Matter of Southmark Corp.

United States Court of Appeals,

Fifth Circuit.

No. 94-10534

Summary Calendar.

In the Matter of SOUTHMARK CORPORATION, Debtor.

SOUTHMARK CORPORATION, Appellant,

v.

Joseph GROSZ, Appellee.

April 14, 1995.

Appeal from the United States District Court for the Northern
District of Texas.

Before DUHÉ, WIENER and STEWART, Circuit Judges.

WIENER, Circuit Judge:

Southmark Corporation ("Southmark"), a debtor in possession,

appeals from a judgment dismissing its claim that a payment to

Joseph Grosz, a former officer of one of Southmark's subsidiaries,

was preferential and thus avoidable under 11 U.S.C. § 547. As we

conclude that the bankruptcy court erred in determining that Grosz

was not compensated with funds from Southmark's estate, we reverse

the summary dismissal of Southmark's preference claim and remand

for further proceedings consistent with this opinion.

I

FACTS AND PROCEEDINGS

Southmark, debtor in possession of a real estate and financial

services company,1 has literally hundreds of affiliated businesses

1
As a debtor in possession in a Chapter 11 reorganization
proceeding, Southmark has all the rights and powers of a trustee,

1
and subsidiaries, one of which is a wholly owned subsidiary named

American Realty Advisors ("ARA"). In 1984, Grosz entered in an

employment agreement with Southmark and Southmark Funding (later

renamed ARA), to serve as the president and a director of ARA, and

American Realty Trust, another of Southmark's wholly owned

subsidiaries. In consideration of that service, Grosz was entitled

to compensation in the form of, inter alia, loan procurement fees,

bonuses, and profit sharing.

Sometime during the late 1980s, the relationship between

Southmark and Grosz soured, and Southmark refused to pay Grosz

portions of the accrued fees and bonuses to which he believed he

was entitled. Southmark and Grosz decided to resolve the dispute

out of court and entered in a settlement agreement.

Pursuant to that agreement, Southmark delivered Grosz a check

totaling $289,258.96, $214,228 of which was for commissions and

other compensation that he had previously earned.2 Although the

check named ARA as the remitter and the W-2 Form reporting Grosz'

income to the IRS identified ARA as the payor, the check was

actually drawn on an account owned by Southmark.

The somewhat confused circumstances surrounding the identity

of the entity that paid Grosz were caused by the fact that

Southmark uses a cash management system (the "CMS") to administer

which includes the right to avoid a payment under § 547. See
Georgia Pac. Corp. v. Sigma Serv. Corp., 712 F.2d 962, 966 n. 1
(5th Cir.1983).
2
The remaining $75,030.96 was for future consulting
services.

2
more efficiently and effectively its financial operations and

assets. The CMS employs several different bank accounts to process

all deposits, transfers, and payments of Southmark and of those

affiliates and subsidiaries—such as ARA—that also use the CMS.

Although each company's receipts and disbursements are commingled

in the CMS for cash management purposes, they are segregated for

record keeping purposes and can be readily identified. At the time

Grosz was paid, ARA had a positive balance in the CMS.

Grosz' check was drawn on a general miscellaneous bank

account, referred to as the "Payroll Account."3 Like other

accounts in the CMS, the Payroll Account is maintained in

Southmark's name and is owned, operated, and controlled by

Southmark. Southmark used funds from the account to pay for its

own obligations in addition to those incurred by affiliates and

subsidiaries participating in the CMS. There is no evidence of any

agreement between ARA and Southmark restricting Southmark's access

to or use of the funds in the Payroll Account. In fact, had

Southmark desired, it could have totally depleted that account to

pay its own creditors—or those of any affiliate or

subsidiary—without regard to any other subsidiary's contribution to

or balance remaining in the account.

In 1989, Southmark filed a voluntary petition for relief under

3
The Payroll Account is funded periodically from a
concentration bank account (the "Concentration Account"), which
is maintained primarily to receive deposits from Southmark and
its subsidiaries and affiliates. Those funds are then shifted as
needed to other Southmark accounts. The Concentration Account is
also in the name of, and operated without restriction by,
Southmark.

