Capital Investors Co. v. Executors of Morrison's Estate

• Decision Date: 29 September 1978
• Docket Number: No. 75-1498,75-1498
• Citation: Capital Investors Co. v. Executors of Morrison's Estate, 584 F.2d 652 (4th Cir. 1978)
• Parties: CAPITAL INVESTORS CO., Plaintiff, Norman B. Frost, Deceased, and Harry Dreisen, Appellees, v. EXECUTORS OF the ESTATE OF Arthur R. MORRISON, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 652

584 F.2d 652

CAPITAL INVESTORS CO., Plaintiff Norman B. Frost, Deceased, and Harry Dreisen, Appellees, v. EXECUTORS OF the ESTATE OF Arthur R. MORRISON, Appellant.

No. 75-1498.

United States Court of Appeals Fourth Circuit.

Argued Oct. 3, 1977.

Decided Sept. 29, 1978.

Joseph B. Hyman, Arlington, Va. (Echols & Hyman, Arlington, Va., on brief), for appellant.

Lee T. Ellis, Jr., Washington, D. C. (John A. Beck, Washington, D. C., on brief), for appellees.

Before HAYNSWORTH, Chief Judge, and WINTER and WIDENER, Circuit Judges.

PER CURIAM:

This is the fifth appeal in this diversity jurisdiction case. ¹ Arthur R. Morrison, who was engaged in financial controversy with his estranged wife, was the owner of valuable lands in Rosslyn, Virginia and in Brevard County, Florida. He contracted to convey those lands to Capital Investors Company, a shell corporation wholly owned by James T. Benn, for $1,100,000 represented by unsecured notes. Because of Mrs. Morrison's claims against the Virginia lands, the contract was renegotiated and a new agreement entered into affecting the Virginia lands alone. Notes were issued to Morrison and Mrs. Morrison in the amount of $500,000 each, while $100,000 was retained by Capital Investors to "clear the title" which was encumbered by a relatively small deed of trust and which was complicated by what purported to be a prior conveyance of the fee and by another instrument which purported to be a ninety-nine year lease.

In the course of clearing the title to the Virginia lands, the district judge required Benn to give the Morrisons deeds of trust to secure their notes. There was default in the payment of the notes, and the Morrisons repurchased the Virginia lands at a foreclosure sale.

At the time of the first contract between Morrison and Capital Investors, a deed was signed by Morrison conveying the Florida lands to Capital Investors, in return for which he received Capital Investors unsecured notes in the amount of $400,000. ² Benn persuaded Morrison that he could not lawfully encumber the Florida lands to secure the payment of the notes of Capital Investors because the title was uncleared. ³

Initially, the district court held there was no evidence of fraud on Benn's part. At the time, it was concerned solely with the Virginia lands and at the time there was no evidence of a number of transactions affecting the validity and the value of the notes of Capital Investors. Later, after a full trial before another district judge, it was found that no consideration had been paid for the conveyance of the Florida lands and that Capital Investors did not intend to comply with its obligations by paying the notes. He imposed a constructive or resulting trust upon the Florida lands, or the notes representing their proceeds. On appeal we affirmed that decision.

Shortly after issuing its notes aggregating $400,000 for the Florida property, Capital Investors sold the land to Do-Mor, Inc. for $460,000 of which $400,000 was represented by notes secured by a mortgage. Later, Capital Investors transferred the Do-Mor notes to another corporation owned by Benn and later to still another. One note in the face amount of $25,000 was paid by Do-Mor; another in the face amount of $50,000 was sold to Mrs. Morrison. The remaining two, aggregating $325,000, after default, were sold for $150,000 to a nominee of Norman B. Frost, who, in turn, sold a one-half interest in the notes to Harry Dreisen for $75,000.

After our affirmance of the judgment establishing a constructive or resulting trust, Frost and Dreisen intervened. The district judge then undertook to balance the equities between Morrison, on the one hand, and Frost and Dreisen, on the other hand, and, considering Frost and Dreisen untainted by Benn's machinations, he concluded that they should prevail. We reversed. We held that the Uniform Commercial Code controlled, and that, since the Do-Mor notes were in default at the time of their purchase by Frost, they took the notes subject to lawful claims against them. However, we rejected Morrison's contention that Frost and Dreisen were bound by the earlier decision imposing a constructive or resulting trust upon the notes. They had not been parties to the litigation when that issue was heard and decided. We thought they should have an opportunity to relitigate the issue if they could produce additional relevant evidence.

