In re Dow Corning Corp.

• Decision Date: 15 February 1996
• Docket Number: Bankruptcy No. 95-20512.
• Citation: 192 BR 428
• Parties: In re DOW CORNING CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

192 B.R. 428 (1996)

In re DOW CORNING CORPORATION, Debtor.

Bankruptcy No. 95-20512.

United States Bankruptcy Court, E.D. Michigan, Northern Division.

February 15, 1996.

Barbara J. Houser, Sheinfeld, Maley & Kay, P.C., Dallas, TX, for Dow Corning Corporation.

OPINION ON CONSTRUCTIVE TRUSTS IN BANKRUPTCY

ARTHUR J. SPECTOR, Bankruptcy Judge.

Introduction

This dispute requires the interpretation not just of the holding of a recently-decided case, but its ratio decidendi as well. Specifically, I must decide HOW the Court of Appeals for the Sixth Circuit decided as it did in XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir.1994).

No one disputes the facts, which were stated in the movant's original motion ("Motion"). As set forth there, Wilfarm LLC is a customer of Dow Corning Corporation (the "Debtor"). On March 7 and 8, 1995, the Debtor invoiced Wilfarm for an order of Sylgard 309 silicone surfactant which the Debtor delivered in two truck shipments to Wilfarm per its purchase agreement. On April 12, 1995, a Dow Corning employee called Wilfarm inquiring about payment. Wilfarm was only recently formed out of the merger of two other companies. The Debtor mailed the original invoices to an office which no longer handled the accounts payable function, which apparently was the cause for the delay in payment. When this fact was brought to the Debtor's attention, it faxed the two invoices to the new Wilfarm accounts payable office. On April 17, 1995, Wilfarm's payment clerk then mailed the Debtor its check for $304,198.32. The following day, the original invoices arrived from Wilfarm's former accounts payable office. A different Wilfarm payment clerk issued another check covering the same two invoices.¹ The Debtor received both checks and deposited them in its general account. Both checks cleared. Everyone agrees that this is a case of simple clerical mistake as the second payment was made in error. The parties differ greatly however, as to the consequences which flow from this fact.

On May 15, 1995, Dow Corning filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 11 U.S.C. § 101 et seq.² On August 11, 1995, Wilfarm filed a "Motion for Relief From the Automatic Stay Pursuant to 11 U.S.C. § 362(d)." After reciting the above facts and characterizing its view of the law applicable to them, Wilfarm requested "this Court to lift the automatic stay . . . and allow the debtor to send to the movant the amount of . . . $329,294.69. . . ." Motion, p. 5 (emphasis added). Additionally, in its accompanying brief, "Wilfarm requests that this Court grant Wilfarm's motion for relief from the automatic stay, and require Dow Corning to transfer the mistaken payment back to Wilfarm." Wilfarm's Memorandum in Support of Motion, p. 10 (emphasis added).

As a preliminary matter, and notwithstanding that other courts have seemingly found nothing untoward about the procedure,³ I confess confusion over the form of relief requested. Certainly, a bankruptcy court may grant a movant relief from the stay. Once the stay is lifted, the movant is then free to take an action from which it was previously enjoined, such as the commencement of a suit against the debtor. However, Wilfarm does not need relief from the stay to request relief from the bankruptcy court. See In re Briggs, 143 B.R. 438, 454-55 (Bankr.E.D.Mich.1992).

If what Wilfarm wants is an order giving the Debtor permission to return the $329,294.69, a victory on the motion would be hollow. The Debtor, by strenuously resisting the motion, makes it obvious that it would not voluntarily repay the money. On the other hand, if Wilfarm is actually requesting an order compelling the Debtor to pay it money, the procedure runs afoul of F.R.Bankr.P. 7001(1). This rule states that, with exceptions not relevant to this matter, a proceeding "to recover money or property" is an "adversary proceeding" which necessitates the filing of a complaint and the service of a summons and a copy of the complaint upon a "defendant." Further, if the request is in effect asking for a mandatory injunction, the procedure runs afoul of Rule 7001(7) which requires an adversary proceeding "to obtain an injunction or other equitable relief."

The Debtor and the Official Committee of Tort Claimants objected to the motion, but failed to raise these procedural points. This, in itself, might be enough to allow me to overlook the procedural peculiarities. But, more importantly, the fact that I will deny on the merits any of the various forms of relief requested by Wilfarm moots any further discussion of procedure.

