Constructive Trust Over Disputed Funds Held by an “Innocent” Stakeholder Who Invites Judicial Direction (Seventh Circuit Predicting Illinois Law)

Introduction

LQD Business Finance, LLC v. AKF, Inc. (7th Cir. Mar. 17, 2025) arises from a dispute in the alternative business financing industry over a $78,000 commission generated by a financing “deal.” LQD Business Finance, LLC (“LQD”) and AKF, Inc. (“AKF”) are competitors; LQD’s employee, Azizuddin Rose, secretly routed business to AKF and attempted to divert commissions to himself.

The key post-trial issue on appeal was narrow but doctrinally important: whether a federal district court applying Illinois law could impose a constructive trust on funds still held by AKF—despite the jury rejecting LQD’s tortious inducement claim against AKF and despite the fact that the money had never been transferred out of AKF’s possession. A second issue concerned whether AKF, having prevailed on LQD’s trade-secrets counts at summary judgment, was entitled to attorney’s fees under the fee-shifting provisions of the DTSA and ITSA based on alleged bad faith.

The Seventh Circuit affirmed across the board in a nonprecedential disposition, but its reasoning supplies a clear roadmap for future litigants and courts confronting “stakeholder-like” behavior by a defendant holding disputed money.

Summary of the Opinion

  • Constructive trust affirmed: The district court properly imposed a constructive trust over the $78,000 commission and ordered AKF to transfer it to LQD. Even if AKF was not found liable for tortious inducement, AKF’s own trial position—through CEO Alex Shvarts—repeatedly represented that AKF was holding the money only until a court determined “whose money is it.” Under Illinois equitable principles (as predicted by the Seventh Circuit), this invitation to judicial direction, combined with unjust enrichment concerns, supported the constructive trust.
  • Attorney’s fees denied: The district court did not abuse its discretion in denying AKF fees under the DTSA and ITSA. LQD’s trade-secrets theories, although ultimately unsuccessful, were not shown to be frivolous or pursued for an improper purpose.

Analysis

Precedents Cited

1. Standard of review and equitable-remedy framing

  • Erdman v. City of Madison, 91 F.4th 465, 470 (7th Cir. 2024): Provided the review framework—factual findings for clear error; legal conclusions de novo. This matters because AKF’s challenge was framed as “clear legal error” about the availability of constructive trusts, not merely a dispute about what happened.
  • In re Miss. Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014): Reinforced the same standards and later supported the link between unjust enrichment and constructive trust doctrine. The court used it to underscore that unjust enrichment is the animating inequity that triggers constructive trust relief.
  • Beatty v. Guggenheim Expl. Co., 122 N.E. 378, 386 (N.Y. 1919): The famous Cardozo formulation (“the conscience of equity”) supplied the conceptual starting point: constructive trust is not a rigid “cause of action” but a remedial mechanism equity uses to prevent unjust retention.

2. Illinois constructive trust doctrine: unjust enrichment vs. rigid prerequisites

  • Perry v. Wyeth, 184 N.E.2d 861, 864 (Ill. 1962): Cited for the baseline proposition that constructive trusts arise “by operation of law,” distinguishing them from express trusts. Later, Perry reappears as a limiting principle: courts may not use constructive trust doctrine as a generalized remedy for “mere contract breaches or unpaid debts.”
  • Blumenthal v. Brewer, 69 N.E.3d 834, 848 (Ill. 2016): Quoted for the broad statement that constructive trusts arise where retention would unjustly enrich the holder—supporting the Seventh Circuit’s resistance to AKF’s attempt to cabin the doctrine to wrongdoing-plus-transfer scenarios.
  • Davis v. Combes, 294 F.3d 931, 936 (7th Cir. 2002): Used to anchor that constructive trusts are matters of state law—necessitating Illinois-law analysis and, where state law is not definitive, an Erie prediction.
  • Suttles v. Vogel, 533 N.E.2d 901, 904 (Ill. 1988) and Smithberg v. Ill. Mun. Ret. Fund, 735 N.E.2d 560, 565 (Ill. 2000): These were AKF’s hoped-for boundaries—Illinois decisions often discuss constructive trusts where property was wrongfully or mistakenly transferred. The Seventh Circuit acknowledged that pattern but emphasized it is not exhaustive.

3. Flexibility of the constructive trust and Erie prediction methodology

  • Golden Budha Corp. v. Canadian Land Co., 931 F.2d 196, 202 (2d Cir. 1991): Supported the characterization of constructive trust as a “flexible device” not bound by “an unyielding formula.”
  • George G. Bogert, et al., The Law of Trusts and Trustees § 471, Westlaw (3d ed. Jul. 2024 update): Invoked to justify that equity does not enumerate every “specific form of inequitable holding,” preserving adaptability for “whatever knavery human ingenuity can invent.”
  • Straits Fin. LLC v. Ten Sleep Cattle Co., 900 F.3d 359, 369 (7th Cir. 2018): The explicit Erie guidepost—where Illinois Supreme Court precedent is not definitive, the Seventh Circuit must predict how it would likely rule.

