John Wadsworth, individually v. Ronald B. Talmage

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JOHN WADSWORTH,
individually and as trustee for
RBT Victim Recovery Trust;
RBT VICTIM RECOVERY
TRUST,
Plaintiffs-Appellants,
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; NEW
CENTURY PROPERTIES LTD.,
In Default as of 8/31/2017,
Defendants,
and
UNITED STATES OF AMERICA,
Defendant-Appellee.
No. 17-35805
D.C. No.
3:16-cv-02082-SI
ORDER CERTIFYING
QUESTION TO THE
SUPREME COURT OF
OREGON

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WADSWORTH V. UNITED STATES 2
Filed December 27, 2018
Before: William A. Fletcher, Jay S. Bybee,
and Paul J. Watford, Circuit Judges.
Order
SUMMARY*
Constructive Trust / Oregon State Law
The panel certified to the Oregon Supreme 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?
COUNSEL
William B. Ingram and Alan R. Houston, Strong & Hanni,
Salt Lake City, Utah, for Plaintiffs-Appellants.
Randolph L. Hutter and Thomas J. Clark, Attorneys; Richard
E. Zuckerman, Principal Deputy Assistant Attorney General;
* This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.

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WADSWORTH V. UNITED STATES 3
Tax Division, United States Department of Justice,
Washington, D.C.; for Defendant-Appellee.
ORDER
Pursuant to Oregon Revised Statute § 28.200, we
respectfully certify the following question to the Oregon
Supreme Court:
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?
We respectfully ask the Oregon Supreme Court to
exercise its discretionary authority under Oregon’s Uniform
Certification of Questions of Law Act to accept and decide
this question. See Or. Rev. Stat. §§ 28.200–.255. The
certified question of law would be determinative of a cause
now pending in this court and it appears to this court that
there is no controlling precedent in the decisions of the
Oregon Supreme Court or the Oregon Court of Appeals. Id.
§ 28.200.
BACKGROUND
I. Factual and Procedural History
We begin by setting forth a “statement of all facts
relevant to the question[] certified” to show “fully the nature
of the controversy in which the question[] arose.” Or. Rev.
Stat. § 28.210(2).

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WADSWORTH V. UNITED STATES 4
The underlying case arises out of competing claims to real
property known as the RiverCliff Property (“RiverCliff”) in
Corbett, Oregon, located in Multnomah County. Because this
case was resolved in federal district court on a motion to
dismiss, the factual background is based on the allegations in
the complaint, which we assume to be true.
John Wadsworth and other members of the RBT Victim
Recovery Trust (collectively, “the Trust”) allege that Ronald
Talmage, an investment manager, began fraudulently
diverting his clients’ funds in the 1990s as part of a Ponzi
scheme. Members of the Trust entrusted Talmage with “over
$55 million” between 2002 and 2015.
In 1997, Talmage and his first wife purchased RiverCliff
for almost $1 million. The property was purchased with the
proceeds of Talmage’s Ponzi scheme. From 1998 to 2008,
Talmage spent over $12.5 million of entirely stolen funds to
improve the property. Talmage paid his first wife
$1.5 million dollars in 2005 using money “stolen . . . from . . .
Trust beneficiaries” to purchase her half-interest in RiverCliff
after the couple divorced. Throughout this time, Talmage
resided at RiverCliff.
Talmage and his current wife failed to pay federal income
taxes for the tax years of 1998–2005 and 2007. The Internal
Revenue Service filed notices of federal tax liens in
Multnomah County on September 17, 2008; November 28,
2008; May 20, 2013; and January 31, 2014. The federal
government (“Government”) then brought an action in U.S.
District Court in Oregon seeking “to foreclose its tax liens
on” RiverCliff. United States v. RiverCliff Farm, Inc., No.
3:16-cv-1248-SI, 2017 WL 3388172, at *2 (D. Or. Aug. 7,
2017). The Trust sought to intervene in the Government’s