Because the motion nominally requested relief from the stay, a preliminary hearing was timely scheduled. Wilfarm put forth two separate grounds for relief, both of which are based upon Michigan law. First, it asserted that a party who mistakenly pays money to another, retains "equitable title" in that money. Accordingly, Wilfarm argued that the Debtor obtained no more than bare legal title, subject to Wilfarm's equitable interest and that the money should, therefore, be excluded from the bankruptcy estate pursuant to § 541(d). As an alternative, Wilfarm claimed that it is entitled to an order "impressing a constructive trust . . . to divide legal title from the equitable interest in the mistaken payment. . . ." Wilfarm's Memorandum in Support of Motion, p. 6.

In its responsive brief, the Debtor counter-argued that both of Wilfarm's theories are foreclosed by Omegas, supra. The stay was continued pending a final hearing. Because I believed that Omegas defeated Wilfarm's alternative constructive trust theory, the sole issue identified for trial (really legal argumentation since the facts were never in dispute) was "whether equitable title to the money remains with Wilfarm." Pre-Trial Order of September 9, 1995. At the final hearing, I reconsidered the effect of Omegas, and gave Wilfarm the opportunity to brief the issue anew. After receipt of several more sets of briefs, the question was reserved for the decision which follows.⁴

A Brief History of Constructive Trusts and its Emergence in Bankruptcy

The use of constructive trusts as a form of relief against unjust enrichment has its beginnings in seventeenth century England. 1 George E. Palmer, The Law of Restitution § 1.3, at 9-12 (1978). Until recently, the remedy remained limited under English law in that it required the presence of a fiduciary relationship. Id. By necessitating such a relationship, English courts retained a connection (or confusion) between constructive trusts and express trusts. Id.⁵

American courts greatly expanded use of constructive trusts by eliminating the requirement of a fiduciary relationship. Id. at p. 12. This development drew a line of distinction between express and constructive trusts and led to the general view that the circumstances giving rise to a constructive trust are virtually limitless. See McKey v. Paradise, 299 U.S. 119, 122, 57 S.Ct. 124, 125, 81 L.Ed. 75 (1936).

Interestingly, English law now seems to be leaning toward the more expansive American view. In Chase Manhattan Bank v. Israel British Bank (London) Ltd., 1981 Ch. 105, the court held that one who makes a mistaken payment not due is entitled to the benefit of a constructive trust. Palmer, The Law of Restitution § 1.3 at 12 n. 11 (Supp. I 1995) Although the court stated that the mistaken payment created a fiduciary relationship, the holding, in actuality, seems to dispense with the requirement. Id.

The use of constructive trust in bankruptcy also has a long history in American law. References to this remedy can be found in bankruptcy cases dating back to the 1800's. See Conro v. Crane, 110 U.S. 403, 407, 4 S.Ct. 102, 104, 28 L.Ed. 191 (1884); Graham v. Boston H. & E.R. Co., 118 U.S. 161, 173-74, 6 S.Ct. 1009, 1015-16, 30 L.Ed. 196 (1886). Since that time, literally hundreds of bankruptcy cases have recognized the constructive trust doctrine. For example, in In re Berry, 147 Fed. 208, 210-11 (2d Cir.1906), the court imposed a constructive trust on $1,500 paid under the mistaken impression that a debt was owing when in fact it was not.

On a number of occasions, the United States Supreme Court has at least impliedly recognized the applicability of constructive trusts within the bankruptcy context. In Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924), several creditors who had been defrauded through a financial scheme masterminded by Charles Ponzi (the debtor and namesake of the infamous "Ponzi scheme"), requested imposition of a constructive trust on money in Ponzi's bank account. The Court denied imposition, but only because the creditors were unable to trace their individual payments. Id. In McKey, supra, the Court said that "it would be impossible to state all the circumstances in which equity will fasten a constructive trust upon property . . . but the mere failure to pay a debt does not belong in that category." 299 U.S. at 123, 57 S.Ct. at 125. The Court again addressed the issue in Jaffke v. Dunham, 352 U.S. 280, 77 S.Ct. 307, 1 L.Ed.2d 314 (1957), where it held that whether there was sufficient evidence to establish a constructive trust was a question of state law.

While declining to impose a constructive trust on the facts there, I, too, recognized that the remedy is appropriate within bankruptcy in Cook v. United States (In re Earl Roggenbuck Farms, Inc.), 51 B.R. 913, 922 (Bankr.E.D.Mich.1985).

However, there has existed for some time an undercurrent of dissatisfaction concerning the appropriateness of constructive trusts in bankruptcy. See, e.g., Torres v. Eastlick (In re North American Coin and Currency, Ltd.), 767 F.2d 1573, 1575 (9th Cir.1985) ("We necessarily act very cautiously in exercising such a relatively undefined equitable power in favor of one group of potential creditors at the expense of other creditors, for ratable distribution among all creditors is...