Broomfield v. Kosow

• Citation: 349 Mass. 749,212 N.E.2d 556
• Parties: George BROOMFIELD, receiver, v. Joseph KOSOW et al.
• Decision Date: 15 December 1965
• Court: United States State Supreme Judicial Court of Massachusetts

Page 556

212 N.E.2d 556

349 Mass. 749

George BROOMFIELD, receiver, v. Joseph KOSOW et al.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Oct. 5, 1965.

Decided Dec. 15, 1965.

Arthur T. Wasserman, Boston, for Kosow & another.

Hertz N. Henkoff, Boston (George Broomfield, Boston, with him) for plaintiff.

Before SPALDING, WHITTEMORE, CUTTER, KIRK, SPIEGEL, and REARDON, JJ.

REARDON, Justice.

This is a suit originally brought by the plaintiff as receiver of Dr. McCarthy's Rest Home, Inc. (the Home) seeking to establish a trust on certain funds alleged withheld or diverted by the defendant Leon Gordon in excess of the cost of construction work performed by him at the Home and for an accounting. Other defendants were Joseph Kosow and Industrial Small Business Investment Corp. (Investment Corp.). Following trial before a judge of the Superior Court, the plaintiff was given leave to amend his bill to conform with proposed findings, rulings, and an order for decree. The plaintiff filed an amended bill which sought to impress the trust on certain monies held by Kosow. Thereafter the judge made findings of material facts, rulings, and an order for a decree. The final decree required Kosow to pay to the plaintiff a sum computed by the judge, with interest from the date of entry of the original bill of complaint. The bill was dismissed as to the defendants Gordon and Investment Corp. Both the plaintiff and Kosow appealed.

The judge made findings as follow. The plaintiff is by a Superior Court appointment the receiver of the Home, a corporation operating a nursing home in Cambridge. Dr. Frank C. Romano was the owner of all the capital stock of this corporation and was in addition the owner of all the capital stock of five other corporations, also operating as nursing homes. In each of the six corporations he was president, treasurer, and a director. The defendant Kosow was a principal stockholder in charge of the operation of the defendant Investment Corp. This latter corporation was licensed under the Federal Small Business Investment Act. The nursing homes owned and operated by the six corporations had an approximate total of 400 beds and a gross annual revenue running between $750,000 and $850,000. For approximately two years prior to January, 1960, Romano and his corporations had from time to time borrowed from the defendant Kosow and from 'entities in which he was interested.' Kosow had studied the Romano operations intensively and 'had intimate, personal, first-hand knowledge' of their condition. There was a close business relationship and friendship between Romano and Kosow. In 1958 the Romano corporations had borrowed jointly and severally $700,000 from Court Street Venture No. 1 (the Venture) in which Kosow was a participant. For that loan they had executed a note in the sum of $1,292,084.67 secured by mortgages on all of the real estate owned by the Romano corporations.

In January, 1960, the Home did not meet the standards of the Massachusetts Departments of Public. Safety and Public Health, and to obtain compliance the departments requested alterations and additions. At about the same time, being unable to procure bank financing, Romano 'sought out Kosow for the financing and building' both because of the departments' request and because he wished to build an addition to the Home in order that its volume of business might be increased by extra rooms. Kosow offered to survey the situation and to obtain a contractor 'who would build the addition at the best possible price' with the cost of construction to be met by a loan from a Kosow operated finance company. Kosow and his associate Gordon then made a plan of the facilities of the Home with a view to complying with the departments' standards, and Kosow eventually informed Romano that he had a contractor (Leon Gordon) who would construct the addition for $141,661 'well knowing that the entire work of addition and alteration would cost not more than $75,000 and possibly $80,000.' Leon Gordon, one of the several defendants, had an office in a suite maintained by Kosow and was engaged in general construction, as well as being as associate of Kosow in the operation of nursing homes. Kosow and Gordon presented the preliminary plans to Romano, and Kosow told Romano that in the event the total construction cost was less than $141,661 he would give Romano a 'breakdown.' He 'led Romano to understand that he would give an accounting to Romano at the conclusion of the work and give Romano, that is Dr. McCarthy's Rest Home, Inc. credit for the excess.' Romano told Kosow that his proposition was satisfactory and that he should proceed to final plans and specifications, including arrangements for financing and preparation of the necessary documents. In February, 1960, Kosow engaged a lawyer to prepare an agreement between Romano, Romano's wife, the Home, and Gordon as contractor for the building of the addition. On June 15, 1960, the parties executed formal written contracts for the proposed construction. Concurrently Romano, for each of the six Romano corporations, executed and delivered six notes and six real estate mortgages securing the notes representing the loans from the defendant Investment Corp., which instruments had been prepared by still other counsel retained by Investment Corp. Three of these notes were for $30,000, two for $20,000, and a sixth for a lesser amount. Checks from Investment Corp. in the amount of the respective loans to each of the Romano corporations were given to Romano and he immediately indorsed each one over to Gordon. Gordon deposited them after indorsement in his own bank account but five days thereafter, on June 20, 1961, he drew a check on his bank in the amount of $141,661, the total amount of the loand, payable to the Sherman Kosow Family Venture. That check was deposited to the credit of the Sherman Kosow Family Venture in the City Bank and Trust Company. The rate of interest on each of the several loans to Romano's corporations was fifteen per cent per annum. At the time the loans were made there was in existence a government regulation prohibiting a loan as large as $141,661 from Investment Corp. to any single borrower.

