Court Opinion

ID: 9690261
Source: CourtListenerOpinion
Date Created: 2023-08-24 19:00:18.044307+00
Date Added: 2024-06-11T18:18:54.553653
License: Public Domain

LAWSON, Justice
(dissenting).
I am constrained to dissent because I am convinced that we erred in our opinion on former appeal and that the court in this case is perpetuating that error.
The complainant and cross complainants base their right to relief on the principle that:
“Whenever the legal title to proper^ ty, real or personal, has been obtained through actual fraud, misrepresenta.tion, concealment, or through undue influence, duress, taking advantage of one’s weakness or necessities, or through any other similar means 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, although he may never perhaps have had any legal estate therein; and a court of equity has jurisdiction to reach the property in the hands of the original wrongdoer or in the hands of a subsequent holder, until a purchaser of it in good faith and without notice acquires a higher right, and-takes the property relieved of the trust.” — 4 ,.Pom.Eq.¡ -Jurisprudence, § 1053, p. 119. . c: ...
Of the quotation from Pomefóty set but above, we said on the first appeal':
• “We have found this quotation in fiye of our. cases, each of .which discloses a-fiduciary relationship, in which ; the person practicing the fraud - took- title to land in himself and claimed antagonistically to the party who, .in equity, should have had the title. (Cases cited)
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.“Thus, every time the quqtation has been approved in our cases, it has been in.a case where a fiduciary relationship, and not that of lender and borrower, prevailed. No such fiduciary, relationship is shown between Douglas Pope and any of the appellants.” (270 Ala. 207-208, 117 So.2d 174, 179)
The court’s opinion on the second appeal says, ' in effect, that the langúage1 quoted above does not constitute a holding that a constructive trust arises Only where a fiduciary relationship is discloséd.' But.despite this categorical statement, the „ opinion, as I understand it, is replete with other statements which indicate that such a relationship is necessary in order for a 'court of equity to proceed oil the .theory of a constructive trust.
A fiduciary relationship is not essential: to the establishment of a constructive trust — r Restatement of Restitution, § 16G, Comment a; Bolin v. Fines, 51 Neb. 650, 71 N.W. 293; Lady Ensley Coal, Iron & R. Co. v. Gordon, 155 Ala. 528, 46 So. 983.
The rule is stated in 4 Scott on Trusts, 2d Ed., § 462.1, p. 3104, as follows:
“An express trust is a fiduciary relationship with respect to property, arising as a result of a manifestation of an intention to create it and subjecting the person in whom the title is fixed to equitable duties to deal with it for the benefit of others. On the., other hand, a constructive trust arises where *408a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it. In both cases the person who has the title to the property is under an equitable duty to deal with it for the benefit of- another person. To this extent the two types of trust are similar. In other respects, however, they differ. An express trust arises because the parties intended to create it. A constructive trust is not based on the intention of the parties but is imposed in order to prevent one of them from being unjustly enriched at the expense of the other. In the case of an express trust the trustee ordinarily has active duties of management. In the case of a constructive trust, the duty is merely to surrender the property. A constructive trust, unlike an express trust, is not a fiduciary relation. The circumstances which give rise to a constructive trust may, but do not necessarily, involve a fiduciary relation.” (Emphasis supplied)
It seems to be well established that where a constructive trust is shown, the cestui que trust can follow the trust funds and appropriate to himself the property into which such funds have been changed provided the trust fund can be clearly ascertained, traced and identified and provided the rights of bona fide purchasers for value without notice have not intervened.—4 Scott on Trusts, 2d Ed., §§ 507, 508, 508.1; Restatement of Restitution, § 202, p. 818.
In 4 Scott on Trusts, § 508.1, at pp. 3252, 3254 — 3255, it is said:
“§ 508.1. Kinds of wrongdoers. The principle under which the claimant is entitled to follow his property into, its product is applied to all kinds of conscious . wrongdoers. It is applied to trustees and to fiduciaries, to persons who have obtained property by fraud, duress or undue influence, and to those who have converted the property of others.
