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Wadsworth v. Talmage

Supreme Court of Oregon, En Banc

October 10, 2019

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.

          Argued and submitted June 4, 2019

          United States Court of Appeals for the Ninth Circuit - 17-35805

         On certified question from the United States Court of Appeals for the Ninth Circuit; certification order dated January 2, 2019; certification accepted January 31, 2019.

          William B. Ingram, Strong & Hanni, Salt Lake City, Utah, argued the cause and fled 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 fled the brief for defendant on review. Also on the brief was Jeremy N. Hendon, Washington D.C.

         [365 Or.App. 559] Case Summary: The Ninth Circuit certified a question to the Oregon Supreme Court: Does a constructive trust arise at the moment of purchase of a property using fraudulently-obtained funds, or does it arise when a court order that a constructive trust be imposed as a remedy? Held: (1) A constructive trust arises when a court imposes it as a remedy, but the party for whose benefit the constructive trust is imposed has an equitable ownership interest in the property that predates the constructive trust; (2) 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 at issue in this case.

         The certified question is answered.

         [365 Or.App. 560] BALMER, J.

         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.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         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 ("Because this case was resolved in federal district court on a motion to dismiss, the factual background is based on the allegations in the complaint, which we assume to be true.").

         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 [365 Or.App. 561] 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 River Cliff 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.

         The government brought an action to foreclose its tax liens on RiverCliff. Plaintiffs

"then brought the present action to quiet title to RiverCliff as to the Government. The Trust's complaint contends that because Talmage 'used wholly stolen funds' to obtain and improve RiverCliff, 'he did not hold an enforceable or legitimate property interest' in the property. The Trust contends that the Government's federal tax liens therefore could not attach to RiverCliff under 26 USC § 6321, which authorizes liens on 'all property and rights to property * * * belonging [365 Or.App. 562] to' a person who owes 'back taxes.' The Trust contends that it has either an exclusive or superior interest in RiverCliff under Oregon law as a resulting trust, as a constructive trust, or based on other equitable relief."

Wadsworth, 911 F.3d at 996. The government moved to dismiss, arguing that RiverCliff

"'belonged' to Talmage within the meaning of 26 USC § 6321, and that a federal tax lien could attach. It argued that the Trust had, 'at most,' a claim that did not become choate until after the federal tax liens had attached. The Government argued its tax liens were therefore superior to any claims the Trust might have."

Id. The trial court agreed with the government and dismissed plaintiffs' quiet title claim.

         Plaintiffs appealed to the Ninth Circuit, which explained that the dispute turned on "Oregon state law regarding constructive trusts" and that,

"[t]o determine whether property 'belongs' to someone within the meaning of § 6321, a federal court must, first, 'look *** to state law to determine what rights the taxpayer has in the property the Government seeks to reach,' and then, second, 'determine whether the taxpayer's state-delineated rights qualify as "property" or "right to property" within the compass of 26 USC § 6321."

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 [365 Or.App. 563] 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 Tapper 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.

         II. WHEN CONSTRUCTIVE TRUSTS BEGIN

         A. The Scope of the Question

         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.

         [365 Or.App. 564] A constructive trust is a form of remedy for unjust enrichment. Tupper, 349 Or at 219. 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. 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) (quoting Restatement (Third) of Restitution and Unjust Enrichment § 4 comment e (2001)); see also Restatement (Third) § 60 ("Except as otherwise provided by statute and by § 61, a right to restitution from identifiable property is superior to the competing rights of a creditor of the recipient who is not a bona fide purchaser or payee of the property in question.").

         Here, plaintiffs seek a constructive trust to obtain priority over the federal government's tax liens. But, somewhat counterintuitively, the case before us is not a fight over the priority rules that govern constructive trusts. The parties agree that a plaintiff entitled to a constructive trust would receive priority over ordinary creditors under state law and that whichever answer we give to the question of when the constructive trust originates will not make the slightest difference to the application of those rules. That is because, the government acknowledges, a constructive trust may "relate back" to an earlier date, even if it arises only when it is declared by a court. The parties also agree that federal law allows tax liens to jump the ordinary priority queue, as long as the property to which the lien attaches "belonged" to the taxpayer at that time. Here, then, the question of when a constructive trust arose is not pertinent to priority directly, but rather to whom RiverCliff-in the words of the federal statute, 26 USC § 6321-"belongfed]" when the government obtained its tax liens. That question, the parties submit, hinges on when a constructive trust arose.

         As the foregoing illustrates, the question before us has significance only to the application of federal law, and only as it bears, if it does, on whether RiverCliff "belong[ed]" [365 Or.App. 565] to the taxpayer when the actions giving rise to the constructive trust arose. Many of the cases cited by the government on the question of when a constructive trust originates are federal cases, dealing with other interactions between federal law and state constructive trusts. See, e.g., Healy v. Commissioner,345 U.S. 278, 282-83 (1953); Blacky v. Butcher,221 F.3d 896, 905 (6th Cir 2000); International Refugee Org. v. Maryland Drydock Co.,179 F.2d 284, 287 (4th Cir 1950). Not only is there no Oregon case that lends the question of when a ...


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