3
Chapter 11 of the Bankruptcy Code.4 Almost two years later,

Southmark, as a debtor in possession, filed an adversary action in

Bankruptcy Court in the Northern District of Texas in which it

sought to recover, inter alia, the payment to Grosz, arguing that

the transfer was a preferential payment and thus avoidable under §

547(b). Grosz filed a motion for summary judgment, arguing, among

other things, that the funds with which he had been paid were not

the property of Southmark's estate, so that the payment was not an

avoidable preference. The bankruptcy court agreed and dismissed

Southmark's preference claim (the "February Order"), then tried the

remaining issues in the case, ultimately ruling in favor of Grosz

on all counts.

Southmark appealed the February Order to the district court,

which affirmed the bankruptcy court's summary judgment. In the

instant appeal, Southmark urges only that the court erred in

dismissing its claim that the $214,228 portion of the disbursement

to Grosz was a preferential payment, and is thus avoidable under §

547(b).

II

ANALYSIS

A. STANDARD OF REVIEW

Both the bankruptcy court and the district court granted

summary judgment for Grosz. "Summary judgment is appropriate if

the moving party establishes that there is no genuine issue of

4
Southmark originally filed its petition in the Northern
District of Georgia, but the case was subsequently transferred to
the bankruptcy court in the Northern District of Texas.

4
material fact and that it is entitled to a judgment as a matter of

law."5 "The courts' reasoning on issues of law must be appraised

de novo."6

B. PROPERTY OF THE DEBTOR'S ESTATE

Section 547(b) permits a debtor in possession to avoid

transfers of its property if the transfer meets certain conditions

established by statute.7 A preliminary requisite, however, is that

the transfer involve property of the debtor's estate. Even though

Grosz was paid by check drawn on a bank account that is owned by

Southmark, the bankruptcy court concluded that Grosz was entitled

to summary judgment as there were no genuine issues of material

fact presented, and that, as a matter of law, the payment was from

ARA's estate, not the estate of Southmark. The district court

agreed and affirmed the bankruptcy court, but for a different

reason. The district court held that the funds in Southmark's

Payroll Account in the CMS that were used to pay Grosz were held in

a "quasi trust" for the benefit of ARA.8 Even though we agree with

5
In re Jones, 966 F.2d 169, 172 (5th Cir.1992) (citing
FED.R.CIV.P. 56(c) and Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986)); see In
re Baudoin, 981 F.2d 736, 739 (5th Cir.1993).
6
In re Kolstad, 928 F.2d 171, 173 (5th Cir.) (citing
Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1307
(5th Cir.1985)), cert. denied, 502 U.S. 958, 112 S.Ct. 419, 116
L.Ed.2d 439 (1991).
7
See 11 U.S.C. § 547(b) (1988).
8
Although the district court does not expressly use the
phrase "constructive trust" in its judgment (that court referred
only to a "quasi trust"), the record indicates that the court
affirmed the bankruptcy court based on that theory. See In re
Carolin Paxson Advertising, Inc., 938 F.2d 595, 597 (5th

5
both the bankruptcy and the district courts that the record

presents no genuine issue of material fact regarding which estate,

for the purposes of preference law, owned the funds that were paid

to Grosz, we disagree with both courts' legal conclusions—drawn

from the undisputed facts—that the funds were not part of

Southmark's bankruptcy estate.

1. ARA as the Remitter

The bankruptcy court dismissed Southmark's preference claim

against Grosz based primarily on the court's reasoning in a prior

ruling, Southmark Corporation v. Kranz,9 which involved Southmark

and another of its subsidiaries, Southmark/Envicon. In Kranz, the

bankruptcy court held that a payment to Kranz, a former officer of

Southmark/Envicon, was not an avoidable transfer under § 547(b),

Cir.1991) ("A constructive trust generally arises when a person
with legal title to property owes equitable duties to deal with
the property for the benefit of another.").

