Wendell Corp. Trustee v. Thurston

• Citation: 239 Conn. 109,680 A.2d 1314
• Decision Date: 20 August 1996
• Docket Number: No. 15367,15367
• Court: Supreme Court of Connecticut
• Parties: WENDELL CORPORATION TRUSTEE v. Marisa I. THURSTON et al.

Page 1314

680 A.2d 1314

239 Conn. 109

WENDELL CORPORATION TRUSTEE v. Marisa I. THURSTON et al.

No. 15367.

Supreme Court of Connecticut.

Argued June 4, 1996.

Decided Aug. 20, 1996.

Karl Fleischmann, with whom was Elizabeth B. Leete, Hartford, for appellant (plaintiff).

Richard E. Hayber, Higganum, for appellee (named defendant).

Andrew Brand, with whom was Eileen Duggan, New London, for appellees (defendant Martin Gottesdiener and Company et al.).

Before CALLAHAN, BORDEN, BERDON, NORCOTT and PALMER, JJ.

BORDEN, Associate Justice.

The plaintiff appeals ¹ from the judgment of the trial court, rendered after a court trial, rejecting the plaintiff's claim for the imposition of a constructive trust on certain property owned by one of the defendants and subject to a mortgage in favor of the other defendant. The case was tried pursuant to a three count amended complaint. In the first count, the plaintiff, Wendell Corporation Trustee (Wendell), sought foreclosure of a mortgage from the defendant trustee Martin Gottesdiener (trustee), on property located in Meriden that secured a promissory note executed by the trustee. The second count, alternatively, was against the trustee seeking payment of the promissory note. The third count was against the named defendant Marisa I. Thurston and the defendant Martin Gottesdiener and Company (Gottesdiener and Company), for a constructive trust on certain property located in West Springfield, Massachusetts, and for subordination of a mortgage on that property held by Gottesdiener and Company. At the commencement of trial, Wendell withdrew the first count, namely, for foreclosure of the mortgage on the Meriden property, and proceeded only on the other two counts.

The trial court, on the second count, rendered judgment against the trustee on the promissory note in the amount of $774,715.72. On the remaining count, under which Wendell sought a constructive trust on the Massachusetts property owned by Thurston and subordination of the mortgage held by Gottesdiener and Company, the trial court rendered judgment for Thurston and Gottesdiener and Company.

On appeal, Wendell claims that the trial court misapplied the law of constructive trusts, and that the applicable law requires the conclusions that: (1) Thurston holds the property in constructive trust for the benefit of Wendell; and (2) the mortgage of Gottesdiener and Company is subordinated to Wendell's constructive trust. We agree and, accordingly, we reverse the judgment.

The following facts are undisputed. Martin Gottesdiener is an accountant doing business as Gottesdiener and Company. ² He is also a trustee of the Marisa I. Thurston Trust (trust), of which Thurston is the beneficiary. In 1990, the trustee executed on behalf of the trust, a promissory note in the amount of $509,049, to Meadow Haven, Inc., and secured that note by a mortgage on property located in Meriden that was owned by the trust. On March 9, 1990, Wendell purchased the note and mortgage from Meadow Haven, Inc., for $400,000, and, in connection with that transaction, Carabetta Enterprises, Inc., guaranteed the note. The trustee paid the interest on the note through August, 1990, and Carabetta Enterprises, Inc., paid the interest on the note through August, 1991. Since that date, however, no payments have been made on the note, and the note is in default. As of the date of the commencement of the trial, the amount of principal and interest due on the note was $748,585. ³

On November 1, 1990, the trustee, in accordance with his power to distribute trust principal to the beneficiary, transferred to Thurston, without consideration, several parcels of real estate, including a parcel located at 855 Riverdale Road in West Springfield, Massachusetts. The transfer left the trust with assets of approximately $100. At the time of the transfer, Thurston gave Gottesdiener and Company a note in the amount of $230,275, secured by a mortgage on the Massachusetts property. The principal of the note was for past accounting services rendered by Gottesdiener and Company to the trust and to various business entities in which Thurston was a stockholder. In addition, the mortgage also secured any obligation for accounting services rendered in the future by Gottesdiener and Company to those business entities.