4. The central analog: stakeholder invites court direction

  • Smithberg v. Ill. Mun. Ret. Fund, 735 N.E.2d 560 (Ill. 2000): The opinion’s keystone.
    • Why it mattered: Smithberg held that courts retain “inherent equitable power” (id. at 565) to direct payment “be it by constructive trust or some other form” (id. at 566), even when a statute seemed to point the other way.
    • The stakeholder feature: In Smithberg, the municipal retirement fund was “innocent,” had not wrongfully obtained the benefits, and nonetheless could be acted upon because it sought the court’s direction and “agreed to pay the benefit to either party” (id. at 563).
    • The Seventh Circuit’s mapping: AKF, through Shvarts’s testimony (“just tell me… whose money is it?”), took on the same posture: a self-described non-wrongdoer holding disputed funds, expressly delegating to the court the decision of rightful ownership.

5. Unjust enrichment as the trigger; limits to avoid “debt collection” by equity

  • Hofert v. Latorri, 174 N.E.2d 866, 868 (Ill. 1961) and In re Miss. Valley Livestock, Inc., 745 F.3d 299, 304 (7th Cir. 2014): Cited to reaffirm that unjust enrichment is the inequity that gives rise to constructive trust relief.
  • Amendola v. Bayer, 907 F.2d 760, 763 (7th Cir. 1990) and Perry v. Wyeth, 184 N.E.2d at 863: These decisions were used as guardrails: constructive trust is not a general substitute for contract remedies or ordinary debt collection.
  • 35 Ill. Law & Prac. Trusts § 55: Reinforced the same limitation—nonpayment of a debt or failure to perform a promise alone does not establish the requisite inequity for a constructive trust.

6. Attorney’s fees: bad faith under DTSA/ITSA

  • 4SEMO.com Inc. v. S. Ill. Storm Shelters, Inc., 939 F.3d 905, 913 (7th Cir. 2019): Established abuse-of-discretion review for fee decisions.
  • Multimedia Sales & Mktg., Inc. v. Marzullo, 188 N.E.3d 789, 795 (Ill. App. Ct. 2020): Defined “bad faith” under the ITSA to include frivolous claims or improper purpose (harassment, delay, cost escalation). This supplied the controlling state-law benchmark.
  • Tradesman Int'l, Inc. v. Black, 724 F.3d 1004, 1016 (7th Cir. 2013): Clarified that an ITSA claim can be in bad faith if “initiated in bad faith, maintained in bad faith, or both.”
  • RJB Wholesale, Inc. v. Castleberry, 788 F. App'x 565, 566 (9th Cir. 2019) and Elmagin Cap., LLC v. Chen, No. 22-2739, 2024 WL 2845535, at *5 (3d Cir. Mar. 21, 2024): Used to justify the Seventh Circuit’s assumption that DTSA “bad faith” can be assessed using analogous state-law definitions.
  • Clark Consulting, Inc. v. Richardson, No. 07 C 7231, 2009 WL 424541, at *1 (N.D. Ill. Feb. 19, 2009): Distinguished because the plaintiff there had no basis to allege downloading/transmission—unlike LQD’s evidence that Rose downloaded proprietary files and communicated extensively with competitors.
  • Multimedia Sales & Marketing, 188 N.E.3d at 794: Distinguished because the “trade secrets” there were publicly broadcast customer names, whereas LQD’s alleged information was not publicly disseminated and thus more plausibly protectable.

Legal Reasoning

1. The constructive trust holding: equity can act on a professed “innocent” holder who asks the court to decide

AKF’s core argument was formalistic: Illinois constructive trusts require either (a) wrongdoing by the holder or (b) a mistaken/wrongful transfer away from the rightful owner; here, AKF was found not liable on the relevant tort claim and the funds never left AKF’s possession. The Seventh Circuit rejected the certainty of AKF’s premise, noting Illinois cases often involve transfers but do not rigidly limit the doctrine to those settings. The court then engaged in an Erie prediction, treating Smithberg v. Ill. Mun. Ret. Fund as the closest, most “recent and in-depth” Illinois Supreme Court guidance.

The crucial move was to frame AKF as having assumed a stakeholder-like posture akin to the retirement fund in Smithberg. AKF’s CEO did not merely deny wrongdoing; he repeatedly testified that AKF was holding the money awaiting a judicial determination of rightful ownership. That testimony, the Seventh Circuit reasoned, did two things:

  1. It conceded non-ownership: AKF presented itself as not entitled to the commission, but merely holding it temporarily.
  2. It invited equitable direction: By asking the court to decide “whose money is it,” AKF invoked the court’s equitable authority to direct payment, undermining a later objection that such authority could not be exercised.

