KSB

Judge Berger

11-06154 Rajala, Chapter 7 Trustee v. US Bank (Doc. # 25)

Rajala, Chapter 7 Trustee v. US Bank, 11-06154 (Bankr. D. Kan. Dec. 18, 2012) Doc. # 25

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The relief described hereinbelow is SO ORDERED.
SIGNED this 18th day of December, 2012.

 


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re: Case No. 10-20388-7

TERRY LEE CHRISTENSON and

CARMELLA MARTHA O’DWYER-CHRISTENSON,
Debtors.

ERIC C. RAJALA, CHAPTER 7 TRUSTEE,
Plaintiff,

v. Adv. No. 11-06154
US BANK,
Defendant.

MEMORANDUM OPINION AND ORDER
GRANTING DEFENDANT’S CROSS MOTION FOR SUMMARY JUDGMENT
AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT


Plaintiff Eric C. Rajala, Chapter 7 Trustee, and defendant US Bank both seek summary

judgment in this proceeding to determine whether the debtor’s return of the cash advance on

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February 2, 2010, is avoidable under 11 U.S.C. § 547(b). Plaintiff’s motion is denied.
Defendant’s motion is granted. This adversary proceeding is core and the Court has
jurisdiction.1

Findings of Fact

The material facts are not disputed. On January 15, 2010, Carmella O’Dwyer-
Christenson (Christenson or debtor) took a cash advance of $8,000 on her US Bank Visa card.
The cash advance was in the form of a check written to herself. Christenson took the cash
advance “out of desperation” because she could not pay all of her expenses. Christenson
admitted that she “felt like it was stealing” to take the funds. She attempted to correct this lapse
of judgment by returning the money to US Bank 18 days later. There is no indication
Christenson used the money to pay any other creditors or for any other purpose while it was in
her possession. On February 22, 2010, debtor filed her Chapter 7 bankruptcy petition. On May
18, 2011, trustee Eric C. Rajala initiated this adversary proceeding to avoid the transfer to US
Bank under 11 U.S.C. § 547(b).

Conclusions of Law

A. Summary Judgment Standard
Summary Judgment is appropriate if the moving party demonstrates there is no genuine
issue as to any material fact, and he is entitled to judgment as a matter of law.2 Cross-motions
for summary judgment allow the court to assume the only evidence to be considered has been
submitted with the pleadings. However, cross-motions are to be considered independently, and

1 28 U.S.C. § 157; 28 U.S.C. § 1334.
2 FED. R. BANKR. P. 7056.


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summary judgment is not appropriate if disputes remain as to any material fact.3 Summary
judgment is designed to secure the just, speedy, and inexpensive determination of an action.4

B. Preferential Transfer
Prepetition payments are avoidable as preferential transfers under 11 U.S.C. § 547(b) if:

(1) they are of an interest of the debtor in property; (2) they are to or for the benefit of a creditor;
(3) they are made for or on account of an antecedent debt owed by the debtor before such
transfer was made; (4) they are made while the debtor was insolvent; (5) they are made on or
within 90 days before the date of the filing of the petition; and (6) they allow such creditor to
receive more than such creditor would otherwise receive in a chapter 7 liquidation proceeding.5
The trustee bears the burden of proving the avoidability of a transfer under § 547(b).6 If the
trustee succeeds, he may recover the transferred property for the benefit of the estate.7
The only issue in this case is whether the transfer was of an interest of the debtor in
property. The Bankruptcy Code does not define “an interest of the debtor in property.”8 Several
cases define property of the debtor as property that would have been part of the estate had it not
been transferred before the commencement of the bankruptcy proceedings.9 Property of the
estate, defined in § 541(a)(1), includes “all legal or equitable interests of the debtor in property

3 Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000).
4 Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
5 Brown v. Kitchenmaster, et al. (In re Hertzler Halstead Hosp.), 334 B.R. 276, 286 (Bankr. D. Kan.


2005).
6 11 U.S.C. § 547(g).
7 11 U.S.C. § 550(a).
8 Begier v. I.R.S., 496 U.S. 53, 58 (1990).
9 Id.; Mitsui Mfrs. Bank v. Unicom Computer Corp., 13 F.3d 321, 324 (9th Cir. 1994); Parks v. FIA Card

Services, N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir. 2008).

