Merryweather v. Pendleton

• Decision Date: 14 June 1962
• Docket Number: No. 6572,6572
• Citation: 91 Ariz. 334,372 P.2d 335
• Parties: Hubert MERRYWEATHER, Appellant, v. T. T. PENDLETON, J. B. Pendleton, James V. Robins, Baca Float Ranch, Inc., and Valley National Bank of Phoenix, a national banking association, Appellees.
• Court: Arizona Supreme Court

Page 335

372 P.2d 335

91 Ariz. 334

Hubert MERRYWEATHER, Appellant, v. T. T. PENDLETON, J. B. Pendleton, James V. Robins, Baca Float Ranch, Inc., and Valley National Bank of Phoenix, a national banking association, Appellees.

No. 6572.

Supreme Court of Arizona, In Banc.

June 14, 1962.

Herbert Mallamo, Phoenix, Nasib, Karam, Nogales, and Lewis, Roca, Scoville, Beauchamp & Linton, Phoenix, for appellant.

Darnell, Holesapple, McFall & Spaid, Tucson, for appellees T. T. Pendleton, j. B. Pendleton, James V. Robins and Baca Float Ranch, Inc.

Gust, Rosenfeld & Divelbess, Phoenix, for appellee Valley Nat. Bank.

Paul LaPrade, Elmer C. Coker, James E. Flynn, Foster G. Mori, Loretta whitney, Valdemar A. Cordova, Keith A. Haien, Charles N. Walters, Rudolph Mariscal, Langmade & Langmade, Phoenix, Chandler, Tullar, Udall & Richmond, Wolfe, Greer & Knez, Rees, Estes & Browning, Tucson, amici curiae.

BERNSTEIN, Chief Justice (on rehearing),

This is a suit in euity to have an agreement in the form of an absolute sale of stock declared to be an equitable mortgage. The facts concerning this transaction and other circumstances leading up to the agreement are more fully outlined in the previous opinion in this case, 90 Ariz. 219, 367 P.2d 251.

The cause was tried to an advisory jury which returned a general verdict and answers to 13 special interrogatories in all respects favorable to the plaintiff-appellant, Merryweather. The superior court granted defendant-appellee's motion to set aside the findings and verdict of the jury, and entered judgment for Pendleton. In the original opinion, the majority of this court affirmed the action of the court below.

We granted the motion for rehearing upon the urging of appellant and the amici curiae that the decision heretofore rendered beclouded the legal principles dealing with equitable mortgages previously established by this and other courts, and was contrary to fundamental justice. They pointed out that some of the authorities relied upon by the previous majority opinion have been significantly qualified, and that the court misapprehended some facts upon which portions of that opinion were based.

Plaintiff Merryweather was the owner of 5997 shares (50% of the issued stock) in the Baca Float Ranch, Inc. in Santa Cruz County. Defendants T. T. Pendleton and Jim Pendleton controlled the remaining shares in the corporation. Merryweather was under financial pressure from dealings not concerned with the ranch operation, and over a period of several years had engaged in a series of loans in which the Baca Float stock was pledged as security. In July of 1954, Merryweather paid off a $160,000 loan from T. T. Pendleton and incurred an $180,000 thirty day obligation to D. M. Haggard. The following month T. T. Pendleton agreed to loan Merryweather $180,000 to pay off the Haggard loan, but this loan was never consummated as Merryweather needed $200,000 by this time. The Haggard loan was extended to January 24, 1955.

As the due date of the Haggard loan approached, Merryweather again contacted Pendleton with a view to rasing the funds necessary to pay off this obligation, which by now had increased to $220,000. It is at this point that testimony of the parties diverges. Merryweater stated that Pendleton agreed to loan $200,000 and take the stock as security, and it was not until the morning of January 25th, 1955, shortly before the agreement was signed, that he first learned that the instrument was drawn up in the form of a sale with option to repurchase. He testified that Pendleton assured him that this form was used because the Valley National Bank, which was supplying funds to Pendleton, required that the stock be held in Pendleton's name, and that Pendleton agreed that there would be no changes in the organization or operation of the ranch during the period of the agreemdent. Pendleton' testimony was that he had insisted on several occasions that he would not again become involved in a loan or pledge involving the Merryweather stock, but that he would buy it for $200,000 and give Merryweather a one year option to repurchase the stock upon payment of 5% interest. Pendleton said he wanted this form of transfer to avoid the trouble of a foreclosure sale. In its answers to the special interrogatories, the advisory jury accepted Merryweather's view of these dealings.

