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Broomfield v. Kosow - 349 Mass. 749

Rule:

In many representative social and business relationships there is no special intimacy or great degree of trust and confidence but in certain of them "great intimacy" is the rule because of knowledge by one party of the business and family affairs of another. Equity takes an active interest in the fostering and protection of these intimate relationships which it calls fiduciary. It is also stated that the exact limits of the term "fiduciary relation" are difficult to ascertain, that equity refuses to bind itself by an all inclusive definition, and that it reserves entire freedom to declare relationships to be fiduciary upon the particular facts of each case. Finally, there is importance in great disparity of position.

Facts:

This suit was originally brought by Broomfield as receiver of Dr. McCarthy's Rest Home, Inc. (the Home) seeking to establish a trust on certain funds alleged withheld or diverted by the defendant Leon Gordon in excess of the cost of construction work performed by him at the Home and for an accounting. Other defendants were Joseph Kosow and Industrial Small Business Investment Corp. (Investment Corp.).

In January 1960, the Home did not meet the standards of the Massachusetts Departments of Public Safety and Public Health, and to obtain compliance the departments requested alterations and additions. At about the same time, being unable to procure bank financing, Romano, the owner of all the capital stock of the Home sought out Kosow for financing and building to increase the volume of business by the increased extra rooms. Kosow offered to survey the situation and to obtain a contractor "who would build the addition at the best possible price" with the cost of construction to be met by a loan from a Kosow-operated finance company. Kosow and his associate Gordon then made a plan of the facilities of the Home with a view to complying with the departments' standards, and Kosow eventually informed Romano that he had a contractor (Leon Gordon) to complete the work.

Gordon was at all times acting for, and under the direction and control of, Kosow. Gordon was aware from the first that the cost of the work would be approximately $ 63,000, but under the direction of Kosow he signed a contract for $ 141,661, subsequently turning the entire amount over to Kosow. He was paid $ 63,124.35 in full by Kosow, and there was no fiduciary relationship between him and Romano or the Home.

The loans, however, remained unpaid and the title to the mortgaged nursing homes was eventually acquired by Geriatric Services, Inc. Broomfield, as receiver of the Home, sought to establish a trust in certain funds withheld and diverted in excess of the cost of construction work performed at the nursing home. Kosow suggested that 1.) since Romano, as owner of the nursing home, sought him out for financing, 2.) because Romano was a businessman, and 3.) since there was a business friendship between him and Romano, their relationship was not fiduciary in character but a purely business one. The trial court agreed with Kosow.

Issue:

Was there constructive trust created from Romano and Kosow’s relationship?

Answer:

Yes.

Conclusion:

In all of the negotiations and transactions, Romano, who was untutored in construction costs trusted and confided in Kosow who exerted the influence springing from that trust and confidence to obtain personal advantage at the expense of the owner and his nursing homes. In many representative social and business relationships, there is no special intimacy or great degree of trust and confidence but in certain of them great intimacy is the rule because of knowledge by one party of the business and family affairs of another. He adds that equity has continued to take an active interest in the fostering and protection of these intimate relationships which it calls 'fiduciary.'

This was not an arm's length transaction but one which the judge rightly found to be a fiduciary relationship carrying with it all the consequences of such a relationship. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience obtain the beneficial interest, equity converts him into a trustee. The remedy sought, imposition of a constructive trust, was warranted.

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