Unpublished Disposition, 893 F.2d 1338 (9th Cir. 1990)

MEMORANDUM^* 

Appellant, Insurance Company of the West ("ICW"), seeks reversal of an order of the Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") affirming an order of the Bankruptcy Court for the Central District of California granting summary judgment to appellee, a Chapter 7 trustee, and denying summary judgment to appellant. ICW seeks to recover funds in the bankruptcy estate of Foam Systems Company on the grounds that the funds were held in an express trust or, alternatively, that a resulting trust should be imposed. The BAP affirmed the bankruptcy court finding that the equities militated against the imposition of a resulting trust and held that an express trust had not been created. ICW appeals this decision.

STATEMENT OF FACTS

In 1983, Foam Systems and Ryan Marine Corporation entered into a contract which provided that Foam Systems would supply material over a period of years to Ryan Marine. Ryan Marine paid $255,000, the entire amount due under the contract, in advance. However, Ryan Marine required an advance payment bond to indemnify it in the event the money was used for purposes other than meeting the requirements of the contract.

ICW issued a $300,000 advance payment bond for the benefit of Ryan Marine conditioned upon Foam Systems' use of the funds solely to fulfill its obligations under the supply contract. The funds were placed in an interest-bearing account at Security Pacific National Bank in Foam Systems' name. Foam Systems and ICW had agreed that the account would be in Foam Systems' name for tax reporting purposes, as the interest would accrue to the benefit of Foam Systems. The account had three signatories: one from Foam Systems, and two from ICW. In order to make a withdrawal, the signature of at least one ICW representative was required. However, the ICW officers signed the signature card on file in the bank in the spaces where the account owner's corporate officers were supposed to sign. Nothing on the card indicated that the signatories were from ICW. Security Pacific was never informed that Foam Systems was acting as trustee.

In 1985, a $100,000 payment was released to Foam Systems from the account. In 1986, the account was transferred to Riverside National Bank. The ICW signatures were still required for withdrawals, but again, the bank was not informed that the signatories were from ICW or that Foam Systems was acting as a trustee of the funds.

In May, 1986, Foam Systems filed for bankruptcy under Chapter 11. Its statement of affairs filed with the bankruptcy court did not list any account held in trust. In December of 1986, Ryan Marine notified Foam Systems that it was not in compliance with the contract, and that the next scheduled $100,000 disbursement would not be made. Foam Systems made no further shipments to Ryan Marine, which then declared it in default and cancelled the contract. ICW received a release from any obligations under the bond, and an assignment of all rights under the contract with Foam Systems.

In January of 1987, the Chapter 11 action was converted to a Chapter 7 action, with appellee William J. Simon ("Simon") acting as trustee. ICW requested that Simon release the funds in the account, but Simon did not comply. ICW paid Ryan Marine from its own funds in March of 1987. ICW then commenced an adversary proceeding for reclamation of the funds. In a hearing before the bankruptcy court, the parties stipulated to all of the facts. Although the court denominated the matter as cross motions for summary judgment, the hearing was set as a hearing on the merits and after stipulating to the facts, the parties submitted the matter to the bankruptcy court on the papers. Thus, we will treat this matter as an appeal from a judgment on the merits.

ICW's alternative positions were that either the money was held by Foam Systems in an express trust or the money was subject to a resulting trust. The bankruptcy court rejected all of ICW's claims, holding that the funds were not subject to a resulting trust as the funds were never specifically placed in trust by either party and the title of the account did not indicate ownership in anyone other than Foam Systems. In its decision, the court emphasized that if ICW had an ownership interest in the account, placing title in the debtor's name misled both the taxing authorities and potential creditors.

The BAP affirmed the bankruptcy court decision. The BAP declined to impose a resulting trust due to the policy of ratable distribution among creditors. In addition, the BAP held that the parties did not create an express trust, in that ICW's intent was to create a security interest in the account rather than a trust. ICW now appeals to this court.

ANALYSIS

This court must look to state law to determine whether a trust exists in federal bankruptcy proceedings. In re Bullion Reserve of N.Am., 836 F.2d 1214, 1217 (9th Cir.), cert. denied, 108 S. Ct. 2824 (1988). This dispute focuses on California's requirement that a competent trustor properly manifest an intention to create a trust. Cal.Prob.Code Sec. 15201 (West 1989);¹  In re Teichman, 774 F.2d 1395, 1399 (9th Cir. 1985). A party's intent is ascertained from its words and conduct, in light of the circumstances surrounding the transaction. In re B.I. Fin. Servs. Group, Inc., 854 F.2d 351, 354 (9th Cir. 1988).

