Wadsworth v. Talmage

558

Argued and submitted June 4, certified question answered October 10, 2019

John WADSWORTH,

individually and as trustee for

the RBT Victim Recovery Trust,

Plaintiffs,

v.

Ronald B. TALMAGE

and Annette C. Talmage,

in Default as of 8/31/2017;

Rivercliff Farm, Inc., an Oregon corporation,

in Default as of 1/26/2017; and

New Century Properties Ltd.,

in Default as of 8/31/2017,

Defendants below,

and

UNITED STATES OF AMERICA,

Defendant.

(United States Court of Appeals

for the Ninth Circuit - 17-35805)

(SC S066414)

450 P3d 486

The Ninth Circuit certified a question to the Oregon Supreme Court: Does

a constructive trust arise at the moment of purchase of a property using

fraudulently-obtained funds, or does it arise when a court order that a construc-

tive trust be imposed as a remedy? Held: (1) A constructive trust arises when a

court imposes it as a remedy, but the party for whose benefit the constructive

trust is imposed has an equitable ownership interest in the property that pre-

dates the constructive trust; (2) plaintiffs have a viable subrogation theory that

allows them to seek a constructive trust based on equitable interests that predate

all tax liens on the property at issue in this case.

The certified question is answered.

En Banc

On certified question from the United States Court of

Appeals for the Ninth Circuit; certification order dated

January 2, 2019; certification accepted January 31, 2019.

William B. Ingram, Strong & Hanni, Salt Lake City,

Utah, argued the cause and filed the briefs for plaintiffs on

Cite as 365 Or 558 (2019) 559

review. Also on the briefs were Thomas A. Ped, Williams

Kastner Greene & Markley, Portland.

Randolph L. Hutter, U.S. Department of Justice,

Washington, D.C, argued the cause and filed the brief

for defendant on review. Also on the brief was Jeremy N.

Hendon, Washington D.C.

BALMER, J.

The certified question is answered.

560 Wadsworth v. Talmage

BALMER, J.

This case is before the court on a certified ques-

tion from the United States Court of Appeals for the Ninth

Circuit, under ORS 28.200. The Ninth Circuit certified to

the court the following question:

“Under Oregon law, does a constructive trust arise at the

moment of purchase of a property using fraudulently-

obtained funds, or does it arise when a court orders that a

constructive trust be imposed as a remedy?”

Wadsworth v. Talmage, 911 F3d 994, 999 (9th Cir 2018).

We accepted that question, reformulating it to include one

related issue:

“If the former, does it make any difference if the fraud as to

the party seeking establishment of a trust occurred after

the initial purchase?”

As we discuss in greater depth below, we answer the

first part of the question by clarifying that a constructive

trust arises when a court imposes it as a remedy, but that

the party for whose benefit the constructive trust is imposed

has an equitable ownership interest in specific property that

predates the imposition of the constructive trust. We also

answer the second part of the question by explaining that,

in the circumstances of this case, plaintiffs have a viable

subrogation theory that allows them to seek a constructive

trust based on equitable interests that predate all tax liens

on the property.

I. FACTUAL AND PROCEDURAL BACKGROUND

We begin by setting out the underlying facts, which

we take from the Ninth Circuit’s certification order and, in

light of the procedural posture of the case, the complaint.

See Wadsworth, 911 F3d at 995 (“Because this case was

resolved in federal district court on a motion to dismiss, the

factual background is based on the allegations in the com-

plaint, which we assume to be true.”).

Beginning in the 1990s, defendant Ronald Talmage

ran a Ponzi scheme. More specifically, he represented to

client investors, in the United States and Japan, that he

would hold their funds in trust and invest them. Instead, he

Cite as 365 Or 558 (2019) 561

made no investments on behalf of clients and repaid clients

only through use of the funds of later clients. Talmage also

induced investments through false claims about his fund’s

size and history. In 1997, Talmage and his wife acquired

the RiverCliff Property (“RiverCliff”) for $903,000, and paid

that price exclusively using money that Talmage was hold-

ing for his clients. Between 1998 and 2006, Talmage took

more than $12.5 million of client funds to make improve-

ments to the property.

Plaintiffs are victims of the scheme;1 they first

invested funds with Talmage in 2002. Much of the money

that they invested with Talmage was used in the improve-

ments to RiverCliff. In 2005, another $1.5 million of

plaintiffs’ funds was used to pay Talmage’s wife for her

half interest in RiverCliff, after the couple divorced. And

$3.4 million of plaintiffs’ funds was used to repay earlier,

pre-2002 investor clients, including clients whose funds had

been used to purchase RiverCliff. In June 2005, Talmage

transferred RiverCliff, without consideration, to a corporate

entity that he controlled and that is also a defendant in the

federal action.

Meanwhile, Talmage had failed to pay federal

income taxes from 1998 to 2005, and in 2007. The Internal

Revenue Service (IRS) recorded tax liens, beginning in

2008, under 26 USC § 6321. That history sets the stage for

the present dispute, which is between plaintiffs and the fed-

eral government.

The government brought an action to foreclose its

tax liens on RiverCliff. Plaintiffs

“then brought the present action to quiet title to RiverCliff

as to the Government. The Trust’s complaint contends that

because Talmage ‘used wholly stolen funds’ to obtain and

improve RiverCliff, ‘he did not hold an enforceable or legiti-

mate property interest’ in the property. The Trust contends

that the Government’s federal tax liens therefore could not

attach to RiverCliff under 26 USC § 6321, which authorizes

liens on ‘all property and rights to property * * * belonging

1

Specifically, plaintiff Wadsworth was a victim of the scheme, and a number

of victims, including Wadsworth, assigned their interests to plaintiff RBT Victim

Recovery Trust.

562 Wadsworth v. Talmage

to’ a person who owes ‘back taxes.’ The Trust contends that

it has either an exclusive or superior interest in RiverCliff

under Oregon law as a resulting trust, as a constructive

trust, or based on other equitable relief.”

Wadsworth, 911 F3d at 996. The government moved to dis-

miss, arguing that RiverCliff

“ ‘belonged’ to Talmage within the meaning of 26 USC

§ 6321, and that a federal tax lien could attach. It argued

that the Trust had, ‘at most,’ a claim that did not become

choate until after the federal tax liens had attached. The

Government argued its tax liens were therefore superior to

any claims the Trust might have.”

