Deist v. Wachholz ( 1984 )

No. 82-428
IN THE SUPREME COURT OF THE STATE OF MONTANA
1984
JOAN A. DEIST,
Plaintiff and Respondent,
PAUL D. WACHHOLZ JOHN R. DITTMAN
VAN KIRKE NELSON, and CONRAD NATIONAL
BANK ,
Defendants and Appellants.
APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable John S. Henson, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Garlington, Lohn & Robinson; Gary L. Graham
argued and Sherman V. Lohn argued, Missoula,
Montana
Murphy, Robinson, Heckathorn & Phillips,
Kalispell, Montana
Murray, Kaufman, Vidal & Gordon, Kalispell,
Montana
For Respondent :
Sharon Morrison argued, Helena, Xontana
William Rossbach, Missoula, Montana
Submitted: November 17, 1983
Decided: February 22, 1984
Clerk
Honorable Henry Loble, District Judge, delivered the Opinion
of the Court.
Defendants Wachholz, Dittman, and Nelson appeal from
the judgment of the District Court of the Eleventh Judicial
District, Flathead County. Defendant Conrad National Bank
was not affected by the judgment and therefore is not a
party to this appeal. For the reasons stated below, we
affirm the District Court judgment in part, reverse in part,
and remand for further proceedings to be conducted in
accordance with this opinion.
Joan Deist and her husband, Russell, owned a ranch
west of Kalispell, Montana. During the course of operation,
Russell incurred a large debt on the ranch, represented by a
Farmers1 Home Administration mortgage and a demand note with
the Conrad National Bank of Kalispell. By the late 19701s,
the ranch had become an unprofitable enterprise. Russell
died in May of 1978, leaving Joan with a debt of
approximately $200,000.
Officers of the Conrad National Bank informed Joan
that something had to be done about the debt. Joan had been
a ranch wife for much of her life, and although she had been
appointed to fill her late husband's seat on the Flathead
County Commission, and had been elected to the position in
her own right in 1980, she had little, if any, experience in
real estate matters. Eugene Gillette, president of the bank
and a family friend, advised Joan that she had three
options: continue to operate the ranch, subdivide it, or
sell. Gillette recommended a complete liquidation of her
interest in the property, recognizing that the ranch was not
turning a profit in its current condition, and that Joan
would not pursue subdivision.
Paul Wachholz was vice-president for marketing at the
Bank. According to his testimony at trial, his chief
responsibility consisted of matching people with business
opportunities, although he did counsel bank customers from
time to time. Wachholz had toured the Deist ranch with
other bank officials after Russell's death when they were in
the process of deciding how to help Joan deal with the
outstanding debt. Joan asked him to help her find a buyer,
and he agreed to do so. There is nothing in the record to
suggest that he was authorized to negotiate a sale on Joan's
behalf, or that he acted in an advisory capacity similar to
the role played by Eugene Gillette. Apparently, any offers
to buy made their way to Joan through Roy Deming, an
agricultural loan officer with the Conrad National Bank.
Deming then passed on any information about prospective
buyers to Joan.
That the Deist ranch was for sale was obviously common
knowledge in the Kalispell community, as Joan was approached
by prospective buyers or individuals who knew about
prospective buyers. One of the former was Dr. Loren
Vranish, a local physician and acquaintance of Joan Deist.
Joan was willing to negotiate with Vranish, and her
attorney, James Murphy of Kalispell, assisted her in drawing
up acceptable terms. Vranish made an offer to purchase the
real property for $500,000 with a $50,000 down payment and
monthly payments of approximately $3800 reflecting an
interest rate of nine-and-one-half percent (9-1/2%).
Vranish also wanted deed releases included in the contract,
to allow sale of 80 acre parcels after 1985. Although Joan
was hoping that an agreement could be reached, the
negotiations eventually fell through. Vranish was having
trouble raising sufficient money to make the purchase. He
sought a loan from the Conrad National Bank, but was turned
down. Vranish's testimony, however, revealed that his deal
with Joan collapsed over the proposed deed release
provisions. Joan was unwilling to sell without assurances
that the land would be preserved for agricultural use.
Vranish testified that he intended to ranch the land for as
long as it proved economically feasible to do so, but wanted
the deed release option available. This compromise was
unacceptable to Joan.
In the meantime, however, another offer became
available. Wachholz referred a local forestry consultant
and real estate investor, John Dittman, to Joan's attention.
Dittman was willing to purchase the ranch, and had already
submitted an offer to Roy Deming in late September of 1978,
about the time the Vranish deal was floundering. Wachholz
and Gillette represented Dittman to be a reputable buyer,
and Joan testified that Wachholz told her that entering into
an agreement with Dittman would be a "good deal." After the
Vranish deal fell through, negotiations between Murphy,
Joan's attorney, and Dittman proceeded.
There is some dispute about the extent of Joan's
knowledge as to what took place during these negotiations.
Joan usually was not present when Murphy a.nd Dittman
discussed contract terms. Eventually, on January 2, 1979,
Joan signed a contract for deed with Dittman, who purchased
as a trustee. There were no other signatories to the
contract, and there was nothing in the contract, except the
designation of Dittman as trustee, to indicate whether other
buyers were involved in the purchase. The agreement called
for a sales price of $532,400 for the land and outbuildings
with $74,200 downpayment and the balance to be paid over
fifteen years at eight percent (8%) interest.