Moreover, the record does not support a conclusion that
the funds were either held in an express or resulting trust
or earmarked as ARA's for payment to Grosz. See In re
Oxford Management, Inc., 4 F.3d 1329, 1335 (5th Cir.1993)
(concluding that no express trust can exist when recipient
of funds can use them as its own and commingle them with its
own monies); Coral Petroleum, Inc. v. Banque Paribas-
London, 797 F.2d 1351, 1362 n. 12 (5th Cir.1986) (explaining
that doctrine of "earmarking" cannot be invoked where debtor
" "had absolute control over [the] funds [and claimant] had
no legal right to force him to make an endorsement' "
(quotation omitted)); Harris v. Sentry Title Co., 715 F.2d
941, 946 (5th Cir.1983) (stating that resulting trust
requires "evidence of a shared intent to establish a strict
fiduciary relationship"), modified on other grounds, 727
F.2d 1368 (per curiam), cert. denied, 467 U.S. 1226, 104
S.Ct. 2679, 81 L.Ed.2d 874 (1984).
9
Ch. 11 Case No. 389-36324-SAF-11, Adv. No. 391-3400
(N.D.Tex. June 25, 1992).

6
even though that payment, like the one to Grosz here, was made from

Southmark's Payroll Account.10 The bankruptcy court took judicial

notice of the fact that, in numerous other cases in which claims

had been filed against Southmark's affiliates or subsidiaries,

"Southmark had encouraged this court in thousands of objections to

be very mindful of the separate legal entity [with which] people

were dealing." The court then concluded that Southmark could not

avoid the transfer, because Southmark/Envicon—not Southmark—was the

corporate entity that actually paid Kranz, therefore the transfer

was made with property belonging to Southmark/Envicon.

In the instant case, the court invoked Kranz and again held

that the transfer did not involve property from Southmark's estate:

The court has consistently in the Southmark case attempted to
recognize appropriate boundaries of legal entities not
imposing liability on a parent company if it's not there, but
by the same token not permitting the parent company when it's
appropriate to step into the shoes of the subsidiary and so
forth. The result is there have been lots of claims against
Southmark disallowed, but it also cuts in this case in favor
of the defendant [Grosz].

The court continued,

The fact that funds are transferred through a cash management
system to get into a Southmark payroll account in San Jacinto
does not create a genuine issue of material fact, [that] in
this case this is an ARA, Inc. payment. It's an ARA check.
W-2 Reports to the IRS it's an ARA payment. The ARA accounts
are charged and credited. Southmark's providing a servicing
function here only. The property interests are those of ARA.

The bankruptcy court's ruling dismissing Southmark's

preference claim makes clear that the court was attempting, in an

10
In that case, unlike this one, Southmark/Envicon had a
negative balance in the CMS at the time that Southmark paid the
subsidiary's former officer.