Id. The trial court agreed with the government and dis-

missed plaintiffs’ quiet title claim.

Plaintiffs appealed to the Ninth Circuit, which

explained that the dispute turned on “Oregon state law

regarding constructive trusts” and that,

“[t]o determine whether property ‘belongs’ to someone

within the meaning of § 6321, a federal court must, first,

‘look * * * to state law to determine what rights the tax-

payer has in the property the Government seeks to reach,’

and then, second, ‘determine whether the taxpayer’s state-

delineated rights qualify as “property” or “right to prop-

erty” within the compass of’ 26 USC § 6321.”

Wadsworth, 911 F3d at 997 (quoting Drye v. United States,

528 US 49, 58, 120 S Ct 474, 145 L Ed 2d 466 (1999)). Having

so framed the inquiry, the Ninth Circuit explained that, “[i]n

the case before us, the Trust can prevail in its quiet title

action only if, under Oregon law, a constructive trust arises

at the moment of the purchase of a property with ill-gotten

gains, such that the purchaser never acquires rights in the

property beyond bare legal title.” Wadsworth, 911 F3d at 998.

That court then observed that the descriptions of construc-

tive trusts in our case law have not been entirely consistent

and certified to us the question of when a constructive trust

arises.

In their briefs, plaintiffs and the government cite

numerous cases that this court has decided. Plaintiffs high-

light cases that refer to a constructive trust arising at some

Cite as 365 Or 558 (2019) 563

time prior to a court’s judgment, which they characterize as

consistent with the “majority rule.” The government cites a

number of cases that refer to constructive trusts as purely

remedial mechanisms, or where courts are said to “impress”

or to “impose” a constructive trust.

The parties also offer theoretical reasoning in sup-

port of their positions. The government contends that, in

light of our holdings in Barnes v. Eastern & Western Lbr. Co.,

205 Or 553, 594, 287 P2d 929 (1955), and Tupper v. Roan,

349 Or 211, 219, 243 P3d 50 (2010), a constructive trust is

a form of remedy, and, like other remedies, must arise only

when imposed by a court. Any retroactive existence, says

the government, is therefore purely fictional, the product of

the doctrine that constructive trusts relate back to an ear-

lier unjust enrichment. Plaintiffs cite several treatises and

argue that taking the government’s position would entail a

rejection of the majority view of constructive trusts.

We find neither party’s arguments fully persua-

sive. As we explain, the question that they are fighting over

appears to be less consequential than they take it to be,

and we do not see any fundamental conflict in our case law.

Nevertheless, we agree with the government that, because a

constructive trust is a form of remedy, rather than a type of

trust, constructive trusts originate at the time that they are

imposed by the court. We also agree with plaintiffs, however,

that a remedial constructive trust is based on a preexisting

equitable ownership interest and that an understanding of

the nature of that interest may prove helpful to the Ninth

Circuit in resolving the issue before it. We therefore discuss

briefly the nature of the equitable interest that forms the

basis for the imposition of a constructive trust under Oregon

common law.

II. WHEN CONSTRUCTIVE TRUSTS BEGIN

A. The Scope of the Question

The parties, and the Ninth Circuit, highlight an

inconsistency in our cases as to when a constructive trust

arises. We cannot resolve that inconsistency for purposes of

answering the certified question without first clarifying its

relevance to that question, and we begin there.

564 Wadsworth v. Talmage

A constructive trust is a form of remedy for unjust

enrichment. Tupper, 349 Or at 219. The remedy has its lim-

its, as “a constructive trust can attach only to items and

money that the evidence clearly identifies as rightfully

‘belonging’ to the plaintiff, or to the identifiable products of,

or substitutes for, those items and money.” Id. at 222. But it

also has its advantages, and one reason that a plaintiff may

elect a constructive trust as a remedy is “ ‘for the sake of pri-

ority against the defendant’s general creditors.’ ” Evergreen

West Business Center, LLC v. Emmert, 354 Or 790, 801, 323

P3d 250 (2014) (quoting Restatement (Third) of Restitution

and Unjust Enrichment § 4 comment e (2001)); see also

Restatement (Third) § 60 (“Except as otherwise provided by

statute and by § 61, a right to restitution from identifiable

property is superior to the competing rights of a creditor of

the recipient who is not a bona fide purchaser or payee of the

property in question.”).

Here, plaintiffs seek a constructive trust to obtain

priority over the federal government’s tax liens. But, some-

what counterintuitively, the case before us is not a fight over

the priority rules that govern constructive trusts. The par-

ties agree that a plaintiff entitled to a constructive trust

would receive priority over ordinary creditors under state

law and that whichever answer we give to the question of

when the constructive trust originates will not make the

slightest difference to the application of those rules. That is

because, the government acknowledges, a constructive trust

may “relate back” to an earlier date, even if it arises only

when it is declared by a court. The parties also agree that

federal law allows tax liens to jump the ordinary priority

queue, as long as the property to which the lien attaches

“belonged” to the taxpayer at that time. Here, then, the

question of when a constructive trust arose is not pertinent

to priority directly, but rather to whom RiverCliff—in the

words of the federal statute, 26 USC § 6321—“belong[ed]”

when the government obtained its tax liens. That question,

the parties submit, hinges on when a constructive trust

arose.

As the foregoing illustrates, the question before us

has significance only to the application of federal law, and

only as it bears, if it does, on whether RiverCliff “belong[ed]”

Cite as 365 Or 558 (2019) 565

to the taxpayer when the actions giving rise to the construc-

tive trust arose. Many of the cases cited by the government

on the question of when a constructive trust originates are

federal cases, dealing with other interactions between fed-

eral law and state constructive trusts. See, e.g., Healy v.

Commissioner, 345 US 278, 282-83 (1953); Blachy v. Butcher,

221 F3d 896, 905 (6th Cir 2000); International Refugee Org.

v. Maryland Drydock Co., 179 F2d 284, 287 (4th Cir 1950).

Not only is there no Oregon case that lends the question

of when a constructive trust begins any significance, the

parties have been unable to identify any other state case in

which a substantive issue turned on the resolution of that

question.

