Midstate Amusement Corporation v. Rivers

• Decision Date: 31 March 1944
• Docket Number: No. 111.,111.
• Citation: 54 F. Supp. 738
• Parties: MIDSTATE AMUSEMENT CORPORATION v. RIVERS et al.
• Court: U.S. District Court — District of Washington

54 F. Supp. 738

MIDSTATE AMUSEMENT CORPORATION v. RIVERS et al.

No. 111.

District Court, E. D. Washington, S. D.

March 31, 1944.

Cameron Sherwood, of Walla Walla, Wash., for plaintiff.

W. A. Toner, of Walla Walla, Wash., for defendant Koepke, Sr.

G. S. Bond and Judd D. Kimball, both of Walla Walla, Wash., for defendants Rivers.

SCHWELLENBACH, District Judge.

Plaintiff, a Nevada corporation, brings this action against defendants Rivers, citizens and residents of Washington, and defendant Koepke, citizen and resident of Oregon, to enforce a claimed constructive trust against certain real property situated in Walla Walla County, Washington. Plaintiff alleges that defendant Edwin Rivers was its resident manager in Walla Walla operating three theaters in that city for it. It is alleged that, as manager, Edwin Rivers acquired from plaintiff certain confidential and private information concerning the business activities and plans of the plaintiff in Walla Walla, particularly concerning the acquisition by plaintiff of the real estate here involved with the theater building located thereon. Plaintiff asserts that, prior to and at the time of Edwin Rivers' employment, it was negotiating for the purchase of this property, and that, by virtue of his position, Edwin Rivers became possessed of information confidential in character which enabled him and caused him to conspire with the defendants Herbert Rivers and Koepke to acquire the property through secret negotiations and concealment from the plaintiff, all of which was adverse to plaintiff's interest and violative of defendant Edwin Rivers' responsibility arising out of his confidential and fiduciary relationship to the plaintiff. The complaint alleges that the defendants conspired and took advantage of Edwin Rivers' confidential information and fiduciary relationship and that, by reason of such information and relationship, they were able secretly and surreptitiously to purchase the property. The complaint alleges the value of the property to be $7,500, and, as evidence of its willingness to do equity herein, plaintiff has deposited $10,000 to be made available to the defendants to cover reimbursement for any sum defendants may have paid for the property. Plaintiff alleges that, while title stands exclusively in the name of Koepke, he holds such title on behalf of himself and the defendants Rivers. Plaintiff prays that the Court enforce the trust which it claims has been impressed upon the property but it seeks no personal judgment against the defendants. To this complaint, each of the defendants has interposed a motion to dismiss.

Insofar as the motions present the general proposition of failure to state a claim, I approach the problem with the conviction that ordinarily charges such as are here made should not be disposed of in this manner. It is only in instances which are rare and under circumstances peculiarly impelling that the Court is justified, much less required, to make disposition of charges of fraud on the basis of pleadings alone. A business transaction has overtones, the blending of which may so change the entire climate surrounding the transaction as to force an entirely different conclusion after hearing the testimony concerning it than would result from considering a bare delineation of it by a pleader. Furthermore, every man is entitled to have his acts judged in the light of all the surrounding circumstances. That which might shock the conscience of a chancellor when viewed in one posture, might seem only reasonable and natural and ethical when viewed in another. Courts of equity usually should be diffident to hastily dispose of cases such as this on the basis of the bare pleadings.

With the foregoing reservation and explanation, I am of the belief that plaintiff has pleaded a case of constructive trust. The confidential relationship between plaintiff and Edwin Rivers and the fiduciary obligation resulting therefrom is apparent. A company operating as was the plaintiff was required to repose a large degree of confidence in its local manager. Equity cannot permit him and his co-conspirators to profit through the surreptitious and concealed breach of that confidence.

"Where a fiduciary in violation of his duty to the beneficiary acquires property through the use of confidential information, he holds the property so acquired upon a constructive trust for the beneficiary." Restatement of the Law, Restitution, § 200. "Where a fiduciary in violation of his duty to the beneficiary * * * causes property to be transferred to a third person, the third person, * * * if he had notice of the violation of duty, holds the property upon a constructive trust for the beneficiary." Idem, § 201(1). "Where a fiduciary in violation of his duty to the beneficiary communicates confidential information to a third person, the third person, if he had notice of the violation of duty, holds upon a constructive trust for the beneficiary any profit which he makes through the use of such information." Idem, § 201(2). It was upon this theory that the Circuit Court of Appeals for the Ninth Circuit, in Fleishhacker v. Blum, 109 F.2d 543, impressed a trust upon the profits acquired by Fleishhacker through bonuses received by him from the Barde Steel Products Corporation for procuring loans from the bank of which he was an officer. The same rule has been applied by various courts. Casari v. Victoria Amusement Enterprises, Inc., 327 Pa. 382, 194 A. 503; Ballard v. Claude Drilling Co., 149 Kan. 506, 88 P.2d 1021, 1023; Van Sickle v. Keck, 42 N.M. 450, 81 P.2d 707, 717; Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 20 N.E.2d 482, 489; Caveney v. Caveney, 234 Wis. 637, 291 N.W. 818, 823; Risvold v. Gustafson, 209 Minn. 357, 296 N.W. 411, 412; Meade v. Vande Voorde, 139 Neb. 827, 299 N.W. 175, 176, 137 A.L.R. 554; In re Browning's Estate, 176 Misc. 308, 27 N.Y.S.2d 318, 320.

Mr. Justice Cardozo, when serving on the Court of Appeals of the State of New York in Meinhard v. Salmon, 249 N. Y. 458, 164 N.E. 545, 546, 62 A.L.R. 1, stated the rule: "Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the `disintegrating erosion' of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court."

Judge Sanborn, in Trice v. Comstock, 8 Cir., 121 F. 620, 622, 61 L.R.A. 176, detailed the rationale of the rule in language which frequently has been the subject of quotation in many later cases and textbooks. See 26 R.C.L. p. 1247, Trusts, § 93. This is what Judge Sanborn said:

"For reasons of public policy, founded in a profound knowledge of the human intellect and of the motives that inspire the actions of men, the law peremptorily forbids every one who, in a fiduciary relation, has acquired information concerning or interest in the business or property of his correlate from using that knowledge or interest to prevent the latter from accomplishing the purpose of the relation. If one ignores or violates this prohibition, the law charges the interest or the property which he acquires in this way with a trust for the benefit of the other party to the relation, at the option of the latter, while it denies to the former all commission or compensation for his services. This inexorable principle of the law is not based upon, nor conditioned by, the respective interests or powers of the parties to the relation, the times when that relation commences or terminates, or the injury or damage which the betrayal of the confidence given entails. It rests upon a broader foundation, upon that sagacious public policy which, for the purpose of removing all temptation, removes all possibility that a trustee may derive profit from the subject-matter of his trust, so that one whose confidence has been betrayed may enforce the trust which arises under this rule of law although he has sustained no damage, although the confidential relation has terminated before the trust was betrayed, although he had no legal or equitable interest in the property, and although his correlate who acquired it had no joint interest in or discretionary power over it. The only indispensable...