Title: St. Joe Co. v. Norfolk Redev. and Hous. Auth.

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
THE ST. JOE COMPANY 
 
 
 
 
 
 
 
 
     OPINION BY 
v.    Record No. 102342             JUSTICE S. BERNARD GOODWYN 
 
    March 2, 2012 
NORFOLK REDEVELOPMENT  
AND HOUSING AUTHORITY 
 
FROM THE CIRCUIT COURT OF THE CITY OF NORFOLK 
John R. Doyle, III, Judge 
 
In this appeal, we consider whether the circuit court 
erred in imposing a constructive trust on funds removed from a 
debtor’s operating account, by a secured creditor with a 
perfected interest in the account, when those funds were 
entrusted to the debtor in its capacity as the agent of a third 
party. 
Background 
 
Norfolk Redevelopment and Housing Authority (NRHA) filed a 
complaint against the St. Joe Company (St. Joe) and Advantis 
Real Estate Services Company (Advantis) in the Circuit Court of 
the City of Norfolk alleging unjust enrichment and seeking 
imposition of a constructive trust and recovery of funds 
supplied by NRHA to its agent, Advantis, for the payment of 
contractors who had performed services for NRHA.  St. Joe held 
a perfected secured interest in Advantis’s operating account 
and exercised its rights as a secured creditor over that 
account to have funds from Advantis’s account, including those 
 
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entrusted to Advantis as NRHA’s agent, transferred to a St. Joe 
account.1 
 
NRHA and St. Joe filed an agreed stipulation of facts with 
the circuit court and submitted cross-motions for summary 
judgment on the constructive trust and unjust enrichment 
counts. Following oral argument, the circuit court issued a 
letter opinion and entered a final order granting NRHA’s motion 
for summary judgment on both counts.  St. Joe appeals. 
Facts 
 
NRHA entered into a property management agreement with 
Advantis, under which Advantis would serve as NRHA’s agent with 
regard to repair and architecture contracts for the improvement 
of an NRHA office building in Norfolk, Virginia.  Under the 
management agreement, when payments became due to a contractor, 
NRHA was to provide the necessary funds for Advantis to hold in 
trust for transmission to the contractor on behalf of NRHA.  
Pursuant to the management agreement, Advantis entered into 
agreements with a roof repair contractor and an architectural 
firm for the repair of NRHA’s building. 
In June 2008, St. Joe became a secured creditor of 
Advantis, entering into a deposit account control agreement 
with Advantis and Wachovia Bank.  NRHA was not a party to this 
agreement. 
                     
1 Advantis is not a party to this appeal. 
 
3 
On May 30, 2009, Advantis sent NRHA an invoice of 
$119,221.44 for work performed on the office building: 
$112,473.06 was due the roofing contractor and $6,478.38 was 
due Advantis as a management fee.  On the same date, Advantis 
submitted to NRHA an invoice in the sum of $3,041.14, of which 
$2,869.00 was due the architectural contractor and $172.14 was 
due Advantis.   
On or about June 11 and 18, 2009, NRHA delivered checks 
and corresponding invoices to Advantis: (1) in the amount of 
$119,221.44 for the purpose of paying Advantis and the roof 
repair contractor, and (2) in the amount of $3,041.14 to pay 
Advantis and the architectural contractor.  The check stubs 
identified the invoice to which each check was applicable.  
Advantis deposited these checks into its Wachovia master 
operating account, which was governed by the deposit account 
control agreement with St. Joe.  On July 17 and 20, 2009, NRHA 
issued cure notices, demanding that Advantis transmit the 
payments to the contractors. 
Advantis did not transmit the payments to the contractors 
before St. Joe seized control of the Wachovia account, and 
under the terms of the deposit account control agreement, 
instructed Wachovia to wire the balance of the Advantis account 
to a BB&T account held by St. Joe.  NRHA sent a letter to St. 
Joe demanding the return of the money which was supposed to 
 
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have been paid to NRHA’s contractors.  St. Joe declined to 
return the money to NRHA.  At all relevant times, the balance 
of the operating account exceeded $115,342.06, the amount of 
the fees due the contractors.  
Analysis 
 
