KENNEDY, J., delivered the opinion of the court, in which BOGGS and BATCHELDER, JJ., concurred except as to part III-B. BATCHELDER, J. (pp. 934-37), delivered a separate opinion, in which BOGGS, J., concurred, which constitutes the opinion of the court with respect to the issue addressed in part III— B.
Robert Kitchen (“Kitchen”) and New Properties, Inc., (“NPI”) (collectively referred to as “movants”) moved the bankruptcy court to lift the 11 U.S.C. § 362 automatic stay in bankruptcy with respect to money that debtor George D. Newpower, Jr., (“Newpower” or “debtor”) embezzled. Movants argued that the embezzled funds were not property of Newpower’s bankruptcy estate because: as a thief Newpower did not take title to the funds he embezzled; Newpower was acting as an agent and thus never had title to money loaned to NPI; money was held by New-power pursuant to an express trust. The bankruptcy court held that the $171,516.48 that Newpower transferred directly to third parties from NPI was not property of Newpower’s estate, but declined to lift the stay on the remaining $582,463. The Kitchens and NPI appealed the bankruptcy court’s ruling to the district court, which held that none of the embezzled funds were property of Newpower’s bankruptcy estate, and thus, were not subject to the automatic stay in bankruptcy. For the reasons that follow, we shall affirm in part and reverse in part.
I.
The facts of this case were extensively detailed by the district court in In re Newpower,
In January of 1996, Kitchen and New-power, a licensed Michigan real estate broker, entered an agreement to form NPI. The corporation’s purpose was to purchase and develop real estate in northern Michigan. Kitchen and Newpower were the sole shareholders and directors of the corporation. Kitchen was named vice president and secretary and Newpower was named president and treasurer.
Kitchen and Newpower agreed that Newpower would identify properties in Michigan for purchase and development by the corporation. If both shareholders agreed to purchase the property, NPI would do so, with a loan in the amount of 50% of the purchase price to the corporation by each shareholder. At the time the agreement was entered into, Kitchen lived in Alaska and Newpower lived in Michigan.
The first property that the shareholders agreed to purchase was an eighty-acre parcel in Kalkaska County, Michigan. The price of the property was $400,000, and as agreed, Kitchen and his wife (the “Kitchens”) sent a check to Newpower for $200,000. The memo portion of the check stated that the check was for NPI, and contained a portion of the legal description of the property to be purchased. Instead of using the money to purchase the agreed upon property, Newpower deposited the check in his personal account and used the $200,000 for his own purposes.
Thereafter, for the remainder of 1996, Kitchen and Newpower conducted regular telephone discussions regarding the Kal-kaska property, as well as four other parcels. Prior to each closing, Newpower would tell Kitchen how much money was needed to purchase the specified property. The Kitchens would then wire funds totaling one-half of the purchase price of the property to the corporate account, on which Newpower was the sole authorized signatory. Newpower continued his practice of misappropriating the funds for his own use with respect to these transfers as well. At the same time Newpower reported to Kitchen that everything was progressing as planned and even went so far as to travel to Alaska to meet with Kitchen and deliver fraudulent copies of deeds for the agreed upon properties.
When the Kitchens traveled to Michigan in December 1996 to check on the status of the properties, they quickly discovered that no properties had actually been purchased by Newpower. By investigating
The Kitchens also filed a complaint with the Michigan Attorney General’s office and a Michigan State Police investigation was commenced. Newpower initially fled, but eventually turned himself in and pled guilty to embezzlement. He was sentenced to six-to-ten years in prison and ordered to pay $755,000 in restitution to the Kitchens. Shortly thereafter, New-power filed for bankruptcy and the Kitchens’ lawsuit against the transferees of the embezzled funds was automatically stayed by the bankruptcy court on November 7, 1997, pursuant to the automatic stay provisions of 11 U.S.C. § 362. The Kitchens and NPI moved to lift the stay or order an abandonment so that they could proceed with their state court action.
