Don R. Sensabaugh
Jaclyn A. Bryk
Flaherty Sensabaugh & Bonasso
Charleston, West Virginia
Attorneys for W.V. Medical Association
Robert L. Greer
Clarksburg, West Virginia
Attorney for Blue Cross & Blue Shield
Christopher S. Smith
Hoyer, Hoyer & Smith
Charleston, West Virginia
Attorney for Appellee Receiver
CHIEF JUSTICE DAVIS delivered the Opinion of the Court.
This appeal was brought by the International Union, United Mine Workers of America, appellant/intervenor below (hereinafter UMWA), from an order of the Circuit Court of Kanawha County that granted summary judgment in favor of the Receiver of Blue Cross and Blue Shield of West Virginia, appellee/applicant (hereinafter Receiver). (See footnote 1) This matter arose out of a delinquency proceeding (See footnote 2) involving Blue Cross and Blue Shield of West Virginia (hereinafter Blue Cross). (See footnote 3) During the delinquency proceeding, UMWA intervened and filed a claim with the Receiver for the return of money it had previously given to Blue Cross. UMWA argued that the money was given to Blue Cross as a trust fund and was therefore not part of the liquidation estate of Blue Cross or, alternatively, that the money was a secured claim or special deposit. The Receiver rejected UMWA's contentions and found that, for priority payment purposes, UMWA had a general unsecured creditor claim. (See footnote 4) The circuit court appointed a referee to make recommendations on how to resolve the dispute. The parties filed cross-motions for summary judgment with the referee. The referee issued findings of fact and conclusions of law and recommended denying UMWA's motion for summary judgment and granting the Receiver's motion for summary judgment. The circuit court adopted the referee's findings of fact, conclusions of law and recommendations. In this appeal, UMWA contends that the circuit court committed error in finding that its claim was not a trust and therefore outside the liquidation estate of Blue Cross. (See footnote 5) After consideration of the arguments of the parties and a careful review of the briefs and record, we reverse the circuit court's order and remand this case for entry of an order granting UMWA's motion for summary judgment.
[w]here a person, not acting merely as agent, has or
accepts possession and control of money, promissory notes, or
other personal property, with the express or implied
understanding that he is not to hold it as his own absolute
property, but is to hold and apply it for certain specific purposes,
or for the benefit of certain specified persons, a valid and
enforceable trust exists.
83 W. Va. 659, 666, 98 S.E. 880, 883 (1919) (citations omitted).
On three separate occasions, UMWA and Blue Cross entered into written agreements regarding the conveyance of the one million dollars. Each agreement contained an Appendix A that set forth the exact same conditions as follows:
[Blue Cross] and [UMWA] hereby agree as follows:
Within thirty (30) days from the effective date herein, [UMWA] will remit to [Blue Cross] the sum of One Million Dollars ($1,000,000.00) to be held by [Blue Cross] for [UMWA] IN TRUST in accordance with the following terms and conditions:
A. The term of the trust shall be one year, commencing from the date that [Blue Cross] is in receipt of the trust corpus amount.
B. [Blue Cross] shall invest the trust corpus at an annual interest rate which is no less than one percent (1%) greater than the current yield to maturity on a one year Treasury Bill. [Blue Cross] shall provide [UMWA] a monthly written statement setting forth the interest amount earned on the trust corpus.
C. At the end of the one year term described herein, the entire trust corpus ($1,000,000.00) shall be returned to the [UMWA] by [Blue Cross]. Further, [Blue Cross] at that time shall provide [UMWA] a written statement setting forth the amount of interest earned on the trust corpus during the term of the trust. Said interest amount shall then be invested by [Blue Cross] for a one year period (investment period) at an annual interest rate that is no less than one percent (1%) greater than the current yield to maturity on a one year Treasury Bill.
D. Upon the termination of the Group Enrollment Agreement, there shall be established a one year period known as the claims run-out period. During that time, [Blue Cross] shall pay all claims, subject to the terms and conditions of the membership certificate, incurred by the [UMWA's] members prior to the termination date. [Blue Cross] is under no obligation, either express or implied, to pay any additional such claims after the expiration of the claims run-out period.
