Ferrante, In re, 93-16700

• Decision Date: 11 April 1995
• Docket Number: No. 93-16700,93-16700
• Citation: 51 F.3d 1473
• Parties: 33 Collier Bankr.Cas.2d 540, 27 Bankr.Ct.Dec. 108, Bankr. L. Rep. P 76,465 In re Michael A. FERRANTE; In re Geraldine L. Ferrante, Debtors. Edward WALSH, Chapter 11 Trustee in Bankruptcy, Plaintiff-Appellee, v. NORTHWESTERN NATIONAL INSURANCE COMPANY OF MILWAUKEE, WISCONSIN, a Wisconsin corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1473

51 F.3d 1473

33 Collier Bankr.Cas.2d 540, 27 Bankr.Ct.Dec. 108,

Bankr. L. Rep. P 76,465

In re Michael A. FERRANTE; In re Geraldine L. Ferrante, Debtors Edward WALSH, Chapter 11 Trustee in Bankruptcy, Plaintiff-Appellee, v. NORTHWESTERN NATIONAL INSURANCE COMPANY OF MILWAUKEE WISCONSIN, a Wisconsin corporation, Defendant-Appellant.

No. 93-16700.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 13, 1995.

Decided April 11, 1995.

Leonard J. Martinet, Williams & Martinet, San Francisco, CA, for defendant-appellant.

Linda Sorensen, Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, San Francisco, CA, for plaintiff-appellee.

Appeal from the United States Bankruptcy Appellate Panel.

Before: NORRIS, WIGGINS, and FERNANDEZ, Circuit Judges.

FERNANDEZ, Circuit Judge:

Northwestern National Insurance Company appeals the Bankruptcy Appellate Panel's affirmance of the bankruptcy court's summary judgment for Edward M. Walsh, Chapter 11 Trustee. Walsh had sued on a surety bond issued by Northwestern to Charles Duck, Walsh's predecessor as trustee for the estate of Michael and Geraldine Ferrante. The bankruptcy court surcharged Northwestern for proceeds that remained unaccounted for after Duck auctioned off certain vehicles of Great American Construction Company (GACC), the Ferrantes' wholly owned company. It also surcharged Northwestern for other monies that Duck embezzled. We affirm.

BACKGROUND

Michael and Geraldine Ferrante filed their Chapter 11 petition on October 22, 1982. Charles Duck was appointed as Chapter 11 trustee. Northwestern issued two bonds totaling $500,000, ensuring Duck's faithful performance as trustee.

Michael Ferrante was the sole shareholder of GACC, an apparently insolvent corporation suspended by the State of California for failure to pay its franchise taxes. On September 29, 1983, Duck, as trustee, took control of GACC and, without leave of court, he liquidated the assets. Duck obtained auction proceeds of $231,750.96 after deducting auction expenses and after paying some of GACC's creditors. Duck deposited $15,408.85 in a commingled bank account. This money was paid to him by a GACC creditor, Wells Fargo, which had agreed to pay the estate five percent of the auction proceeds for its services. ¹ The remaining $216,342.11 was ultimately placed in Duck's personal account. This latter amount consisted of two categories of auction proceeds: $62,960.00 from the sale of unencumbered vehicles and $153,382.11 from the sale of collateral. Two of GACC's creditors, Wells Fargo and Credit Alliance Corporation, had security interests in the collateral.

In February of 1988, more than four years after the auction, Duck filed a complaint for interpleader and declaratory relief in the bankruptcy proceedings in which he named Wells Fargo Bank and Credit Alliance Corporation. He asked the court to determine ownership of the net auction proceeds. The parties subsequently stipulated to a distribution, and on April 28, 1988, the bankruptcy court entered a judgment whereby $10,000 was to be disbursed to Credit Alliance Corporation, $2,596.00 was to be disbursed to Duck to cover attorney's fees, and the remaining balance was to be disbursed to Wells Fargo. Duck paid Wells Fargo $192,939.41, which represented the balance of the proceeds of the collateral together with interest. The remainder of the fund, $65,830.02, approximated the proceeds of the unencumbered vehicles, and was not demanded by Wells Fargo. Duck, thus, continued to hold it in his capacity as trustee, at least until he peculated it.

When Duck's defalcations were discovered, he was replaced as trustee. Edward M. Walsh, the successor trustee of the Ferrante estate, commenced an investigation of Duck's dealings in the Ferrante estate, including an accounting of the GACC auction. It was discovered that $83,834.97 (auction funds, auction fee and attorney's fees) was not accounted for in the Ferrante estate.