That observation leads to one potential concern, in

this instance pertinent to our acceptance of this question:

whether the question that we have been asked to answer

is actually one of state law at all. See Western Helicopter

Services v. Rogerson Aircraft, 311 Or 361, 365, 811 P2d 627

(1991) (explaining that we can accept certification only if

the question is one of Oregon law). The Eleventh Circuit,

at least, has suggested that an analogous question in the

forfeiture context is really one of federal law. United States

v. Ramunno, 599 F3d 1269, 1274 n 2 (11th Cir 2010) (distin-

guishing a prior case concerning the time that a construc-

tive trust came into being on the ground that it “was consid-

ering the federal law temporal question, not the threshold

state law question of whether a constructive trust exists”).

Because the question’s practical consequences are limited

to interactions with federal statutes, it might be contended

that the question is, at heart, one of federal law. Indeed, the

government attempts to rely on Healy, 345 US at 282-83, in

which the United States Supreme Court treated the effect of

state constructive trusts on tax obligations as a question of

federal law and, in that context, discussed the time at which

they originated without any reference to state law.

Nevertheless, we are persuaded that it remains

appropriate for us to answer the question certified by the

Ninth Circuit. There is, at bottom, a state law answer to

that question, even if the law of our state may not completely

resolve the federal question at issue in this case. At the end

of the day, and strictly as a matter of state law, it must

566 Wadsworth v. Talmage

either be the case that a constructive trust exists from the

moment of the fraudulent transaction or that it is created by

the court at some later date. The distinction might be one

that, apart from its federal law consequences, is essentially

academic, but academic questions still have answers.2

Plaintiffs argue that, given the relative insignifi-

cance of the question for any purpose other than the fed-

eral statute at hand, the equitable purposes of a construc-

tive trust would be better served if we were to decide that

a constructive trust originates at the time of the fraudulent

conduct. Put another way, if accepting plaintiffs’ theory of

a constructive trust’s origins is necessary for federal courts

to respect the priority that state law accords to constructive

trusts—and there are no other real stakes to this case—

then why not accept it for that reason alone?3

We view that as an inappropriate consideration in

our decision. To the extent that federal law deviates from

Oregon’s priority rules, that is Congress’s decision to make,

just as our own legislature ordinarily has the authority

to modify our state’s rules of equity by statute. See Evans

Products v. Jorgensen, 245 Or 362, 372, 421 P2d 978 (1966)

(declining to apply unjust enrichment principles in a case

subject to Article 9 of the Uniform Commercial Code (UCC),

because “[t]he purpose and effectiveness of the UCC would

be substantially impaired if interests created in compliance

with UCC procedures could be defeated by application of

the equitable doctrine of unjust enrichment”). Our role in

this case is to elucidate the structure of constructive trusts

under Oregon common law, not to gerrymander our terms so

as to yield a particular result under federal law.

2

“[T]he decisional effect of our answer” is one factor to weigh when deciding

whether to answer a certified question. Western Helicopter Services, 311 Or at

369. For the reasons just given, this may not be a significant decision for state law

purposes. However, the Ninth Circuit, at least, has indicated that the application

of the federal statute at issue turns on the law of this state, and the answer to

this question may be significant in other federal contexts as well. See United

States v. Wilson, 659 F3d 947, 954-55 (9th Cir 2011) (looking to state law on when

a constructive trust begins in the forfeiture context).

3

The government, for its part, suggests that, because the priority accorded

to constructive trusts is inequitable to the extent that it deprives the govern-

ment’s tax liens of validity, this court should adopt the government’s theory of

constructive trusts in order to avoid that result.

Cite as 365 Or 558 (2019) 567

B. The Development of the Constructive Trust in Oregon

We turn to our cases on constructive trusts. As

we discuss, those cases evince a transformation over time

from a view of the constructive trust as a species of trust

to a view of the constructive trust as a remedy for unjust

enrichment—a transformation that is in line with the devel-

opment of American law generally. That shift explains, in

part, the different usages of the term “constructive trust”

that the parties have found in our cases.

Our earliest cases on constructive trusts classed

them as a species of trust. Trusts were divided into “express”

and “implied,” and the category of implied trusts was sub-

divided into resulting trusts and constructive trusts. See

Manaudas v. Mann, 22 Or 525, 530, 30 P 422 (1892) (cit-

ing John N. Pomeroy, 2 A Treatise on Equity Jurisprudence

§ 987, 533-34 (1st ed 1886)); Springer v. Young, 14 Or 280,

282-83, 12 P 400 (1886).

In one of our earliest substantial discussions of con-

structive trusts, we appeared to take a position on the time

that a constructive trust emerged. In Barger v. Barger, 30

Or 268, 269, 47 P 702 (1897), the plaintiff and her husband

had received a parcel of land through the Donation Land

Act, of which plaintiff originally owned half.4 The couple

sold their claim, and, using that money, the husband pur-

chased an interest in a ferry. Id. at 270. That, too, was sold,

and the husband used some of the funds to purchase 115

head of cattle. Id. 270. Some years later, the cattle business

was sold, and the proceeds were used to cover most of the

purchase of two tracts of land. Id. at 271. The husband died,

some portion of the land passed to the couple’s children, and

the plaintiff sought to have recognized an implied trust over

4

The Donation Land Act provided grants of land to Oregon settlers and con-

veyed to a married man “the quantity of one section, or six hundred and forty

acres, one half to himself and the other half to his wife, to be held by her in her

own right * * *.” Act of Sept 27, 1850, 9 Stat 496, 497 (emphasis added). Early on,

we held that the Donation Land Act, at least in combination with a subsequent

act of the territorial legislature, gave the wife title to her half of the granted

land, and that she could not be divested of it by her husband against her will.

Linnville v. Smith, 6 Or 202, 204 (1876). In two cases prior to Barger—Linnville

and Springer—this court had used trust theories to protect a married woman’s

interest in proceeds from land that she had received through the Donation Land

Act.