We are faced at the outset with the question of the scope of review by this court in a case of this nature. Here an advisory jury answered special interrogatories and returned a verdict favorable to the plaintiff, Merryweather. The trial court set aside this verdict, entered findings of fact in some respects different from those of the jury, and gave judgment for the defendant, Pendleton. We have previously indicated that where a trial court disregards the verdict of an advisory jury, the judgment of the court and not the answers of the jury must be assumed to be correct, Carrillo v. Taylor, 81 Ariz. 14, 299 P.2d 188 (1956), and that where a case is tried to the court, and the court does not enter findings of fact, the judgment of the court will be upheld if there is any substantial evidence to support it, State Tax Commission v. Graybar Electric Co., 86 Ariz. 253, 344 P.2d 1008 (1959); Kellogg v. Bowen, 85 Ariz. 304, 337 P.2d 628 (1959).

However, when, as here, the court makes findings of fact, review of these findings is governed by 16 A.R.S. R. Civ.P. 52(a): 'Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of witnesses.' In the leading case interpreting the words 'clearly erroneoush the United States Supreme Court said:

'A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.' United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746, (1948). ¹

Of course, a finding of a trial court is clearly erroneous where it is induced by an erroneous view of the law, Galena Oaks Corp. v. Scofield, 218 F.2d 217 (5th Cir. 1954). This rule applies in the case at bar. The trial court did not make an express finding of the parties' intent in entering the agreement in question, but impliedly found that an absolute sale was intended since it found that there was no continuing obligation on Merryweather to pay Pendleton for the stock, and that Merryweather 'sold' the stock to Pendleton. We think these findings were induced by the view of the trial court that Merryweather had the burden to prove 'beyond question' the continuing existence of an obligation to repay the funds procured from Pendleton.

The trial court, in setting aside the verdict and findings of the advisory jury stated:

'An examination of the agreement nowhere reveals any obligation on the part of the plaintiff to pay the indebtedness in any event, * * * The plaintiff did not sign any promissory note, nor was any evidence adduced from which the court could construe a continuing obligation to pay the defendants any amount whatever. * * *'

The court accepted the defendant's position, stating:

'[A]n essential requisite to the setting aside of an instrument absolute in form in order to construe it as a mortgage or pledge is that the obligation to pay the indebtedness must appear beyond question from the evidence.'

we do not believe that this position accurately states the law. It is certainly true that, in order for a conveyance absolute in form to be held to be a mortgage, a debtor-creditor relationship must exist between the mortgagor-seller and mortgagee-buyer. Charter Gas Engine Co. v. Entrekin, 30 Ariz. 341, 246 P. 1038 (1926); Goodfellow v. Goodfellow, 219 Cal. 548, 27 P.2d 898 (1933); Hess v. Hess, 164 Kan. 139, 187 P.2d 383 (1947). And where the court finds that the parties intended that such a relationship should not exist, or that a pre-existing indebtedness should be extinguished by the conveyance, no mortgage can exist. Charter Gas Engine Co. v. Entrekin, supra; Miller v. Stringfield, 45 Ariz. 458, 45 P.2d 666 (1935). But it is quite a different thing to require that this one element be shown beyond question by express evidence in every instance where an attempt is made to show that an absolute conveyance is in fact a mortgage or pledge. The important consideration is: What did the parties intend? Did they intend a security transaction or did they intend a bona fide bargained-for sale of the property in question? Britz v. Kinsvater, 87 Ariz. 385, 351 P.2d 986 (1960). ² Was the property transferred for the purpose of assuring repayment, or was the property itself the consideration for which funds were paid?

The absence of any clear indication of continuing debt argues strongly for an absolute sale, Murry v. Butte-Monitor Tunnel Mining Co., 41 Mont. 449, 110 P. 497, 112 P. 1132 (1910); 59 C.J.S. Mortgages § 38, but where the agreement is otherwise shown to have been intended as a security transaction, it is not essential that the debt itself be shown. Murry v. Butte-Monitor Tunnel Mining Co., supra; Henderson Baker Lumber Co. v. Headley, 247 Ala. 681, 26 So.2d 81 (1946); Tansil v. McCumber, 201 Iowa 20, 206 N.W. 680 (1925); Kerfoot v. Kessener, 227 Ind. 58, 84 N.E.2d 190 (1949); Jones, Mortgages §§ 316, 323, (8th Ed. 1928); 59 C.J.S. Mortgages § 38; 36 Am.Jur., Mortgages § 152. Where it is clear that the arrangement was a loan in substance, the existence of a continuing debt may be implied, Murry v. Butte-Monitor Tunnel Mining Co., supra; Henderson Baker Lumber Co. v. Headley, supra; Bordan v. Hall, 255 S.W.2d 920 (Tex.Civ.App.1951). It is not necessary that a personal obligation of the mortgagor or pledgor be shown, Osborne v. Osborne, 196 Iowa 871, 195 N.W. 586 (1923); Tansil v. McCumber, supra; Kerfoot v. Kessner, supra; 59 C.J.S. Mortgages § 38, as among other reasons, the...