Following a hearing on movants’ motion to lift the automatic stay, the bankruptcy court granted movants’ motion in part and denied it in part. The bankruptcy court concluded that the funds which were transferred by Newpower directly from the NPI account to a third party, without passing through Newpower’s personal account, were not property of the estate. Accordingly, the court concluded that the Kitchens were entitled to proceed on their actions to recover such funds from the recipients. However, as to money that passed through Newpower’s hands in any way or that was used to purchase assets titled in Newpower’s name, the court concluded that it was property of the estate. Thus, the bankruptcy court lifted the stay on $171,516.48 of assets that Newpower transferred directly to third parties from NPI but declined to lift the stay on the remaining $582,463 of assets traceable to the money that the Kitchens loaned NPI.
Kitchen and NPI appealed the bankruptcy court’s ruling to the district court. The district court held that the bankruptcy court erred in concluding that property traceable to the Kitchens’ embezzled funds were property of Newpower’s estate. Consequently, the district court reversed the bankruptcy court’s decision to the extent that it declined to lift the automatic stay under 11 U.S.C. § 362 with respect to the remaining $582,463 of property traceable to movants’ funds.
II.
In considering an appeal from a decision of the district court, which reviewed a decision of the bankruptcy court, this court independently reviews the bankruptcy court’s decision. In re Koenig Sporting Goods, Inc.,
III.
A.
This appeal raises the question of whether the money misappropriated by
Section 541 provides: “(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a). What qualifies as a property interest is determined by reference to state law, unless some federal interest requires a different result. Butner v. United States,
The district court concluded that none of the funds and property at issue were part of debtor’s bankruptcy estate because, as a thief, debtor took no title to the funds, an express trust existed under the circumstances, and debtor held the embezzled funds as an agent. Based on its conclusions, the district court reversed the bankruptcy court’s order and remanded for entry of an order granting relief from stay as to the $582,463 and causes of action to recover that sum.
Unless a countervailing federal interest exists, state law determines whether a debtor has a property interest for purposes of § 541(a)(1). Butner v. United States,
Movants argued that debtor stole the funds embezzled from NPI and further assert that because a thief takes no title under Michigan law, embezzled funds or proceeds thereof are not property of debt- or’s bankruptcy estate. While the bankruptcy court recognized that state law would determine the extent of debtor’s property interest in the money he embezzled, it did not specifically review Michigan law, merely concluding that “this was not a true theft.” On appeal, movants rely on Morgan v. Hodges,
In Morgan, the plaintiff leased horses, a harness, buggy, robes, and a whip to Seaman. Seaman rented the horses and gear for the purpose of driving to Frankfort, Michigan. Instead, however, Seaman drove to Grand Rapids and sold the horses and gear to defendants, who knew Seaman and had no reason to doubt his representations of ownership. By the time plaintiff finally traced his property to defendants’ possession, defendants had sold the horses but still retained the rest of plaintiffs property. Plaintiff informed defendants that they had his stolen property and proposed that if the buggy, robe, and harness were returned, he would not pursue a claim for the value of the horses, as defendants had purchased them in good faith. Defendants agreed and returned plaintiffs property to him. Plaintiff then sued defendants for the value of the horses. In response, defendants argued that they had entered into a contract with plaintiff by agreeing to give plaintiff the horse and buggy in exchange for his promise not to sue. However, the Michigan Supreme Court held that plaintiff was entitled to
While Morgan is an old case, as far as we were able to determine it remains good law in the state of Michigan. Morgan stands for the proposition, long established at common law, that a thief has no title in the property that he steals. See Restatement (Second) of Torts § 229 cmt. d (1965); Bogert, Trust & Trustees § 476 (2d ed.1978). Bogert, Trust & Trustees discusses this rule as it applies to proceeds from larceny, embezzlement, or conversion, providing:
A thief does not ordinarily become the owner of property he steals; he has mere possession. If the stolen property is found in his hands, it is recoverable by the injured party in a possessory action at law. There is no basis for a constructive trust as to the stolen property in the hands of the thief because of his lack of a property interest.
