Court Opinion

ID: 9458854
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:03:24.779878+00
Date Added: 2024-06-11T17:35:54.264122
License: Public Domain

BARNES, Circuit Judge,
dissenting:
I dissent, and would affirm the District Court. The facts are undisputed. The trial court found, applying California law:
“III. The Court concludes from the facts as found herein, applying California law to the question in issue:
A. That the bankrupt breached her trust and fiduciary duty as administratrix of the decedent’s estate when in March and early April of 1963, prior to her bankruptcy, she used the cash sum of $12,000, out of a total cash sum of approximately $25,000 in her hands at that time, to purchase the subject state liquor license for her own personal business use and thereby failed to pay over to the decedent’s estate out of said cash sum her personal debt to the estate which was then due, owing and payable in the like amount of approximately $25,000 and which sum she then held in hand and could have paid to the estate; and
B. That, upon the facts and law, justice and equity compel the Court to recognize that the subject liquor license was held by the bankrupt, at the time of bankruptcy, as a trustee ex maleficio for the decedent’s estate as cestui que trust, that said license was accordingly not an asset belonging to the bankrupt nor subject to administration in these bankruptcy proceedings, and that the involuntary and constructive trust for the benefit of the decedent’s estate should now be enforced against and to the extent of the proceeds from the sale of said license now remaining in the hands of the bankruptcy Trustee. California Civil Code §§ 1573 and 2224; California Probate Code, § 920. Estate of Walker, 125 Cal. 242, 57 P. 991 (1899); In re Loheide’s Estate, 17 Cal.App. 475, 120 P. 56 (1911). Cf. In re Newcomb Interests, Inc., 171 F.Supp. 704 (N.D.Calif.1959), affirmed, sub nom. Huffman v. Farros, 275 F.2d 350 (9th Cir. 1960).”
This case is controlled, as the government urges not by tax law, nor bankruptcy law, but the California law of constructive trusts.
Section 2224 of the California Civil Code states:
“ * * -x- One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, is, unless he has some other and better right thereto, an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it.” [Emphasis added.]
*1252The applicability of this equitable rule to the present case is clear upon its face. The bankrupt-administratrix violated “a trust” (Estate of Walker, 125 Cal. 242, 57 P. 991 (1899)) and thereby gained “a thing (the liquor license) which otherwise” (if she had performed her fiduciary duty and paid over the $25,000 toward discharge of her debt) the estate would “have had” (to the extent of the $12,000 paid for the license). She therefore must be held, as the district court held, to be the constructive trustee of the license for the benefit of the estate, and her trustee in bankruptcy (appellant here) has no “better right thereto.”
The language of In re Loheide, 17 Cal.App. 475, 120 P. 56 (1911), is here applicable:
“The only excuse tendered in the case here is that he [the administrator] would have had to sacrifice his private business in paying the note. But his primary duty was to the trust he had assumed. He was not authorized to show favor to himself as a debtor to the estate greater than to any other person. He had no right to use the credit of the estate to promote his personal gain or to maintain a business which might suffer if he drew out of his capital enough to pay what he owed the estate.” [Emphasis added] Id. at 483, 120 P. p. 59.
See also California Civil Code, § 1573, and Cardozo v. Bank of America, 116 Cal.App.2d 833, 254 P.2d 949 (1953), where constructive fraud by an innocent executrix rendered her liable, (p. 837 et seq., 254 P.2d 949)
See also Elliott v. Bumb, 356 F.2d 749 (9 Cir. 1966), where this Court held the constructive trust funds, “in existence and clearly identifiable”, were part of the estate — while commingled funds were not. In Elliott, the matter was remanded to trace the sources of the commingled funds; here the tracing was an accomplished fact in the lower court, as found by the trial judge. Such finding is not clearly erroneous as a matter of law or fact.