In Re General Coffee Corporation, Debtor.city National Bank of Miami and City National Bankcorporation, Plaintiffs-appellees, v. General Coffee Corporation, Defendant-appellant, 828 F.2d 699 (11th Cir. 1987)

This is an appeal by debtor General Coffee and intervenor Shawmut Boston International Banking Corporation¹  from an adverse bankruptcy decision by the district court that General Coffee, as debtor-in-possession, could not bring into its estate over $6 million it held in constructive trust for City National Bank of Miami ("CNB"). We affirm.

The facts are undisputed. The bankruptcy court found that: (1) General Coffee defrauded CNB; (2) CNB properly traced a constructive trust res of $6,488,011 to assets within the control of General Coffee as debtor-in-possession; and (3) CNB proved a factual basis to justify the imposition of a constructive trust in its favor.²  The bankruptcy court nevertheless held that the assets of the constructive trust of which CNB was beneficiary were part of General Coffee's bankruptcy estate and subject to distribution to General Coffee's creditors. The court explained that under Florida law "a constructive trust comes into existence on the date of the order or judgment of a court of competent jurisdiction declaring that a series of events has given rise to a constructive trust." In re General Coffee Corp., 41 B.R. 781, 783 (Bankr.S.D. Fla. 1984) (In re General Coffee I) (quoting Palmland Villas I Condominium Assoc. v. Taylor, 390 So. 2d 123, 124 (Fla. 4th DCA 1980)). Thus, the court concluded, CNB's constructive trust arose after General Coffee has filed for bankruptcy, and General Coffee could bring the trust assets into the bankruptcy estate through its strong-arm powers under 11 U.S.C. § 544:

In the final analysis, the issue here is whether an economic loss should be born [e] by the bank's stockholders or by the debtor's creditors. Both groups were equally innocent of responsibility for causing the loss. Congress has resolved through Sec. 544 that the debtor's creditors must at all costs be protected from secret liens. The Florida court has resolved that a constructive trust remains a secret lien until it is imposed by a court.... It follows that the debtor is entitled to avoid any constructive trust which [the bank is] entitled to assert.

Id. 41 B.R. at 784.

On appeal the district court reversed. It held that the bankruptcy court's exclusive reliance on Palmland Villas was misplaced. The holding in Palmland Villas that a constructive trust does not arise until decreed by a court was, according to the district court, contrary to Florida law. In re General Coffee Corp., 64 B.R. 702, 707 (S.D. Fla. 1986) (In re General Coffee II) . The court explained that the Florida Supreme Court has long accepted the majority view³  that a constructive trust arises as a matter of law when the facts giving rise to the fraud occur. Id. at 706-07. The district court concluded, therefore, that the constructive trust in favor of CNB arose prior to the filing of General Coffee's bankruptcy petition. Id. at 707.

Having determined that CNB's rights arose before General Coffee filed its bankruptcy petition, the district court had to decide whether General Coffee could nevertheless bring the trust assets into its estate through its powers under 11 U.S.C. § 544(a). The court explained, relying exclusively on In re Quality Holstein Leasing, 752 F.2d 1009 (5th Cir. 1985), that a debtor-in-possession could not bring into the estate property in which it held only legal title. In re General Coffee II, 64 B.R. at 708. The court concluded, therefore, that CNB was entitled to recover from General Coffee the $6,488.011 in traced assets.

General Coffee contends on appeal that the district court improperly ignored the Palmland Villas decision and that the constructive trust did not arise until the bankruptcy court decreed it, which occurred after General Coffee filed its bankruptcy petition. The traced trust assets were therefore part of the estate subject to distribution to its creditors. General Coffee further argues that even if the constructive trust arose prior to the bankruptcy petition, it could bring the trust assets into the estate through its strong-arm powers under 11 U.S.C. § 544(a). We reject both of these contentions and therefore affirm.

The bankruptcy court relied exclusively on Palmland Villas to conclude that a constructive trust does not exist until the date of judgment declaring that a series of events has given rise to a constructive trust. In re General Coffee I, 41 B.R. at 783-84. General Coffee contends that the bankruptcy court properly applied Florida law and that the district court erred in refusing to follow controlling Florida precedent.