Bogert, Trust & Trustees § 476 at 119 (2d ed. 1978 & Supp.1999) (citing cases recognizing this principle).
Appellees argue, however, that under Michigan law when title to property is obtained by fraud, the title is voidable, not void. In support, appellees cite Jones v. Hicks,
Appellees correctly observe that under Michigan law, the critical difference between larceny crimes and false pretense crimes is the passage of title. See, e.g., People v. Malach,
Moreover, regardless of what crime debtor pled guilty to, it is clear that NPI never intended to pass title in the appropriated funds to debtor. As the district court observed, Newpower had only limited authority to move corporate funds for authorized corporate purposes, i.e., to purchase the agreed upon properties. Thus, the $382,463
The original owner would normally not be without remedy in such a situation, as a constructive trust may be imposed on the proceeds held by the thief or embezzler. Bogert, Trust & Trustees § 476 at n. 74 (2d ed. 1978 & Supp.1999) (collecting cases standing for this proposition). However, under In re Omegas, a constructive trust is an equitable interest that exempts property from the bankrupt’s estate under § 541(d), only if the trust is declared by a court in a separate prepetition proceeding or a state statute provides that the property is to be held in trust for a particular purpose. In re Omegas,
Thus, we hold that the bankruptcy court erred in concluding that money which debtor embezzled from NPI was part of debtor’s bankruptcy estate. Consequently, we also hold that the debtor’s bankruptcy estate has no property interest in such embezzled funds which are now in the hands of third parties. As discussed, debt- or never had a legal interest in such funds and appellants should be allowed to pursue third party recipients to recover embezzled funds and property traceable to such funds to the extent that the law allows.
B.
I must disagree with my colleagues, however, in their assertion that the automatic stay should be lifted with respect to property that debtor purchased with stolen funds. In her separate opinion, which is the opinion of the court on this issue, Judge Batchelder observes that an automatic stay in bankruptcy may be lifted “where the debtor does not have an equity interest in the property and the property is not necessary to an effective reorganization.” See 11 U.S.C. § 362(d). As Judge Batchelder’s notes, we have concluded that the debtor did not obtain equitable title to the proceeds at issue and “there is no reorganization present in this case because debtor is liquidating his assets under Chapter 7.” However, removing the automatic stay in bankruptcy serves no purpose with respect to property debtor purchased with stolen funds. As we noted above, debtor clearly has legal title to such funds. While the Kitchens could have
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 “impressing” defendant’s property or assets with a constructive trust. Therefore, a creditor’s claim of entitlement to a constructive trust is not an “equitable interest” in the debtor’s estate existing prepetition, excluded from the estate under § 541(d).
Id. at 1451. This apparently remains the case even if the state would view the constructive trust as coming into existence on the date the wrongful acts which gave rise to it took place. Id. at 1449 (stating that “[ujnless a court has already impressed a constructive trust upon certain assets or a legislature has created a specific statutory right to have particular kinds of funds held as if in trust, the claimant cannot properly represent to the bankruptcy court that he was, at the time of the commencement of the case, a beneficiary of a constructive trust held by the debtor”).
Because the Kitchens clearly have not had a court declare a constructive trust as to these proceeds prepetition, there is no action that the state court could take which would affect their disposition. Even if a state court were to find that the constructive trust arose at the time of the theft, In re Omegas states that this is irrelevant, as bankruptcy law controls. See id. at 1450-51 (concluding that for the purposes of Bankruptcy law, a constructive trust does not exist until judicially decreed; see also id. at 1453-55) (Guy, J. Concurring) (disagreeing with the majority’s approach and instead relying on his belief that under Kentucky law constructive trusts do not come into existence until impressed by a court). Consequently, I must disagree with the majority opinion on this issue. I would retain the stay in bankruptcy as to these proceeds. To do otherwise is to ignore In re Omegas. The debtor had legal title; that is enough to include such proceeds in the bankruptcy estate. Under In re Omegas, a subsequently imposed constructive trust does not remove property from the bankruptcy estate.
