John WADSWORTH, individually and as trustee for the RBT Victim Recovery Trust, Plaintiffs,
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.
and submitted June 4, 2019
States Court of Appeals for the Ninth Circuit - 17-35805
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
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.
certified question is answered.
Or.App. 560] BALMER, J.
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
"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
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?"
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.
FACTUAL AND PROCEDURAL BACKGROUND
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.").
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.
are victims of the scheme; 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
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.
government brought an action to foreclose its tax liens on
"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
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.
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
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.
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.
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.
WHEN CONSTRUCTIVE TRUSTS BEGIN
The Scope of the Question
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.
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.").
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.
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 ...