Court Opinion

ID: 9549698
Source: CourtListenerOpinion
Date Created: 2023-08-07 18:23:31.533178+00
Date Added: 2024-06-11T15:20:46.468217
License: Public Domain

STRUCKMEYER, Chief Justice
(dissenting) .
The evidentiary facts upon which the ultimate decision in this case rests are substantially without dispute. The cause being in equity, this Court is at liberty to draw its own conclusions from the undisputed *229facts. Sanders v. Brown, 73 Ariz. 116, 238 P.2d 941.
Baca Float Ranch, Inc. is an Arizona corporation, incorporated in November of 1932. It is the owner of approximately 52,400 acres of grazing land and 1,600 acres of agricultural land, all of which is improved with wells, tanks, fencing, feed mills, pens, ditches, underground pipelines and buildings and facilities suitable and capable of caring for 5,000 cattle. The jury found that Merryweather’s stock at the time of its purported sale to Pendleton in 1955 was worth $630,000.
Merryweather first met Pendleton in 1939 at which time, seemingly, the two became close personal friends and thereafter business associates. In 1941 Merryweather first acquired a block of stock in the Baca Float Ranch and by February of 1949 owned 5,997 shares representing 50% of the total shares issued, paying a sum slightly in excess of $160,000. Pendleton was in charge of the ranch during which time Merry-weather “always went along” with what he did.
In October of 1949 Merryweather commenced a series of transactions which culminated in the present dispute. He first borrowed $140,000 from one Thomas Graham Bell; thereafter, on May 18, 1952, he borrowed $160,000 from D. M. Haggard and Tobe Foster, using the proceeds to discharge the Bell obligation. On January 9th, 1953, appellant borrowed $160,000 from T. T. Pendleton which he used to pay- off the Haggard-Foster obligation. In July of 1954, he borrowed $180,000 from D. M. Haggard (later increased) and used the proceeds to pay off the Pendleton obligation. In each of these transactions Merryweather pledged his 5,997 shares of stock in the Baca Float Ranch as security for the indebtedness.
“The party of the second part, [Pendleton] in consideration of the sum of Ten Dollars ($10.00) and other valuable consideration to him in hand paid by the party of the first part, [Merryweather] does hereby give and grant unto the party of the first part an exclusive right and option to repurchase said shares of stock at any time within one (1) year from date hereof. The purchase price of said stock, if said option is exercised shall be the sum of Two Hundred Thousand Dollars ($200,000), plus interest on said sum at the rate of five per cent (5%) per annum from the date thereof until the said option is exercised, which shall be payable in cash at the *230time of exercising said option. Should first party .fail to exercise said option within one (1) year from date hereof, the same shall thereupon expire and be of no further force or effect.”
*229Early in August of 1954, Merryweather and Pendleton began discussions with reference to paying off the Haggard obligation. The discussions culminated on January 25th, 1955, with the assignment of the stock in blank and transfer to Pendleton accompanied by a written collateral agreement that within one year Merryweather had the right to repurchase for the sum of $200,000 plus interest at the rate of five per cent (5%) per annum.1 Merryweather’s position is that the transaction, while ostensibly *230a sale, was in substance a pledge of the Baca Float Ranch stock to secure a loan and neither more nor less than a transaction to secure the repayment thereof. A sale absolute on its face will be treated as a mortgage if the parties so intend. Britz v. Kinsvater, 87 Ariz. 385, 351 P.2d 986. In the instant case the repurchase agreement executed contemporaneous with the transfer prima facie evidences the intention of the parties.
In construing the repurchase agreement there must be adherence to the accepted rules uniformly prevailing to determine the meaning of instruments. The construction of a written contract is, of course, peculiarly a function of the Court. Ruby v. United Sugar Companies, S. A., 56 Ariz. 535, 109 P.2d 845; Rio Grande Oil Co. v. Pankey, 50 Ariz. 529, 73 P.2d 707; Sills v. Velvin, 49 Ariz. 553, 68 P.2d 338. Its legal effect is to be determined by its provisions and not by the labels which are appended thereto. Employer’s Liability Assurance Corporation v. Heaton Lunt & Son, 82 Ariz. 320, 313 P.2d 393; Intermountain Building & Loan Ass’n v. Gallegos, [9th Circuit] 78 F.2d 972, certiorari denied, 296 U.S. 639, 56 S.Ct. 172, 80 L.Ed. 454. Courts are concerned with the practical operation of instruments and not with the descriptive words which may be applied to them. Arizona State Tax Comm. v. Garrett Corporation, 79 Ariz. 389, 291 P.2d 208.
