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Merryweather v. Pendleton

Supreme Court of Arizona

December 7, 1961

Hubert MERRYWEATHER, Appellant,
T. T. PENDLETON, J. B. Pendieton, James V. Robins, Baca Float Ranch, Inc., an Arizona corporation, et al., and Valley National Bank of Phoenix, a national banking association, Appellees.

In Banc.

Hearing Granted April 24, 1962.

[90 Ariz. 221] Nasib Karam, Nogales, and Herbert Mallamo, Phoenix, for appellant.

Darnell, Holesappel, McFall & Spaid, Tucson, for appellee T. T. Pendleton.

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

Page 252

UDALL, Justice.

Hubert Merryweather, plaintiff below and appellant here, brought an action to have an agreement with T. T. Pendleton, in the form of an absolute sale of certain shares of stock with an option to repurchase, declared to be an equitable mortgage or pledge. In the alternative the plaintiff contended that if the court should find the agreement was in fact a sale absolute it should also find (1) that plaintiff tendered payment under the option, (2) that defendant refused to accept payment and thereby waived performance under the terms of the sale agreement, and (3) that defendant T. T. Pendleton and the other defendants had by their acts converted plaintiff's stock.

The immediate transaction giving rise to this litigation was, in a sense, the culmination of a series of transactions involving the transfer of a block of 5,997 shares of stock in Baca Float Ranch, Inc. The shares, purchased by Merryweather from Baca Float Ranch, Inc. and T. T. Pendleton, its president, over a period of eight years, represent 50% of the total stock issued by the corporation. The initial purchase was completed February 19, 1949, Merryweather having paid therefor slightly in excess of $160,000.

Shortly after acquiring the stock plaintiff commenced an unbroken sequence of loans with pledges of the stock as security in each instance, which continued down to the transaction here in controversy.

The first loan was on October 13, 1949 from one Bell in the amount of $140,000. It was repaid and the stock redeemed on May 18, 1953 with the proceeds of a $160,000 loan from one Haggard executed the same day and also including a pledge of the redeemed stock. The second loan (from Haggard) was repaid by plaintiff on June 9, 1953 with the proceeds of a loan of $160,000 from T. T. Pendleton. Again the stock was pledged as security. This third loan was extended until July 17, 1954 when it was satisfied by the proceeds of another loan from Haggard for the increased amount of $180,000. Before the due date of the fourth loan (ultimately extended to January 25, 1955), plaintiff borrowed additional funds from Haggard which brought his indebtedness to the latter up to $220,000.

The transaction in dispute was the end result of plaintiff's negotiations with T. T. [90 Ariz. 222] Pendleton in an attempt to raise funds to satisfy the July 17, 1954 loan from Haggard and to prevent foreclosure on the pledged shares of stock. To accomplish this the parties executed on January 25, 1955 an agreement, Exhibit 4, which on its face provided for purchase of the stock by Pendleton for $200,000 and an option to repurchase by plaintiff within one year for the same sum plus 5% interest. On the same day and in a separate transaction the stock was pledged by Pendleton as security for a loan of $200,000 from defendant Valley National Bank the proceeds of which were used by Pendleton to pay plaintiff for the stock. The block of 5,997 shares was transferred from plaintiff to Pendleton on the books of the Baca Float Ranch, Inc.

Significantly, the bank also required Pendleton to pledge 2,797 shares of his own stock in the corporation to obtain the $200,000 loan. In addition the bank required a 'takout' letter whereby one Thomas F. Griffin agreed to buy from the bank 5,000 of the shares at $42 per share at the request of either the bank or Pendleton if the latter were granted the loan and if he (Pendleton) retained ownership of the block of 5,997 shares for at least 14 months.

The court tried the case with an advisory jury which answered special interrogatories and also returned a general verdict, the latter in favor of plaintiff and supported by the answers to the interrogatories. Upon appropriate motion by defendants, however, the trial court substituted its own findings and set aside the verdict for plaintiff.

