Dixon v. Bennett

• Decision Date: 14 October 1987
• Docket Number: No. 171,171
• Citation: 72 Md.App. 620,531 A.2d 1318
• Court: Court of Special Appeals of Maryland
• Parties: , Bankr. L. Rep. P 72,110 Phyllis Sachs DIXON v. Craig A. BENNETT, et al. Sept. Term 1987.

Page 620

72 Md.App. 620

531 A.2d 1318, Bankr. L. Rep. P 72,110

Phyllis Sachs DIXON v. Craig A. BENNETT, et al.

No. 171 Sept. Term 1987.

Court of Special Appeals of Maryland.

Oct. 14, 1987.

Harvey M. Lebowitz (Diana Motz, Jay A. Shulman, Ellen L. Hollander and Frank, Bernstein, Conaway & Goldman, on brief), Baltimore, for appellant

Harold B. Murnane, III (Murnane & O'Neill, on brief), Glen Burnie, for appellees.

Argued before GILBERT, C.J., and BLOOM and ROSALYN B. BELL, JJ.

ROSALYN B. BELL, Judge.

Phyllis Sachs Dixon, appellant, filed suit in the Circuit Court for Anne Arundel County against Craig A. Bennett and CBZ Construction and Management Company. Her complaint was later amended to include A.A. Utility Operations Company. Appellant, an unsecured creditor of Richard B. Rice, alleged that transfers made by Rice to Bennett, CBZ and Utility were fraudulent under the Maryland Uniform Fraudulent Conveyance Act (MUFCA). She sought to recover those assets fraudulently conveyed or damages.

Appellant arrived at her position as an unsecured creditor in a convoluted way. Campanelli, Inc. held a one-half interest in Wincamp Partnership. Campanelli assigned all its rights, title and interest in Wincamp to Rice and W. Dudley Dixon, Trustee. The general partners of Wincamp, Rice, W. Dudley Dixon, Trustee, and William E. Dixon, ¹ agreed to indemnify Campanelli, Inc. from all obligations, damages or claims arising out of Wincamp. When Wincamp failed, Campanelli, Inc. was required to pay in excess of $450,000 and at argument was still liable for an additional sum of approximately $400,000. In accordance with the indemnity agreement, that liability created a claim in favor of Campanelli, Inc. against Rice, W. Dudley Dixon, Trustee, and William E. Dixon.

Rice filed a petition for relief under Chapter 7 of the Bankruptcy Code in October of 1982. The permanent bankruptcy trustee was appointed in November of 1982. Rice's discharge was granted in March of 1983. Approximately five weeks later, Campanelli, Inc. assigned the claim against Rice, W. Dudley Dixon, Trustee, and William E. Dixon to appellant for an unspecified consideration. Neither Campanelli, Inc. nor appellant, the assignee, elected to file a claim as an unsecured creditor in the distribution of Rice's bankruptcy estate. The parties agree that the trustee's right to sue to avoid fraudulent transfers expired in November of 1984. Thereafter, appellant brought suit claiming, pursuant to the MUFCA, Md.Com.Law Code Ann. §§ 15-204, 15-205, 15-206, 15-207 (1975, 1983 Repl.Vol., 1987 Cum.Supp.), that Rice or corporations or entities under his direction and control had fraudulently transferred assets to Bennett, CBZ and Utility. ²

Appellees denied appellant's claim that they had received any fraudulent conveyances from Rice or any Rice entities. They moved for summary judgment contending that appellant's state law claim was barred because the bankruptcy trustee had the exclusive right to bring an action to set aside any alleged fraudulent transfers by Rice. The Circuit Court for Anne Arundel County agreed and granted summary judgment in favor of Bennett, CBZ and Utility.

During the discovery stage of the dispute, appellant sought an order to compel Bennett, Rice's accountant and an appellee here, to produce certain documents. The order On appeal, appellant contests both the granting of the summary judgment and the motion for a protective order. Appellant claims that the failure of the bankruptcy trustee to avoid fraudulent transfers within the two-year period provided by federal bankruptcy law does not preclude an unsecured creditor, whose applicable state limitations has not expired, from subsequently bringing a state cause of action against the transferee of property fraudulently conveyed by the debtor. Appellant also claims that the accountant-client privilege does not protect documents either created by or disseminated to third parties or documents prepared in anticipation of a fraudulent scheme in which the accountant participated as a principal. We hold that appellant is not barred from bringing a cause of action based on the state fraudulent conveyance laws once the federal bankruptcy trustee is precluded from suing to recover assets fraudulently transferred by the debtor. In addition, we hold that the Maryland accountant-client privilege cannot be invoked to avoid production of documents prepared in contemplation of a fraud in which the accountant allegedly participated.

