Millard v. Green

• Decision Date: 07 May 1920
• Citation: 94 Conn. 597,110 A. 177
• Court: Connecticut Supreme Court
• Parties: MILLARD v. Green et al.

110 A. 177

94 Conn. 597

MILLARD v. Green et al.

Supreme Court of Errors of Connecticut.

May 7, 1920

Appeal from Superior Court, Litchfield County; John P. Kellogg Judge.

Action by Thomas G. Millard, trustee in bankruptcy of the New Milford Hat Company, against William G. Green and another, to recover stock standing in the name of defendant Green as bought by him with funds of the Hat Company and pledged to the other defendant, the First National Bank of New Milford to secure his personal debt. From judgment for plaintiff defendants appeal. No error.

William F. Henney, of Hartford, and John F. Addis, of New Milford, for appellants.

J. Moss Ives, of Danbury, and Frederick H. Wiggin, of New Haven, for appellee.

GAGER J.

This action is brought by the trustee in bankruptcy of the New Milford Hat Company to recover certain stock standing in the name of the defendant W. G. Green, bought by him with the funds of the Hat Company, and by him pledged to the First National Bank of New Milford to secure his personal indebtedness to the bank.

Two questions arise upon the record: First, did the defendant W. G. Green hold the securities hereinafter described in his own right or as trustee for the New Milford Hat Company? Second, if Green held these securities as trustee for the hat company, did his pledge of the securities to the defendant bank give the bank a claim superior to that of the Hat Company, or its trustee in bankruptcy?

The essential facts with reference to the first question are these: S. S. Green, a brother of W. G., was majority stockholder, treasurer and active financial officer of the Hat Company; W. G. Green was a stockholder and assistant treasurer, and one Barnes, an uncle of the Greens, was a stockholder and president. These three owned all the stock. From the beginning the Greens were borrowers from the hat company, and made advances to and kept ledger accounts with the company, the balances appearing upon these accounts fluctuating from one side to the other from time to time. W. G. Green's ledger account was not accurate, and, when accurately stated, showed that he was in fact heavily indebted to the hat company at all times during the transactions on which this action is based. Between 1905 and 1909 W. G. Green bought with funds of the Hat Company, in four blocks at different dates, 102 shares of the capital stock of the New Milford Water Company, and took title in his own name. Between 1907 and 1912 Green also bought with the funds of the Hat Company, in six blocks at different dates, 41 shares of the First National Bank of New Milford, and took title in his own name. He also bought three shares of stock and three bonds of the New York realty owners in the same way. In these purchases Green had no intent or purpose to make investments for the hat company. The title to these stocks remained in W. G. Green, and they were in his possession and control until they were hypothecated by him to the bank, as will be described later. The funds of the Hat Company used by W. G. Green in the purchase of these stocks were never charged to his account upon the books of the company, nor did it appear in what way he obtained the funds of the Hat Company. He was credited with interest and dividends therefrom. Why he was so credited does not appear otherwise than that he was at all times indebt to the hat company. At all times when said stocks were bought by W. G. Green his brother, S. S. Green, treasurer and financial manager of the Hat Company, had full knowledge of these stock purchases. The hat company became insolvent between 1907 and 1915, but the expert accountants were unable to ascertain at what time between these dates the insolvency occurred. The hat company filed its voluntary petition in bankruptcy May 26, 1915, and was adjudged bankrupt on July 2, 1915, when the plaintiff became trustee.

