California Trade Technical Schools, Inc., In re

• Decision Date: 10 January 1991
• Docket Number: No. 89-55611,89-55611
• Citation: 923 F.2d 641
• Parties: , 24 Collier Bankr.Cas.2d 813, 65 Ed. Law Rep. 319, Bankr. L. Rep. P 73,784 In re CALIFORNIA TRADE TECHNICAL SCHOOLS, INC., dba California Trade Technical College, Debtor. Arnold L. KUPETZ, Trustee for California Trade Technical Schools, Inc., aka California Trade Technical College, Plaintiff-Appellee, v. UNITED STATES of America, on Behalf of the UNITED STATES DEPARTMENT OF EDUCATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 641

923 F.2d 641

59 USLW 2478, 24 Collier Bankr.Cas.2d 813,

65 Ed. Law Rep. 319,

Bankr. L. Rep. P 73,784

In re CALIFORNIA TRADE TECHNICAL SCHOOLS, INC., dba

California Trade Technical College, Debtor.

Arnold L. KUPETZ, Trustee for California Trade Technical

Schools, Inc., aka California Trade Technical

College, Plaintiff-Appellee, v. UNITED STATES of America, on Behalf of the UNITED STATES

DEPARTMENT OF EDUCATION, Defendant-Appellant.

No. 89-55611.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 10, 1990.

Memorandum Sept. 25, 1990.

Order and Opinion Jan. 10, 1991.

Frederick M. Brosio, Jr., and Kathryn M. Ritchie, Asst. U.S. Attys., Fred J. Marinucci, Office of Gen. Counsel, U.S. Dept. of Educ., Los Angeles, Cal., for defendant-appellant.

Howard M. Ehrenberg, Sulmeyer, Kupetz, Baumann & Rothman, Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before REINHARDT and HALL, Circuit Judges, and RE, Chief Judge. ^*

REINHARDT, Circuit Judge:

California Trade Technical Schools, Inc. ("CTTS") filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code on July 25, 1983. The case was converted to a chapter 7 liquidation proceeding on June 19, 1984. Shortly thereafter, Arnold Kupetz was appointed trustee of the bankruptcy estate. On August 21, 1986, Kupetz filed a complaint to recover funds transferred to the government on May 20, 1983 as an avoidable preference under 11 U.S.C. Sec. 547 (1979). The bankruptcy court granted summary judgment for Kupetz. The government timely appealed under Bankruptcy Rule 8002(a) and objected to disposition of the appeal by the Bankruptcy Appellate Panel. The appeal was transferred to the district court under 28 U.S.C. Sec. 158(a), and the district court affirmed the judgment of the bankruptcy court. The government timely filed a notice of appeal to this court under 28 U.S.C. Sec. 158(d).

On appeal, the government contends that, because the money transferred to the government on May 20, 1983 consisted of reconstituted trust funds, the money transferred on May 20, 1983 was not CTTS's property and thus was not subject to avoidance under section 547. Kupetz contends that, because none of the funds transferred were traceable to the originally diverted trust funds, the entire May 20 transfer consisted of CTTS's own property and is avoidable under section 547. We find that funds deposited into the federal trust account prior to the ninety-day preference period constituted valid trust funds; thus, the portion of the May 20 transfer consisting of such funds cannot be avoided by the trustee as a preference under section 547. However, we also find that the deposit of non-trust funds into the trust account within the ninety-day period constitutes a transfer of the debtor's property subject to the trustee's avoidance powers under section 547. We therefore affirm the district court as to the portion of the May 20 transfer consisting of funds deposited on April 26, 1983 but reverse as to the remainder of the May 20 transfer. ¹

ISSUE PRESENTED

Did the bankruptcy court err in finding that, because funds in a trust account could not be traced to the trust funds originally diverted, the restored funds were property of the debtor and their transfer to the government could be avoided under 11 U.S.C. Sec. 547?

FACTS

CTTS participated in federal student assistance programs authorized under Title IV of the Higher Education Act of 1965 ("title IV"), as amended, 20 U.S.C. Secs. 1070-98 (1982). Funds disbursed under title IV programs are held by the participating institution in trust for the intended student beneficiaries, and the institution may not use or hypothecate such funds for any other purpose. 34 C.F.R. Sec. 668.22 (1982). The Department of Education ("DOE") retains claim to any such trust funds that are not obligated to specific students for the current payment period. See 34 C.F.R. Secs. 668.13, 668.20, 668.83 (1982). CTTS maintained segregated "federal Between September 1982 and January 1983, CTTS wrongfully diverted at least $461,682.02 from one such account at First International Bank ("the FIB account"). The parties agree that CTTS improperly dissipated these funds in general operating expenditures. DOE discovered the diversion of $461,682.02 and, in January 1983, demanded that CTTS restore the funds. On February 4, 1983, CTTS deposited $250,000 in the FIB account and sent DOE a letter stating that the $250,000 deposit was made in partial repayment of the diverted trust funds. DOE continued to demand repayment of the rest of the diverted money. ² On April 26, 1983, CTTS deposited into the FIB account $211,682.02, the balance of the $461,682.02 initially diverted from the trust fund. Both the $250,000 and the $211,682.02 deposits consisted of money raised by CTTS independently of the diverted funds.

trust accounts" for the title IV funds it received.