The work required by the construction contract was performed satisfactorily, and as it progessed either Gordon paid its cost and was reimbursed by the Sherman Kosow Family Venture, or payment was made directly by it. Kosow made arrangements for all sub-contracts. The cost of the construction work was $63,124.35, representing all payments made by or through the defendant Gordon from the proceeds of the six loans. This did not include any overhead or profits charge for Gordon, Kosow, or others who worked on the project, and no payment for any such items was ever requested.

'Romano relied on the good faith of Kosow in placing the $141,661 in Kosow's hands for disbursement to Gordon and others in accordance with the terms of the contract.' Despite his promise to give an accounting, Kosow never disclosed to Romano what happened to the funds after they were given over to Gordon as Kosow's agent. In the spring of 1961 Romano delivered to Kosow a letter prepared for Romano's signature by an attorney. The letter stated Romano's satisfaction with the size of certain interest charges.

Gordon was at all times acting for, and under the direction and control of, Kosow. Gordon was aware from the first that the cost of the work would be approximately $63,000, but under the direction of Kosow he signed a contract for $141,661, subsequently turning the entire amount over to Kosow. He was paid $63,124.35 in full by Kosow, and there was no fiduciary relationship between him and Romano or the Home.

In addition to the findings of the judge, facts stipulated by the plaintiff and the defendant Kosow indicated that on November 13, 1961, the balance due on the six mortgage notes was $129,661, and no further payments were made thereon by any of the Romano corporations. It also appears that between June 15, 1960, and November 13, 1961, interest was paid. Kosow sold his holdings and resigned from all positions in Investment Corp. on June 29, 1961. On November 27, 1961, Investment Corp. sold the six notes and mortgages to Congress Management Corp. for an amount equal to the then balance, thus wholly reimbursing itself. Congress Management Corp. simultaneously sold the notes to the Venture for $50,000 in cash and a promissory note for $79,661. The Venture sold them to one Barney Goldstein on the same date for his note in the amount of $129,661. A foreclosure of the mortgages ensued in the last week of March and the first week of April, 1962, when the equities in the properties were sold to Barney Goldstein for $2,500 each. The sale resulted in gross deficiencies in the sum of $122,062 plus foreclosure costs. These remain unpaid. Title to the mortgaged nursing homes was eventually acquired by Geriatric Services, Inc.

The judge found that in connection with the making of the loans and the construction of the addition Romano reposed trust and confidence in Kosow and that the influence growing out of that trust and confidence was 'exerted' by Kosow 'to obtain a personal advantage at the expense of Romano and his enterprises.' The judge rejected Kosow's contention that this was an open contract openly arrived at in which Kosow made an offer to do all the work required for $141,661. On the contrary, the judge found that Romano placed complete faith in Kosow, entrusting him with the entire project, and signed all documents including notes, contracts and mortgages submitted to him by Kosow without questioning or examining them in any way, trusting Kosow implicitly and doing the latter's bidding throughout the undertaking. He found further that Romano was never given any breakdown or accounting and knew nothing of the details of the construction loans and that Kosow 'sought to make as handsome a profit as he could, without...