                was granted.   Bennett then moved for a protective order.   That motion was granted based upon the accountant-client privilege.   On a motion to reconsider, the court conducted, with counsel present, four in camera hearings.   Appellant's request that a court reporter be present at those hearings was denied.   The court then granted appellees' protective order finding that a majority of the documents were privileged because they were used, directly or indirectly, by Bennett in performing accounting work or services
                

THE BANKRUPTCY CODE

The Bankruptcy Code has been amended several times since its most recent enactment in 1978. Those changes have not substantively affected the application of the Code provisions relevant to this case. Although this case was subject to the 1982 amendments, we use in this opinion the 1978 Code as a reference point. ³

Under § 541 of the 1978 Bankruptcy Code, 11 U.S.C. § 541 (1978), the filing of a petition in bankruptcy creates an estate made up of all the property of the debtor. Any action against property of the estate is automatically stayed under § 362 of the Bankruptcy Code, 11 U.S.C. § 362 (1978), until such time as the property is no longer property of the estate.

Section 541 defines "property of the estate" as all legal or equitable interests of the debtor in property. 11 U.S.C. § 541(a)(1) (1978). Here, Rice retained an equitable interest in any property fraudulently transferred since equitable title in property fraudulently transferred remains in the transferor. In re Mortgageamerica Corp., 714 F.2d 1266, 1275 (5th Cir.1983). Section 541(a)(3) of the Bankruptcy Code provides that "interest in property that the trustee recovers under [his avoidance powers]" becomes property of the estate. 11 U.S.C. § 541(a)(3) (1978) (emphasis added). Neither appellant nor appellees challenge the lower court's finding that the property presently being held by appellees was never recovered by the trustee and is therefore not property of the estate.

The trustee possessed as distinct property of the estate the "right to sue" to recover fraudulently transferred assets because the phrase "all legal and equitable interests" also includes "rights of action." In re Mortgageamerica Corp., 714 F.2d at 1274. The trustee's right to pursue an action to recover transferred property is governed by §§ 548 and 544(b) of the Bankruptcy Code. 11 U.S.C. §§ 548, 544(b) (1978). Section 548 is the federal fraudulent transfer avoidance power. Section 544(b) vests in the trustee the rights of unsecured creditors of the debtor. Both sections are subject to the time limitations of 11 U.S.C § 546(a) (1978). Section 546(a) limits the bringing of an action or proceeding under either §§ 548 or 544 to the earlier of two years after the appointment of a trustee or the time the case is closed or dismissed. § 546(a).

In the case sub judice, the permanent trustee was appointed on November 15, 1982. Thus, the trustee had until November 15, 1984 to bring suit to set aside the fraudulent conveyances. Appellees concede that, because the trustee failed to take action against the conveyance within the time period proscribed under § 546(a), the trustee was barred under that statute from bringing suit to recover the property for the estate.

Appellees do claim that the lower court was correct in its finding that the power to set aside fraudulent transfers rests exclusively with the bankruptcy trustee. Therefore, they argue that § 546(a), which after two years bars the trustee from bringing suit to avoid the transfers, also precludes any attempt by an unsecured creditor to recover the fraudulently transferred assets. With this we disagree.

--Trustee's Statute of Limitations Before 1978--

The precept of the trustee's statute of limitations, now codified in § 546(a), can be traced back to the Bankruptcy Act of 1867. A brief examination of the textual and substantive changes made between 1867 and 1978 reveals that, under pre-1978 bankruptcy law, the trustee's limitation period was coterminous with or greater than the statutory period allowed for creditors under state statutes of limitations. Thus, the unsecured creditor's right to set aside fraudulent conveyances would always be preempted by the trustee's right.

The Bankruptcy Act of 1867 vested in the assignee title to "all the property conveyed by the bankrupt in fraud of his creditors." Bankruptcy Act of 1867, Ch. 176, 14 Stat. 517, § 14, repealed by Act of June 7, 1878, 20 Stat. 99. ⁴ Under § 2 of the Act, the right to avoid fraudulent transfers was vested in the assignee for a period of two years, after which all rights to file suits affecting property were barred. This bar encompassed the right of creditors to sue. Section two of that Act provided:

"[N]o suit at law or in equity shall in any case be maintainable by or against such assignee, or by or against any person claiming an adverse interest, touching the property and rights of property aforesaid, in any court whatsoever, unless the same shall be brought within two years from the time the cause of action accrued, for or against such assignee...."

Bankruptcy Act of the Act of 1867, § 2.

Under that provision, all suits "by ... the assignee" or "against any person claiming an adverse interest, touching the property and rights of property" not brought within the two-year period were forever barred. Because the assignee had the exclusive right to recover fraudulent property during the...