568 Wadsworth v. Talmage

the land, arguing that she had owned half of the Donation

Land Act claim, the proceeds of which were ultimately used

to purchase the land in dispute. Id. at 269, 273-74. With

respect to both constructive and resulting trusts, the court

explained that

“a trust of either description must arise, if at all, at the time

of the conveyance, and the money or other consideration for

the deed which is the foundation of the trust must then be

paid, or secured to be paid.”

Id. at 276 (emphasis added). This court linked that principle

to the concept of tracing, which was at the heart of the case:

“The fund, or other form of property which it is sought to

trace into a different form, does not lose its identity, while it

may change in semblance, as, if a sum of money is expended

for a parcel of land, or a band of cattle exchanged for stock

in a bank, the property form is changed, but the identity

of the original form is traceable and distinguishable. * * *

That which was the property of the cestui que trust in

the first instance continues to be his property, in equity,

throughout all its metamorphoses, but when the identity is

lost the trust escapes. * * * It is therefore the entire owner-

ship, speaking in an equitable sense, that must be estab-

lished, and not some equitable lien upon the changed form

of property; and, if established, the cestui que trust takes

the property thus identified, not that his demand be satis-

fied out of it.”

Id. at 276-77. This court ultimately determined that the

plaintiff’s funds that were derived from the original land had

become too intermingled with other funds over the course of

the relevant transactions to be traceable, and that, based

on her consent, certain transactions “must be regarded as

a loan, rather than the imposition of trust obligations upon

[her husband].” Id. at 279.

Barger thus clarified two fundamental principles

of constructive trusts. First, for a constructive trust to be

established there must be a traceable equitable ownership

interest in specific property—one that existed at the time

of conveyance. Second, in light of that principle, Barger

declared that constructive trusts, like resulting trusts, orig-

inate at the time of the conveyance.

Cite as 365 Or 558 (2019) 569

Despite that clear statement in Barger, however, this

court on several occasions described the origins of construc-

tive trusts differently. The next year, in Parrish v. Parrish,

33 Or 486, 54 P 352 (1898), overruled on other grounds by

Hanscom v. Irwin, 186 Or 541, 208 P2d 330 (1949), this

court stated that “ ‘the interference of courts of equity is

called into play by fraud as a distinct head of jurisdiction,

and the complainant’s right of relief is based upon that

ground; the defendant being treated as a trustee merely for

the purpose of working out the equity of the complainant.’ ”

Id. at 492 (quoting George T. Bispham, The Principles of

Equity § 91, 133 (4th ed 1887)). That statement expressed

a different view of constructive trusts—that is, as a fiction

employed after-the-fact by the court, rather than a type of

trust.

Inconsistency in how constructive trusts were con-

ceptualized predominated during this period. In Kroll v.

Coach, 45 Or 459, 473, 78 P 397 (1904), this court quoted

the same passage from Bispham’s treatise, and, in Clough

v. Dawson, 69 Or 52, 60-61, 138 P 233 (1914), the court held

that “[t]he Circuit Court properly impressed a constructive

trust” on certain property, each of which could suggest that

a constructive trust originated only after the intervention of

a court. Yet those cases were followed by an emphatic state-

ment to the contrary:

“If a resulting or a constructive trust arose at all, it must

have been at the time of the conveyance; for these are obliga-

tions imposed by the law itself in spite of or independent of

the actions of the parties themselves. The law is constantly

operant, and without delay attaches the consequences to be

derived from the acts of the parties. So far as such trusts

are concerned, they are not created or established by sub-

sequent acts of any of the participants.”

Chance v. Graham, 76 Or 199, 208-09, 148 P 63 (1915).

And, inconsistent with the earlier assertion that a court

impresses a constructive trust, this court stated in Meek v.

Meek, 79 Or 579, 591, 156 P 250 (1916), that, “[i]n a case

where confidential relations, such as husband and wife, par-

ent and child, exist, the betrayal of such a confidence itself

raises a constructive trust.”

570 Wadsworth v. Talmage

That confusion was understandable, because this

court was hardly the only court struggling to develop a

conceptually satisfying theory of constructive trusts. See

Warren A. Seavey & Austin W. Scott, Restitution, 54 LQ Rev

29, 40 (1938) (observing that, prior to the Restatement (First)

of Restitution, there was “no general agreement among the

treatise writers as to what constitutes a constructive trust,

and the definitions and descriptions given are widely diver-

gent”). In fact, a rather important doctrinal shift was about

to occur on a national level. The shift likely began with a 1920

law review article by Roscoe Pound, then Dean of Harvard

Law School. See Lionel Smith, Legal Epistemology in the

Restatement (Third) of Restitution and Unjust Enrichment,

92 BU L Rev 899, 908 (2012) (describing origins of the shift).

Pound expressed the key innovation simply: “An express

trust is a substantive institution. Constructive trust, on

the other hand, is purely a remedial institution.” Roscoe

Pound, The Progress of the Law, 1918-1919 Equity, 33 Harv

L Rev 420, 420-21 (1920). Pound went on to suggest that,

“[i]f one bears in mind the purely remedial nature of con-

structive trust, the results which courts have reached in

[cases involving constructive trusts] are attained with much

less difficulty.” Id. at 422.

That view proved influential. Although construc-

tive trusts were initially slated to be included in the

American Law Institute’s Restatement (First) of Trusts, the

decision ultimately was made to move constructive trusts,

as well as quasi-contractual obligations, into a restate-

ment of their own, the Restatement (First) of Restitution.

See Restatement (First) of Trusts, Introduction at xi (1935)

(explaining that constructive trusts had not been included);

Andrew Kull, Three Restatements of Restitution, 68 Wash

& Lee L Rev 867 (2011) (describing that history). The first

Restatement strongly embraced the remedial view of con-

structive trusts:

“The term ‘constructive trust’ is not altogether a felici-

tous one. It might be thought to suggest the idea that it is

a fiduciary relation similar to an express trust, whereas it

is in fact something quite different from an express trust.

An express trust and a constructive trust are not divisions

of the same fundamental concept. They are not species of

Cite as 365 Or 558 (2019) 571

the same genus. They are distinct concepts. A constructive

trust does not, like an express trust, arise because of a

manifestation of an intention to create it, but it is imposed

as a remedy to prevent unjust enrichment. A constructive

trust, unlike an express trust, is not a fiduciary relation,

although the circumstances which give rise to a construc-

tive trust may or may not involve a fiduciary relation.