The court also emphasized a pragmatic equity concern: AKF’s stance may have influenced how the factfinder assessed AKF’s non-collusion narrative. Allowing AKF to escape liability through assurances that it would pay the rightful party, and then permitting it to reverse course and keep the funds, would constitute “the definition of unjust enrichment.” On that basis, the constructive trust functioned as a targeted remedy: it did not punish AKF for a tort it was not found to have committed; it prevented AKF from retaining money it repeatedly acknowledged was not its own.

Finally, the Seventh Circuit reaffirmed limits: Illinois law forbids using constructive trust doctrine as a backdoor collection remedy for mere nonpayment. AKF’s conduct, in the court’s view, went beyond a simple refusal to pay; it involved an express request for judicial allocation and reliance on that posture as part of its defensive presentation.

2. The fee-shifting holding: losing is not bad faith

On attorney’s fees, the Seventh Circuit treated “bad faith” as requiring more than an unsuccessful claim. Applying the ITSA’s framework (and assuming a similar standard for DTSA), the court credited LQD’s evidentiary basis at the time it litigated: Rose forwarded more than 60 applications; both parties’ experts opined those applications could be trade secrets; Rose used multiple email addresses with competitors; and he downloaded proprietary client files. Even though the district court granted summary judgment to AKF on trade secrets—finding the applications were not trade secrets and that LQD lacked evidence of transmission of certain internal evaluative files—the Seventh Circuit held that this outcome did not retroactively render LQD’s pursuit frivolous or improper.

Impact

1. Constructive trust: expanded practical availability against a non-wrongdoing holder who seeks judicial instruction

Although nonprecedential, the decision is a meaningful synthesis of Illinois constructive trust principles and an Erie-based extension of Smithberg’s stakeholder logic. Its likely influence is most significant in cases where:

  • A defendant holds disputed funds and repeatedly represents it will pay “the rightful owner” once determined; and
  • The plaintiff cannot establish (or does not prevail on) an underlying tort against that holder; yet
  • Equity would be offended if the holder were allowed to keep the money after inviting judicial direction and benefiting strategically from that posture.

The opinion implicitly warns litigants: if a party positions itself as a neutral stakeholder asking a court to decide ownership, it may be treated like one—meaning the court may deploy equitable remedies to direct payment even absent a “classic” wrongful transfer narrative.

2. Guardrails preserved: not a constructive-trust-for-debt rule

The court took care to preserve Illinois’ anti-expansion principle: constructive trusts do not lie for ordinary nonpayment or breached promises. The decision thus encourages a fact-sensitive inquiry into what the holder did—particularly whether it invoked the court’s equitable authority and disclaimed entitlement—rather than turning constructive trust into a general remedy whenever money is owed.

3. DTSA/ITSA fee petitions: a high bar for “bad faith”

For trade-secrets defendants, the decision reinforces that prevailing on summary judgment is not enough. To obtain fees, defendants should be prepared to show not merely that the claim failed, but that it was frivolous when filed or maintained, or pursued for an improper purpose. Conversely, plaintiffs can mitigate fee risk by documenting their pre-suit factual basis and articulating a plausible theory of secrecy and misappropriation.

Complex Concepts Simplified

  • Constructive trust: Not an actual trust created by agreement. It is an equitable remedy where a court treats a person holding property as if they are a trustee, requiring them to hand the property to the person who should have it—used to prevent unjust enrichment.
  • Unjust enrichment: Keeping a benefit (here, money) in circumstances where it would be unfair to do so, even if the keeper did not commit an independent tort proven at trial.
  • Equitable vs. legal claims; advisory jury: Legal claims (e.g., damages for certain torts) typically entitle parties to a binding jury verdict. Equitable claims (e.g., certain restitutionary remedies like constructive trust) are decided by the judge; a jury may be used in an “advisory” capacity.
  • Erie prediction (“Erie gap”): When state supreme court law is not explicit, a federal court applying state law must predict how the state’s highest court would rule.
  • Fee shifting for “bad faith” trade-secrets claims: Under DTSA/ITSA, a prevailing defendant may receive fees only if the misappropriation claim was made in bad faith—typically meaning frivolous and/or pursued for an improper purpose, not merely unsuccessful.

Conclusion

LQD Business Finance, LLC v. AKF, Inc. affirms two practical rules. First, under an Erie-based reading of Illinois equity—anchored in Smithberg v. Ill. Mun. Ret. Fund—a court may impose a constructive trust over disputed funds held by a party that professes neutrality, disclaims entitlement, and affirmatively invites the court to determine the rightful payee, even where there was no prior transfer and no finding of tort liability against that holder. Second, a defendant’s victory on DTSA/ITSA claims does not automatically justify fees; “bad faith” requires a stronger showing than failure on the merits.

The opinion’s broader significance is its insistence that equity responds to conduct and posture in litigation—especially where a party uses “we’re just waiting for the court” as both shield and strategy—while still preserving the boundary that constructive trusts are not a general tool to collect ordinary debts.