FARMERS ST BK OF VICTOR v IMP C
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No. 85-032 IN THE SUPREME COURT OF THE STATE OF MONTANA 1985 FARMERS STATE BANK OF VICTOR, MONTANA, a Montana Banking corp., Plaintiff and Respondent, IMPERIAL CATTLE COMPANY, a Montana Corporation, et al., Defendant and Appellant. APPEAL FROM: District Court of the Twentieth Judicial District, In and for the County of Lake, The Honorable Douglas Harkin, Judge presiding. COUNSEL OF RECORD: For Appellant: James A. Manley, St. Ignatius, Montana For Respondent: Datsopoulos, MacDonald Missoula, Montana & Lind; Edward Murphy, Submitted on Briefs: June 13, 1985 Decided: September 18, 1985 Filed: $k? - , Mr. Justice L. C. Gulbrandson delivered the Opinion of the Coiurt . Imperial Cattle Company (ICC), Kenneth N. Lillethun and Norman I. Rock, appellants, appeal a judgment of the Fourth Judicial District, Lake County, entered in favor of James Edmiston, respondent, on August 8, 1984. The District Court concluded that appellants failed to establish their claims of constructive fraud, breach of fiduciary duty and conversion against respondent. We affirm. Respondent and Lillethun first other in had contact with each 1972 in connection with the sale of silage by respondent to Lillethun. Late that year or early in 1973 they organizing a course these conversations, Lillethun brought Rock into the discussions. Lillethun and started operation. Rock both to discuss During were the experienced of in the large-scale dairy dairy business. Respondent, while he knew little about the dairy business, was an experienced businessman and banker, and owned a ranch and feed lot near Columbia Falls, Montana. Respondent formed ICC in 1967 but did not conduct any business relevant to this action through the corporation until late February or early March, 1973. At that time, he, Lillethun and Rock contributed assets to the corporation in an attempt to construct a dairy operation on his ranch. Respondent contributed $50,000 in cash. Lillethun and Rock contributed their milk bases valued at about $48,000 and $65,000, respectively. Milk base is the amount of grade one milk, expressed as pounds per day, an individual is permitted to sell and is essential to a profitable dairy ranch. Lillethun and Rock agreed to manage the dairy operation and were to receive a salary until the business began to generate a profit. Lillethun and respondent were to seek the financing required to set up the operation at the ranch. All p a r t i e s agreed t h a t i f t h e p r o j e c t could n o t be p u t t o g e t h e r by September 1 5 , 1 9 7 3 , t h e y would abandon i t and e a c h would have t h e i r c o n t r i b u t i o n s r e t u r n e d t o them. In March through a 1973, leasing Lillethun arrangement acquired with the cattle Dolson company t h a t had b o u g h t many o f h i s c a t t l e . for TCC Company, a Rock s o l d many o f h i s c a t t l e t o Dolson Company and t h e n l e a s e d back t h e same cattle for ICC. third A person, Searles, also sold his c a t t l e t o Dolson Company and I C C l e a s e d t h e same h e r d . The c a t t l e o p e r a t i o n r a n a t t h r e e l o c a t i o n s a f t e r ICC l e a s e d t h e cattle, Lillethun's dairy in Lake County, Rock's dairy in R a v a l l i County, and S e a r l e s ' d a i r y , which was b e i n g l e a s e d i n R a v a l l i County. Lillethun, Rock and S e a r l e s r e c e i v e d rent from I C C f o r t h e u s e o f t h e d a i r i e s . A l s o i n March 1973, L i l l e t h u n and r e s p o n d e n t r e f i n a n c e d some m a c h i n e r y t h r o u g h Western Farm Bureau I n s u r a n c e . They r e p r e s e n t e d t h e m a c h i n e r y a s b e l o n g i n g t o I C C and t o o k o u t a loan for $64,500 in the company's personally guaranteed t h e loan. name. Respondent The p a r t i e s u s e d $28,955.55 o f t h e l o a n p r o c e e d s t o r e p a y PCA t o a v o i d a f o r e c l o s u r e on respondent's machinery. encumbrance on Lillethun They u s e d Lillethun's personally. corporation. Both $13,567.62 machinery. The Lillethun remainder and t o pay o f f an $9,000 went to stayed in the respondent signed an a p p r a i s a l s t a t i n g t h e t o t a l c a s h v a l u e o f t