Interestingly, the agreement provided for deed releases
beginning in 1980. Joan also sold the farm machinery for
$25,800.
The immediate dispute began the same day the contract
was signed. While dining with her daughter and son-in-law,
Joan learned from them that Wachholz and a local physician,
Van Kirke Nelson, were partners in the Dittman purchase.
The three had entered into a partnership agreement covering
the ownership and management of the ranch a few days before
the contract was signed. Furthermore, testimony at trial
revealed that Dittman and Wachholz were partners in other
local real estate transactions. Joan was apparently upset
about this revelation and, in particular, Nelson's
involvement, although she testified at trial that, some time
prior to completion of her negotiations with Dittman,
Wachholz had told her that he might join in the Dittman
purchase. She insisted, however, that Wachholz never told
her that he had finally decided to join Dittman.
In the weeks following the signing of the contract,
Wachholz, Dittman and Nelson had the land platted into
twenty and forty acre parcels, in expectation that proposed
changes in state law might affect future subdivision of the
property. They sold the ranch machinery and equipment, and
eventually sold the Deist family home located on the ranch,
in addition to twenty acres for $115,000 on a contract
p r o v i d i n g nine-and-one-half percent (9-1/2%) interest. In
t h e i n t e r i m , Joan sought a d v i c e a s t o any l e g a l r e c o u r s e s h e
might have against Wachholz, Dittman and Nelson. In
December, 1979, Joan formally requested rescission of the
contract, but her request was refused. In September of
1 9 8 0 , t h e p a r t n e r s s o l d a n o t h e r t w e n t y a c r e s f o r $ 5 6 , 0 0 0 on
a c o n t r a c t f o r nine-and-one-half p e r c e n t (9-1/2%) i n t e r e s t .
A c o m p l a i n t was filed in January, 1980, seeking
r e s c i s s i o n o f t h e c o n t r a c t a s a g a i n s t Wachholz, D i t t m a n a n d
Nelson, and, in the alternative, damages from the
t r a n s a c t i o n a s a g a i n s t t h e Conrad N a t i o n a l Bank. The t h e o r y
behind t h e i n i t i a l complaint involved an a l l e g e d breach of
f i d u c i a r y d u t y by Wachholz o r t h e Bank t o J o a n . An amended
c o m p l a i n t f i l e d i n May o f 1 9 8 1 c l e a r l y s e t f o r t h a l l e g a t i o n s
of constructive fraud and undue i n f l u e n c e on t h e p a r t o f
Wachholz, and s o u g h t r e s c i s s i o n a g a i n s t t h e t h r e e p a r t n e r s
o r , i n t h e a l t e r n a t i v e , damages a g a i n s t t h e Bank.
After extensive discovery, t h e c a s e came t o t r i a l i n
April, 1982. Following trial and further briefing, the
court rendered judgment against Wachholz, Dittman and
Nelson. The Court concluded that Wachholz owed Joan a
f i d u c i a r y duty both i n h i s c a p a c i t y a s an o f f i c e r of the
Bank, which t h e c o u r t f o u n d was i n a f i d u c i a r y r e l a t i o n s h i p
w i t h J o a n , and b e c a u s e Wachholz a n d t h e Bank were h e r a g e n t s
i n the s a l e of t h e ranch. Wachholz was f o u n d l i a b l e f o r
c o n s t r u c t i v e f r a u d a n d undue i n f l u e n c e i n h i s d e a l i n g s w i t h
Joan, and the contract was ordered rescinded as to all
parties. Joan was ordered to tender payment of monies
r e c e i v e d under t h e c o n t r a c t t o g e t h e r w i t h t e n p e r c e n t ( 1 0 % )
interest, and defendants were ordered to pay Joan rental
payments for the time the ranch was in their possession, and
also the monies due them under land sales made after the
contract was signed. An amended judgment was entered
specifying the sums due all of the parties. The Bank was
not adjudged liable to Joan in any way. Wachholz, Dittman
and Nelson filed a notice of appeal.
Appellants present four issues for review:
(1) Whether the trial court erred in finding that a
fiduciary relationship existed on the part of Wachholz with
respect to dealings with Joan?
(2) Whether the trial court erred in finding
constructive fraud and undue influence respecting the real
estate transaction between Joan and the appellants?
(3) Whether rescission was a proper remedy?
(4) Whether the trial court erred in its determination
of amounts due Joan under the judgment?
THE EXISTENCE OF A FIDUCIARY DUTY
Appellants correctly note that a finding of a
fiduciary duty is essential to subsequent findings of
constructive fraud and undue influence. In the absence of
such a duty, Joan's grounds for rescission are shaky at
best.
The claim of a fiduciary duty on the part of Wachholz
is based on three alleged relationships: (1) that the Bank
was Joan's agent for the sale of the ranch, and that the
fiduciary duty arising from the agency relationship flowed
to all the Bank's officers, including Wachholz; (2) that
Wachholz was Joan's personal agent for the sale of the
ranch, and therefore owed her a personal fiduciary duty; and
(3) that the Bank, acting as Joan's financial adviser, owed
her a fiduciary duty and that this duty flowed to all the
bank's officers, including Wachholz.