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“Persons obtaining property by fraud or duress. The principle is applicable also where a person wrongfully acquires title to property and exchanges it for other property, even though he is not in a fiduciary relation to his victim. Thus it is applicable where property is acquired by fraud and is exchanged for other property. If B obtains money by fraud from A and invests it in shares of stock, A is entitled to enforce a constructive trust of the shares or to enforce an equitable lien upon them * * (Emphasis supplied)
In Sliger v. Sliger, 21 Tenn.App. 64, 105 S.W.2d 117, the court said in part as follows:
“Where a party makes false representations for the purpose of borrowing money and invests it in other lands or mortgages on other lands, a constructive trust is created.” (105 S.W.2d 120)
On the first appeal, the appellants cited a number of cases from other jurisdictions which hold that where a person has embezzled, stolen or misappropriated funds of another and used them for the purpose of payment of premiums on insurance on his life, a trust is created in favor of the owner of the funds, and the owner is entitled to recover from the proceeds of the insurance policies.
I read the opinion on first appeal as-holding that the holdings of the cited cases have no bearing on this case 'because they all dealt with embezzlement, theft or misappropriation of funds where title to the money did not pass from the true owner, whereas in this case the title did pass from-the complainant and cross complainants to-Douglas Pope.
*409Apparently this is a holding to the effect that a constructive trust cannot be enforced where the title to property has passed from the person defrauded to the person committing the fraud. If such is the holding it is, in my opinion, incorrect, as is pointed out in the quotations heretofore made from Scott and Pomeroy.
Actually, the principle of a constructive trust was applied in those cases not because title had not passed but because there had been a conversion of the funds into other property. In 4 Scott on Trusts, § 508.1, which deals with “kinds of wrongdoers,” it is said on page 3255 as follows:
“Converters. The principle is applicable also to one who is a mere converter. A converter, it is true, is not a constructive trustee of the property converted. He acquires no title to the property and cannot pass title even to a bona fide purchaser. He is liable for the conversion in an action at law, and ordinarily a suit in equity cannot be maintained against him, since the remedy at law is adequate. But if the property is exchanged by the converter for other property, a different situation arises. In an action at law, the person whose property was converted can reach the product of his property only by attachment or levy of execution, and in so reaching it he stands in no better position than any other creditor. It is only just, however, that he should be permitted to reach the product of his property ahead of the general creditors of the wrongdoer. Accordingly, the courts have had no difficulty in holding that he is at least entitled to an equitable lien upon the product of the converted property * *
In regard to the so-called embezzlement, theft or misappropriation cases cited by appellants on the first appeal, we further observed :
“We are not to be understood by this opinion as approving or disapproving ‘the majority rule’ which the cases cited by appellants enunciate. That question, concerning the thief, embezzler, or accomplice, is not before us. We merely hold that those cases are not apt authority when applied to the -facts in the instant case.” (270 Ala. 208, 117 So.2d 180)
But this court long ago extended the rule of those cases to an instance where a person by fraudulent concealment was induced to pay out money on a mistaken assumption of an interest in an insurance policy.—Summers v. Summers, 218 Ala. 420, 118 So. 912.
The Summers Case, supra, was instituted by Dora Summers against the Grand Lodge of Brotherhood of Railroad Trainmen as the insurer of the life of her son, Robert F. Summers, deceased, and against Hanna B. Summers, his widow, as the illegally substituted beneficiary in his policy of insurance, for the purpose of enforcing complainant’s asserted, priority as the equitable owner of the proceeds of the policy. The insurance company paid the money due on the policy into court for the benefit of the party entitled to receive it and was released from further liability and discharged as a party respondent.
The widow of the insured, Hanna B. Summers, interposed a demurrer which was sustained and the bill was dismissed. The plaintiff, Dora Summers, appealed to this court.
A statement of the averments of the bill of complaint made by Judge Somerville and set out in the report of the case, but not in the opinion, reads as follows:
“Complainant shows that the policy was issued in November, 1913, and that she. was named as the beneficiary therein; that from the date of issuance until the death of insured, in November, 1926, she paid all dues and assessments on the policy; that the insured married respondent, Hanna B. Summers, about the year 1916, and in 1918 he had a new policy issued in which his said wife -was named as *410Beneficiary, of’which complainant had rió ■ knowledge until after the death of the insured,- and that the fact of complainant’s said payments was known to the insured and to his wife, Hanna, Who knew also "that complainant had in her possession the original policy.
