Court Opinion

ID: 9486450
Source: CourtListenerOpinion
Date Created: 2023-08-05 11:48:17.372146+00
Date Added: 2024-06-11T17:51:43.718814
License: Public Domain

RALPH B. GUY, Jr., Circuit Judge,
concurring in the result.
Although I concur in the result reached by the court, I would travel a different route to reach that result.
Section 544(a) of the Bankruptcy Code (11 U.S.C. § 544(a)) establishes the so-called “strong-arm” power of a trustee in bankruptcy. It
gives a bankruptcy trustee the rights and powers of a judicial lien creditor or a bona fide purchaser of real property and allows the trustee to avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by a judicial lien creditor or a bona fide purchaser of real property. This section therefore permits the trustee to bring property of the debtor into the bankruptcy estate.
In re Crabtree, 871 F.2d 36, 37 (6th Cir.1989).
This strong-arm power, however, sometimes comes in conflict with the provisions of section 541(d) of the Bankruptcy Code (11 U.S.C. § 541(d)). Section 541(d)
*1454excludes certain equitable interests from the bankruptcy estate; it provides that property in which the debtor holds only legal title and not an equitable interest (such as a mortgage) becomes property of the estate only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
Id. at 37-38.
The federal courts have differed in their resolution of the apparent conflict between section 544(a) and section 541(d). Some courts
have held ... that § 541(d) prevails over the trustee’s strong-arm powers under § 544(a). Other courts have rejected this approach, holding that sections 541(d) and 544(a) operate independently; specifically, these courts have reasoned that § 541(d) does not limit the trustee’s avoidance powers under § 544(a) but instead qualifies § 541(a), which specifies the interests of the debtor in property that comprise the bankruptcy estate.
Id. at 38 (citations omitted).
The bankruptcy trustee would have us embrace the latter position, contending that Congress did not intend the extent of the strong-arm power to be narrowed by section 541(d). He argues that to deprive the bankruptcy estate of funds that state law might find subject to a constructive trust, especially one created post-petition, would be to ignore the priorities set out in the Bankruptcy Code to the detriment of the debtor’s other unsecured creditors. See In re North American Coin & Currency, Ltd., 767 F.2d 1573 (9th Cir.1985). The trustee emphasizes that, in the instant case, Omegas commingled Data-comp’s money with over $1,600,000 of money it received from other sources. Many of these deposits were from creditors that prepaid for goods or services to be provided by Omegas. None of these other creditors were afforded special protection by the bankruptcy court.
Datacomp, however, asserts that the trustee’s powers as a judicial lien creditor are not as substantial with regard to personal property as they would be as a hypothetical bona fide purchaser of real property. See In re Mill Concepts Corp., 123 B.R. 938 (Bankr.D.Mass 1991); In re Storage Technology Corp., 55 B.R. 479, 484 (Bankr.D.Colo.1985) (“The law is clear in Colorado that, with regard to personalty, a beneficiary of a constructive trust or other equitable lien prevails over a judicial lien creditor. The law may be different with regard to realty, but for personal property the rule has remained unchanged for almost ninety years_”).
Even if, arguendo, we were to accept Da-tacomp’s characterization of the bankruptcy trustee’s powers, this would be of little help to plaintiff. Those circuits which have determined that the force of section 544(a) is overcome by a constructive trust created consistent with section 541(d) have only so held as to those trusts which came into being pre-petition. “Where state law impresses property that a debtor holds with a constructive trust in favor of another, and the trust attaches prior to the petition date, the trust beneficiary normally may recover its equitable interest in the property through bankruptcy court proceedings.” Matter of Quality Holstein Leasing, 752 F.2d 1009, 1013-14 (5th Cir.1985); see also Universal Bonding Ins. Co. v. Gittens & Sprinkle Enters., Inc., 960 F.2d 366, 372 (3d Cir.1992); In re Howard’s Appliance Corp., 874 F.2d 88, 95 (2d Cir.1989) (“[W]e need not concern ourselves with whether section 544 of the Bankruptcy Code would mandate a result contrary to the one we reach today since the constructive trust imposed here attached prior to the filing of the Chapter 11 petition.” (citation omitted)); In re N.S. Garrott & Sons, 772, F.2d 462, 467 (8th Cir.1985) (“The estate succeeds to only such title and rights in the property as the debtor had at the time the petition was filed.”).
It is well established that “[o]ne must look to state law ... to determine whether to impose a constructive trust on property within the debtor’s possession.” In re Howard’s Appliance Corp., 874 F.2d at 93; see also In re Terwilliger’s Catering Plus, Inc., 911 F.2d 1168 (6th Cir.1990). State law also defines the point at which property held by the debtor has been subjected to such a trust.
*1455There appears to be no ruling of the Kentucky Supreme Court which addresses the issue of whether a constructive trust arises at the time of the wrongdoing or at the time of the judgment imposing the trust. However, “[a] federal court applying state law is bound to adhere to decisions of the state’s intermediate appellate 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).
After the district court affirmed the decision of the bankruptcy court, the Kentucky Court of Appeals, in Commonwealth Cabinet for Human Resources v. Security of America Life Insurance Co., 834 S.W.2d 176 (Ky.Ct.App.1992), held that a lien creditor has priority over a constructive trust beneficiary, if the lien creditor’s interest attached to the property before the court created the constructive trust.1 The Security of America court concluded that “the constructive trust being a creature of equity did not come into existence until it was created by court order.” Id. at 180-81. See also Borg-Warner Acceptance Corp. v. First Nat’l Bank of Prestonsburg, 577 S.W.2d 29 (Ky.App.1979).
Accordingly, the most authoritative expression of Kentucky law provides that a constructive trust only comes into being at the time of its judicial creation. Therefore, at the time of debtor’s bankruptcy filing, Data-comp did not have an equitable interest in the deposits it paid to Omegas. As this was so, the bankruptcy trustee’s section 544(a) strong-arm power could not have been compromised by the operation of a post-petition constructive trust. The trust created by the bankruptcy court in the case at bar must be dissolved and the funds contained within committed to Omegas’ bankruptcy estate.

. Datacomp contends that we need not follow Security of America because there are earlier cases which arguably reach an inconsistent result. However, I believe that under the factual circumstances presented here the most recent pronouncement of the Kentucky Court of Appeals is the one we should apply. The cases relied upon by Datacomp are distinguishable.