Upon review of the testimony, we conclude that the
existence of a true agency relationship between either the
Bank or Wachholz and Joan is unsubstantiated. Unlike the
trial court, we find no evidence to suggest that either the
Bank or Wachholz were authorized to negotiate a sale of the
ranch or to direct to Joan only those prospective buyers
whom the bankers deemed appropriate. Thus, any fiduciary
duty owed to Joan by the Bank and its officers had to arise
from the Bank's role as Joan's financial advisor.
The relationship between a bank and its customer is
generally described as that of debtor and creditor, State v.
Banking Corp. of Montana (1926), 77 Mont. 134, 251 P. 151,
and as such does not give rise to fiduciary
responsibilities. Neverthless, there are exceptions in
certain situations:
"As a general rule, the relationship
between a bank and a depositor or
customer does not ordinarily impose a
fiduciary duty of disclosure upon the
bank. They deal at arm's length.
[citations omitted] However, special
circumstances may dictate otherwise: one
who speaks must say enough to prevent his
words from misleading the other party;
one who has special knowledge of material
facts to which the other party does not
have access may have a duty to disclose
these facts to the other party; and one
who stands in a confidential or fiduciary
relation to the other party to a
transaction must disclose other facts.
[citation omitted] Present-day
commercial transactions are not, as in
past generations, primarily for cash;
rather, modern banking practices involve
a highly complicated structure of credit
and other complexities which often thrust
a bank into the role of an advisor,
thereby creating a relationship of trust
and confidence which may result in a
fiduciary duty upon the bank to disclose
facts when dealing with the customer.
[citation omitted] '
I
Tokarz v. Frontier Fed. Sav. & Loan Assln. (1983), 33
Wash.App. 456, 656 P.2d 1089, 1092. See also Dolton v.
Capitol Fed. Sav. & Loan Assln. (1981 Colo.App.), 642 P.2d
21. See generally Annot., 70 A.L.R. 3d 1344 (1976) (existence
under special circumstances of fiduciary relationship
between bank and depositor or customer so as to impose
special duty of disclosure upon bank).
The existence of a fiduciary duty to a loan customer
depends upon satisfactory proof of a special relationship.
In Stewart v. Phoenix Nat'l Bank (1937), 49 Ariz. 34, 64
P.2d 101, the Arizona Supreme Court held that:
"[wlhere it is alleged [that] a bank has
acted as the financial advisor of one of
its depositors for many years, and that
the latter has relied upon such advice,
it is a sufficient allegation that a
confidential relationship in regard to
financial matters does exist and that, if
it is proved, the bank is subject to the
rules applying to confidential relations
in general."
49 Ariz. 34, 64 P.2d at 106. Accord: Fridenmaker v. Valley
Nat'l Bank of Ariz. (1975), 23 Ariz.App. 565, 534 P.2d 1064;
Bank of America v. Sanchez (1934), 3 Cal. App. 2d 238, 38 P.2d
787; Lloyds Bank, Ltd. v. Bundy [1974], 3 Al1.E.R. 757
(C.A.) (English Court of Appeal, Civil Division) (Opinion of
Sir Erich Sachs). Similarly, in Pigg v. Robertson (1977
Mo.App.), 549 S.W.2d 597, the Missouri Court of Appeals held
that evidence that a banker was aware he was being called
upon to advise a customer on obtaining a loan for purchase
of real estate would entitle a jury to find that a
confidential relation existed and that certain disclosures
by the customer to the banker should be protected, and that
disclosures by the banker to the customer of any adverse
interests on the former's part should be encouraged.
There is substantial, credible evidence in the case at
bar that the relationship between the Conrad National Bank
and Joan Deist was more than a simple debtor-creditor
affair. Joan and her husband had dealt with the bank for
about twenty-four years prior to his death. Both she and
Russell had imposed trust and confidence in the advice of
Eugene Gillette, who as an officer was the alter-ego of the
enterprise and, for all practical purposes, was the "bank"
to Joan and other customers. See Independent Banker's Ass'n
of Georgia, Inc. v. Dunn (1973), 230 Ga. 345, 197 S.E.2d
129, appeal after remand, 231 Ga. 421, 202 S.E.2d 78, appeal
after remand (1976), 237 Ga. 252, 227 S.E.2d 227. Gillette
acted as a financial advisor to Joan after Russell's death
with respect to handling the ranch debt. Even though Joan's
association with the Bank in this transaction did not extend
over several years, the nature of the association and her
reliance, combined with her husband's years of dealings with
the bank on essentially the same matters, were sufficient to
make out a prima facie case that a fiduciary relationship
existed. Even appellants Wachholz, Dittman and Nelson have
conceded that the Bank might have been in such a
relationship and had such a duty under these facts.
Appellants principal concern, however, is how
Wachholz, as a bank officer, is vested with a duty or
responsibility to Joan. Appellants emphasize that Wachholz
did not act in the same capacity as Gillette. Wachholz
never advised Deist on her financial situation and how she
might cope with it. He did agree to help Joan find a buyer
for the ranch, and he did tell her that selling to Dittman
would amount to a "good deal," but there is no evidence that
he participated in negotiations between Joan or her attorney
and Dittman. Appellants point to this lack of evidence as
satisfactory proof that Wachholz was not acting in the role
of confidant and advisor and could not therefore be vested
with fiduciary responsibilities.
