Court Opinion

ID: 3046931
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:20:13.026275+00
Date Added: 2024-06-11T11:49:11.536320
License: Public Domain

United States Bankruptcy Appellate Panel
                         FOR THE EIGHTH CIRCUIT

                                 _______________

                                   No. 09-6010
                                 _______________

In re: Rodney N. Farr,                    *
                                          *
      Debtor                              *
                                          *
Michael S. Dietz, Trustee,                *   Appeal from the United States
                                          *   Bankruptcy Court for the
      Plaintiff - Appellant               *   District of Minnesota
                                          *
             v.                           *
                                          *
Ronald Langlie,                           *
                                          *
      Defendant - Appellee                *

                                 _______________

                              Submitted: May 13, 2009
                                Filed: June 8, 2009
                                 _______________

Before SCHERMER, FEDERMAN, and SALADINO, Bankruptcy Judges

FEDERMAN, Bankruptcy Judge

        Plaintiff Michael S. Dietz, the Chapter 7 Trustee in Debtor Rodney N. Farr’s
bankruptcy case, appeals from the Bankruptcy Court’s judgment determining that
funds previously held in the Debtor’s bank account were held subject to a constructive
trust in favor of Defendant Ronald Langlie. Plaintiff contends that such funds were
an asset of the Debtor and that the pre-bankruptcy payment of such funds to Langlie
was a preferential or fraudulent transfer. For the reasons that follow, we reverse.
                               FACTUAL BACKGROUND

       The Debtor and Langlie have been friends since childhood. For approximately
twenty-five years prior to the filing of his bankruptcy case, the Debtor was in the
business of general construction contracting for residential housing. Langlie was a
successful business owner. In September 2005, the Debtor and Langlie entered into
a written contract whereby Langlie loaned money to the Debtor for the purpose of
building a spec house for their mutual profit. Pursuant to the contract, the Debtor
periodically assembled proof of his out-of-pocket costs for construction of the house
and submitted written requests for advances from Langlie. Langlie would review the
requests and then fund the draws by placing a phone call to the president of United
Prairie Bank, Patrick Segler, directing Segler to transfer funds available to Langlie
into the Debtor’s checking account at United Prairie Bank.

       On April 10, 2006, the Debtor made the eighth of twelve draw requests under
the spec house contract. This was a written draw request to Langlie in the amount of
$23,195, to which the Debtor attached the customary back-up documentation of his
costs. That same date, April 10, Langlie called Segler to direct him to make a deposit
into the Debtor’s checking account. Segler did not personally answer Langlie’s phone
call that day; instead, Langlie left a message on Segler’s voicemail at work, directing
him to make the transfer. Upon hearing the voice message, on April 10, 2006, Segler
transferred $123,195, rather than $23,195, from Langlie’s line of credit to the Debtor’s
checking account. In other words, Segler transferred $100,000 more than had been
requested by the Debtor in the written draw request. The Bankruptcy Court found that
the transfer of the extra $100,000 was a mistake.1

      According to the Debtor and Langlie, neither of them reviewed their banking
statements between April 10, 2006, and mid-October 2006, and so neither of them

       1
         As discussed below, the Trustee asserts that the transfer of the additional money was
not a mistake and that the Bankruptcy Court erred in so holding.

                                               2
noticed the discrepancy during that six-month period. On October 6, 2006, the Debtor
consulted with an attorney for the purpose of filing a Chapter 7 case. On October 16,
2006, as he was preparing for the bankruptcy filing, the Debtor finally reviewed his
bank statements and discovered that the balance in his account was approximately
$90,000 more than he thought it should be. He contacted the Bank to inquire about
the discrepancy, and the Bank traced the excess back to the April 10 transaction. At
that point, Segler and the Debtor agreed for Segler to debit the Debtor’s checking
account for $90,000 and credit that amount to Langlie’s line of credit. At some point
thereafter, Segler or the Debtor informed Langlie of the situation.