In its Order granting defendants' motion to set aside the findings and verdict of the jury and to enter judgment for defendants, the trial court said:

'An examination of the agreement nowhere reveals any obligation on the part of the plaintiff to pay the indebtedness

Page 253

in any event, and it goes without saying that to construe an instrument as a mortgage, which on its face is clear and unambiguous, evidence which is clear and convincing must be established to show that it was in fact a mortgage rather than a sale as it purports to be on its face. 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. Plaintiff could exercise his option if he chose to do so, and if he did not he was not obliged to pay any amount to the defendant T. T. Pendleton.

* * *

* * *

'Without further quotation from the cases, the court feels that in addition to the cases heretofore discussed the following citations bear out defendants' position that an essential requisite to the setting aside of an instrument absolute in form in order to construe it [90 Ariz. 223] as a mortgage or pledge is that the obligation to pay the indebtedness must appear beyond question from the evidence [citations omitted]. * * * That element the court has found lacking in this case and therefore is obliged to grant the defendants' motion. * * *'

In considering this appeal we are bound by the rule as stated in Carrillo v. Taylor, 81 Ariz. 14, 19, 299 P.2d 188, 191 (1956) that:

'* * * where a verdict is advisory, the finding made by the trial court, and not the answers given by the jury to interrogatories determines the judgment, and that it is the judgment of the trial court and not the answers of the jury which must be assumed to be correct.'

See also Bohmfalk v. Vaughan, 89 Ariz. 33, 357 P.2d 617 (1960); Ariz.R.Civ.P. 39(l), 16 A.R.S.

At the outset we are met with plaintiff's assertion that the trial court erred in holding that the burden of proof was on the plaintiff to prove the instrument was other than what it purported to be by clear and convincing evidence. Plaintiff admits this to be the rule when one undertakes to prove that a sale absolute is in effect a mortgage but contends the case is otherwise when an option to repurchase is involved.

This argument that a lesser quantum of proof is necessary when attempting to show a mortgage was intended rather than a sale with option to repurchase was expressly rejected by the Supreme Court of Washington in Johnson v. National Bank of Commerce, 65 Wash. 261, 271, 118 P. 21, 23, L.R.A.1916B, 4 (1911). That court countered:

'We think the better rule is that, where there is a deed absolute in form either with or without a contemporaneous agreement for a resale of the property, there being nothing upon the face of the collateral papers to show a contrary intent, the presumption of law, independent of evidence, is that the transaction is what it appears to be, and that he who asserts that the writing should be given a different construction must show by clear and convincing evidence that a mortgage, and not a sale with the right to repurchase, was intended.'

The court went on to hold that it had not been proved by clear and convincing evidence that the agreement in question was a mortgage.

That this rule obtains in Arizona see Sullivan v. Woods, 5 Ariz. 196, 200, 50 P. 113, 115 (1897), wherein it was held that 'clear and certain and conclusive evidence' was required to show that a deed absolute and a separate option to repurchase together constituted[90 Ariz. 224] a mortgage. And in California proof 'beyond all reasonable controversy that it was the intention of not only one but all of the parties that the deed should be a mortgage' is required of the proponent in this type of action. Wohle v. Price, 202 Cal. 394, 397, 260 P. 878, 879 (1927). See also Parks v. Mulledy, 49 Idaho 546, 290 P. 205, 79 A.L.R. 934 (1930).

Page 254

Plaintiff next argues that the trial court was wrong in requiring that an obligation on plaintiff's part to pay an indebtedness 'must appear beyond question from the evidence.' It is important that this phrase from the trial court's order be read in connection with and in light of the preceding remark that there was not 'any evidence adduced from which the court could construe a continuing obligation to pay the defendants any amount whatever.' (Emphasis added.) When so read it is clear that the trial court required no more and no less than 'clear and convincing evidence' to establish the debt.

The very essence of a mortgage is a subsisting obligation to pay. It matters not whether the debt existed before or was created by the transaction in question. But debt there must be. Charter Gas Engine Co. v. Entrekin, 30 Ariz. 341, 246 P. 1038 (1926). 'It is not material that there should be any note or bond or other written evidence of debt, nor is it material that the indebtedness should have arisen in any particular manner. It is only material that there should be a bona fide debt.' I Jones, Mortgages, § 316 at 391 (8th ed. 1928). Here the instrument made it optional with plaintiff whether he should repurchase the stock. In such a case the trial court must look to the circumstances surrounding execution of that instrument for any evidence of mutual recognition of a continuing obligation to pay. None was found here. There is substantial evidence in the record to support the trial court's holding that the debt, which must be established by clear and convicing evidence, was not proved in this case.