Nevertheless, the court found that because "the
officers of the Conrad National Bank were Joan's financial
and business advisors and because she reposed trust and
confidence in them, the officers of the bank owed to Joan
Deist a fiduciary duty. That fiduciary duty extended to
Paul Wachholz . .. " Presumably, the court was convinced
that, because Eugene Gillette, and perhaps Roy Deming, acted
as financial advisors to Joan respecting the sale of the
ranch, any fiduciary duty vested in them carried over to any
other bank officer involved in the transaction, including
Wachholz. This presumption appears well grounded in
precepts of agency, so long as the duty imposed does not
extend beyond the scope of the Bank's or Wachholzgs
association with the sale of the Deist ranch. Appellants
argue that Wachholz cannot be held liable merely because the
Bank fails to discharge affirmative duties which it owes to
a third person. This argument, however, misconceives the
nature of Wachholzgs duties and any liabilities arising from
the breach thereof. As noted above, the duty extends no
further than his involvement with the land sale.
Appellants' fear that innocent employees could be made to
suffer for the sins of errant coworkers is assuaged by the
rule that the agent of a disclosed principal (here, the
Bank) is not subject to liability for the conduct of other
agents unless he is at fault in cooperating with them. See
Restatement (Second) of Agency, Section 358 (1957).
We recognize that most, if not all, of the cases
relied upon to support the trial court's finding of a
fiduciary duty involve fact situations different than those
in the immediate dispute. Nevertheless, the ratio decidendi
of these decisions is not incompatible with the facts of the
case at bar. The Bank acted as Joan's financial advisor,
and she undoubtedly relied upon their counsel. Equity is
not compromised by holding Wachholz to a fiduciary duty to
Joan in those dealings intimately associated with the
off ices of the Bank, so long as the duty reaches no further
than the internal association that gave rise to it. The
Bank was unquestionably involved in the sale of the ranch,
and Wachholz was not so detached from the transaction that
imposition of fiduciary responsibilities would be
impermissible. Appellants' retort that innocent bank
employees would always suffer unjustly because of another
employee's indiscretions is unwarranted.
In summary, Wachholz had an obligation to inform Joan
fully as to his involvement in the ranch purchase and to do
nothing which would place Joan at a disadvantage. He was
bound to insure that Joan was not "insufficiently informed
of some factor which could affect [her] judgment." Bundy,
supra, at 768. We are not saying that Wachholz could not
make a "reasonable legitimate profit" from his dealing with
Joan, so long as he disclosed fairly and honestly all the
information which might be presumed to have influenced her
in the transaction. Cf. Stewart v. Phoenix Nat'l Bank,
supra, 49 Ariz. 34, 64 P.2d 101, 106 (bank owing fiduciary
duty to client in transaction may make reasonable legitimate
profit from client so long as bank fully discloses all facts
presumed to influence client in the transaction).
PROOF OF CONSTRUCTIVE FRAUD AND UNDUE INFLUENCE
According to Section 28-2-406, MCA, constructive fraud
consists of:
"(1) any breach of duty which, without an
actually fraudulent intent, gains an
advantage to the person in fault or
anyone claiming under him by misleading
another to his prejudice or to the
prejudice of anyone claiming under him;
or (2) any such act or omission as the
law especially declares to be fraudulent
without respect to actual fraud."
Clearly, subsection (1) of Section 28-2-406 is at issue
here, even though respondent relies upon some case law
construing subsection (2). Appellants have also muddied the
waters with references to the nine elements of actual fraud,
which have nothing to do with proof of constructive fraud.
See Moschelle v. Hulse (Mont. 1980), 622 P.2d 155, 37
St.Rep. 1506. Consequently, the following discussion will
address only those factual and legal issues pertinent to
subsection (1).
The trial court found a breach of duty on Wachholz's
part by concluding that (1) the contract price and terms
were disadvantageous to Joan; (2) the true purchasers were
undisclosed to her; and (3) the property was used by the
buyers for purposes other than those contemplated by Joan.
With respect to the contract price, it should be
remembered that Joan and Dittman agreed to a total sales
price of approximately $558,000, which included the land and
farm equipment. This figure was higher than that proposed
in the unsuccessful negotiations between Joan and Dr.
Vranish, the only other figure that was the result of actual
negotiations. Nevertheless, the trial court's attention was
not focused on the Vranish figure. Instead, the court
considered two varying estimates of the fair market value of
the ranch as of January 2, 1979, the date of sale. Joan's
appraiser, Roger Jacobson, valued the property at about
$870,000, or about $300,000 over the actual contract price.
Appellants' appraiser, Wayne Neil, testified that the
property was worth about $515,000, just slightly under the
contract price. In its findings of fact, the trial court
makes mention of the $870,000 figure, but found that the
fair market value as of January 2, 1979, was $635,000.
There is only one possible source for the latter
figure. During her testimony, Joan indicated that she
consulted another appraiser named Zugliani sometime after
the sale. This appraisal produced a value of $635,000.