       Approximately three weeks later, the Debtor filed his Chapter 7 petition. He
did not disclose the $90,000 transfer to Langlie on his schedules, nor did he list
Langlie as a creditor, even though he purportedly still owed Langlie for the additional
$10,000 that had been transferred to the Debtor’s account in April. The Debtor also
failed to disclose the transaction at his § 341 meeting of creditors. After the Chapter
7 Trustee discovered the undisclosed transfer, he filed this adversary proceeding
against Langlie seeking to recover the $90,000 as either a preferential or fraudulent
transfer. In April 2008, the parties filed cross motions for summary judgment and the
Bankruptcy Court took the motions under advisement on about April 29, 2008.

       On January 6, 2009, the Bankruptcy Court orally announced its findings and
conclusions on the motions for summary judgment. In sum, the Bankruptcy Court
found in favor of Langlie by imposing a retroactive constructive trust on the funds
transferred to Langlie by the Debtor. The Court concluded that, because the Debtor
had held the money in his account in constructive trust for Langlie from April 10
through October 16, 2006, the withdrawal of the $90,000 from the Debtor’s account,
and the crediting of that sum to Langlie’s account, was not a transfer of an interest of
the Debtor in property. Since the Court held that the funds transferred to Langlie
were never property of the Debtor, such transfer could not be preferential or
fraudulent under §§ 547 or 548 of the Bankruptcy Code. The same day that its

                                           3
findings were announced, the Bankruptcy Court entered an Order denying the
Trustee’s motion for summary judgment, and entered Judgment in favor of Langlie.
The Trustee appeals.

                                       STANDARD OF REVIEW

       We review findings of fact for clear error, and legal conclusions de novo. We
review a court’s grant of summary judgment de novo.2 “We will affirm [a court’s]
grant of summary judgment ‘if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with affidavits . . . ,’ demonstrate that no genuine
issue of material fact exists and the moving party is entitled to judgment as a matter
of law.”3

        2
            In re MJK Clearing, Inc., 371 F.3d 397, 401 (8th Cir. 2004) (citation omitted).
        3
            Id.; Fed. R. Civ. P. 56(c), made applicable in bankruptcy cases by Fed. R. Bankr. P.
7056.

                                                   4
                                        DISCUSSION

                        Minnesota Standard for Constructive Trust

       The Trustee’s Complaint seeks to avoid the $90,000 transfer as a preferential
or fraudulent transfer under § 547 and § 548, respectively, both of which contemplate
as a threshold matter that the Debtor made a “transfer of an interest of the debtor in
property.”4 The Bankruptcy Court did not reach any of the other elements under § 547
or § 548 because, as stated above, it determined that the $90,000 transfer had not been
a “transfer of an interest of the debtor in property” since the Debtor held the $90,000
in constructive trust for Langlie. Essentially, the Bankruptcy Court determined that
the Debtor simply returned to Langlie what belonged to Langlie.

      The Bankruptcy Court’s decision turns first on the question of whether, under
Minnesota law,5 a mistake can form the basis for imposing a constructive trust, or
whether the concept requires something more than a mistake, such as wrongful
conduct on the part of the person against whom the trust is sought. The Bankruptcy
Court determined that a mistake is sufficient to impose a constructive trust. In so
holding, the Court disagreed with the analysis in In re Graphics Technology, Inc.,
which stated:

       Under Minnesota law, a court may impose a constructive trust only when
       there is clear and convincing evidence that a constructive trust is
       necessary to prevent unjust enrichment and whenever legal title to
       property is obtained through fraud, oppression, duress, undue influence,
       force, crime, or similar means, or by taking improper advantage of a
       confidential or fiduciary relationship. In re Estate of Eriksen, 337

       4
           11 U.S.C. §§ 547(b) and 548(a).
       5
          As the Bankruptcy Court pointed out, state law governs the resolution of property
rights within a bankruptcy proceeding and, therefore, Minnesota law governs this case. In re
MJK Clearing, 371 F.3d at 401.

