Aetna Life and Cas. Co. v. Union Trust Co.

• Court: Connecticut Supreme Court
• Writing for the Court: BORDEN; BERDON
• Citation: Aetna Life and Cas. Co. v. Union Trust Co., 646 A.2d 799, 230 Conn. 779 (Conn. 1994)
• Decision Date: 16 August 1994
• Docket Number: No. 14903,14903
• Parties: AETNA LIFE AND CASUALTY COMPANY v. UNION TRUST COMPANY.

Page 799

646 A.2d 799

230 Conn. 779

AETNA LIFE AND CASUALTY COMPANY v. UNION TRUST COMPANY.

No. 14903.

Supreme Court of Connecticut.

Argued June 3, 1994.

Decided Aug. 16, 1994.

William H. Narwold, with whom were Charles D. Ray and, on the brief, David D. Legere, Hartford, for appellant (defendant).

J. Paul Johnson, with whom was Gary R. Khachian, Stamford, for appellee (plaintiff).

Before BORDEN, BERDON, KATZ, PALMER and SPEAR, JJ.

BORDEN, Associate Justice.

The principal issue in this appeal is whether, under the circumstances of this case, a bank is liable to a trust beneficiary for obeying the fiduciary's instruction to transfer funds out of the fiduciary's general trust account in payment of the fiduciary's personal obligation to the bank. The defendant, Union Trust Company, appeals ¹ from the judgment of the trial court holding it liable to the subrogee of the trust beneficiary for participation in a breach of trust. The plaintiff, Aetna Life and Casualty Company, ² in addition to claiming that the trial court was correct, proposes as alternative grounds for affirmance of the trial court's judgment that the defendant should be held liable on a theory of either conversion or constructive trust. We agree with the defendant's claim; we find no merit in the plaintiff's alternative grounds for affirmance; and we therefore reverse the judgment of the trial court.

The plaintiff brought this action to recover money it had paid to the estate of Grace M. Flannigan (estate) as surety for the estate's fiduciary, attorney James C. Moyer, after Moyer committed a breach of trust by utilizing trust funds to pay off his personal obligations to the defendant. The case was referred to an attorney trial referee, who heard the case pursuant to a stipulation of facts, and filed a report with the trial court. The trial court rendered judgment for the plaintiff.

The parties stipulated to the following facts. On November 13, 1987, the defendant lent $85,000 to Moyer, who on the same date executed a mortgage deed to the defendant on property in Trumbull as security for the loan. In February, 1989, the defendant discovered through an internal audit report and title rundown that the mortgage had not been recorded in the Trumbull land records. Upon subsequently discovering that the property had been sold by Moyer on December 28, 1988, Daniel Glassberg, senior vice-president and general counsel to the defendant, contacted Moyer in March, 1989, and demanded immediate repayment of the loan. According to Glassberg, Moyer stated that he would make payment in full before April 1, 1989. In addition, the defendant conducted a credit search in an unsuccessful attempt to locate assets owned by Moyer to recover the amount due.

On May 2, 1989, Moyer entered the Derby branch of the defendant and instructed the assistant branch manager, Hazel Hummel, to debit an account, specified only by number, in the amount of $93,179.24, and to apply these funds to: (1) pay off the mortgage loan balance of $88,745.19; (2) pay off another note of Moyer's that was due to the defendant in the amount of $2433.33; and (3) deposit $2000 into Moyer's personal checking account. Hummel carried out Moyer's request after verifying the balance in the account and the payoff figures for the loans in question. She did not seek to determine the type of account that Moyer instructed to be debited, or whether the loans were Moyer's personal loans, although this information was available to her in the bank records. She knew, however, because of the numbered code of the account, that it was not a personal account. The transactions were carried out by the defendant's central processing department on the basis of a debit/credit memo prepared by Hummel.

The account debited, titled "James C. Moyer, Trustee," was an attorney's trust account maintained by Moyer, which had been opened by Hummel at an earlier date. Moyer was also the conservator of the estate, appointed by the Shelton Probate Court. Almost all of the funds in the account, namely, $110,285.21 out of $110,300.03, represented proceeds received by Moyer as conservator of the estate in connection with the sale of certain real property of the estate that Moyer had sold. On May 1, the day before Moyer had instructed Hummel to effectuate the transaction at issue, he had, at the defendant's Westport branch, deposited the sale proceeds check, which had been made out to "James C. Moyer, Conservator," to his attorney's trust account.