"A federal court applying state law is bound to adhere to decisions of the state's intermediate courts absent some persuasive indication that the state's highest court would decide the issue otherwise." Silverberg v. Paine, Webber, Jackson & Curtis, Inc., 710 F.2d 678, 690 (11th Cir. 1983); see also Peoples Bank of Polk County v. Roberts, 779 F.2d 1544, 1545 (11th Cir. 1986) (per curiam); King v. Guardian Life Ins. Co., 686 F.2d 894, 898 (11th Cir. 1982). We believe, however, that Palmland Villas does not accurately reflect Florida law. With the exception of Palmland Villas Florida courts have consistently applied the majority view on when constructive trusts arise. We are convinced that, if presented with this issue, the Florida Supreme Court would reaffirm the majority approach that a constructive trust arises when the facts giving rise to the fraud occur.

In Wilkins v. Wilkins, 144 Fla. 590, 198 So. 335 (1940), the Florida Supreme Court implicitly recognized that a constructive trust exists from the moment the fraudulent transaction giving rise to it takes place:

The contention is made that because the deed to the property into which the [constructive] trust fund was traced conveyed the property as an estate by the entireties to J.S. Wilkins and wife, the lien could not be impressed upon that property. The fallacy of this is that the trust was impressed in the very transaction in which the conveyance was acquired and, therefore, J.S. Wilkins and wife took the property as an estate by the entireties impressed with a lien to the extent of the trust fund which went into the payment for that property.

Id. 198 So. at 337.

The Florida Supreme Court reached a similar conclusion in City of Sarasota v. Dixon, 146 Fla. 369, 1 So. 2d 198 (1941). There the court held that because A.W. Dixon had made fraudulent representations to the city regarding the Dixon Fish Company building, "he took possession of such building in trust for the use and benefit of Dixon Fish Company and its receiver." Id. 1 So. 2d at 201. The court concluded that "in the instant case the facts and circumstances raised a constructive trust in favor of M.W. Dixon against A.W. Dixon in his lifetime and his personal representative who so held the property subsequent to his death." Id. Thus, the Supreme Court recognized that the constructive trust existed long before the court granted any equitable relief.

Although these decisions did not expressly adopt the majority rule, they applied that rule to the facts of each case. Subsequent Florida appellate court decisions have similarly applied, without expressly adopting, the majority rule that a constructive trust exists from the time the facts giving rise to it occur. See, e.g., Mayer v. Cianciolo, 463 So. 2d 1219, 1221 (Fla. 3d DCA 1985) (constructive trust in favor of son arose when he quitclaimed his joint interest in real property for the sole reason of facilitating its sale by his mother); Malkus v. Gaines, 434 So. 2d 957, 960-61 (Fla. 3d DCA 1983) (Malkus held partnership interest in company in constructive trust for Gaines since the date of the fraud), pet. for rev. denied, 446 So. 2d 100 (Fla.1984); Johnson v. Johnson, 349 So. 2d 698, 699 (Fla. 4th DCA 1977) ("When Mrs. Johnson conveyed her interest in The Harborage to her husband, she became the beneficiary under a constructive trust and he became the trustee."); Hallam v. Gladman, 132 So. 2d 198, 204 (Fla. 2d DCA 1961) (constructive trust "arises through operation of law [w]here one through fraud, abuse of confidence, or other questionable means gains property which in equity or good conscience he should not be permitted to retain"); Traub v. Traub, 102 So. 2d 157, 158 (Fla. 2d DCA 1958) (defendant held real property in constructive trust for his brothers from the time they executed the misleading deed to the property).⁴ 

The only Florida appellate decision to reject the majority approach was Palmland Villas. Palmland Villas did not cite any of the cases mentioned above. The court relied exclusively on Wadlington v. Edwards, 92 So. 2d 629 (Fla.1957) and Yawn v. Blackwell, 343 So. 2d 906 (Fla. 3d DCA 1977). The court's entire reasoning was as follows:

An action for the declaration of a constructive trust may be barred if the events giving rise to the necessity for the imposition of this equitable remedy transpired beyond the period permitted by the applicable statute of limitations, usually expressed in terms of laches. See Yawn v. Blackwell, 343 So. 2d 906 (Fla. 3d DCA 1977). This leads inevitably to the conclusion that a constructive trust is not created by the facts themselves since no trust is found where the operable facts occur beyond the statutory period. The facts simply form the basis upon which a court may presently impose a trust if the statute of limitations has not barred this remedy. Wadlington v. Edwards, 92 So. 2d 629 (Fla.1957).

