Durfee v. Durfee & Canning

• Decision Date: 08 July 1948
• Citation: 80 N.E.2d 522,323 Mass. 187
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: WILLIAM DURFEE, JUNIOR v. DURFEE & CANNING, INC.& another.

323 Mass. 187

80 N.E.2d 522

WILLIAM DURFEE, JUNIOR v. DURFEE & CANNING, INC.& another.

Supreme Judicial Court of Massachusetts, Bristol.

July 8, 1948

December 5, 1947.

Present: QUA, C.

J., LUMMUS, DOLAN WILKINS, & SPALDING, JJ.

Corporation Officers and agents, Corporate entity. Fiduciary. Trust Constructive trust. Profits.

In a suit in equity brought for the benefit of a corporation by the owner of one half of its capital stock against the owner of the other half, who also was its treasurer, vice-president, and a director, a decree was ordered entered adjudging the defendant a constructive trustee of profit wrongly and secretly realized by another corporation which was the defendant's creature, where it appeared that the defendant, using the facilities and personnel of the first corporation while ostensibly operating in the name of his creature corporation, which lacked such facilities and personnel, caused his creature corporation to purchase a certain grade of gasoline, advantageous to the first corporation's business, from a seller who would have dealt directly with the first corporation, and to sell the gasoline to the first corporation at such profit to the creature corporation.

One who was treasurer, vice-president, and a director of a corporation and who wrongly realized a secret profit through a second corporation which was his creature by causing his creature corporation to buy gasoline and sell it to the first corporation at such profit, was not relieved of liability to the first corporation as constructive trustee of such profit by the mere facts that the first corporation was not financially able to purchase the gasoline and that he personally had financed the transactions.

In a suit in equity brought for the benefit of a corporation by the owner of one half of its capital stock against the owner of the other half, who also was its treasurer, vice-president, and a director, to charge the defendant as a constructive trustee of a profit wrongly gained through a second corporation which was the defendant's creature, by means of sales of gasoline by the creature corporation to the first corporation at a mark-up, a finding by a master that the defendant had failed to prove by a fair preponderance of the evidence that the plaintiff "consented to, approved, ratified or acquiesced" in such sales with knowledge of all the material facts was not inconsistent with his findings that the plaintiff all along knew that the defendant's creature corporation was making sales to the first corporation and suspected that such sales were at a mark-up, but that he did not know of the fact of the mark-up or its extent until after the period of the sales and a few months before the suit was commenced.

A master in a suit in equity, who had warrantably found a sum for which, if the court so ruled on his findings, the defendant would be chargeable as constructive trustee to a corporation, of which he was treasurer, vice-president, and a director, as for certain profits realized during a period of over two years through a corporation which was his creature by means of a mark-up on sales of gasoline by the creature corporation to the first corporation, rightly refused to use, in the absence of other evidence, as the measure of the mark-up during a further period of four months, the average mark-up of the previous period, where he found that similarity of conditions in the two periods had not been proved, although he also found that in the circumstances he would be warranted in drawing the most adverse inference possible against the defendant.

BILL IN EQUITY, filed in the Superior Court with a writ of summons and attachment dated August 3, 1944, and afterwards amended.

By order of Cabot, J., there were entered an interlocutory decree confirming a master's report, and a final decree dismissing the bill. The plaintiff appealed.

J. P. Rooney, (J.

C. Reilly with him,) for the plaintiff.

H. E. Foley, (C.

I. Peterson & H.

L. Berman with him,) for the defendant Chester H. Canning.

DOLAN, J. This bill in equity is brought by the plaintiff, a stockholder, on behalf of Durfee & Canning, Inc., and all other stockholders thereof, to enforce in favor of the corporation certain liabilities of the defendant Chester H. Canning since 1930 treasurer, vice-president, purchasing agent, a director and a stockholder of the corporation. Durfee & Canning, Inc., and the Pacific Gas Corporation are also named as defendants. ^[1]

