PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: THOMAS H. DAMERON, t/a St.

Asaph Lawyers Title Company,

Incorporated, t/a Beneficial

Settlement Services, Incorporated,

t/a Choice Settlement Services,

Incorporated; MID-ATLANTIC TITLE &

ESCROW SERVICES, INCORPORATED;

HILL MANAGEMENT & INVESTMENT,

LIMITED; INWOOD CENTER

ASSOCIATES; SYLVAN GROVE WASTE

TREATMENT, INCORPORATED,

Debtors.

OLD REPUBLIC NATIONAL TITLE

INSURANCE COMPANY; CHEMICAL

No. 97-2402

RESIDENTIAL MORTGAGE COMPANY,

Plaintiffs-Appellees,

and

MORTGAGE ACCESS CORPORATION,

Plaintiff,

v.

ROBERT O. TYLER, Trustee,

Defendant-Appellant,

and

RICHARD S. MENDELSON; MIDATLANTIC TITLE & ESCROW SERVICES,

INCORPORATED; BURKE & HERBERT

BANK & TRUST COMPANY,

Defendants.
Appeal from the United States District Court

for the Eastern District of Virginia, at Alexandria.

Claude M. Hilton, Chief District Judge.

(CA-97-976-A, BK-96-10873-DOT, AP-96-1083)

Argued: June 5, 1998

Decided: September 24, 1998

Before MURNAGHAN and MICHAEL, Circuit Judges, and

BUTZNER, Senior Circuit Judge.

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Affirmed by published opinion. Judge Murnaghan wrote the opinion,

in which Judge Michael and Senior Judge Butzner joined.

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COUNSEL

ARGUED: Robert Terrence Ney, MCGUIRE, WOODS, BATTLE &

BOOTHE, L.L.P., McLean, Virginia, for Appellant. Brian F. Kenney,

MILES & STOCKBRIDGE, P.C., McLean, Virginia, for Appellees.

ON BRIEF: James M. Lewis, Robert R. Vieth, MCGUIRE,

WOODS, BATTLE & BOOTHE, L.L.P., McLean, Virginia; Madeline A. Trainor, TYLER, BARTL, BURKE & ALBERT, Alexandria,

Virginia, for Appellant. David J. Ervin, MILES & STOCKBRIDGE,

P.C., McLean, Virginia, for Appellees.

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OPINION

MURNAGHAN, Circuit Judge:

Appellant, bankruptcy trustee Robert O. Tyler (Trustee), appeals

the district court's grant of summary judgment to the Appellees, Old

Republic National Title Insurance Co. (Old Republic) and Chemical

Residential Mortgage Co. (Chemical), in an adversary proceeding

commenced by those parties to recover from the bankruptcy estate

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funds they claim were misappropriated by the debtor. Because we

agree that summary judgment was proper, we affirm.

I.

The debtor, Thomas H. Dameron, is a former member of the Virginia bar who conducted residential real estate settlements through his

company, Mid-Atlantic Title & Escrow Services, Inc. (Mid-Atlantic).

In the course of that business, Dameron received funds from various

lenders to be held for disbursement to designated third parties following closings. Dameron held such funds in his general corporate

account at Burke & Herbert Bank & Trust Co. (B&H).

Four transactions conducted by Dameron are relevant to this

appeal. On January 25, 1996, Dameron received $71,475.40 from

Shelter Mortgage Corp. (Shelter) for use in the Browning settlement.1

Four days later, Dameron received $41,619.20 from Mortgage Access

Corp. (Mortgage Access) for use in the Hedayaty settlement and

$180,749.82 from Chemical for use in the Ruffin settlement.2 Finally,

on January 31, 1996, Dameron received another $164,807.10 from

Chemical for use in the Abercrombie settlement. 3

Early in 1996, the Virginia State Bar received information indicating that Dameron was misappropriating settlement funds. The State

Bar commenced an action against Dameron in the Circuit Court for

the City of Alexandria, Virginia, and the court appointed a receiver

for Dameron and froze his personal and corporate assets, including

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1 Shelter's closing instructions to Dameron stated as follows: "Settlement of this loan is to be completed in FULL ACCORDANCE with

these instructions. . . . If any of the aforementioned conditions cannot be

met, you may NOT settle the loan or disburse our closing funds."

2 Mortgage Access's closing instructions to Dameron stated as follows:

"NO FUNDS MAY BE DISBURSED UNTIL ALL CLOSING CONDITIONS HAVE BEEN COMPLIED WITH." Chemical's instructions

stated similarly: "You may not cash, deposit or disburse our funds until

you have fully complied with all instructions."

3 Chemical's closing instructions stated as follows: "You may not cash,

deposit or disburse our funds until you have fully complied with all

instructions."

