Bullion Reserve of North America, In re
| Citation | 836 F.2d 1214 |
| Decision Date | 11 January 1988 |
| Docket Number | No. 86-6649,86-6649 |
| Parties | , Bankr. L. Rep. P 72,149 In re BULLION RESERVE OF NORTH AMERICA, A California Corporation, Curtis B. DANNING, Chapter 7 Trustee, Plaintiff-Appellee, v. Theodore P. BOZEK, Defendant-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Ronald Gold, Murphy & Gold, Woodland Hills, Cal., for defendant-appellant.
Isaac M. Pachulski, Theodore B. Stolman, Stutman, Treister & Glatt, Los Angeles, Cal., for plaintiff-appellee.
Appeal from the United States District Court for the Central District of California.
Before SNEED, PREGERSON and KOZINSKI, Circuit Judges.
Theodore P. Bozek appeals from a district court's order affirming a bankruptcy court's grant of summary judgment in favor of the bankruptcy trustee for Bullion Reserve of North America (BRNA). The trustee, Curtis B. Danning, sued Bozek under 11 U.S.C. Sec. 547(b) to set aside and recover an alleged preferential transfer made by BRNA to Bozek. We affirm.
BRNA was a California corporation that purported to be in the business of buying precious metals (bullion) for the public through a "member account program." Customers became member account program participants by filling out a short application and paying a nominal administrative fee. Thereafter, program participants were entitled to purchase bullion through BRNA at wholesale prices fixed in the international market. BRNA charged a commission on all bullion orders it executed.
BRNA published a brochure describing its program. The brochure warranted that, upon request, BRNA would segregate and store a program participant's bullion in a storage vault at Perpetual Storage Incorporated. BRNA also represented that the stored bullion would be under the trusteeship of the Intermountain Depository Corporation, its wholly owned subsidiary.
In fact, BRNA never fulfilled its obligation to purchase and store bullion for program participants. Instead, BRNA comingled funds it received from program participants and deposited those monies into its own general bank accounts. Once in BRNA's accounts, the participants' funds were further comingled with income BRNA received from other sources. BRNA then used the money in its accounts to pay various expenses, including its general operating costs. BRNA did store a small amount of bullion at Perpetual Storage Incorporated. However, the amount of bullion BRNA stored at Perpetual Storage Incorporated was insufficient to cover storage orders placed by member account program participants. BRNA frequently had to purchase bullion on the open market to meet liquidation demands. Eventually, BRNA encountered financial difficulties and, on October 3, 1983, filed for relief under Chapter 11 of the Bankruptcy Code. On January 10, 1984, the bankruptcy court converted BRNA's Chapter 11 reorganization to a Chapter 7 liquidation proceeding.
Bozek became a member account program participant in December 1981. Thereafter, between 1981 and 1983, Bozek purchased bullion through BRNA. 1 Like many program participants, Bozek asked BRNA to store his bullion. On August 22, 1983, forty-two days before BRNA filed for Chapter 11 relief, Bozek liquidated his member account and received bullion worth $212,138.60 from BRNA.
Subsequently, on August 9, 1984, BRNA's bankruptcy trustee brought this adversary action against Bozek under 11 U.S.C. Sec. 547 (1982) to recover the bullion as a preferential transfer. The bankruptcy court granted summary judgment in favor of the trustee and the district court affirmed. We review the bankruptcy court's grant of summary judgment de novo. See Nash v. Kester (In re Nash), 765 F.2d 1410, 1412 (9th Cir.1985).
A bankruptcy trustee may recover property for the benefit of the debtor's estate if there (1) was a transfer; (2) of property of the debtor; (3) to or for the benefit of a creditor; (4) for or on account of an antecedent debt; (5) made while the debtor was insolvent; (6) made on or within ninety days before the date of the filing of the debtor's bankruptcy petition; (7) that enables the creditor to receive more than he would receive if the transfer had not been made and the debtor's estate liquidated according to the provisions of the bankruptcy code. 11 U.S.C. Sec. 547(b) (1982). 2 The burden of proving the existence of these elements is on the bankruptcy trustee. Grover v. Gulino (In re Gulino), 779 F.2d 546, 549 (9th Cir.1985).
Bozek contends that the bankruptcy court erred by finding that (1) the bullion BRNA transferred to him was property of the debtor, (2) he was BRNA's creditor, and (3) the transfer of bullion was on account of an antecedent debt. Bozek also contends that, if the transfer was a preference, it was excepted from avoidance under Sec. 547(c)(1) and (2).