“By amended paragraph 13 it is alleged:
“ ‘That .your oratrix has a vested interest in the first policy aforesaid set out; that .the said Robert F. Summers at the time of the issuance of the first policy as aforesaid agreed with your oratrix that she should be and remain the sole beneficiary therein, during his lifetime, provided that she paid all dues and assessments thereon; that the said Robert F. Summers delivered possession of said policy to your oratrix in pursuance of said agreement and said possession has remained in the oratrix, of which defendant, Hanna B. Summers, has notice; that by reason thereof and by reason of the fulfillment of said contract and agreement on the part of your oratrix, the said Robert F. Summers was estopped from making any change in the beneficiary of said policy.’
“The bill also charges that—
“The substituted policy ‘was issued upon false averments and allegations and in fraud of the vested interest of your oratrix under said first-mentioned policy, which said false averments * * * were material in procuring and obtaining said illegally substituted policy, as aforesaid.’ ”
The original opinion was prepared for the court by Judge Somerville and he affirmed.
The principles with which we are presently concerned were not treated at any length in the original opinion. The affirmance of the decree was based primarily on the provisions of § 8445 of the Code of 1923, which read:
“Within the above restrictions éach meinber shall have the right to désignate his beneficiary, and, from time'to-time, have the same changed in accordanee with the laws, rules and regulations of the society, and no beneficiary shall have or obtain any vested interest in the said benefit until the same has become due and payable upon the death of the said member.”
About the only reference in the original opinion to the allegations of fraud contained in the bill was this:
“As to the contention that complainant was defrauded by a false affidavit by means of which the insured effected the substitution of another beneficiary and secured the issuance of a new policy, as observed by Mr. Justice Sayre in McDonald v. McDonald, 212 Ala. 137, 141, 102 So. 38, 36 A.L.R. 761, if complainant had no vested interest in the policy, she could not have been defrauded, and, if she had such an interest, the alleged fraud could not have affected it; hence the imposition, if any, was upon the association alone, and, if the association waives it, no one else can complain. It was so declared in Slaughter v. Grand Lodge, etc., 192 Ala. 301, 305, 68 So. 367. See, also, to the same effect, Hoeft v. Supreme Lodge, etc., 113 Cal. 91, 45 P. 185, 33 L.R.A. 174; 4 Cooley’s Briefs on Insurance, 372. The allegation of fraud in this behalf does not aid the bill.”
An application for rehearing was filed. In the opinion prepared for the court on rehearing by Judge Foster, the rehearing was granted and the cause was reversed and remanded. In matters pertinent to this case, it was said:
“It is insisted that complainant has an equitable lien in the nature of a trust, because her money was wrongfully obtained with which the premiums were paid, citing Cooley’s Briefs on Ins. vol. 7, p. 6492 (Ed. 1928). The *411■authorities cited there apply when trust funds are used by the insured to pay the premiums. It is upon the principle ‘which allows a cestui que trust to follow trust funds, and to appropriate to himself the property into which such funds have been changed,’ as where a partner wrongfully abstracts ^partnership funds, with which he pays premiums on á policy payable to his wife, Holmes v. Gilman, 138 N.Y. 369, 34 N.E. 205, 20 L.R.A. 566, 34 Am.St.Rep. 463; Dayton v. [H. B.] Claflin, 19 App.Div. 120, 45 N.Y.S. 1005; or where, ‘the premiums were paid from funds stolen or embezzled,’ Truelsch v. N.W. Mutual Life Ins. Co., 186 Wis. 239, 202 N.W. 352, 38 A.L.R. 914; Vorlander v. Keyes (C.C.A.), 1 F. (2d) 67; Mass. Bonding & Ins. Co. v. Josselyn, 224 Mich. 159, 194 N.W. 548; Anno. page 930, 38 A.L.R. There is no reason why this principle may not be extended to an instance .where a person by fraudulent concealment is induced to pay out money on a mistaken assumption of an interest in the policy. By such concealment, a trust ex maleficio, constructive in nature, is-created to the extent of the funds so ■paid. The effect of the transaction is that the insured obtained the funds of appellant by fraud, and they were used in paying the premiums on the policy sued on, thereby tracing such funds into said property. [Supreme Council] Royal Arcanum v. McKnight, 238 Ill. 349, 87 N.E. 299; Allen v. Cunningham, 143 Tenn. 11, 223 S.W. 450.
