In re General Coffee Corp.

• Decision Date: 26 August 1986
• Docket Number: No. 85-2024 Civ.,85-2024 Civ.
• Citation: 64 BR 702
• Parties: In re GENERAL COFFEE CORPORATION, Debtor. CITY NATIONAL BANK OF MIAMI and City National Bank Corporation, Appellants/Cross-Appellees, v. GENERAL COFFEE CORPORATION, Appellee/Cross-Appellant.
• Court: U.S. District Court — Southern District of Florida

64 B.R. 702 (1986)

In re GENERAL COFFEE CORPORATION, Debtor CITY NATIONAL BANK OF MIAMI and City National Bank Corporation, Appellants/Cross-Appellees, v. GENERAL COFFEE CORPORATION, Appellee/Cross-Appellant.

No. 85-2024 Civ.

United States District Court, S.D. Florida, Miami Division.

August 26, 1986.

COPYRIGHT MATERIAL OMITTED

Robert Schantzman, Miami, Fla., Haddad, Josephs & Jack, Bert Hellman, Coral Gables, Fla., for appellants, cross-appellees.

Alan Kluger, David Levine, Miami, Fla., for appellee, cross-appellant.

MEMORANDUM DECISION

SCOTT, District Judge.

This is an appeal from the United States Bankruptcy Court for the Southern District of Florida. City National Bank of Miami and City National Bank Corporation ("City National") appeal the Bankruptcy Court's determination that the Debtor — General Coffee ("General Coffee") can avoid the imposition of a constructive trust. General Coffee and Intervenor Shawmut Boston International Banking Corporation ("SBIBC") cross-appeal the lower court's finding that City National properly traced the trust res to assets presently within General Coffee's (the debtor-in-possession) control.

I. HISTORY OF THE CASE

For the purposes of this appeal, the undisputed facts are succinctly set forth in the Bankruptcy Court's Memorandum decision:

In March 1982, the debtor expanded its coffee roasting business by purchasing the Chase & Sanborn division in New Orleans, Louisiana from Standard Brands. The purchase price consisted of $3 million cash, a note in the amount of $4.75 million, and an amount equal to the value of the inventory of coffee on the day before the closing. The amount paid for the inventory was $6,488,011. General Coffee paid the sum by check drawn on its account at City National Bank of Miami.

The funds upon which the check was drawn are those which plaintiffs Appellants claim were wrongfully taken from them by a series of events which began with the bank\'s purchase in March 1982 of an $8 million certificate of deposit from Banco Exterior S.A. (Panama). The purchase was made on the recommendation of Camilio Bautista, who was simultaneously an officer and director of both Domino Investments, Ltd., which controlled General Coffee, and the plaintiff bank. The $8 million certificate was pledged by Bautista, without the plaintiffs\' authorization, as collateral for an $8 million loan from Banco Exterior to Domino. Domino then transferred the $8 million to General Coffee and the money was deposited into its account at City National Bank.

Neither Domino nor General Coffee has repaid any part of the debt owed Banco Exterior, which has set off the certificate of deposit against the delinquent account. Plaintiffs have also sued Banco Exterior for the $8 million in an action pending in another court.

The Chase & Sanborn assets acquired by General Coffee through the agreement with Standard Brands included not only the inventory of coffee, which has been turned over numerous times since 1982, but also a plant in New Orleans, equipment and trademarks.

In Re General Coffee, 41 B.R., 781, 782-83 (Bankr. S.D.Fla. 1984).

City National does not challenge the Bankruptcy Court's factual determinations (1) that General Coffee defrauded City National; (2) that City National properly traced a constructive trust res of $6,488,011 to assets within the control of the debtor-in-possession; and (3) that City National proved a factual basis to justify the imposition of a constructive trust. Rather City National takes issue with the court's legal conclusions (1) that under Florida law a constructive trust comes into existence only after judicial determination; and (2) that the provisions of § 544 of the Bankruptcy Code override those of § 541 to bring the trust property within the estate notwithstanding the absence of the debtor's beneficial ownership. The threshold question posed by these issues is whether the trust-impressed property was held by General Coffee for City National's benefit at the "commencement of the case". See § 542(d). That question, in turn, depends upon when a constructive trust comes into existence.¹

II. FLORIDA LAW AND CONSTRUCTIVE TRUST

There are two prevailing views on when a constructive trust arises: The majority view is that a trust is created when the fraud or other wrong is perpetrated; the minority view is that a trust is not formed until such time as a court decrees it. The Bankruptcy Court applied the minority rule and did so based upon the authority of Palmland Villas I Condominium v. Taylor, 390 So.2d 123 (Fla.4th DCA 1980).