Thus, it has been held that while the body of an instrument is called an option yet upon examination it becomes apparent that it is an instrument to reconvey upon contingencies, a court will so declare its true nature. Jeffries v. Charlton, 74 N.J.Eq. 430, 70 A. 145. Such is, of course, consistent with the universally applicable rule that equity looks to the substance rather than the form. Equity will go behind the form of a transaction to impose liability against evasion by a concealment of the instrument’s true character. Kennedy v. Morrow, 77 Ariz. 152, 268 P.2d 326; Wallace v. First Nat. Bank, 39 Ariz; 451, 452, 7 P.2d 586.
The agreement gave Merryweather the right to have the stock returned to him upon payment of the $200,000 [the purchase price] plus five per cent (5'%) interest. Were it collateral to a deed it would constitute an agreement of defeasance. Under such circumstances, that is, where the purported purchaser of property gives back to the purported seller a written agreement containing a right to have the property re-conveyed, the transaction has been considered as one of security. Logsdon v. Quist, 102 Colo. 560, 81 P.2d 770; Exchange Trust Co. v. Godfrey, 128 Okl. 108, 261 P. 197; Wells *231V. Hilburn, 129 Tex. 11, 98 S.W.2d 177. In Logsdon v. Quist, supra, the agreement provided :
“ ‘It is therefore mutually agreed that the said The Star Loan Company will reconvey said real property to said Emma M. Logsdon, provided however, that all of the following terms and conditions are complied with, to wit: * * * ” [102 Colo. 560, 81 P.2d 771.]
The Colorado Court stated:
“ * * * That the company held it but conditionally is evidenced by the fact that upon the payment of certain money it was to be reconveyed to her. In legal effect the conveyance with the right to a reconveyance upon the payment of a certain amount of money constituted the transaction a mortgage.”
Jones on Mortgages states the rule:
“ * * * Any stipulation or agreement that plainly indicates an intention to return or reconvey the property, upon payment of the sum named, consti-. tutes a mortgage. If there be in the deed itself, or in any separate deed executed at the same time, and constituting with the conveyance one transaction, a provision that the estate shall be reconveyed upon the payment of the debt, such stipulation constitutes a defeasance as much as if the words ‘on condition,’ or ‘provided, however,’ were used. Thus, a reservation by a grantor of the privilege of redeeming within a specified time creates a mortgage, if the deed was given to secure a debt.” 8th Ed., Vol. 1, Section 291.
The purchase agreement .gave notice to the world that title could be defeated on the condition stated therein. On its face it has the indicia of a transaction of security.
The general rule is that an absolute deed will be held to be a mortgage where it conveys an estate subject to defeasance. It is a defeasance, express or implied which makes an instrument in the form of an absolute conveyance a mortgage, Owens v. State, 133 Okl. 183, 271 P. 938, for a mortgage is simply a deed containing a clause of defeasance. No particular form of defeasance is required, Gish v. Terrell, 266 Ky. 424, 99 S.W.2d 168. Provisions in instruments that the seller has the privilege of repurchasing have been construed as mortgages. Parrish v. Parrish, 258 Ala. 13, 61 So.2d 130; Bender v. Kaelin, 257 Ky. 783, 79 S.W.2d 250; Law v. Meadows, 131 W. Va. 132, 46 S.E.2d 449.
While on its face the instrument has all the earmarks of a transaction to secure a debt, in order to derive the intention of the parties, the true character of the transaction may be shown by parol. Warner v. Gosnell, 8 Ill.2d 24, 132 N.E.2d 526; Umpqua Forest Industries v. Neenah-Oregon Land Co., 188 Or. 605, 217 P.2d 219.