Judge Batchelder attempts to draw a factual distinction between this case and In re Omegas in that, “In re Omegas dealt with a situation wherein the debtor obtained property from a creditor in the ordinary course of business,” whereas here the debtor was a thief and never had any claim to an equitable interest. But the debtor in In re Omegas was alleged to be guilty of fraud against the creditor and also did not have equitable title. Thus, there does not appear to be a relevant distinction here.
Judge Batchelder also appears to draw a distinction between whether or not the bankruptcy court can impose a constructive trust and whether the bankruptcy court can enforce a state court judgment. She says in her opinion, referring to In re Omegas, “[w]e held that it was not the province of the bankruptcy court to impose a constructive trust, but we were not faced with the question of either obtaining or enforcing a state court judgment holding that the equitable interest belonged to someone other than the debtor.” This supposed distinction cannot matter, however, because the In re Omegas court specifically held that, “[u]nless a court has already impressed a constructive trust upon certain assets ... the claimant cannot properly represent to the bankruptcy court that he was, at the time of the commencement of the case, a beneficiary of a constructive trust held by the debtor.”
C.
We next address the $200,000 that the Kitchens transferred to Newpower directly, in his name, prior to the formation of NPI. The bankruptcy court found that the $200,000 that the Kitchens sent Newpower was a loan to the corporation, even though the corporation was not yet in existence. The bankruptcy court reached this conclusion due to testimony that the money the Kitchens sent was a loan to the corporation, the fact that the corporate minutes noted that it was a loan to the corporation, and the fact that the memo section of the check that the Kitchens sent stated that check was for NPI, and briefly described the property to be purchased. However, despite the fact that the court found that the $200,000 was a loan to the corporation, it concluded that the money was property of debtor’s bankruptcy estate, because debtor deposited the money in his personal account.
Appellees disagree, arguing that debtor was acting as their agent with respect to the money they loaned to the corporation. As a result, appellees contend that the funds at issue remained their property while in the hands of debtor, and thus could not be included in debtor’s bankruptcy estate. In support, appellees cite several cases, including In re Zwagerman,
[A]n agency is a relationship arising from a contract, express or implied, by which one of the parties confides to the other the transaction or management of some business or other activity in the principal’s name, or on the principal’s behalf, and whereby the agent performs the anticipated act and renders an account thereof. [T]he title to the property remains in the ... principal, and the ... agent holds the property ... for the owner’s benefit. Consequently, it has been settled under the Code and prior law that absent state statutory enactment to the contrary, if property was in a debtor’s hands as bailee or agent, the debtor’s estate holds only the same interest, and the bailor or principal could recover the property or its proceeds.
Collier on Bankruptcy ¶ 541.06[l][a] (15th ed.1999). Thus, if appellees are correct in arguing that debtor was their agent with respect to the $200,000 they initially transferred to him, then the money would not be property of debtor’s bankruptcy estate.
In determining whether an agency has been created under Michigan law, the Michigan Supreme Court has stated that it will consider “the relations of the parties as they in fact exist under their agreements or acts.” Saint Clair Intermediate School Dist. v. Intermediate Educ. Ass’n,
[I]n its broadest sense agency “includes every relation in which one person acts for or represents another by his authority.” Saums v. Parfet,270 Mich. 165 , 170-71,258 N.W. 235 (1935). We further recognized in Saums that “[t]he characteristic of the agent is that he is a business representative. His function is to bring about, modify, affect, accept performance of, or terminate contractual obligations between his principal and third persons.” Id. at 172,258 N.W. 235 . Also fundamental to the existence of an agency relationship is the right to control the conduct of the agent, CapitolCity Lodge No. 141, FOP v. Meridian Twp., 90 Mich.App. 533 , 541,282 N.W.2d 383 (1979), with respect to the matters entrusted to him.
