Cafritz v. Corporation Audit

United States District Court for the District of Columbia · Corporations

CorporationsFiduciary dutiesAccountingCorporate officer liabilityTrust fund doctrinefiduciary relationshipaccounting dutyburden to account

Facts

For many years Cafritz employed Corporation Audit Company to keep his books, deposit checks, and prepare tax returns, and Barney Robins was the general manager in active charge of that work. In 1941 five checks totaling $36,134.75 were prepared for loans to Cafritz-controlled corporations, signed by Cafritz, and given to Robins to deposit for those corporations and record on the books, but the withdrawals were never entered and neither Cafritz nor his corporations received the proceeds. Bank statements and paid checks were sent to the Audit Company's office and, despite demand, were never delivered to Cafritz. One $8,400 check corresponded with a same-amount deposit into Corporation Finance Company and a same-day withdrawal by Robins personally, and later Rose Robins individually collected $2,889 from the sale of all Audit Company assets.

Issue

Whether Corporation Audit Company and Robins stood in a fiduciary relationship to Cafritz so that, after receiving checks for a specific purpose, they bore the burden to account for the proceeds and were liable when they failed to do so. The court also considered whether Robins, Corporation Finance Company, and Rose Robins individually were liable for their respective participation in the transactions.

Rule

Whether a fiduciary relation exists is a question of fact and arises where confidence is reposed on one side and resulting superiority and influence exist on the other. When an accounting party occupies a fiduciary relation because money or property is entrusted to him, the burden is on that party, after receipt is shown, to prove proper disposition and performance of the trust; failure to keep records, produce documents, or account permits an inference against the fiduciary. A corporate officer is personally liable if he knowingly causes or actively participates in the corporation's wrongful acts, and corporate assets sold while the corporation is indebted are a trust fund for creditors.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

For 11 years in Baltimore, Dana Mercer used Harbor Ledger Services, a small bookkeeping firm, to maintain her ledgers, prepare tax filings, and make bank deposits for several closely held companies she controlled. The firm's manager, Victor Lane, handled all of Dana's records and routinely received signed checks from her to deposit for designated business purposes.

If Dana later sues after several entrusted checks disappear, what is the strongest basis for treating the firm and Victor as fiduciaries?

Explanation. The majority treated fiduciary status as a factual question, arising where confidence is reposed on one side and superiority and influence exist on the other. A long-running accounting arrangement involving control of books, deposits, and records supports that finding. The opinion did not hold that every service relationship automatically creates fiduciary duties or that a formal trust instrument is required. (Derived from Cafritz v. Corporation Audit (n.d.).)