Mickelson v. Barnet

Decision Date19 January 1984
Citation460 N.E.2d 566,390 Mass. 786
PartiesHenry MICKELSON v. David S. BARNET et al., trustees. 1
CourtUnited States State Supreme Judicial Court of Massachusetts Supreme Court

J. Thomas Price and Daniel D. Levenson, Boston, for plaintiff.

Before HENNESSEY, C.J., and WILKINS, NOLAN and O'CONNOR, JJ.

HENNESSEY, Chief Justice.

During the 1960's, Nathaniel Lipton, a certified public accountant in New Bedford, obtained large sums of money from the plaintiff and about seventy-five other persons, under the pretense of investing the money for them. Lipton appropriated the funds to his own use, returning some newly acquired funds to the would-be investors as "interest."

On October 31, 1969, some of the victims discovered Lipton's scheme and, because they feared that he would flee the Commonwealth, obtained a ne exeat writ in the Superior Court in Bristol County. They met with Lipton in the office of his attorney and threatened him with execution of the writ. He promised to turn over substantially all of his assets to them.

The next day, November 1, 1969, Lipton and his family executed an instrument which, on its face, is a conveyance of their assets to the defendants as trustees for the benefit of Lipton's creditors. 2 The victims did not execute the ne exeat writ and permitted it to expire. Lipton thereupon left the Commonwealth, returning only to face trial for embezzlement and serve his sentence; he no longer resides in the Commonwealth.

On December 17, 1970, the Internal Revenue Service assessed deficiencies and civil fraud penalties totaling more than $555,000 against Lipton. The deficiencies were based entirely on Lipton's failure, in returns for the years 1963-1968 filed August 13, 1969, to report as income the sums taken from his victims. Litigation in the Tax Court resulted in a stipulated total deficiency of about $545,000. In 1977, some of the victims obtained a default judgment against Lipton in the amount of $855,000 plus interest and costs. The value of the trust assets is less than the amount of the Federal tax deficiency. The United States has demanded the assets of the trust, as a partial collection of the deficiency.

The plaintiff brought this action, in the Superior Court in Bristol County, against the trustees and the United States, seeking a declaration that the victims are entitled to the trust assets. The case was removed to the United States District Court for the District of Massachusetts, where the United States was dismissed by stipulation, and the case was remanded to the Superior Court. The victims of Lipton's embezzlement were certified as a class, the parties agreed upon a statement of facts, and the case was reported to the Appeals Court. The Appeals Court decided that the tax claim of the United States is entitled to priority. 15 Mass.App. 918, 443 N.E.2d 906 (1983). We allowed the plaintiff's application for further appellate review. We conclude that, in so far as the law of the Commonwealth is concerned, the victims of the embezzlement are entitled to the assets of the trust.

The plaintiff argues: (1) that Lipton held the embezzled money and its traceable proceeds as a constructive trustee for the victims of the embezzlement; (2) that, although the assets held by Lipton in October of 1969 were not traceable proceeds, Lipton, by promising his assets to the victims, restored the constructive trust and subjected the assets thereto as of October 31, 1969; (3) that on November 1 Lipton held bare legal title to the assets; and (4) that, therefore, the instrument executed by Lipton conveyed only that legal title to the trustees.

We are unable to conclude that Lipton's promise to convey his assets to the victims amounted to a restoration of the constructive trust. We hold, however, that because the written conveyance did not reflect the intent of the parties and did not fulfil their prior oral agreement, the plaintiff is entitled to reformation of the instrument. Because the United States is not a party to this action, we are unable to make a binding determination whether, despite reformation, it is entitled to the assets under the Federal priority statute, 31 U.S.C. §§ 191, 192 (1976). We can decide only that as a matter of the law of the Commonwealth the victims of the embezzlement are entitled to the assets in the trust.

1. Restoration of the constructive trust. Lipton's conversion of the would-be investors' funds was an embezzlement, that is, the relationship between Lipton and the investors was that of agent and principal, not debtor and creditor. See Commonwealth v. Anthony, 306 Mass. 470, 476-477, 28 N.E.2d 542 (1940); Commonwealth v. Hutchins, 232 Mass. 285, 290-292, 122 N.E. 275 (1919). Consequently, Lipton became a constructive trustee of the money and its traceable proceeds. National Mahaiwe Bank v. Barry,125 Mass. 20, 24 (1878). Bresnihan v. Sheehan, 125 Mass. 11, 13 (1878). However, the plaintiff does not attempt to trace the embezzled funds to the assets held by Lipton in 1969. Rather, he argues that Lipton, by acknowledging his defalcation and promising restitution, restored the constructive trust, and that the assets promised immediately became impressed with that trust. See Perkins v. Perkins, 134 Mass. 441 (1883); Supreme Lodge of the Portuguese Fraternity v. Liberty Trust Co., 215 Mass. 27, 102 N.E. 96 (1913). In both of the cited cases a trustee converted trust property and then replaced it with property of his own. In both we held that beneficial interest in the new property was transferred to the beneficiary by the trustee's declaration to the beneficiary that he held the property in trust.

