St. Joe Company v. Norfolk Redev. and Housing Authority ( 2012 )

Present: All the Justices
THE ST. JOE COMPANY
OPINION BY
v. Record No. 102342 JUSTICE S. BERNARD GOODWYN
March 2, 2012
NORFOLK REDEVELOPMENT
AND HOUSING AUTHORITY
FROM THE CIRCUIT COURT OF THE CITY OF NORFOLK
John R. Doyle, III, Judge
In this appeal, we consider whether the circuit court
erred in imposing a constructive trust on funds removed from a
debtor’s operating account, by a secured creditor with a
perfected interest in the account, when those funds were
entrusted to the debtor in its capacity as the agent of a third
party.
Background
Norfolk Redevelopment and Housing Authority (NRHA) filed a
complaint against the St. Joe Company (St. Joe) and Advantis
Real Estate Services Company (Advantis) in the Circuit Court of
the City of Norfolk alleging unjust enrichment and seeking
imposition of a constructive trust and recovery of funds
supplied by NRHA to its agent, Advantis, for the payment of
contractors who had performed services for NRHA. St. Joe held
a perfected secured interest in Advantis’s operating account
and exercised its rights as a secured creditor over that
account to have funds from Advantis’s account, including those
entrusted to Advantis as NRHA’s agent, transferred to a St. Joe
account. 1
NRHA and St. Joe filed an agreed stipulation of facts with
the circuit court and submitted cross-motions for summary
judgment on the constructive trust and unjust enrichment
counts. Following oral argument, the circuit court issued a
letter opinion and entered a final order granting NRHA’s motion
for summary judgment on both counts. St. Joe appeals.
Facts
NRHA entered into a property management agreement with
Advantis, under which Advantis would serve as NRHA’s agent with
regard to repair and architecture contracts for the improvement
of an NRHA office building in Norfolk, Virginia. Under the
management agreement, when payments became due to a contractor,
NRHA was to provide the necessary funds for Advantis to hold in
trust for transmission to the contractor on behalf of NRHA.
Pursuant to the management agreement, Advantis entered into
agreements with a roof repair contractor and an architectural
firm for the repair of NRHA’s building.
In June 2008, St. Joe became a secured creditor of
Advantis, entering into a deposit account control agreement
with Advantis and Wachovia Bank. NRHA was not a party to this
agreement.
1
Advantis is not a party to this appeal.
2
On May 30, 2009, Advantis sent NRHA an invoice of
$119,221.44 for work performed on the office building:
$112,473.06 was due the roofing contractor and $6,478.38 was
due Advantis as a management fee. On the same date, Advantis
submitted to NRHA an invoice in the sum of $3,041.14, of which
$2,869.00 was due the architectural contractor and $172.14 was
due Advantis.
On or about June 11 and 18, 2009, NRHA delivered checks
and corresponding invoices to Advantis: (1) in the amount of
$119,221.44 for the purpose of paying Advantis and the roof
repair contractor, and (2) in the amount of $3,041.14 to pay
Advantis and the architectural contractor. The check stubs
identified the invoice to which each check was applicable.
Advantis deposited these checks into its Wachovia master
operating account, which was governed by the deposit account
control agreement with St. Joe. On July 17 and 20, 2009, NRHA
issued cure notices, demanding that Advantis transmit the
payments to the contractors.
Advantis did not transmit the payments to the contractors
before St. Joe seized control of the Wachovia account, and
under the terms of the deposit account control agreement,
instructed Wachovia to wire the balance of the Advantis account
to a BB&T account held by St. Joe. NRHA sent a letter to St.
Joe demanding the return of the money which was supposed to
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have been paid to NRHA’s contractors. St. Joe declined to
return the money to NRHA. At all relevant times, the balance
of the operating account exceeded $115,342.06, the amount of
the fees due the contractors.
Analysis
St. Joe argues that the circuit court erred in determining
that the funds in Advantis’s account remained the property of
NRHA and subject to its control. It also argues that the
circuit court erred in imposing a constructive trust absent any
evidence that St. Joe exercised control over the funds in the
account by fraud, abuse of confidence, or other questionable
means. St. Joe further maintains that regardless of the
propriety of imposing a constructive trust, NRHA cannot prevail
because it is unable to adequately trace the funds into St.
Joe’s possession.
NRHA responds that the circuit court correctly found that
the funds remained its property until used for their intended
purpose. NRHA also asserts that because Advantis did not own
the funds, the circuit court properly found that a constructive
trust existed and that the funds could be traced into St. Joe’s
possession. We agree with NRHA.
In an appeal from a circuit court’s decision to grant or
deny summary judgment, this Court reviews the application of
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law to undisputed facts de novo. E.g., Johnson v. Hart, 279
Va. 617, 623, 692 S.E.2d 239, 242 (2010).
In the Commonwealth, it is well established that
[w]here money or property is intrusted [sic] to an
agent for a particular purpose, it is impressed by
the law with a trust in favor of the principal until
it has been devoted to such purpose; and, if it be
wrongfully diverted by the agent, such trust follows
the fund or property in the hands of a third person
and the principal is ordinarily entitled to pursue
and recover it as long as it can be traced and
identified, if no superior equities have intervened.
This applies whether it is the identical property put
into the hands of the agent or other property
purchased by the agent with the proceeds, and even
when it has been mixed with the mass of other
property, if not so as to be incapable of being
distinguished.
Baldwin v. Adkerson, 156 Va. 447, 463-64, 158 S.E. 864, 869
(1931) (citations omitted). Correspondingly, a trustee does
not become the owner of entrusted funds unless the trustee is
granted unrestricted use thereof. Broaddus v. Gresham, 181 Va.
725, 732, 26 S.E.2d 33, 36 (1943) (noting that money paid to
another may create a trust or debt, depending upon the
intention of the payor) (citation omitted).
