In Re:Strategic Tech ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
7-19-2005
In Re:Strategic Tech
Precedential or Non-Precedential: Non-Precedential
Docket No. 04-3149
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
NO. 04-3149
___________
IN RE: STRATEGIC TECHNOLOGIES, INC.
Debtor
GULFSTREAM AEROSPACE CORP.
Appellant
v.
ANTHONY R. CALASCIBETTA
___________
On Appeal from the United States District Court
for the District of New Jersey
(Civil No. 03-5079)
District Judge: Honorable Katharine S. Hayden
___________
Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
July 14, 2005
BEFORE: VAN ANTWERPEN, ALDISERT and WEIS, Circuit Judges
(Filed : July 19, 2005)
___________
OPINION
___________
VAN ANTWERPEN, Circuit Judge
I. FACTS
Debtor Strategic Technologies, Inc. (“STI”) was in the business of providing
shipping-related services to freight carrier customers. STI’s clients employed the
company to audit their freight carrier invoices and inform them of the charges. The
clients then could pay their bills by depositing funds with STI, which would then forward
the funds to the carrier. STI generally commingled its customers’ funds in “funding
accounts,” maintained at different banks, but it did not maintain records to match or
reconcile monies that customers deposited with monies that STI paid out to the freight
carriers.
STI maintained one of these funding accounts at Fleet Bank (the “Fleet Account”).
This account was essentially a pooled account into which STI deposited checks from its
customers until it withdrew those funds to pay their freight charges. As a pooled account,
the customers’ funds were commingled in this account, but STI did not keep accurate
records to track individual deposits and withdrawals on behalf of individual customers.
On June 11, 2002, STI stopped using the Fleet Account and began using an
account maintained by Commerce Bank (the “Commerce Funding Account”). The Fleet
Account was subsequently closed and the remaining funds totaling $5,132,456.02 were
transferred into the Commerce Funding Account by July 5, 2002. On July 11, 2002, the
Commerce Funding Account had a negative balance of $2,371,223.54. Later that day, an
STI customer deposited $2,983,841.05 leaving a positive balance of $612,617.51.
Appellant Gulfstream Aerospace Corp. (“Gulfstream”), one of STI’s clients, deposited
$208,436.89 into the Commerce Funding Account on July 15, 2002. Several more
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deposits and withdrawals were made by STI and its clients and, on July 17, the ending
balance was $3,130,576.44. The next day, STI filed for bankruptcy protection under
Chapter 11.
As it turns out, no later than 1993, STI had begun using monies in the client
funding accounts for purposes unrelated to paying its customers’ freight bills. For
instance, STI tapped its funding accounts to fund payroll and operating accounts, and
Marc Cooper, the company’s president and sole shareholder, diverted money for his own
personal use. STI covered its misappropriations by engaging in what was essentially a
kiting scheme. As it depleted the funding accounts, STI relied on newer funds deposited
from customers to pay earlier, overdue freight bills of other customers. Eventually the
receipts from customers became insufficient to cover the shortfall in the funding
accounts, and on July 18, 2002, STI filed for bankruptcy protection under Chapter 11.
On July 31, 2002, the United States Bankruptcy Court for the District of New
Jersey converted STI’s Chapter 11 proceeding into a Chapter 7 liquidation proceeding
and appointed Appellee Anthony Calascibetta as the bankruptcy trustee (the “Trustee”).
On August 14, 2002, the Bankruptcy Court ordered the Trustee to place all funds
remaining in STI’s various bank accounts, including the Commerce Funding Account,
into an interest-bearing “segregated account.” The Trustee complied by depositing
$3,634,438 into the segregated account. On September 24, 2002, the Bankruptcy Court
directed the Trustee to pay $255,468.03 from the segregated account to Knoll, Inc., one of
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STI’s former customers who mistakenly transferred that amount to STI after STI had filed
for bankruptcy.
