## The H ONORABLE PAUL A. MAGNUSON, Chief Judge, United State s 1 

## District Court for the District of Minnesota, sitting by designation. 

# United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________ No. 96-2357

___________ In re: Broadview Lumber Co., Inc., *
* Debtor, *

---------------------------------------- *
* Thomas J. O’Neal, Trustee, *
* Plaintiff-Appellant, *
* Appeal from the Unite d States v. * District Court for the
* Western District o f Missouri. Southwest Missouri Bank of * Carthage; Mercantile Bank of * Joplin; Richard Mansfield; * Jenny Mansfield, *
* Defendants-Appellees. *

___________ Submitted: March 10, 1997
Fil ed: July 8, 1997

___________ Before McMILLIAN and HANSEN, Circuit Judges, an d MAGNUSON, District Judge.

1

## The Hono rable Joseph E. Stevens, Jr., United States District Judge for th e 2 

## Western District of Missouri.
T he Honorable Arthur B. Federman, United States Bankruptcy Judge for th e 3 

## Western District of Missouri.
While Richard Mansfield and his wife Jenny are appellees in this case, thei r 4 

## failure to file briefs on appeal waived any arguments on their behalf.
-2- HANSEN, Circuit Judge.

Thomas J. O’Neal (Tr ustee), as Chapter 7 trustee for the bankruptcy estate of Broadview Lumber Company, Inc

. (Broadview), appeals the district court’s decisio n 2 

## affir ming certain rulings of the bankruptcy court i n 3 

## favo r of Southwest Missouri Bank of Carthage, Missour i (SMB) and Mercantile Bank of Joplin (Mercantile), in the Trustee’s adversary proceeding based on transaction s undertaken by Broadview’s former president, Richar d Mans field (Mansfield). At issue in this appeal i s 4 

## whet her the district court erred in affirming th e bankruptcy court’s ruling in favor of Mercantile on th e Trustee’s claims for conversion and postpetitio n tran sfer, and whether the district court erred i n affirming the bankruptcy court’s findings in favor of SMB and Mercantile on the Trustee’s claims for an equitabl e lien or constructive trust. We affirm.

I.

This case involves a complicated series o f transactions undertaken by Mansfield to transfe r Broadview's corporate assets to his personal accounts ; only one of these transactions is involved here. Th e

## -3-

facts as relevant to this appeal are as follows

. Broadview--a wholesale lumber brokerage firm --wa s established in 1905. In 1990, Mansfield enjoyed a posit ion as president and fifty-percent stockholder

. Broadview’s

## -4-

corporate checking account was maintained at SMB, and its financing was provided by Fidelcorp, which ad vanced funds against Broadview’s accounts receivable. Fidelcorp wa s acqu ired by CIT Group (CIT) sometime before January 1 , 1991 ; CIT refused to advance further funds beginnin g January 2, 1991, and Broadview was left without funds to support over $400,000 in checks previously written. A s a result, Broadview was forced to cease opera tions almost immediately.

Be tween January and May 1991, Mansfield liquidate d inventory and collected accounts receivable s ufficient to pay money due to CIT. Mansfield overpaid the debt to CIT by $17,303 .37, and that amount was refunded to Broadview by check. An involuntary bankruptcy petition was file d against Br oadview on November 12, 1991. On November 25, 1991, Mansfield purchased a cashier’s check from SMB i n the amount of $19,303.37 payable to “Broadview Lumber, ” with t he $17,303.37 check from CIT and $2,000 drawn o n Broadview’s account at SMB.

Mansfield and his wi fe maintained a personal account at Mercantile. On January 21, 1992, Mansfield endorse d the $ 19,202.27 cashier’s check “Broadview Lumber Co. , Inc., Richard Mansfield, President,” and presented th e check to Mercantile for deposit in this perso nal account; the accompanying deposit slip described the account a s “Richard T . or Jenny P. Mansfield Construction Account.” Funds from that account--which included other corporat e fund s transferred into it by Mansfield--were used fo r construction of the Mansfields’ home in Carthage , Missouri. Mercantile, who had previously agreed to loan the Mansfields $180,000 for the construction, extende d

## -5-

pe rmanent financing for the repayment of the loan i n April 1992. Mercantile holds a deed of trust to th e Mansfields ’ property securing the repayment of the loan.

