Opinion
Case No. A00-0298 CV(JKS) CHAPTER 7
June 8, 2001
ORDER
INTRODUCTION
Presently before the Court is an appeal filed by Appellant America Pacific Tours, Inc. ("AP") of a decision of the United States Bankruptcy Court for the District of Alaska which granted judgment in favor of William Barstow, Chapter 7 Trustee ("Trustee"), for the bankruptcy estate of MarkAir and against AP in the amount of $17,652.52 plus interest. See Docket No. 7 (Appeal); 12 (Opp'n); 14 (Reply).
FACTUAL AND PROCEDURAL BACKGROUND
The underlying facts are not in dispute. See Docket Nos. 7 at 2-3; 12 at 1. "AP paid MarkAir $29,855.12 on December 28, 1993[,] to satisfy the amount MarkAir mistakenly claimed was owed for the purchase by AP of tours from MarkAir." Docket No. 7 at 2. "MarkAir subsequently discovered that AP had paid more than was actually owed to MarkAir. As a result, MarkAir, in February of 1995, issued a check to AP in the amount of $14,390, representing the overpayment of the amounts paid by AP fourteen months previously. The check was cashed by AP on February 22, 1995." Docket No. 12 at 1 (citation omitted). On April 14, 1995, MarkAir filed for bankruptcy. See id.
During the bankruptcy proceedings, "AP argued that the inadvertent overpayment it made to MarkAir at MarkAir's request was never MarkAir's property, since it was held in trust. It was therefore never part of MarkAir's bankruptcy estate, and its payment could not constitute a preference" under 11 U.S.C. § 547. See Docket No. 7 at 3. AP also "argued that the payment was made in the ordinary course of business under § 547(c)(2)." See Docket No. 12 at 1. MarkAir argued that there was no type of trust, constructive or express, and that the payments were not made in the ordinary course of business. See id. at 3-4. The Bankruptcy Court agreed with MarkAir, rejected the arguments made by AP, and entered judgment in favor of MarkAir and against AP in the amount of $17,652.52 plus interest. See Docket No. 1, Final J. at 1.
AP has appealed the decision to this Court. See id. at 1. In its brief, AP raises similar issues to those addressed by the United States Bankruptcy Court for the District of Alaska. See generally Docket No. 7. Specifically, AP argues that inadvertent overpayment was held in a constructive trust that was not part of the bankruptcy estate and thus its repayment could not constitute a preference. See id. at 3. Alternatively, AP argues that the refunded overpayment "occurred during the ordinary course of business and was therefore not a preferential transfer." See id. at 9. MarkAir argues that a constructive trust was never created; creating one here would violate the principles underlying federal bankruptcy law; AP should be treated like the other creditors; and that AP did not properly trace the overpayment using the lower intermediate balance test ("LIBT"). See Docket No. 12 at 3-4.
DISCUSSION
I. Standard of Review
The Court must "review the bankruptcy court's conclusions of law de novo and must uphold its findings of fact unless they are clearly erroneous." See In re Video Depot, Ltd., 127 F.3d 1195, 1197 (9th Cir. 1997). If there are no disputed factual issues, "[t]he bankruptcy court's grant of summary judgment is also reviewed de novo." See In re Betacom of Phoenix, Inc., 240 F.3d 823, 828 (9th Cir. 2001).
II. Constructive Trust Claim
"[W]hether a trust has been established is a question to be resolved under state law." In re B.I. Fin. Servs. Group, Inc., 854 F.2d 351, 354 (9th Cir. 1988). In Alaska, [t]he constructive trust may be defined as a devise used by chancery to compel one who unfairly holds a property interest to convey that interest to another to whom it justly belongs. When a court of equity finds that a defendant is the holder of a property interest which he retains by reason of unjust, unconscionable, or unlawful means, it takes such interest from the defendant and vests it in the wronged party.
