United States v. Newbury Mfg. Co.

• Decision Date: 16 January 1941
• Docket Number: No. 762-764.,762-764.
• Parties: UNITED STATES v. NEWBURY MFG. CO. et al. (two cases). SAME v. BELMONT KNITWEAR CO. et al.
• Court: U.S. District Court — District of Massachusetts

36 F. Supp. 602

UNITED STATES v. NEWBURY MFG. CO. et al. (two cases).

SAME v. BELMONT KNITWEAR CO. et al.

Nos. 762-764.

District Court, D. Massachusetts.

January 16, 1941.

Edmund J. Brandon, U. S. Atty., and Edward O. Gourdin, Asst. U. S. Atty., both of Boston, Mass., for plaintiff.

Mark M. Horblitt, of Boston, Mass, for defendants Robert P. Cable and Newbury Mfg. Co.

Harry Bergson, of Boston, Mass., for defendants Newbury Mfg. Co. and others.

BREWSTER, District Judge.

The above civil actions are before the court on motions to dismiss filed by all of the defendants except Nathan Thomson, upon whom no service was made. The defendant corporations in No. 762 will be referred to as "Newbury" and "Belmont". No. 763 is against Newbury and two of its stockholders; and No. 764 is against Belmont and the same two individuals, stockholders in that corporation. The motions are all on the single ground that the complaints fail to state a claim upon which relief can be granted.

In each complaint plaintiff has alleged a sale of merchandise in 1932 to Newbury, which had been fully consummated by delivery and acceptance of the goods and, so far as appears, payment of the purchase price. In each complaint, the plaintiff alleges that Newbury made the following agreement: "The purchaser agrees to dispose of the property covered by this contract for export to foreign countries only, and that it shall not be offered for sale for use in, nor be permitted to reach the local markets within, the continental limits of the United States. The purchaser further agrees to furnish at the time of shipment, and in the case of each individual shipment made, a copy of the manifest or bill of lading as evidence of the shipment to foreign countries of the property covered by this contract."

In Nos. 762 and 763 plaintiff also alleges a breach of that contract by the sale of quantities of said merchandise to Belmont and to others within the United States, and by failing to furnish evidence of shipments to foreign countries.

In No. 762 there are further allegations that Belmont was organized in 1934 with interest and control identical with Newbury, and that Belmont, with full knowledge of the promises made by Newbury and pursuant to a conspiracy with that corporation, purchased a portion of said merchandise and re-sold the same, realizing a gross profit therefrom.

In No. 763 it is alleged that the two individual defendants as stockholders of Newbury received salaries and dividends paid to them by Newbury out of the profits derived by the corporation from the sale of merchandise in violation of said contract.

In No. 764 it is alleged that the same individual defendants were stockholders in Belmont and, as such stockholders, received salaries and dividends paid to them by Belmont out of the profits derived by that corporation from the re-sale of the merchandise bought from Newbury.

In both Nos. 763 and 764 plaintiff seeks judgment against one of the two corporations measured by the gross profits received by each respectively, and also an accounting from the individual defendants for the sums received by each out of said profits.

It is quite apparent that, in framing these complaints, the plaintiff proceeded upon the theory that it was entitled to follow the proceeds of the merchandise, sold by Newbury in violation of the contract of sale, not only into the hands of that corporation and its stockholders but into the hands of Belmont and its stockholders. It is equally obvious, I take it, that in order to prevail in this attempt, plaintiff must invoke some principle of equity jurisprudence which entitles a seller of merchandise to recover from the purchaser the proceeds derived from the disposition of the goods in violation of the purchaser's agreement and to follow these proceeds until the goods reach the hands of an innocent purchaser for value. Equity will afford relief when property has been acquired by fraudulent means, and will rescind the transfer and order restoration of the property and require an accounting for the proceeds if the property has been sold by the wrongdoer. Equity will likewise relieve a beneficiary when his fiduciary disposes of the trust res in violation of his trust. In such cases a constructive trust ex maleficio arises which equity will enforce by holding the trustee accountable for the value of the property illegally acquired. Jones v. Van Doren, 130 U.S. 684, 9 S.Ct. 685, 32 L.Ed. 1077; Angle v. Chicago, St. P., M. & O. Ry. Co., 151 U.S. 1, 14 S.Ct. 240, 38 L.Ed. 55; United States v. Dunn, 268 U.S. 121, 45 S.Ct. 451, 69 L.Ed. 876; Independent Coal & Coke Co. v. United States, 274 U. S. 640, 47 S.Ct. 714, 71 L.Ed. 1270; Buffum v. Peter Barceloux Co., 289 U.S. 227, 53 S.Ct. 539, 77 L.Ed. 1140.

And equity will follow the property or its proceeds until it reaches the hands of an innocent purchaser for value. Jones v. Van Doren, supra; United States v. Dunn, supra; Independent Coal & Coke Co. v. United States, supra.

The authorities proceed on the hypothesis that when property has been obtained by fraud equity recognizes the law to be that the property always belonged to the true owner and, therefore, its proceeds must also belong to him and may be reclaimed in a suit in equity against the voluntary assignee or the one holding in bad faith. United States v. Bitter Root Development Co., 200 U.S. 451, 26 S.Ct. 318, 50 L.Ed. 550.

The wrongdoer is said to hold the property as trustee for the party who had been wronged. It can readily be seen that this rule has no application to the facts alleged in the complaint. The allegations show a completed sale, passing full title to the merchandise to Newbury without reservations or conditions. There is no allegation that the sale was procured by fraud entitling the plaintiff to rescind the sale and recover the merchandise, nor is there any allegation even intimating that Newbury had assumed any fiduciary obligations with respect to the same. It is a reasonable inference that the promise made by Newbury was a part of the consideration, and that there has been a partial failure of consideration. Such circumstances, however, do not give rise to a constructive trust ex maleficio. The extent of plaintiff's allegations common to all the complaints is that Newbury entered into a contract with the plaintiff which it proceeded to violate and, as a means of escaping the consequence, it organized Belmont, with an interest and control identical with Newbury.

It follows, therefore, that the plaintiff is not entitled to judgments against the individual defendants who may have received salaries and dividends from the defendant corporations. It also follows that Belmont cannot be liable for profits derived from purchase and sale of the goods subject to the agreement on any theory...