Musico v. Champion Credit Corp.

• Decision Date: 10 June 1985
• Docket Number: D,No. 445,445
• Citation: 764 F.2d 102
• Parties: Frank MUSICO, Jr., as Personal Representative of the Estate of Francis G. Musico, deceased, Plaintiff-Appellee, v. CHAMPION CREDIT CORPORATION, Lexington Maintenance Corporation, Jerob Brokerage Corporation and Jerome Garfield, Defendants-Appellants. ocket 84-7607.
• Court: U.S. Court of Appeals — Second Circuit

Page 102

764 F.2d 102

Frank MUSICO, Jr., as Personal Representative of the Estate of Francis G. Musico, deceased, Plaintiff-Appellee, v. CHAMPION CREDIT CORPORATION, Lexington Maintenance Corporation, Jerob Brokerage Corporation and Jerome Garfield, Defendants-Appellants.

No. 445, Docket 84-7607.

United States Court of Appeals Second Circuit.

Argued Nov. 26, 1984.

Decided June 10, 1985.

John R. Bartels, Jr., White Plains, N.Y., for defendants-appellants.

Douglas Kramer, New York City (Baden Kramer Huffman and Brodsky, P.C., New York City, of counsel), for plaintiff-appellee.

Before FRIENDLY, WINTER and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

Defendants Champion Credit Corporation, Lexington Maintenance Corporation, Jerob Brokerage Corporation, and Jerome Garfield appeal from an amended judgment of the United States District Court for the Southern District of New York, Lloyd F. MacMahon, Judge, awarding $403,221.46 in damages and prejudgment interest to plaintiff Frank Musico, Jr., as personal representative of the estate of his father Francis G. Musico, Sr. The defendants had acted as agents for the Musico, Sr. estate in handling various aspects of the estate's taxicab business, and the district court held them liable to the estate for breach of fiduciary duty, constructive fraud, and conversion. Damages represented, first, moneys which the court found had been collected by the defendants on behalf of the estate, but which had not been passed on to the estate or otherwise accounted for; and second, agency fees which the estate had paid to defendants, but which were now forfeited because of defendants' breach of their fiduciary obligations.

We affirm in part and reverse in part, and remand for recalculation of damages. We affirm that part of the district court's judgment holding defendants liable for breach of fiduciary duty, constructive fraud, and conversion, and that part imposing damages and prejudgment interest for the funds collected on behalf of the estate and unaccounted for. We reverse that part of the judgment requiring defendants to forfeit all agency fees. The agency fees were earned for separate tasks governed by four separate agency agreements, and for a number of those tasks there is no claim or proof of breach of duty to the estate, nor any claim or proof that performance of those tasks was tainted by defendants' misconduct. We therefore remand so that the district court may modify the computation of damages to eliminate the forfeiture of fees for services properly performed, while keeping the forfeiture of fees paid for services improperly performed.

BACKGROUND

During the 1970's Francis G. Musico, Sr. ("Musico, Sr.") was the sole owner of forty-three New York corporations, each of which owned two New York City taxi medallions. In early 1977, three years before his death, Musico, Sr. sold the stock of thirty of these corporations, using conditional sales agreements which provided him with "buy-back" options that could be exercised if the conditional purchasers defaulted Musico, Sr. died on January 25, 1980, while visiting New York from his home in Florida. At the time of his death, and since at least June of 1979, the business of collecting the installment payments on the sales of stock and taxi medallions was handled on an agency basis by Jerome Garfield ("Garfield") and Champion Credit Corporation ("Champion"), a New York corporation wholly owned by Garfield. Within three days of Musico, Sr.'s death his son, Frank Musico, Jr. ("Musico, Jr."), met with Garfield and gave him a power of attorney which the parties intended as authorization for him to continue running the Musico, Sr. taxicab business in New York. This was the first of the four agency agreements relevant to this appeal.

on their installment payments. At the same time the taxi medallions owned by the remaining thirteen corporations were also conditionally sold.

In late March of 1980 the Surrogate's Court in Florida formally appointed Musico, Jr. as personal representative of his father's estate, and in that capacity he signed the other three agency agreements with Garfield and others on October 2, October 10, and November 20 of 1980. The October 2nd agreement gave Garfield, Champion, and Ronald Stoppelman agency powers to collect payments from the sale of stock of the Musico, Sr. corporations. The October 10th agreement gave Garfield a special power of attorney to act on five specific matters, at least four of which apparently involved Musico, Sr. taxi corporations; this agreement was signed by Musico, Jr. not only as representative of the estate, but also as president of the corporations involved in the matters specified in the agreement. The November 20th agreement gave Garfield a general power of attorney with broad powers. All of the agency agreements continued in effect until August, 1982, when Musico, Jr. terminated them along with all of Garfield's powers of attorney.

