Rare Coin Galleries of America, Inc., In re

• Decision Date: 04 October 1988
• Docket Number: Nos. 88-1451,88-1504,s. 88-1451
• Citation: 862 F.2d 896
• Parties: Bankr. L. Rep. P 72,501 In re RARE COIN GALLERIES OF AMERICA, INC., Debtor. John J. REGAN, etc., Plaintiff, Appellee, v. VINICK & YOUNG, etc., et al., Defendants, Appellants. International Surplus Lines Insurance Company, et al., Defendants, Appellees. In re RARE COIN GALLERIES OF AMERICA, INC., Debtor. John J. REGAN, etc., Plaintiff, Appellee, v. VINICK & YOUNG, etc., et al., Defendants, Appellees. International Surplus Lines Insurance Company, Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 896

862 F.2d 896

Bankr. L. Rep. P 72,501

In re RARE COIN GALLERIES OF AMERICA, INC., Debtor.

John J. REGAN, etc., Plaintiff, Appellee, v. VINICK & YOUNG, etc., et al., Defendants, Appellants.

International Surplus Lines Insurance Company, et al.,

Defendants, Appellees.

In re RARE COIN GALLERIES OF AMERICA, INC., Debtor.

John J. REGAN, etc., Plaintiff, Appellee, v. VINICK & YOUNG, etc., et al., Defendants, Appellees.

International Surplus Lines Insurance Company, Defendant, Appellant.

Nos. 88-1451, 88-1504.

United States Court of Appeals, First Circuit.

Heard Oct. 4, 1988.

Decided Nov. 30, 1988.

Sharon R. Burger, with whom Edward P. Leibensperger, Donald R. Peck and Nutter, McClennen & Fish, Boston, Mass., were on brief, for Vinick & Young, etc., et al.

Jerome M. Leonard, with whom Ropes & Gray, Boston, Mass., was on brief, for Intern. Surplus Lines Ins. Co.

Lawrence G. Green, with whom Neill E. Silverman and Perkins, Smith, Arata & Howard, Boston, Mass., were on brief, for John J. Regan.

Before COFFIN, Circuit Judge, TIMBERS, ^* Senior Circuit Judge, and TORRUELLA, Circuit Judge.

TIMBERS, Circuit Judge:

Appellants Vinick & Young, Certified Public Accountants, Arnold W. Vinick, individually (collectively "Vinick & Young" or "the accountant"), and International Surplus Lines Insurance Company ("ISLIC" or when joined with Vinick & Young, "the appellants"), appeal from a preliminary injunction entered February 18, 1988 in the District of Massachusetts, Andrew A. Caffrey, Senior Judge, on the motion of appellee John J. Regan ("the trustee"), he being the Chapter 7 bankruptcy trustee of debtor Rare Coin Galleries of America, Inc. ("RCG").

The court granted the relief requested on the grounds that the trustee had demonstrated a reasonable likelihood of success on the merits and the balance of risk of irreparable harm weighed in favor of the trustee. Part One of the injunction enjoins ISLIC from using in any manner the proceeds of a $250,000 liability insurance policy it had issued to Vinick & Young, thus barring the payment of any settlement or use of the proceeds to fund Vinick & Young's defense in the instant action. Part Two permits the trustee to reach and apply the policy proceeds to satisfy any eventual judgment it might recover from Vinick & Young. Our jurisdiction rests on 28 U.S.C. Sec. 1292(a)(1) (1982).

We find that there are three principal issues on appeal. First, appellants argue that the trustee lacks standing to bring the underlying action for damages. Second, there is a question, under Part One of the injunction, whether the balance of hardship favors appellants, since Massachusetts law limits the legal remedies appellee may have against the proceeds of the liability insurance policy. Third, appellants urge that we vacate Part Two of the injunction because the remedy of a bill to reach and apply is not available at this stage of the proceedings under Massachusetts law on the facts of the instant case.

We hold that, although the trustee has standing to bring the underlying action, the district court erred in granting both parts of the injunction. We vacate the injunction.

I.

We shall summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

RCG was a company specializing in buying, selling and investing in rare coins for its customers. Misappropriation by principals of RCG led the firm into bankruptcy. On October 14, 1986, RCG filed for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Massachusetts, Eastern Division. Appellee John J. Regan subsequently was appointed bankruptcy trustee. The bankruptcy proceeding later was converted to a Chapter 7 liquidation proceeding. The district court has withdrawn the case from the bankruptcy court pursuant to 28 U.S.C. Sec. 157(d) (Supp. IV 1986).

