MEMORANDUM OPINION GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT

K. Rodney May, United States Bankruptcy Judge.

The court-appointed receiver ("Receiver") for the entities involved in a Ponzi scheme seeks the imposition of an equitable lien and constructive trust on the Florida homestead of Vernon Lee (the "Debtor") and his wife ("Sommers-Lee").1 Between 2005 and 2008, the Debtor, then unmarried, received distributions from the Ponzi scheme totaling $2,942,264, which exceeded the amount of his investments by more than $1 million.2 The District Court has determined that these excess proceeds were fraudulent transfers, resulting in a judgment against Debtor for $935,631.57.3

FACTUAL BACKGROUND

The Debtor deposited all of his Ponzi scheme distributions into three brokerage accounts at Fidelity Investments; two of which are relevant to this dispute ("Account 2750" and "Account 2887," collectively, the "Fidelity Accounts").4 On February 25, 2008, the Debtor purchased a home with $227,126.78 drawn from Account 2887.5 That account had been augmented about ten days earlier, on February 14, 2008, by the Debtor's deposit of $100,000 from Account 2750. At that time, Account 2750 had a balance of $256,710, including $100,000 received directly from the Ponzi scheme and $156,710 from other sources. Immediately after the house purchase, $21,419.20 remained in Account 2887. Debtor and Sommers-Lee (together referred to as "Defendants") married in 2010.6

Defendants allege that after the Debtor purchased the home, Debtor added $70,600 of untainted funds to Account 2887.7 Defendants contend that between March 28, 2008, and April 15, 2008, they made improvements to the home, which expenses were paid primarily from Account 2887.8

Debtor filed this Chapter 7 case in 2015,9 shortly after the Eleventh Circuit affirmed the District Court's fraudulent transfer judgment.10 In the Chapter 7 case, the Debtor listed his home as exempt under Florida's constitutional homestead exemption and as a tenancy-by-the-entireties with his wife.11

On April 10, 2015, the Receiver filed an objection to the claims of exemption, asserting that since the home had been purchased with fraudulent transfers from the Ponzi scheme before the Defendants were married, Debtor was not entitled to either exemption.12 The Defendants have not been accused of any wrongdoing associated with Nadel's Ponzi scheme, only that they are the undeserving beneficiaries of the false profits derived therefrom.13

In turn, the Receiver filed a complaint against the Debtor (individually and in his capacity as the trustee of the Vernon M. Lee Trust) and his non-debtor wife. The Receiver then filed a motion for partial summary judgment on his claims for the imposition of an equitable lien and a constructive trust on Defendants' homestead.14

ANALYSIS

A. Summary Judgment Standard

Summary judgment is appropriate "if the movant shows that no genuine issue of material fact exists, and that it is entitled to judgment as a matter of law."15 "The moving party bears the initial burden of demonstrating that no genuine issue of material fact exists. If the moving party meets this initial burden, the non-movant must demonstrate the existence of a genuine issue of material fact."16

B. Equitable Lien and Constructive Trust

The Receiver seeks the imposition of an equitable lien and a constructive trust against the Defendants' homestead, because substantially all of the funds used to purchase it originated from the fraudulent transfers. He relies on the affidavit of forensic accountant Maria M. Yip ("Ms. Yip"), who opined that $227,127 of such transfers can be identified as passing through the Debtor's Fidelity Accounts into the home.17

The Defendants counter that no more than $127,126.78 can be traced to Ponzi scheme proceeds, because $100,000 of the purchase price came from commingled funds in Account 2750. Defendants also claim that they should receive a "credit," of as much as $87,653.84, for their home improvements.18

The imposition of an equitable lien falls squarely within a recognized exception to Florida's homestead exemption. Havoco of America, Ltd. v. Hill is the leading case, holding that a Florida homestead is protected from creditors' claims even if money was put into a home with the owner's specific intent to hinder, delay, or defraud creditors.19 The Florida Supreme Court noted in that opinion, however, that an equitable lien may be imposed "where funds obtained through fraud or egregious conduct were used to invest in, purchase, or improve the homestead."20

The question presented here is whether that exception requires that the fraud or the egregious conduct be committed by the homeowner who is claiming the exemption. In this case, the Debtor passively received the fraudulent transfers and used them to buy the house. It is not alleged that he or his wife engaged in any fraud or egregious conduct.

In Palm Beach Savings & Loan Association, F.S.A. v. Fishbein,21 decided before Havoco, the Florida Supreme Court affirmed the imposition of an equitable lien on the homestead of Mrs. Fishbein, who was the unknowing beneficiary of a fraud committed by her husband.22 He had forged her signature to obtain a fourth mortgage;23 then, he used a portion of the loan proceeds to satisfy the three existing mortgages.24 Ultimately, Mrs. Fishbein became the sole owner of the property.25 When the lender attempted to foreclose, she asserted that it was precluded from doing so because she was innocent of her husband's fraud and was, therefore, entitled to the full homestead exemption.26 The lender's mortgage was invalid because of the forgery, but the trial court granted the lender an equitable lien on the homestead,27 which the Florida Supreme Court upheld.28 Otherwise, Mrs. Fishbein would have received a windfall from the satisfaction of the three pre-existing mortgages and the voiding of the foreclosing lender's lien.29