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as of the commencement of the case.”10 Property interests are created and defined by state law.11
Property held in trust for another is not property of the estate for purposes of § 547(b).12
Bankruptcy courts are courts of equity and may impose equitable remedies.13

Here, the debtor withdrew the cash advance, misrepresenting to US Bank that she would
pay them back. However, instead of using the money to pay her other creditors, debtor chose to
do the equitable thing by returning the money to US Bank. Plaintiff contends that under In re
Marshall14 this cash advance became property of the estate once the debtor exercised control
over the funds.

In Marshall, the 10th Circuit Court of Appeals held that when a debtor transfers money
from one credit card to another, and elements (2) through (6) of § 547(b) are met, then the first
element is also satisfied and the transfer is avoidable.15 In Marshall, the debtors did not place
the funds in their personal account but rather directed one credit card company to pay the
balance owed to another credit card company.16 In common parlance, the payment was a balance
transfer. The Marshall court found that the funds existed within the bankruptcy estate for an
instant of time and therefore fell under the reach of § 547(b). The court in Marshall relied on the
“dominion/control test” to determine whether funds borrowed from one creditor to pay another
are property of the estate. The court stated that the majority view holds that “when a debtor

10 11 U.S.C. § 541(a)(1).

11 Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1197 (10th Cir. 2002).

12 Begier, 496 U.S. at 59; see also RESTATEMENT (FIRST) OF RESTITUTION § 160 cmt. e (1937) (where a
person holds property upon a constructive trust for another, the latter has the beneficial interest therein).

13 Young v. United States (In re Young), 535 U.S. 43, 50 (2002) (Scalia, J., stating that bankruptcy courts
“are courts of equity and ‘appl[y] the principles and rules of equity jurisprudence.’”) (quoting Pepper v. Litton, 308

U.S. 295, 304 (1939)).
14 550 F.3d 1251, 1255.15 Id. at 1256.
16 Id. at 1253.

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converts an offer of credit into loan proceeds and uses those proceeds to pay another creditor, the
debtor deprives the bankruptcy estate of those proceeds.”17

C. Constructive Trust
The case sub judice is distinguishable from In re Marshall because the debtor returned
the funds to US Bank and did not use them to pay other creditors. If debtor had used the cash
advance to pay other debt, the transfer would be avoidable under § 547(b) and Marshall. Here,
the debtor borrowed the funds without any intent to pay them back, but instead of using the
money for her own benefit, she quickly realized the wrongful nature of her actions and returned
the money. In these unique and limited circumstances, the Court determines that the debtor
never acquired an equitable interest in the funds.18

In Leitner,19 the debtor embezzled from his employer approximately $1 million. A
portion of these funds was used to purchase the debtor’s residence, which at the time of the
decision, would have been fully exempt under Kansas law. Judge Flannagan imposed a
constructive trust on the debtor’s residence in favor of the beneficiary. The beneficiary of a
constructive trust is the owner of the equitable interest as well as the injured party, and in the
Leitner case, the beneficiary was debtor’s former employer from whom debtor embezzled
$1 million. The constructive trust trustee (debtor) held only a bare legal title to the property that
was in the trust, and it was only this bare legal title that entered the bankruptcy estate. Judge
Flannagan observed that a debtor holds this bare legal title subject to a duty to convey the

17 Id. at 1256 (citing Meoli v. MBNA America Bank, N.A. (In re Wells), 382 B.R. 355, 360 (B.A.P. 6th Cir.
2008); Yoppolo v. Greenwood Trust Co. (In re Spitler), 213 B.R. 995, 999 (Bankr. N.D. Ohio 1997)).

18 At most, debtor held bare legal title to the funds as the constructive trust trustee; regardless, the funds
were not an asset of the debtor’s estate, even for a nanosecond. Marshall, 550 F.3d at 1258 n.6.

