General Coffee Corp., In re

• Decision Date: 28 September 1987
• Docket Number: No. 86-5798,86-5798
• Parties: , Bankr. L. Rep. P 72,043 In re GENERAL COFFEE CORPORATION, Debtor. CITY NATIONAL BANK OF MIAMI and City National Bank Corporation, Plaintiffs-Appellees, v. GENERAL COFFEE CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 699

828 F.2d 699

96 A.L.R.Fed. 85, Bankr. L. Rep. P 72,043

In re GENERAL COFFEE CORPORATION, Debtor.

CITY NATIONAL BANK OF MIAMI and City National Bank

Corporation, Plaintiffs-Appellees, v. GENERAL COFFEE CORPORATION, Defendant-Appellant.

No. 86-5798.

United States Court of Appeals, Eleventh Circuit.

Sept. 28, 1987.

Julian Clarkson, Holland & Knight, Tallahassee, Fla., Joseph B. Manello, Goldstein & Manello, Boston, Mass., for defendant-appellant.

Arthur J. England, Jr., Miami, Fla., for plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before GODBOLD and HILL, Circuit Judges, and ESCHBACH ^*, Senior Circuit Judge.

GODBOLD, Circuit Judge:

This is an appeal by debtor General Coffee and intervenor Shawmut Boston International Banking Corporation ¹ from an adverse bankruptcy decision by the district court that General Coffee, as debtor-in-possession, could not bring into its estate over $6 million it held in constructive trust for City National Bank of Miami ("CNB"). We affirm.

I. FACTUAL BACKGROUND

The facts are undisputed. The bankruptcy court found that: (1) General Coffee defrauded CNB; (2) CNB properly traced a constructive trust res of $6,488,011 to assets within the control of General Coffee as debtor-in-possession; and (3) CNB proved a factual basis to justify the imposition of a constructive trust in its favor. ² The bankruptcy court nevertheless held that the assets of the constructive trust of which CNB was beneficiary were part of General Coffee's bankruptcy estate and subject to distribution to General Coffee's creditors. The court explained that under Florida law "a constructive trust comes into existence on the date of the order or judgment of a court of competent jurisdiction declaring that a series of events has given rise to a constructive trust." In re General Coffee Corp., 41 B.R. 781, 783 (Bankr.S.D.Fla.1984) (In re General Coffee I ) (quoting Palmland Villas I Condominium Assoc. v. Taylor, 390 So.2d 123, 124 (Fla. 4th DCA 1980)). Thus, the court concluded, CNB's constructive trust arose after General Coffee has filed for bankruptcy, and General Coffee could bring the trust assets into the bankruptcy estate through its strong-arm powers under 11 U.S.C. Sec. 544:

In the final analysis, the issue here is whether an economic loss should be born[e] by the bank's stockholders or by the debtor's creditors. Both groups were equally innocent of responsibility for causing the loss. Congress has resolved through Sec. 544 that the debtor's creditors must at all costs be protected from secret liens. The Florida court has resolved that a constructive trust remains a secret lien until it is imposed by a court.... It follows that the debtor is entitled to avoid any constructive trust which [the bank is] entitled to assert.

Id. 41 B.R. at 784.

On appeal the district court reversed. It held that the bankruptcy court's exclusive reliance on Palmland Villas was misplaced. The holding in Palmland Villas that a constructive trust does not arise until decreed by a court was, according to the district court, contrary to Florida law. In re General Coffee Corp., 64 B.R. 702, 707 (S.D.Fla.1986) (In re General Coffee II ). The court explained that the Florida Supreme Court has long accepted the majority view ³ that a constructive trust arises as a matter of law when the facts giving rise to the fraud occur. Id. at 706-07. The district court concluded, therefore, that the constructive trust in favor of CNB arose prior to the filing of General Coffee's bankruptcy petition. Id. at 707.

Having determined that CNB's rights arose before General Coffee filed its bankruptcy petition, the district court had to decide whether General Coffee could nevertheless bring the trust assets into its estate through its powers under 11 U.S.C. Sec. 544(a). The court explained, relying exclusively on In re Quality Holstein Leasing, 752 F.2d 1009 (5th Cir.1985), that a debtor-in-possession could not bring into the estate property in which it held only legal title. In re General Coffee II, 64 B.R. at 708. The court concluded, therefore, that CNB was entitled to recover from General Coffee the $6,488.011 in traced assets.

General Coffee contends on appeal that the district court improperly ignored the Palmland Villas decision and that the constructive trust did not arise until the bankruptcy court decreed it, which occurred after General Coffee filed its bankruptcy petition. The traced trust assets were therefore part of the estate subject to distribution to its creditors. General Coffee further argues that even if the constructive trust arose prior to the bankruptcy petition, it could bring the trust assets into the estate through its strong-arm powers under 11 U.S.C. Sec. 544(a). We reject both of these contentions and therefore affirm.

