692 F.2d 214 (1st Cir. 1982), 82-1281, Nation-Wide Check Corp., Inc. v. Forest Hills Distributors, Inc.

Docket Nº:82-1281, 82-1285.
Citation:692 F.2d 214
Party Name:NATION-WIDE CHECK CORPORATION, INC., Plaintiff, Appellee, v. FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellants. NATION-WIDE CHECK CORPORATION, INC., Plaintiff, Appellant, v. FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellees.
Case Date:November 15, 1982
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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692 F.2d 214 (1st Cir. 1982)



FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellants.



FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellees.

Nos. 82-1281, 82-1285.

United States Court of Appeals, First Circuit

November 15, 1982

Argued Sept. 17, 1982.

Ivor C. Armistead, III, with whom Daniel S. Margolies, and Widett, Slater & Goldman,

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P.C., Boston, Mass., were on brief, for defendants Forest Hills Distributors, Inc., et al.

John Wall, with whom Cullen & Wall, and Harry C. Mezer, Boston, Mass., were on brief, for plaintiff Nation-Wide Check Corp.

Before DAVIS [*], CAMPBELL and BREYER, Circuit Judges.

BREYER, Circuit Judge.

Appellants Joseph Braunstein, Stephen Gordon, and Victor Dahar (the "assignees") are assignees for the benefit of creditors of Forest Hills Distributors, Inc., and Forest Hills of New Hampshire, Inc. ("Forest Hills"). Appellee Nation-Wide Check Corporation ("Nation-Wide") sells money orders. Forest Hills sold Nation-Wide's money orders on Nation-Wide's behalf. After Forest Hills assigned its assets for the benefit of its creditors, Nation-Wide sued the assignees for the proceeds of the money order sales. The district court found in its favor. The assignees appeal, claiming that the court rested its decision in part upon an impermissible inference based upon the fact that the assignees allowed the destruction of certain Forest Hills documents in their possession. We believe the district court's inference was permissible, and we therefore affirm its decision.


In October 1973 Nation-Wide agreed with Forest Hills that Forest Hills would sell Nation-Wide's money orders to the public in return for a commission. The agreement specifically provided that Forest Hills would hold the sale proceeds apart from all its other assets and revenues, depositing those proceeds in a separate account with The First National Bank of Boston. This procedure, however, was not followed. Instead, the proceeds were deposited in various Forest Hills accounts in local banks near Forest Hills' stores, then transferred to various other Forest Hills accounts in Boston banks. From there, Forest Hills periodically remitted amounts due to Nation-Wide. Moreover, the proceeds were commingled with general Forest Hills revenues when they reached the Boston banks.

In late 1974 Forest Hills encountered financial difficulties and stopped sending money order proceeds to Nation-Wide. On December 18, Forest Hills executed an assignment of all its assets for the benefit of its creditors. At the time of the assignment, Forest Hills owed Nation-Wide $71,417.69 for money orders issued between early November (when Forest Hills stopped paying Nation-Wide) and December 18 (when the assignment took place and money order sales were halted).

The assignees quickly liquidated most of Forest Hills' assets. By the end of December 1974 they apparently accumulated a fund of more than $600,000. Nation-Wide with equal promptness told the assignees about its claim against Forest Hills. Nation-Wide said that its claim took precedence over the claims of Forest Hills' general unsecured creditors because of the "separate-fund" provisions in its 1973 money order agreement. Nation-Wide's lawyers spoke to assignee Gordon around December 19 and wrote to Gordon about their claim a few days later. The assignees rejected Nation-Wide's priority claim and Nation-Wide filed suit against the assignees and Forest Hills on April 1, 1975, seeking payment of its $71,000 out of the $600,000 the assignees had accumulated.

On April 11, Gordon, an associate in a Boston law firm, wrote a letter to a senior partner in the same office about Forest Hills' business records. He noted that the records were being stored at some expense and asked if they should be discarded. In accordance with advice he received from the firm's partner, he then abandoned many of the documents--including all 1974 checks--to the landlord of the storage premises. Gordon's act of abandonment lies at the center of the controversy on this appeal.

In August 1979, when denying cross motions for summary judgment, the district

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court made clear just what Nation-Wide would have to prove to establish a preferred position vis-a-vis the general creditors and thereby to prevail. First, Nation-Wide would have to prove that Forest Hills breached a specific agreement to keep the money order sale proceeds separate. At that point Nation-Wide's claim would be like that of a secured creditor or a beneficiary of a trust, whose property the debtor or trustee has commingled with other property of his own. See In re Dexter Buick-GMC Truck Co., 2 B.R. 247, 250 (Bkrtcy.D.R.I.1980). Second, Nation-Wide would then have to trace the funds from the sales themselves into the final $600,000 accumulated by the assignees.


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