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WADSWORTH V. UNITED STATES 5
foreclosure action, but intervention was denied. See United
States v. River Cliff Farm, Inc., No. 3:16-cv-1248-SI, 2016
WL 4582048, at *1 (D. Or. Sept. 2, 2016), reconsideration
denied, 2016 WL 6662696 (Nov. 10, 2016).
The Trust 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 legitimate property interest” in the property.
The Trust contends that the Government’s federal tax liens
therefore could not attach to RiverCliff under 26 U.S.C.
§ 6321, which authorizes liens on “all property and rights to
property . . . belonging 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.
The Government moved to dismiss the quiet title claim
under Federal Rule of Civil Procedure 12(b)(6) for failure to
state a claim on which relief can be granted. The
Government argued that Talmage had the property rights of
any deed-holder in RiverCliff, including, for example, the
right to exclude trespassers. It further argued that even
assuming Talmage should be treated as holding voidable title
based on the Trust’s constructive trust, Talmage had the right
to transfer the property to a bona fide purchaser under Or.
Rev. Stat. § 72.4030(1). The Government argued that
RiverCliff therefore “belonged” to Talmage within the
meaning of 26 U.S.C. § 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.

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WADSWORTH V. UNITED STATES 6
On August 1, 2017, the district court granted the
Government’s motion to dismiss under Rule 12(b)(6). It held
that “the Trust’s allegations do not show that the Trust’s
beneficiaries currently own the RiverCliff Property in either
constructive or resulting trust under Oregon law.” The court
held that Talmage, by contrast, had acquired rights in
RiverCliff under Oregon law because he “acquired title” and
thereafter resided at RiverCliff, asserting “substantial control”
over the property. The court concluded that under Oregon
law even an embezzler subject to a constructive trust can
transfer title to a bona fide purchaser (citing Tupper v. Roan,
349 Or. 211, 223 (2010)) and can encumber the property
(citing Evergreen W. Bus. Ctr., LLC v. Emmert, 354 Or. 790,
792, 805 (2014)). Finally, the court held that even if a
constructive trust existed or would exist in the future, the
federal tax liens would still take priority because they had
already attached to Talmage’s interest in RiverCliff, while
any claim to a trust had not. The Trust appealed.
II. Discussion
The question in this case is whether federal tax liens could
attach to Talmage’s interest in RiverCliff while it was subject
to a constructive trust. The answer turns on Oregon state law
regarding constructive trusts. Under 26 U.S.C. § 6321:
If any person liable to pay any tax neglects or
refuses to pay the same after demand, the
amount . . . shall be a lien in favor of the
United States upon all property and rights to
property, whether real or personal, belonging
to such person.

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WADSWORTH V. UNITED STATES 7
To 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 taxpayer 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 property’ within the compass
of” 26 U.S.C. § 6321. Drye v. United States, 528 U.S. 49, 58
(1999). Section 6321 does not create property rights, “but
merely attaches consequences, federally defined, to rights
created under state law.” United States v. Craft, 535 U.S. 274,
278 (2002). “[I]n determining whether a federal taxpayer’s
state-law rights constitute ‘property’ or ‘rights to property,’
the important consideration is the breadth of the control the
taxpayer could exercise over the property.” Drye, 528 U.S.
at 61 (internal alterations and citation omitted).
The Trust argues that its constructive trust in RiverCliff
prevents the Government from obtaining a lien against the
property. To prove a constructive trust under Oregon law, a
plaintiff must show:
(1) “that property or a property interest that
rightfully belongs to her was taken or
obtained by someone else under
circumstances that in some sense were
wrongful or inequitable;” (2) “that the person
who now possesses the property is not a bona
fide purchaser for value and without notice;”
and (3) by “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