The Trustee commenced an adversary proceeding naming all of STI’s customer-
creditors as defendants. Through the entry of default judgments and consent orders, the
Trustee was able to resolve many of the claims against STI. Eventually, it resolved the
claims of all but four of the interested parties through a settlement agreement.
On August 11, 2003, the Bankruptcy Court entered the consent order embodying
the settlement agreement. The order called for the distribution of $423,155.73 from the
segregated account to Knoll, representing funds mistakenly transferred to STI after the
bankruptcy case was filed. The remaining funds were distributed pro rata to the settling
defendants, with a portion set aside to cover the costs of administration of the bankruptcy
estate and other priority claims. The agreement was to become effective upon entry of a
final order granting summary judgment in the Bankruptcy Court in favor of the Trustee
with respect to any non-settling defendant.
On August 13, 2003, the Trustee filed a motion for summary judgment against the
four hold-out defendants. Prior to the return date of that motion, all but Gulfstream
agreed to the settlement. Gulfstream filed a cross-motion for partial summary judgment
seeking return of $208,436.89 that it had deposited into the Commerce Funding Account
on July 15, 2002, three days before STI filed for bankruptcy. Gulfstream offered three
arguments in support of its motion: 1) none of the money in the funding account is
property of the bankruptcy estate and therefore it can only be used to pay the beneficial
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owners; 2) although the trust money is commingled, the universe of co-owners of the
money is determinable; and 3) the Trustee erred in preferring the claim of Knoll over
Gulfstream.1
The District Court rejected Gulfstream’s arguments and affirmed the decision of
the Bankruptcy Court. Gulfstream timely appealed.
II. JURISDICTION & STANDARD OF REVIEW
The District Court derives its jurisdiction over bankruptcy matters from 28 U.S.C.
§ 1334 (2005). This section confers upon the District Court “original and exclusive
jurisdiction of all cases under title 11” and “original but not exclusive jurisdiction over all
civil proceedings arising under title 11, or arising in or related to cases under title 11.” Id.at (a)-(b). Section 157(a) of the Bankruptcy Code allows a district court to refer most of
these matters to a bankruptcy court. 28 U.S.C. § 157(a) (2005); see In re Combustion
Eng'g, Inc., 391 F.3d 190, 226 (3d Cir. 2004).
We have jurisdiction over this appeal pursuant to 28 U.S.C. §§ 158(d) and 1291.
“[T]his Court reviews ‘the Bankruptcy Court's findings of fact for clear error and
exercises plenary review over the Bankruptcy Court's legal determinations.’” Zinchiak v.
CIT Small Bus. Lending Corp. (In re Zinchiak), 406 F.3d 214, 221-22 (3d Cir. 2005)
(citing Duke Energy Royal, LLC v. Pillowtex Corp. (In re Pillowtex, Inc.), 349 F.3d 711,
716 (3d Cir. 2003)).
1
Although Gulfstream compares its claim to Knoll’s, it does not argue on appeal
that Knoll was not entitled to the return of funds it deposited after STI filed for
bankruptcy.
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III. ANALYSIS
Gulfstream seeks the return of funds it entrusted to STI shortly before STI filed for
bankruptcy. To support its case, Gulfstream relies on two alternative principles. First,
Gulfstream, argues that all of the money in the Commerce Funding Account amounted to
trust assets and therefore the Bankruptcy Court had no jurisdiction to direct the
disposition of those funds. In the alternative, Gulfstream argues that if the money in the
Commerce Funding Account was commingled, the Court was obligated to apply the
Lowest Intermediate Balancing Test. For the reasons set forth below, we reject both
theories and affirm.
A. The Court had Jurisdiction Over the Commerce Funding Account
Gulfstream’s initial argument is that the Bankruptcy Court and the Trustee agree
that the money in the Commerce Funding Account was primarily customer money held in
a constructive trust, and therefore, the Bankruptcy Court did not have jurisdiction to
direct the disposition of those funds. We find two flaws with this theory.
