In re J & J Record Distributing Corp.
| Decision Date | 25 November 1987 |
| Docket Number | Adv. No. 87-0706S.,Bankruptcy No. 80-03255K |
| Citation | 80 BR 53 |
| Parties | In re J & J RECORD DISTRIBUTING CORPORATION (Substantively Consolidated With Record Museum, Inc., a Pennsylvania Corporation; Record Museum, Inc., a Delaware Corporation; and Record Museum, Inc., a New Jersey Corp.) Debtor. John P. JUDGE, Trustee, Plaintiff, v. PINCUS, VERLIN, HAHN & REICH, P.C., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Edward J. DiDonato, Philadelphia, Pa., for plaintiff/trustee.
Allen B. Dubroff, Philadelphia, Pa., for defendant.
John P. Judge, Philadelphia, Pa., Trustee.
The instant proceeding presents an issue which our research indicates has rarely been addressed by other bankruptcy courts: does a law firm representing a Chapter 11 debtor-in-possession (hereinafter referred to as "DIP") have a duty to invest funds held by it in an interest-bearing account, such that the firm will be liable for interest which could have been received when it fails to do so? We hold that the answer to this question, generally, is affirmative, and that the firm here is liable for at least a portion of the sums demanded from it by the Trustee of the Debtors, the Plaintiff herein.
The first of the instant bankruptcy cases was commenced almost seven years ago on December 8, 1980, with the filing of an involuntary Chapter 7 case against the Debtor. This case was converted to a Chapter 11 proceeding on December 10, 1980. On December 29, 1980, the Defendant law firm, a medium-sized, prominent local firm which has performed a significant amount of high-quality representation in our court over the years, was appointed as counsel for the Debtor. The four cases in issue, presently consolidated, have been jointly administered since January 12, 1981.
On July 30, 1982, the jointly-administered cases were converted back to Chapter 7 proceedings. On August 13, 1982, a Trustee, the Plaintiff in this proceeding, was appointed, and, effective September 24, 1982, present counsel was appointed to represent him.
These cases have not proceeded swiftly since 1982. Objections to certain Proofs of Claim were filed in 1985 and resolved in 1986. On October 21, 1986, the Trustee's unopposed motion to substantively consolidate these cases was granted. On March 10, 1987, we conducted a hearing to show cause why the matters should not be dismissed for lack of prosecution, but we denied same upon the Trustee's representation that the cases would be prosecuted to their conclusion shortly. After effecting a partial distribution on May 6, 1987, the Trustee filed this Adversary proceeding on July 24, 1987.
After the filing of an Answer herein by the Defendant, the instant proceeding came before us for trial on September 22, 1987. By agreement of the parties, we entered an Order stating that the matter would be disposed of upon a Stipulation of Facts and Briefs of the parties. By November 13, 1987, all of these filings had been made.
The Stipulation of Facts has attached to it the Debtors' Accounting of Receipts and Disbursements, filed by the Defendant on November 14, 1983, more than a year after the appointment of the Trustee. The Accounting indicates that the Defendant maintained two relevant accounts for the Debtor.
The first Account in issue consisted of a sum which the Accounting states was the balance of $135,000.00 from the proceeds of the sale of the Debtors' leases and $16,100.00 proceeds from the sale of certain inventory, which were initially placed in the Defendant's escrow account at some unspecified date between April and July, 1981, and thereafter were placed in a Fidelity Bank non-interest-bearing checking account in July, 1981, allegedly anticipating certain disbursements. However, although the Account was reduced from $151,000.00 to $69,603.37 by August 24, 1981, the only payment thereafter, through November, 1982, when the funds were turned over to the Trustee, was a $3,500.00 payment on March 24, 1982, in settlement of certain litigation.