Zugliani was not called as a witness, and his report was not
entered into evidence. Under the circumstances, it is
arguable whether the court's finding should be upheld. The
figure adopted by the trial court is based on data that
could not be cross-examined by appellants. Nevertheless,
the court's implicit recognition of the Jacobson appraisal
of $870,000 suggests that the fair market value of the ranch
on the date of sale was substantially higher than the actual
contract price. The expression of market value in specific
dollars is not as important as the fact that the value was
higher than the agreed contract price.
Although we regard the trial court's acceptance of the
$635,000 figure as harmless error in this case, this does
not absolve the court from its failure to explain why one
appraiser's figure should be believed over that of another.
In marriage dissolution and property settlement cases, this
Court has expressed dissatisfaction with district court
findings on valuation that skip the essentials of
elaboration:
"As a general rule, if contested evidence
is presented to the trial court regarding
the existence or valuation of marital
assets and no findings are made regarding
that asset or no explanation is provided
as to why the District Court accepted one
party's valuations over that of the
other, the District Court has abused its
discretion. Peterson v. Peterson (1981)
Mont., 636 P.2d 821, 38 St.Rep. 1723.
Item-by-item findings are not required in
property division cases, but findings
nevertheless must be sufficiently
adequate to ensure that this Court need
not succumb to speculation while
assessing the conscientiousness or
reasonableness of the District Court's
judgment. In re the Marriage of Caprice
(1978), 178 Mont. 455, 585 P.2d 641.
"This Court cannot uphold [a] District
Court's judgment as within the realm of
its broad discretion if we have no
inkling of its thought process."
Larson v. Larson (Mont. 1982), 649 P.2d 1351, 1354, 39
St.Rep. 1628, 1631-32. The same principle should be
followed by trial judges in all future cases involving
valuation of real estate.
Evidence was submitted challenging the other contract
terms. Much if not all of it came through the testimony of
attorney Milton Datsopolous, who was called by Joan as an
expert in the field of real estate transactions. In answer
to a question about a hypothetical sale similar to the one
to appellants, Datsopolous indicated that the Deist contract
was "tilted very much so in favor of the purchasers."
Specifically, Datsopolous faulted the sales price as being
below market value, the interest rate as being below
prevailing rates in the area, and the annual payments as
being lower than usual. Datsopolous also criticized the
deed release provisions for giving appellants the
opportunity to sell off choice parcels, thereby jeapordizing
any interest or value Joan would have in the land if the
parties terminated the contract and allowed all legal and
equitable interests to revert to Joan.
Datsopolous did not examine the escrow files of the
Bank or make independent studies of interest rates other
than to speak to his experience as a real estate speculator
in the area and as a director of the bank in Columbia Falls,
Montana. He did not conduct an independent appraisal of the
Deist property. Nevertheless, appellants did not attempt to
challenge his status as an expert witness. However, they
did rely on testimony from other witnesses that the contract
was the result of honest bargaining. For example: attorney
Murphy testified that, in his opinion, he had negotiatied a
good deal on Joan's behalf. Wachholz testified that, in
other real estate purchases he participated in shortly
before the Deist purchase, he was giving a slightly lower
interest rate on contracts, although Dittman admitted that
the interest rate on future sales of sections of Deist land
was nine-and-one-half percent (9-1/2%).
The trial court obviously accepted Datsopolous'
testimony that the contract was more favorable to the
purchasers. His testimony is, for the most part,
uncontradicted and credible. Because this Court will not
disturb findings based on substantial though conflicting
evidence, unless there is a clear preponderence of evidence
against such findings, Toeckes v. Baker (Mont. 1980), 611
P.2d 609, 37 St.Rep. 948, the trial court's observation that
the contract terms were more favorable to appellants
withstands challenge.
The matter of whether Joan knew Wachholz and Nelson
were involved in the purchase also involves consideration of
conflicting testimony. Joan insists that she never knew
these individuals were partners in the Dittman purchase,
even though she knew at one time that Wachholz had expressed
to her an interest in possibly joining as a co-purchaser.
Wachholz contends that Joan was aware he would be a buyer
before the contract was signed, and that her attorney,
Murphy, corroborated this testimony. Gillette thought it
best that Wachholz inform Joan if he intended to join
Dittman, as that would be proper policy for a bank employee.
The court again chose to believe Joan and we can find no
acceptable reason to question that judgment.
The interesting aspect of the disclosure matter is
whether Joan knew that Dr. Nelson was a purchaser. Gillette
testified that Joan came into his office sometime after the
sale and told him that Nelson "was involved in buying the
ranch and had she known it, she would not have sold it to
them." This testimony was corroborated by Nelson himself.
He indicated that when he first saw Joan after the sale, she
expressed displeasure with his involvement, and again said
that had she known he would be a co-purchaser, she would
never have signed the contract. There was no indication at
trial why Joan looked upon Nelson's involvement with
disfavor, but it does appear that she did not know of his
interest, even if it can be argued that she knew or had
reason to know that Wachholz was involved.
Although the trial court concluded that appellants
"intended to use the property for purposes other than those
represented to Joan before the sale," Joan's "intentions"
were somewhat cloudy. She testified that it was always her
intention to have the ranch remain in agricultural use, but
she admitted that the ranch was unprofitable and that the
sale of some acreage was inevitable. Moreover, she agreed
to deed releases in the Dittman contract, to begin in 1980,
even though she had rejected the Vranish proposal, which
included provisions for deed releases beginning in 1985.