*232Plaintiff, Merryweather, joined the Valley National Bank of Phoenix, a national banking association, as a party to this action because the bank was in possession of the stock. The bank acquired possession when contemporaneous with the execution of the transfer of the stock certificates and the repurchase agreement it loaned to Pendleton the sum of $200,000 and accepted as part security the 5,997 shares of capital stock of the Baca Float Ranch previously held in Merryweather’s name but reissued to Pendleton in the presence of Charles Patton, a vice president of the bank.
After Merryweather signed the stock certificates and executed the repurchase agreement, Pendleton executed a note for $200,-000 payable to the bank. This was the amount of Merryweather’s indebtedness to Haggard. Haggard was called and came over to the bank and accepted the $200,000. This was necessary because the stock had been pledged to secure the Haggard indebtedness. Pendleton’s brother then brought over the corporate stockbook and seal and the stocks were reissued in Pendleton’s name. Thus, the stocks which were in Merryweather’s name until a few moments before became part of the collateral for the bank’s loan to Pendleton.
It should be reiterated that Merryweather owed D. N. Haggard $200,000 on previous loans; that Pendleton made arrangement's for repayment of the Haggard debt by borrowing $200,000 from the bank; that immediately after Merryweather signed over the stock it was reissued in Pendleton’s name and accepted by the bank as collateral for the loan to Pendleton.
Under A.R.S. § 33-791—Foreclosure of Pledge of Chattels, as much of the pledged property as is necessary to pay the debt must be sold at public auction. So, if Pendleton defaulted only those shares necessary to satisfy the debt would have been sold. Whether they were Pendleton’s original shares or shares transferred to Merry-weather would, of course, be immaterial to Pendleton since all the shares were in his name. Hence, looking through the form of the transaction to its substance, since the shares were worth $630,000, it is plain that Merryweather’s property was in reality the security for the debt.
Pendleton argues that this can not be a transaction to secure a debt for the reason that there was no debt in existence which Merryweather was required to pay. It is true that the existence of the debt is essential in order to have a transaction construed as one of security. Indeed, this is the distinguishing aspect which determines whether the parties are dealing as in the ordinary agreement of repurchase or as security for an indebtedness. Charter Gas Engine Co. v. Entriken, 30 Ariz. 341, 246 P. 1038. But the question .of whether there was a debt is not to be solved by examining the evi*233dence to determine whether Merryweather gave Pendleton his personal promise to repay the $200,000.
It is at this point that I am in most serious disagreement with the majority. It is assumed because there was no specific promise to pay in such words as “I promise to pay” or their equivalent, that there was no debt. The very contrary is true. It is commonplace to find an agreement that a debt will be satisfied out of a particular fund or security. That an indebtedness nonetheless exists can not be doubted even though there is no further personal liability on the part of a debtor. It is the security that becomes liable for the extinguishment of the debt. Russell v. Southard, 12 How. 139, 13 L.Ed. 927; Hilpert v. Commissioner of Internal Revenue, S Cir., 151 F.2d 929, 162 A.L.R. 899; In re A. Roth Co., 7 Cir., 118 F.2d 156; Land O’Lakes Dairy Co. v. Wadena County, 229 Minn. 263, 39 N.W.2d 164; O’Briant v. Lee, 214 N.C. 723, 200 S.E. 865; Jones on Mortgages, 8th Ed., Vol. 1, Section 436.
In this case the security, the stock in the Baca Float Ranch, was valued at many times in excess of the obligation. The stock was more than ample to indemnify Pendleton against any possible loss and this was known to both of the parties to the transaction. No personal promise to pay was necessary because by transferring the stock to Pendleton payment of the obligation was guaranteed a year in advance of the maturity date. There was no need for Merry-weather to assume a further personal liability and patentedly none was expected. Nonetheless, while there was no personal responsibility for the $200,000 beyond the security transferred to Pendleton, the fact is unalterable that Merryweather’s property secured the repayment of that sum to Pendleton. As was stated in Russell v. Southard, 12 How. 139, 13 L.Ed. 927, supra:
“ * * * It is not to be expected that the party would, by taking personal security effectually defeat his own attempt to avoid the appearance of a loan.”
