Opinion ID: 1347532
Heading Depth: 1
Heading Rank: 1

Heading: Whether the State's Evidence Will Sustain the Creation of a Trust With Respect to the Sums Prepaid to Defendant for Delivery of Agricultural Supplies.

Text: The primary thrust of defendant's appeal is a contention that the State's evidence was insufficient as a matter of law to permit a trier of fact to find that a trust arrangement existed with respect to the funds that had been prepaid for future delivery of agricultural products. The elements of the crime with which defendant was charged are set forth in the following statute: A person commits theft when the person does any of the following: .... 2. Misappropriates property which the person has in trust, or property of another which the person has in the person's possession or control, whether such possession or control is lawful or unlawful, by using or disposing of it in a manner which is inconsistent with or a denial of the trust or the owner's rights in such property, or conceals found property, or appropriates such property to the person's own use, when the owner of such property is known to the person. Iowa Code § 714.1(2) (1991). The State's theory of prosecution was based on the property which the person has in trust language as were the trial court's instructions to the jury. In State v. Galbreath, 525 N.W.2d 424 (Iowa 1994), we considered the property of another language contained in section 714.1(2) and concluded that a down payment made pursuant to the terms of a construction contract is not held by the contractor as `property of another,' Id. at 426. Although the opinion focused primarily on the property of another language, it also discussed trust principles. We rejected, in Galbreath, the conclusion of a Washington appellate court in State v. Joy, 121 Wash.2d 333, 851 P.2d 654 (1993), that, if a contract suggests that funds tendered by a buyer will be used to purchase specifically described materials, it is a breach of a trust to use the funds for other purposes. We concluded that while perhaps satisfying, [the outcome in Joy ] can only be reached through a legal fiction of converting an unconditional transfer to a transfer in trust. Galbreath, 525 N.W.2d at 426. In the present case, the State attempted to establish a trust predicated on the fact that the monies were tendered to the defendant to secure a performance that required him to purchase specific products on the customers' behalf. Our review of the record does not support the claim that defendant purchased or agreed to purchase agricultural products as the customers' agent. The defendant purchased or agreed to purchase these products in his own name and resell them to his customers for a profit. The situation is thus similar to that before the Washington appellate court in Joy. In rejecting the Joy court's rationale in our Galbreath decision, we suggested that this type of transaction gives rise to a contractual relationship rather than a trust relationship. Both the State and the defendant rely on language in Black's Law Dictionary 1352 (5th ed. 1979) defining the terms trust or in trust as [a] fiduciary relation with respect to property, subjecting person by whom the property is held to equitable duties to deal with the property for the benefit of another person which arises as the result of a manifestation of an intention to create it.  (Emphasis added.) [1] The parties quarrel, however, over the formalities required to create a trust meeting this definition. Even if we accept the State's contention that no specific formality is required, we cannot ignore the requirement that there be some objective manifestation of an intention to create the relationship as defined in the quoted definition. The Restatement (Second) of the Law of Trusts sets out the methods of creating a trust. Only two of these methods are relevant to the present dispute. These are: (a) a declaration by the owner of property that he holds it as trustee for another; and (b) a transfer inter vivos by the owner of property to another person as trustee for the transferor or for a third person. Restatement (Second) of Trusts § 17 (1959) [hereinafter Restatement]. The first of these two methods, by its very definition, requires a declaration by the purported trustee that this person accepts the trust. The second method requires some manifestation of the purported settlor's intent that the purported trustee is to accept the res subject to the conditions of the trust. The defendant urges that the required manifestation of a trust is lacking under either of these methods. We agree. Except in those instances in which the legislature itself has declared a trust relationship on the part of a merchant such as is the case with prepayment of funeral expenses, see State v. Ludvigson, 482 N.W.2d 419 (Iowa 1992) (interpreting Iowa Code § 523A.1), or disposal by a partner of partnership assets, see State v. Sylvester, 516 N.W.2d 845 (Iowa 1994) (interpreting Iowa Code § 486.21), we do not believe that a trust agreement may be inferred in the absence of some proof of the requisite manifestation of intention. [2] The evidence offered by the State in its effort to show the existence of a trust relationship was based entirely on the assumptions entered into by defendant's customers. Typical of this evidence is the testimony of three witnesses for the State. Dennis Berger