                                               5
N.W.2d 671, 674 (Minn. 1983) (citing Knox v. Knox, 222 Minn. 477, 25
N.W.2d 225, 228 (1946)); Bly v. Gensmer, 386 N.W.2d 767, 769 (Minn.
       App.1986). Unjust enrichment occurs when a claim is based on the
       failure of consideration, fraud, mistake, and in other situations where it
       would be morally wrong for one party to enrich himself at the expense
       of another. Cady v. Bush, 283 Minn. 105, 166 N.W.2d 358, 361-362
       (1969). To show unjust enrichment, however, more is required than a
       mere benefit to one party – “it must be shown that a party was unjustly
       enriched in the sense that the term unjustly could mean illegally or
       unlawfully.” Schumacher v. Schumacher, 627 N.W.2d 725, 729 (Minn.
       App.2001) (quoting First Nat'l Bank of St. Paul v. Ramier, 311 N.W.2d
502, 504 (Minn.1981)).6

The Graphics Technology panel held that, because there had been no clear and
convincing evidence that the debtor in that case obtained the disputed funds “through
fraud, oppression, duress, undue influence, force, crime, or similar means, or by taking
improper advantage of a confidential or fiduciary relationship,” the debtor “was not
unjustly enriched in the sense that it acted unlawfully or illegally.”7

      The Bankruptcy Court held that the foregoing analysis is contrary to Minnesota
law because it requires some element of wrongdoing before a constructive trust will
be imposed. We disagree with the Bankruptcy Court’s analysis of Minnesota law.

      As the Bankruptcy Court did, we start with the Minnesota Supreme Court’s
decision in Henderson v. Murray,8 which held:

       [W]here a party obtains the legal title to land by fraud or bad faith, or by
       taking advantage of confidential or fiduciary relations, or in any other

       6
         Ramette v. Digital River, Inc. (In re Graphics Technology, Inc.), 306 B.R. 630, 636-37
(B.A.P. 8th Cir. 2004), aff’d 113 Fed. Appx. 734 (8th Cir. 2004).
       7
           Id. at 637.
       8
           121 N.W. 214 (Minn. 1909).

                                               6
       unconscientious manner, so that he cannot justly retain the property,
       equity will impress a constructive trust upon it in favor of the party who
       is equitably entitled to it. Such trusts for convenience are termed ex
       maleficio or ex delicto, and are practically without limit.9

This language certainly contemplates some wrongdoing on the party in possession of
the property before a constructive trust will be imposed. However, some later
Minnesota cases, relied upon by the Bankruptcy Court here, have used language
which has blurred Henderson v. Murray’s otherwise clear message.

        For example, in Knox v. Knox, the Minnesota Supreme Court said that “fraud,
in its true sense, need not even be present,” and that “it is not even necessary that a
fiduciary relation should exist” for a constructive trust to be imposed.10 Further:

       The nature of a constructive trust can best be comprehended by keeping
       clearly in mind that it is not, in its true sense, a trust at all, but purely a
       creation of equity designed to provide a remedy for the prevention of
       unjust enrichment where a person holding property is under a duty to
       convey it to another to whom it justly belongs. A court of equity, in
       decreeing a constructive trust, is bound by no unyielding formula, but is
       free to effect justice according to the equities peculiar to each transaction
       wherever a failure to perform a duty to convey would result in unjust
       enrichment. . . . Where a person holding title to property is subject to an
       equitable duty to convey it to another on the ground that he would be
       unjustly enriched if he were permitted to retain it, a constructive trust
       arises.11
In Thompson v. Nesheim, the Minnesota Supreme Court held that a specific agreement
to reconvey the property to the rightful owner is not necessary, reiterating that “[a]

       9
           Id. at 216 (citation omitted). “Ex maleficio” is defined as “[b]y malfeasance” or
“[t]ortious.” “Ex delicto” is defined as “[a]rising from a crime or tort.” Black’s Law Dictionary
(8th ed. 2004). Both contemplate wrongdoing.
       10
            25 N.W.2d 225, 228 (Minn. 1946).
       11
            Id. (citations and internal quotation marks omitted).