7
equitable fashion, to disentangle the various assets and

liabilities of the Southmark family of companies.11 Although §

105(a) of the Bankruptcy Code ("Code") authorizes bankruptcy courts

to fashion such orders as are necessary to further the substantive

provisions of the Code, that provision does not, as we recently

observed, empower bankruptcy courts to act as " "roving

commission[s] to do equity.' "12 "Even the broad powers of the

bankruptcy courts to fashion equitable remedies ... must be

exercised only within the confines of the Bankruptcy Code."13 "The

"statute does not authorize the bankruptcy courts to create

substantive rights that are otherwise unavailable under applicable

law....' "14

11
The bankruptcy court appears to have been persuaded by the
evidence that ARA was the company identified as the payor on
Grosz' check and on his W-2 Form, which suggests that the purpose
of the transfer was to compensate Grosz for his service to ARA.
But we have stated that, "[t]he purpose of the transfer is not
dispositive of the question whether it qualifies as an avoidable
preference under section 547(b) because "it is the effect of the
transaction, rather than the debtor's or creditor's intent, that
is controlling.' " See In re T.B. Westex Foods, Inc., 950 F.2d
1187, 1195 (5th Cir.1992) (quoting 4 COLLIER ON BANKRUPTCY ¶ 547.01
(Lawrence P. King et al. eds., 15th ed. 1994) (emphasis in
original)). In this case, the effect was that the payment to
Grosz depleted the amount of funds that otherwise could have been
used to pay Southmark's creditors.
12
In re Haber Oil Co., 12 F.3d 426, 443 (5th Cir.1994)
(quoting United States v. Sutton, 786 F.2d 1305, 1308 (5th
Cir.1986)); accord In re Oxford Management, Inc., 4 F.3d at
1334.
13
In re Haber Oil Co., 12 F.3d at 442-43 (citing Norwest
Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963,
968, 99 L.Ed.2d 169 (1988)).
14
In re Oxford Management, Inc., 4 F.3d at 1334 (quoting
Sutton, 786 F.2d at 1308).

8
 In attempting to do equity here, the bankruptcy court

exceeded the limits of its equitable powers under § 105(a) by

creating substantive rights that otherwise would not have existed.

The court ruled that ARA possessed a property interest in funds

that, under the law governing avoidable preferences, indisputably

belonged to Southmark's estate: The check paid to Grosz was drawn

on Southmark's Payroll Account, a general bank account containing

commingled funds,15 to which Southmark held complete legal title,

all indicia of ownership, and unfettered discretion to pay

creditors of its own choosing,16 including its own creditors.17 The

15
4 COLLIER ON BANKRUPTCY, supra note 11, ¶ 541.11, at 541-74
("Deposits in a bank to the credit of a debtor become property of
the estate under section 541(a)(1)."); see In re Bellanca
Aircraft Corp., 850 F.2d 1275, 1279 (8th Cir.1988) (same); In re
Bullion Reserve of N. Am., 836 F.2d 1214, 1217 (9th Cir.)
(stating that money in commingled bank accounts under debtor's
control "presumptively constitutes property of the debtor's
estate"), cert. denied, 486 U.S. 1056, 108 S.Ct. 2824, 100
L.Ed.2d 925 (1988).
16
See Coral Petroleum, Inc. v. Banque Paribas-London, 797
F.2d 1351, 1358 (5th Cir.1986) (noting that "key" in determining
if funds are part of debtor's estate is whether debtor "controls"
the funds); cf. In re Coutee, 984 F.2d 138, 141 & n. 3 (5th
Cir.1993) (per curiam) (stating that debtor is mere "conduit or
agent" if party does not obtain "actual dominion or control over
funds"); see also In re Kemp Pac. Fisheries, Inc., 16 F.3d 313,
316-17 (9th Cir.1994) (per curiam) (holding transfer to be
preferential where creditor "did not exercise the requisite
control over the funds or place any limits whatsoever on the
parties to whom debtor could present checks"); In re Cybermech,
Inc., 13 F.3d 818, 820-21 (4th Cir.1994) (holding transfer to be
preferential where funds were commingled with other money, and
debtor had "right to withdraw, transfer, or otherwise use the
payment funds in any way it wanted"); In re Chase & Sanborn
Corp., 813 F.2d 1177, 1181 (11th Cir.1987) (noting that "any
funds under the control of the debtor, regardless of their
source, are properly deemed to be the debtor's property").
17
In fact, one commentator has explained the proper
resolution of a factual situation very similar to the one we

9
last point is particularly important, as the primary consideration

in determining if funds are property of the debtor's estate is

whether the payment of those funds diminished the resources from

which the debtor's creditors could have sought payment.18

Conversely, if funds cannot be used to pay the debtor's

creditors, then they generally are not deemed an asset of the

debtor's estate for preference purposes.19 A common example is when

consider here:

"If the debtor determines the disposition of funds from
the third party and designates the creditor to be paid,
the funds are available for payment to creditors in
general and the funds are assets of the estate." In
this event, because the debtor controlled the funds and
could have paid them to anyone, the money is treated as
having belonged to her for purposes of preference law
whether or not she actually owns it.