E. At the end of the investment period described in Section C, [Blue Cross] shall provide [UMWA] a written statement setting forth the amount of claims paid by [Blue Cross] under the terms of this certificate, plus [Blue Cross'] retention charge of eleven and five hundredths percent (11.05%) of the aforesaid claims amount. In the event that said paid claims plus [Blue Cross'] retention charge exceed the premiums received by [Blue Cross] from the [UMWA's] members, then [Blue Cross] shall retain an additional amount equal to such excess from the interest amounts earned during the one-year term of the trust and the investment period described in this Appendix A. The remaining interest earned, however, shall be returned by [Blue Cross] to [UMWA]. In no event shall [UMWA] be required to pay [Blue Cross] an amount greater than the interest amount earned during the term of the trust and the investment period, regardless of the total amount of claims paid.
Under Appendix A, Blue Cross received one million dollars from UMWA for the specific purpose of investing it at an annual interest rate that was at least 1% greater than a one year Treasury Bill. Appendix A required Blue Cross to return the one million dollars after one year. The limitations contained in Appendix A are consistent with the requirements of Keller for creating a trust. Consequently, we find that for the three years in which the parties executed an agreement containing Appendix A, a valid trust was created.
No further written agreements were entered between the
parties with respect to the UMWA Emergency Care Program
following termination of the third agreement on March 31,
1989. . . . However, [the parties] agreed to continue the
Emergency Care Program until April 30, 1990, when it was
terminated. The $1,000,000.00 was not returned to the UMWA
following the Program's termination.
This finding of fact does not support the circuit court's legal conclusion that the trust expired
on April 1, 1989. To the contrary, this finding of fact indicates that Blue Cross and UMWA agreed to continue the trust (See footnote 26) for another year that ended April 30, 1990. (See footnote 27)
Second, the mere fact that no formal written trust agreement was entered into by Blue Cross and UMWA to continue the trust for another year is not relevant. (See footnote 28) It has been recognized that the required manifestation of intention to create a trust in [personalty] may be written or spoken or by conduct. Restatement (Third) of Trusts, §13 at 207 (2003). In fact, it has been recognized by statute, (See footnote 29) and we expressly hold, that when a trust is created through the conveyance of personal property to another person, either in trust for the person making the conveyance, or in trust for a third person, no writing is required. (See footnote 30) See Everly v. Schoemer, 139 W. Va. 392, 395, 80 S.E.2d 334, 337 (1954) (It is unnecessary to have [a trust] agreement in writing to enforce such trust, and the trust may be shown by oral evidence.); Boggs v. Yates, 101 W. Va. 407, 409, 132 S.E. 876, 876 (1926) (At common law no particular form of creation or declaration of a trust . . . was required. It could be by deed, or will, or writing not under seal, or mere word of mouth.); Hudkins v. Crim, 64 W. Va. 225, 227, 61 S.E. 166, 166 (1908) ([An] oral trust, though not created or manifested in writing, [is] enforced in equity in West Virginia.). Therefore, the parties could and in fact did continue the trust until April 30, 1990, even though no new formal written trust agreement was created. Further, there is nothing in the record to show that the informal extension of the last formal written trust agreement compromised the trust, or allowed Blue Cross to have greater rights to the corpus of the trust than was authorized under Appendix A.