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his account at B&H. On February 23, 1996, various individual

claimants4 (collectively, Lenders) filed an involuntary Chapter 11

petition against Dameron and Mid-Atlantic, claiming to be creditors

in the amount of $458,652, and commenced an adversary proceeding

to recover their share of Dameron's frozen account. As of the petition

date, the account contained $453,338.47.

In the consolidated adversary proceeding, the Lenders moved for

summary judgment and the Trustee filed a cross-motion for summary

judgment. The bankruptcy court, Judge Tice, denied the Trustee's

motion but granted the Lenders' motion on the grounds that they are

entitled to an express or constructive trust over their share of

Dameron's bank account. The Trustee appealed that decision to the

district court, which affirmed the grant of summary judgment to the

Lenders. This appeal followed.

II.

The Trustee contends that the district court erred in granting summary judgment to the Lenders on the ground that they were entitled

to an express or constructive trust over a portion of Dameron's bank

account. We review de novo the district court's decision to grant summary judgment to the Lenders. See M&M Med. Supplies & Servs. v.

Pleasant Valley Hosp., Inc., 981 F.2d 160, 163 (4th Cir. 1992) (en

banc). Summary judgment is appropriate only if there is no genuine

issue of material fact and the moving party is entitled to judgment as

a matter of law. See Fed. R. Civ. P. 56(c); M&M, 981 F.2d at 162-63.

Under the Bankruptcy Code, a trustee is entitled to distribute all

property within the scope of the bankruptcy estate. The Code defines

the scope of such property broadly, including within the estate "all

legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Expressly excluded

from the estate is any "[p]roperty in which the debtor holds, as of the

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4 Old Republic issued insured closing letters to Chemical, Shelter, and

Mortgage Access in connection with the four settlements at issue. When

called upon to do so, Old Republic paid Shelter and Mortgage Access --

but not Chemical -- for their losses and thereby became subrogated to

their rights in the funds.

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commencement of the case, only legal title and not an equitable interest . . . ." 11 U.S.C. § 541(d). We have previously explained that the

purpose of § 541(d)'s exclusion is to ensure that the trustee "take no

greater rights [in the property] than the debtor himself had." MidAtlantic Supply, Inc. v. Three Rivers Aluminum Co. , 790 F.2d 1121,

1124 (4th Cir. 1986) (quoting S. Rep. No. 989, 95th Cong., 2d Sess.

82, reprinted in 1978 U.S.C.C.A.N. 5787, 5868). Therefore, when a

"debtor does not own an equitable interest in property he holds in

trust for another, that interest is not `property of the estate'" for purposes of the Bankruptcy Code. Begier v. IRS, 496 U.S. 53, 59 (1990).

Our consideration of what constitutes an "equitable interest" subject to exclusion from the bankruptcy estate under§ 541(d) is a question of state law. See Butner v. United States , 440 U.S. 48, 55 (1979)

("Property interests are created and defined by state law . . . [u]nless

some federal interest requires a different result . . . ."); Barnhill v.

Johnson, 503 U.S. 393, 398 (1992) ("In the absence of any controlling

federal law, `property' and `interests in property' are creatures of state

law."); American Bankers Ins. Co. v. Maness , 101 F.3d 358, 363 (4th

Cir. 1996) ("[W]hile federal law creates the bankruptcy estate, Butner

and the cases following it establish that state law, absent a countervailing federal interest, determines whether a given property falls

within this federal framework."). Therefore, in the present case, we

must first decide whether, in light of Virginia law, the Lenders are

entitled to a trust over some portion of Dameron's account.

Virginia law recognizes three basic forms of trust. See Leonard v.

Counts, 272 S.E.2d 190, 194-95 (Va. 1980) (discussing express, constructive, and resulting trusts). Of these, the two that are potentially

relevant to the instant case are the express (or actual) trust and the

constructive trust. An express trust is created when the parties affirmatively manifest an intention that certain property be held in trust

for the benefit of a third party. See Peal v. Luther, 97 S.E.2d 668, 669

(Va. 1957); Broaddus v. Gresham, 26 S.E.2d 33, 35 (Va. 1943). An

express trust may be created "without the use of technical words."

Broaddus, 26 S.E.2d at 35. All that is necessary are words, see id. at

35 (citation omitted), or circumstances, see Woods v. Stull, 30 S.E.2d

675, 682 (Va. 1944) (citation omitted), "which unequivocally show an

intention that the legal estate was vested in one person, to be held in

some manner or for some purpose on behalf of another. . .,"

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Broaddus, 26 S.E.2d at 35; see also Schloss v. Powell, 93 F.2d 518,

519 (4th Cir. 1938). In contrast to an express trust, a constructive trust

"arise[s] by operation of law, independently of the intention of the

parties . . . ." Crestar Bank v. Williams, 462 S.E.2d 333, 335 (Va.