testified on direct examination: Q. When you gave Mr. Caslavka the money, these different checks totaling $44,000, what did you think would be done with what you had paid him? A. Either it goes into a special account or he deals right with the distributor of that product to get the cheaper price. David Brezina testified on direct examination: Q. Mr. Brezina, when you gave Cas Feed that check, what did you think would be done with the money? A. I figured Lon would deposit it into his bank account to be used to purchase chemicals and fertilizer. Q. Did you expect that your pre-pay amount would actually be used to get you the product or supplies that you had paid for? A. Yes. Calvin Dostal testified on direct examination: Q. When you gave the money to Mr. Caslavka, those three checks that have been received into evidence, what was your expectation as to what would be done with the money? A. The chemicals and fertilizer would be purchased at that time and more or less set aside for us to use in the spring. .... Q. Let me ask you this: Did you expect that the money that you gave to Mr. Caslavka would be used for the purposes that you had agreed upon? A. Yes. Q. Did you expect that the money that you paid to Mr. Caslavka would be used for the supplies as indicated on the invoices? A. Yes. Q. Did you expect that the money that you had used to pre-pay would be used for other purposes? A. No. None of the three witnesses whose testimony we have quoted or the other twenty farmers who testified against the defendant made any claim that defendant assured them at the inception of these transactions that their money would be held in trust for use in purchasing the designated products on their behalf. Nor did any of these witnesses claim that they manifested an intention to impose such duties on defendant when the funds were delivered. Indeed, there is no claim in the testimony of these witnesses that the subject was even discussed. We have independently searched the record and can find no objective manifestation of intent to create a trust. Absent some manifestation of that intention by either defendant or his customers, it is not a reasonable assumption within the commercial realities of the transaction that a duty would be imposed on him to deal with the funds as a trustee. As one court has observed, the establishment of a fiduciary relationship requires that the relationship of the parties must exhibit the characteristics of a traditional trust relationship and that the fiduciary duties exist before the act of wrongdoing and not as a result of it. In re Pedrazzini, 644 F.2d 756, 758 (9th Cir.1981). The State seeks to obviate the absence of commitment by defendant to establishing a trust account by pointing to the testimony of certain of these witnesses that defendant, in conversation, indicated that he had placed their payments in a special account. Typical of this testimony is that of the witness Kenneth Strohbehn, who testified as follows: Q. When you found theIn light of what you'd been told when you tried to pick up your product and in light of what you found in the warehouse, what did you do next? A. I asked Lon when we were going to get the product or where it was. Q. What did he tell you? A. He said the bank took his money so go see the bank. .... Q. And after that then, did you go back to theCas Feed? A. Yes. Q. And what happened then? A. Well, Lon said he had taken our money that we paid for these products and he put it in a special account, and Lon told us that the bank took that account so he couldn't buy the product unless the bank gave him back the money. This testimony and that of the other witnesses who stated that defendant had mentioned a special account involved conversations that took place long after they had paid their money to defendant. These conversations occurred when defendant was being pressed for delivery of the product in the spring. There is nothing in the record to suggest that defendant's mention of a special account had any meaning other than the savings account of the Cas Feed Store business. Except for two transactions that occurred subsequent to the seizure of that account by the bank, defendant had placed the farmers' monies in this account. The problem was that he did not leave it there. As we have previously indicated, however, whatever meaning may be attributed to the term special account, the act of segregating money in a special account does not create a trust absent the requisite manifestation of intention. As a final effort to avoid the inadequacies in its proof, the State contends that defendant admitted that he had a duty not to use the farmers' money for purposes other than buying the product. We find this claim to be based on testimony taken out of context. Immediately following the testimony of defendant on which the State relies, he stated: Q. Would you agree that you had a duty towards the farmers to use their pre-pay funds in such a way as to ensure they received what they paid for? ... A. I worked for them basically, yes. I was there to fill their needs. Q. That was their money; wasn't it? A. What money? Q. The pre-pay money? A. Money that went into our account, again, it was a general account. We disbursed it as we felt was fit. We conclude that defendant's position has at all times been that he was free to place this money in a general account and disburse it as he saw fit.