377 F.3d 209 (2nd Cir. 2004), 02-5065, In re First Central Financial Corp

Docket Nº:02-5065.
Citation:377 F.3d 209
Party Name:In re: FIRST CENTRAL FINANCIAL CORPORATION, Debtor. Superintendent of Insurance for the State of New York, as Liquidator of First Central Insurance Company, Plaintiff-Appellant, v. Martin Ochs, Esquire, a Chapter 7 Trustee of First Central Financial Corporation, First Central Financial Corporation, Defendants-Appellees.
Case Date:July 27, 2004
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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377 F.3d 209 (2nd Cir. 2004)

In re: FIRST CENTRAL FINANCIAL CORPORATION, Debtor.

Superintendent of Insurance for the State of New York, as Liquidator of First Central Insurance Company, Plaintiff-Appellant,

v.

Martin Ochs, Esquire, a Chapter 7 Trustee of First Central Financial Corporation, First Central Financial Corporation, Defendants-Appellees.

No. 02-5065.

United States Court of Appeals, Second Circuit

July 27, 2004

Argued: Nov. 18, 2003.

Page 210

William O. Purcell (David Simon and Judith A. Pacitti, on the brief), Kirkpatrick & Lockhart LLP, New York, NY, for Plaintiff-Appellant.

Norman N. Kinel (Melissa Zelen Neier, on the brief), Sidley Austin Brown & Wood LLP, New York, NY, for Defendants-Appellees.

Before: POOLER, B.D. PARKER, and WESLEY, Circuit Judges.

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B.D. PARKER, JR., Circuit Judge.

The Superintendent of Insurance for the State of New York, in his capacity as Liquidator of First Central Insurance Company ("FCIC"), appeals from a judgment of the United States District Court for the Eastern District of New York (Denis R. Hurley, J.), which affirmed a decision of the United States Bankruptcy Court for the Eastern District of New York (Carla E. Craig, B.J.), granting summary judgment to First Central Financial Corporation ("FCFC") and FCFC's Chapter 7 Trustee, Martin Ochs (the "Trustee"). The principal issue on this appeal is whether the Bankruptcy Court and the District Court erred in declining to impose a constructive trust on a tax refund that the Trustee received from the IRS and held as property of FCFC. Such a trust would have kept the refund out of FCFC's estate and would have required it to be paid to FCIC. We hold that because a written agreement exists between FCIC and FCFC covering how taxes were to be allocated, and because FCFC's estate was not unjustly enriched by the Trustee's retention of the refund, a constructive trust is not an appropriate remedy. Consequently, the judgment of the District Court is affirmed.

BACKGROUND

FCFC is the parent corporation of FCIC, a New York insurance company. In the 1980s, the two companies executed a tax allocation agreement (the "Agreement"), which prescribed how tax charges and refunds were to be apportioned between FCFC and FCIC. From at least as far back as 1993 through 1997, FCFC filed consolidated tax returns on behalf of itself, FCIC, and another wholly-owned subsidiary (collectively, the "group"). The Agreement provided that if any tax refunds were generated, FCIC was entitled to receive at least the amount that it could have claimed on its own behalf had it filed individual returns and claimed refunds on a "stand alone" basis. In 1994 and 1995, FCIC was the only member of the group to earn taxable income and, consequently, paid the group's entire tax liability for those years. After 1995, the group as a whole and FCIC, on a stand alone basis, suffered losses. In 1996 and 1997, FCFC applied for and received refunds of taxes paid by the group in prior years. The IRS sent the refunds directly to FCFC, which then paid them to FCIC pursuant to the Agreement.

In January 1998, FCIC became insolvent and was placed in rehabilitation proceedings under the control of the New York State Department of Insurance. FCFC itself filed for bankruptcy in March 1998. In December 1998, FCFC's Chapter 7 Trustee, Martin P. Ochs, applied to the IRS for a refund of the remainder of the taxes that the group had paid in 1994 and 1995. The IRS sent the Trustee a refund of approximately $2.5 million. Instead of turning over this refund to FCIC as the Agreement required, and as FCFC had done in prior years, the Trustee kept it, claiming that the funds belonged to FCFC's bankruptcy estate. The Superintendent subsequently commenced an adversary proceeding in the Bankruptcy Court seeking a declaration that, because the refund was held in trust for FCIC, it was not property of FCFC's estate. See 11 U.S.C. § 541(d).