In 2001, the bankruptcy court for the Southern District of Florida imposed an equitable lien and constructive trust against the Florida homestead of a Mrs. Levy, whose husband was involved, through his brokerage firm, in a Ponzi scheme operated by Financial Federated Title and Trust, Inc. ("FinFed").30 The Levys had purchased their homestead with Ponzi scheme funds collected through Mr. Levy's company. Mrs. Levy was not involved in FinFed's fraud, but her "innocence" was considered irrelevant because the underlying funds used to purchase the home were obtained through fraud.31

The Eleventh Circuit affirmed, adopting the bankruptcy court's reasoning in full:

Defendants seek to distinguish the foregoing decisions on the ground that neither Debtor, nor his wife, was engaged in the Ponzi scheme. But, the Florida Supreme Court has already rejected that argument. In Fishbein, the underlying decision was premised on the stated principle that "the only basis on which a court may impose an equitable lien is where there is fraud or egregious conduct by the party claiming the homestead exemption."33 On appeal, the Supreme Court rejected that rule, basing its decision on preventing unjust enrichment:

Likewise, the Fifth Circuit Court of Appeals, in Crawford v. Silette,35 upheld the imposition of an equitable lien on a Florida homestead where false profits from a Ponzi scheme were used to pay off the mortgage. The homeowner was unaware that the funds she had received as a gift from her boyfriend came from a Ponzi scheme.36 She asserted that the Florida homestead exemption barred an equitable lien because she was not complicit in the fraud.37 After reviewing Havoco, Fishbein, and FinFed, the Fifth Circuit concluded that a homeowner's "innocence" was irrelevant because "the focus is on unjust enrichment, not fraud."38 Otherwise, the homeowner will receive a windfall.39

Accordingly, this Court concludes that it is appropriate to impose an equitable lien on the Defendants' homestead to prevent their unjust enrichment from the funds traced to the Ponzi scheme. The Debtor received $1,069,002.60 of fraudulent transfers from the Ponzi scheme.40 The Debtor maintains that all of those funds, including the funds used to buy the house, have been spent.41 The focus is not on the Defendants' culpability, but on the necessity of preventing or mitigating their unjust enrichment by permitting fraudulent transfers to be sheltered in their homestead.

The Receiver also seeks the imposition of a constructive trust, as an additional remedy to allow him to take control of Defendants' home and sell it. The remedy of a constructive trust is not limited, as Defendants argue, to remedy abuses in confidential or fiduciary relationships. In American National Bank v. Federal Deposit Insurance Corp.,42 the Eleventh Circuit, relying on the Florida Supreme Court case of Quinn v. Phipps,43 recognized that "actual fraud" or "abuse of confidence" are alternative bases for the imposition of a constructive trust:

Imposing a constructive trust is an appropriate remedy for unjust enrichment.45 Courts have authorized this remedy even in the absence of a confidential relationship between the defendant and the claimant.46

Here, Defendants have been unjustly enriched by the receipt of the fraudulent transfers that they invested in their home. Under the constructive trust doctrine, the rightful owner of misappropriated trust property may trace whatever has been bought with the trust proceeds to the extent such property can be substantially identified as having been acquired with the misappropriated property or funds.47

There is a final judgment determining that Debtor received $935,631 of fraudulent transfers. Thus, Debtor did not have rightful ownership of those funds, which must be considered as being held in trust for the benefit of the receivership.48 A constructive trust will be imposed to the extent of the Ponzi scheme distributions are traceable into Defendants' home.

C. Extent of the Equitable Lien and Constructive Trust

The parties disagree on whether $100,000 of the funds used for the home purchase price can be identified as being derived from the Ponzi scheme. The Receiver's forensic accountant, Maria Yip, traced distributions from one of the entities, Victory IRA Fund Ltd. ("Victory Fund"), to Debtor's Fidelity Accounts before he purchased his home.49

Ms. Yip utilized several assumptions in her analysis: (1) the fraudulent transfers deposited into the Fidelity Accounts belong to the Receiver, but are considered to be held in trust by the Debtor; (2) payments by the Debtor to third parties are considered, first, to be from his untainted funds; (3) the funds received from the Ponzi scheme (trust funds) are limited to the "lowest intermediate balance" in each account after their being deposited; (4) deposits from any other source are assumed to be untainted funds; and (5) Ponzi scheme funds moved by Debtor into another of his accounts are considered to retain their character as trust funds. Ms. Yip concluded that "it is clear that [Debtor] purchased the [home] with funds in the amount of $227,126.78 that are traceable to the [f]alse [p]rofits from Nadel's Ponzi scheme."50

The "lowest intermediate balance rule" is an acceptable method for treating trust proceeds that have been commingled with other funds:51 where trust funds are commingled in an account they are considered as undiminished so long as the total account balance is at least equal to the amount of the trust fund deposits.52 If the aggregate amount of trust deposits exceeds the lowest intermediate balance in the account, they are considered lost.53 Thus, "the lowest intermediate balance in a commingled account represents trust funds that have never been dissipated and which are reasonably identifiable."54 This method has been approved by courts in cases requiring the tracing of money through accounts where assets have been commingled.55