h e e q u i p m e n t was $101,350. R e s p o n d e n t ' s e q u i p m e n t was w o r t h a b o u t $67,850 and L i l l e t h u n ' s was w o r t h a b o u t $33,500. f a l l of D u r i n g t h e summer and 1973 c e r t a i n i t e m s o f e q u i p m e n t w e r e t r a d e d i n and r e p l a c e d w i t h o t h e r i t e m s which w e r e f i n a n c e d t h r o u g h W e s t e r n Farm Bureau I n s u r a n c e . The e q u i p m e n t , e x c e p t f o r L i l l e t h u n ' s i t e m s , was l o c a t e d on r e s p o n d e n t ' s l a n d . L i l l e t h u n and r e s p o n d e n t f i r s t c o n t a c t e d s e v e r a l b a n k s and lenders in western Montana in an effort to arrange financing and equipment for the dairy. Later, t h e y made numerous t r i p s o u t o f s t a t e t o New York, C h i c a g o , S e a t t l e and other places t o find such contacts, fruitless. f i n a n c i a l backing made f o r t h e dairy. from March t o mid August All 1973, proved Respondent p a i d f o r most o f t h e e x p e n s e s f o r t h i s t r a v e l o u t o f h i s own p o c k e t . During t h i s s e a r c h f o r f i n a n c i n g , ICC produced milk a t the three valued at separate locations. $59,584.19 and w i t h d r e w between $54,990.34 Respondent provided $36,000-$38,000 and $57,466.34 in silage cash. He a s payment f o r t h e s i l a g e during t h i s period. Around August 1973, r e s p o n d e n t c o n c l u d e d t h a t f i n a n c i n g f o r t h e p r o j e c t was u n l i k e l y and t h a t t h e s e a r c h s h o u l d b e abandoned. Consequently he t u r n e d a l l L i l l e t h u n and Rock. ICC records over t o I n a d d i t i o n , s i n c e c h e c k s w r i t t e n on t h e company a c c o u n t a t Conrad N a t i o n a l Bank w e r e b e i n g r e t u r n e d "NSF," t h e bank wanted t h e a c c o u n t c l o s e d . withdrew the remaining s i l a g e m e n t i o n e d above. funds, including Respondent t h e n the payment for f u r t h e r banking took p l a c e a t All F a r m e r ' s S t a t e Bank o f V i c t o r . A f t e r t a k i n g o v e r t h e books, L i l l - e t h u n and Rock made They began b o r r o w i n g money from a l l t h e d e c i s i o n s f o r ICC. F a r m e r ' s S t a t e Rank t o m e e t o p e r a t i n g e x p e n s e s . 1974, Lillethun vice-presidents and for Rock, ICC, in executed a their On March 1, capacity s e c u r i t y agreement as and n o t e w i t h t h a t bank f o r a b o u t $35,800 and u s e d t h e money t o p a y off e a r l i e r l o a n s . The e q u i p m e n t t h a t had been r e f i n a n c e d t h r o u g h Western Farm Bureau I n s u r a n c e was u s e d t o s e c u r e t h e loan. note. Lillethun and Rock also The s e c u r i t y a g r e e m e n t had personally guaranteed the a provision s t a t i n g t h a t t h e s a l e of t h e c o l l a t e r a l constituted default. On March 4 , 1974, respondent s o l d a l l t h e equipment on t h e r a n c h , a l o n g w i t h t h e r a n c h , t o H a r r y and Helen J o h n s o n . He paid Western Farm Bureau Insurance the balance of their note. None of the remaining proceeds were transferred to ICC or Farmer's State Bank. Farmer's State Bank brought an action against ICC, Lillethun, Rock and Johnsons to collect on its note , and asserted a claim against the respondent and his wife for conversion of property. The Bank moved for and was granted summary judgment against all the defendants. an appeal to this Court by respondent, we held On that respondent allowed the Bank to rely on his representations that the equipment belonged to ICC and was estopped from denying he had converted the property. Farmer's State Bank of Victor v. Johnson (1980), 188 Mont. 55, 610 P.2d 1172. Although the judgment was against all the defendants, respondent eventually paid the note and interest exceeding $62,000 in total. Lillethun claimed that respondent stopped payment on a check for $27,500 which represented a five percent commission due him on the cattle brought into ICC through the sale-lease back arrangement with Dolson Company. The check's date, November 1, 1973, and the amount were typewritten, while Lillethun's name and respondent's signature were handwritten. Respondent's checkbook register