                                                  7
court of equity, in decreeing a constructive trust, is bound by no unyielding formula,
but is free to effect justice according to the equities peculiar to each transaction
wherever a failure to perform a duty to convey would result in unjust enrichment.”12
In Iverson v. Fjoslien, the Minnesota Supreme Court repeated that “a constructive
trust is an equitable remedy and that no unyielding formula is required to create such
a trust. A court of equity may do so wherever unjust enrichment would otherwise
result.”13 And, in 1983, the Minnesota Supreme Court said in In re Estate of Eriksen,
that “fraud need not be present in order to impose a constructive trust.” Rather, “[t]he
court must only be persuaded by clear and convincing evidence that the imposition of
a constructive trust is justified to prevent unjust enrichment.”14

       Relying on the language in these cases, the Bankruptcy Court concluded that
a constructive trust may be imposed to remedy a simple mistake. However, despite
the broad language in these cases, and the Minnesota Supreme Court’s pronouncement
that “fraud in its true sense” and “fiduciary relation”need not be present,15 in none of
those cases on which the Bankruptcy Court relied did the Supreme Court actually
impose a constructive trust based on a mere mistake. Rather, in these cases, the
Supreme Court only imposed constructive trusts in situations where there was indeed
some wrongdoing or a breach of a fiduciary or confidential relationship, or where the
disputed property was agreed by the parties to be jointly owned despite the title.

       Specifically, in Knox v. Knox, on the advice of counsel, a husband had
conveyed his interest in real estate to his wife, with the verbal understanding that the
actual ownership should nevertheless remain with him. The wife thereafter refused
to honor the oral agreement. Despite its pronunciation that it was “not . . . necessary

      12
           159 N.W.2d 910, 916 (Minn. 1968).
      13
           213 N.W.2d 627, 628-29 (Minn. 1973).
      14
           337 N.W.2d 671, 674 (Minn. 1983).
      15
           Knox v. Knox, 25 N.W.2d at 228.

                                               8
that a fiduciary relation should exist,” the Minnesota Supreme Court affirmed the trial
court’s imposition of a constructive trust on the basis that the wife had, in fact,
betrayed her confidential and fiduciary duty to him.16 In Thompson v. Nesheim, the
husband transferred property to his second wife in an attempt to shield it from his first
wife, with the promise from the second wife that they shared the property fifty-fifty.
However, when the second wife died, her will left the husband only a life estate in half
of their property, with no remainder interest for his children. Again, based on the
breach of the wife’s agreement with her husband, the violation of their confidential
relationship, and unjust enrichment, the Minnesota Supreme Court held that the
imposition of a constructive trust on half of the property was appropriate.17

       Iverson v. Fjoslien involved an action to set aside a lease on land. The
defendants in that case wanted to acquire, from the Federal government, title to a lot
for hunting purposes. Federal policy gave a preference to adjoining landowners,
which they were not, so they instead paid for certain adjoining landowners who did
have a preference to obtain title. Since those adjoining landowners were minors, the
defendants obtained the title in the name of their father, as guardian. After being
allowed by the father to hunt there for twenty-five years, and after the minors reached
majority, they refused to sign a lease allowing the defendants to continue to hunt on
the property, and filed suit to set aside the lease their father had entered. The
defendants sought the imposition of a constructive trust. After setting out the general
statement cited by the Bankruptcy Court here, the Minnesota Supreme Court affirmed
the trial court’s judgment denying imposition of a constructive trust, holding that
there had been no unjust enrichment:

       16
           Indeed, in discussing the statute of limitations in that case, the Supreme Court also
said that “[t]here can be no constructive trust until we have as its basis an adverse and
inequitable witholding [sic] of property.” 25 N.W.2d at 231.
       17
159 N.W.2d at 918-19.