Finally, assuming for the sake of argument, that the trust agreement was not extended after the April 1, 1989, termination date, this fact alone did not destroy the trust. This Court has previously held that [a] trust does not ordinarily terminate automatically when the time for the termination arrives because the duties of the trustees do not cease upon such termination but continue until their duties have been completed. Syl. pt. 3, Guthrie v. First Huntington Nat'l Bank, 155 W. Va. 496, 184 S.E.2d 628 (1971). See William F. Fratcher, Scott on Trusts § 344, at 543-44 (4th ed. 1989) ([A] trust ordinarily does not automatically terminate merely because the time for distribution has arrived; it is terminated
only when the trustee has finally accounted [for] and conveyed the trust property to the persons entitled to it on the termination of the trust.). Insofar as there was no evidence showing that Blue Cross returned the trust corpus and interest to UMWA on or shortly after April 1, 1989, the trust would have continued to exist. (See footnote 31) See Swoboda v. United States, 258 F.2d 848, 850 (3rd Cir. 1958) (explaining that a trust of personalty does not terminate until the trustee has transferred the corpus to the beneficiary); Commissioner of Internal Revenue v. Davis, 132 F.2d 644, 646 (1st Cir. 1943) (same); Ridgely v. Pfingstag, 50 A.2d 578, 588 (Md. 1946) (same); Wachovia Bank & Trust Co. v. Taliaferro, 97 S.E.2d 776, 782 (N.C. 1957) (same); In re Thaw's Estate, 63 A.2d 417, 420 (Pa. 1949) (same).
Trust funds do not lose their character as such because they are commingled with those of the trustee. Once a trust is created, it cannot be destroyed by the action, wrongful or innocent, of the trustee, in the absence of the intervening right of a purchaser for value without notice.
Syl. pt. 4, Henson, 120 W. Va. 552, 199 S.E. 459. (See footnote 33) See also Syl. pt. 4, Ream's Drug Store
v. Bank of the Monongahela Valley, 115 W. Va. 66, 174 S.E. 788 (1934) (A deposit
impressed with the character of a trust fund does not lose that impression through
commingling with the general funds of the bank.); Syl. pt. 1, in part, Sullivan v. Madeleine
Smokeless Coal Co., 115 W. Va. 115, 175 S.E. 521 (1934) (Trust funds in the control of an
employer do not lose their character as such merely because they are commingled with other
We need not dwell on the issue of commingling. Our prior cases, as well as other jurisdictions, have made clear that a trustee's commingling of trust funds with its own funds will not, in and of itself, destroy a trust. See Bell v. Killian, 93 So. 2d 769, 778 (Ala. 1957); Hurst v. Hurst, 405 P.2d 913, 917 (Ariz. Ct. App. 1965); Chambers v. Williams, 132 S.W.2d 654, 656 (Ark. 1939); Elliott v. Elliott, 41 Cal. Rptr. 686, 688 (1964); Cotting v. Berry, 114 P. 641, 643 (Colo. 1911); Curran v. Smith-Zollinger Co., 151 A. 217 (Del. Ch. 1930); Myers v. Matusek, 125 So. 360, 366 (Fla. 1929); Adler v. Hertling, 451 S.E.2d 91, 97 (Ga. Ct. App. 1994); In re Comm'r of Banks & Real Estate, 764 N.E.2d 66, 100 (Ill. App. Ct.
2001); Ross v. Thompson, 146 N.E.2d 259, 266 (Ind. 1957); State v. Hawkeye Oil Co., 110 N.W.2d 641, 648 (Iowa 1961); Matter of Miller's Estate, 594 P.2d 167, 170 (Kan. 1979); Farmers' Bank of White Plains v. Bailey, 297 S.W. 938, 939 (Ky. 1927); D.T. & A.T. Lee v. First Nat'l Bank, 139 So. 63, 65 (La. Ct. App. 1932); Brown v. Coleman, 566 A.2d 1091, 1097 (Md. 1989); Feeney v. Feeney, 140 N.E.2d 642, 645 (Mass. 1957); Blair v. Trafco Prods., Inc., 369 N.W.2d 900, 903 (Mich. Ct. App. 1985); Petersen v. Swan, 57 N.W.2d 842, 846 (Minn. 1953); Holliman v. Demoville, 138 So. 2d 734, 736 (Miss. 1962); In re Myers' Estate, 376 S.W.2d 219, 222 (Mo. 1964); Bennett v. Glacier Gen. Assur. Co., 857 P.2d 683, 685 (Mont. 