19 Clark v. Wetherill (In re Leitner), 236 B.R. 420, 425 (Bankr. D. Kan. 1999).

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property to the beneficiary, who holds the equitable interest in the property. The equitable
interest of the owner does not become property of the bankruptcy estate. A constructive trust
comes into existence as of the inception of the transaction or wrongful conduct.20 Judge
Flannagan went on to hold that since the debtor held only bare legal title to the residence, the
trustee’s claim for a preferential transfer under § 547(b) must fail “because neither the trust nor
the attachment were a ‘transfer of an interest of the debtor in property.’”21 Although in Leitner
the debtor held the property of the trust on the bankruptcy petition date, the facts giving rise to
the imposition of a constructive trust on the debtor’s residence had occurred prior to the filing of
the bankruptcy. In Leitner, the property of the trust (the residence) was sold after the filing of
Leitner’s bankruptcy. In the case sub judice, all of the events, including return of the property of
the constructive trust to US Bank (the beneficiary), occurred prior to the filing of the bankruptcy.
Just as Judge Flannagan ultimately found that he could impose a constructive trust when the
events straddle the filing of the bankruptcy, this Court finds that it may impose or find a
constructive trust when all of the transactions were complete prior to the filing of the bankruptcy.

A person who holds property in trust for another does not have an equitable interest in the
property.22 “Trusts are classified with respect to the manner of their origin.”23 Property procured
by fraud may be treated as being held in constructive trust and excluded from the bankruptcy
estate.24 Determination of whether a constructive trust exists is fact sensitive. The existence of
a constructive trust may be determined by the bankruptcy court even absent a prepetition

20

Id.
21 Id. at 426 (footnote collecting cases omitted).
22 Begier, 496 U.S. at 59.
23 See GEORGE BOGERT, BOGERT’S TRUST AND TRUSTEES § 1, at 11 (2d ed. 1984).
24 See Canal Corp. v. Finnman, et al. (In re Johnson), 960 F.2d 396 (4th Cir. 1992).


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adjudication. A debtor who procures property subject to a constructive trust has a duty to repay
the debt in order to avoid unjust enrichment.25 Whether property is held in trust is determined by
applicable state law.26 In Kansas, a constructive trust may arise when “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 . . . .”27 Unjust enrichment arises when (1) a
benefit has been conferred upon a person; (2) that person retains the benefit; and (3) under the
circumstances, the retention of the benefit is unjust.28

A constructive trust can be imposed in cases where “a person by fraud, actual or
constructive, or by any form of unconscionable conduct, or questionable ethics has obtained or
holds title to property which in equity and good conscience he ought not to possess or which
justly belongs to another.”29 For example, a constructive trust can arise as a remedy for “fraud,
misrepresentation, duress, undue influence or mistake of such a character that the transferor is
entitled to restitution.”30 Fraud is not necessary for the imposition of a constructive trust.31 A
constructive trust is effective from the “inception of the transaction,” or in other words, it relates
back to the occurrence of the misconduct that caused it.32

A constructive trust requires specific property “on which the constructive trust can be

25 See 1 HENRY J. SOMMER, ET AL., CONSUMER BANKRUPTCY LAW AND PRACTICE § 18.5.2.2. at n.159 (9th
ed. 2009 & Supp. 2010). “State courts’ prepetition imposition of constructive trusts is not a transfer that can be
avoided as a preference,” citing In re Pitchford, 410 B.R. 416 (Bankr. W.D. Penn. 2009).

26 5 COLLIER ON BANKRUPTCY ¶ 547.03[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2012).

27 Nelson v. Nelson, 288 Kan. 570, 580 (2009) (emphasis omitted), (quoting RESTATEMENT (FIRST) OF
RESTITUTION §160).

28

See id.

29 Id. at 585 (emphasis added by Luckert, J.) (quoting In re Estate of Zimmerman, 207 Kan. 354, 357
(1971)).

30 Id. (quoting Horsley v. Hrenchir, 146 Kan. 767, 769 (1937)).

31 Id.

32 Leitner, 236 B.R. at 425.

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fastened, and such property is held by the person to be charged as constructive trustee.”33 “[A]
constructive trust is essentially a tracing remedy, allowing recovery of the specific asset or assets
taken from the plaintiff, any property substituted for it, and any gain in its value.”34 Once the
elements for a constructive trust are found, the remedy may not be imposed without determining
whether the specific property returned by debtor was the property that she held in trust. Since it
is undisputed in this case that the cash advance was returned quickly, not repaid or paid to a
third party, and was only in debtor’s possession for a short time, the Court finds that this
requirement is satisfied.

The only issue remaining is whether, under these unique circumstances, a constructive
trust existed such that US Bank retained its equitable interest in the funds. The Court finds that a
constructive trust arose at the time of the cash advance and, consequently, the equitable interest
in the funds never transferred to debtor.