The battleground is drawn; and Palmland is the situs. City National contends that Palmland is not an accurate statement of Florida Law but rather an aberration in it. General Coffee counters that Palmland was correctly decided and points to subsequent decisions. Since the contentions of the parties rise or fall upon the correctness of Palmland, it is axiomatic that any analysis must begin with that decision.

A. Palmland

The Fourth District Court of Appeal in Palmland held for the first and only time in Florida jurisprudence that a constructive trust is not created by the facts themselves but by a court order or judgment. 390 So.2d at 124. In other words, the trust remains inchoate absent a judicial decree.

In Palmland the appellant sought to determine the validity of several liens which were recorded against a parcel of real property. The appellant argued that the liens could not have been attached "since the property was a trust asset from the time of the conveyance." Id. Consequently, "the debtor-obligor was thereafter simply a trustee without power to pledge trust assets to secure its corporate obligations." Id. While acknowledging that a constructive trust arises by operation of law, the Appellate court nonetheless determined that

. . . a constructive trust is not created by the facts themselves since no trust is found where the operable facts occur beyond the statutory period.

Id. at 125

The basis for the court's conclusion came from two earlier cases which did not address the "creation" issue but held essentially that an action for an imposition of a constructive trust could be time barred. Wadlington v. Edwards, 92 So.2d 629 (Fla. 1957); and Yawn v. Blackwell, 343 So.2d 906 (Fla.3d DCA 1977). Based upon these decisions, the Palmland court reached the "inevitable" conclusion that if the "beneficiary" could be precluded from equitable relief it is the adjudication not the facts which give rise to the trust's creation. A determination of the correctness of this conclusion requires an analysis of these cases as well as a historical review of Florida law on constructive trusts.

In Wadlington, supra the plaintiff sought to have a constructive trust imposed on a parcel of land which her husband had allegedly purchased with her funds. She further contended that title to the property was taken "against her will."² The Florida Supreme Court first espoused the general principle that "a constructive trust is a remedy which equity applies in order to do justice." 92 So.2d at 631. The court then compared resulting trusts to constructive trusts opining that "a constructive trust is a relationship adjudicated to exist by a court based on particular factual situations created by one or more of the parties." Id. "The trust is `constructed' by equity to prevent an unjust enrichment at the expense of another as the result of fraud. . . ."³ Although the court ultimately found that the facts warranted equitable relief, it nonetheless determined that the plaintiff's excessive delay in seeking judicial assistance barred her from such extraordinary relief.⁴

Yawn v. Blackwell, supra, the second case relied upon by the Palmland court, similarly did not address the creation issue but instead whether summary judgment has been properly granted. Appellants, plaintiffs below, initially sought the imposition of a constructive trust on a parcel of land. Plaintiffs subsequently amended their pleadings to describe the trust claimed as a resulting trust. The trial court determined that the claim was stale because of the twenty year limitation regarding the assertion of claims against recorded deeds. The Court of Appeal reversed and remanded holding that material issues of fact existed regarding the formation of the resulting trust. The creation issue was never considered by the court. In passing, however, the court noted the distinction between a resulting trust and a constructive trust vis-a-vis the statute of limitations.

Wadlington and Yawn hold that a "beneficiary" will be precluded from obtaining equitable relief when he has sat on his rights. In essence, these cases support the basic maxim that "equity aids the vigilant". Because a beneficiary is denied equitable relied in these circumstances, it does not "inevitably" follow that a constructive trust is created only by judicial decree. This Court concludes that the reasoning applied in Palmland is in error. This conclusion is supported by a review of other Florida precedent.

B. Other Florida Precedent

In Wilkins v. Wilkins, 144 Fla. 590, 198 So. 335 (1940), the Florida Supreme Court clearly articulated and applied the majority rule. In that case, a son wrongfully obtained monies from the sale of his father's bonds. This money was subsequently transferred from the son's account into that of his wife's account. From that account a parcel of real estate was purchased in the joint names of the son and wife. The court concluded that this property was held in a constructive trust from the date of its purchase —

The contention is made that because the deed to the property into which the 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 the 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

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