## Facts

- JD Services, Inc. (JD) filed for Chapter 11 reorganization and continued operating as debtor-in-possession.
- JD deposited a $7,250 check into its account at Bank of America (BofA).
- BofA mistakenly encoded the deposit and credited JD’s account with $725,000 instead of $7,250.
- On August 30, JD transferred the credited funds to an account at First Security Bank.
- BofA discovered the error and notified JD on September 5.
- On September 13, JD and First Security agreed to place a hold on $717,750 (the difference between the intended $7,250 deposit and the $725,000 credit).
- Between August 30 and September 13, JD used the First Security account in its ordinary course of business; large sums flowed in and out and the account balance fluctuated as deposits and withdrawals occurred.
- The parties stipulated to the First Security account activity and to two alternative lowest intermediate balance calculations for the relevant period:
  - A “Collected Balance” method (looking at total funds on deposit), yielding a low of $717,750.
  - An “Available Balance” method (accounting for holds on deposits and the amount actually available to withdraw), yielding a low of $394,460.47.
- BofA filed an adversary proceeding seeking return of the mistaken credit and moved for summary judgment.

## Issues

1. Whether JD’s retention of the mistaken postpetition credit supported imposing a constructive trust in favor of BofA under applicable state law principles of unjust enrichment.
2. Whether BofA could trace the mistaken funds through JD’s commingled operating account using the lowest intermediate balance rule, and whether the “collected” or “available” balance should measure the traceable amount.
3. Whether any amount not traceable as trust property should be allowed as an administrative expense claim against the bankruptcy estate.

## Decision

- The court granted summary judgment in part, concluding JD was not entitled to the benefit of the bank’s encoding error and that equitable relief was warranted to the extent the funds could be identified in JD’s hands.
- The court imposed a constructive trust for BofA’s benefit only to the extent BofA could trace the mistaken credit through the commingled First Security account.
- Applying the lowest intermediate balance rule, the court used the “Available Balance” calculation and held that BofA traced $394,460.47, which was recoverable as trust property.
- As to the remaining portion of the $717,750 that could not be traced under the lowest intermediate balance analysis, the court allowed BofA an administrative expense claim for the shortfall.

## Legal Principles

- A constructive trust may be imposed where a party holds money that, in fairness, belongs to another—such as a windfall resulting from a bank’s encoding error—when retaining it would amount to unjust enrichment.
- Property subject to a constructive trust is excluded from “property of the estate” under 11 U.S.C. § 541 to the extent the claimant can identify and trace the trust res; the claimant bears the tracing burden.
- When trust funds are commingled in a deposit account, courts commonly apply the lowest intermediate balance rule: the claimant’s recovery is capped at the lowest balance in the account after commingling, because later deposits do not restore dissipated trust funds.
- In determining the lowest intermediate balance, the court may consider not only the ledger (collected) balance but also restrictions affecting what was actually withdrawable (available balance), where those restrictions bear on whether the trust funds remained in the account.
- If the estate’s postpetition use of mistakenly received funds causes a postpetition loss that is not recoverable as trust property due to tracing limits, the creditor may be entitled to an administrative expense claim under 11 U.S.C. § 503(b) for the portion treated as a cost of preserving the estate.

## Conclusion

The court held that JD could not keep the benefit of BofA’s postpetition encoding error and imposed a constructive trust only to the extent BofA could trace the mistaken funds through JD’s commingled operating account, awarding BofA $394,460.47 under an available-balance lowest intermediate balance calculation and granting an administrative expense claim for the remaining untraceable shortfall.


In re JD Services, Inc., 284 B.R. 292 (2002)