Plaintiff assigns numerous other errors but most of these are subsumed under his main contention that the trial court erred in failing to find that Pendleton agreed to advance the money on a loan basis as in times past and only insisted that the agreement be in the form of Exhibit 4 to meet the requirements of the bank from which Pendleton was to borrow to pay plaintiff. Pendleton's rejoinder is that he refused to make the loan because he was unwilling further to involve himself in repeated loan transactions with one so continuously in financial straits and that the best he would do for plaintiff was to buy the stock and give the option to repuchase.

It is admitted by plaintiff that in August of 1954 he told T. T. Pendleton that he needed $200,000 to pay the indebtedness to Haggard, but in their discussions apparently[90 Ariz. 225] Pendleton would loan him only the sum of $180,000. To confirm this understanding between the parties plaintiff wrote a letter to defendant Pendleton on August 20, 1954, which read in part as follows:

'In consideration of your agreement to loan to me the sum of $180,000 I hereby agree that I will not later than August 25, 1954, accept the loan of $180,000, and in consideration therefor execute to you a note for the principal sum of $180,000, bearing interest from August 18, 1954, at the rate of five per cent per annum until paid, payable on or before August 18, 1955; that I will deliver to you as security for said note 5997 shares of the capital stock of Baca Float Ranch, and will execute and deliver to you a pledge of said stock, said pledge to be in the form of the previous pledge agreement executed to you on the 9th day of June, 1953.'

This loan however was never consummated because plaintiff needed $200,000, and more as time passed, to pay off his indebtedness. The exact language used in the discussions between the parties after August 20th is in dispute. The statement of Merryweather's attorney in his opening brief acknowledges this continuing conflict:

'We must confess that there is a sharp conflict in the evidence as to whether or not the subsequent discussions [the discussions that took place after the tentative agreement to loan $180,000 in August of 1954] between the Plaintiff and Defendant, T. T. Pendleton, related to a sale of stock with an option to repurchase or whether these discussions related to a loan.'

Page 255

The record further discloses that in a discussion which took place between the parties during the month of November 1954, Merryweather told T. T. Pendleton that his obligation to Haggard was the sum of $220,000. Pendleton's answer to Merryweather was:

'That's when I told him that $200,000.00 was my limit regardless of anything, and that I would never again get messed up in any loan, but that I would buy the stock outright and give him an option for a year to repurchase it.'

On or about December 10, 1954, the parties had another meeting at which time Pendleton testified he reiterated his statement concerning 'this purchase and repurchase thing', apparently referring to his purchase of the stock and the option extended to Merryweather to repurchase it. Further testimony on the part of Pendleton, which was in harmony with his position taken in November and December, reads as follows:

'Q. And what was that, again, that you told him on the 18th of January [1955]? A. I told him to remember that the only way I was going to touch this thing was to buy the stock outright[90 Ariz. 226] and give him an option to repurchase it, because I may say that I had been to Mr. Patton and laid the foundation for this thing.'

Pendleton testified further that in their meeting on January 24, 1955, the day before the execution of plaintiff's Exhibit 4, he represented the same stand to Merryweather. And to the question

'Did you at any time between November, 1954, and the 25th of January, 1955 agree or offer to lend to Mr. Merryweather this amount of money?'

Pendleton replied:

'Never. I was careful about my language to him.'

At the time of the signing of the agreement, T. T. Pendleton testified that 'Merryweather read the agreement and indicated that it was the way he had understood it and that it was acceptable, and that's about it.'

Present at the time of the signing of the agreement was Charles Patton, vice president of the Valley National Bank. Patton testified that he understood the agreement to be a bona fide sale, and that neither T. T. Pendleton nor Merryweather, nor anyone else, ever told him or in any manner ...

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