Palmland Villas, 390 So. 2d at 125.

Wadlington and Yawn hold only that a beneficiary of a constructive trust will be precluded from obtaining equitable relief if he has sat on his rights.⁵  Because a constructive trust beneficiary may be denied equitable relief because he has sat on his rights does not "inevitably" lead to the conclusion that a constructive trust does not exist until so decreed by a court of equity.

General Coffee suggests that Palmland Villas can be reconciled with the prior Florida decisions applying the majority rule because Palmland Villas implicitly adopts the rule that a constructive trust arises at the time of the fraud when an action is between the wrongdoer and the constructive trust beneficiary and that such a trust arises at the time of a judicial decree when an action is between an innocent third party and the beneficiary. This suggestion is without merit. A constructive trust arises from a situation where one party has defrauded another. The constructive trust relationship has nothing to do with the rights of innocent third parties. See A. Scott, The Law of Trusts Sec. 462.4, at 3421 (3d ed. 1967).

General Coffee also argues that we are bound by our former decision in In re Lucar Enterprises, Inc., No. 85-0329 (11th Cir. May 1, 1986), which affirmed a district court decision pursuant to Eleventh Circuit Local Rule 25. The district court in that case, relying on In re General Coffee I and Palmland Villas, had held in part that a constructive trust did not arise until decreed by a court of equity.

When the court affirms the judgment of the district court pursuant to Rule 25, it does not necessarily adopt the reasoning of the district court; it merely holds that the judgment is not erroneous. Cf. DeShong v. Seaboard Coast Line R.R., 737 F.2d 1520, 1523 (11th Cir. 1984) (where appellate court affirms district court decision with a memorandum opinion stating that "the appellant has not presented any valid basis for reversal," memorandum opinion has no binding precedential value).

We hold that under the Florida law that we are convinced the Supreme Court of that state would find controlling, a constructive trust in favor of CNB came into existence before General Coffee filed its petition in bankruptcy.

Because we agree with the district court that the constructive trust in favor of CNB came into existence before the bankruptcy proceedings began, we must decide whether General Coffee can nevertheless bring the trust assets into the estate for distribution to its creditors under 11 U.S.C. § 544(a). Section 544(a), the "strong-arm" provision of the Bankruptcy Code, permits a trustee to avoid secret liens against property in the debtor's possession. It grants a trustee the rights of an essentially ideal lienholder against property in which the debtor does not possess complete title.⁶ 

The district court held that General Coffee could not use Sec. 544(a) to defeat CNB's rights as beneficiary of the constructive trust. In re General Coffee II, 64 B.R. at 708. The court explained that under 11 U.S.C. § 541(d), the estate took only legal title to the trust assets, subject to the equitable interests of CNB.⁷  The court concluded, relying exclusively on In re Quality Holstein Leasing, 752 F.2d 1009 (5th Cir. 1985), that the provisions defining property of the estate in Sec. 541(d) prevail over a trustee's strong-arm powers under Sec. 544. In re General Coffee II, 64 B.R. at 708.

The drafters of the Bankruptcy Code appear not to have anticipated the potential for tension between sections 541(d) and 544(a). Since the enactment of Sec. 541(d), however, many courts have recognized that these sections are not always easily reconciled because Sec. 541(d) excludes certain equitable interests from the estate of a bankrupt while Sec. 544(a) permits the trustee to bring certain tainted property into the control of the estate. For example, where the debtor holds certain real property in constructive trust for another because of fraud, Sec. 541(d) excludes from the estate the constructive trust beneficiary's equitable interest in the property. See, e.g., Quality Holstein Leasing, 752 F.2d at 1012; In re Elin, 20 B.R. 1012, 1015-16 (Bankr.D.N.J. 1982), aff'd mem., 707 F.2d 1400 (3d Cir. 1983). It appears, however, that Sec. 544(a) would bring the trust property into the estate in spite of Sec. 541(d). Section 544(a) would permit the bankruptcy trustee to bring the constructive trust property into the estate through his strong-arm powers as a hypothetical bona fide purchaser because a constructive trust beneficiary's interest in real property is, by definition, an unrecorded interest, which is inferior to the interest of a bona fide purchaser of the real property. See, e.g., In re Eads, 69 B.R. 730, 735 (Bankr. 9th Cir. 1986); In re Cascade Oil Co., 65 B.R. 35, 42 (Bankr.D. Kan. 1986); In re Great Plains Western Ranch Co., 38 B.R. 899, 906 (Bankr.C.D. Cal. 1984).