ICW argues that Ryan Marine manifested an intent to create a trust by restricting the use of the funds under the bond, and by making ICW a signatory to the account such that no withdrawals could be made without ICW's approval. ICW also argues that Foam Systems behaved as if a trust existed by not comingling the funds and by never attempting to gain control of the funds, "even at a time when it could have readily used them."

The bankruptcy court did not specifically address the issue of whether an express trust was created. However, it is implicit in the bankruptcy court's findings that the parties did not intend to enter into an express trust. Although we are reluctant to rely on implied findings, it is clear from the bankruptcy court's discussion of the issue of a resulting trust that it found that the parties did not intend to create a trust of any kind. Accordingly, under its findings, no express trust could have been created. The issue of whether an express trust has been established is a question of fact, which we review under the clearly erroneous test.

We hold that the bankruptcy court did not clearly err in finding that a trust was not created. At no time was any agreement between the parties referred to as a trust agreement. The bank account named Foam Systems as the owner, not "owner in trust." The indemnity agreement between the debtor and the insurance company also did not use trust language. Use of the words "trust" or "trustees" is not conclusive proof of intent to create a trust. Petherbridge v. Prudential Sav. & Loan Ass'n, 79 Cal. App. 3d 509, 519, 145 Cal. Rptr. 87 (1978). Nor is the absence of such terms conclusive the other way. However, the presence or absence of trust language is one factor to consider, and in this case its absence should be viewed in light of the fact that the parties were very sophisticated, and that either one of them could have easily manifested its intent to create a trust in the language of the contracts and other writings.

The conduct of the parties is "perhaps the most probative evidence on the question of intent." Petherbridge, 79 Cal. App. 3d at 522. The conduct of these parties does not clearly indicate an intent to create a trust. ICW insisted that the account exist in Foam Systems' name. This freed ICW from tax liability on the interest. By not indicating that the funds were in trust, ICW did not put other potential creditors on notice that these assets were unavailable to Foam Systems. Moreover, the record does not show other indicia of compliance with common trust practices. For example, no schedule of payments for the services of the trustee existed, and the funds were not listed in Foam Systems' schedule of accounts as in trust. On the basis of all the facts and circumstances, the bankruptcy court apparently concluded that the parties created a security agreement rather than an express trust. That determination was not clearly erroneous.

Under California law, "A resulting trust arises from a transfer of property under circumstances showing that the transferee was not intended to take the beneficial interest.... The resulting trust carries out the inferred intent of the parties...." American Motorists Ins. Co. v. Cowan, 127 Cal. App. 3d 875, 885, 179 Cal. Rptr. 747, 752 (1982) (quoting 7 B. Witkin, Summary of California Law, Trusts Sec. 123, at 5481 (8th ed.1974) (citations omitted)). As with the issue of express trust, we review the decision of the bankruptcy court regarding creation of a resulting trust under the clearly erroneous standard.

At least where equitable remedies are involved, state law must be applied in a manner consistent with the policies of federal bankruptcy law. See In re North Am. Coin & Currency, Ltd., 767 F.2d 1573, 1575 (9th Cir.), modified, 774 F.2d 1390 (1985), cert. denied, 475 U.S. 1083 (1986). One of the primary policies of the Bankruptcy Code is ratable distribution among all creditors. In re Lewis W. Shurtleff, Inc., 778 F.2d 1416, 1419-20 (9th Cir. 1989). Because the imposition of a resulting trust is an equitable remedy, courts act "very cautiously in exercising such a relatively undefined equitable power in favor of one group of potential creditors at the expense of other creditors." In re North Am. Coin & Currency, Ltd., 767 F.2d at 1575.

We hold that the bankruptcy court's finding that a resulting trust should not be imposed was not clearly erroneous. Although it may not be entirely clear as a matter of state law whether Ryan Marine intended to give Foam Systems a beneficial interest in the fund, the equities do not appear to favor the imposition of a resulting trust. The bankruptcy court found that the policy of ratable distribution would be frustrated if it were to allow ICW to recover its funds in their entirety, rather than allocating the funds among the creditors in the appropriate statutory priority. It concluded that there was not sufficient justification to ignore the "ratable distribution" policy and to impose a resulting trust. In doing so, it did not commit reversible error.

AFFIRMED.