Wendell sought to have the trial court (1) impose a constructive trust in its favor on the Massachusetts property, ⁴ and (2) subordinate Gottesdiener and Company's mortgage on that property to that constructive trust. The trial court declined to impose a constructive trust, reasoning in part ⁵ that Wendell had not proven a pecuniary loss because it had not offered evidence that the equity in the Meriden property that secured the note was insufficient to satisfy the debt. Accordingly, the trial court did not reach the question of subordination of Gottesdiener and Company's mortgage, and rendered judgment for Thurston and Gottesdiener and Company. Thereafter, Wendell moved to open the judgment to offer evidence regarding the value of the Meriden property. The trial court denied the motion, and this appeal followed.

I

Wendell claims that, on the basis of the undisputed facts, a constructive trust in its favor must be imposed on the Massachusetts property, as a matter of law, and that the mortgage of Gottesdiener and Company on that property must be subordinated to the constructive trust. ⁶ We agree.

Our general standards governing the imposition of a constructive trust are well established. "[A] constructive trust arises contrary to intention and in invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. 76 Am.Jur.2d, Trusts, § 221, p. 446; see Van Auken v. Tyrrell, 130 Conn. 289, 291-92, 33 A.2d 339 [1943].... Zack v. Guzauskas, 171 Conn. 98, 103, 368 A.2d 193 (1976); see also Brown v. Brown, 190 Conn. 345, 349, 460 A.2d 1287 (1983) (constructive trust based upon unjust enrichment)." (Internal quotation marks omitted.) Aetna Life & Casualty Co. v. Union Trust Co., 230 Conn. 779, 791, 646 A.2d 799 (1994). Moreover, the party sought to be held liable for a constructive trust must have engaged in conduct that wrongfully harmed the plaintiff. Id.

Although we have not specifically determined our scope of appellate review of a trial court's determination of whether to impose a constructive trust, we have determined that scope in the closely related context of unjust enrichment. In that context, we have held that the trial court's determination must stand unless it is clearly erroneous or involves an abuse of discretion. Hartford Whalers Hockey Club v. Uniroyal Goodrich Tire Co., 231 Conn. 276, 283, 649 A.2d 518 (1994). "This limited scope of review is consistent with the general proposition that equitable determinations that depend on the balancing of many factors are committed to the sound discretion of the trial court." Id. Considering the similarities between the equitable doctrine of unjust enrichment and the equitable remedy of constructive trust, we conclude that the same deferential scope of review applies to a trial court's determination of whether to impose a constructive trust.

Applying that limited scope of review, we conclude, nonetheless, that the trial court abused its discretion in declining to impose a constructive trust. Two lines of authority, applied to these particular facts, persuade us to reach that conclusion.

The first line of authority emanates from the Restatement (Second) of Trusts, and from respected treatises. Section 279 of the Restatement (Second) of Trusts (1959), provides: "If a creditor is entitled by a proceeding in equity to reach trust property and apply it to the satisfaction of his claim, and the trustee conveys the trust property to the beneficiary before the claim has been paid, the creditor can by a proceeding in equity hold the beneficiary personally liable for the claim to the extent of the value of the trust property so conveyed, unless the beneficiary is a bona fide purchaser or has so changed his position that it is inequitable to hold him personally liable."

Professors Scott, Fratcher and Bogert take the same view. "The beneficiaries of a trust may be personally liable to a third person to whom an obligation is incurred by the trustee in the administration of the trust, if the third person was entitled to satisfaction of his claim out of the trust estate and the trust estate was distributed among the beneficiaries before the claim was paid. In such a case a beneficiary is not liable beyond the value of the property that he has received, and he is not liable if he is in the position of a bona fide purchaser or has so changed his position that it would be inequitable to compel him to make the payment." 3A A. Scott & W. Fratcher, Trusts (4th Ed.1988) § 279, p. 532. "The view has been expressed that if a trustee has properly incurred a contract liability, and thereafter distributes trust property to a beneficiary, and the creditor is unable to collect from the trustee, he may sue the beneficiary in equity and recover from him to the extent of the distribution which he has received, unless the beneficiary was a bona fide purchaser of the distribution or has so changed his position after the distribution as to make it inequitable to enforce liability against him." G. Bogert & G. Bogert, Trusts and Trustees (2d Ed.Rev.1982) § 721, p. 341.

It is true, as Thurston argues, that we have never specifically adopted these statements as authoritative. It is also true, however, that these authorities state principles that are consistent with established Connecticut law. In the area of fraudulent...