showed the check issued to Lillethun on July 16, 1973 but did not indicate an amount. Lillethun did not present the checks for payment until late February 1974 when he knew a large sum of money was in respondent's account. Respondent claimed he signed the check in blank to cover some travel expenses for Lillethun and that Lillethun wrongfully inserted the amount. He also claimed that a commission was initially discussed but the parties never agreed on it. The District Court found that a five percent commission was consistent with the nature of the parties' agreement but that it was an ICC obligation rather than respondent's personal debt. The dairy operation failed in the fall of 1974. cattle were turned over to the Dolson Company. The Respondent paid the remaining deficiency by transferring property worth $45,000 to Dolson Company. The District Court found that Lillethun and Rock had their milk bases returned to them in accordance with the earlier agreement of the parties. At that time, they were not in a position to utilize their milk bases and consequently lost then because of non-production for a period established by state regulation. This case commenced on April 18, 1975 when Farmer's State Bank of Victor filed an action against K.N. Lillethun, Joe Rock and ICC to collect on several promissory notes, and against James and Phillis Edmiston for conversion of the collateral securing one of the notes, explained above. The complaint was later amended to name Harry and Helen Johnson as defendants since they purchased the collateral from the Edmistons. Lillethun, Rock and ICC filed a cross-claim against the Edmistons for conversion and for indemnification for any judgment entered against them. filed a cross-cl aim indemnification. against the The Johnsons also Edmiston s for On November 4, 1977, Lillethun, Rock and ICC filed an amended cross-complaint against the Edmistons for conversion of the collateral and conversion of money and Lillethun filed against respondent for stopping payment on the $27,500 check. They also cross-complained against the Johnsons. On leave to January 4, 1984, Lillethun, Rock and ICC sought file a second amended cross-complaint. This complaint alleged breach of contract, fraud committed with respect to that contract, and conspiracy to commit fraud. The Johnsons' motion to dismiss the claims against them was granted. This Court allowed the filing of the second amended cross-compaint against the Edmistons. Edmistons' answer raised the statute of limitations as a defense to all claims except conversion of equipment which was alleged in the first cross-complaint in 1975 and for stopping payment on the check which was alleged in the first amended cross-complaint filed Following plaintiff's case-in-chief, the District Court dismissed the case against Phillis Edmiston. not being appealed. That order is After the trial on April 11-13, 1984, the court entered judgment in favor of respondent on all. claims. Appellants raise the following issues on appeal: (1) Did the District Court err in concluding Lillethun and Rock had not established claims for constructive fraud and breach of fiduciary duty against respondent? (2) Did the District Court err in concluding Lillethun and Rock had not established a claim for conversion against respondent? (3) Did the District Court err in not entering findings or conclusions on ICC's claims against respondent? (4) Was there substantial credible evidence to support the District Court's findings? Respondent raises an additional issue: (5) Are any or all of appellants' claims barred by statutes of limitations? The issues raised by appellants all concern whether the District Court's findings and judgment were proper. [They] are presumed correct and will not be overturned unless the [appellants meet] the burden of proving with a preponderance of evidence that they are wrong. Merely showing the evidence establishes reasonable grounds for reaching a different conclusion is insufficient to reverse the District Court findings. (Citation omitted. ) Frank L. Pirtz Constr., Inc. v. Hardin Town Pump, Inc. (Mont. Appellants contend, as part of their claim for constructive fraud, that respondent breached his fiduciary duty by failing to inform them of his true intention