The second Account consisted of the initial payment installment on the purchase of the leases of $140,000.00, made in April, 1981, $115,000.00 of which was invested in certificates of deposit at two different times, but which was consistently held in the Fidelity Bank checking account at all times after August 7, 1981, through November, 1982. This deposit was allegedly made "anticipating certain administrative payments to be made." However, apparently only five payments were made out of this account, bringing its balance of $118,126.15 down to $99,157.64, as of November, 1982.
The parties also stipulated that the interest paid by Philadelphia banks in the period from July, 1981, through November, 1982, was five (5%) percent, and that, had the funds been placed in an interest-bearing account over that period, they would have realized $9,961.00 in interest.
The statutory basis of the Trustee's case is 11 U.S.C. § 345(a), which provides as follows:
Without citing any bankruptcy cases as authority, the Trustee argues that the DIP had a fiduciary duty to invest funds which were not being utilized for an extended period.
The Defendant argues that, given the history prohibiting investment of funds unless same was expressly authorized by the court under the Bankruptcy Act and the non-mandatory language of § 345(a), it had no duty to invest the proceeds. It cites perhaps the only previous case construing this Code section, In re Peckinpaugh, 50 B.R. 865, 868 (Bankr.N.D.Ohio 1985), in its favor. Finally, it argues that, even if a duty to invest might arise under certain facts, no duty arose here because it reasonably anticipated that the funds would be needed for disbursements on a regular basis, and therefore was justified in leaving them in checking accounts.
We believe that the controlling principles are enunciated in the RESTATEMENT (SECOND) OF TRUSTS (1959). We further believe that those principles establish that the Defendant was a "trustee" of the funds on behalf of the creditors of the DIP's estate. A trust is "a fiduciary relationship with respect to property, subjecting the party by whom title to the property is held to equitable duties to deal with the property for the benefit of another person" is present, id., § 2, at 6. See also 76 AM. JUR. 2d 247-48 (1975). Given the "colorless" sense that the terms "title" and "ownership" are used in this section, id., comment d, at 8, we hold that the Defendant held "title" or control of the funds and that the "ownership" of the property was in the creditors. Clearly, a DIP manages his property as a fiduciary for its creditors, in the highest sense of the term "fiduciary." See Wolf v. Weinstein, 372 U.S. 633, 642-53, 83 S.Ct. 969, 975-76, 10 L.Ed.2d 33 (1963); In re Crouse Group, Inc., 75 B.R. 553, 557-58 (Bankr.E.D.Pa.1987); and In re Baldwin-United Corp., 43 B.R. 443, 459-60 n. 22 (Bankr.S.D.Ohio 1984). Thus, a trust was indeed created. The Defendant, experienced and trusted bankruptcy counsel acting for the DIP as an agent of the DIP, is fully liable for its own negligent actions to the detriment of the beneficiaries of the DIP's duties as fiduciary. See RESTATEMENT (SECOND) OF AGENCY, § 354, at 125-29 (1958).
This principle has been recognized in Pennsylvania law for many years. See, e.g., In re Estate of Pitone, 489 Pa. 60, 66-68, 413 A.2d 1012, 1015-16 (1980); In re Jones' Estate, 400 Pa. 545, 554-63, 162 A.2d 408, 413-17 (1960); Bruner's Appeal, 57 Pa. 46, 51-52 (1868); Biles's Appeal, 24 Pa. 335, 337 (1855); and In re Estate of Vaughn, 315 Pa.Super. 354, 360-61, 461 A.2d 1318, 1321 (1983). The law of other jurisdictions is consistent with that of this state. See, e.g., Lynch v. John M. Redfield Foundation, 9 Cal.App.3d 193, 88 Cal. Rptr. 86, 89-92 (1970); Witmer v. Blair, 588 S.W.2d 222, 224-25 (Mo.App.1979); Cooper v. Jones, 78 A.D.2d 423, 435 N.Y.S.2d 830, 834 (1981); In re Estate of Kugler, 117 Wis.2d 314, 344 N.W.2d 160, 164-65 (1984); and 76 AM.JUR.2d, supra, at 582-83.
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