Following cross-motions for summary judgment, the Bankruptcy Court granted judgment to FCFC and the Trustee. In re First Cent. Fin. Corp., 269 B.R. 481, 491-95 (Bankr.E.D.N.Y.2001). The Court concluded that the refund was not held in trust for two reasons. First, the Agreement itself did not give rise to a trust or agency relationship because it did not require

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the refund to be segregated or restricted in use. Id. at 495-98.1 Second, a constructive trust was not warranted under New York law because the relationship between the parties was governed by a written agreement. Id. at 499-501. Accordingly, to the extent that FCIC was entitled to any portion of the refund, the Bankruptcy Court's ruling effectively required it to pursue the funds as an unsecured creditor in the bankruptcy proceedings. Id. at 502. The Bankruptcy Court also concluded that FCIC was not entitled to the full amount of the refund under the terms of the Agreement, but only to the amount it would have received if it had filed taxes on a stand alone basis. Id. at 495. FCIC appealed to the District Court, which affirmed the Bankruptcy Court in all respects. In re First Cent. Fin. Corp., No. 02-CV-397 (E.D.N.Y Sept. 9, 2002). FCIC appeals and we affirm.

DISCUSSION

A district court's affirmation of a bankruptcy court's judgment is subject to plenary review. Cody, Inc. v. County of Orange (In re Cody, Inc.), 338 F.3d 89, 94 (2d Cir. 2003). Here, we review conclusions of law de novo, and findings of fact under a clearly erroneous standard. Id.

Section 541(a)(1) of the Bankruptcy Code provides that the "estate" created by bankruptcy proceedings includes "all legal or equitable interests of the debtor in property [that the debtor holds] as of the commencement of the case." 11 U.S.C. § 541(a)(1). Section 541(d) provides that "[p]roperty in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... 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. § 541(d).

The Superintendent contends that the refund, which resulted from taxes that FCIC alone paid and which was principally generated by FCIC's losses, is being held in constructive trust for FCIC, and consequently is not part of the bankruptcy estate. In making the determination as to whether a constructive trust applies, New York law controls. In re Howard's Appliance Corp., 874 F.2d 88, 93 (2d Cir. 1989).

New York law generally requires four elements for a constructive trust: "(1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer of the subject res made in reliance on that promise; and (4) unjust enrichment." United States v. Coluccio, 51 F.3d 337, 340 (2d Cir. 1995); see also Bankers Sec. Life Ins. Soc'y v. Shakerdge, 49 N.Y.2d 939, 940, 428 N.Y.S.2d 623, 406 N.E.2d 440 (1980); Simonds v. Simonds, 45 N.Y.2d 233, 241-42, 408 N.Y.S.2d 359, 380 N.E.2d 189 (1978). The fourth element is the most important since "the purpose of the constructive trust is prevention of unjust enrichment." Simonds, 45 N.Y.2d at 242, 408 N.Y.S.2d 359, 380 N.E.2d 189; see also Counihan v. Allstate Ins. Co., 194 F.3d 357, 361 (2d Cir. 1999) ("[A constructive trust's] purpose is to prevent unjust enrichment."); In re Koreag, Controle et Revision S.A., 961 F.2d 341, 354 (2d Cir. 1992) (stating that unjust enrichment constitutes the "key factor" in determining whether a constructive trust should be imposed).

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Whether a party is unjustly enriched is a legal conclusion. See Brand v. Brand, 811 F.2d 74, 81 (2d Cir. 1987) ("A conclusion that one has been unjustly enriched is essentially a legal inference drawn from the circumstances surrounding the transfer of property and the relationship of the parties.") (internal quotation marks and citation omitted). We therefore review de novo the Bankruptcy Court's conclusion that the retention of the tax refund in FCFC's estate results in no unjust enrichment.

A. The Existence of a Valid and Enforceable Contract

A threshold question for us is whether a...

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