This statement of facts unmistakably shows a case where a subordinate financial officer of a company uses funds of the company to buy stocks in his own name, with no intention or purpose to make investments for the company, and without authority or direction of the company or any superior officer. This situation makes the officer so buying these stocks a constructive trustee of these stocks for the company. The statement of the finding is brief, but comprehensive and conclusive, that he used the funds of the company, not for the purposes of the company, but to buy stocks to hold and use for himself. There is no suggestion from the books or elsewhere of a loan or a gift to W. G. Green of the funds used in purchasing the stocks, nor any disclosure of the methods by which W. G. Green gained control of the Hat Company funds other than can be implied from his fiduciary position as assistant treasurer. The mere fact that S. S. Green, treasurer of the company, knew of this transaction is not sufficient of itself to qualify the effect of the finding as to the use of the funds. In the absence of any explanation, the legal interpretation of the finding admits of but one conclusion, as just stated; that W. G. Green became constructive trustee for the hat company. Whether the hat company was a family concern or not, and whether at the time of the purchase of the stocks it was solvent or insolvent is immaterial. On the finding he used the funds of the company intentionally for his own benefit. Parenthetically, we should say that the finding that the hat company became insolvent between 1907 and 1915, but that the court was unable to find at what time between these dates, cannot be used affirmatively to establish the insolvency before 1915, and all these stocks were bought prior to 1915.

That W. G. Green became by these transactions a constructive trustee is well established by the authorities. In Pomeroy's Equity (4th Ed.) § 1044 et seq. the subject of constructive trusts is elaborately discussed. In section 1044, Mr. Pomeroy says:

" Constructive trusts include all those instances in which a trust is raised by a doctrine of equity for the purpose of working out justice in the most efficient manner where there is no intention of the parties to create such a relation, and in most cases contrary to the intention of the one holding the legal title, and where there is no express or implied written or verbal declaration of the trust. They arise when the legal title to property is obtained by a person in violation, express or implied, of some duty owed to the one who is equitably entitled, and when the property thus obtained is held in hostility to his beneficial rights of ownership. As trusts of this class are imposed by equity contrary to the trustee's intention and will upon property in his hands, they are often termed trusts in invitum; and this phrase furnishes a criterion generally accurate and sufficient for determining what trusts are truly ‘ constructive.’ An exhaustive analysis would show, I think, that all instances of constructive trusts properly so-called may be referred to what equity denominates fraud, either actual or constructive, as an essential element and as their final source."

In section 1045 Mr. Pomeroy says:

" The specific instances in which equity impresses a constructive trust are numberless, as numberless as the modes by which property may be obtained through bad faith and unconscientious acts."

Again, in section 1051, it is said:

" A constructive trust arises whenever another's property has been wrongfully appropriated and converted into a different form. If one person having money or any kind of property belonging to another in his hands wrongfully uses it for the purchase of lands, taking the title in his own name, or if a trustee or other fiduciary person wrongfully converts the trust fund into different species of property, taking to himself the title, or if an agent or bailee wrongfully disposes of his principal's securities, and with the proceeds purchases other securities in his own name-in these and all similar cases equity impresses a constructive trust upon the new form or species of property, not only while it is in the hands of the original wrongdoer, but as long as it can be followed and identified in whomsoever's hands it may come except into those of the bona fide purchaser for value and without notice; and the court will enforce the constructive trust for the benefit of the beneficial owner or original cestui que trust who has thus been defrauded."

And in the note to this section it is further said:

" In order that this species of trust may arise, it is not indispensable that the conventional relation of trustee and cestui que trust, or even any fiduciary relation, should exist between the original wrongdoer and the beneficial owner, although such relation generally exists in these cases. Where securities have been stolen and transferred and sold by the thief, a trust was held impressed upon them and on their transfers in the hands of the transferee with notice" -citing Newton v. Porter, 69 N.Y. 133, 25 Am.Rep. 152; Bank of America v. Pollock, 4 Edw. Ch. (N. Y.) 215.

See, also, Tecumseh National Bank v. Russell, 50 Neb. 277, 69 N.W. 163; Lightfoot v. Davis, 198 N.Y. 261, 91 N.E. 582, 29 L.R.A. (N. S.) 119, 139 Am.St.Rep. 817, 19 Ann. Cas. 747. Also in treating of trusts ex maleficio, Mr. Pomeroy, in section 1053, says:

" In general whenever the legal title to property, real or personal, has been obtained through actual fraud, misrepresentations, concealments, or under any other similar circumstances which render it unconscientious for the holder of the legal title to retain and enjoy the beneficial interest, equity impresses a constructive trust on the property thus acquired in favor of the one who is truly and equitably entitled to the same. *** The forms and varieties of this

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