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WADSWORTH V. UNITED STATES 8
her, or is a product of or substitute for that
property.”
Tupper v. Roan, 243 P.3d 50, 58 (Or. 2010) (en banc)
(internal quotations omitted). Here, the Trust has plausibly
pleaded that RiverCliff is the “product” of funds that
rightfully belong to Trust members but that were taken by
Talmage under “wrongful” circumstances. The Trust has
thus plausibly pleaded that RiverCliff is subject to a
constructive trust under Oregon law, with the Trust members
as beneficiaries. The issue in this case becomes, then, what
rights Oregon law affords to the beneficiary of a constructive
trust in a case where the property is subject to a federal tax
lien.
The rights of the legal title-holder, and of lienors such as
the Government, depend on when the constructive trust
arises. Under the laws of the several states, a constructive
trust can arise either at the moment a purchase is made with
the fraudulently-obtained funds, or at the moment a court
imposes the trust as an equitable remedy. Under the majority
rule, a trust arises automatically at the moment of purchase.
See In re Leitner, 236 B.R. 420, 424 (Bankr. D. Kan. 1999)
(“[U]nder the majority state law rule, a constructive trust
arises at the time of the occurrence of the events giving rise
to the duty to reconvey the property, not at the date of final
judgment declaring the trust . . .”); see also RESTATEMENT
(THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 55 cmt.
e (2011). In states following this rule, the legal title-holder is
a constructive trustee who holds no rights beyond bare legal
title. For purposes of the federal tax lien statute, 26 U.S.C.
§ 6321, property held in a constructive trustee-taxpayer’s
name therefore does not “belong” to the taxpayer, and tax
liens cannot attach. See, e.g., FTC v. Crittenden, 823

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WADSWORTH V. UNITED STATES 9
F. Supp. 699, 704 (C.D. Cal. 1993) (finding that an “IRS lien
does not attach” to business funds that are subject to a
constructive trust under California law); Mervis Indus., Inc.
v. Sams, 866 F. Supp. 1143, 1147 (S.D. Ind. 1994) (finding
tax liens could not attach to property whose title is held by an
embezzler because Indiana law “is clear” that “an embezzler,
from the beginning, acquires no beneficial ownership in
property purchased with stolen funds”).
Under the minority rule, a constructive trust arises only
once it is imposed as a judicial remedy. In that case, the legal
title-holder retains all the rights of a property owner until
such a remedy is imposed by a court. Until that time, the
property “belongs” to the title-holder for purposes of
26 U.S.C. § 6321 and federal tax liens against the title-holder
can attach. If no court has imposed a trust when the tax liens
attach, the beneficiaries of a potential constructive trust hold
at most an inchoate claim to the property. For example, in
Blachy v. Butcher, 221 F.3d 896, 905 (6th Cir. 2000) (quoting
Soo Sand & Gravel Co. v. M. Sullivan Dredging Co.,
244 N.W. 138, 140 (Mich. 1932)), the Sixth Circuit found
that “[u]nder Michigan law, a ‘constructive trust is strictly not
a trust at all, but merely a remedy administered in certain
fraudulent breaches of trusts.’” Because “a constructive trust
does not arise until a judicial decision imposes such a trust
under Michigan law,” beneficiaries of the trust alleged in that
case held only an inchoate state-created lien, over which an
attached federal tax lien takes priority. Id.
In 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. No Oregon statute defines

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WADSWORTH V. UNITED STATES 10
when a constructive trust arises. Nor are we aware of any
decision from the Oregon Supreme Court or intermediate
appellate courts that defines when a constructive trust arises
for purposes of determining which rights, if any, the legal
title-holder has in the property under state law.
Descriptions of constructive trusts by the Oregon
Supreme Court appear to provide support for both the
majority and minority rule. In 1954, the Court stated that a
constructive trust had arisen upon a fraudulent transfer, even
though in that case there had been no previous judicial
declaration. Newton v. Pickell, 269 P.2d 508, 512 (Or. 1954).
In 1955, the Court indicated that section 166 of the
Restatement of Restitution accurately described the Oregon
law of constructive trusts. See Barnes v. E. & W. Lumber
Co., 287 P.2d 929, 948 (Or. 1955) (en banc). Comment b of
that section provided that “[w]here one person acquires title
to . . . money from another by fraud, he holds the chattels or
money upon a constructive trust for the defrauded person”
and that in the case of the fraudulent person’s bankruptcy
(which presents an analogous question to that of competing
liens) “the defrauded person is entitled to enforce a
constructive trust of the chattel and compel the trustee in
bankruptcy to restore the chattel in specie.” RESTATEMENT
(FIRST) OF RESTITUTION § 166 cmt. b (1937). And in 1977,
the Court wrote that “it is now universally recognized that a
constructive trust will arise when stolen or embezzled funds
are used to purchase other property. The owner of the funds
may follow and recover the property or its proceeds as long
as it has not been transferred to a bona fide purchaser.” Lane
Cty. Escrow Serv., Inc. v. Smith, 560 P.2d 608, 615 (Or.
1977) (en banc) (emphasis added) (citing A.L.R.3D
CONSTRUCTIVE TRUSTS-STOLEN FUNDS 1359 (1971) and
V SCOTT ON TRUSTS § 462.4 (3d ed 1967)). More recently,

