Hartsock v. Strong

Gilbert, J., delivered the opinion of the Court. This appeal, from a decreé of the Circuit Court for Montgomery County (Shearin, J.), arises from the medical partnership of the appellant, Dr. Frederick B. Hartsock, and the now deceased, Dr. William Ronald Strong. The essence of this case is whether the chancellor erred in impressing a constructive trust in favor of Valda Berzins Strong, the widow and personal representative of Dr. Strong’s estate, upon the proceeds of two insurance policies issued upon Dr. Strong’s life, but owned by Dr. Hartsock. The record discloses that Drs.

Hartsock and Strong entered into a written partnership agreement on December 29, 1959. By the terms of the agreement the doctors covenanted that they would remain partners in a medical compensation clinic for a term of ten years, self-renewing for succeeding five year periods unless the termination clause embodied in the agreement was exercised by either partner. The partnership traded under the name “Faragut Medical Clinic”. Although the business was conducted in the District of Columbia, both the decedent and the appellant resided in Montgomery County, Maryand.

Section 24 of the partnership agreement provided that upon the death of either partner the survivor would continue the partnership business without interruption and would inter alia, in the manner provided in the agreement, purchase the interest of the deceased partner from his estate. Among the items to be purchased by the survivor was “good will”, and a dollar amount was assigned to that factor. The surviving partner was to pay to his deceased partner’s estate: “The sum of $7,500 which the parties hereto agree represents their share of the good will of the clinic. This amount may be changed by subsequent amendments to this agreement, but if there is no amendment, this amount will'apply.” The partnership was conducted on a fifty-fifty basis.

The ¹¹³ parties further agreed that in order to have sufficient monies available, or at least a substantial portion of the money, to purchase a deceased partner’s share, that each would obtain a life insurance policy on the other partner in the amount of twenty thousand dollars ($20,000). The policy was to name the insured’s partner as beneficiary, and the insured possessed none of the incidents of ownership. On February 6, 1960 the Lincoln National Life Insurance Company issued its policy in the amount of twenty thousand dollars ($20,000) on the life of Dr. Strong. Dr. Hartsock was named as the owner and beneficiary.

The partnership prospered to the point that Eugene F. Roesser, an insurance agent and a member of the District of Columbia Bar, wrote under date of January 22, 1962 to Drs. Hartsock and Strong that: “It is my opinion that based on your current [financial] statement, the good will value at the death of either of you should be $40,000 .... Sheldon Noble [a certified public accountant for the doctors] agrees. You currently own $20,000 of insurance on each other, of which $7,500 represents payment for good will and the difference is to help the survivor pay for the 1/2 interest in . . . non liquid assets which he must buy from the estate.

I recommend that you increase the insurance by $30,000 each, making the total amount you will own on each other an even $50,000. $40,000 of this may then be used for the good will purchase and the balance of $10,000 used to pay for other partnership assets.” The doctors were informed that if they agreed, they were to sign the forms that had been enclosed with the letter, return the forms and forward a partnership check covering the premium. The doctors were of the same age so that the premium charged each was identical. The letter further advised that arrangements would be made for the necessary medical examinations. A $30,000 insurance policy on the life of William Ronald Strong was issued by the New England Mutual Life ¹¹⁴ Insurance Company on February 6, 1962 with Dr. Hartsock named as beneficiary and owner.

The partnership continued until Dr. Strong’s demise in May of 1972. Mrs. Strong, the personal representative of Dr. Strong’s estate, made demand upon the appellant for the payment of $40,000 good will and half of the other assets of the partnership. According to testimony presented by accountants the sum due Dr. Strong’s estate, exclusive of good will, was $17,260. The testimony further revealed that Dr. Hartsock received $50,475.13 from the two insurance companies that had written policies on Dr. Strong’s life.

When the monies demanded from the appellant were not received, the personal representative filed a Bill of Complaint in the Circuit Court for Montgomery County in which she alleged the partnership agreement, covenant to repurchase, existence of the two life insurance policies, receipt of the proceeds therefrom by Dr. Hartsock and the doctor’s failure to abide by the terms of the partnership agreement. The appellant demurred to the Bill of Complaint basically on the ground that it failed to allege that there had been an amendment to the partnership agreement by which the good will was increased from $7,500 each to $40,000 each. 1 The demurrer was overruled, and after an answer was filed, the case proceeded to trial. Roesser testified concerning the letter of January 22,1962 in which he had recommended the increase in life insurance as well as the increase in partnership good will. Roesser said that Dr. Hartsock’s attorney, Richard Hartsock, who was also the doctor’s brother, had called Roesser on April 26, 1962 in reference to amending the partnership agreement.

A draft of the amendment had been prepared by Roesser. Roesser further said that Richard Hartsock felt that the good will value was on the low side and should be raised to “around $65,000.” There was also a discussion pertaining to the disability provisions of the partnership agreement, and it was decided that the attorneys would defer final decision until the doctors and the attorneys had an opportunity to arrive at a ¹¹⁵ decision acceptable to all concerned. Roesser, as was his habit, dictated a memorandum of his conversation with Richard Hartsock. While the testimony of Roesser concerning his conversation with Richard Hartsock came in over objection, there was no objection to the admission into evidence of the memorandum itself.

Richard Hartsock, testifying for the appellant, said that he had no recollection of any such discussion with Roesser. The Chancellor found: (1) that the letter dated January 22, 1962, from Roesser to the deceased, was in fact written; (2) that the appellant and the deceased acted in accordance with the recommendations contained in the letter; (3) that the conversation between Roesser and Richard Hartsock had in fact occurred, and that Richard Hartsock, who had kept no memorandum, could hardly be expected to remember a telephone conversation occurring eleven years before; (4) that the partners, by their action, did amend the partnership agreement so as to increase good will from $7,500 each to $40,000 each; (5) that the $50,000 of insurance could be used to purchase, upon the death of either partner, the $40,000 “good will” and the $10,000 balance could be applied to the purchase of the deceased partner’s one-half interest in the remaining partnership assets. (6) that the amount due and owing, exclusive of good will, by the appellant to Dr. Strong’s estate was $17,260; (7) that the appellant had received $50,475.13 in life insurance proceedings; (8) that the total amount due Dr. Strong’s estate by the appellant was $57,260. The court then imposed a constructive trust upon the proceeds of the two insurance policies in question and signed ¹¹⁶ a decree on August 19, 1973 in which it ordered payment by the appellant to his deceased partner’s estate in the amount of $57,260 with interest.

I. “Constructive trusts are such as are raised by equity in respect of property which has been acquired by fraud, or where, though acquired originally without fraud, it is against equity that it should be retained by him who holds it. They arise purely by construction of equity, independently of any actual or presumed intention of the parties to create a trust, and are generally thrust on the trustees for the purpose of working out the remedy. The trusts are not what are known as technical trusts, and the ground of relief in such cases is, strictly speaking, fraud, and not trust. Equity declares the trust in order that it may lay its hand on the thing and wrest it from the possession of the wrongdoer.