to sell the ranch, causing their greatest damages. fraud is "any breach of duty which to the person in fault . . . by S28-2-406, prejudice." . . . gains Constructive an advantage misleading another to his MCA. The parties presented conflicting evidence both on whether Lillethun and Rock knew respondent's intentions. ranch was for sale and on respondent's Appellants do not seriously dispute the findings that respondent made his agreed financial contribution, that he paid other expenses in an effort to find financing and that he travelled to numerous places to find financing. The District Court also determined that respondent used his best efforts to make the dairy operation a success and concluded that he "exercised diligent good faith efforts" on behalf of ICC. We find there was substantial evidence for the District Court to conclude that respondent did not breach any duty and that, as a result, appellants failed to establish a claim for constructive fraud. Appellants rest their second claim, in part, on this Court's prior holding in Farmer's State Bank, 188 Mont. 55, 610 P.2d 1172. The respondent was estopped from asserting ownership of the equipment because he allowed the Bank's loan officers to rely on documents showing ICC owned it. Here, appellants rather than the Bank are asserting a claim for conversion. Our holding that respondent led the Bank to act on a particular belief was based on estoppel and does not establish that respondent transferred ownership equipment or led appellants to act on that belief. of the Thus they must independently establish their claim rather than relying on the Bank's proof. Conversion requires ownership of the property, a right of possession, and unauthorized dominion over the property by Gebhardt v. D. A. Davidson another resulting in damages. Co. (Mont. 1983), 661 P.2d & 855, 858, 40 St.Rep. 521, 524. Since respondent undisputedly owned the equipment prior to the activation of ICC, appellants must show transferred ownership to prove conversion. personal property ownership. creates a respondent Possession of rebuttable presumption of Park v. Grady (1922), 62 Mont. 246, 204 P. 382. Respondent retained possession of the equipment. Nothing in the record indicates the equipment was ever used at the locations of the dairy operation. No writing exists between the parties indicating respondent transferred any title to ICC even though the parties' contributions of cash and milk bases were acknowledged in writing by a promissory note and letters, respectively. Respondent and Lillethun were both involved in the decision to pay off the earlier loans on the equipment and so must have discussed the arrangements. The District Court's finding that Lillethun and respondent both knew respondent did not intend to transfer ownership of the equipment, while disputed, presented at trial. was supported by evidence Without the transfer of ownership, no claim for conversion exists. We hold that the District Court properly concluded appellants did not establish a claim for conversion. In the third issue, appellants argue that ICC proved a claim of conversion against respondent in the same manner Lillethun and Rock established their claims. holding respondent never transferred Since we are ownership of the equipment, negating the first element, ICC's claim fails as well. Appellants list thirteen specific District Court findings in the fourth issue and argue they were either unsupported or not substantially supported by the evidence. Certain monetary amounts vary slightly from the proof offered at trial. However the variation in amounts has no affect on the outcome of the issues. As such it is harmless error not requiring a reversal of the judgment. Montana Livestock and Loan Co. v. Stewart (1920), 58 Mont. 221, 190 P. 985. The remaining findings, although made on conflicting evidence, have adequate support in the record. We will not reverse a district court's findings of fact when supported by the evidence presented at tria 1. Frank L. Pirtz Constr., Inc., 692 P.2d at 462. Respondents raise the additional defense. statute of limitations 2s an Our holdings on the first four issues make this issue moot. The judgment of the District I We concur: - 9
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