There is seemingly one conflict in the evidence. Defendants point to this as justification for affirming the trial court’s findings. Pendleton argues that he offered to buy Merryweather’s stock for $200,000, and that this created an outright sale. However, when he was closely pressed on cross-examination he was compelled to admit the reason why the transaction took the form of an absolute sale.
“Q. Now you have stated, Mr. Pendleton, that the reason why you wanted this sale, as you say, was to avoid that contingency that if at the end of a year’s time if the money for repurchase was not paid to you you would avoid the unpleasantness of a foreclosure of Merryweather’s stock. Is that correct ?
* ?fc íjí Jji
*234“A. That is partly correct.
“Q. In deciding the route that you would go in helping Hubert or in keeping others from getting interested in the Baca Float Corporation you decided that you did not want any agreement which would require you to foreclose Merryweather’s stock? A. I will say that was partly the reason.
“Q. And what was the rest of the reason, sir? A. Well, it just seemed simpler to me than going through all this complicated foreclosing and trouble that had been going on here for four or five years.
“Q. Now, I take it that by going this route, of sale you knew that at the end of this year’s time you would not have to put the stock up for sale and have a public or private auction of it. Is that what you were trying to avoid? A. Yes, that was one thing.”
The only conclusion that can be drawn from Pendleton’s testimony is that the transaction took the form of a sale because he, Pendleton, wanted to avoid the trouble of a foreclosure. This is the very reason for an intervention by a court of equity. Handrub v. Griffin, 127 Kan. 732, 275 P. 196; Wiswell v. Simmons, 77 Kan. 622, 95 p. 407; Worley v. Carter, 30 Okl. 642, 121 P. 669; Talley v. Eastland, 259 Ky. 241, 82 S.W.2d 368. The court in Handrub v. Griffin, supra, in reaching the conclusion that the transaction did not constitute a sale stated:
“Where, at the same time a deed is made, the grantee executes a contract to reconvey upon the payment of an existing debt owing by the grantor, the transaction is in effect a mortgage, notwithstanding the grantee takes possession, and refuses to accept an ordinary mortgage, giving as a reason that he does not wish to be at the expense of a foreclosure in case of a default.” [127 Kan. 732, 273 P. 200.]
Whether the transaction is called a loan or sale is simply a question of what word the witness chooses to use, whether it be the instrument or the man. Pendleton intended to make funds available to Merryweather to pay off the Haggard debt and as security for repayment thereof Merryweather’s stock in the Baca Float Ranch was transferred to him. The form of the transaction was for the purpose of assuring that Pendleton was repaid the money, but without the trouble of a complicating foreclosure.
A.R.S. § 33-702 provides:
“Mortgage defined; pledge distinguished; admissibility of proof that transfer is a mortgage
“Every transfer of an interest in property, other than in trust, made only as a security for the performance of another act, is a mortgage, except a transfer of personal property accom*235panied by an actual change of possession; which is deemed a pledge. The fact that a transfer was made subject to defeasance on a condition, may, for the'purpose of showing that the transfer is a mortgage, be proved except against a subsequent purchaser or encumbrancer for value and without notice, notwithstanding that the fact does not appear by the terms of the instrument.”
It is plain that the bank had notice of Merryweather’s dominant interest in the stock. The transfer of stock and the signing of the repurchase agreement was as stated in the presence of Mr. Charles Patton, Vice President of the Valley National Bank, in charge of agriculture and livestock loans. He testified that discussions concerning the loan were had in his office prior to the actual consummation of the transaction. The execution of the repurchase agreement, together with the attendant circumstances were known to the bank— Merryweather’s indebtedness to Haggard, the transfer of the stock in order to secure the loan to Pendleton by which Haggard was paid—all under the Statute, A.R.S. § 33-702, supra, could only lead an impartial observer to but one conclusion that while the transaction took the form of an outright sale it was in fact intended to be security for a loan.