The debtor misrepresented her intentions to US Bank. When debtor wrote the US Bank
check to herself, she did not intend to repay the debt. Her initial intentions were to use the
money for her own gain by paying other creditors and then declaring bankruptcy. Under these
facts, the elements of unjust enrichment are satisfied. First, debtor obtained the benefit of the
funds. Second, she retained the benefit for nearly three weeks. Third, under these
circumstances, and according to her own conscience, the retention of the benefit was unjust. The
retention of the benefit was unjust because she did not intend to return the funds and presumably
thought that the debt would be discharged in bankruptcy. Because the elements of unjust

33 RESTATEMENT (FIRST) OF RESTITUTION § 160 cmt. i (1937).
34 Nelson, 288 Kan. at 580 (citation omitted).


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enrichment are satisfied, the Court finds that equity imposed a constructive trust on the funds
originating from the time debtor wrote the check to herself and continuing until the money was
repaid. Other facts establish a constructive trust. The debtor engaged in wrongful conduct by
procuring the cash advance from US Bank to whom she did not intend to repay the debt. It can
be argued with some vigor that debtor engaged in fraud when she first procured the cash
advance, and there is a statutory presumption of fraud in the Bankruptcy Code. A finding of a
constructive trust is also supported by the manner in which debtor incurred the debt to US Bank
when she wrote a check to herself for deposit without a concurrent intent to repay the debt; since
the debtor filed bankruptcy only 40 days after the initial cash advance, it may be safely presumed
that she also did not possess the independent financial means to repay the debt. The debtor was
subject to the equitable duty to convey the $8,000 cash advance back to US Bank, a duty upon
which she acted 18 days later when she returned the cash advance to US Bank. The facts of this
case lead to one conclusion: that a constructive trust arose prepetition and the debtor was the
trustee holding bare legal title to $8,000, property which she had a duty to convey to US Bank as
the beneficiary of the constructive trust. As a result of the constructive trust, debtor never
acquired an equitable interest in the property and therefore the cash advance never became
property of the estate under § 541. Tracing the funds in this case is not an issue. The debtor
received $8,000 from US Bank and within three weeks transferred this sum back to US Bank.
This repayment was after deposit of the $8,000 into debtor’s account, and the debtor’s ability to
repay the $8,000 shortly thereafter sufficiently establishes tracing of the funds from US Bank to
the debtor and the transfer of said funds to US Bank.

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D. Policy
This outcome not only conforms with the Bankruptcy Code and the law in Kansas, it also
best serves the underpinnings of the Bankruptcy Code. A central purpose of the Code is “to
provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with
their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort,
unhampered by the pressure and discouragement of preexisting debt.’”35 This “fresh start” policy
of the Bankruptcy Code is limited, however, to “the honest but unfortunate debtor.”36

With this policy in mind, a review of §§ 547(b) and 523(a)(2)(C)(i)(II) demonstrates that
the Code does not support a finding for the trustee. The purposes of § 547(b) are “to discourage
actions by creditors that might prematurely compel the filing of a petition and to secure an equal
distribution of assets among creditors of like class.”37 Neither of these goals are hindered by this
Court’s conclusion. First, this decision will not encourage actions by creditors that might
prematurely compel the filing of a petition. Second, the concept of a constructive trust “is not
inherently incompatible with the fair treatment of creditors in bankruptcy.”38 A constructive
trust comes into existence at the time of the transaction and therefore “[t]he beneficiary’s
equitable interest does not become property of the estate.”39 This sentiment follows the idea
stated by Justice Black in a case under the 1898 Bankruptcy Act: “The Bankruptcy Act simply

35 Grogan v. Garner, 498 U.S. 279, 286 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244
(1934)).

36 Id.

37 Gillman v. Scientific Research Prods. Inc. of Del. (In re Mama D’Angelo, Inc.), 55 F.3d 552, 554 (10th
Cir. 1995).

38 In re Leitner, 236 B.R. at 423.

39

Id. at 424.
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does not authorize a trustee to distribute other people’s property among a bankrupt’s creditors.”40
Debtor did not use the borrowed money and later repay US Bank with other property prior to her
other creditors; she returned the money that she procured in order to correct her wrongful
conduct. Because debtor did not intend to repay US Bank at the time she took the cash advance,
she had a duty to return the money, which she fulfilled.