See McKnight v. Rice, Hoppner, Brown Brunner, 678 P.2d 1330, 1335 (Alaska 1984). "A person `does not wrongfully take possession or assume control of property within the [meaning of the constructive trust] rule where [s]he, in good faith, assumes possession and control of property under a claim of title in [her]self wholly adverse to . . . that which may turn out to be the true title.'" Bowman v. Blair, 889 P.2d 1069, 1072 n. 6 (Alaska 1995) (quoting 76 Am. Jur.2d Trusts § 229 (1992)). "Property held in constructive trust by the debtor is not considered to be part of the debtor's estate." Gallant v. Gallant, 882 P.2d 1252, 1256 (Alaska 1994) (citing 11 U.S.C. § 541(d) (1992)). When property of an estate is alleged to be held in trust, the claimant has the burden of establishing the original trust relationship. A claimant must prove its title, identify the trust property, and where the property has been mingled with that of the debtor, the claimant must adequately trace the property. However, if the claimant cannot first show that a trust has been created, there is no need to inquire further as to whether the property can be identified or traced. In that case, a simple debtor-creditor relationship exists. In re B.I., 854 F.2d at 354 (internal citations omitted).
Here, it does not appear that a constructive trust was created since there is no evidence in the record that MarkAir retained the overpayment by unjust, unconscionable or unlawful means. Mere negligence would not appear to be sufficient under Alaska law. An analysis of the record does not reveal any evidence indicating a lack of good faith. Rather it appears that there was a clerical error in the billing process, which once discovered, was promptly rectified. AP has failed to prove the existence of the grounds for creation of a constructive trust under Alaska law. Consequently, the Court shall uphold the Bankruptcy Court's determination that the overpayment was not subject to a constructive trust.
Alaska law appears to differ from California law in this respect, rendering In re Unicom Computer Corp., 13 F.3d 321, 323 (9th Cir. 1994) distinguishable. Alaska would not impose a constructive trust under the circumstances of this case.
III. Ordinary Course of Business
As its final argument, AP argued that "the refunded overpayment was not a preference since that refund was made in the ordinary course of business." See Docket No. 7 at 9 (citing 11 U.S.C. § 547(c)(2)). Under 11 U.S.C. § 547(c) [t]he trustee may not avoid under this section a transfer —
(2) to the extent that such transfer was —
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms.
See 11 U.S.C. § 547(c)(2). The party asserting the defense has the burden of proving that section 547(c)(2) applies by a preponderance of the evidence. To qualify for the "ordinary course" exception, a creditor must prove that: 1) the debt and its payment are ordinary in relation to past practices between the debtor and this particular creditor; and 2) the payment was ordinary in relation to prevailing business standards. See In re Food Catering Hous., Inc., 971 F.2d 396, 398 (9th Cir. 1992) (internal citations omitted).
While AP has made allegations that the payment was made in the ordinary course of business, see Docket Nos. 7 at 9-10; 14 at 6-7, AP has not provided sufficient evidence to sustain its burden that "the debt and its payment are ordinary in relation to past practices between the debtor and this particular creditor . . . and . . . the payment was ordinary in relation to prevailing business standards." See In re Food Catering, 971 F.2d at 398. There was no evidence regarding how MarkAir customarily handled billing errors. Consequently, the Bankruptcy Court was justified in finding the defense inapplicable.
CONCLUSION
The Bankruptcy Court was reasonably concerned that treating every favorable billing adjustment granted by a debtor to a favored creditor as a constructive trust would undermine the bankruptcy preference rules. While AP has made a vigorous argument, it has not made a convincing one. The contention that one party has overcharged the other could be made in virtually thousands of transactions dealing with the sale of goods and services.
IT IS THEREFORE ORDERED:
The decision of the Bankruptcy Court is AFFIRMED. The Clerk shall enter judgment dismissing this appeal. Dated at Anchorage, Alaska, this 8th day of June 2001.