## Facts

- Edna Carroll sold Agnes Beardon a building and surrounding acreage known as the Hillside Ranch for $42,000, taking back a promissory note secured by a mortgage.
- Beardon paid $8,000 down and made only one monthly payment before defaulting.
- Carroll filed a mortgage foreclosure action in a Montana district court, alleging a substantial unpaid balance and seeking foreclosure on the real and certain personal property.
- The Hillside Ranch had been used as a house of prostitution before the sale.
- Beardon asserted an illegality/public-policy defense, alleging the transaction was made with Carroll’s knowledge and intent that the property would continue to be used for prostitution.
- The case was submitted to the trial court on depositions rather than live testimony.

## Issues

1. Whether the note and mortgage were unenforceable as illegal or contrary to public policy because the transaction allegedly furthered prostitution.
2. Whether a buyer may avoid payment on an illegality defense when the seller allegedly knew of the buyer’s unlawful intended use but did not actively participate in the unlawful conduct.

## Decision

- The Montana Supreme Court affirmed the foreclosure judgment for Carroll.
- The court declined to treat the note and mortgage as void on the record presented.
- The court treated the transaction as an otherwise lawful real-estate sale and financing arrangement, notwithstanding allegations about the property’s intended use.
- A concurring justice agreed in the result, reasoning that even if both parties were involved in illegality, the buyer should not be relieved of her payment obligation.

## Legal Principles

- Contracts that directly require or effectuate criminal conduct may be unenforceable on illegality/public-policy grounds.
- Mere knowledge by a seller that a buyer intends to use property for unlawful purposes does not, by itself, make the seller a participant in the illegality or render the sale financing agreement unenforceable.
- The illegality defense generally requires proof that the contract is an instrument of the unlawful scheme or that the party seeking enforcement actively participated in the unlawful conduct.

## Conclusion

The court enforced the mortgage and allowed foreclosure because the evidence did not establish that the financing agreement itself was an illegal bargain or that the seller’s involvement rose above knowledge of an unlawful intended use.


Carroll v. Beardon, 381 P.2d 295 (Mont. 1963)