1 DAVID G. EPSTEIN ET AL., BANKRUPTCY § 6-7, at 522 (1992)
(quotation omitted). As in the hypothetical, it is
undisputed that Southmark controlled the funds in the
Payroll Account and that it could have paid them to anyone,
including its own creditors. For the purposes of preference
law, therefore, the money in Southmark's Payroll Account is
treated as part of Southmark's estate, whether or not
Southmark actually owns it.
18
Coral Petroleum, Inc., 797 F.2d at 1356 (citing with
approval case explaining that key question in determining if
transaction is preferential is whether transferred assets would
otherwise have been available to pay claims of other creditors);
see 4 COLLIER ON BANKRUPTCY, supra note 11, ¶ 547.03, at 547-22.2
("The fundamental inquiry [in determining whether a transfer is
preferential] is whether the transfer diminished or depleted the
debtor's estate.")
19
See Coral Petroleum, Inc., 797 F.2d at 1359 (funds in
debtor's account not part of debtor's estate where debtor never
had control over funds); see, e.g., Georgia Pac. Corp. v. Sigma
Serv. Corp., 712 F.2d 962, 971-72 (5th Cir.1983) (funds received
by debtor are part of estate, unless irrevocable agreement
compels debtor to use money exclusively for creditor's benefit);
see also In re Auto-Train Corp., 810 F.2d 270, 274 (D.C.Cir.1987)
(same).

10
a debtor holds funds in trust for another.20 Here, the district

court invoked a trust theory—albeit constructive, not express—in

affirming the bankruptcy court's judgment. But, as explained

immediately below, the summary judgment record cannot support that

ruling.

2. Constructive Trust

The district court found that Southmark could not avoid the

payment to Grosz because the funds that were used to pay him were

not Southmark's. Rather, said the court, the funds in question

were held in "quasi" (or constructive) trust by Southmark for ARA.

Section "541(d) excludes property subject to a constructive trust

from the bankruptcy estate."21

The district court relied on Begier v. IRS22 in concluding that

the payment to Grosz was not from Southmark's estate, because

Southmark held only legal title to the money that was paid to

Grosz, but not an equitable interest as well. Although the

district court properly invoked that aspect of Begier (i.e., that

20
In re Bullion Reserve of N. Am., 836 F.2d 1214, 1217 n. 3
(9th Cir.) (explaining that presumption that funds in debtor's
account belong to its estate is overcome by showing that funds
were held in constructive trust for another), cert. denied, 486
U.S. 1056, 108 S.Ct. 2824, 100 L.Ed.2d 925 (1988); see 1 EPSTEIN
ET AL., supra note 17, § 6-7, at 522 ("[A] debtor's transfer of
property held in trust by her is never a preference....")
(citing § 541(b)(1)).
21
In re Haber Oil Co., 12 F.3d 426, 436 (5th Cir.1994); see
In re Sakowitz, Inc., 949 F.2d 178, 181 (5th Cir.1991)
("[P]roperty held in trust for another is not property of the
estate under 11 U.S.C. § 541 in the event of the trustee's
bankruptcy." (citing Begier v. IRS, 496 U.S. 53, 110 S.Ct. 2258,
110 L.Ed.2d 46 (1990)).
22
496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990).

11
for property to be part of the debtor's estate the debtor must

possess both legal title and equitable interest), the court did not

first analyze whether ARA possessed an equitable property interest

in the funds from Southmark's account that were used to pay Grosz.

And, it is that issue that proves problematic in this case.