“It is true that both in the case of an express trust and

in that of a constructive trust one person holds the title to

property subject to an equitable duty to hold the property

for or to convey it to another, and the latter has in each case

some kind of an equitable interest in the property. In other

respects, however, there is little resemblance between the

two relationships. An attempt to define a trust in such a way

as to include constructive trusts as well as express trusts

is futile, since a single definition which would include such

distinct ideas would be so general as to be useless.”

Restatement (First) of Restitution § 160 comment a (1937).

The constructive trust was linked to the animating princi-

ple of the Restatement—unjust enrichment. The Restatement

explained that “[a] constructive trust is imposed upon a per-

son in order to prevent his unjust enrichment.” Restatement

(First) of Restitution § 160 comment c. That, it should be

noted, was a substantial innovation, and a distinctly

American one. See D. W. M. Waters, The Constructive Trust

in Evolution: Substantive and Remedial, 10 Est & Tr J 334

(1991) (contrasting development of American law of con-

structive trusts with that of Commonwealth countries).

However, despite that innovation, the Restatement

effectively took the position that the constructive trust

arose at the time of the transaction giving rise to the unjust

enrichment, not when instituted by the court. For example,

in explaining the bona fide purchaser rule—the principle

that property in the hands of a bona fide purchaser cannot

be recovered through a constructive trust, see Tupper, 349

Or at 223—the Restatement explained:

“This principle is most frequently applied to the situation

where a person holds property subject to a constructive

trust and transfers it to a person who pays value without

notice of the facts which gave rise to the constructive trust;

in which case the constructive trust is cut off.”

572 Wadsworth v. Talmage

Restatement (First) of Restitution § 172 comment a. In that

context, the Restatement used “constructive trust” to refer

to an interest that predated the court’s order and, indeed,

could be terminated prior to the case coming before a court.

Similarly, when discussing the effect of the availability of

alternative remedies, the Restatement asserted that

“a constructive trust may exist even though[,] because of

the adequacy of the remedy at law[,] a proceeding in equity

cannot be maintained specifically to enforce it; but a con-

structive trust will not be imposed merely because[,] owing

to the insolvency of the defendant[,] the remedy at law is

inadequate.”

Restatement (First) of Restitution § 160 comment f. Thus,

in the terminology of the Restatement, a constructive trust

exists in the discussed circumstances all the while but may

(or may not) be enforced by the court.

Two decades later, in Barnes, 205 Or at 594-97, this

court came to adopt the remedial view of constructive trusts

set forth in the Restatement (First) of Restitution. In that

case, we explained that

“a constructive trust is simply a procedural device. A con-

structive trust does not create in the party favored by it

any new substantive rights. Its sole purpose is to enable

the courts to afford the victim of the wrong relief in specie.

In instances in which the law employs a constructive trust,

the doctrine of unjust enrichment governs generally the

substantive rights of the parties.”

Id. at 596-97. We also emphasized what a constructive trust

was not intended to accomplish:

“The purpose of creating the procedural device known as

a constructive trust was not to effect a change in the sub-

stantive law and place the trustee of a constructive trust

upon the same level as that of a trustee of an express trust.”

Id. at 602. That phrasing, as well as the remedial tenor of

the case, could suggest that a constructive trust is something

created by a court, but as in the Restatement, other lines in

Barnes suggested otherwise: “If the defendants’ fraud made

them constructive trustees when they acquired the Buehner

stock, no rescission was necessary and no court action was

needed to bring about that result.” Id. at 593.

Cite as 365 Or 558 (2019) 573

Our usage of the term “constructive trust” since

Barnes has not been entirely consistent, either. In several

cases, we have referred to a court “impressing” property

with a constructive trust. See Montgomery v. U.S. Nat’l

Bank et al, 220 Or 553, 570, 349 P2d 464 (1960) (using that

wording); Schomp et al v. Brown et al, 215 Or 714, 716, 335

P2d 847, decision clarified on denial of reh’g, 215 Or 723, 337

P2d 358 (1959) (same). And in several more cases, we have

made references to courts “imposing” constructive trusts or

the “imposition” of a constructive trust by a court. Stirewalt

v. Chilcott, 236 Or 128, 136, 387 P2d 351 (1963); Jimenez

v. Lee, 274 Or 457, 462, 547 P2d 126 (1976); Osterberg v.

Osterberg, 278 Or 277, 279, 563 P2d 696 (1977); Tupper, 349

Or at 223. However, in a handful of cases, we have contin-

ued to refer to constructive trusts in ways that are more

consistent with a constructive trust emerging at the time of

an unjust enrichment. We have stated that, in certain situ-

ations, a trust “arose by operation of law” based on a given

set of facts. Person v. Pagnotta, 273 Or 420, 425, 541 P2d 483

(1975); see also Lane County Escrow Serv., Inc. v. Smith, Coe,

277 Or 273, 285, 560 P2d 608 (1977) (“it is now universally

recognized that a constructive trust will arise when stolen

or embezzled funds are used to purchase other property”).

Plaintiffs rely on Albino v. Albino, 279 Or 537, 568 P2d 1344

(1977), although that case used both formulations, first stat-

ing that a “resulting trust continued until [the defendant]

violated the confidential relationship and refused to pay

the sale price of the property to the plaintiffs, when it was

converted into a constructive trust,” id. at 552, then stating

that, “[i]f the circuit court can trace the funds into the hands

of either or both defendants, it shall impose a constructive

trust upon the proceeds,” id. at 555.

C. Resolving the Confusion

Since Barnes, the Restatement (First) of Restitution

has been superseded by the Restatement (Third) of

Restitution and Unjust Enrichment, which we relied upon

in our discussion of constructive trusts in Evergreen West

Business Center, LLC, 354 Or at 801.5 The new Restatement

5

A Restatement (Second) of Restitution was attempted but never came to fru-

ition. See Kull, 68 Wash & Lee L Rev at 867 (describing that history).