St. Joe argues that the circuit court erred in determining 
that the funds in Advantis’s account remained the property of 
NRHA and subject to its control.  It also argues that the 
circuit court erred in imposing a constructive trust absent any 
evidence that St. Joe exercised control over the funds in the 
account by fraud, abuse of confidence, or other questionable 
means.  St. Joe further maintains that regardless of the 
propriety of imposing a constructive trust, NRHA cannot prevail 
because it is unable to adequately trace the funds into St. 
Joe’s possession. 
NRHA responds that the circuit court correctly found that 
the funds remained its property until used for their intended 
purpose.  NRHA also asserts that because Advantis did not own 
the funds, the circuit court properly found that a constructive 
trust existed and that the funds could be traced into St. Joe’s 
possession.  We agree with NRHA. 
 
In an appeal from a circuit court’s decision to grant or 
deny summary judgment, this Court reviews the application of 
 
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law to undisputed facts de novo.  E.g., Johnson v. Hart, 279 
Va. 617, 623, 692 S.E.2d 239, 242 (2010). 
In the Commonwealth, it is well established that 
[w]here money or property is intrusted [sic] to an 
agent for a particular purpose, it is impressed by 
the law with a trust in favor of the principal until 
it has been devoted to such purpose; and, if it be 
wrongfully diverted by the agent, such trust follows 
the fund or property in the hands of a third person 
and the principal is ordinarily entitled to pursue 
and recover it as long as it can be traced and 
identified, if no superior equities have intervened.  
This applies whether it is the identical property put 
into the hands of the agent or other property 
purchased by the agent with the proceeds, and even 
when it has been mixed with the mass of other 
property, if not so as to be incapable of being 
distinguished. 
 
Baldwin v. Adkerson, 156 Va. 447, 463-64, 158 S.E. 864, 869 
(1931) (citations omitted).  Correspondingly, a trustee does 
not become the owner of entrusted funds unless the trustee is 
granted unrestricted use thereof.  Broaddus v. Gresham, 181 Va. 
725, 732, 26 S.E.2d 33, 36 (1943) (noting that money paid to 
another may create a trust or debt, depending upon the 
intention of the payor) (citation omitted). 
The stipulated evidence established that Advantis acted as 
NRHA’s agent in contracting with and paying the contractors.  
Likewise, NRHA delivered the funds for the express purpose of 
paying the contractors.  NRHA never granted Advantis 
unrestricted use of the funds and in fact issued cure notices 
demanding that the money be used to pay the contractors.  NRHA 
 
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provided the funds for a specified purpose.  Although St. Joe 
notes that the funds intended for payment of the contractors 
were placed in the master operating account and not in the 
trust account contemplated by the contract between NRHA and 
Advantis for rent collections,2 the failure on the part of 
Advantis to put the funds intended for payment of the 
contractors into a trust account does not preclude a finding 
that the funds were held for transmission to the contractors. 
 
“Constructive trusts are those which the law creates, 
independently of the intention of the parties, to prevent fraud 
or injustice.”  Leonard v. Counts, 221 Va. 582, 588, 272 S.E.2d 
190, 195 (1980).  Consequently, constructive trusts “occur not 
only where property has been acquired by fraud or improper 
                     
2  
The contract between NRHA and Advantis (Manager) 
provided as follows: 
 
The Manager shall deposit all rents and other 
funds collected from the operation of each Property 
or Properties, including any and all advance rents, 
in a bank approved by Owner in a separate or combined 
account or accounts at the direction of Owner . . . 
for the Property in the name of: Advantis Real Estate 
Services Company as Agent for Norfolk Redevelopment & 
Housing Authority. 
 
The bank shall be informed in writing that the 
account and funds therein are held in trust for and 
owned by the Owner.  Out of each account, Manager 
shall pay the operating expenses of the Property and 
any other payments relative to the Property as 
required by the terms of this Agreement.  If more 
than one account is required to operate the Property, 
each account must have a unique name. 
 
