In re Markair, Inc., BAP No. AK-93-1539-JRO. Bankruptcy No. A92-00476-HAR
| Citation | 172 BR 638 |
| Decision Date | 29 August 1994 |
| Docket Number | BAP No. AK-93-1539-JRO. Bankruptcy No. A92-00476-HAR,A92-00477-HAR. |
| Parties | In re MARKAIR, INC., an Alaskan Corporation; Markair Express, Inc., an Alaskan Corporation, Debtors. AIRWORK CORPORATION, Appellant, v. MARKAIR EXPRESS, INC.; Markair, Inc., Creditors Committee of Markair, Inc., Creditors Committee of Markair Express, Inc., Safeco Credit Company, Inc., Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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Harvey A. Strickon, New York City, for appellant.
Susan M. Freeman, Phoenix, AZ, for appellees.
Before JONES, RUSSELL and OLLASON, Bankruptcy Judges.
OVERVIEW
Appellant Airwork Corp. repaired the debtor's damaged aircraft engine. The debtor moved the court to release to Airwork the insurance proceeds payable to the debtor for the loss. The unsecured creditors committee and Safeco, a secured creditor with an interest in both the engine and the insurance proceeds, resisted the motion. Airwork offered various theories to establish its sole rights to the proceeds, but the court, after concluding that Airwork had not established any basis for giving it an advantage over other unsecured creditors, ordered the funds released to the debtor. For the reasons set forth below, we affirm.
On February 24, 1992, an aircraft owned by Markair, Inc. and leased to Markair Express, Inc. (collectively "Markair" or "the Debtor") was involved in a collision at Anchorage International Airport, resulting in damage to an engine. The debtor notified its insurance company of a loss. On March 10, 1992, the debtor shipped the damaged engine to appellant Airwork Corp. in Millville, New Jersey for repair. On May 21, after repairing and overhauling the engine, Airwork sent it to Rocky Mountain Aircraft in Calgary, Canada at the debtor's request. Rocky Mountain Aircraft installed the engine in another of the debtor's aircraft. Airwork billed the debtor $189,119.29, of which $158,673.50 was attributed to repair work. On June 8, 1992, the debtor filed for bankruptcy protection.
On July 8, while the engine was still in Rocky Mountain's possession, Airwork sent the debtor a reclamation notice and notice of assertion of lien under 11 U.S.C. § 546(b).1 On August 8, Rocky Mountain delivered the craft with the installed engine to the debtor. The insurance proceeds remained in escrow with the debtor's insurance company.
On March 9, 1993, the debtor filed a motion seeking release of the insurance proceeds to Airwork. The motion was objected to by the unsecured creditors' committees of both debtor entities and by SAFECO. SAFECO had a perfected security interest in both aircraft and in any insurance proceeds relating to them. After a hearing, the bankruptcy court held that Airwork was not entitled to the proceeds. Airwork timely appealed. As SAFECO and the debtor were involved in a global settlement, and SAFECO was oversecured in any event, SAFECO relinquished all interest in the proceeds, and the court authorized release of the proceeds to the debtor.
Airwork offered six theories as a basis for recovery:
1. A constructive trust should be imposed on the proceeds for Airwork's benefit;
2. Payment of the proceeds to SAFECO would result in unjust enrichment;
3. An equitable lien should be imposed on the proceeds for Airwork's benefit 4. Airwork was entitled to the proceeds because it repaired the engine in reliance thereon;
5. Airwork possessed a valid reclamation claim with respect to installed engine parts;
6. Airwork had valid rights in the engine based on a mechanic's lien.
Airwork also contends that issues 5 and 6 were not before the court on a motion to release the proceeds and should not have been adjudicated.
Facts are not disputed. The case presents a mixed question of law and fact because the historical facts are established, the rule of law is undisputed, and the issue is whether the facts satisfy the legal rule. Pullman-Standard v. Swint, 456 U.S. 273, 289 n. 19, 102 S.Ct. 1781, 1790 n. 19, 72 L.Ed.2d 66 (1982); Moss v. Commission, 831 F.2d 833, 838 n. 9 (9th Cir.1987); United States v. McConney, 728 F.2d 1195, 1200 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984). Mixed questions generally are reviewed de novo because they require the consideration of legal concepts and the exercise of judgment about the values that animate legal principles. Boone v. United States, 944 F.2d 1489, 1492 (9th Cir.1991); United States v. Spillone, 879 F.2d 514, 520 (9th Cir.1989), cert. denied, 498 U.S. 878, 111 S.Ct. 210, 112 L.Ed.2d 170 (1990); McConney, 728 F.2d at 1204; but see Assembly of the State of California v. Dept. of Commerce, 968 F.2d 916, 919 (9th Cir. 1992) ().