“In the case of Kent v. Dean, 128 Ala. 600, 30 So. 543, this court quotes from 2 Pom. Eq., §§ 1053, 1055, as follows :
“ ‘Whenever the legal title to property, real or personal, has been obtained through actual fraud, misrepresentation, concealments [or etc.], or through any other similar means or under any other similar circumstances which render it unconsciéntióus 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; * * * and a court of equity has jurisdiction to reach the property * * * until a purchaser of it in good faith, and without notice acquires a higher right.’ (Authorities cited)
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“To create a constructive frust, ‘actual fraud is not necessary;' but such a trust will arise whenever the- circumstances under which property was acquired make it inequitable that it should be retained by him who holds the legal title.’ 39 Cyc. 169.
“ ‘One who acquires land or ■ other property by fraud, misrepresentation, concealment, or under any other circumstances which render it inequitable for him to retain it, is, in equity, regarded as the trustee of the party who suffers by reason of the fraud- or other wrong and who is equitably entitled to the property.’ 39 Cyc. 172.
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“The bill may not be sufficient in its” averment of fraud; but there was 'no ground of demurrer for such insufficiency. While the court will riot 'con- ' sider the bill as amended to the extent of adding new matter in the nature of' independent facts essential to be averred, it will, for the purpose of determining its equity, view the bill as if the matters stated were properly pleaded. Slaughter v. Grand Lodge, supra. While fraud is not sufficiently' alleged, there is an allegation' of fraud, and a general demurrer for want of equity should not be sustained,- but to reach that defect the demurrer must specifically point it out. (Authorities cited)
*412“We hold, therefore, that the demurrer should not have been sustained, and that the bill has equity for the purpose of tracing appellant’s funds alleged to have been fraudulently obtained, consisting of the payments of the premiums and interest from date of each payment, and of impressing upon the proceeds of the policy a trust to the extent of such funds so obtained with the interest thereori.”
The amended complaint of Dora Summers is not, in my opinion, subject to the construction that it shows that Hanna B. Summers, the wife, had notice of the agreement to the effect that Dora Summers, the mother, would remain the sole beneficiary of the policy during the insured’s lifetime provided Dora Summers paid all dues and assessments thereon. The bill merely alleges that Hanna B. Summers knew that Dora Summers paid the premiums and knew that the policy remained in the possession of Dora Summers.
In any event, the opinion on rehearing in the Summers Case makes no reference to such averments and the conclusion reached on rehearing was in no wise affected by those averments insofar as the opinion discloses. The opinion on rehearing simply applied the principle' of the out-of-state cases cited in the opinion and the principle stated in § 1053 of Pomeroy’s Equity Jurisprudence. The out-of-state cases relied upon in the opinion on rehearing in the Summers Case were pressed upon us on the first appeal and again on this appeal.
In the Summers Case, supra, we extended the principle of the cited out-of-state cases to an instance where a person by fraudulent concealment is induced to pay out money on a mistaken assumption of an interest in an insurance policy. I can see no rational basis for not applying the same rule to one who is induced to lend money on a fraudulent misrepresentation as to the borrower’s financial status, since it is the policy of the law to discourage fraud in all its phases and especially actual fraud, which involves an intent criminal in its nature, always difficult of detection, furtive in its artifices and damaging in the dishonesty of its consequences. It is the universal maxim of the law, as it is of .common honesty, that no one shall be permitted to build a legal right upon the basis of a legal wrong' — that actual fraud can be the source and origin of no right which will be recognized by law.—Kitchell v. Jackson, 71 Ala. 556.
The court has cited a number of cases from other jurisdictions in support of its holding. I will not undertake to analyze or distinguish them. In my Opinion, it is sufficient to say that they do not coincide with the holding of this court' in the Summers Case, supra, which the court in the instant case has refused to follow.
In regard to the court’s holding relative to § 624, Title 7, Code 1940, I call attention to the fact that it was apparently thought to have no application in the Summers Case. It was not referred to, no doubt, because the out-of-state cases cited and relied upon in that case held similar statutes no bar to the enforcement of a constructive trust under the facts of those cases.
The court’s opinion, as I see it, places a stamp of approval upon fraud in business tranactions. I cannot agree.
I am of 'the opinion that the trial court erred in sustaining demurrer to the amended bill and to the amended cross bills and in dismissing them. I would reverse and remand.
GOODWYN, J., concurs in the dissenting opinion of LAWSON, J.