A court is unsophisticated indeed to allow the protestations of interested parties after the fact to control the decision. The testimony establishes that Pendleton set up the form of the transaction only after numerous consultations with his attorney. The instruments of sale and repurchase were drawn by his then lawyer. The jury found that the stock at the time of the transaction was more than three times the value of its purported sale price. Merryweather asked the court to declare the transaction a pledge so that he might have the statutory period to redeem and if unable to do so then that it, or so much as necessary to satisfy the debt, be sold to the highest bidder pursuant to the law—first applying the proceeds to payment of the bank’s debt. Anything less, in my opinion, is unconscionable.
This case was tried to a jury which returned a general verdict and thirteen (13) special findings, all favorable to Merry-weather. These findings were thereafter set aside by the trial court which entered findings opposed to those of the jury and upon such findings entered a verdict in favor of appellees.
In its written order setting aside the findings and verdict of the jury, the trial court stated:
“* * * an essential requisition to the setting aside of an instrument absolute in form in order to construe it as a mortgage or pledge that the obligation to pay the indebtedness must appear beyond question from the evidence. * * * That element the court has *236found lacking in this case and therefore is obliged to grant the defendant’s motion to set aside the findings and verdict of the jury.” (Emphasis supplied.)
In this the trial court palpably was in error.
The words “beyond question” are synonymous with “beyond a reasonable doubt”. In re Meckley, 3 Cir., 137 F.2d 310. Proof beyond question or beyond a reasonable doubt is known only to the criminal law, it being the universal rule in civil actions that the party having the burden of an affirmative issue must establish his case by clear and convincing evidence. Jones v. Provident Mut. Life Ins. Co., 7 Cir., 109 F.2d 412; Cowles v. Zlaket, 167 Cal.App.2d 20, 334 P.2d 55; Investor’s Mortgage Security Co. v. Hamilton, 51 Idaho 113, 4 P.2d 347; Child v. Child, 8 Utah 2d 261, 332 P.2d 981; Zivotosky v. Max, 190 Misc. 1044, 75 N.Y. S.2d 553. In some instances such language has been used as clear, cogent and convincing, Rincon Inv. Co. v. White, Tex. Civ.App., 99 S.W.2d 390; clear, strong and convincing, Dumas v. O’Leary, 152 Wash. 101, 277 P. 449, or clear, satisfactory and convincing, Winkelmann v. Luebbe, 151 Neb. 543, 38 N.W.2d 334; Sheets v. Huben, 354 Mich. 536, 93 N.W.2d 168.
The controlling principles which should govern the decision are stated in Galena Oaks Corporation v. Scofield, 5 Cir., 218 F. 2d 217, 219:
“ * * * Insofar, however, as the so-called ‘ultimate fact’ is simply the result reached by process of legal reasoning from, or the interpretation of the legal significance of, the evidentiary facts, it is ‘subject to review free of the restraining impact of the so-called “clearly erroneous” rule.’ Lehmann v. Acheson, 3 Cir., 206 F.2d 592, 594. As succinctly stated by Professor Moore, ‘Findings of fact that are induced by an erroneous view of the law are not binding. Nor are findings that combine both fact and law, when there is error as to the law.’ 5 Moore’s Federal Practice 2d Ed., Sec. 52.03(3), p. 2631. * * *” (Emphasis supplied.)
Where the trial court has misconceived the burden of proof as here, its findings of fact and conclusions of law dependent thereon are so irredeemably tainted that they should be held to be devoid of any effectuality.
The trial court had, however, correctly instructed the jury as to the burden of proof in this language:
“ * * * In this case the plaintiff has asserted that the written agreement constituted a pledge of stock, and the burden of proof as to that issue is therefore on the plaintiff. Your decision as to whether plaintiff has carried his burden of proof must be made according to whether or not that issue *237has been proved to you by clear and convincing proof.”
Because the trial court entered judgment in favor of the defendants under an erroneous view of the law while the jury was correctly instructed, this Court should reinstate the special findings and general verdict in favor of plaintiff and direct the entry of judgment in accordance therewith.
For the foregoing reasons I am of the opinion the judgment of the court below should be reversed.

. The relevant part of the agreement.