## Facts

- North American Coin & Currency, Ltd. (NAC) was an Arizona corporation that bought and sold precious metals.
- In the weeks before NAC’s bankruptcy filing, the company suffered severe financial losses tied to transactions initiated by its president.
- NAC’s principals met and, based on the company’s condition and concerns about management, believed NAC might not be operating soundly and might not continue as a going concern.
- The principals decided to keep NAC operating for one additional week until a scheduled directors’ and shareholders’ meeting.
- To continue operations while attempting to protect new customers during that week, NAC created a separate bank account labeled a “Special Trust Account.”
- NAC deposited into that account the money received from customer transactions during the one-week period immediately before the bankruptcy filing.
- The principals intended that the segregated funds would be used either (a) to fill those customers’ precious-metals orders if the directors chose to continue operations and shareholders provided new capital, or (b) to refund those customers if NAC shut down and filed for bankruptcy.
- NAC filed a voluntary Chapter 11 petition with the balance in the “Special Trust Account” still intact.
- Customers who placed and paid for orders during that final week did not receive the metals and filed a class action in the bankruptcy proceeding against the successor trustee, seeking to recover the segregated funds.
- The customers argued that NAC obtained their payments through fraud or misrepresentation, so the trustee held the funds in a constructive trust for them and the funds were not property of the bankruptcy estate.
- The bankruptcy court entered summary judgment for the trustee, and the district court affirmed.
- The customer class appealed to the Ninth Circuit from the district court’s affirmance of summary judgment.

## Issues

1. Whether the customers were entitled to a constructive trust over funds in NAC’s “Special Trust Account” on the theory that NAC obtained their payments by fraud or misrepresentation under Arizona law.
2. Whether imposing a constructive trust on the segregated customer funds would improperly remove assets from the bankruptcy estate and disrupt equal treatment among unsecured creditors.

## Decision

- The Ninth Circuit affirmed the judgment for the trustee.
- The court held the customers did not establish the kind of fraud, misrepresentation, or comparable misconduct required under Arizona law to justify a constructive trust.
- The court held that NAC’s segregation of receipts into an account labeled “Special Trust Account,” without more, did not create a trust interest that excluded the funds from the estate.
- The court emphasized that constructive trust remedies are applied with caution in bankruptcy because recognizing them can give one group of unsecured claimants priority over others.

## Legal Principles

- Under Arizona law, a constructive trust is an equitable remedy generally requiring that the defendant obtained or retained property through fraud, misrepresentation, concealment, or other wrongful conduct that makes retention unjust.
- In bankruptcy, property the debtor holds in a valid trust for another is not property of the estate, but the party asserting the trust bears the burden of proving a trust interest that defeats the estate’s claim.
- A debtor’s unilateral act of segregating funds, or labeling an account as a “trust,” does not by itself establish an enforceable trust relationship or a constructive trust.
- Because a constructive trust can operate like a priority that alters the Bankruptcy Code’s distribution scheme, bankruptcy courts are reluctant to impose constructive trusts absent clear proof of the state-law elements.
- Doubts about a debtor’s financial health or internal concern about continued operations, without transaction-specific fraudulent conduct toward the claimants, do not suffice to impose a constructive trust.

## Conclusion

The Ninth Circuit affirmed summary judgment for the bankruptcy trustee, holding that customer payments placed into NAC’s prepetition “Special Trust Account” remained property of the bankruptcy estate because the customers failed to prove the fraud or similar wrongdoing necessary for a constructive trust under Arizona law, and because imposing such a remedy in bankruptcy would improperly favor that customer group over other unsecured creditors.


Torres v. Eastlick (In re North American Coin & Currency, Ltd.), 767 F.2d 1573, cert. denied, 475 U.S. 1083 (1985)