On remand, Frost and Dreisen produced no new evidence, but did prevail upon the district judge to review his earlier decision imposing a trust upon the notes. At this time he found no fraud on Benn's part. Alternatively, he found that Morrison's claim to the Florida lands was foreclosed by a release purportedly signed by Morrison. He found that the release was supported by a consideration and effectively barred the claim.

I.

While we held that the strict rules of Res judicata did not foreclose relitigation of the issue by Frost and Dreisen, who had not been parties to the litigation when the issue was decided, we did not intend for earlier findings and conclusions, which had been affirmed on appeal, to be overturned with no new evidentiary basis for it. ⁴ There was no infirmity in the earlier findings and conclusions. After their affirmance on appeal, the principles of the law of the case required adherence to them.

The principle is not absolute nor inflexible. In such cases courts have an inherent power to correct earlier error, if it becomes apparent, and to avoid injustice, but there is no such situation here. The evidence of Benn's fraud is compelling.

Benn persuaded Morrison to accept the unsecured notes of Capital Investors. There was no cash payment. He was careful not to obligate himself. He quickly had Capital Investors deed the land to Do-Mor, and then he stripped Capital Investors of its only assets, leaving it with no resources with which to pay anything on the notes given to Morrison. Do-Mor paid one note in the face amount of $25,000, but it is not clear that any of that got to Morrison. The $50,000 note which had been sold to Mrs. Morrison was subsequently paid by Frost and Dreisen. No payment was ever made on the remaining notes aggregating $325,000. The mortgage securing the payment of those Do-Mor notes has now been foreclosed by Frost and Dreisen, however, and they acquired title to the land in the foreclosure sale. What Benn did amply supports the finding that he never intended that the Capital Investors notes be paid; he diverted all of Capital Investors' assets and stripped it of all means of payment. In the process, what cash flowed to Capital Investors or to Benn, or to other controlled corporations probably was not passed on to Morrison. All of it certainly was not.

Benn was an accomplished fraud artist. On a plea of guilty, he was convicted in 1971 in the United States District Court of the District of Columbia of fraud by mail. In 1963, the Tax Court found him guilty of tax fraud. T.C. Memo 1963-151. In its opinion, the Tax Court referred to a pattern of acquiring valuable properties largely on the basis of notes which were, or became, worthless and which Benn never intended paying. The kind of complicated schemes in which he engaged are illustrated in the opinion of Judge Jones in Sankin v. 5410 Connecticut Avenue Corporation, D.C.D.C., 281 F.Supp. 524 (1968), in the opinion of Judge Fulton in Walsh v. Continental Insurance Underwriters, Inc., (S.D. of Fla No. 63-576-Civ-CF, 1965) and in the opinion of Judge Hoffman in Freehill v. Benn (E.D. of Va., No. 3421, 1969). He had the capacity of persuading even sophisticated business people to place their trust in him. Though he was not a lawyer, he dealt in legalisms. He convinced Morrison that he was a "legal genius" and a helping friend. What he did to Morrison, however, was in the pattern disclosed in the court cases. When he stripped Capital Investors of its assets and devoted them to his own use without paying the Morrisons, he clearly established that his intention, from the beginning, was not to pay the Morrisons.

Frost, about whom the district judge was concerned, was not entirely an innocent, unsuspecting victim of deception. Several reasons for this are catalogued in the opinion reported at 484 F.2d 1157 at pages 1164 and 1165. Frost, now deceased, was a reputable lawyer in the District of Columbia, but he knew Benn. His firm represented some of Benn's associates in the Sankin case. Indeed, he paid Benn only $100,000 for the two notes, the remaining $50,000 of the price being a credit for legal fees due Frost's firm by Benn's associates, the payment of which Benn had guaranteed. From the facts in the Sankin case, Frost was bound to have known the kind of man Benn was.

Under the circumstances, we think the district judge was required to adhere to his earlier findings and conclusions that a constructive or resulting trust did arise.

II.

Within three months of the initial transaction, Morrison purportedly signed a release acquitting Capital Investors and Benn of all claims by him. Released were any claims to the Florida lands and to any payments by Do-Mor on its notes. The release was under seal and delivered in Virginia. The district court held that Morrison's estate had failed to prove there was no consideration for the release, and he concluded that it was valid and binding.

Benn never testified that he gave any actual consideration for the release. He claimed generally that he had given or paid Morrison some $28,500, though Morrison testified it was no more than $4,000. The contract obligated Benn to pay to Morrison a minimum of $25,000 a year, for living expenses, until the titles were cleared. Benn produced receipts purportedly signed by Morrison for cash payments in 1963 of $30,537, but, of that, $12,500 was payment for some corporate stock, according to Benn's testimony. Thus, only $17,500 was paid to Morrison by Benn in 1963 for the real estate, and that would have been...