First Capital Mortg. Loan Corp., In re
| Decision Date | 12 October 1990 |
| Docket Number | INC,RESEARCH-PLANNIN,No. 87-1748,87-1748 |
| Citation | 917 F.2d 424 |
| Parties | , 23 Collier Bankr.Cas.2d 1659, Bankr. L. Rep. P 73,651 In re FIRST CAPITAL MORTGAGE LOAN CORPORATION, a Utah corporation, Debtor., Plaintiff-Appellant, v. Roger G. SEGAL, Trustee of First Capital Mortgage Loan Corporation, a Utah corporation, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Claron C. Spencer and Dale E. Anderson, of Spencer & Anderson, Salt Lake City, Utah, for plaintiff-appellant.
John T. Morgan and Julie A. Bryan, of Cohne, Rappaport & Segal, P.C., Salt Lake City, Utah, for defendant-appellee.
Before HOLLOWAY, Chief Judge, and SETH, McKAY, LOGAN, SEYMOUR, MOORE, ANDERSON, TACHA, BALDOCK, BRORBY and EBEL, Circuit Judges.
This case presents the question whether funds placed in escrow with the debtor, who improperly used them to pay debts owed to a good faith creditor, constitute part of the bankruptcy estate when recovered by the trustee in settlement of a preference action. 1 A divided panel of our court reversed the decision of the bankruptcy and district courts and held that these funds never became part of the bankruptcy estate and thus were recoverable as funds held in trust for the escrow depositor. 872 F.2d 335. We granted rehearing en banc. We now vacate the panel decision and hold that the funds became part of the bankruptcy estate when they were recovered by virtue of the trustee's avoidance powers.
The facts are undisputed. In August 1980, plaintiff Research-Planning agreed to loan $260,000 to R.K. Buie and Associates for investment in real property. Research-Planning and Buie agreed in writing to use the debtor, First Capital Mortgage Loan Corporation, as escrow agent. On August 18, Research-Planning gave First Capital a $260,000 check made out to First Capital and Buie. First Capital obtained Buie's endorsement and deposited the check the next day in its general account at the Bank of Utah. Within the next week, the Bank of Utah honored two checks drawn on First Capital's general account, payable to First Security Bank of Utah, in the amounts of $66,000.00 and $2,489.66. 2 These checks had been returned for insufficient funds prior to the deposit of the escrow funds. First Capital had no authorization from Research-Planning to disburse the escrow funds to First Security and acted in violation of the escrow agreement. It is undisputed that First Security was a bona fide purchaser who gave value in exchange for the two checks written by First Capital.
First Capital subsequently was involuntarily placed into bankruptcy under Chapter 7 of the Bankruptcy Code, and defendant Roger Segal was appointed trustee. The trustee brought two adversary actions against First Security, claiming that the amounts paid to it were avoidable preferences. The trustee and First Security settled the preference actions, which settlements were approved by the bankruptcy court, and the trustee recovered $62,489.66.
After the trustee's recovery, Research-Planning brought the present action claiming that the amount recovered from First Security was subject to a trust in its favor, and was not available for distribution among creditors generally as part of the bankruptcy estate. In ruling for the trustee, the bankruptcy court held that Research-Planning lost its beneficial interest in the funds when they were transferred to First Security, a bona fide purchaser for value. When the funds were recovered by the trustee in settlement of the preference actions, they therefore became part of the estate, leaving Research-Planning with a general unsecured claim against the debtor for wrongful disbursement of the escrow funds. See Research-Planning, Inc. v. Segal (In re First Capital Mortgage Loan Corp.), 60 B.R. 915 (Bankr.D.Utah 1986).
On appeal the district court affirmed. See Research-Planning, Inc. v. Segal (In re First Capital Mortgage Loan Corp.), 99 B.R. 462 (D.Utah 1987). The district court noted that, as of the time of the bankruptcy, First Security's status as a bona fide purchaser for value meant that it held title to the funds free of any claims of Research-Planning arising out of its status as escrow depositor. First Security surrendered these funds to the trustee, not to First Capital, solely because the trustee is vested with federal avoidance powers designed to ensure evenhanded treatment among creditors of the estate. The court concluded that the special nature of the trustee's avoidance powers could not revive any beneficial or equitable claim to the funds favorable to Research-Planning without offending the avoidance powers' purpose of augmenting the estate for the benefit of all creditors. Id. at 468. The court noted that Research-Planning, with its unsecured creditor's claim, Id. at 469-70.