574 Wadsworth v. Talmage

contains a comment expressly dealing with the question of

when constructive trusts originate. The answer set out in

that comment begins with a statement lending some sup-

port to plaintiffs’ position:

“The question is artificial, because it implies that the term

‘constructive trust’ describes a legal relationship that is

either created or decreed; when in fact the words are no

more than a judicial shorthand describing the parties’ pre-

existing interests in particular property. The tendency

to ask when the constructive trust is ‘created’ is encour-

aged by familiar statements to the effect that a court may

‘impose’ a trust, or ‘subject’ the disputed property to a trust

in favor of the claimant, or even ‘convert the holder of title

into a trustee,’ but such expressions are merely the magis-

terial rhetoric of equity.”

Restatement (Third) § 55 comment e.

That portion of the comment appears to favor plain-

tiffs, but the Restatement subsequently acknowledges that

“[t]here is a sense in which the remedial obligation of the

constructive trustee does not exist until the court issues its

decree” and ultimately adopts a form of agnosticism:

“The answer to the question posed, therefore, is that the

constructive trust ‘exists’ from the moment of the transac-

tion on which restitution is based; or (if the court prefers)

that the constructive trust arises on the date of judgment,

but that the state of title it describes ‘relates back’ to the

transaction between the parties. The practical consequence

is that the ownership rights of the constructive trust bene-

ficiary, once recognized, are protected from the moment the

trustee acquires legal title.”

Id. We agree with the thrust of that statement. The key point

is that, however characterized, “the rights of the claimant

are paramount to the rights of the defendant’s successors

in interest, so long as the latter do not qualify as bona fide

purchasers.” Id. Whether a constructive trust exists from

the start or simply relates back is purely terminological.

Although in this case we have been told that it

does matter, we respectfully suggest that the parties may

be treating a linguistic inconsistency as more significant

than it is, while looking past a substantive consistency in

Cite as 365 Or 558 (2019) 575

our law. Professor Andrew Kull, the Reporter of the Third

Restatement, has elaborated on the question at somewhat

greater length, in a law review article cited by plaintiffs:

“ ‘Constructive trust’ is a declaratory judgment about

property out of place. The necessary condition of construc-

tive trust, and the legal wrong to which the remedy responds,

is that ownership, possession, and title to property have

been improperly separated. The restitution claimant com-

plains of an involuntary transfer, typically one resulting

from fraud, mistake, or coercion: a transfer, in short, that

is legally insufficient to bring about a conclusive alteration

of property rights. * * * If the retained rights need a name,

they can be called ‘equitable ownership,’ or ‘an equitable

interest,’ or simply ‘an equity.’ Property rights of this char-

acter are asserted by means of a claim in restitution.”

Andrew Kull, Restitution in Bankruptcy: Reclamation and

Constructive Trust, 72 Am Bankr LJ 265, 287 (1998).

We find that view, and that use of terminology, to

be both persuasive and consistent with our cases. From our

earliest cases, we have recognized that the basis for a con-

structive trust is an equitable ownership right—one that

arises out of a transaction that is fraudulent, mistaken, the

product of a violation of fiduciary duty, or otherwise results

in unjust enrichment. In Barger, we explained that, for a con-

structive trust to arise, it is “the entire ownership, speaking

in an equitable sense, that must be established” and that

tracing is the process of following that equitable ownership

interest as the property changes form. 30 Or at 276-77. In

Barnes, we quoted the Restatement (First) of Restitution for

the following principle:

“ ‘It is true that both in the case of an express trust and

in that of a constructive trust one person holds the title to

property subject to an equitable duty to hold the property

for or to convey it to another, and the latter has in each case

some kind of an equitable interest in the property.’ ”

Barnes, 205 Or at 595 (quoting Restatement (First) of

Restitution § 160 comment a). In explaining the relationship

of the constructive trust to that interest, we clarified that

a constructive trust “does not create in the party favored

by it any new substantive rights”—that is, that the rights

576 Wadsworth v. Talmage

enforced by the constructive trust necessarily predated

its creation. Accord Seavey & Scott, 54 LQ Rev at 42 (the

Reporters of the Restatement (First) of Restitution suggest-

ing that the “[constructive trust] part of the Restatement

might perhaps more properly have been entitled ‘Rights in

Property Created as the Result of a Right to Restitution’ ”).

And we emphasized the same feature in two of the three

elements of a constructive trust that we set out in Tupper:

“First, the plaintiff must show that property or a prop-

erty interest that rightfully belongs to her was taken or

obtained by someone else under circumstances that in

some sense were wrongful or inequitable. * * * Finally, the

plaintiff must establish, with ‘strong, clear and convincing

evidence,’ that the property in the hands of that person, i.e.,

the property upon which she seeks to impose a constructive

trust, in fact is the very property that rightfully belongs to

her, or is a product of or substitute for that property.”

349 Or at 223. Or, as Tupper explained in summarizing our

earlier case law,

“when a person possesses property that, in equity and good

conscience belongs to another, the fact that that person is

innocent of any affirmative wrongdoing with respect to the

property will not, standing alone, prevent the equitable

owner from obtaining a constructive trust.”

Tupper, 349 Or at 222 (emphasis added).

The link between the remedy of a constructive

trust and the underlying equitable ownership right already

possessed by the beneficiary is, and has always been, cru-

cial to our constructive trust law. That equitable interest

is, however, distinguishable from the remedial order by the

court. Our past cases sometimes have conflated those two

concepts and used the term “constructive trust” to refer to

both. Thus, as we have documented, our cases refer to a con-

structive trust arising out of parties’ actions, using the term

in the first sense, and also state that a constructive trust is

imposed by the court, using the term in the second sense.

In our pre-Barnes cases, it made some sense to use the term

“constructive trust” to refer to the fact that the person in

possession of the property lacked an equitable interest in

it. When those earlier cases were decided, this court gener-

ally treated constructive trusts as a species of actual trust,

Cite as 365 Or 558 (2019) 577

rather than as a form of equitable remedy. Under that view,

it was intuitive to treat constructive trusts, as we do other

types of trusts, as a product of earlier actions by the parties,

rather than as a creation of the courts.

