Haley, Chisholm & Morris, Inc. v. Parrish

• Decision Date: 10 May 1991
• Docket Number: Civ.A. No. 90-0034-C.
• Citation: 127 BR 366
• Court: U.S. District Court — Western District of Virginia
• Parties: HALEY, CHISHOLM & MORRIS, INC., Appellant, v. Helen P. PARRISH, Trustee, Appellee.

127 B.R. 366 (1991)

HALEY, CHISHOLM & MORRIS, INC., Appellant, v. Helen P. PARRISH, Trustee, Appellee.

Civ.A. No. 90-0034-C.

United States District Court, W.D. Virginia, Charlottesville Division.

May 10, 1991.

Douglas E. Little, Robert M. Musselman & Assoc., Charlottesville, Va., for appellee.

W. Stephen Scott, Paxson, Smith Gilliam & Scott, P.C., Charlottesville, Va., for appellant.

MEMORANDUM OPINION

MICHAEL, District Judge.

The matter presently before the court is an appeal from the bankruptcy court's order and memorandum opinion entered in this case on June 22, 1990. All concerned parties have filed legal memoranda, and they have agreed to waive oral argument in the case. Accordingly, this matter is ripe for resolution, but before turning to an analysis of the various assignments of error and assertions made upon appeal, a brief recounting of the pertinent facts is appropriate.

Factual Background

The appellant in this case, Haley, Chisholm & Morris, Inc., is a real-estate developer who established the Quintfield subdivision in Albemarle County, Virginia. The appellant sold several lots in the Quintfield sub-division to Robert Leslie Martin, III,¹ a general contractor, and on one of these lots, the appellant and Martin decided to construct, pursuant to an executed jointventure agreement, a house that would be later sold for profit. According to the terms of the joint-venture agreement, the appellant would provide up to $96,000.00 in funds for the construction of the house (Martin would be liable for construction costs that surpassed $96,000.00), and Martin would provide the lot and would serve as general contractor on the project. Once the house was completed and sold, the agreement provided that, of the amount received for the project by the joint venture, $96,000.00 would go to the appellant as reimbursement for the proceeds that it contributed for the construction of the house, $20,000.00 would go to Martin as payment for the lot on which the house was constructed, and the remainder would be divided equally between the two joint-venturers.²

Martin was not, however, required by the joint-venture agreement to segregate the funds that he received from the appellant for the construction costs, and as things developed, Martin actually commingled these funds with other proceeds held in his bank accounts and used some of these funds to pay debts unrelated to the goal of the joint venture. Furthermore, Martin, although required by the joint-venture agreement to submit monthly itemized statements for his costs in constructing the house, never provided such itemized statements. Finally, Martin, pursuant to the joint-venture agreement, was allowed to retain title to the property on which the house was built, and no security interest in the property was retained or recorded by the appellant. As with many of the "best laid schemes o' mice an' men," R. Burns, To a Mouse, reprinted in The New Oxford Book of English Verse (1972), however, this joint venture faltered, and on March 6, 1989, Martin filed his petition for relief under Chapter 7 of the Bankruptcy Code.

Subsequent to the filing of the petition, the appellee, Helen P. Parrish, was appointed as trustee to administer Martin's estate. As part of the proceedings before the bankruptcy court, several of the lots that were owned by Martin in the Quintfield sub-division were sold by the trustee, and the appellant laid claim to the proceeds from the sale of the lot that it had agreed to develop jointly with Martin. The appellant contended that the funds generated from the sale of the lot in question were its property and, therefore, asked the bankruptcy court to impose a constructive trust on the funds for its benefit. After resolving several other issues that have not been appealed to this court, the bankruptcy court declined to impose a constructive trust on the proceeds derived from the lot in question. The bankruptcy court held that, before a constructive trust would be imposed upon the facts of the present case, the debtor's breach of some fiduciary duty had to be shown, and the bankruptcy court concluded that no such breach existed in the instant case to make proper the imposition of a constructive trust. For this reason, the bankruptcy court concluded that the appellant should be treated no differently than the other unsecured creditors seeking to recover from the debtor's estate.

The matter presently before the court is an appeal from the bankruptcy court's refusal to impose a constructive trust in the instant case. Before this court, the appellant asserts that the bankruptcy court's decision in this regard was clearly erroneous and should be reversed. Additionally, the parties have asked this court — in lieu of remanding the case immediately to the bankruptcy court — to rule, if a constructive trust is imposed, on whether the trustee has, nonetheless, superior statutory rights to the proceeds in question than those held by the appellant as beneficiary of the constructive trust. Both of these issues have been thoroughly briefed by the parties, and since they have waived oral argument in this appeal, the issues are ripe for resolution by this court.