                                                 9
      While plaintiffs undoubtedly benefited [sic] by the efforts of the
      defendants to acquire Lot 1 in their names, it has not been shown that
      plaintiffs were unjustly enriched in the sense that the term ‘unjustly’
      could mean illegally or unlawfully. Moreover, there is no allegation by
      defendants, nor is there evidence in the record, of fraud, violation of a
      confidential or a fiduciary relationship, or breach of any duty or
      agreement by plaintiffs on which the imposition of a constructive trust
      for the benefit of defendants could be based.18

In other words, even though the plaintiffs benefitted from acquiring property paid for
by the defendants (as the Debtor here benefitted from the April 2006 transfer), since
the defendants failed to show some illegal or unlawful act, or fraud, violation of
confidential or fiduciary relationship, or breach of duty on the part of the plaintiffs,
no constructive trust would be imposed.

       In Eriksen, an unmarried couple bought a house together, but titled it in only
the man’s name because the woman had not yet obtained a divorce from her husband
and because it would have caused her to lose governmental assistance benefits. When
the man died, the court imposed a constructive trust on half of the house for the
benefit of the woman because she had contributed equally to the acquisition and
maintenance of the home, and because the parties had agreed to joint ownership.
Thus, the Court held, failure to award her one-half interest in the home would result
in unjust enrichment to the man’s probate estate.19

      Although Eriksen did not involve an allegation of fraud or misconduct, it
similarly did not involve any mistake, and at least one Minnesota appellate court has
declined to apply Eriksen in the case of a mistake. In Lee v. Lake Area Bank,20 the
owner of a certificate of deposit signed a handwritten statement stating that she

      18
           213 N.W.2d 627 (citation omitted).
      19
337 N.W.2d at 674.
      20
           2000 WL 1376440 (Minn. App. Sept. 26, 2000) (unpublished opinion).

                                                10
wanted to change the payable-on-death beneficiary designation on the CD. A bank
employee mistakenly advised the owner’s attorney that she could make that change
by having the attorney write a letter to that effect on her behalf, which the attorney
did. When the intended beneficiaries attempted to cash in the CD after the owner
died, the bank refused to pay them because the change in beneficiary was invalid
under Minnesota law since the attorney’s letter was not the owner’s writing, and the
document that had been in her handwriting had not been received by the bank prior
to her death. The intended beneficiaries sued the bank and the named beneficiaries,
arguing, inter alia, that the court should impose a constructive trust on the CD due to
the mistake. The court rejected that argument. After repeating the often-quoted
language regarding the standard for constructive trusts from Knox and Eriksen, among
other cases, the Court of Appeals held that none of the Minnesota precedent, including
the seminal Henderson v. Murray case, stood for the proposition that “mistake” forms
the basis for a constructive trust:

      Citing Wilson v. Skogerboe, 379 N.W.2d 696, 699 (Minn. App. 1986),
      the [intended beneficiaries] argue that Minnesota courts have
      acknowledged that unjust enrichment can occur when, by mistake, a
      party obtains property to which the party is not entitled. But Skogerboe
      did not involve unjust enrichment through mistake. Although the
      Skogerboe court cited Henderson v. Murray, 108 Minn. 76, 79, 121
N.W. 214, 216 (1909), for this proposition, Henderson also did not
      involve a mistake, and the Henderson court did not refer to “mistake” as
      a basis for finding unjust enrichment but rather “fraud or bad faith, or by
      taking advantage of confidential or fiduciary relations, or in any other
      unconscientious manner,” so that the property could not justly be
      retained. Henderson, 108 Minn. at 79, 121 N.W. at 215. The [intended
      beneficiaries] also rely on Rollins v. Mitchell, 52 Minn. 41, 53 N.W.
1020 (1892). But Rollins involved a false representation or fraudulent
      promise, not mistake, and is therefore inapplicable as well. Id. at 49, 523
      N.W. at 1021. We conclude that the [intended beneficiaries] have failed

                                          11
       to show that a mistake is sufficient to support the finding of unjust
       enrichment necessary for the imposition of a constructive trust.21

The Court of Appeals further rejected the argument that Eriksen helped the
beneficiaries’ position because that case had been premised on the notion that both
parties had contributed to a home, even though it had been titled in one of their names,
and it would be unjust to deprive one of the parties of her interest. In Lee, none of the
individuals involved in the litigation contributed to the CD, and so the Court of
Appeals declined to impose a constructive trust. Although, perhaps in some contrast
to Lee, the funds here were Langlie’s prior to the transfer, Lee still stands for the
proposition that mistake does not support the imposition of a constructive trust.