On the basis of the plaintiff's description of the events of October 31, 1969, we conclude that a restoration of the trust did not occur. We think the actions of Lipton on October 31 amounted merely to a promise, and not a declaration. The plaintiff's complaint states that Lipton "agreed ... to turn over" his property to the victims. This is clearly a representation regarding future action, not present status. That the parties themselves did not believe that the beneficial interest in the assets had been transferred is demonstrated by their undertaking, the very next day, steps that purported to transfer that beneficial interest. Their belief is indicative of their intent, and there could be no transfer of the beneficial interest without an intent to transfer it. See Berger v. Berger, 333 Mass. 540, 544, 132 N.E.2d 179 (1956). Thus we conclude that Lipton's promise to convey his assets to the victims did not restore the constructive trust.

2. Reformation of the instrument. The parties have stipulated that the instrument executed by Lipton was "a standard form trust agreement which was available ... at that moment," and was used because "time was of the essence," that none of the parties "at any time intended that the assets paid over to the trustees were for the benefit of the general creditors of Lipton," and that "it was always intended by Lipton and the defendants that the victims of his embezzlement be made as whole as possible from the transferred assets." From these facts, the plaintiff argues that the choice of this form of trust instrument was a mistake, and that, in so far as it purports to give rights to Lipton's general creditors, it should not be given legal effect.

We treat this argument as a request for reformation of the instrument, and we consider whether that remedy is available in these circumstances. The plaintiff claims that the language adopted by the parties did not reflect their true intent. Such a mutual mistake is reformable. See, e.g., Reder v. Kuss, 351 Mass. 15, 217 N.E.2d 904 (1966); White v. White, 346 Mass. 76, 190 N.E.2d 102 (1963); Franz v. Franz, 308 Mass. 262, 32 N.E.2d 205 (1941); Dickman v. McClellan, 302 Mass. 87, 18 N.E.2d 430 (1939); Keith v. Thomas, 266 Mass. 566, 165 N.E. 679 (1929); J.P. Eutis Mfg. Co. v. Saco Brick Co., 198 Mass. 212, 84 N.E. 449 (1908). See also Hurley v. Hobbs, 360 Mass. 618, 620-622 & n. 3, 277 N.E.2d 125 (1971); Eno v. Prime Mfg. Co., 317 Mass. 646, 59 N.E.2d 284 (1945). It is immaterial that the mistake may be characterized as a mistake of law. 3 There has never been a rule that equity will afford relief only in case of mistake of fact. Reggio v. Warren, 207 Mass. 525, 533-535, 93 N.E. 805 (1911). Indeed, the opposite was recognized in 1859 by this court in an opinion by Chief Justice Shaw. See Canedy v. Marcy, 13 Gray 373, 377 (1859).

The parol evidence rule is no bar to the consideration of extrinsic evidence of intent when mistake is alleged. Reder v. Kuss, supra 351 Mass. at 17, 217 N.E.2d 904. Martin v. Jablonski, 253 Mass. 451, 453, 149 N.E. 156 (1925). Goode v. Riley, 153 Mass. 585, 587, 28 N.E. 228 (1891). Traditionally, we have required that a party present "full, clear, and decisive" proof of mistake in order to be entitled to reformation. Stockbridge Iron Co. v. Hudson Iron Co., 107 Mass. 290, 317 (1871). Kennedy v. Poole, 213 Mass. 495, 498, 100 N.E 635 (1913). German American Ins. Co. v. Davis, 131 Mass. 316, 316 (1881). In the instant case the "proof" consists largely of the stipulations of the parties that the instrument does not reflect the intent of the parties and that an assignment for the benefit of creditors in general was not intended. However, the parties' failure to perform the procedures regarding notice to creditors, which generally attend an assignment for the benefit of creditors, see G.L. c. 203, § 41, tends to corroborate the parties' stipulation. See Childs v. Harbor Lounge of Lynn, Inc., 357 Mass. 33, 35, 255 N.E.2d 606 (1970). Under the circumstances, we consider the proof sufficient to warrant reformation.

We conclude that the legal effect of the instrument was to convey the Lipton family's assets 4 in trust for the victims of Lipton's embezzlement, and that the plaintiff is entitled to reformation of the instrument. 5

3. The Federal Law...

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