Dittman maintained that Joan never told him directly that
she wanted the land maintained as a ranching unit, but he
admitted hearing rumors to the contrary. Once again, the
trial court was forced to weigh conflicting testimony, and
chose to believe Joan, even though her entire testimony on
the matter was confusing and possibly contradictory.
ZIJevertheless, even if we concede that Joan had full
knowledge of the appellant's actual intentions, such an
admission is not fatal to the ultimate finding of
constructive fraud.
Two other considerations affecting the alleged breach
of duty must be addressed. The first was the introduction
into evidence of the so-called "Bowler Report," the results
of an internal audit of the Conrad National Bank conducted
in 1980. Bowler appeared as a witness for appellants,
although his report, submitted during presentation of Joan's
case-in-chief, was potentially damaging to Wachholz. The
report concluded that the bank had made loans to
individuals, partnerships and companies in which Wachholz
had financial interests. All were real estate projects.
Wachholz's personal net worth had increased nearly
$2,000,000 in the years between 1972 and 1980, and the
increase was due primarily to his real estate investments.
The audit found nothing illegal in these transactions,
principally because the Bank did not have a clear conflict
of interest policy. However, the audit concluded that
because of his "extensive outside interest," Wachholz's
lending authority should be curtailed or eliminated and
brought into compliance with a formal conflict of interests
policy.
The other consideration was the role played by Joan's
attorney, James Murphy, during the negotiations. Appellants
cannot conceive how Joan could assert that her best
interests were unprotected when she was represented by
counsel. Admittedly, Joan was not present during many of
the meetings, although Murphy testified that he had
counseled Joan on all important decisions and had striven to
get the best possible deal for her. Murphy's testimony does
not describe the negotiation process beyond his
generalizations about protecting Joan's best interests. He
did indicate, however, that he did not advise Joan on the
difference between various interest rates, or about the
legal significance of a "trustee." As noted earlier, Murphy
claimed that Joan was aware of Wachholz's involvement, but
his testimony is silent as to his knowledge of Nelson's
interest. Obviously, the court was unimpressed with his
representation, and possibly regarded portions of his
testimony as revealing less than a yeoman's effort on behalf
of Joan.
Considering together the testimony about contract
price and terms, the allegations about disclosure, the
alleged misrepresentations of intended use of the land,
Wachholz's past activities, and attorney Murphy's role, we
cannot say that the trial court erred in finding a breach of
duty amounting to constructive fraud. There is substantial
credible evidence that the contract terms favored appellants
at Joan's expense, and the fact that she was represented by
counsel does not mitigate any harm suffered by her.
Wachholz breached his fiduciary duty and failed to consider
Joan's best interests.
The court also found that the evidence support.ed a
finding of undue influence, relying on Section 28-2-40'7(1),
MCA, which provides, in pertinent part, that undue influence
"consists in . . . the use by one in whom a confidence is
reposed by another . . . of such confidence ... for the
purpose of obtaining an unfair advantage over him." This
subsection has apparently never been construed by this
Court, and there is little guidance from the California
courts as to the scope of identical language in Cal.Civ.Code
Section 1575(1) (West 1982). As a general rule, however, a
presumption of undue influence arises from a transaction
between individuals in a fiduciary relationship where the
dominant party in the relationship is the beneficiary of the
transaction. See 25 AmJur 2d Duress and Undue Influence
Section 39 (1966). Presumably, however, the dominant party
must exert some kind of unfair presuasion over the victim.
Id.
- Because Wachholz never negotiated directly with Joan,
and because there was no evidence of unfair persuasion on
Wachholzls part when he told Joan about the Dittman
proposal, it seems clear that the presumption of undue
influence was successfully rebutted by the testimony of
several parties, including Joan. Nevertheless, the
available evidence still supports the finding of
constructive fraud.
THE APPROPRIATENESS OF RESCISSION
Section 28-2-1712(1), MCA, requires the party
aggrieved by the contract to "rescind promptly upon
discovering the facts which entitle him to rescind . . ."
Because Joan allegedly took several months to seek
rescission, appellants argue that pursuit of the remedy is
barred by laches. It is unnecessary, however, to inquire
into the time frame in which Joan acted. Laches is an
affirmative defense and must be set forth in a defendant's
answer. Rule 8(c), M.R.Civ.P. Appellants, however, did not
raise this defense in answers to the initial and amended
complaints, and it cannot be raised for the first time on
appeal. Moschelle, supra, 622 P.2d at 160, 37 St.Rep. at
1511.
Appellants also maintain that rescission is improper
because Dittman, not Wachholz, was the "actual" purchaser,
and because Dittman (and Nelson) did not breach any duty to
Joan and therefore cannot be held liable to rescind. This
argument is an unpersuasive exercise in semantics. Wachholz
was a "purchaser" by virtue of his partnership with Dittman
and Nelson to buy the ranch. Moreover, Section
28-2-1711(1), MCA, apparently allows for rescission against
all the par ties even though the sole llwrongdoer,ll
Wachl?olz,
did not participate in the negotiations or the signing. The
statute provides that the aggrieved party may rescind his
contract if his consent "was ... obtained through . . .
fraud, or undue influence exercised by or with the
connivance of the party as to whom he rescinds or of any
other party to the contract jointly interested."