      Further, while we recognize that decisions from the Minnesota Court of
Appeals are not binding, they do provide persuasive authority,22 and those courts have,
on more than one occasion, expressly held that a finding of unjust enrichment requires
some sort of wrongful conduct under Minnesota law.23 Even in a case relied upon by

       21
            Id. at *2 (emphasis added).
       22
          Lancaster v. Am. and Foreign Ins. Co., 272 F.3d 1059, 1062 (8th Cir. 2001). Similarly,
unpublished decisions in Minnesota, such as Lee, are not precedential, but are persuasive
authority. See Minn. Stat. § 480A.08, subd. 3(c) (2006); Donnelly Bros. Constr. Co. v. State
Auto Property and Casualty Ins. Co., 759 N.W.2d 651, 659 (Minn. App. 2009).
       23
          See, e.g., Olson v. Bird, 2006 WL 2601684 at *4 (Minn. App. 2006) (unpublished
opinion) (stating that, to prove a claim of unjust enrichment, “[a] claimant must also show that a
party was unjustly enriched in the sense that the term ‘unjustly’ could mean illegally or
unlawfully, or that a party’s conduct was unconscionable by reason of a bad motive,” and
holding that a woman who cohabitated with a farm-owner, and worked on the farm for years,
was not entitled to a claim for unjust enrichment because she did not prove any of these
elements, or that the parties had agreed to a co-ownership interest) (citations and internal
quotation marks omitted); Erickson Plus Ltd. v. Ventura, 2002 WL 31867733 at *4 (Minn. App.
Dec. 24, 2002) (unpublished opinion) (“[U]njust enrichment claims do not exist merely because
one party benefits from another’s effort or obligation. Instead, unjust enrichment requires that a
party benefit in an illegal or unlawful manner or that morally wrong behavior led to the party’s
enrichment at the expense of another.”) (emphasis added); Custom Design Studio v. Chloe, Inc.,
584 N.W.2d 430 (Minn. App. 1998) (reversing the trial court’s judgment for unjust enrichment

                                                12
the Bankruptcy Court, Gateway Cos. v. Brevik,24 which held that a cause of action for
unjust enrichment “can be maintained whenever one man has received or obtained the
possession of the money of another, which he ought in equity and good conscience to
pay over” and disagreeing with the defendant’s argument that “illegal or unlawful
conduct” was required, the Court of Appeals held that the defendant had been unjustly
enriched because he knowingly used the plaintiff’s computer equipment for four years
in his law practice without paying for it, at the plaintiff’s expense.25 Although the
plaintiff’s conduct had not been “illegal or unlawful,” the facts on which unjust
enrichment were found certainly contemplated some “wrongful” conduct amounting
to more than a mere mistake.

       The conclusion that something more than mistake is required finds further
support in the Minnesota Supreme Court’s decision in First National Bank of St. Paul
v. Ramier.26 In that case, the plaintiff-bank entered into an unsecured “swing loan”
agreement for $50,000 with one Ronald Rohloff for the purchase of a new home while
Rohloff attempted to sell his prior home. After Rohloff died, the bank sought
recovery from Rohloff’s widow, arguing that she had been unjustly enriched by the
retention of the loan proceeds and that the bank was entitled to a constructive trust.
In rejecting that argument, the Minnesota Supreme Court, citing Iverson v. Fjoslien,
held that “unjust enrichment claims do not lie simply because one party benefits from