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WADSWORTH V. UNITED STATES 11
however, the Court described a constructive trust “as an
equitable remedy, available to divest an individual who has
been unjustly enriched of property that he or she ‘ought not,
in equity and good conscience, hold and enjoy.’” Evergreen
W. Bus. Ctr., LLC v. Emmert, 323 P.3d 250, 255 (Or. 2014)
(en banc) (emphases added) (quoting Marston v. Myers et ux.,
342 P.2d 1111, 1116 (Or. 1959)). The question presented to
the Court in Evergreen was not when a constructive trust
arises, but rather whether a constructive trust is an equitable
or legal remedy. Id. at 252. We therefore hesitate to
conclude that the Court intended for its labeling of a
constructive trust as a “remedy” to answer the question at
issue in this case.
Opinions by the Oregon Court of Appeals similarly lend
support to both approaches. In one case, the Court of
Appeals described constructive trusts as “remedial devices to
avoid unjust enrichment when no other adequate remedy is
available.” Brown v. Brown, 136 P.3d 745, 752 (Or. Ct. App.
2006). However, to support this proposition, the court cited
an earlier Court of Appeals decision holding that “[a]
constructive trust may be imposed only when the putative
trustee holds property which rightfully belongs to another and
is thereby unjustly enriched.” Id. (emphasis added) (quoting
McDonald v. McDonald, 643 P.2d 1280, 1282 (Or. Ct. App.),
review denied, 648 P.2d 854 (Or. 1982)).
We thus find no “controlling precedent” on the question
of when a constructive trust arises for purposes of
determining the question before us. Because the resolution of
this case turns solely on Oregon law, we certify this question
to the Oregon Supreme Court for an authoritative decision of
this issue.

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WADSWORTH V. UNITED STATES 12
CONCLUSION
We accordingly respectfully certify to the Oregon
Supreme Court the following question of Oregon law:
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?
Our phrasing of the question should not restrict the
Court’s consideration of the issues involved. We
acknowledge that “[t]he [C]ourt may reformulate the relevant
state law questions as it perceives them to be, in light of the
contentions of the parties,” Toner ex rel. Toner v. Lederle
Labs., 779 F.2d 1429, 1433 (9th Cir. 1986), and “[w]e agree
to abide by the decision of the Oregon Supreme Court,”
Doyle v. City of Medford, 565 F.3d 536, 544 (9th Cir. 2009).
If the Court determines that the question presented in this
case is inappropriate for certification, or if it declines the
certification for any other reason, we will resolve the question
according to our best understanding of Oregon law.
The Clerk will file a certified copy of our Order with the
Oregon Supreme Court under Oregon Revised Statute
§ 28.215. The Clerk will also provide the Oregon Supreme
Court a copy of the record in this case, in whole or in part,
upon request. Further proceedings in this case are stayed
pending receipt of the answer to the certified question or
notification from the Oregon Supreme Court that it declines
to answer. The parties shall notify this Court within ten days
after the Oregon Supreme Court accepts or rejects
certification. If the Oregon Supreme Court accepts
certification, the parties shall file a joint status report with this

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WADSWORTH V. UNITED STATES 13
Court six months after the date of acceptance and every six
months thereafter until the case is decided. The parties shall
then notify this Court within ten days of the Oregon Supreme
Court’s decision. The Clerk is directed to administratively
close this docket, pending further order.
William A. Fletcher, Circuit Judge, Presiding

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