Essentially, this method imposes several presumptions on the custodian of a trust res, where trust assets are commingled with other funds, for the purpose of preserving the trust res. According to the Restatement (Second) of Trusts:

Tracing does not require that each dollar be specifically accounted for at all points in time; it requires only that tainted funds be identified and followed from the point of origin (i.e. the fraudulent act).57 The commingling of funds does not preempt tracing.58 There need only be sufficient proof to permit the identification of the funds through the various transfers.59 A "dollar-for-dollar" accounting is not required.60

Defendants urge the Court to adopt a different accounting method — either the "first-in-first-out" method, or the "pro rata distribution" method.61 But, these methods would allow Defendants to keep a larger portion of their unjust enrichment. The Debtor has dissipated nearly $1 million of Ponzi scheme funds that were fraudulently transferred to him. There is nothing else for the Receiver, on behalf of other Ponzi scheme victims, to recover. The use of either the first-in-first-out or pro rata method would give the Defendants a windfall. Moreover, they have not provided any legal authority to justify these alternative methods.62

According to Ms. Yip's declaration, the fraudulent transfers from the Ponzi scheme to Debtor can be summarized, as follows:

Defendants' primary objection to Ms. Yip's analysis is an alleged inconsistency in her application of the lowest intermediate balance rule. They contend:

The Defendants misconstrue the applicable principles employed by courts to preserve a trust res. When funds are withdrawn from an account holding commingled funds, ordinarily the presumption is that non-trust funds are withdrawn first, thereby preserving as much of the beneficiary's trust funds for as long as possible.65 This presumption, however, is at the option of the trust beneficiary.66

There is also a fundamental difference between Debtor's payments to third parties from commingled funds — treated as diminishing non-trust funds — and Debtor's transfers to himself, from one of his accounts to another. The applicable principles of restitution require treating the latter in a manner that also preserves the trust res, where the funds retain their tainted character as long as the original recipient is holding them. Otherwise, any recipient of a fraudulent trust res could change the character of the funds by moving the money from one account to another.

The Court has carefully considered Ms. Yip's analysis and the tables attached to her Declaration. Ms. Yip's findings are the only record evidence before the Court regarding the tracing of Ponzi scheme distributions. It was appropriate for Ms. Yip to apply established principles of restitution, including the treatment of the diminishing balances in Accounts 2750 and 2887 in accordance with the "lowest intermediate balance rule."67 There is a clear path of $100,000 from the Ponzi scheme into Account 2750, with the subsequent transfer of exactly that amount into Account 2887. That $100,000 retained its character as fraudulent transfers from the Ponzi scheme, from the time the Debtor first deposited them into Account 2750 until he purchased the home with funds drawn from Account 2887. Ms. Yip's analysis is legally and factually sound.

After reviewing the documents and applying the principles stated above, it is a reasonable conclusion that the entirety of the funds used to purchase the home originated as excess distributions from the Ponzi scheme. Thus, the $227,126.78 drawn from Account 2887 to purchase is the Receiver's trust res, which warrants preservation by imposing an equitable lien and a constructive trust on the home.

The Court further concludes that Defendants should get no credit for any alleged home improvement expenses. They have not specified what these expenses were for, or how they added any value to the property. The appraiser's report submitted by Defendants values the home at $300,000 as of October 3, 2014; but, it does not attribute any increase in value above the $227,126.78 purchase price to any particular home improvements.68

The assumed $70,000 increase in value over six years is more plausibly the result of market appreciation since 2008. Accordingly, the Court declines to award the Defendants any "credit" against the $227,126.78 for home improvement expenditures.

Likewise, the Court will not augment the amount of the Receiver's equitable lien to include the $21,419.20 of "tainted" funds remaining in Account 2887 after the home purchase. The Receiver has offered no evidence to show that any of the funds remaining in that account can be traced into the home after it was purchased.69

Finally, the Receiver is not entitled to the entire value of the home solely because it was acquired with Ponzi scheme funds.70 Nevertheless, an award of prejudgment interest is consistent with the premise of the Receiver's entitlement to recover the fraudulent transfers invested in the home.71 The calculation of prejudgment interest has not yet been done following the Eleventh Circuit's remand of the issue.72 The Receiver's proof of claim included prejudgment interest of $451,706.21 on the entire amount of the fraudulent transfer judgment.73 A proration of that judgment amount ($227, 126.78/$935,631.51) would imply prejudgment interest on the $227,126.78 of $109,652.76;74 but the parties will be given the opportunity to present further argument on that issue.

CONCLUSION

Summary judgment is due to be granted for the Receiver. There are no material facts in dispute to be tried. There are no issues of witness credibility. The Fidelity Accounts' records demonstrate that the entirety of the funds Debtor used to purchase the home, $227,126.78, came from fraudulent transfers from the Ponzi scheme. The Receiver is entitled to the remedies of an equitable lien and a constructive trust in the amount of $227,126.78, plus pre-judgment interest.

Accordingly, it is

ORDERED:

ORDERED.