aware that no funds would be disbursed directly to the Andruses or MACLAC but nevertheless told the Andruses otherwise in order to induce them to mortgage their land. In general, there is no fraud if the one making a representation believes it to be true at the time it is made. See Fowler v. Uezzell, 94 Idaho 951, 500 P.2d 852 (1972). “In Idaho, fraud is not to be presumed, but rather must be shown by clear and convincing evidence.” Gneiting v. Clement, 96 Idaho 348, 350, 528 P.2d 1283, 1285 (1974). Thus, standing alone, the trial court’s conclusion that the bank misled the Andruses regarding the $20,000 is not sufficient to establish that the Andruses were defrauded.
The majority has held that the bank’s failure to tender to the Andruses the $20,-000 cash that it had allegedly promised them constituted a failure of consideration, precluding the bank from looking to the Andrus land to satisfy Muirbrook’s unpaid promissory note. However, it is undisputed that the bank actually did disburse the entire $250,000 it had agreed to lend. Much of this money apparently went to refinance Muirbrook’s pre-existing indebtedness as the parties agreed would be done. As explained earlier, consideration to Muirbrook was also consideration to the Andruses. Furthermore, the record discloses that some of the loan proceeds were used to meet current expenses of the MACLAC joint venture and some was used to pay the debts incurred by the Andruses. The trial court failed to make detailed findings regarding the source of the obligations for the satisfaction of which the loan proceeds were disbursed. The court simply found that the Andruses “never received . . . any funds from the loan proceeds.” However, unless we are to limit receipt of funds to the placing of cash into the recipient’s hand or bank account, John Andrus’s own testimony shows that this finding was clearly erroneous:
“Q. [By Mr. Barrett] Were you familiar with the fact that your payment to the Federal Land Bank is paid from the proceeds of this loan?
“A. Yes. . . .
“Q. Was the payment made to Mr. Russell Hebdon on your behalf?
“A. The payment was made to Mr. Russell Hebdon on my behalf [and] was [for] feed that we bought from Mr. Russell Hebdon for the operation of the [joint venture] along in the fall of the year. “Q. Was a payment made to Mr. J. Harper for your account?
“A. Yes.”
Thus, although the borrowed funds were not disbursed directly to Andrus, a portion of the loan proceeds were paid directly to his creditors for his benefit. Hence, there was no complete failure of consideration sufficient to relieve the Andruses of the consequences of mortgaging their land.
At most the Andruses might be entitled to some amount of setoff for damages they are able to prove. It is certainly not a foregone conclusion that they should be entitled to set off the full amount that the bank failed to make directly available to them or MACLAC. It seems that the bank’s failure to disburse the funds in that manner was attributable to the fact that the entire $250,000 was expended in refinancing part of Muirbrook’s existing indebtedness and in paying the expenses of Andrus and the joint venture. Thus, even if the bank had tendered the $20,000 directly to them, it is quite conceivable that the money ultimately would have gone to the same creditors who in fact received it, albeit by way of an extra set of hands.
I would reverse the judgment of the trial court and remand the matter for a new trial.

. The finding is open to criticism for at least two reasons. First, the trial court’s finding seems to be premised upon the written joint venture agreement between the Andruses and Muirbrook which referred to a $20,000 contribution to the venture by Muirbrook. The court found that the bank had approved of the joint venture agreement, knowing that Muirbrook’s only source of cash would be the loan proceeds; that the Andruses “had a right to rely upon the reference to the $20,000 contained in the joint venture agreement”; and that “[t]he basic consideration for [the Andruses’] execution of the mortgage was their belief that they would receive immediately upon execution of the documents $20,000 from the loan proceeds for their operational expenses.” In my view, the bank’s familiarity with the terms of the Andrus-Muirbrook joint venture agreement and with Muirbrook’s financial status is not a suitable basis for inferring that the bank was somehow obliged to see to it that the Andruses or MACLAC would get $20,000 from the loan proceeds.
A further difficulty with the trial court’s finding is that the court seemed to equivocate regarding the exact nature of the expectancy to which the bank’s conduct allegedly gave rise. For example, at one point the court indicated that the bank “led [the Andruses] ... to believe that [$20,000] would, in fact, be deposited to the joint venture operating account.” However, the court also found that the Andruses “never received any part of the $20,000.” This suggests that the court was not really clear whether the funds were to be delivered to the Andruses personally or placed in a joint venture account. The majority seems to assume that the money was to go directly to the Andruses, though this is inconsistent with the Andruses’ letter to the bank indicating that they would “participat[e] in proceeds . in and through MACLAC joint venture.” (Emphasis supplied).

. The trial court’s conclusion that the Andruses acted as a gratuitous surety is particularly perplexing in light of the court’s own finding that they were to receive $20,000 of the loan proceeds, which surely must mean that they were to receive consideration for mortgaging their land. That they might not have subsequently received the promised money in hand should have no bearing upon the gratuitousness of their contribution to the procurement of the loan. The bank’s failure to deliver the promised $20,000 would constitute, at most, a breach of the agreement, for which damages would be an adequate remedy. The majority’s discussion of this problem is murky and appears to endorse the trial court’s faulty reasoning with respect to the issue of gratuitousness.