Courts have responded to the tension between these sections in two ways. Some courts, like the district court here, have held that Sec. 541(d) prevails over the trustee's strong-arm powers under Sec. 544(a). See, e.g., Quality Holstein Leasing, 752 F.2d at 1013; In re Triple A Coal Co., 55 B.R. 806, 813 (Bankr.S.D. Ohio 1985); In re Earl Roggenbuck Farms, Inc., 51 B.R. 913, 917 (Bankr.E.D. Mich. 1985). These courts have reasoned that " [a]lthough [Sec. 544(a)'s strong-arm] powers allow a trustee to assert rights that the debtor itself could not claim to property, Congress did not mean to authorize a bankruptcy estate to benefit from property that the debtor did not own." Quality Holstein Leasing, 752 F.2d at 1013. Any other interpretation would, according to these courts, render Sec. 541(d) meaningless. See id. at 1013 n. 9 (legislative history of Sec. 541(d) reveals that purpose of section is to protect the holder of an equitable interest where the debtor possesses only legal title); Earl Roggenbuck Farms, 51 B.R. at 917 ("The effect of [Sec. 541(d) ] is that the interest in property to which the trustee succeeds can be no greater than that which the debtor itself had.").

A majority of courts have rejected this approach. They have held that sections 541(d) and 544(a) operate independently. Thus, property not part of the estate under Sec. 541(d) may come into the estate under Sec. 544(a). See, e.g., Cascade Oil Co., 65 B.R. at 39; In re Dlott, 43 B.R. 789, 792 (Bankr.D. Mass. 1983); Great Plains, 38 B.R. at 902-05; In re Anderson, 30 B.R. 995, 1009-10 (Bankr.M.D. Tenn. 1983); Elin, 20 B.R. at 1016. These courts have reasoned as follows:

[A] reading and comparison of Sec. 541(d) and Sec. 544 leads to the inescapable conclusion that Sec. 541(d) does not represent a general limitation on the trustee's avoidance powers under Sec. 544. Section 541(d) qualifies the trustee's right under Sec. 541(a) to succeed to certain property interests possessed by the debtor at the time of the filing of his bankruptcy petition. In contrast, Sec. 544(a) arms the trustee at the time of the filing of the debtor's bankruptcy petition with all the rights and powers of various creditors and transferees of the debtor so as to avoid incomplete or improperly perfected transfers of the debtor and thereby insure an equality of distribution among the debtor's general unsecured creditors. See, e.g., 4 L. King, Collier on Bankruptcy p 541.01, 541-5 to 541-9 and p 544.01, 544-2 to 544-4 (15th ed. 1982); 2 W. Norton, Bankruptcy Law and Practice Secs. 29.01 and 30.01 (1982). Section 544(a) in fact contemplates that the debtor has no remaining interest in the property which is the subject of the avoided transaction. The trustee is thus given the ability to bring into the estate, in addition to the debtor's property as defined by Sec. 541(a) and limited by Sec. 541(d), any property which he can obtain through his avoidance powers under the Bankruptcy Code, including his ability to invalidate certain transfers by the debtor under Sec. 544(a).

Anderson, 30 B.R. at 1009-10. Although this result seems to contradict the language of Sec. 541(d), these courts have explained that it is consistent "with the letter and with the spirit of the Bankruptcy Code." Great Plains, 38 B.R. at 907.

This circuit has never resolved the tension between sections 541(d) and 544(a). Nor do we need to do so here. The result in this case is the same under either approach.