Airwork failed to establish a right to the res under its equitable theories.
The trial court concluded that Airwork had no legal right to the insurance proceeds res under state law, and in the event that an equitable claim existed, the court had discretion to refuse to apply equitable state court remedies based on overriding bankruptcy concerns. We agree.
Analysis focuses on the legal relationship between the parties. If no debtor-creditor relationship exists or was intended, a trust will exclude property from the estate. In re Unicom Computer Corp., 13 F.3d 321 (9th Cir.1994) (); In re Torrez, 63 B.R. 751 (9th Cir. BAP 1986) (); and In re Anchorage Nautical Tours, Inc., 102 B.R. 741 (9th Cir. BAP 1989) ().
If, on the other hand, the law would impose a trust as a remedy, circumstances may warrant treating the claimant as any other creditor of the debtor, and thus subject to bankruptcy's policy of ratable distribution. This is the result of In re Tleel, 876 F.2d 769 (9th Cir.1989) (); In re Bullion Reserve of North America, 836 F.2d 1214 (9th Cir.1988) (); In re Lewis W. Shurtleff, Inc., 778 F.2d 1416 (9th Cir.1985) (); In re North American Coin & Currency, Ltd., 767 F.2d 1573 (9th Cir.1985) (); In re Foam Systems Co., 92 B.R. 406 (9th Cir. BAP 1988), affirmed, 893 F.2d 1338 (9th Cir.1989) ().
Although oftentimes the terms constructive trust and resulting trust are used together or interchangeably, the two concepts are distinct. A resulting trust arises by operation of law to enforce the inferred intention of the parties to the transaction. The existence of a resulting trust is established by circumstances showing that the transferee was never intended to take beneficial interest through the transaction. In re Foam Systems Co., 92 B.R. 406, 408 (9th Cir. BAP 1988). Once the trust is declared, the remedy is delivery of the res by the trustee to the beneficiary. A resulting trust can defeat the trustee's strong arm powers under § 544. The resulting trust having been determined by law to exist, the trustee has no equitable rights in the trust, and the res is not property of the estate pursuant to § 541.
On the other hand, a constructive trust is a remedy which is inchoate prior to its imposition. In re North American Coin & Currency, Ltd., 767 F.2d 1573, 1575 (9th Cir.1985). Rather than being a determination of rights arising by law because of mistake or omission as is a resulting trust, a constructive trust is an equitable remedy. Unlike a resulting trust, "a constructive trust is not grounded in the intention of the parties, inferred or presumed; it is a remedial device of equity — a trust in invitum — to prevent unjust enrichment." Moses v. Moses, 140 N.J.Eq. 575, 53 A.2d 805 (N.J.1947). The distinction between resulting and constructive trusts may blur because, as an equitable remedy, a constructive trust remediates inequitable circumstances by imposing what the parties in equity should have intended.
While a constructive trust is a flexible remedy, "we necessarily act very cautiously in exercising such a relatively undefined equitable power in favor of one group of creditors at the expense of other creditors. . . ." North American Coin, 767 F.2d at 1575. Because it is a remedy, a constructive trust cannot affect rights in the res until it is imposed. A constructive trust imposed by state law pre-petition would therefore exclude the res from the debtor estate. If the remedy remains inchoate post-petition, however, it is subordinate to the trustee's strong arm power. In re Tleel, 876 F.2d 769, 771-72 (9th Cir.1989). The incipient beneficiary of a constructive trust has no rights greater than any other creditor of the debtor who has not reduced his claim to judgment and perfected it.
Airwork contends that it is entitled to either a constructive trust to the res or an equitable lien therein, because SAFECO and the debtor were unjustly enriched by retention of both the repaired engine and the insurance proceeds.2 When a creditor can establish that it is entitled to a constructive trust remedy under state law, the burden shifts to the debtor...
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