Shortly after terminating these agreements, Musico, Jr. filed this lawsuit alleging that Garfield and his corporations, while acting as agents for the estate, had collected funds on behalf of the estate but had neither deposited those funds with the estate nor accounted for them in any other way. Federal jurisdiction was based on diversity of citizenship, 28 U.S.C. Sec. 1332. The funds at issue came from the lease and sale, after Musico, Sr.'s death, of taxicab medallions originally owned by ten of the Musico, Sr. corporations. These medallions, or the corporations owning the medallions, had been conditionally sold in 1979 or 1980, but the buyers had defaulted and the "buy-back" options were exercised. There is no disagreement over the fact that Garfield and his corporations handled these buy-backs, as well as the subsequent lease and sale of the reacquired medallions; there is, however, a great deal of disagreement over the exact details of how defendants handled these matters, as well as the extent to which Musico, Jr. knew and approved of what defendants did.

Plaintiff's version of the facts is the following. On January 30, 1980, Garfield, acting under the power of attorney from Musico, Jr., signed an agreement leasing the reacquired medallions to an independent company, Four Square Operating Corporation, for rental payments of $800 per medallion per month. Under Garfield's direction these payments were first sent to Lexington Maintenance Corporation ("Lexington"), a New York corporation controlled by Garfield; Lexington then remitted to Champion not the full $800, but only $528 for each rental payment received. Champion, which was also collecting the regular monthly installment payments from the earlier conditional sales made by Musico, Sr., provided monthly statements to Musico, Jr. and the estate, but these statements reflected payments of only $528 per medallion, the reduced amount paid to Champion by Lexington, and they made no mention of the full amount of $800 per medallion that Lexington had received. Plaintiff claims that neither he nor the estate was ever informed of this arrangement for reduced payments, and that Lexington held back, in all, over $38,000 in Plaintiff contends that similar unauthorized deductions at the time the reacquired medallions were finally sold deprived the estate of nearly $152,000. According to plaintiff, when the medallions were sold Garfield directed the payments to Jerob Brokerage Corporation ("Jerob Brokerage"), which Garfield controlled, and only the reduced amount of these payments was reported and transmitted to the estate.

rental payments which should have gone to the estate.

Defendants' account of the medallion reacquisition, lease, and sale presents a somewhat different picture--or rather, several pictures, for defendants have given at least three different and partially inconsistent accounts of what occurred. One version, presented at trial and also in defendants' initial appellate brief, is that Garfield reacquired the medallions for Musico, Sr. in 1979 and 1980, but that in doing so he spent considerable amounts of his own money; the personal funds Garfield spent, he claims, constituted loans to Musico, Sr. which his estate was obligated to pay back. A second version of the crucial events, also presented at trial and in defendants' initial appellate brief, maintains that Garfield did not reacquire the medallions for Musico, Sr., but that Garfield took title to the medallions in his own name, taking over the installment payments due under the original conditional sales agreements. In this version the fact that Garfield retained title, or at least "equitable" title, to the medallions was actually part of a scheme designed by Musico, Jr. and the estate's accountants to reduce estate taxes by keeping the value of the medallions out of the estate. Finally, a third version is set out for the first time in defendants' reply brief on appeal. In this third account, Garfield spent his own money to acquire the medallions not in his own name, and not for Musico, Sr. personally, but for the Musico, Sr. corporations which originally held them.

In all these versions defendants claim that the channeling of payments through Lexington and Jerob Brokerage was fully understood by Musico, Jr. Under the first and third versions Garfield claims that any funds from the lease and sale of the medallions which he held back were, in fact, repayments of loans owed to him. He also claims that Musico, Jr. not only was informed about the loan repayments, but also understood and approved them. Under the second account there were no loans, but the funds were properly withheld because Garfield as the substitute purchaser and lessee was obligated to pay the estate only the amounts due on the original conditional sales contracts, and not the higher amounts earned under the new lease and sale of the medallions which occurred after Musico Sr.'s death. Under any version of what happened, Garfield also contends...