## Facts

- Joseph Douglas Shepard operated “JDS Marketing, Inc.” and entered a merchant servicing agreement with Central Trust Company to process MasterCard and Visa charge slips and receive immediate credit.
- From November 19 to December 7, 1981, Shepard deposited altered charge slips totaling about \$274,000 into the JDS account; from November 20 to December 11, 1981, he withdrew about \$250,000 in cash.
- The scheme involved obtaining authorizations for small purchases and altering the slips to reflect much larger charges.
- Central discovered unusual account activity and investigated; the U.S. Postal Service also investigated.
- Shepard instructed his secretary to cash three \$10,000 checks and place the cash in a filing cabinet at his home.
- Pursuant to a search warrant, a postal inspector seized \$28,440 in cash from Shepard’s residence; the cash was in Central’s currency wrappers bearing teller stamps and dates matching the check-cashing activity.
- Shepard filed Chapter 7; the trustee took custody of the seized cash.
- Central filed an adversary proceeding seeking a constructive trust and turnover of the \$28,440, arguing it was traceable fraud proceeds; a default was entered against Shepard, and the trustee contested Central’s claim.

## Issues

1. Whether the \$28,440 seized from Shepard’s home was traceable fraud proceeds subject to a constructive trust in favor of Central, leaving the debtor and estate with only bare legal title.
2. Whether imposing a constructive trust on traced funds is barred by bankruptcy’s policy favoring ratable distribution to unsecured creditors under 11 U.S.C. § 541.

## Decision

- The court entered judgment for Central and imposed a constructive trust on the \$28,440.
- The court found the cash was sufficiently identified and traced to Central through the currency wrappers, teller stamps, and matching dates tied to Shepard’s withdrawals and instructions.
- Because the debtor held no equitable interest in the cash, the funds were not property of the estate under § 541; the trustee was ordered to turn over the cash to Central.

## Legal Principles

- A constructive trust may be imposed when property is obtained by fraud such that the holder would be unjustly enriched by retaining it and is under an equitable duty to reconvey it.
- A party seeking a constructive trust must identify and trace a specific res (specific property or proceeds) in the debtor’s possession.
- Under 11 U.S.C. § 541(d), the bankruptcy estate generally succeeds only to the debtor’s legal title when the debtor holds property subject to another’s equitable interest; such trust property is excluded from the estate’s beneficial ownership.
- Recognizing a constructive trust over traced funds is not treated as a bankruptcy preference among unsecured creditors because it reflects prepetition equitable ownership of specific property rather than a mere unsecured claim.

## Conclusion

The bankruptcy court held that cash seized from the debtor’s home was traceable proceeds of a fraud against the bank and therefore was held in constructive trust for the bank; as a result, the trustee had to turn over the funds because the estate held only bare legal title and no equitable interest under § 541.


Central Tr. Co. v. Shepard (In re Shepard), 29 B.R. 928 (Bankr. M.D. Fla. 1983)