Saint Clair Intermediate School Dist.,
While the bankruptcy court concluded that debtor was not an agent of NPI, it never addressed the issue of whether debtor was an agent of the Kitchens with respect to the funds they sent directly to debtor prior to NPI’s formation. As the bankruptcy court observed, the minutes reflected that the initial $200,000 sent to Newpower by the Kitchens was a loan to NPI. The parties also consistently referred to this money as a loan to the corporation and the memo section of the check stated that the money was for NPI. Further, during sentencing for the criminal charge of embezzlement debtor admitted that he operated as the Kitchen’s agent. Debtor clearly did not have authority to do with the funds as he wished, as all evidence indicated that the Kitchens sent the money to him for the sole and express purpose of depositing it with the Corporation once it formally came into being. Under the circumstances, we agree with the district court’s conclusion that an agency relationship existed with respect to the $200,000 that the Kitchens initially sent the debtor. Consequently, the bankruptcy court erred in concluding that these funds were part of debtor’s bankruptcy estate. However, as discussed above, debtor would have legal title to any proceeds obtained with these embezzled funds, rendering such proceeds part of debtor’s bankruptcy estate.
D.
It is unnecessary to address appellee’s contention that debtor was an agent of NPI or that debtor held funds in an express trust for both NPI and the Kitchens with respect to items to which he had legal title, since legal title places those items in the debtor’s estate.
IV.
In sum, we AFFIRM the district court’s conclusion that none of the money misappropriated by debtor was property of the debtor’s bankruptcy estate although some of the proceeds are. We REVERSE the district court to the extent it concluded that debtor’s bankruptcy estate did not have legal title to the property that debtor bought with such funds, and that he still possessed at the time he filed his bankruptcy petition. Further, we AFFIRM the district court’s decision to lift the 11 U.S.C. § 362 automatic stay with respect to the $753,979.48 at issue, as well as funds or property traceable to this money. The Kitchens are free to seek to recover such funds or proceeds thereof, wherever they may be found, to the extent that the law allows. We REMAND this case to the bankruptcy court with directions to lift the automatic stay and for further proceedings consistent with this opinion.
ALICE M. BATCHELDER, Circuit Judge, writing for the court as to part III— B and concurring in the remainder of the majority opinion. We held in part III-A that, as to the assets purchased with the stolen funds, the debtor obtained only bare legal title, that those assets are includable in the bankruptcy estate, and that the assets are thus subject to an automatic stay in bankruptcy under 11 U.S.C. § 362. We agree with this holding as far as it goes, but it doesn’t go far enough. Although property in which a debtor holds only bare legal title may, in some cases, be protected by the automatic stay, in this case the appellees’ equitable interest in the property Newpower bought with embezzled funds precludes such protection.