and holding that, because the record contained no evidence of “any fraudulent or illegal acts” by
the defendant, the plaintiff could not sustain an action for unjust enrichment); American
Compensation Ins. Co. v. Blue Cross Blue Shield of Minnesota, 2001 WL 69480 at *4 (Minn.
App. Jan. 30, 2001) (unpublished opinion) (“To sustain an action for unjust enrichment, a
plaintiff must provide evidence of fraudulent or illegal acts by the defendants.”).
       24
            2005 WL 1154278 at *3 (Minn. App. May 17, 2005) (unpublished opinion).
       25
          Id. (quoting Klass v. Twin Cities Fed. Sav. & Loan Ass’n., 190 N.W.2d 493, 494-95
(1971) (rejecting the proposition that there can be no recovery on the principle of unjust
enrichment without a showing of fraud or mistake)).
       26
            311 N.W.2d 502 (Minn. 1981).

                                               13
the efforts or obligations of others, but instead it must be shown that a party was
unjustly enriched in the sense that the term ‘unjustly’ could mean illegally or
unlawfully.”27 Noting that the bank could have protected itself by obtaining security
for the loan or the wife’s signature, the Supreme Court declined to impose a
constructive trust.28 It is significant that the dissent in Ramier said, as the Bankruptcy
Court does here, that improper conduct is not a prerequisite for the imposition of a
constructive trust in Minnesota.29 While the dissent is some evidence that the issue
may not be crystal clear in Minnesota, the majority did not so hold.

       Based on the foregoing discussion of Minnesota law, we disagree with the
Bankruptcy Court’s holding that a mistake is sufficient for the imposition of a
constructive trust and its conclusion that the Graphics Technology decision is “simply
wrong.” The Eighth Circuit affirmed the Graphics Technology decision, expressly
concluding that the panel in that case “properly analyzed the issues and properly
applied Minnesota law.”30 Moreover, in In re MJK Clearing, Inc., the Eighth Circuit
held, as did the Graphics Technology panel, that, under Minnesota law (namely,
Henderson v. Murray), a party seeking to impose a constructive trust must prove that
the party holding the disputed property obtained such property “by fraud, by bad faith,
or by other improper means.”31 While we are of course bound by Eighth Circuit
decisions, we also conclude that MJK Clearing and Graphics Technology are well-
supported by Minnesota law. As a result, the Bankruptcy Court erred in holding to
the contrary.

       27
            Id. at 504.
       28
          Id. As discussed more fully below, Langlie could very easily have protected himself
from this problem as well.
       29
            Id.
       30
            In re Graphics Technologies, Inc., 113 Fed. Appx. 734, 736 (8th Cir. 2004).
       31
            371 F.3d 397, 401 (8th Cir. 2004).

                                                 14
                     Preferential Transfer Under 11 U.S.C. § 547(b)

       Having concluded that the Bankruptcy Court erred in imposing a constructive
trust based on mistake, it follows that the Debtor had legal title to the $90,000 when
it was in his account and that his transfer of that money to Langlie was, therefore, a
“transfer of an interest of the debtor in property.” Section 547(b) permits the Trustee
to avoid such a transfer if it is –

      (1) to or for the benefit of a creditor;

      (2) for or on account of an antecedent debt owed by the debtor before
      such transfer was made;

      (3) made while the debtor was insolvent;

      (4) made –

               (A) on or within 90 days before the date of the filing of the
               petition; or

               (B) between ninety days and one year before the date of the filing
               of the petition, if such creditor at the time of such transfer was an
               insider; and

      (5) that enables such creditor to receive more than such creditor would
      receive if –

               (A) the case were a case under chapter 7 of this title;

               (B) the transfer had not been made; and

               (C) such creditor received payment of such debt to the extent
               provided by the provisions of this title.32

      32
           11 U.S.C. § 547(b).

                                            15
In viewing Langlie’s summary judgment pleadings, all of his defenses to these
elements were based on the underlying premise that the $90,000 was not the Debtor’s
property. Specifically, he asserted that there was no “transfer” because the Debtor did
not have a “legal interest” in the money, and that it was not a transfer of “an interest
of the debtor in property” because, although the Debtor had legal title, he had no
equitable interest in it. However, without the imposition of a constructive trust, the
Debtor did have legal title to the money in his bank account. As a result, those
defenses fail.