The stipulated evidence established that Advantis acted as
NRHA’s agent in contracting with and paying the contractors.
Likewise, NRHA delivered the funds for the express purpose of
paying the contractors. NRHA never granted Advantis
unrestricted use of the funds and in fact issued cure notices
demanding that the money be used to pay the contractors. NRHA
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provided the funds for a specified purpose. Although St. Joe
notes that the funds intended for payment of the contractors
were placed in the master operating account and not in the
trust account contemplated by the contract between NRHA and
Advantis for rent collections, 2 the failure on the part of
Advantis to put the funds intended for payment of the
contractors into a trust account does not preclude a finding
that the funds were held for transmission to the contractors.
“Constructive trusts are those which the law creates,
independently of the intention of the parties, to prevent fraud
or injustice.” Leonard v. Counts, 221 Va. 582, 588, 272 S.E.2d
190, 195 (1980). Consequently, constructive trusts “occur not
only where property has been acquired by fraud or improper
2
The contract between NRHA and Advantis (Manager)
provided as follows:
The Manager shall deposit all rents and other
funds collected from the operation of each Property
or Properties, including any and all advance rents,
in a bank approved by Owner in a separate or combined
account or accounts at the direction of Owner . . .
for the Property in the name of: Advantis Real Estate
Services Company as Agent for Norfolk Redevelopment &
Housing Authority.
The bank shall be informed in writing that the
account and funds therein are held in trust for and
owned by the Owner. Out of each account, Manager
shall pay the operating expenses of the Property and
any other payments relative to the Property as
required by the terms of this Agreement. If more
than one account is required to operate the Property,
each account must have a unique name.
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means, but also where it has been fairly and properly acquired,
but it is contrary to the principles of equity that it should
be retained, at least for the acquirer’s own benefit.” Jones
v. Harrison, 250 Va. 64, 70, 458 S.E.2d 766, 770 (1995)
(citations and internal quotation marks omitted). A circuit
court may impose a constructive trust, thereby preventing a
failure of justice, “even when property has been acquired
fairly and without any improper means.” E.g., Faulknier v.
Shafer, 264 Va. 210, 215, 217, 563 S.E.2d 755, 758, 759 (2002).
Contrary to St. Joe’s assertion, no allegation of fraud or
abusive conduct is required for the imposition of a
constructive trust upon the funds in the Advantis account.
See, e.g., Richardson v. Richardson, 242 Va. 242, 245-47, 409
S.E.2d 148, 150-51 (1991) (imposing constructive trust to
prevent unjust enrichment, despite absence of wrongdoing on
part of the gratuitous transferee).
This Court has stated:
When property is given or devised to a defendant in
breach of a donor’s or testator’s contract with a
plaintiff, equity will impose a constructive trust
upon that property in the hands of the recipient even
though (1) the transfer is not the result of breach
of a fiduciary duty or an actual or constructive
fraud practiced upon the plaintiff, and (2) the donee
or devisee had no knowledge of the wrongdoing or
breach of contract.
Faulknier, 264 Va. at 215, 563 S.E.2d at 758 (quoting Jones,
250 Va. at 69, 458 S.E.2d at 769).
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The scenario described in Faulknier and Jones is analogous
to the facts in the instant case. NRHA provided funds to
Advantis for the payment of the contractors, but Advantis did
not pay them in accord with the management agreement. Although
not “given or devised” to St. Joe, the funds arrived “in the
hands of” the company, despite its apparent lack of knowledge
that Advantis was to pay the contractors with the funds. The
property was acquired legally by St. Joe, but allowing the
company to retain the funds would be contrary to the principles
of equity.
“[I]n order to be entitled to the benefit of a
constructive trust, a claimant’s money must be ‘distinctly
traced’ into the chose in action, fund, or other property which
is to be made the subject of the trust.” Crestar Bank v.
Williams, 250 Va. 198, 204, 462 S.E.2d 333, 335 (1995). For
commingled funds, such tracing may be sufficiently accomplished
under the lowest intermediate balance rule by a showing that
the amount in the destination account exceeded the value of the
constructive trust. Old Republic Nat’l Title Ins. Co. v.
Tyler, 155 F.3d 718, 724 (4th Cir. 1998). (“In cases where the
trust property has been commingled, courts resolve the issue
with reference to the so-called ‘lowest intermediate balance’
rule, . . . which is grounded in the fiction that, when faced
with the need to withdraw funds from a commingled account, the
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trustee withdraws non-trust funds first, thus maintaining as
much of the trust’s funds as possible. Hence, pursuant to the
lowest intermediate balance rule, if the amount on deposit in
the commingled fund has at all times equaled or exceeded the
amount of the trust, the trust’s funds will be returned in
their full amount.”); see Federal Reserve Bank of Richmond v.
Peters, 139 Va. 45, 69, 123 S.E. 379, 386 (1924) (“This money
passed from the agent’s hands to the hands of the receiver
impressed with a trust, and is sufficiently identified, since
it appears that an amount equal to the amount held [in trust]
was in its hands . . . until its failure.”). In the instant
case, the parties stipulated that the balance of the Wachovia
account did not fall below the amount of the funds designated
for payment to the contractors.
Furthermore, St. Joe stipulated that it “has maintained
possession of the $115,343.06 that is the subject of this case
during the pendency of this litigation.” Even absent
application of the lowest intermediate balance rule, St. Joe’s
stipulation effectively ends the inquiry, as it has admitted
possession of the very funds at issue.
We therefore hold that imposition of a constructive trust
was proper and necessary to prevent a failure of justice, and
unjust enrichment.
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Conclusion
Accordingly, for the reasons stated, we will affirm the
judgment of the circuit court.
Affirmed.
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