The material allegations of the bill are that in breach of trust the defendant Canning, without disclosing to the directors of Durfee & Canning, Inc., his interest in the defendant Pacific Gas Corporation, or the profit that Pacific Gas Corporation, of which Canning was an officer, director and stockholder, was making from certain transactions without the knowledge or consent of the directors of Durfee & Canning, Inc., caused the latter to purchase natural gasoline from Pacific Gas Corporation at prices in excess of market prices and in excess of the prices paid by that corporation in purchasing that gasoline from Warren Petroleum Corporation, and that these transactions were effected by Canning fraudulently and in bad faith and in violation of his duty of loyalty to Durfee & Canning, Inc. The relief sought by the bill is the recovery in behalf of Durfee & Canning, Inc., of the profits realized by Pacific Gas Corporation from these transactions, that is, the difference between the amount that corporation paid for the natural gasoline and that which it charged to Durfee & Canning, Inc.

The case was referred to a master, whose findings may be summarized as follows: ^[1] Durfee & Canning was organized under the laws of this Commonwealth in 1930 for the purpose of dealing in petroleum products, principally gasoline, kerosene and fuel oil. Prior to incorporation it was a partnership conducted by Durfee and Canning and when incorporated had assets of the value of about $100,000. Since that time it has been in effect a "two-man affair" with Durfee as its president, assistant treasurer and a director, and Canning as its treasurer, vice-president and a director. Throughout, one half of the capital stock of the corporation has been owned by each of them. They had equal powers and duties and there were no important spheres of corporate activity to which either confined himself to the exclusion of the other. On October 8, 1941, Canning organized the Island Transport Company, investing $40 which represented the subscription price of its entire capital stock consisting of four shares held by nominees for his benefit. He was president, treasurer and a director of that corporation and he selected the remaining directors. On June 24, 1942, he caused the name of that corporation to be changed to Pacific Gas Corporation. At that time he transferred three of its four shares into his wife's name for her benefit and that of her daughter. He transferred the fourth share to Angela Cashen, an employee in his New York office, for the benefit of her brother James A. Cashen, Junior, hereinafter referred to as Cashen, through whose services and influence with Warren the Pacific-Warren transactions were negotiated. The only consideration for the transfer of the fourth share was the services that Cashen had rendered and was expected to render as Canning's consultant and contact with Warren. Canning continued to hold the same offices in Pacific as he had held in Island Transport Company, and "installed" his wife and his attorney as the remaining directors. They are "`dummy' directors." Mrs. Canning and her daughter have never been consulted about the conduct of the business of Pacific. Canning's attorney has been doing legal work for Pacific but has exercised no independent judgment as a director. Cashen's only financial return from Pacific has been to collect compensation from it for effecting sales of natural gasoline to it by Warren. During the period with which we are here concerned Canning "alone determined its [Pacific's] policies and actively managed and directed its business."

"Prior to June, 1942, Durfee & Canning . . . was a relatively small enterprise. . . . By 1942, its business and organization had grown and expanded considerably as compared with the situation existing at the time of its incorporation in 1930, and it had become an important local factor." For years Durfee & Canning had been dealing for the most part in "regular" grade gasoline. Until June, 1942, Durfee & Canning did not deal in natural gasoline. The product known as "14# natural gasoline" may be obtained as a residual product by a process of extracting certain high hydrocarbon ingredients from "26# natural gasoline." It was as a result of a war production board program encouraging this process that the industry first discovered the commercial possibilities of 14# natural gasoline as a blending agent with regular gasoline. Number 14 natural gasoline was new and imperfectly understood in

February, 1942, and its possibilities did not come to the attention of Canning until the spring of 1942.

"Faced with the problem created by the suspension of butane and propane sales [in which Canning began to deal early in 1942] and recognizing the utility of 14# natural gasoline as a volume substitute for regular gasoline, Canning became eager [in May, 1942] to engage in 14# natural gasoline dealings. He had in mind the fact that Pacific . . . lacked storage, terminal and transportation facilities and experienced, trained personnel for the efficient handling of this product, and . it is a fair inference from the evidence that Warren executives were also aware of this. Canning's only practical recourse was to use the facilities and personnel of Durfee & Canning . . . by...