Appeals Court Holds More Than Mere “Mistake” Required for Imposition of Constructive Trust; Bankruptcy Trustee Entitled to Mistaken $90,000 Deposit into Debtor’s Account

12 Jun Appeals Court Holds More Than Mere “Mistake” Required for Imposition of Constructive Trust; Bankruptcy Trustee Entitled to Mistaken $90,000 Deposit into Debtor’s Account

The Eighth Circuit Bankruptcy Appellate Panel recently reversed a Minnesota bankruptcy court’s ruling that under Minnesota law, a chapter 7 trustee was not entitled to $90,000 which had been mistakenly deposited by a bank president into the debtor’s bank account before he filed bankruptcy. The bankruptcy court had ruled that because the deposit was a mistake, a constructive trust should be imposed on the funds, meaning that the debtor never actually owned the funds. The bankruptcy court therefore denied the chapter 7 trustee’s demand that the funds be turned over, citing the mistaken nature of the deposit.

In this case, Dietz v. Langlie, No. 09-6010 (8th Cir. BAP June 8, 2009), the debtor had asked a business associate to advance $23,195 into his bank account for a construction project. The business associate agreed, and he left a voice mail message instructing the bank president to make a deposit of that amount into the debtor’s bank account, from the business associate’s account. The bank president promptly deposited $123,195, rather than the requested $23,195, into the debtor’s account. No one noticed the mistake until six months later, when the debtor prepared to file chapter 7 bankruptcy.
Upon noticing he had an extra $90,000 in his account, the debtor determined that a mistake had been made. He asked the bank president to debit his account and apply the funds to his business associate’s account, to partially rectify the mistake. He filed bankruptcy three weeks later, failing to disclose either the transfer or the remaining $10,000 debt he still owed his business associate.
After discovering this $90,000 transfer, the chapter 7 trustee filed a lawsuit in bankruptcy court, seeking to recover the $90,000 transfer as a preferential payment to a creditor. The bankruptcy court refused this request, holding that no “transfer” to the business associate had occurred, because the mistaken $100,000 deposit never acually became debtor’s legal property. The bankruptcy court applied Minnesota law to conclude that a constructive trust had existed upon the funds due to mistake. Because the debtor never owned the funds, his act of returning the funds to the business associate could not constitute a preference.
On appeal, the Bankruptcy Appellate Panel reversed the lower court. The appeals court held that Minnesota law required more than a mere mistake in order to impose a constructive trust. It conducted a review of Minnesota case law and ruled that “fraud, oppression, duress, undue influence, force, crime, … or taking advantage of a confidential or fiduciary relationship,” was necessary in order for a constructive trust to be imposed.
The appeals court noted that there was no wrongdoing on the part of the debtor in obtaining the mistaken $100,000 deposit. It was only through the bank president’s mistake that the funds were delivered into the debtor’s account. According to the appeals court, a constructive trust could not be imposed under Minnesota law to remedy a simple mistake. Without actual wrongdoing, the debtor owned the $100,000 at the moment it was mistakenly deposited into his account.
The debtor’s transfer to his business associate of $90,000 three weeks prior to his bankruptcy filing was therefore a preferential payment of a debt to a creditor. Accordingly, the appeals court ordered that the trustee was entitled to recover the $90,000 payment from the business associate. It should be noted that the Bankruptcy Appellate Panel relied heavily upon cases decided by the Minnesota Court of Appeals, which appear to apply a narrower standard for imposition of constructive trusts than the standards set forth by decisions of the Minnesota Supreme Court.
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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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