Under the minority approach, CNB's interest in the trust assets as beneficiary of the constructive trust does not come into General Coffee's bankruptcy estate. Where a debtor holds property in a constructive trust for another, " [t]he rule is elementary that the estate succeeds only to the title and rights in the property that the debtor possessed.... Therefore ..., the estate will generally hold such property subject to the outstanding interest of the beneficiaries." Georgia Pacific Corp. v. Sigma Serv. Corp., 712 F.2d 962, 968 (5th Cir. 1983) (quoting 4 Collier on Bankruptcy p 541.13 (L.King 15th ed. 1987)); see also Quality Holstein Leasing, 752 F.2d at 1012. Thus, because Sec. 541(d) prevails over a trustee's strong-arm powers under Sec. 544(a), CNB has a right to recover the assets of the constructive trust.

CNB has the same rights under the majority approach. Section 544(a) confers on the bankruptcy trustee the rights of a hypothetical "ideal creditor" under state law. 4 Collier on Bankruptcy p 544.02.⁸  General Coffee contends that because a constructive trust is essentially an equitable lien, it is defeated by a subsequent lienholder without notice. General Coffee is correct that under Florida law "an equitable lien is superior to the right of all persons except bona fide purchasers, or subsequent valid lienholders, without notice," Blumin v. Ellis, 186 So. 2d 286, 295-96 (Fla. 2d DCA), cert. denied, 189 So. 2d 634 (Fla.1966), but General Coffee goes too far. Although it is difficult to define a constructive trust precisely, it is not an equitable lien under Florida law.

Florida law defines an equitable lien as follows:

An equitable lien is not an estate of property in the thing itself nor a right to recover the thing, that is, a right which may be the basis of a possessory action. It is simply a right of a special nature over a thing, which constitutes a charge or encumbrance upon it, so that the very thing itself may be proceeded against in an equitable action....

Tucker v. Prevatt Builders, Inc., 116 So. 2d 437, 439-40 (Fla.1959); see also Hullum v. Bre-Lew Corp., 93 So. 2d 727, 730 (Fla.1957). A constructive trust, on the other hand, is a trust relationship created "by equity to prevent the unjust enrichment of one person at the expense of another as the result of fraud, undue influence, abuse of confidence or mistake in the transaction that originates the problem." Wadlington v. Edwards, 92 So. 2d 629, 631 (Fla.1957); see also Steinhardt v. Steinhardt, 445 So. 2d 352, 356 (Fla. 3d DCA 1984). In a trust relationship the trust beneficiary possesses an equitable ownership interest in the trust property, while the trustee possesses legal title to the property. See Axtell v. Coons, 82 Fla. 158, 89 So. 419, 420 (1921). A constructive trust beneficiary therefore possesses an equitable ownership interest in the trust property, which is substantively different than an equitable lien against the property. See generally A. Scott, The Law of Trusts Sec. 463 (3d ed. 1967). The question before us is thus whether an ideal creditor would prevail over a constructive trust beneficiary under Florida law.

We have found no Florida cases on this question. We believe, however, that for purposes of priority in bankruptcy a constructive trust beneficiary should have the same rights to the trust assets that a beneficiary of an express trust would have. An express trust beneficiary clearly has priority to trust assets over a judicial lienholder or execution creditor.⁹  CNB's rights as beneficiary of the constructive trust therefore would prevail over a hypothetical ideal lienholder.

Professor Scott would reach a similar conclusion. As he discussed in his treatise on trusts, a constructive trust beneficiary prevails over all subsequent takers of the trust property except bona fide purchasers. A. Scott, The Law of Trusts Sec. 462.4, at 3621. He explained his reasoning with the following example:

[W]here A's money is wrongfully taken by B and is used by B to purchase land, A is entitled to enforce a constructive trust of the land. In this case A has such an interest in the land as to enable him to reach it in satisfaction of his claim. He can reach the land even though B is insolvent, since B's creditors are not in the position of bona fide purchasers.

Id. Sec. 462.5, at 3423; cf. In re Storage Technology Corp., 55 B.R. 479, 484 (Bankr.D. Colo. 1985) (beneficiary of a constructive trust prevails over a judicial lien creditor under Colorado law).

We hold that because General Coffee cannot bring the trust assets into its bankruptcy estate under either approach, CNB is entitled to recover the traced assets of $6,488.011.

AFFIRMED.