Legal Analysis

A constructive trust is a device created by equity to redress actual or constructive fraud, to prevent the perpetration of injustice, or to curtail unjust enrichment. See Campbell v. Corpening, 230 Va. 45, 49, 334 S.E.2d 589, 591 (1985) ("Constructive trusts arise, independently of the intention of the parties, by construction of law. . . . They occur not only where property has been acquired by fraud or improper means, but also where it has been fairly and properly acquired, but it is contrary to the principles of equity that it should be retained, at least for the acquirer's own benefit.") (emphasis deleted) (internal citations omitted). Although arising in a variety of contexts, constructive trusts are often employed when one party in a fiduciary capacity vis-a-vis another party abuses that relationship to his improper benefit. See Horne v. Holley, 167 Va. 234, 188 S.E. 169 (1936). In that instance, the law will step in and act to protect the interests of the abused party against the malfeasance of the fiduciary. See Klingstein v. Rockingham Nat'l Bank, 165 Va. 275, 182 S.E. 115 (1935).

Increasingly, constructive trusts are employed in the bankruptcy context. See, e.g., Mid-Atlantic Supply, Inc. v. Three Rivers Aluminum Co., 790 F.2d 1121 (4th Cir.1986); see generally 9A Am. Jur.2d Bankruptcy §§ 237-42, 259-66 (1980); 2 Collier on Bankruptcy 541.07 (3rd ed.1991). For example, a constructive trust would be appropriate in a bankruptcy case when the debtor was in a partnership or joint venture and violated his fiduciary responsibilities to another party. See In re Mahan & Rowsey, Inc., 817 F.2d 682 (10th Cir.1987), aff'g, 62 B.R. 46 (W.D.Okla.1985), aff'g in part and rev'g in part, 35 B.R. 898 (Bankr.W.D.Okla.1983), later proceeding, 37 B.R. 530 (Bankr.W.D.Okla.1984); see also Kasishke v. Keppler, 158 F.2d 809 (10th Cir.1947). In that example, the injured partner or joint venturer would be given priority in recovering from the debtor's estate particular money or property that was improperly obtained from him by the debtor. See id. at 684; see also Bethlehem Steel Corp. v. Tidwell, 66 B.R. 932 (M.D.Ga.1986). When proposing to employ the constructive-trust device in the bankruptcy context, however, a federal court must look to relevant state law to determine whether such action is appropriate. See In the Matter of Pinetree, Ltd., 876 F.2d 34 (5th Cir.1989); Boyd v. Martin Exploration Co., 56 B.R. 776 (E.D.La. 1986).

In the Commonwealth of Virginia, both partnership and joint-venture relationships are regarded as imposing fiduciary responsibilities on their participants, and any breach of those responsibilities can result in the creation of a constructive trust. See Horne, 167 Va. at 239-40, 188 S.E. at 172 ("A joint venture has been aptly defined as a special combination of two or more persons, where in some specific venture, profit is jointly sought without any actual partnership or corporate designation. . . . The obligations . . . of persons engaged in a joint venture are similar to those existing between partners. The relationship is one of mutual trust and confidence. The utmost good faith, the most scrupulous honesty, is expected of each party toward the other. Each must guard the interest of his co-venturer equally with his own and must make a frank and full disclosure of all material facts. Each is regarded by a court of equity as a trustee or agent of the other with regard to the enterprise to be undertaken. . . . Within the scope of the enterprise, they stand in a fiduciary relation each to the other, and are bound by the same standards of good conduct and square-dealing as are required between partners. This obligation begins with the opening of negotiations for the formation of the syndication, applies to every phase of the business which is undertaken, and continues until the enterprise has been completely wound up and terminated. . . . It is well-settled that, where one person sustains a fiduciary relation to another, he cannot acquire an interest in the subject matter of the relationship adverse to such other party. If he does so, equity will regard him as a constructive trustee and compel him to convey to his associate a proper interest in the property or to account to him for the profits derived therefrom.").³ Under Virginia law, however, the party seeking to impose a constructive trust on money or property held by another party must show that some fiduciary duty has been violated by the latter party. See In re Crotts, 87 B.R. 418 (Bankr.E.D.Va.1988). Moreover, a constructive trust can be created only when there is clear and convincing evidence to support its creation, see Greenspan v. Osheroff, 232 Va. 388, 351 S.E.2d 28 (1986), and finally, under both Virginia and...