On May 4, 1987, the trustee commenced the instant adversary proceeding in the district court. The complaint named Vinick & Young as defendants. Vinick & Young had served as RCG's accountant and auditor. As part of its duties, the accountant had certified four Invoice Liquidation Reports ("the reports"). These reports summarized rare coin transactions conducted by RCG on behalf of its customers. The accountant certified that the reports conformed with generally accepted accounting principles. The complaint alleged against Vinick & Young negligence, breach of contract, negligent misrepresentation and unfair and deceptive acts or practices under Mass.Gen.Laws. ch. 93A, Secs. 2, 11 (1984). The complaint sought damages for (1) the cost of the accountant's services, (2) the cost of commissions RCG paid to financial planners, (3) the misappropriation of assets by RCG principals, (4) the administrative costs of bankruptcy, and (5) the cost to the estate of an $11.8 million proof of claim filed by the Federal Trade Commission ("FTC") on behalf of RCG's public consumer creditors.

The complaint also named ISLIC and Rollins, Burdick and Hunter of Massachusetts, Inc. ("the broker"), Vinick & Young's liability insurance broker, as trustee defendants. ISLIC had issued to Vinick & Young a professional liability insurance policy ("the policy") limiting ISLIC's liability to Vinick & Young to $250,000 per claim, or in the aggregate, per year. This liability limit included all damage claims incurred by the accountants and all "claims expenses", defined as

"any and all costs, charges, fees and/or expenses incurred by [ISLIC] in investigating, defending, negotiating and/or otherwise attending to a claim, or any litigation arising therefrom".

Thus, the complaint named ISLIC and the broker only "so that the plaintiff's reach and apply and injunction motions may be enforced against the subject insurance policy".

Simultaneously with the filing of the complaint, the trustee filed a motion for a temporary restraining order ("TRO"). The proposed TRO would "enjoin[ ] [ISLIC and the broker] from paying, disposing of, or otherwise encumbering ... any insurance policy issued or brokered by [ISLIC and the broker] for the benefit of [Vinick & Young]". The proposed TRO also would authorize the trustee to reach and apply the proceeds of any insurance policy issued by ISLIC to Vinick & Young in satisfaction of any subsequent judgment obtained by the trustee against Vinick & Young. These two parts of the proposed TRO eventually became the two parts of the preliminary injunction.

The district court granted the TRO. On May 15, 1987, the court, upon the stipulation of ISLIC and the trustee, extended the TRO until further order of the court. On October 15, 1987, Vinick & Young moved to modify the TRO to allow ISLIC to use the policy proceeds to pay defense costs. The court denied this motion on December 21, 1987. Two days later the trustee filed an application for a preliminary injunction. On February 18, 1988, following a hearing, the court entered the preliminary injunction, incorporating the terms of the TRO. ISLIC and Vinick & Young now appeal from the preliminary injunction.

II.

As a preliminary matter, we are constrained to comment on the district court's failure to comply with Fed.R.Civ.P. 52(a) which requires that, before the court may enter a preliminary injunction, it must "find the facts specially and state separately its conclusions of law" upon which the injunction is based, as it is required to do when trying a case upon the facts without a jury. ¹

In the instant case the findings of fact and conclusions of law consist of five lines on the final page of the transcript of the preliminary injunction hearing reading as follows:

"O.K. I find that there is a reasonable likelihood the plaintiff will succeed on the merits of this case and that the balance of risk of irreparable harm weighs in favor of the plaintiff and I hereby grant plaintiff's application for preliminary injunction."

This is clearly inadequate. ²

We emphasize that it is of vital importance that the court scrupulously follow the requirements of Rule 52(a). The burden is not a heavy one. "[T]he judge need only make brief, definite, pertinent findings and conclusions upon the contested matters". Fed.R.Civ.P. 52(a) Advisory Committee Note (1946 Amendment); see also Kelley v. Everglades Drainage Dist., 319 U.S. 415, 422 [63 S.Ct. 1141, 1145, 87 L.Ed. 1485] (1943) ("[T]here must be findings ... sufficient to indicate the factual basis for the ultimate conclusion."). Under the current version of the Rule, the court even may make these findings orally from the bench.

Ordinarily, in view of the absence of findings, we would remand to the district court with directions to comply with Rule 52(a). Since there appears to be no dispute as to the facts and the appeal turns primarily on questions of law, we shall turn directly to the merits.

III.

The law of this Circuit limits review of the granting of a preliminary injunction to determining if the district judge abused his discretion. E.g., Romero Feliciano v. Torres Gaztambide, 836 F.2d 1, 2 (1st Cir.1987); Collazo Rivera v. Torres Gaztambide, 812 F.2d 258, 259 (1st Cir.1987). " '[A]pplication of an improper legal standard in determining the likelihood of success on the merits.... [or] misapplication of the law to particular facts is an abuse of discretion.' " Planned Parenthood League of Mass. v. Bellotti, supra, 641 F.2d at 1009 (quoting Charles v. Carey, 627 F.2d 772, 776 (7th Cir.1980) (citations omitted)).

Appellants argue that the district judge abused his discretion in finding that the trustee was likely to succeed on the merits despite the trustee's lack of standing to assert the instant claims. Appellants contend that the trustee is asserting claims on behalf of the customers of RCG (who are creditors of the estate), and that such claims belong to the customers, not the estate. If this were so, the trustee would be acting beyond the scope of his powers under the Bankruptcy Code. Section 704(1)...