VALUATION OF AMOUNTS DUE UNDER THE JUDGMENT
In the judgment, the court ordered appellants to pay
Joan $11,122 in rent for each year or part thereof when they
were in possession of the ranch, or $35,072 total. In
addition, the court ordered appellants to tender the
$171,000 they earned from sale of the parcels after purchase
of the ranch. Both sums were to be applied as a set-off to
the $249,512.48 that Joan had received from the sale of the
ranch between January 1979 and the time of judgment.
Appellants maintain that the computations behind these
set-offs are in error.
The $11,122 per year rental payment is based on an
esimate of annual net income derived from the Neil
appraisal, the report commissioned by appellants.
Apparently, this figure is based upon an assumption that
approximately $100,000 of additional capital improvements
would have to be made on the property to generate that net
income. Under the circumstances, the figure used by the
trial court could be considered erroneous. We note,
however, that this figure represents the net return after
expenses on a gross return of approximately $25,000 per
year. This $25,000 figure appears to be akin to an average
estimate of gross returns ranging from approximately $5,250
per year to over $35,000 per year, depending upon the basis
of r e n t i n g o r l e a s i n g a g r i c u l t u r a l p r o p e r t y . The low f i g u r e
reflects a pure cash rental method. The high figure
r e f l e c t s a c o m b i n a t i o n o f c r o p and c a l f s h a r i n g . A third
method c o n t e m p l a t e s o p e r a t i n g t h e r a n c h s t r i c t l y f o r c a t t l e
raising, and g i v e s a r e n t a l f i g u r e of $22,725, a sum v e r y
c l o s e t o t h e $25,000 used a s a g r o s s r e t u r n . Given t h a t a l l
three bases for renting or leasing a g r i c u l t u r a l property a r e
observable in the v i c i n i t y of the D e i s t ranch, and given
constant annual expenses of operation, the $11,122 annual
r e n t a l payment o r d e r e d b y t h e c o u r t a s a s e t - o f f does not
appear excessive o r unreasonable. Even when w e g r a n t t h a t
t h e f i g u r e h a s some c o n n e c t i o n t o g r o s s income f r o m g r e a t l y
improved p r o p e r t y , i t s t i l l a p p e a r s t o a p p r o x i m a t e c l o s e l y a
fair net return on property not substantially improved.
Because of this close proximity, we are reluctant to
o v e r t u r n t h i s p o r t i o n o f t h e t r i a l c o u r t ' s judgment.
W do n o t 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 a p p e l l a n t s
e
must "tender" to Joan in the form of a set-off the full
$ 1 7 1 , 0 0 0 owed t o them u n d e r the contracts for s a l e of the
parcels. Appellants note t h a t t h e $171,000 is n o t y e t i n
t h e i r hands. T h i s i s a sum owing t o them o v e r t h e p e r i o d s
of the contracts. The p r e s e n t v a l u e o f a n y sum d u e i n t h e
f u t u r e , w h e t h e r i n i n s t a l l m e n t s o r lump sum, is worth less
today. S e e A. Alchian & W. A l l e n , E x c h a n g e and P r o d u c t i o n :
-o r y i n
T h e- Use, 264 ( 1 9 6 9 ) ; R. Heilbroner, Understanding
Macroeconomics, 118-19 (4th ed. 1972). Any set-off
involving t h e s a l e of t h e two p a r c e l s s h o u l d amount t o no
more than the present value of the $171,000 t o be earned
over the life of the sales contracts. The trial court
s h o u l d h a v e examined t h e p e r i o d t h a t t h e c o n t r a c t s were i n
effect prior to delivery of the warranty deeds and applied
an appropriate discount rate to the total sales price in
order to reflect present value.
JUDGMENT
Those portions of the District Court's judgment
involving the finding of a fiduciary duty and a breach of
that duty amounting to constructive fraud are affirmed. The
requirement that $11,122 in rent for each year or part
thereof appellants were in possession of the ranch be
applied as a set-off to the amount owed by Joan under the
terms of rescission is also affirmed. That portion of the
judgment requiring treatment of the full $171,000 owing on
the two contracts for deed as a set-off is reversed, and the
case is remanded to the District Court for additional
proceedings to determine the present value of the amounts
owing to appellants under those contracts and to enter an
appropriate judgment.
Ho~orableH e n r y ~ o ~ l e ,
District
Justice
We concur:
3 ~ 4.$v&
4 d,
Chief Justice
Justices
Mr. Justice L.C. Gulbrandson dissenting
I respectfully dissent.
After citing Stewart v. Phoenix National Bank (1937),
49 Ariz. 34, 64 P.2d 101, for the existence of a bank's
fiduciary duty to a loan customer, the majority opinion
states: "The Bank was unquestionably involved in the sale of
the ranch and Wachholz was not so detached from the
transaction that imposition of fiduciary responsibilities
would be impermissible."
I quote from the next case cited by the majority,
Fridenmaker v. Valley National Bank of Arizona (1975), 23
"Fridenmaker has previously alleged that
he was in a confidential relationship
with the Bank and that this relationship
forces this court to examine the right to
rely in that light. It is contended that
the length of time he dealt with the
Bank, the receipt of credit lines on a
signature, the intermittent advice given
by the Bank, all, if proven, indicate a
confidential relationship. Stewart v.