1995) (citation omitted). Such trusts "occur not only where the property has been acquired by a fraud or improper 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 . . . ." Leonard, 272 S.E.2d

at 194-95 (citation omitted). With either form of trust, Virginia law

recognizes the beneficiary as "equitable owner of the trust property."

Broaddus, 26 S.E.2d at 36 (quoting Austin W. Scott, Scott on Trusts

§ 12.1, at 86).

In the case at bar, the Lenders maintain that the parties created an

express trust in Dameron to hold the Lenders' funds for the benefit

of specified third parties. They point out that, pursuant to the plain

language of their closing instructions, Dameron was to hold the funds,

essentially as an escrow, for disbursement after closing. That arrangement, they contend, is the very definition of an express trust.

We agree. The language of the parties' agreements and the circumstances under which the Lenders advanced their funds to Dameron

leave no doubt that the parties intended Dameron to act merely as an

intermediary. There was plainly no expectation that Dameron would

keep the Lenders' funds after closing or that he would develop any

equitable interest in the funds. In fact, under Virginia law, a trust fiduciary is prohibited from acquiring an equitable interest in trust property adverse to his principal. See Greenspan v. Osheroff, 351 S.E.2d

28, 37 (Va. 1986) ("It is well settled that where one person sustains

a fiduciary relation to another he can not acquire an interest in the

subject matter of the relationship adverse to such other party.") (quoting Horne v. Holley, 188 S.E.2d 169, 172 (Va. 1936)). Therefore,

under Virginia law and the law of trusts generally, we have no doubt

that an express trust was created. See Restatement (Second) of Trusts

§ 32 cmt. d. ("Where the owner of property delivers in escrow the

subject matter or instrument of transfer, manifesting an intention that

upon the happening of a certain event the depositee should deliver the

subject matter or the instrument to a third person as trustee, and the

owner does not reserve a power of revocation, a trust is created at the

time of the delivery in escrow."). In light of that conclusion and the

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plain language of § 541(d), the district court was correct to hold that

the Lenders' funds are beyond the reach of the bankruptcy estate. See

United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.10 (1983)

("We note . . . that Congress plainly excluded[from the bankruptcy

estate] property of others held by the debtor in trust at the time of the

filing of the petition."); In re Omegas Group, Inc., 16 F.3d 1443,

1449 (6th Cir. 1994) ("A debtor that served prior to bankruptcy as

trustee of an express trust generally has no right to the assets kept in

trust . . . ."); Gulf Petroleum v. Collazo , 316 F.2d 257, 261 (1st Cir.

1963) ("Courts of bankruptcy recognize that money held in escrow is

not property which vests in the trustee . . . since the bankrupt in such

a case, and subsequently his trustee, is to be regarded as holding the

so-called escrowed funds in trust under the terms of the agreement

and not for the general creditors . . . ."); American Service Co. v.

Henderson, 120 F.2d 525, 530 (4th Cir. 1941) ("The rule is elementary that a trustee . . . succeeds to only the title and rights in property

that the particular debtor had . . . .).5 

The Trustee argues that the intended beneficiaries, rather than the

trustors, are the proper plaintiffs to sue for disgorgement of the trust

property. We disagree. An escrow arrangement, like all express trusts,

is a contractual relationship, in which disbursement by the trustee is

conditioned upon the happening of a specified occurrence. See

Winslow, Inc. v. Scaife, 254 S.E.2d 58, 60 (Va. 1979) ("The depository of an escrow is, in fact, the agent of both parties. As the agent

of the grantor it is his business to withhold the[trust property] until

the condition is performed; as the agent of the grantee it is his business to hold it for him and to deliver it to him after the condition is

performed.") (citation omitted). It is, therefore, elementary that when

trust conditions are not satisfied the trustee has a duty to return the

property to the trustor. See Gulf Petroleum, 316 F.2d at 261 ("[The

trustee] must be held to have received the [funds] in trust and to have

assumed the fiduciary duty of holding them intact and returning them

to [the trustor] if, as happened, the closing under the contract was prevented from taking place . . . .") (citations omitted). In the present

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5 Because we conclude that the parties intended to create an express

trust, we have no occasion to address the district court's alternative holding that the Lenders are entitled to recover under a theory of constructive

trust.