In May 1983, DOE terminated CTTS's participation in all Title IV programs and demanded the immediate return of all federal trust funds remaining in any CTTS bank account. In response, on May 20, 1983, CTTS transferred back to DOE $372,355.44. All but approximately $100.00 of this sum was transferred by check from the FIB account, and represented the remaining balance in that account. It is this transfer from the FIB account that is directly challenged by the bankruptcy trustee as an avoidable preference under 11 U.S.C. Sec. 547.

STANDARD OF REVIEW

In reviewing a district court's affirmance of a bankruptcy court decision, this court's role is essentially the same as the district court's; findings of fact are reviewed under the "clearly erroneous" standard, and conclusions of law are reviewed de novo. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986).

DISCUSSION

A bankruptcy trustee may avoid a transfer of property of the debtor if it was: (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt; (3) made while the debtor was insolvent; (4) made on or within ninety days before the date of the filing of the petition; and it (5) enables such creditor to receive more than it would receive if the transfer had not been made and the debtor's estate was liquidated according to the provisions of the Bankruptcy Code. 11 U.S.C. Sec. 547(b) (1982); Danning v. Bozek (In re Bullion Reserve of North America), 836 F.2d 1214, 1217 (9th Cir.1988), cert. denied, 486 U.S. 1056, 108 S.Ct. 2824, 100 L.Ed.2d 925 (1988). ³ In order to avoid a transfer as a preference under section 547, the trustee must also establish that the property involved was property of the debtor such that the transfer diminishes the fund from which bankruptcy creditors may be paid. Sierra Steel v. S. & S. Steel Fabrication (In re Sierra Steel, Inc.), 96 B.R. 271, 273 (Bankr. 9th Cir.1989); Shaw Industries v. Gill (In re Flooring Concepts, Inc.), 37 B.R. 957, 961 (Bankr. 9th Cir.1984). The government maintains that the challenged transfer involved federal funds held in trust by CTTS, and that, therefore, the bankruptcy court erred in finding that the funds transferred were property of CTTS. ⁴

Bankruptcy law does not view property held in trust by the debtor as property of the estate available for general Whether a trust has been established is generally a question to be resolved under the law of the state that is the situs of the trust fund. B.I. Financial, 854 F.2d at 354; Elliott, 356 F.2d at 753 (citing Jaffke v. Dunham, 352 U.S. 280, 281, 77 S.Ct. 307, 308, 1 L.Ed.2d 314 (1957)). Because all of CTTS's federal trust accounts, including the FIB account, were located in California, we apply California law in this case.

                creditors. 5   Generally, property is only considered property of the debtor for purposes of section 547 if its transfer would deprive the estate of something which could be used to satisfy the claims of creditors.  Danning, 836 F.2d at 1217.    Property that the debtor holds in trust at the time the debtor files its bankruptcy petition is excluded from the bankruptcy estate and thus is not property of the debtor for purposes of section 547. 6   United States v. Whiting Pools, Inc., 462 U.S. 198, 206 n. 10, 103 S.Ct. 2309, 2314 n. 10, 76 L.Ed.2d 515 (1983) (obiter dictum );  B.I. Financial Services Group v. Altura Partnership (In re B.I. Financial Services Group, Inc.), 854 F.2d 351, 354 (9th Cir.1988)
                

Under California law, money deposited back into the FIB account became federal trust funds. Where a trustee commingles trust funds with individual funds, dissipates the money, and then subsequently deposits individual funds into the trust account, the subsequent deposits become a part of the trust fund, and the beneficiary is entitled to treat them as such without proving express intent on the part of the trustee to replace the dissipated funds. Church v. Bailey, 90 Cal.App.2d 501, 504, 203 P.2d 547 (1949); see also Mitchell v. Dunn, 211 Cal. 129, 134, 294 P. 386 (1930) (where trustee deposits personal funds in a partially dissipated trust account, there is a strong presumption that it is the trustee's intention to make the trust fund whole). It has also been held that, even where a trust fund has been dissipated, the trust can be revived by subsequent deposits that are specifically intended to achieve this purpose. Alioto v. United States, 593 F.Supp. 1402, 1411 (N.D.Cal.1984) (citing In re Gottfried Baking Co., 312 F.Supp. 643, 645 (S.D.N.Y.1970)). ⁷ In this case, the trust fund in question was dissipated by CTTS's wrongful diversion of the title IV program funds. CTTS subsequently made two deposits by way of restitution for the initial diversion. In its correspondence with DOE, CTTS manifested the intent to restore the trust fund. Thus, under both Church and Alioto, the repayments made by CTTS on February 4 and April 26, 1983 effectively became trust funds upon their deposit.

Kupetz contends, however,...