Section 523(a)(2)(C)(i)(II) of the Code is intended to prevent dishonest consumer debtors
from receiving the benefit of a discharge in bankruptcy for a particular category of debt.41 It
does so by creating a presumption of fraud when a cash advance is withdrawn within 70 days of
the filing of the petition. This provision hopefully dissuades consumer debtors from “loading
up” on debt in anticipation of bankruptcy.42 Congress was concerned that, absent this provision,
debtors would incur excessive debt within a short period prior to the filing of the petition and not
only would this “result in direct losses for the creditors that are the victims of the spree, but it
also creates a higher absolute level of debt so that all creditors receive less in liquidation.
During this period of insolvency preceding the filing of the petition, creditors would not extend
credit if they knew the true facts.”43 In the case sub judice, the debtor is a consumer and the cash
advance is a consumer debt as contemplated by this exception to discharge. This statutory
presumption of fraud is further indicia that this Court should impose a constructive trust on the
funds borrowed from defendant. In addition, Judge Flannagan’s decision In re Leitner44 supports

40 Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36 (1962), quoted in Leitner at 425 n.13.
41 See, generally, Cohen v. de La Cruz, 523 U.S. 213, 217-18 (1998).
42 Bank One Columbus, N.A., v. Schad (In re Kountry Korner Store), 221 B.R. 265, 271 (Bankr. N.D. Okla.


1998) (citing S. REP. NO. 98-65, at 9 (1983)).

43 S. REP. NO. 98-65, at 9 (1983).

44 236 B.R. 420 (Bankr. D. Kan. 1999, Flannagan, J.).

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the notion that if the debtor “obtains property by fraud or other improper means, a court can
impose a constructive trust to protect the injured party.”45 Continuing, Judge Flannagan explains
that a constructive trust is “a legal fiction that adopts the analogy of a trust and declares that a
beneficiary owns an equitable interest in property. The constructive trust imposes a duty on the
trustee to hold the equitable property interest in trust for its owner, the beneficiary.”46 The
beneficiary of the trust is US Bank, the injured party. The property held by the debtor in a
constructive trust is held in trust for its owner (the injured party).

A finding for the trustee in this case does not serve the goals of § 523. Exceptions to
discharge reflect public policy. If the trustee prevails, it would bring the debt and the funds into
the estate, essentially causing the “loading up” that the Bankruptcy Code discourages. By
bringing the cash advance into the estate, the trustee would increase the total debt and only
provide a small increase in payments to the other creditors. Furthermore, this slight benefit to
the creditors would come at a cost. A finding for the trustee could punish the debtor by making
the $8,000, from which she never benefitted, nondischargeable. This result prevents
Christenson, the “honest but unfortunate debtor” who corrected her prepetition misjudgment,
from obtaining a “fresh start” upon completion of her bankruptcy. Despite the initial cash
advance, this debtor subsequently acted ethically and morally by repaying the funds.

The outcome urged by the trustee does not fit the central goal of the Bankruptcy Code or
the policy embodied therein. There is no question that debtor acted wrongfully by withdrawing
the cash advance. However, there is also no question that the moral and ethical act was to return

45

Id. at 424.

46

Id.

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the money, which she did. This is not an action by a debtor that this Court wishes to discourage.

E. Conclusion
For the reasons stated above, the Court finds for the defendant and holds that the return
of the cash advance is not avoidable under § 547(b) because the debtor never obtained an
equitable interest in the funds. Debtor did not transfer property of the estate to US Bank. The
recognition by this Court that the US Bank monies were held in constructive trust is limited to
the narrow facts of the case sub judice and will seldom apply to other avoidance or recovery
actions. The policy considerations only augment and do not stand alone as a basis for this
Court’s holding.

It is therefore ordered that defendant’s Cross Motion for Summary Judgment is granted
and that plaintiff’s Motion for Summary Judgment is denied and judgment will issue in
defendant’s favor on plaintiff’s Complaint.

It is further ordered that the foregoing constitutes findings of fact and conclusions of law
under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal
Rules of Civil Procedure. A separate judgment based on this ruling will be entered on a separate
document as required by Fed. R. Bankr. P. 9021 and Fed. R. Civ. P. 58.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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