1993); In re Estate of Redpath, 402 N.W.2d 648, 651 (Neb. 1987); Division of Employment Sec. v. Pilot Mfg. Co., 199 A.2d 78, 81 (N.J. 1964); Daughtry v. International Bank of Commerce, 134 P. 220, 221 (N.M. 1913); General Motors Acceptance Corp. v. Norstar Bank, N.A., 532 N.Y.S.2d 685, 687 (1988); Michigan Nat'l Bank v. Flowers Mobile Homes Sales, Inc., 217 S.E.2d 108, 111 (N.C. Ct. App. 1975); Engstrom v. Larson, 44 N.W.2d 97, 109 (N.D. 1950); In re Graham's Estate, 98 N.E.2d 104, 111 (Ohio Prob. Ct. 1950); Boroughs v. Whitley, 363 P.2d 150, 152 (Okla. 1961); Montgomery v. U.S. Nat'l Bank of Portland, 349 P.2d 464, 473 (Ore. 1960); In re Paxson Trust I, 893 A.2d 99, 129 (Pa. 2006); In re Erie Trust Co. of Erie, 191 A. 613, 617 (Pa. 1937); Want v. Alfred M. Best Co., 105 S.E.2d 678, 701 (S.C. 1958); Farmers' Sav. Bank v. Bergin, 216 N.W. 597, 599 (S.D. 1927); State ex rel. Robertson v. Thomas W. Wrenne & Co., 92 S.W.2d 416, 418 (Tenn. 1936); Flournoy v. Wilz, 2006 WL 2008711 (Tex. Ct. App.); Tooele County Bd. of Educ. v. Hadlock, 11 P.2d 320, 324 (Utah 1932); First Nat'l Bank v. Commercial Bank & Trust Co., 175 S.E. 775, 779 (Va. 1934); Westview Invs., Ltd. v. U.S. Bank Nat'l Ass'n, 138 P.3d 638, 644 (Wash. Ct. App. 2006); Simonson v. McInvaille, 166 N.W.2d 155, 159 (Wis. 1969); City of Casper v. Joyce, 88 P.2d 467, 470 (Wyo. 1939).
The right of a . . . trust [beneficiary] to follow his trust
money or other property into the hands of the receiver of the
insolvent trustee . . . is based upon rights of property. The
theory is that the funds are still the property of the . . . trust
[beneficiary], whether in their original or in some altered or
substituted form. This right to follow and recover trust funds or
property is not based upon any relationship of debtor and
creditor or upon a debt due and owing, nor does it rest on the
ground of compensation for the loss of the property or fund.
Lencioni v. Folk, 36 N.E.2d 980, 982 (Ind. 1941) (internal quotations and citation omitted). See also Andrew v. State Bank of New Hampton, 217 N.W. 250, 252 (Iowa 1928) (The . . . owner of a trust fund traced to the possession of another has the right to have it restored, not as his debt due and owing, but because it is his property wrongfully withheld from him.). In the final analysis, the right to trace and to recover a trust fund or property . . . from the representative of the insolvent [trustee] is based solely upon the theory that since title to the fund or property claimed did not pass to the [trustee], he is, in effect, recovering his own converted property or the proceeds therefrom. In re Ogden State Bank, 75 P.2d 313, 316 (Utah 1938) (internal quotations and citation omitted). This Court held in syllabus point 5 of Ream's Drug Store v. Bank of the Monongahela Valley, 115 W. Va. 66, 174 S.E. 788 (1934), that [s]o long as a trust fund or its product can be identified, equity will follow it.
In the instant proceeding, the circuit court found that, insofar as the trust was destroyed, a debtor-creditor relationship existed between UMWA and Blue Cross. It was only because of the purported destruction of the trust that the circuit court found that W. Va. Code § 33-24-27 barred using the trace remedy. We have already determined that, contrary to the circuit court's conclusion, the trust was never destroyed. Thus, the trace doctrine may be used to locate the trust funds.
2. The trust fund can be traced to assets held by the Receiver. The circuit court found that UMWA's efforts at tracing the trust fund failed because it amounted to conjecture and speculation. In order to determine whether UMWA's trust fund can be traced to funds in the possession of the Receiver, we must first set out a few principles of law applicable to tracing trust funds.