At some time between May 2 and May 19, 1989, Glassberg became concerned, based on the May 2 transaction, that Moyer might have been converting client funds. Glassberg wrote to the statewide grievance committee. Moyer was subsequently arrested and convicted of a criminal offense, and he resigned from the Connecticut bar.

The plaintiff was surety for Moyer on a bond in the amount of $130,000, filed with the Probate Court in connection with the sale of the property owned by the estate. After dismissing Moyer as conservator, the Probate Court called the bond, which the plaintiff paid in the amount demanded, namely, $123,285.21. The plaintiff sued Moyer and obtained a stipulated judgment in the amount of $123,285.21, which remains wholly unsatisfied.

The plaintiff, as subrogee of the rights of the estate, also made written demand upon the defendant for the payment of the money that had been debited from Moyer's trustee account and used to pay Moyer's personal loans from the defendant bank. The defendant disputed liability and the plaintiff commenced this action, claiming damages and the imposition of a constructive trust on the money being held by the defendant.

The matter was presented to the attorney trial referee on four theories of recovery: (1) negligence; (2) participation by the defendant in Moyer's breach of trust; (3) improper setoff; and (4) conversion. On the basis of the stipulated facts, the referee's report rejected the plaintiff's breach of trust, improper setoff and negligence claims. With regard to the conversion claim, the referee recommended that: (1) the trial court adopt, as a matter of law, a broad view of the type of property that is subject to the tort of conversion, and render judgment for the plaintiff; but (2) if, as a matter of law, the court declined to take such a broad view, the court render judgment for the defendant.

The trial court concluded that the defendant was liable because it had participated in Moyer's breach of trust. The court did not specifically consider either the conversion or constructive trust theories, now advanced on appeal by the plaintiff as alternate grounds on which to affirm the judgment. See Practice Book § 4013. ³ Accordingly, the court rendered judgment for the plaintiff. This appeal followed.

I

The defendant claims that the trial court improperly held it liable for participation in Moyer's breach of trust. We agree.

It is not disputed that Moyer committed a breach of trust against the estate. The principal issue in this case is whether the defendant should be held liable as a participant in that breach of trust. The defendant argues that it neither knew nor can be charged with knowledge of Moyer's misapplication of trust funds. The plaintiff concedes that, as the trial court found, no one person in the defendant's employ had actual knowledge of the misapplication of the estate's funds. Indeed, the trial court specifically found that no single individual employed by the defendant, had actual knowledge that Moyer was misapplying the funds of the estate.

In Titcomb v. Richter, 89 Conn. 226, 93 A. 526 (1915), this court considered a claim by a trust beneficiary against stockbrokers for an accounting of trust funds improperly depleted by the fiduciary, Morris. The plaintiff had entrusted funds to Morris for investment, which Morris deposited in an account with the defendants in the name "Charles E. Morris, Trustee." The plaintiff sought to hold the defendants liable for Morris' diversion of her funds.

This court affirmed a judgment for the defendants. We stated that Morris "was bound to account to [the plaintiff] for her property; and if the defendants, knowing of the [fiduciary] relation, aided him in diverting her property from the purposes for which he held it, they would be accountable for it, if it could be traced to their possession." Id., at 229, 93 A. 526. In determining whether the defendants could be chargeable with such knowledge, we drew on the law applicable to banks, and held that the name under which the trust account was maintained had particular significance.

"Where a known trustee uses trust property for his own purposes ... bankers and others, who, knowing the facts, aid such trustee in the improper use of the trust property, are accountable to the cestui que trust for the trust property received by them. And where securities bear upon them full evidence that they belong to the trust estate, that fact is sufficient to put a third party, who receives the trust property as security for the trustee's individual debt, upon inquiry, and to charge him with knowledge of the facts of which such inquiry would have informed him." Id., at 229-30, 93 A. 526. We contrasted this situation, however, with a case in which the diverted property carries no indication on its face of its fiduciary status. In that instance, "if the [fiduciary] diverts it from the purposes for which he received it, as by paying his own debts with it to one who takes it without knowledge of the diversion, the latter's title to it is good, and he cannot be called to account by the principal." Id., at 230, 93 A. 526.

Applying these principles to the facts of the case, we held that the fact that the account was in the name of "Charles E. Morris, Trustee," without any further specification of the nature of the trust account, was insufficient to put the defendants on inquiry. "[The defendants] clearly would have been justified in believing...