The bankruptcy estate comprises all legal or equitable interests of the debtor, unless specifically excepted by the Code, as of the commencement of the bankruptcy case. See 11 U.S.C. § 541(a). However, “[property in which the debtor
The automatic stay imposed by the filing of a bankruptcy petition shall be lifted upon motion by a party in interest in cases where (1) the party can show cause, including the lack of adequate protection of an interest in property of such party in interest, or (2) where the debtor does not have an equity interest in the property and the property is not necessary to an effective reorganization. See 11 U.S.C. § 362(d). The Kitchens qualify under the second condition set forth in § 362(d). As we have already held, the debtor did not obtain equitable title to these proceeds, and this case does not involve a reorganization because the debtor is liquidating his assets under Chapter 7. See also In re Leitner,
The trustee in this case argues that under In re Omegas Group, Inc.,
Judge Kennedy argues in section III-B that there is no purpose in lifting the stay because even if the Kitchens were able to obtain a state court judgment impressing the property with a constructive trust, under In re Omegas “there is no action that the state court could take which would affect disposition [of these proceeds].” This statement, however, fails to recognize the crucial distinction between this case and In re Omegas and the cases cited therein. In re Omegas dealt with a situation wherein the debtor obtained property from a creditor in the ordinary course of
The situation presented by this case is significantly different. Here, Newpower is a thief. The critical issue therefore is not only who has legal title to the property, but also who has equitable title to the property purchased with the stolen funds. We held in part III-A that as a thief, Newpower had no title in the money he stole from the Kitchens, and while New-power obtained bare legal title in the goods he purchased with the stolen funds, he clearly did not obtain equitable title in the goods. The question therefore remains, in whom does the equitable interest in these goods lie? Because the bankruptcy code is clear that property is includable only to the extent of the debtor’s legal title and not to the extent of any equitable interest that the debtor does not have, see 11 U.S.C. § 541(d), this question must be answered in order to determine to what extent the goods purchased with stolen money are includable in the debtor’s bankruptcy estate. In re Omegas precludes the bankruptcy court from imposing a constructive trust on the property postpetition, but ownership of the equitable title in the property must nonetheless be assigned.
We disagree with Judge Kennedy’s contention that In re Omegas bars the bankruptcy court’s enforcement of any constructive trust that the state court might enter on behalf of the Kitchens. In re Omegas did not present a situation in which the debtor was a thief, and it did not purport to answer the question of the enforcement of a state court judgment under the circumstances presented by this case. In re Omegas presented the more common situation in which all the creditors have come to the bankruptcy court after having transferred property to the debtor in the ordinary course of business only to discover that the debtor was unable to pay them back, and was aware of its inability to pay even while engaging in the business transactions. Before In re Omegas, each of those unsecured creditors would rush to the bankruptcy court to argue that debt- or’s dealings with it were more egregious than his dealings with the others and the debtor’s bad conduct justified special treatment, ie., the imposition of a constructive trust by the bankruptcy court. In re Omegas spoke definitively to quash such postpetition scrambling by creditors pushing to a place at the head of the line.
We recognize that In re Omegas speaks negatively of the role of constructive trusts
Notes
. The Kitchens have yet to recover a total of $754,999.64 that they loaned to NPI. The bankruptcy court only addressed whether the automatic stay was appropriate for $753,-979.48, however, appellees do not dispute the difference, as they conceded during oral argument that it represented the only valid transactions that debtor made on behalf of NPI.
. This figure represents the $582,463 which the bankruptcy court held was subject to the automatic stay minus the $200,000 that the Kitchens sent directly to Newpower as a loan to NPI prior to its formal incorporation. The proper disposition of the $200,000 will be discussed further below.
. We note that Morgan v. Hodges does not provide authority to the contrary. As discussed above, in Morgan the original owner was suing the purchasers to recover the value of goods that the purchaser bought from the thief. The purchasers defended on the grounds that the original owner had entered into a contract not to sue the purchasers for the value of the stolen horses if they handed over the original owner's buggy and related equipment. The trial judge instructed the jury that such a contract could be found binding on the parties. The Michigan Supreme Court reversed and ordered a new trial, holding that no contract could exist as the purchasers only did that which they were required by law to do (i.e., return the stolen buggy to the original owner). See Morgan,
. In drawing this conclusion, we merely hold that debtor’s bankruptcy estate has no property interest in such funds and express no opinion as to movants' right, vis-a-vis third parties, to such funds or property traceable to them.
. In re Leitner ultimately concludes that a state court constructive trust, under Kansas law, would relate back to the date of the wrongdoing, thus removing the property from the debtor's estate altogether. See
. In our view, the state court where the Kitchens initiated their action before the bankruptcy petition was filed is best suited to determine who holds the equitable interest in the property at issue under Michigan law.