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means, but also where it has been fairly and properly acquired, 
but it is contrary to the principles of equity that it should 
be retained, at least for the acquirer’s own benefit.”  Jones 
v. Harrison, 250 Va. 64, 70, 458 S.E.2d 766, 770 (1995) 
(citations and internal quotation marks omitted).  A circuit 
court may impose a constructive trust, thereby preventing a 
failure of justice, “even when property has been acquired 
fairly and without any improper means.”  E.g., Faulknier v. 
Shafer, 264 Va. 210, 215, 217, 563 S.E.2d 755, 758, 759 (2002).  
Contrary to St. Joe’s assertion, no allegation of fraud or 
abusive conduct is required for the imposition of a 
constructive trust upon the funds in the Advantis account.  
See, e.g., Richardson v. Richardson, 242 Va. 242, 245-47, 409 
S.E.2d 148, 150-51 (1991) (imposing constructive trust to 
prevent unjust enrichment, despite absence of wrongdoing on 
part of the gratuitous transferee). 
 
This Court has stated: 
When property is given or devised to a defendant in 
breach of a donor’s or testator’s contract with a 
plaintiff, equity will impose a constructive trust 
upon that property in the hands of the recipient even 
though (1) the transfer is not the result of breach 
of a fiduciary duty or an actual or constructive 
fraud practiced upon the plaintiff, and (2) the donee 
or devisee had no knowledge of the wrongdoing or 
breach of contract. 
 
Faulknier, 264 Va. at 215, 563 S.E.2d at 758 (quoting Jones, 
250 Va. at 69, 458 S.E.2d at 769). 
 
8 
 
The scenario described in Faulknier and Jones is analogous 
to the facts in the instant case.  NRHA provided funds to 
Advantis for the payment of the contractors, but Advantis did 
not pay them in accord with the management agreement.  Although 
not “given or devised” to St. Joe, the funds arrived “in the 
hands of” the company, despite its apparent lack of knowledge 
that Advantis was to pay the contractors with the funds.  The 
property was acquired legally by St. Joe, but allowing the 
company to retain the funds would be contrary to the principles 
of equity. 
 
“[I]n order to be entitled to the benefit of a 
constructive trust, a claimant’s money must be ‘distinctly 
traced’ into the chose in action, fund, or other property which 
is to be made the subject of the trust.”  Crestar Bank v. 
Williams, 250 Va. 198, 204, 462 S.E.2d 333, 335 (1995).   For 
commingled funds, such tracing may be sufficiently accomplished 
under the lowest intermediate balance rule by a showing that 
the amount in the destination account exceeded the value of the 
constructive trust.  Old Republic Nat’l Title Ins. Co. v. 
Tyler, 155 F.3d 718, 724 (4th Cir. 1998). (“In cases where the 
trust property has been commingled, courts resolve the issue 
with reference to the so-called ‘lowest intermediate balance’ 
rule, . . . which is grounded in the fiction that, when faced 
with the need to withdraw funds from a commingled account, the 
 
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trustee withdraws non-trust funds first, thus maintaining as 
much of the trust’s funds as possible.  Hence, pursuant to the 
lowest intermediate balance rule, if the amount on deposit in 
the commingled fund has at all times equaled or exceeded the 
amount of the trust, the trust’s funds will be returned in 
their full amount.”); see Federal Reserve Bank of Richmond v. 
Peters, 139 Va. 45, 69, 123 S.E. 379, 386 (1924) (“This money 
passed from the agent’s hands to the hands of the receiver 
impressed with a trust, and is sufficiently identified, since 
it appears that an amount equal to the amount held [in trust] 
was in its hands . . . until its failure.”).  In the instant 
case, the parties stipulated that the balance of the Wachovia 
account did not fall below the amount of the funds designated 
for payment to the contractors. 
Furthermore, St. Joe stipulated that it “has maintained 
possession of the $115,343.06 that is the subject of this case 
during the pendency of this litigation.”  Even absent 
application of the lowest intermediate balance rule, St. Joe’s 
stipulation effectively ends the inquiry, as it has admitted 
possession of the very funds at issue. 
We therefore hold that imposition of a constructive trust 
was proper and necessary to prevent a failure of justice, and 
unjust enrichment. 
 
 
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Conclusion 
Accordingly, for the reasons stated, we will affirm the 
judgment of the circuit court. 
Affirmed.