Our more recent cases, in emphasizing the reme-

dial nature of the constructive trust, demonstrate why it is

appropriate to draw a clearer distinction. Having decided

that a constructive trust is a form of remedy for unjust

enrichment, misunderstanding is most easily avoided if we

use the term “constructive trust” to refer only to the remedy

imposed by the court. That remedy is not enforcement of a

trust that has existed all the while, but a remedial fiction

imposed by the court to achieve justice. That generally has

been our usage of the term “constructive trust” in our cases

since Barnes. To the extent that our more recent cases have

suggested that a constructive trust emerges from the actions

of the parties, that terminology is an artifact of the earlier

view of constructive trusts that we rejected in Barnes, 205

Or 553. To be clear, however, a remedial constructive trust is

still (as constructive trusts have been from the start) based

on a preexisting equitable ownership interest. Therefore,

while some of our terminology has been inconsistent, none

of that inconsistency has been particularly significant.6

Although we think that the foregoing discussion

answers the Ninth Circuit’s question as phrased, we hes-

itate to leave the matter at that. We do not wish to have

inadvertently avoided the reason for the certified question

by redefining some terms. One possible objection, discussed

6

As part of its evidence of inconsistency, the Ninth Circuit highlighted two

excerpts from the Court of Appeals decision in Brown v. Brown, 206 Or App 239,

136 P3d 745 (2006), the first describing constructive trusts as “remedial devices

to avoid unjust enrichment when no other adequate remedy is available,” id. at

251, and the second quoting McDonald v. McDonald, 57 Or App 6, 9, 643 P2d

1280, rev den, 293 Or 373, 648 P2d 854 (1982), for the proposition that “ ‘[a] con-

structive trust may be imposed only when the putative trustee holds property

which rightfully belongs to another and is thereby unjustly enriched,’ ” id. As

should be clear from the foregoing discussion, we see both of those statements as

essentially correct, and perceive no conflict between them, much less a difference

in case outcomes. Similarly, although plaintiffs frame the question by asserting

that there are majority and minority positions on constructive trusts, we have

seen nothing to suggest that there are conflicting substantive approaches to con-

structive trusts among state courts or the various cited treatises, rather than

differences in their terminology.

578 Wadsworth v. Talmage

in a case relied on by the government, is that the equitable

ownership interest that we have described is just as much a

remedial fiction as a constructive trust itself:

“Because a constructive trust, unlike an express trust, is a

remedy, it does not exist until a plaintiff obtains a judicial

decision finding him to be entitled to a judgment ‘impress-

ing’ defendant’s property or assets with a constructive

trust. Therefore, a creditor’s claim of entitlement to a con-

structive trust is not an ‘equitable interest’ in the debtor’s

estate existing prepetition, excluded from the estate under

§ 541(d).”

In re Omegas Group, Inc., 16 F3d 1443, 1451 (6th Cir 1994).

That is a contention advanced most clearly by Professor

Emily Sherwin. Emily Sherwin, Why In re Omegas Group

Was Right: An Essay on the Legal Status of Equitable Rights,

92 BU L Rev 885 (2012).7

Professor Sherwin suggests that “two features

of property rights—definite rules governing what can be

owned and definite rules governing who owns them—are the

minimum components of property rights that are capable of

operating in rem and supporting transactions between own-

ers and the rest of the world.” Id. at 889. She acknowledges

that

“equitable title is also a sensible, though limited, legal con-

cept. A beneficiary’s interest in an express trust is a com-

mon example of a genuine equitable title. Both the thing

equitably owned and its owner are defined by determinate

rules.”

Id. at 890 (footnotes omitted). She contends, however, that

the divided ownership involved in constructive trust cases

“is not a background legal fact recognized by the declaration

of a constructive trust, but a remedial conclusion settling

a dispute about unjust enrichment.” Id. at 892. “There has

been no intentional division of legal and equitable owner-

ship by recognized procedures in the manner of an express

trust.” Id. (footnote omitted).

7

An earlier article by Professor Sherwin supplied an important portion of In

re Omegas Group’s reasoning. See In re Omegas Group, 16 F3d at 1449 (relying

on Emily L. Sherwin, Constructive Trusts in Bankruptcy, 1989 U Ill L Rev 297

(1989)).

Cite as 365 Or 558 (2019) 579

We disagree with that view, for two reasons. First,

as Professor Sherwin acknowledges, that argument relies

on “distinctions between concepts that may in fact differ

only in degree.” Id. at 896. Perhaps it is typically true that

the holder of legal title or the existence of an express trust

is more determinate than whether an unjust enrichment

occurred, but those are patterns to be observed in aggrega-

tions of cases, not essential properties of the type of right.

Rather, the equitable ownership interests at issue in con-

structive trust cases are the product of longstanding, and

determinate, tracing rules that link specific property to

unjust enrichment. Second, our cases, both before and after

our adoption of the remedial approach to constructive trusts,

have acknowledged an actual equitable ownership interest

in property—an interest that is vindicated through the rem-

edy of a constructive trust. That interest, like the equitable

interest in an express trust, is good against both the current

holder of the property and against third parties who are not

bona fide purchasers. We reaffirm that framework.

We think that that discussion carries the ball as

far as state law can take it. It remains to be “ ‘determine[d]

whether the taxpayer’s state-delineated rights qualify as

“property” or “right to property” within the compass of’ 26

USC § 6321.” Wadsworth, 911 F3d at 997 (quoting Drye, 528

US at 58). That, however, is a question of federal law, on

which we express no view.8 It may be that that question is

not meaningfully different from the question that the Ninth

Circuit would face had we answered the certified question

differently.9 Even if our law did label plaintiffs’ pre-2008

equitable interest as a constructive trust, that label would

not mean anything substantively different than the (more

accurate) label that we give it today. Nevertheless, that is

the best answer that we are able to provide.

8

For the same reason, although we emphasize that certain passages of In

re Omegas Group, 16 F3d 1443, do not accurately reflect Oregon law, we do not

mean to suggest that they are inaccurate statements of how federal bankruptcy

law would apply to those property interests.

9

That is, if we had concluded that a constructive trust originates at the time

of the transaction, the Ninth Circuit would still need to decide whether a pre-

judgment constructive trust is too inchoate to render plaintiffs owners for the

purposes of the federal tax lien statute.