The Trustee filed this adversary pro ceeding against SMB, Mercantile, and the Mansfields under 28 U.S.C. § 157(b)(2)(E ) and (F) to recover funds in appropriately transferred out of Broadview’s account. The Truste e asserted, inter alia, that Mercantile had knowledge that Mansfield acted in breach of his fiduciary duty,

## SMB filed the original notice of appeal in this court; the Trustee filed a notice 5 

## of appeal as well. SMB and the Trustee thereafter reached a compromise settlement of the claims raised in SMB’s appeal. The settlemen t was approved by the bankruptcy court and we granted SMB’s motion to dismiss its app eal. SMB has notified this court th atit intends no further action on appeal but has adopted those portions o f Mercantile’s brief which address issues of constructive trust and equitable lien.
-6- violating Missouri’s Uniform Fiduciaries Law (UFL), and that Mercantil e took the $19,303.37 check subject to all claims that might exist and not
as a ho lder in due course under the Uniform Commercial Code (UCC). Th e Truste e alleged Mercantile became liable in conversion by crediting th e check’s proceeds to t he Mansfields’ personal account. The Trustee sought judgment against Mercantile in the amount of $19 ,303.37 and a constructive trust or equitable lien upon the Mansfields’ Carthage property for funds converted by Mansfiel d and used for construction of the Mansfields’ home. The Trustee raised a number of allegations against SMB as well. 5
Following a one-day trial, the bankruptcy court entered a mone y judgme nt against the Mansfields. The bankruptcy court found i n Mercan tile’s favor on the conversion claims against it, concluding tha t Mercan tile did not have actual knowledge that Mansfield breached hi s fiduciary duty or that it knew of such facts that the failure to inquire constituted bad faith. The bankruptcy court noted that even though th e teller was negligent in allowing the deposit and Mercantile’s vic e president knew Broadview had closed its doors, t hese facts did not “add up to knowledge” that Mansfield was breaching his fiduciary duty; nor were th e facts sufficient to put Mercantile on notice that such a breach might be taking pl ace. (Appellant’s Adden. at 26.) Because the Trustee did no t
mee t his burden of establishing that Mercantile had actual knowledge o r acted in bad faith, the bankruptcy court concluded the Trustee could not recover against Mercantile for conversion.
As to the request for a constructive trust or an equitable lien, the bankruptcy court noted that such remedies are av ailable only when there is no adequate remedy at

## -7-

law. In this case, because the bankruptcy court granted the Truste e judgment against the Mansfields (which exceeded the amount of Broadview’s property that the Trustee had shown was used for the Mansfields’ home), th e bankru ptcy court concluded the Trustee’s remedy at law was adequate

. Furthe r, the Trustee failed to establish that the Mansfields wer e insolvent. The district court affirmed the bankruptcy court’s decision fo r the reasons expressed by the bankruptcy court.

The Tr ustee timely appeals, asserting that because Mercantil e stipulated that it had notice of Mansfield’s fid uciary status, and because Mansfield--identified by his endorsement as the president of Broadview-- deposited the corpora tion’s check in his personal account, Mercantile did not becom e a holder in due course. The Trustee further argues tha t Mercantile acted in bad faith contrary to the UFL (Mo. Ann. Stat. § 456.31 0 (West 1992)), and that even though he need not show an inadequate remedy at law for equitable relief, such remedy is inadequate.
Mercantile, on the other hand, asser ts that the teller was unable to determine whether the instrument payable to “Bro adview Lumber” was payable to a corporation; that the Trustee failed to est ablish that the teller had actual knowledge of Mansfield’s breach of fiduciary duty; and that th e Trustee’s remedy is adequate, thus barring equitable relief.

II.
This court reviews the bankruptcy co urt’s factual findings for clear
error and its legal conclusions de novo. See First Nat’l Bank of Olathe
v. Pontow, 111 F.3d 604, 609 (8th Cir. 1997). State law controls issues
conc erning the nature and extent of a debtor’s interest in property

. See Natkin & Co. v. Myers (In re Rine & Rine Auctioneers, Inc.) , 74 F.3d 848, 851 (8th Cir. 19 96). As all the events herein occurred in the state of Missou ri, we apply Missouri law and review de novo the lower court’ s determinations of sta te law. See Nangle v. Lauer (In re Lauer) , 98 F.3d 378, 382 (8th

## -8-

Cir. 1996) (citing Salve Regina College v. Russell , 499 U.S. 225, 23 1 (1991)).

III.

A. Uniform Fiduciaries Law
The applicable UFL provision states in relevant part:

If a fiduciary makes a deposit in a bank to his persona l credit of checks . . . payable to his principal andendorsed by him, i f he is empowered to endorse such checks, or if h e otherwise makes a deposit of funds held by him as fiduciary , the bank receiving such deposit is not bound to inq uire whether the fiduciary is committ ing thereby a breach of his obligation as fiduciary; and the bank is authorized to pay the amount of the deposit or any part thereof upon the personal check of the fiduciary without being liable to the principal, unless th e ban k receives the deposit or pays the check with actua l kno wledge that the fiduciary is committing a breach of hi s obl igation as fiduciary in making such deposit or in drawin g such check, or with know ledge of such facts that its action in receiving the deposit or paying the check amounts t o bad faith.