First, despite its statements that the amount of STI money in the Commerce
Funding Account was negligible, the Bankruptcy Court specifically found that
Gulfstream’s funds were commingled in a single account with other clients’ funds and
STI funds. (Appellant App. at A349.) Neither party has demonstrated that this finding
was clearly erroneous. See Zinchiak, 406 F.3d at 221-22.
When funds are commingled, and a trust recipient claims a right in those funds, “a
claimant must make two showings: (1) demonstrate that the trust relationship and its legal
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source exist, and (2) identify and trace the trust funds if they are commingled.” Goldberg
v. N.J. Lawyers’ Fund for Client Prot., 932 F.2d 273, 280 (3d Cir. 1991). Because
Gulfstream could not sufficiently identify its funds in the commingled account, all of the
Commerce Account Funds are presumed to be part of the bankruptcy estate.
Moreover, the question of whether the funds were part of the bankruptcy estate is
distinct from the question of whether the Bankruptcy Court had jurisdiction over the
disposition of the funds. Even if Gulfstream were able to establish that all of the funds in
the Commerce Funding Account were trust assets, the Bankruptcy Court would still retain
jurisdiction to return those funds to their rightful owners. See Canal Corp. v. Finnman (In
re Johnson), 960 F.2d 396, 402 (4th Cir. 1992).
B. The Court Properly Ordered Pro Rata Distribution
Gulfstream claims that once the Bankruptcy Court determined that the assets were
commingled assets, the Court was required to apply the Lowest Intermediate Balancing
Test (“LIBT”) to allow it to trace its funds in the trust account. “The LIBT is a judicial
construct that some federal courts have applied to ease a beneficiary’s tracing burden
when ‘a trustee commingles trust funds with other monies in a single account.’” City of
Farrell v. Sharon Steel Corp., 41 F.3d 92, 102 (3d Cir. 1994) (quoting In re Columbia Gas
Sys., 997 F.2d 1039, 1063 (3d Cir. 1993)). Under the LIBT, a court assumes that trust
funds are the last monies withdrawn from a commingled account. Id. However, once
trust money is removed (i.e. the balance of the commingled account dips below the total
amount of money claimed as trust funds), that money is not replenished, even if more
7
funds are deposited. Id. “Therefore, the lowest intermediate balance in a commingled
account represents trust funds that have never been dissipated and which are reasonably
identifiable.” Id. (emphasis added).
Gulfstream argues that, applying the LIBT, it can trace $208,436.89 of its money
in the Commerce Funding Account. However, Gulfstream ignores the fact that its funds
were not only commingled in an account with STI’s assets, but also with the trust assets
of other STI customers.
While the LIBT is helpful in identifying one party’s assets commingled with the
trustee, its value is significantly lessened when the assets are commingled with many
other similarly situated individuals. City of Farrell, 41 F.3d at 102 (“[T]he lowest
intermediate balance in a commingled account represents trust funds which are
reasonably identifiable.”) If the Bankruptcy Court had applied the LIBT to identify
Gulfstream’s funds, it would have done so at the possible expense of other customers
similarly situated. In situations such as this one, when one party is claiming assets that
are commingled with the assets of someone similarly situated, this Court has indicated a
preference for a pro rata distribution. See Goldberg, 932 F.2d at 280 (“In general, courts
favor a pro rata distribution of funds when such funds are claimed by creditors of like
status.”). Therefore, the Bankruptcy Court properly determined that all of the assets
originating in the Commerce Funding Account should be distributed pro rata.
C. The Bankruptcy Court did not Err in Paying Expenses
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Finally, Gulfstream argues that the Bankruptcy Court should not have used client
trust funds to pay the expenses of the bankruptcy. However, as discussed above, the
funds that Gulfstream alleges are held in trust cannot be adequately traced. “[T]o
establish rights as a trust recipient, a claimant must . . . identify and trace the trust funds if
they are commingled.” Goldberg, 932 F.2d at 280. Since Gulfstream cannot identify and
trace the trust assets, the Court’s distribution was proper.
IV. CONCLUSION
For the reasons set forth above, we affirm.
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