580 Wadsworth v. Talmage

III. WHEN THE INTEREST ORIGINATED

The second issue briefed by the parties is one that

we added in reformulating the question. Again, that addi-

tional issue was, as further reframed in light of our analysis

of the first issue:

“If plaintiffs’ equitable ownership interest arises at the

moment of the purchase of a property with fraudulently

obtained funds, does it make any difference if the fraud

as to the party seeking establishment of a trust occurred

after the initial purchase?”

That, too, is a question of state law on which the parties

disagree. It is not entirely certain, however, that the answer

will prove dispositive to the Ninth Circuit’s resolution of this

case. If the Ninth Circuit decides that any equitable interest

of plaintiffs would be too inchoate to defeat the tax lien, then

the particulars of that interest will not matter. Despite that

uncertainty, the question satisfies the requirement that

“our decision must, in one or more of the forms it could take,

have the potential to determine at least one claim in the

case.” Western Helicopter Services, 311 Or at 365. We think

it prudent to answer the question for several reasons: It has

already been briefed by the parties; clarifying the nature

of plaintiffs’ interest may be helpful to the Ninth Circuit in

deciding how the federal tax lien statute, 26 USC § 6321,

applies to that interest; and—not being sure of the course

that this case will take from here—it serves the interest of

judicial economy to render a decision now, rather than to

have the parties litigate it again later.

The problem presented here is less a question of

unjust enrichment—plaintiffs have stated such a claim—

than it is of tracing. At issue is whether plaintiffs’ interest

in the money that they transferred to Talmage can be traced

into an ownership interest in the RiverCliff property—

one that existed prior to 2008. Recall that Talmage and

his wife purchased RiverCliff in 1997 using client funds

and, between 1998 and 2006, Talmage used client funds to

improve the property and to purchase his wife’s half share

in the property in 2005, after their divorce. Plaintiffs first

invested with Talmage in 2002. Plaintiffs’ funds were used

to pay for improvements, to purchase Talmage’s wife’s share,

Cite as 365 Or 558 (2019) 581

and to repay funds Talmage had received from pre-2002

investors. The parties agree that plaintiffs’ funds are trace-

able to at least the half-interest in RiverCliff that Talmage

purchased from wife in 2005, after their divorce. Plaintiffs

offer three theories of when and how they acquired an equi-

table ownership interest in the other half of RiverCliff:

(1) when Talmage used money fraudulently obtained from

plaintiffs to improve RiverCliff; (2) when Talmage trans-

ferred RiverCliff to a corporation that he controlled, for no

consideration; and (3) by subrogation, when Talmage paid

off the earlier victims of his scheme using plaintiffs’ funds.

The first two theories are easily disposed of. When

Talmage used plaintiffs’ funds to make improvements in

RiverCliff, that act gave plaintiffs an interest in the prop-

erty, but not an ownership interest for which a constructive

trust would be an appropriate remedy. Instead, they have

recourse to an equitable lien. As the Restatement explains:

“Unjust enrichment is susceptible to remedy by construc-

tive trust when the defendant holds title to property to

which the claimant has an equitable claim of ownership.

* * * By contrast, equitable lien requires only that the asset

in question incorporate value obtained from the claimant to

a significant and measurable degree. The two remedies are

typically distinguished (but occasionally confused) when

the claimant’s assets have been used by the defendant to

improve property rather than to acquire it.”

Restatement (Third) § 55 comment k. The fact that Talmage

used a large amount of plaintiffs’ funds to improve RiverCliff

is relevant to the extent of the equitable lien they may have

on the property, but does not allow plaintiffs to seek a con-

structive trust.

Similarly, Talmage’s transfer of the property from

his personal ownership to a corporation that he controlled

did not change the nature of the interest that plaintiffs had

in the property. Plaintiffs allege that the transfer was made

without consideration and that the entity now holding legal

title to the property (and its parent corporation) are con-

trolled by Talmage. Both of those entities are defendants

in the federal action. Yet, the fact that Talmage initiated

a paper transaction to transfer the property from himself

582 Wadsworth v. Talmage

to an entity that he controlled, without consideration, at

a time when he was holding funds fraudulently obtained

from plaintiffs, does not make RiverCliff “property or funds

that ‘can be traced and followed’ from the specific property”

in which plaintiffs had an equitable ownership interest.

Evergreen West Business Center, LLC, 354 Or at 804 (quoting

Ferchen v. Arndt, 26 Or 121, 129, 37 P 161 (1894)).

However, plaintiffs’ subrogation theory is viable. As

we have explained:

“ ‘Subrogation is the substitution of another person in place

of the creditor to whose rights he succeeds in relation to

the debt, and gives to the substitute all of the rights, prior-

ities, remedies, liens and securities of the party for whom

he is substituted. * * * [W]here one has been compelled to

pay a debt which ought to have been paid by another, he is

entitled to exercise all of the remedies which the creditor

possessed against the other * * *.’ ”

Maine Bonding v. Centennial Ins. Co., 298 Or 514, 521,

693 P2d 1296 (1985) (quoting United States F. & G. Co. v.

Bramwell, 108 Or 261, 277, 217 P 332 (1923)). The right

to subrogation includes “the right to follow trust funds, to

enforce liens, to enforce a mortgage, and to enjoy any pri-

ority that the subrogor enjoyed, not only as to the person

against whom claim is made, but against other creditors,

as well.” State ex rel Healy v. Smither, 290 Or 827, 836-37,

626 P2d 356 (1981). Rights of the former creditor to which a

claimant may potentially be subrogated include claims and

remedies in restitution. See Restatement (Third) § 57 com-

ment d (so stating).

As alleged in the complaint, the RiverCliff property

was purchased exclusively with the funds of Talmage’s ear-

lier victims. Those victims therefore had an equitable own-

ership interest in the property, and a remedy for Talmage’s

unjust enrichment at their expense through a constructive

trust. When Talmage paid the same earlier victims back

with funds fraudulently obtained from plaintiffs, the earlier

victims’ equitable ownership interest in the property was

subrogated to plaintiffs, to the extent of the repayment. See

Restatement (Third) § 57 (“Recovery via subrogation may not

exceed reimbursement to the claimant.”). As a consequence,

Cite as 365 Or 558 (2019) 583

plaintiffs can take advantage of the same constructive trust

remedy.

The certified question is answered.