At the outset, it is important to distinguish generally

between two types of "equitable interests." In a contractual (or

debtor-creditor) relationship, the creditor may possess an

"equitable claim" to property actually owned by the debtor, but

there is no division of ownership or title in the property at

issue; the debtor is entirely free to dispose of the property as

he sees fit. In a trust relationship, by contrast, the law

actually divides the bundle of rights in the property; the trustee

holds legal title while the beneficiary possesses an equitable

title or property interest.23 Only in the latter instance—when

legal title to the property is held by the bankrupt in trust for

the benefit of another—is the property properly excluded from the

bankrupt's estate under preference law.24

But when property that otherwise would be considered part of

23
See generally GEORGE G. BOGERT & GEORGE T. BOGERT, THE LAW OF
TRUSTS AND TRUSTEES § 17, at 216-17 (2d rev. ed. 1984) (explaining
distinction between the two "equitable interests").
24
See In re Monnig's Dep't Stores, Inc., 929 F.2d 197, 202
(5th Cir.1991) (holding that district court erred in imposing
constructive trust where debtor-creditor relationship existed,
not trust); see also BOGERT & BOGERT, supra note 23, § 17, at 216-
17 ("If the trustee becomes insolvent, the beneficiary may take
all identifiable trust property from the assets of the insolvent
trustee.... The general creditor, on the other hand, having no
property interest in the assets owned by his debtor, must accept
merely a dividend." (footnotes omitted)).

12
a debtor's estate is alleged to be held in trust for another,

"[t]he burden of establishing the existence of the constructive

trust rests on the claimant."25 "This burden is based in part upon

the statutory intent reflected by the sweeping marshalling and

avoidance powers accorded a trustee in order to secure all the

debtor's property for an equal distribution according to the terms

of the Code."26 We are mindful, therefore, that the imposition of

a constructive trust is a potent remedy, as it gives the successful

claimant priority over the debtor's unsecured creditors; thus such

a trust should not be imposed "cavalierly" in a bankruptcy

proceeding.27

We look to state law to determine whether a party has

adequately demonstrated that property is held in constructive trust

for another.28 As neither the bankruptcy nor the district court

conducted the requisite analysis, neither court decided which

state's laws should be applied in determining ARA's rights to funds

deposited in Southmark's bank account. Based on the summary

25
In re Haber Oil Co., 12 F.3d at 436; accord In re Oxford
Management, Inc., 4 F.3d 1329, 1335 (5th Cir.1993).
26
Georgia Pac. Corp. v. Sigma Serv. Corp., 712 F.2d 962, 969
(5th Cir.1983).
27
In re Bailey Pontiac, Inc., 139 B.R. 629, 635
(N.D.Tex.1992); see In re Haber Oil Co., 12 F.3d at 436 (noting
that the imposition of a constructive trust can wreak havoc with
the Code's priority system).
28
In re Haber Oil Co., 12 F.3d at 436; In re Monnig's Dep't
Stores, Inc., 929 F.2d at 201; see, e.g., In re Oxford
Management, Inc., 4 F.3d at 1336 (applying Louisiana law);
Georgia Pac. Corp., 712 F.2d at 969 (applying Arkansas and
Mississippi law).

13
judgment record, however, Texas appears to have the "dominant

contact" with the funds,29 so we shall apply its laws.

"Under Texas law, a constructive trust is not actually a

trust, but rather an equitable remedy imposed by law to prevent

unjust enrichment resulting from an unconscionable act."30 We have

explained that, "to justify imposing a constructive trust on

property, fruad—either actual or constructive—must be present."31

The record before us, however, is devoid of evidence of either.

This is no evidence of actual fraud in the record. Moreover,

even assuming arguendo that Southmark, as ARA's parent company and

the administrator of the CMS, owed a fiduciary-like duty to ARA,

the record does not support a finding that Southmark breached that

29
In re Carolin Paxson Advertising, Inc., 938 F.2d 595, 597
(5th Cir.1991).
30
In re Haber Oil Co., 12 F.3d at 436 (citations omitted);
see Southwest Livestock & Trucking Co. v. Dooley, 884 S.W.2d 805,
810 (Tex.Civ.App.—San Antonio 1994, writ denied) (stating that a
constructive trust is a broad and far reaching remedy).
31
In re Monnig's Dep't Stores, Inc., 929 F.2d at 201;
accord Exploration Co. v. Vega Oil & Gas Co., 843 S.W.2d 123, 127
(Tex.Civ.App.—Houston 1992, writ denied); see In re Haber Oil
Co., 12 F.3d at 437 (noting that the imposition of a constructive
trust is justified in generally two circumstances: actual fraud,
or breach of a confidential or fiduciary relationship); In re
Carolin Paxson Advertising, Inc., 938 F.2d at 597 ("Texas law
imposes such a trust when one obtains property by fraudulent
means, when an absolute conveyance of property was performed but
not intended, or when a party breaches a fiduciary-like
relationship.").