Phoenix National Bank, 49 Ariz. 34, 64
P.2d 101 (1937). We agree that this is a
correct statement of law and will
concede, for argument's sake, that
initially a confidential relationship
-
existed. The presence and participation
o f counsel representing------------
...................... Fridenmaker
interests was so Drevalent. however. as
- leave any coniidential relationship
to
that existed of nugatory legal effect."
( Emphasis added. )
Here, the plaintiff was represented by attorney James
Murphy throughout all negotiations for the sale of the ranch
after Mr. Diest's death. Attorney Murphy was instrumental
in drawing the proposed contract to Dr. Vranish, and in fact
testified that he told Dr. Vranish the offer of $800 per
acre was too low. When the Vranish negotiations ended,
attorney Murphy, after consultations with the plaintiff,
o b t a i n e d i n f o r m a t i o n from t h e p l a i n t i f f ' s a c c o u n t a n t , H a r r y
Isch, r e g a r d i n g t e r m s o f down p a y m e n t , a n n u a l payments and
release provisions, and t h e n drew t h e f i n a l c o n t r a c t w i t h
Dittman, t r u s t e e , a t $1,050 p e r a c r e .
A t t o r n e y Murphy t e s t i f i e d a s f o l l o w s :
"Q. With r e f e r e n c e t o Mr. I s c h , w h a t d i d
he do i n t h e c o n t i n u i n g n e g o t i a t i o n s over
t h e summer and autumn?
" A . I c o n s u l t e d w i t h him a b o u t t h e amount
o f money w e c o u l d t a k e down o n t h e Ranch.
I c o n s u l t e d w i t h him a b o u t t h e p a y m e n t s .
I p a r t i c u l a r l y c o n s u l t e d w i t h him a b o u t
release provisions, because we d i d n ' t
w a n t a whole bunch o f money t o b e coming
i n i n any one y e a r where--and l e t too
much o f i t g o t o income t a x . "
"Q. A l l right. Do you remember, Mr.
Murphy, a c o n v e r s a t i o n w i t h Dr. V r a n i s h
w i t h r e f e r e n c e t o an e i g h t hundred d o l l a r
per acre figure?
A . Yes.
"Q. What d i d you s a y t o Dr. V r a n i s h w i t h
reference t o t h a t conversation?
"A. H e s a i d h e was g o i n g t o t a l k t o J o a n
a b o u t i t , a n d I a s k e d him n o t t o .
"Q. Why?
"A. W e l l , b e c a u s e t h e y were r e a l good
friends. And i f h e was g o i n g t o t a l k t o
h e r , I f e l t t h a t h e was g o i n g t o t r y t o
g e t her t o t a k e e i g h t hundred d o l l a r s a n
acre. And I a s k e d him n o t t o , b e c a u s e
s h e n e e d e d t h e money a l o t more t h a n h e
d i d , b e c a u s e t h a t was a l l s h e had t o l i v e
on. And h e had a m e d i c a l p r a c t i c e t o
k e e p him g o i n g . And I t o l d him t h a t we
c o u l d g e t more t h a n t h a t f o r i t .
"Q. Did you g e t more t h a n t h a t ?
"A. W g o t one hundred
e [sic] thousand
and f i f t y f o r i t .
"Q. Okay. I n y o u r b e s t judgment a s h e r
c o u n s e l , Mr. Murphy, d o you b e l i e v e t h a t
was a fair price for the sale at that
time of the land?
"A. I thought we had made a heck of a
good deal."
In my view, the knowledge of the purchasers, and of
all the terms of the contract, by the plaintiff's attorney
and accountant, rendered the existence of any fiduciary
relationship between Paul Wachholz and the plaintiff of
little legal effect.
In addition, the majority correctly states Montana law
regarding the appropriateness of findings by a trial judge,
but then ignores that case law, with the admonition that
trial judges should comply in future cases involving
valuation of real estate. Here the trial court found the
market value of the Deist ranch at the time of sa.le was
$635,000. The testimony to that figure was by the plaintiff
that she consulted an appraiser named Zugliani about ten
months after the sale and that his appraisal value was
$635,000. Zugliani was not called, his appraisal was not
offered by the plaintiff, and no foundation was made
regarding qualifications, acreage appraised, or appraisal
methods used.
The trial court also found that the annual rental
value of the ranch was $11,122. That figure could only have
come from the report of the purchaser's appraiser, Mr. Wayne
Neal, and was clearly based on the assumption that
approximately $100,000 of ditch improvements would ha.ve to
be made first to generate that income. In addition, the
plaintiff herself testified that the ranch had not shown a
profit in the ten-year period preceding the sale of the
ranch.
The t r i a l c o u r t f u r t h e r ordered an immediate s e t o f f
i n favor of t h e p l a i n t i f f of t h e proceeds of t h e two s a l e s
made by t h e a p p e l l a n t s even though t h e s a l e s were made on
contract. I n essence, the judgment converted a contract
r e c e i v a b l e i n t o a cash payment w i t h o u t c o n s i d e r a t i o n of any
discounted value.
Because I b e l i e v e erroneous f i n d i n g s and c o n c l u s i o n s
were e n t e r e d , I would r e v e r s e and remand f o r a new t r i a l .