On May 17, 1991, Walsh commenced an adversary proceeding on Northwestern's bond to recover the funds peculated from the vehicle auction proceeds. He also sought the five percent commission paid from the auction proceeds and attorney's fees paid to the estate by Wells Fargo. The complaint further prayed for reimbursement by Northwestern of accounting and attorney's fees Northwestern appealed the bankruptcy court's order to the Bankruptcy Appellate Panel. The BAP affirmed, and Northwestern in disappointment and dudgeon appealed to us. It contends that BAP erred when it did not dismiss the case for lack of jurisdiction. In addition, it contends that Walsh could not assert rights in the assets of GACC since they belonged to Wells Fargo after the April, 1988 bankruptcy court judgment. In addition, it argues that GACC was a separate legal entity from the Ferrantes' bankruptcy estate, and hence the vehicle proceeds do not belong to the Ferrante estate. Northwestern also argues that the bankruptcy court erred when it ordered it to pay the estate the five percent auction fee, Duck's vacated interim compensation, and money the estate spent on investigating Duck. Finally, it argues that BAP erred when it refused to consider Northwestern's defenses.

that Walsh spent investigating the missing funds and recovery of Duck's vacated interim fee award. The bankruptcy court agreed with Walsh and granted recovery on the bond.

STANDARD OF REVIEW

Decisions of the Bankruptcy Appellate Panel are reviewed de novo. In re Johnston, 21 F.3d 323, 326 (9th Cir.1994). The court of appeals and the BAP review the bankruptcy court's conclusions of law de novo and its findings of facts under the clearly erroneous standard. Id.

JURISDICTION

We have jurisdiction pursuant to 28 U.S.C. Sec. 158(b).

Northwestern argues for the first time that the bankruptcy court did not have jurisdiction over this case. Although jurisdiction was not raised in the bankruptcy court, we must consider the issue on appeal. See McGuckin v. Smith, 974 F.2d 1050, 1052 (9th Cir.1992) (jurisdiction must be considered sua sponte ).

The bankruptcy court did have jurisdiction because this case involves a core proceeding. Core matters " 'concern[ ] the administration of the estate.' " In re Intl Nutronics, Inc., 28 F.3d 965, 969 (9th Cir.) (citation omitted), cert. denied, --- U.S. ----, 115 S.Ct. 577, 130 L.Ed.2d 493 (1994); See In re Cinematronics, Inc., 916 F.2d 1444, 1449-50 (9th Cir.1990); see also Latham v. Wells Fargo, 896 F.2d 979, 983-84 (5th Cir.1990). Because this case evokes the Bankruptcy Act's imposition of duties on trustees to administer estate property and a surety's liability on its bond for the benefit of the estate, it cannot be gainsaid that it involves a core issue. See In re American Solar King, 142 B.R. 772, 773 (Bankr.W.D.Tex.1992). It is also particularly germane to the bankruptcy proceeding context, for it involves the very bankruptcy process itself. Nothing could be more important to the handling of a bankruptcy estate than the fidelity of those who are entrusted with its assets.

Northwestern also challenges Walsh's standing to maintain an action to obtain the auction proceeds. While standing is a jurisdictional argument, we will discuss it when we discuss the merits of the claim that the proceeds are not part of the estate assets. We will do that because we see this as just another iteration of Northwestern's theme that the peculated assets cannot be recovered by the estate, a claim which we reject.

DISCUSSION

The major thrust of Northwestern's attack on the decisions of the bankruptcy court and the BAP proceeds from its rather crabbed view of the duties of the trustee and the assets of the estate. It, essentially, takes the position that its bond obligations relate only to assets that indisputably belong to the estate, those that cannot be claimed by anyone else. It points to the language of its bond, which promises that the trustee will "faithfully and truly account for all the moneys, assets and effects of the estate." From those words it argues that it can have no liability because the auction proceeds were not really assets of the estate, even though the estate owned all of the stock of GACC, and even though the funds came into Duck's hands as trustee of the estate. It overlooks the other language of its bond, which promises that Duck will obey the orders of the court and "faithfully perform all of his official duties as [trustee]." In that we think it very wrong, and once that error, which permeates its specific arguments, is corrected, those arguments fall.

A. The Vehicle Auction Proceeds.

1. The 1988 Judgment and Standing.

In 1988 the bankruptcy court entered a judgment in an interpleader action filed by Duck in which it appeared to order that money from the sale of the assets of GACC be distributed to creditors Wells Fargo and Credit Alliance Corporation. Northwestern claims that the judgment disposed of money from the sale of certain unencumbered vehicles which belonged to the business, and that deprives Walsh of standing. We disagree.

First, the record indicates that the parties to the stipulation which led to the judgment did not believe that the proceeds from the vehicle sale were included in the judgment. For instance, Duck wrote to Wells Fargo on February 23, 1987 informing it that the net balance of the auction was $216,342.11. The letter specifically mentioned that $62,960.00 of that money--"proceeds from the sale of licenced vehicles"--came from the sale of unsecured licensed vehicles. Attached to the letter was a "[r]ecapitulation" of GAAC's auction receipts. According to that document, the "money available for properly secured creditors" was $153,382.11. That specifically did not include the proceeds from the vehicles. In addition, when Duck sent Wells Fargo its check, he noted that "[t]he total amount of money available for distribution was $153,382.11." There is no record of Wells Fargo's objection to...