Wadsworth v. Talmage
Jurisdiction | Oregon |
Parties | John WADSWORTH, individually and as trustee for the RBT Victim Recovery Trust, Plaintiffs, v. Ronald B. TALMAGE and Annette C. Talmage, in Default as of 8/31/2017; RiverCliff Farm, Inc., an Oregon corporation, in Default as of 1/26/2017; and New Century Properties Ltd., in Default as of 8/31/2017, Defendants below, and United States of America, Defendant. |
Citation | 450 P.3d 486,365 Or. 558 |
Docket Number | SC S066414 |
Court | Oregon Supreme Court |
Decision Date | 10 October 2019 |
William B. Ingram, Strong & Hanni, Salt Lake City, Utah, argued the cause and filed the briefs for plaintiffs on review. Also on the briefs was Thomas A. Ped, Williams Kastner Greene & Markley, Portland.
Randolph L. Hutter, U.S. Department of Justice, Washington, D.C., argued the cause and filed the brief for defendant on review. Also on the brief was Jeremy N. Hendon, Washington D.C.
This case is before the court on a certified question from the United States Court of Appeals for the Ninth Circuit, under ORS 28.200. The Ninth Circuit certified to the court the following question:
"Under Oregon law, does a constructive trust arise at the moment of purchase of a property using fraudulently-obtained funds, or does it arise when a court orders that a constructive trust be imposed as a remedy?"
Wadsworth v. Talmage , 911 F.3d 994, 999 (9th Cir. 2018). We accepted that question, reformulating it to include one related issue:
"If the former, does it make any difference if the fraud as to the party seeking establishment of a trust occurred after the initial purchase?"
As we discuss in greater depth below, we answer the first part of the question by clarifying that a constructive trust arises when a court imposes it as a remedy, but that the party for whose benefit the constructive trust is imposed has an equitable ownership interest in specific property that predates the imposition of the constructive trust. We also answer the second part of the question by explaining that, in the circumstances of this case, plaintiffs have a viable subrogation theory that allows them to seek a constructive trust based on equitable interests that predate all tax liens on the property.
We begin by setting out the underlying facts, which we take from the Ninth Circuit’s certification order and, in light of the procedural posture of the case, the complaint. See Wadsworth , 911 F.3d at 995 ().
Beginning in the 1990s, defendant Ronald Talmage ran a Ponzi scheme. More specifically, he represented to client investors, in the United States and Japan, that he would hold their funds in trust and invest them. Instead, he made no investments on behalf of clients and repaid clients only through use of the funds of later clients. Talmage also induced investments through false claims about his fund’s size and history. In 1997, Talmage and his wife acquired the RiverCliff Property ("RiverCliff") for $903,000, and paid that price exclusively using money that Talmage was holding for his clients. Between 1998 and 2006, Talmage took more than $12.5 million of client funds to make improvements to the property.
Plaintiffs are victims of the scheme;1 they first invested funds with Talmage in 2002. Much of the money that they invested with Talmage was used in the improvements to RiverCliff. In 2005, another $1.5 million of plaintiffs’ funds was used to pay Talmage’s wife for her half interest in RiverCliff, after the couple divorced. And $3.4 million of plaintiffs’ funds was used to repay earlier, pre-2002 investor clients, including clients whose funds had been used to purchase RiverCliff. In June 2005, Talmage transferred RiverCliff, without consideration, to a corporate entity that he controlled and that is also a defendant in the federal action.
Meanwhile, Talmage had failed to pay federal income taxes from 1998 to 2005, and in 2007. The Internal Revenue Service (IRS) recorded tax liens, beginning in 2008, under 26 USC § 6321. That history sets the stage for the present dispute, which is between plaintiffs and the federal government.
Id. The trial court agreed with the government and dismissed plaintiffs’ quiet title claim.
Wadsworth , 911 F.3d at 997 (quoting Drye v. United States , 528 U.S. 49, 58, 120 S. Ct. 474, 145 L. Ed. 2d 466 (1999) ). Having so framed the inquiry, the Ninth Circuit explained that, "[i]n the case before us, the Trust can prevail in its quiet title action only if, under Oregon law, a constructive trust arises at the moment of the purchase of a property with ill-gotten gains, such that the purchaser never acquires rights in the property beyond bare legal title." Wadsworth , 911 F.3d at 998. That court then observed that the descriptions of constructive trusts in our case law have not been entirely consistent and certified to us the question of when a constructive trust arises.
In their briefs, plaintiffs and the government cite numerous cases that this court has decided. Plaintiffs highlight cases that refer to a constructive trust arising at some time prior to a court’s judgment, which they characterize as consistent with the "majority rule." The government cites a number of cases that refer to constructive trusts as purely remedial mechanisms, or where courts are said to "impress" or to "impose" a constructive trust.
The parties also offer theoretical reasoning in support of their positions. The government contends that, in light of our holdings in Barnes v. Eastern & Western Lbr. Co ., 205 Or. 553, 594, 287 P.2d 929 (1955), and Tupper v. Roan , 349 Or. 211, 219, 243 P.3d 50 (2010), a constructive trust is a form of remedy, and, like other remedies, must arise only when imposed by a court. Any retroactive existence, says the government, is therefore purely fictional, the product of the doctrine that constructive trusts relate back to an earlier unjust enrichment. Plaintiffs cite several treatises and argue that taking the government’s position would entail a rejection of the majority view of constructive trusts.
We find neither party’s arguments fully persuasive. As we explain, the question that they are fighting over appears to be less consequential than they take it to be, and we do not see any fundamental conflict in our case law. Nevertheless, we agree with the government that, because a constructive trust is a form of remedy, rather than a type of trust, constructive trusts originate at the time that they are imposed by the court. We also agree with plaintiffs, however, that a remedial constructive trust is based on a preexisting equitable ownership interest and that an understanding of the nature of that interest may prove helpful to the Ninth Circuit in resolving the issue before it. We therefore discuss briefly the nature of the equitable interest that forms the basis for the imposition of a constructive trust under Oregon common law.
The parties, and the Ninth Circuit, highlight an inconsistency in our cases as to when a constructive trust arises. We cannot resolve that inconsistency for purposes of answering the certified question without first clarifying its relevance to that question, and we begin there.
A constructive trust is a form of remedy for unjust enrichment. Tupper , 349 Or. at 219, 243 P.3d 50. The remedy has its limits, as "a constructive trust can attach only to items and money that the evidence clearly identifies as rightfully ‘belonging’ to the plaintiff, or to the identifiable products of, or substitutes for, those items and money." Id. at 222, 243 P.3d 50. But it also has its advantages, and one reason that a plaintiff may elect a constructive trust as a remedy is " ‘for the sake of priority against the defendant’s general creditors.’ " Evergreen West Business Center, LLC v. Emmert , 354 Or. 790, 801, 323 P.3d 250 (2014) ( ); see also Restatement (Third) § 60 (...
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