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case, the parties' agreements expressly provided that disbursement of

the Lenders' funds was authorized only if all conditions of settlement

were satisfied. Because those conditions were not met, Dameron had

a fiduciary duty to return the trust property to the Lenders.6

In light of the discussion thus far, the sole remaining issue is

whether the Lenders can adequately trace their assets into Dameron's

frozen bank account. Ordinarily, a party claiming entitlement to a

trust must be able to trace its assets into the fund or property that is

the subject of the trust. See In re United Cigar Stores Co., 70 F.2d

313, 316 (2d Cir. 1934) (citations omitted) ("There can be no recovery . . . where all that can be shown is enrichment of the trustee. [The

trust property] must be clearly traced and identified in specific property."). Although this Court has not previously addressed the issue,

other courts have held, and we agree, that tracing is an issue of federal

rather than state law. See Conn. Gen. Life Ins. v. Universal Ins. Co.,

838 F.2d 612, 618-19 (1st Cir. 1988) ("[B]ecause it pertains to distribution of assets from an entity in federal bankruptcy proceedings,

[tracing] is exclusively a question of federal law."); Matter of Kennedy & Cohen, Inc., 612 963, 966 (5th Cir. 1980) (same).

In the present case, the Trustee argues that tracing is impossible,

since it is undisputed that Dameron commingled the Lenders' funds

in his general corporate account. We find that argument to be without

merit, since courts have consistently rejected the notion that commingling of trust property, without more, is sufficient to defeat tracing.

See, e.g., Chiu v. Wong, 16 F.3d 306, 310 (8th Cir. 1994); Conn. Gen.

Life, 838 F.2d at 619. In cases where the trust property has been commingled, courts resolve the issue with reference to the so-called "lowest intermediate balance" rule, see Schuyler v. Littlefield, 232 U.S.

707 (1914); Cunningham v. Brown, 265 U.S. 1 (1924); Conn. Gen.

Life, 838 F.2d at 619 (citing 4 Collier on Bankruptcy 541-77 (L. King

15th ed. 1987)); 5 A. Scott & W. Fratcher, The Law of Trusts 634-36

(4th ed. 1989); Restatement (Second) of Trusts § 202 cmt. j (1959),

which is grounded in the fiction that, when faced with the need to

withdraw funds from a commingled account, the trustee withdraws

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6 Of course, to prevent double recovery, the Lenders must now relinquish any deeds of trust they received over the subject properties in

return for their loans.

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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 Conn. Gen. Life, 838 F.2d at 619.

Conversely, if the commingled fund has been depleted entirely, the

trust is considered lost. See id. Finally, if the commingled fund has

been reduced "below the level of the trust fund but not depleted, the

claimant is entitled to the lowest intermediate balance in the account."

Id.; Cunningham, 265 U.S. at 12. In no case is the trust permitted to

be replenished by deposits made subsequent to the lowest intermediate balance. See Conn. Gen. Life, 838 F.2d at 619.

In the present case, at the time of the bankruptcy filing, the balance

of Dameron's account was $453,338.47. The Lenders claim entitlement to a trust in the amount of $458,651.52. Because the account has

been reduced below that amount but not depleted entirely, the Lenders are entitled to the lowest intermediate balance, without the benefit

of any deposits made after such balance was reached.

Based on the uncontroverted affidavit of Charles P. Cocke, a Certified Public Account, the district court accepted the following facts

with regards to Dameron's account:

1. On January 25, 1996, Shelter7 deposited $71,475.40 into

the account for the Browning settlement. By January

29, 1996, various unrelated withdrawals created a deficit in the account in the amount of $5,313.05. Because

Shelter was the only lender with funds then in the

account, the court presumed, based on the lowest intermediate balance rule, that the withdrawals depleted

Dameron's own funds first and that Shelter's funds

were withdrawn only to the extent necessary to cover

any remaining deficit. Therefore, Shelter's funds were

reduced by $5,313.05, leaving Shelter with a lowest

intermediate balance of $66,162.35.

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7 Recall that Old Republic has been substituted in these proceedings for

Shelter and Mortgage Access.

 9
2. On January 29, 1996, Mortgage Access transferred into

the account $41,619.20 for the Hedayaty Settlement.

Because those funds were subjected to no subsequent

withdrawals, Mortgage Access has a lowest intermediate balance of $41,619.20.

3. On January 29, 1996, Chemical transferred into the

account $180,749.82 for the Ruffin Settlement. Chemical later transferred another $164,807.10 in connection

with the Abercrombie Settlement. Because the account

was subjected to no subsequent withdrawals, Chemical's lowest intermediate balance is $345,556.92.

In the lower courts, the Trustee presented no affidavits to contradict

Cocke's analysis. Therefore, because no genuine issue of material fact

remains, summary judgment was appropriately granted to the Lenders.

The judgment of the district court is, therefore,

AFFIRMED.

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