Courts take the position generally that when trust funds are commingled with other funds, the trust may be enforced against any part of the commingled fund which can be traced into the hands of a trustee. Simonson v. McInvaille, 166 N.W.2d 155, 159 (Wis. 1969). See also Hurst v. Hurst, 405 P.2d 913, 917 (Ariz. Ct. App. 1965) (If a trustee mixes trust funds with his own, the entire commingled mass should be treated as trust property except in so far as the trustee may be able to distinguish what is his.); Matter of Miller's Estate, 594 P.2d 167, 170 (Kan. 1979) (If trust funds have been commingled with other funds, the person equitably entitled thereto may follow the funds and is entitled to have the trust funds reclaimed and taken out of the assets with which they are commingled.); LaBarbera v. LaBarbera, 452 N.E.2d 684, 689 (Ill. App. Ct. 1983) (Under Illinois law, a fund impressed with a trust may be traced into a fund of commingled money.); In re Flasch, 143 A.2d 208, 223 (N.J. Super. Ct. App. Div. 1958) (The law is settled that where a fiduciary commingles trust funds with his own, equity imposes a trust upon the entire fund[.]); Application of Lyon, 153 N.Y.S.2d 866, 868 (1956) ([W]here funds in the hands of an executor or trustee are commingled with personal funds of the fiduciary officer, all of his funds are impressed with a trust.); Moody v. Pitts, 708 S.W.2d 930, 937 (Tex. Ct. App. 1986) (If a trustee commingles trust funds with the trustee's own, the entire commingled fund is subject to the trust.). Courts which take the position that all funds remaining with a trustee may be subject to the trust, do so on the theory that where the trustee commingles trust funds with his own and subsequently withdraws sums from the combined fund for his own use, the conclusive presumption is that the trustee withdrew his own funds first. Sadacca v. Monhart, 470 N.E.2d 589, 594 (Ill. App. Ct. 1984).
It has been observed that [i]n cases where the trust property has been commingled, courts resolve the issue with reference to the so-called 'lowest intermediate balance' rule[.] In re Dameron, 155 F.3d 718, 724 (4th Cir. 1998). (See footnote 38) Accord In re MJK Clearing, Inc., 371 F.3d 397, 402 (8th Cir. 2004); In re Columbia Gas Sys. Inc., 997 F.2d 1039, 1063 (3rd Cir. 1993); Connecticut Gen. Life Ins. Co. v. Universal Ins. Co., 838 F.2d 612, 619 (1st Cir. 1988); Universal C. I. T. Credit Corp. v. Farmers Bank of Portageville, 358 F. Supp. 317, 325 (E.D. Mo. 1973); Metropolitan Nat'l Bank v. La Sher Oil Co., 101 S.W.3d 252, 255 (Ark. Ct. App. 2003); Chrysler Credit Corp. v. Superior Court, 22 Cal. Rptr. 2d 37, 44 (1993); Matter of Miller's Estate, 594 P.2d 167, 170 (Kan. 1979); Central Prod. Credit Ass'n v. Hans, 545 N.E. 2d 1063, 1073 (Ill. App. Ct. 1989); Ellefson v. Centech Corp., 606 N.W.2d 324, 336 (Iowa 2000); Bennett v. Glacier Gen. Assurance Co., 857 P.2d 683, 686 (Mont. 1993); General Motors Acceptance Corp. v. Norstar Bank, N.A., 532 N.Y.S.2d 685, 687 (1988); Ayers v. Fay, 102 P.2d 156, 159 (Okla. 1949); Barrs v. Barrs Rent-A-Car Co., 50 N.E.2d 388, 389 (Ohio Ct. App. 1943); Appeal of Mehler, 164 A. 619, 620 (Pa. 1932). Specifically, and we hold, the lowest intermediate balance rule is used when a trustee withdraws money from a commingled fund and subsequently makes additions to that fund. Under the lowest intermediate balance rule, there exist three alternative scenarios: (1) if the amount on deposit in a commingled fund has at all times equaled or exceeded the amount of the trust, the monies of the trust will be returned in their full amount; (2) if the commingled fund has been depleted entirely, the trust is considered lost; and (3) if the commingled fund has been reduced below the amount of the trust but has not been depleted, the settlor is entitled to the lowest intermediate balance in the account. Restatement (Second) of Trusts § 202, at 451. (See footnote 39)
In the instant case, the trust agreement between Blue Cross and UMWA