Mo

. Ann. Stat. § 456.310 (West 1992). The UFL relieves banks lik e Mercantile from the common law duty of inquiring into the propriety of suc h transactions conducted by fiduciaries. See Lauer , 98 F.3d at 383. T o establish a claim under the UFL, the Trustee mus t establish that Mansfield
was a f iduciary, that Mansfield breached his fiduciary duty, and tha t Mercantile had either actual knowledge of the breach or sufficient facts such that its conduct amounted to bad faith. See id. at 386.
Actual knowledge for purposes of the UFL requires a present awa reness that a fiduciary is breaching his duty for personal gain. See Trento n Trust Co. v. Western Sur. Co. , 599 S.W.2d 481, 491 (Mo. 1980) (en banc); 

## South ern Agency Co. v. Hampton Bank of St. Louis , 45 2 S.W.2d 100, 105 (Mo. 1970) . “Bad faith” requires

## While the Trustee points out that Mansfield did not have the authority t o 6 

## endorse the check in his personal capacity, we note that “[i]t is not necessary, unde r the Un iform Fiduciaries Act, that the fiduciary have express authority to indorse only for a particular purpose. If he has the power to indorse for any purpose, and if th e limitations on that power have not been communicated to the indorsee ba nk, then actual notice of misappropriation or conduct amounting to bad faith on the part of the ban k must be shown in order for the principal to recover.” See Southern Agency Co. , 452 S.W.2d at 105.
-9- something more than mere negligence and can be found where the perso n accepting a negotiable instrument disregards circumstances that ar e suggestive of a breach and are sufficiently obvi ous such that it is in bad faith to remain passive. See Trenton Trust Co. , 599 S.W.2d at 492; Genera l Ins. Co. v. Commerce Bank of St. Charles , 505 S.W.2d 454, 458 (Mo. Ct. App

. 1974) (“The facts andcircumstances must be so cogent and obvious that to remain passive would amount to a deliberate desire to evade knowledg e because of a belief or fear that inquiry would disclose a defect in th e trans action.”). Absent proof of these factors, the bank is allowed t o presume that the fiduciary is acting within his capacity as a fiduciary.
The bankruptcy court concluded, and we agree, that the Trustee failed to establish that Mercantile acted with “actual knowledge” or in bad faith , as no evidence was produced to establish the tel ler had any knowledge that Man sfield was breaching his fiduciary duty. Compare Trenton Trust , 59 9 S.W.2d at 484-86 (guardian allowed to use insura nce checks made payable to her as guardian for her children to purchase cer tificates of deposit which did not reflect fiduciary relationship; bank officer who allowed her t o cash checks was on first name basis with fiduciary, had been told about he r fiduciary status, andhad supervised fiduciary’s endorsement of checks to match payee, even looking specifically to see if the payee and endorsement s matched; bank was liable under UFL, as officer h ad actual knowledge of the fiduciary’s breach), with Southern Agency , 452 S .W.2d at 102-04 (corporate president deposited checks payable to corporation into account of differen t corporation in which he was the principal shareh older; president then used funds to purchase cashier’s checks; bank did not act with actual knowledge or bad faith, as there was no evidence or testimony to show any of ban k’s employees actually knew president was breaching his fiduciar y obligations). 6

## -10- B. Holder in Due Course

Likewis e, we conclude Mercantile took the check as a holder in du e course without knowledge of Mansfield’s fiduciary status and breach o f fiduci ary duty. Under Missouri law in effect at the time of th e transaction-- 

## a “purchaser [of a negotiable instrument] ha s noti ce of a claim against the instrument when he ha s knowledge that a fiduciary has negotiated the instrument in payment of or as security for his own debt or in an y transaction for his own benefit or otherwise in breach of duty,” Mo. Ann. Stat. § 400.3-304(2) (West 1965). A purchaser who takes with such knowledge does not take as a holder in due
course. See Mo. Ann. Stat. § 400.3-302(1)(c) (W est 1965). Section 400.3- 304(2 ) followed the policy of the Uniform Fiduciaries Act, and the UC C Comment following § 400.3-304 makes it clear that:

mere notice of the existence of the fiduciary relation is not enough in itself to prevent the holder from taking in du e course, and he is free to take the instrument on th e assumption that the fiduciary is acting properly. The purchaser may pay cash into the hands of the fiduciary without notice of an y breach of the obligation.