On appeal, a divided panel reversed. Concluding that it made no difference how the trustee obtained the funds, the majority held that Research-Planning's beneficial ownership interest in the funds survived their transfer to First Security and became enforceable against the trustee upon this recovery. The majority therefore concluded that the recovered funds were not part of the bankruptcy estate but remained in trust for the benefit of plaintiff.
By definition, property held by the debtor in trust is not part of the bankruptcy estate. See 11 U.S.C. Sec. 541(d) (1988); Begier v. Internal Revenue Serv., --- U.S. ----, 110 S.Ct. 2258, 2263, 110 L.Ed.2d 46 (1990); Turley v. Mahan & Rowsey, Inc. (In re Mahan & Rowsey, Inc.), 817 F.2d 682, 684 (10th Cir.1987); see also United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n. 10, 103 S.Ct. 2309, 2314 n. 10, 76 L.Ed.2d 515 (1983) ( ); 4 Collier on Bankruptcy p 541.13 (15th ed. 1990). The dispositive issue, then, is whether funds recovered by the trustee in settlement of preference liability constitute trust funds outside of the bankruptcy estate. If they are considered property of the estate, they are distributed among claimants in a Chapter 7 proceeding pursuant to 11 U.S.C. Sec. 726 (1988). If these funds once recovered are not part of the estate, then the trustee must surrender them to Research-Planning.
No serious controversy exists that the escrow agreement and the parties' actions created a type of trust relationship between the debtor and Research-Planning. See Gulf Petroleum, S.A. v. Collazo, 316 F.2d 257, 261 (1st Cir.1963) (). Rather, the dispute centers upon the legal effect of two of several transactions involving the funds subsequent to the creation of the trust relationship.
The first relevant transfer occurred when the redeposited checks drawn on the debtor's general account at Bank of Utah to First Security were honored with the escrow funds. Both parties agree that First Security, having no notice of the origin of the funds, acted in good faith and also gave value in exchange for the funds received. The legal effect of this transfer is clear and also is not seriously disputed. Once the funds were transferred to a bona fide purchaser for value, neither the debtor nor Research-Planning had any claim to them. See In re Mahan, 817 F.2d at 684; Peterson v. Peterson, 112 Utah 554, 190 P.2d 135, 138-39 (1948); 13 G.G. Bogert & G.T. Bogert, The Law of Trusts & Trustees Sec. 881, at 165 (rev. 2d ed.1982). Research-Planning did, however, retain a cause of action against the debtor for breach of the escrow agreement and for breach of its fiduciary obligation in disbursing the escrow funds. Moreover, in the event the funds were returned to the debtor or to a third party transferee of the debtor with notice of the breach, Research-Planning would have an action for restitution. See 13 Bogert, The Law of Trusts & Trustees Sec. 881, at 163-64.
The more controversial transaction occurred when the bankruptcy trustee recovered some of the funds from First Security in settlement of the preference actions. See 11 U.S.C. Sec. 547(b). The panel majority opinion in essence adopted Research-Planning's argument that the trustee's recovery amounted to a return to the debtor's successor, in effect "reviving" the trust and creating an equitable obligation upon the bankruptcy trustee to return the funds. Because in its view the funds in the hands of the trustee became charged with this obligation, the majority concluded the funds cannot properly be considered part of the bankruptcy estate.
We begin our analysis of this transaction with the relevant provisions of the Bankruptcy Code. Section 541 provides that the bankruptcy estate Id. Sec. 541(a)(3) (emphasis added). Section 550(a) of the Code provides in turn: "To the extent that a transfer is avoided under section ... 547 ... of this title, the trustee may recover, for the benefit of the estate, the property transferred." Id. Sec. 550(a) (emphasis added). Section 547, by virtue of which the trustee recovered the funds at issue, provides the trustee with the power to avoid transfers of the debtor's property, made while insolvent, for the benefit of a creditor, in payment of an antecedent debt where it is made within specified periods of time prior to bankruptcy. See id. Sec. 547(b).
The statutory language emphasized above makes plain that such property is recovered ...
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