Bozek argues that the bullion he received was not property of the debtor, BRNA, because it was purchased with money fraudulently obtained from member account program participants. In effect, he argues that he should be allowed to keep the bullion because he was a victim of BRNA's misconduct.
The term "property of the debtor" is not defined in the Bankruptcy Code. However, we define the term broadly. Elliot v. Frontier Properties (In re Lewis W. Shurtleff, Inc.), 778 F.2d 1416, 1419 (9th Cir.1985). Generally, property belongs to the debtor for purposes of Sec. 547 if its transfer will deprive the bankruptcy estate of something which could otherwise be used to satisfy the claims of creditors. Cf. Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1355-56 (5th Cir.1986) ().
Here, the money BRNA used to purchase bullion came from comingled bank accounts under BRNA's control. Because this money could have been used to pay other creditors, it presumptively constitutes property of the debtor's estate. Henderson v. Allred (In re Western World Funding, Inc.), 54 B.R. 470, 475 (Bankr.D.Nev.1985). 3
The dual purpose of Sec. 547 warrants reaching this result. That purpose is to discourage creditors from racing to the courthouse to dismember the debtor during its slide into bankruptcy and to further the prime bankruptcy policy of equal distribution among similarly situated creditors. Valley Bank v. Vance (In re Vance), 721 F.2d 259, 260 (9th Cir.1983). There is evidence that Bozek directed BRNA to transfer bullion to him after learning of BRNA's financial difficulties. More importantly, Bozek's acquisition of bullion during the ninety day preference period allowed him to recover 100% of his claim against BRNA, while other customers were left to share equally in BRNA's remaining assets. While we appreciate Bozek's plight as a victim, we are also mindful of our obligation to secure an equitable distribution of BRNA's assets among all its creditors.
Bozek also contends that his agreement with BRNA created an express trust under California law that prevented his funds and their product, the bullion, from becoming property of the debtor. Property held in trust by a bankruptcy debtor belongs to the beneficiary of the trust. Elliot v. Bumb, 356 F.2d 749, 753 (9th Cir.), cert. denied, 385 U.S. 829, 87 S.Ct. 67, 17 L.Ed.2d 66 (1966). State law determines whether a trust exists in federal bankruptcy proceedings. Toys "R" Us Inc. v. Esgro, Inc. (Matter of Esgro, Inc.), 645 F.2d 794, 797 (9th Cir.1981).
There is no indication that BRNA intended to assume the duties of a trustee. See Cal.Civ.Code Sec. 2222 (West 1985) (repealed July 1, 1987) (trust created as to trustee by conduct indicating his acceptance of trust). The member account program brochure specified that the Intermountain Depository Corporation would be a trustee for participants' bullion stored at Perpetual Storage Incorporated. 4 BRNA never stated it would be a trustee of the funds it received from program participants.
Moreover, even if an express trust were created, Bozek would still have a duty under federal bankruptcy law to trace his funds to the bullion he received. Such a tracing requirement is necessary to further the Bankruptcy Code's policy of equal distribution among similarly situated creditors. See Elliott, 356 F.2d at 755 (). Here, Bozek cannot trace the money he gave BRNA to the bullion he received. Therefore, the bullion is property of the debtor under Sec. 547. 5
Bozek contends he is not a creditor and that the transfer was not on account of an antecedent debt because BRNA did not owe him anything before making the bullion transfer. Bozek bases his argument on the idea that he never had a creditor's claim against BRNA because bullion was transferred to him upon demand and he did not suffer economic injury.
This argument ignores the Bankruptcy Code's broad definitions. A "creditor" is defined as an "entity that has a claim against the debtor." 11 U.S.C. Sec. 101(9) (1982). "Claim" is defined as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. Sec. 101(4) (1982). The legislative history of the Bankruptcy Code indicates that Congress intended to provide the broadest possible definition of "claim" when it enacted Sec. 101(4). See H.R.Rep. No. 595, 95th Cong., 1st Sess. 309, reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6266; S.Rep. No. 989, 95th Cong. 2d Sess. 21, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5808; see also Ohio v. Kovacs, 469 U.S. 274, 279, 105 S.Ct. 705, 708-09, 83 L.Ed.2d 649 (1985); Kallan v. Litas, 47 B.R. 977, 982-83 (N.D.Ill.1985).
Under these definitions, it is clear that Bozek became a creditor when he transferred...
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