II. CONSTRUCTIVE TRUST

The bankruptcy court relied exclusively on Palmland Villas to conclude that a constructive trust does not exist until the date of judgment declaring that a series of events has given rise to a constructive trust. In re General Coffee I, 41 B.R. at 783-84. General Coffee contends that the bankruptcy court properly applied Florida law and that the district court erred in refusing to follow controlling Florida precedent.

"A federal court applying state law is bound to adhere to decisions of the state's intermediate courts absent some persuasive indication that the state's highest court would decide the issue otherwise." Silverberg v. Paine, Webber, Jackson &amp Curtis, Inc., 710 F.2d 678, 690 (11th Cir.1983); see also Peoples Bank of Polk County v. Roberts, 779 F.2d 1544, 1545 (11th Cir.1986) (per curiam); King v. Guardian Life Ins. Co., 686 F.2d 894, 898 (11th Cir.1982). We believe, however, that Palmland Villas does not accurately reflect Florida law. With the exception of Palmland Villas Florida courts have consistently applied the majority view on when constructive trusts arise. We are convinced that, if presented with this issue, the Florida Supreme Court would reaffirm the majority approach that a constructive trust arises when the facts giving rise to the fraud occur.

In Wilkins v. Wilkins, 144 Fla. 590, 198 So. 335 (1940), the Florida Supreme Court implicitly recognized that a constructive trust exists from the moment the fraudulent transaction giving rise to it takes place:

The contention is made that because the deed to the property into which the [constructive] trust fund was traced conveyed the property as an estate by the entireties to J.S. Wilkins and wife, the lien could not be impressed upon that property. The fallacy of this is that the trust was impressed in the very transaction in which the conveyance was acquired and, therefore, J.S. Wilkins and wife took the property as an estate by the entireties impressed with a lien to the extent of the trust fund which went into the payment for that property.

Id. 198 So. at 337.

The Florida Supreme Court reached a similar conclusion in City of Sarasota v. Dixon, 146 Fla. 369, 1 So.2d 198 (1941). There the court held that because A.W. Dixon had made fraudulent representations to the city regarding the Dixon Fish Company building, "he took possession of such building in trust for the use and benefit of Dixon Fish Company and its receiver." Id. 1 So.2d at 201. The court concluded that "in the instant case the facts and circumstances raised a constructive trust in favor of M.W. Dixon against A.W. Dixon in his lifetime and his personal representative who so held the property subsequent to his death." Id. Thus, the Supreme Court recognized that the constructive trust existed long before the court granted any equitable relief.

Although these decisions did not expressly adopt the majority rule, they applied that rule to the facts of each case. Subsequent Florida appellate court decisions have similarly applied, without expressly adopting, the majority rule that a constructive trust exists from the time the facts giving rise to it occur. See, e.g., Mayer v. Cianciolo, 463 So.2d 1219, 1221 (Fla. 3d DCA 1985) (constructive trust in favor of son arose when he quitclaimed his joint interest in real property for the sole reason of facilitating its sale by his mother); Malkus v. Gaines, 434 So.2d 957, 960-61 (Fla. 3d DCA 1983) (Malkus held partnership interest in company in constructive trust for Gaines since the date of the fraud), pet. for rev. denied, 446 So.2d 100 (Fla.1984); Johnson v. Johnson, 349 So.2d 698, 699 (Fla. 4th DCA 1977) ("When Mrs. Johnson conveyed her interest in The Harborage to her husband, she became the beneficiary under a constructive trust and he became the trustee."); Hallam v. Gladman, 132 So.2d 198, 204 (Fla. 2d DCA 1961) (constructive trust "arises through operation of law [w]here one through fraud, abuse of confidence, or other questionable means gains property which in equity or good conscience he should not be permitted to retain"); Traub v. Traub, 102 So.2d 157, 158 (Fla. 2d DCA 1958) (defendant held real property in constructive trust for his brothers from the time they executed the misleading deed to the property). ⁴

The only Florida appellate decision to reject the majority approach was Palmland Villas. Palmland Villas did not cite any of the cases mentioned above. The court relied exclusively on Wadlington v. Edwards, 92 So.2d 629 (Fla.1957) and Yawn v. Blackwell, 343 So.2d 906 (Fla. 3d DCA 1977). The court's entire reasoning was as follows:

An action for the declaration of a constructive trust may be barred if the events giving rise to the necessity for the imposition of this equitable remedy transpired beyond the period permitted by the applicable statute of limitations, usually expressed in terms of laches. See Yawn v. Blackwell, 343 So.2d 906 (Fla. 3d DCA 1977). This leads inevitably to the conclusion that a constructive trust is not created by the facts themselves since no trust is found where the operable facts occur...