## Facts

- Nina Linsey worked for Carlson Orchards, Inc. as a bookkeeper from about January to November 2001.
- During her roughly 11 months of employment, Nina embezzled more than $100,000 from Carlson by writing unauthorized additional paychecks to herself and diverting checks payable to Carlson.
- Nina deposited the misappropriated funds into two personal bank accounts in her name and paid expenses from those accounts.
- Using funds from those accounts, the Linseys acquired two vehicles: a 1999 Plymouth Grand Caravan and a 1995 Ford F-150.
- The vehicles were titled in Nina’s husband David Linsey’s name, and at trial Nina admitted the vehicles were purchased with the embezzled funds.
- Nina also used funds from the accounts to pay for home-improvement work on the Linseys’ residence at 11 Meadowbrook Road in Hudson, Massachusetts (e.g., windows, siding, landscaping, and electrical work).
- David Linsey had recorded a Massachusetts declaration of homestead on the residence in August 1994, before the embezzlement.
- After Nina filed bankruptcy, Carlson filed an adversary proceeding seeking (among other relief) a constructive trust on the two vehicles and on approximately 32% of the real property, based on tracing the stolen funds into the purchases and improvements.
- At trial, Carlson introduced evidence including bank records, historical account-balance information, and 11 checks written from the relevant accounts to home-improvement contractors.

## Issues

1. Whether, under Massachusetts law as applied in bankruptcy, Carlson established grounds to impose a constructive trust on vehicles purchased with embezzled funds, even though legal title was in the non-embezzling spouse’s name.
2. Whether Carlson proved a sufficiently identifiable, traceable interest in the debtors’ real property (based on home improvements allegedly funded with embezzled money) to warrant a constructive trust on some portion of the property despite a preexisting homestead declaration.
3. How strict tracing requirements and bankruptcy estate concerns affect the availability and scope of constructive-trust relief.

## Decision

- The court imposed a constructive trust in favor of Carlson on the two vehicles, finding Carlson sufficiently traced embezzled funds into the vehicle purchases and noting Nina’s admission that the vehicles were bought with stolen money.
- The court denied Carlson’s request to impose a constructive trust on any portion of the real property, concluding Carlson did not prove a discrete, identifiable interest in the homesteaded residence that could be traced with adequate certainty to the embezzled funds.
- Because the vehicles were subject to a constructive trust, Carlson held an equitable ownership interest in them, and they were not treated as bankruptcy estate property to the extent of Carlson’s equitable interest.

## Legal Principles

- A constructive trust is an equitable remedy used to prevent unjust enrichment when a person wrongfully obtains property at another’s expense; the claimant must connect the wrongfully taken funds to specific, identifiable property.
- In bankruptcy, courts apply state constructive-trust law but are cautious because imposing a constructive trust can remove assets from the estate for one claimant rather than allowing distribution under the Bankruptcy Code; this caution supports demanding proof of clear tracing.
- Tracing requires more than showing that the debtor’s overall wealth increased; the claimant must show the property (or a definable portion of it) is the product or proceeds of the misappropriated funds.
- Legal title in a spouse or other third party does not bar a constructive trust when the evidence shows the asset was acquired with the claimant’s funds; equity looks to beneficial ownership.
- Payments for general home improvements may be harder to convert into a constructive-trust interest in real estate when the claimant cannot show the improvements created a distinct, measurable portion of value that can be identified and traced as a separate res, particularly where homestead rights and other creditor interests would be affected.

## Conclusion

The bankruptcy court granted Carlson a constructive trust on the two vehicles because the embezzled funds were clearly traced into their purchase, but it refused to impose a constructive trust on any portion of the homesteaded residence because Carlson’s evidence did not identify a definite, traceable real-property interest attributable to the stolen money.


Carlson Orchards, Inc. v. Linsey (In re Linsey), 296 B.R. 582 (2003)