Mo. Ann. Stat. § 400.3-304, UCC comment 5 (West 1965); McKee Constr. Co. v. Stanley Plumbing & Heating Co. , 828 S.W.2d 70 0, 703 (Mo. Ct. App. 1992) (wh ere code is adopted by state, accompanying comments “are given grea t weight”); Boatmen’s N at’l Bank of Carthage v. Eidson , 796 S.W.2d 920, 923 (Mo. Ct. App. 1990) ( official UCC comments, while not having the force of statut ory language, are nonetheless permissible and persuasive i n determining legislative intent).

## The transaction in this case occurred in January 1992, and the new UC C 7 

## provision was not approved until July 8, 1992. Section 400.3-307(b)(2) (West 1994 & Supp. 1997) states: 8



## In t he case of an instrument payable to the represented person or th e fiduciary as such, the taker has notice of the breach of fiduc iary duty if the instrument

is (i) taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary, or (ii) taken in a trans action known by the taker to be for the personal benefit of th e fiduciary.
-11- Testimony before the bankruptcy court reflects that while th e Mansfi elds’ loan officer at Mercantile knew of Mansfield’s status a s officer of Broadview and Broadview’s impending bankruptcy, the teller who condu cted the transaction was unaware of both these facts. The telle r testified that she di d not know Mansfield, and she was unable to identify him in the courtroom; she further testified that there was no way to tell whether the check was payable to a corporation, and that she assumed the check may have been payable to a “d/b/a type of account.” These facts are insufficient to demonstrate actual knowledge tha t Mansfield was depositing corporate funds for h is personal benefit and are thus insufficient to put Mercantile on notice of the Trustee’s claim to the funds.

To the extent the Trustee relies on what he believes to be th e current UCC provision, such reliance is misplace d. The Trustee sets forth in his bri ef the UCC provision enacted in Missouri in 1992--after th e tr ansaction at issue here --which stated 

## that a taker has notic e 7 

## of a breach of fiduciary duty where an instru ment payable to a represented person (which includes a cor poration) is “depo sited to an account other than an account of th e fi duciary, as such, or an account of the represente d person.” See Mo. Ann. Stat. § 400.3-307(a) & (b)(2) (iii) (Wes t 1994). The Missouri Legislature amended that provision in 1994, however, to delete the languag e on which the Trustee relies. See Mo. Ann. Stat. § 400.3-307(b)(2) (West 1994 & Supp. 1997). We also 8

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not e that both the current and superseded versions of section 400.3-30 7 apply o nly when the bank has “knowledge” of the presenter’s fiduciar y status; “knowledge of the [bank] is determined by the knowledge of the ‘individual conducting that transaction,’ i.e., the clerk who receives and processes the instrument.” Mo. Ann. Stat. § 400.3-307, UCC comment 2 (Wes t 1994). “Notice which does not amount to knowledge is not enough to cause section 3-307 to apply.” Id. The bank clerk’s mere notice o f Mansfield’s status as a corporate officer does not amount to “knowledge” that Mansfield owed “a fiduciary duty with respect to [the] instrument,” Mo. Ann. Stat. § 400.3-307, within the meaning of Missouri’s Unifor m Commercial Code.
C. Constructive Trust or Equitable Lien

“A con structive trust is a method by which a court exercises it s equitable powers to remedy a situation where a party has been wrongfully deprived of some right, title, benefit or intere st in property as a result of fraud or in violat ion of confidence or faith reposed in another.” Fix
v. Fix , 84 7 S.W.2d 762, 765 (Mo. 1993) (en banc) (internal quotation s omitte d). The purpose of a “constructive trust is to restore to th e rig htful owner the property wrongfully withheld by the defendant.” Id

. Under Missouri law, an equitable lien is applica ble only where there is an inadequate remedy at law and “justice would suffer without the equitable remedy.” Jorritsma v. Tymac Controls Corp. , 864 F.2d 597, 599 (8th Cir. 1988). “G enerally, equity will not intercede if there is an adequat e remedy at law.” Hammons v. Ehney , 924 S.W.2d 843, 847 (Mo. 1996) (e n banc). See Newmark v. Vogelgesang , 915 S.W.2d 337, 339 (Mo. Ct. App. 1996 ) (“Equit able relief is discretionary, extraordinary, and should not b e appli ed when an adequate legal remedy exists.” (internal quotation s omitted)).

As the Tr ustee was awarded a money judgment against the Mansfields, and there is no evidence that the Mansfields are insolvent, we conclud e that the bankruptcy court correctly declined to impose a constructive trus t or an equitable lien.

## -13- IV.
Accordingly, we affirm the judgment of the district court.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.