"We have summarized the elements of a constructive
trust under Texas law as (1) breach of a fiduciary
relationship or, in the alternative, actual fraud, (2)
unjust enrichment of the wrongdoer, and (3) tracing of the
property to an identifiable res." In re Haber Oil Co., 12
F.3d at 437.

14
duty. As a parent company, Southmark was responsible for producing

the maximum results from its investments in its subsidiaries,

including ARA. To help accomplish that goal, Southmark created the

CMS, which consisted of, inter alia, the Payroll Account from which

Grosz' check was drawn. But there is no evidence—and Grosz does

not claim—that Southmark violated any duty by establishing the CMS.

Neither is there evidence that Southmark misappropriated any of

ARA's deposits, used ARA's deposits in an unreasonable manner, or

abused its position with ARA by filing for bankruptcy. In short,

there is nothing in the record to indicate that Southmark violated

any duty that it may have owed to ARA.32 And, absent some proof of

that type, there is no justification for imposing a constructive

trust in this bankruptcy proceeding.

As we have recently written,

[t]he remedy of a constructive trust is ... a potent one in
bankruptcy because it gives the successful claimant "priority
over the defendant's unsecured creditors" to the extent of the
property subject to the trust. As a result, creditors of the
bankrupt debtor have every incentive to argue that their
unsecured claims are eligible under state law for the remedy
of a constructive trust. Because the constructive trust

32
In that regard, the facts of this case mirror those
recently considered by a Colorado district court in In re Amdura
Corp., 167 B.R. 640 (D.Colo.1994). In that case too, a debtor's
subsidiary argued that the court should impose a constructive
trust on certain funds that the subsidiary apparently had
deposited in a "concentration account," the legal title to which
was owned by the subsidiary's parent company. Applying Colorado
state law, which is quite similar to the Texas law applied here,
the district court ruled that the imposition of a constructive
trust was not warranted, as the subsidiary failed to establish
that the parent company abused any confidential relationship that
it might have had with its subsidiary. Important to that
judgment was the fact that the subsidiary's parent, like
Southmark here, had absolute discretion to spend funds in the
concentration account.

15
 doctrine can wreak such havoc with the priority system
ordained by the Bankruptcy Code, bankruptcy courts are
generally reluctant to impose constructive trusts without a
substantial reason to do so.33

Although the district court likely believed that substantial

justification for imposing a constructive trust existed here, the

court was still required to apply state law to ascertain whether

(1) ARA was entitled to the benefit of that equitable remedy, and

(2) the remedy could be properly fashioned from the facts and

within the confines of the Bankruptcy Code. The court failed to do

either. Furthermore, as Grosz has not demonstrated that the money

that he received from Southmark's Payroll Account was held—or

should be deemed to have been held—in trust for ARA by Southmark,

we conclude, as a matter of law, that based on the undisputed

facts, those funds are the property of Southmark's estate for the

purposes of § 547(b).34

III

CONCLUSION

The bankruptcy court erred in summarily dismissing Southmark's

claim that Grosz received a preferential transfer based on the

court's conclusion that funds paid to Grosz from the Payroll

Account were not part of Southmark's estate. Likewise, the

district court erred in affirming the bankruptcy court on a

33
In re Haber Oil Co., 12 F.3d at 436 (citations omitted).
34
We decline Grosz' invitation to affirm the bankruptcy
court's judgment on the alternative theories proffered by Grosz,
but not ruled on by either court. To do so would require that we
make original findings of material facts, a task more
appropriately left to a trial court.

16
constructive trust theory. Accordingly, the bankruptcy court's

order dismissing Southmark's preference claim against Grosz, as

affirmed by the district court, is reversed, and this matter is

remanded to the bankruptcy court for further proceedings consistent

with this opinion.

REVERSED and REMANDED.

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