       Langlie also asserted that the transfer was not “to or for the benefit of a creditor
on an antecedent debt” because Langlie was not a creditor, nor was there a debt,
pointing to the fact that the Debtor did not list Langlie as a creditor on his schedules.33
The term “creditor” means an “entity that has a claim against the debtor that arose at
the time of or before the order for relief concerning the debtor.”34 The term “debt” is
simply defined as a “liability on a claim,”35 and the term “claim” means “right to
payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured,
or unsecured.”36 Absent the imposition of the constructive trust, at the time of the
$90,000 transfer, Langlie had a claim against the Debtor for the return of the
mistakenly-transferred money and was, therefore, a creditor of the Debtor. Further,
the $90,000 payment was to Langlie, as a creditor, on a debt that arose before the
transfer was made – i.e., an antecedent debt. Similarly, Langlie’s assertion that he did

       33
           As the Bankruptcy Court pointed out, the fact that the Debtor failed to list Langlie as a
creditor has no bearing on whether he was, in fact, a creditor.
       34
            11 U.S.C. § 101(10)(A).
       35
            11 U.S.C. § 101(12).
       36
            11 U.S.C. § 101(5)(A).

                                                16
not receive more than he would have in a Chapter 7 liquidation, based again on the
fact that he was not a creditor, must fail for the same reasons.

       Finally, no one disputes that the $90,000 transfer was made within ninety days
before the bankruptcy case was filed, or that the Debtor was insolvent at that time. As
a result, the record supports a finding that, absent the constructive trust, the Trustee
met his burden of proving each of the elements for avoidance under § 547(b). Hence,
no remand is necessary for the Bankruptcy Court to make further findings.

                             Other Issues Raised by the Trustee

       The Trustee raised several additional arguments on appeal. For example, he
asserts that the Bankruptcy Court erred in finding that the April 10, 2006 transfer was,
in fact, a mistake.37 He also contends that the Bankruptcy Court erred in imposing the
constructive trust because the weighing of equities favors the Trustee, and not Langlie,
particularly since Langlie failed to review his bank statements for a full six months.38
Third, the Trustee contends that the Bankruptcy Court erred in imposing the trust

       37
          In finding that the transfer was a mistake, the Bankruptcy Court initially observed that
it was uncontroverted that the transfer was a mistake. To the contrary, that purported fact was
controverted, which the Bankruptcy Court acknowledged when it considered the Trustee’s
motion to alter or amend the findings. Consequently, the Bankruptcy Court concluded that there
was no evidence in the record to support any finding other than that the April 10 transfer had
been a mistake. The Trustee asserts this was error.
       38
           The imposition of a constructive trust is an extraordinary, equitable remedy. “As with
other equitable remedies, the [party seeking a constructive trust] must act with diligence, but this
diligence requires no more than that he shall act with reasonable promptness when he has
acquired either actual or imputed knowledge of a wrongful witholding. Knowledge will be
imputed to the plaintiff when, by the exercise of reasonable care, he should have known of the
circumstances revealing [the] defendant’s adverse and inequitable role.” Knox v. Knox, 25
N.W.2d at 232. In essence, although the Bankruptcy Court found Langlie’s testimony that he
had not looked at the statements for six months to be credible, the Bankruptcy Court actually
made no express finding that Langlie’s lack of diligence during that six month period amounted
to reasonable care.

                                                 17
retroactively and against a party who is no longer in possession of the trust res.39
However, because we conclude that the Bankruptcy Court erred in imposing the
constructive trust based on mistake, we need not decide those additional points here.

                                       CONCLUSION

       Because we conclude that mistake is an insufficient basis for imposition of a
constructive trust under Minnesota law and Eighth Circuit precedent, the Bankruptcy
Court’s Judgment is reversed. The case is remanded to the Bankruptcy Court with
directions to enter judgment in favor of the Plaintiff in the amount of $90,000.

      39
           Citing In re MJK Clearing, Inc., 371 F.3d at 401-02.

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