required Blue Cross to invest the trust fund. Consequently, under the trace doctrine, UMWA
could seek to locate the trust fund by examining Blue Cross' investment portfolio. The
record indicates that UMWA did in fact attempt to trace the trust fund in Blue Cross'
UMWA presented evidence showing that at the time the Receiver was appointed, Blue Cross had an investment portfolio containing seven Treasury Bonds with each having a face value of $1,000,000.00. (See footnote 40) The evidence in this case showed that, while funds moved in and out of Blue Cross' investment portfolio, that portfolio was never below one million dollars during the period of the trust. (See footnote 41)
During the proceeding below, UMWA attempted to trace its trust fund through the movement of one of the seven bonds. The circuit court found that UMWA's evidence regarding that specific bond was conjecture and speculation. We agree. However, we do not believe that, under the unique facts of this case, UMWA was required to trace a specific bond. See Rivero v. Thomas, 86 Cal. App. 2d 225, 238 (1948) (The degree of identification of trust funds depends upon the circumstances surrounding each case.).
We believe that requiring UMWA to trace its trust fund to a specific bond in Blue Cross' investment portfolio is the equivalent of requiring UMWA to locate the exact dollars it wired to Blue Cross to establish the trust. It was not incumbent on UMWA to identify the particular funds, for, as money has no earmarks, this would be practically impossible. Andrew v. State Bank of New Hampton, 217 N.W. 250, 253 (Iowa 1928) (internal quotation marks and citation omitted). See Fratcher, Scott on Trusts, § 517, at 619 (It is impossible and unnecessary to determine whether the claimant's money is included in the part withdrawn or in the part that remains.). It has been said that
[u]nder the modern doctrine prevailing in most . . . jurisdictions, it is not necessary, in order to follow and recover a trust fund from the receiver or other liquidating officer of an insolvent trustee . . ., to identify the specific money constituting the fund, or to point out the identical coins or bills which were originally placed in the custody of the [trustee], where the fund has been mingled with other funds [of] the [trustee].
Staley v. Kreinbihl, 89 N.E.2d 593, 598 (Ohio 1949) (internal quotation marks and citation omitted). This Court came to the same conclusion in Ream's Drug Store:
It is not important that the commingled money bore no
mark, and cannot be identified. It is sufficient to trace it into the
bank's vaults and find that a sum equal to it, and presumably
representing it, continuously remained there until the receiver
took it. The modern rules of equity require no more.
115 W. Va. at 74-75, 174 S.E. at 792 (internal quotations and citation omitted). Thus, [i]f trust funds have been commingled with other funds, the person equitably entitled thereto may follow the funds and is entitled to have the trust funds reclaimed and taken out of the assets with which they are commingled. Matter of Miller's Estate, 594 P.2d 167, 170 (Kan. 1979).
In this proceeding UMWA was able to open Blue Cross' bank vault and find seven investment instruments valued at one million dollars each. (See footnote 42) UMWA needed to do no more, for it had traced the investment of its one million dollars. (See footnote 43) See Appeal of Mehler, 164 A. 619, 620 (Pa. 1932) (Once the proceeds have been traced into some fund, the entire fund is subject to the trust until the amount wrongfully placed in it has been repaid[.]). This conclusion is reached because there was no evidence which demonstrated that any of the seven bonds were earmarked for a special purpose. (See footnote 44) The bonds were designated simply as the property of Blue Cross, and, because of this fact, the Receiver was able to exercise its authority to have them sold. (See footnote 45) In exercising such authority, the Receiver obtained UMWA's trust fund.