In re Earl Roggenbuck Farms, Inc.

Decision Date08 August 1985
Docket NumberBankruptcy No. 84-09233 (Formerly No. 82-00280),Adv. No. 84-9067 (Formerly No. 84-9009).
Citation51 BR 913
PartiesIn re EARL ROGGENBUCK FARMS, INC., Debtor. Richard S. COOK, Trustee, Plaintiff, v. UNITED STATES of America, acting Through the COMMODITY CREDIT CORPORATION, and Earl S. Roggenbuck, individually, Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Michigan

COPYRIGHT MATERIAL OMITTED

Lambert, Leser, Hebert, Dahm, Giunta & Cook, P.C. by Mark Smith, Bay City, Mich., for defendant Roggenbuck.

Hertzberg, Jacob & Weingarten, P.C. by JoAnn C. Stevenson, Detroit, Mich., for plaintiff Trustee.

Robert D. Martinez, Asst. U.S. Atty., Bay City, Mich., for defendant U.S.A.

MEMORANDUM OPINION

ARTHUR J. SPECTOR, Bankruptcy Judge.

I. DESCRIPTION OF THE PROCEEDINGS

This adversary proceeding was filed by the former Chapter 11 debtor Earl Roggenbuck Farms, Inc. and its principal shareholder, Earl Roggenbuck, on January 19, 1984. On March 27, 1984, Richard S. Cook was appointed Chapter 11 trustee. After the bankruptcy case was converted to Chapter 7 on June 15, 1984, and Mr. Cook was appointed the Chapter 7 trustee, he became a party plaintiff and Earl Roggenbuck was redesignated as a party defendant. This occurred on September 12, 1984, when the trustee filed his first amended complaint.1 The trustee seeks to recover from the Commodity Credit Corporation (CCC) proceeds of corn which he alleges was the property of the debtor corporation but which the CCC took and sold in satisfaction of a loan it made to Earl Roggenbuck personally. On February 4, 1985, the trustee filed a motion for partial summary judgment. On March 13, 1985, the CCC filed a motion for partial summary judgment. On April 11, 1985 the plaintiff filed a second amended complaint, and on April 18, filed a second motion for partial summary judgment and a motion for dismissal of a "third-party" claim filed by the CCC against the debtor as part of its answer to the second amended complaint; these motions were scheduled to be heard at one hearing. On April 29, 1985, the attorney for Roggenbuck filed an answer to the cross-claim raised by the CCC in its answer to the second amended complaint; this pleading, filed on behalf of both Roggenbuck and ostensibly the debtor corporation, requested that both the third-party complaint and the cross-claim be dismissed.2

Shortly before the hearing on the various motions was to take place, the parties informed the Court that a settlement was likely, but because local counsel for the CCC did not have the authority to finalize the agreement, the offer had to be submitted to Washington, D.C. Since the government's decision could not be expected for four to six weeks, and since a settlement would inure to the benefit of all the parties, the hearing was adjourned and re-scheduled for June 5, pending approval or rejection of the agreement.

In late May the parties received word that the settlement offer had been rejected, and the instant hearing was re-set. No affidavits or other admissible documents in opposition to the trustee's motion had been filed by the CCC by the time the hearing commenced, although it had filed a memorandum of law with regard to its answer and affirmative defenses in response to the plaintiff's second amended complaint. In the absence of any evidence contravening the plaintiff's proofs, the Court was on the verge of granting the trustee's motion when the CCC produced the affidavits of two of its agents, which bore the execution date of April 19, 1985. During the 48-day period between their execution and the hearing, the affidavits had been in the possession of the government's attorney. The plaintiff immediately objected to the admission of the affidavits on the grounds that they were untimely filed pursuant to F.R. Civ.P. 56(c) and 6(d).3 As it was apparent that resolution of this procedural question could well be determinative of all of the substantive motions (i.e., if the affidavits were excluded, the plaintiff's motion for summary judgment would be granted; if they were admitted, the CCC could probably withstand the motion, and the matter would proceed to trial), the matter was taken under advisement and the parties were asked to brief the issue. Having read those briefs and given the matter further consideration, we hold that the affidavits should not be admitted.

The affidavits are without a doubt material, and indeed, critical to the government's case; they support the CCC's only claim that would entitle it to retain the proceeds herein. The bare bones of that claim are contained in the government's third-party complaint against Earl Roggenbuck Farms, Inc. It contends that Earl Roggenbuck obtained money from the government by means of fraudulent misrepresentations, i.e., that he led the agents of the CCC to believe that the corn pledged as security for the instant loan transaction belonged to him personally rather than to the debtor corporation in which he is the primary shareholder and officer. The government then argues that the traditional elements required for the establishment of a constructive trust exist here. It alleges that the corporate debtor was the beneficiary of the ill-gotten loan because those funds were used to pay off another lien on its corn. It further contends that when the debtor filed its petition for bankruptcy relief, the estate succeeded to the debtor's interest in the corn, subject to any defenses which could be asserted against the debtor. The CCC eventually hopes to prove that the fraudulently obtained funds are traceable directly to the proceeds of the corn and, since the corporation (and therefore the estate) was a transferee that gave no consideration for the property, those proceeds should be imposed with a constructive trust.

The government's affirmative defense raises intriguing issues regarding the interplay between the trustee's "strong arm" lien avoidance powers and the rights of creditors holding an equitable claim under state law. By virtue of 11 U.S.C. § 544(a), of course, the trustee is empowered to avoid any unsecured lien on property of the estate; Congress granted this power to the trustee to enable him or her to collect all assets which should be available for distribution to creditors. Moreover, to the extent that the trustee utilizes § 544(a) to enhance the value of estate property, the party seeking to prevent avoidance of its interest may not raise any misconduct or malfeasance by the debtor as a defense. In re Gustav Schaefer Co., 103 F.2d 237 (6th Cir.1939), cert. denied, 308 U.S. 579, 60 S.Ct. 96, 84 L.Ed. 485 (1939); In re Best Pack Seafoods, Inc., 29 B.R. 23 (Bankr.D.Me.1983). The trustee, in his capacity as trustee, is not estopped by the debtor's misconduct. In re Great Plains Western Ranch Co., Inc., 38 B.R. 899, 11 B.C.D. 894 (Bankr.C.D.Cal.1984).

This does not mean, however, that the trustee has an unfettered right to all property held or claimed by the debtor regardless of the means, fair or foul, by which the debtor acquired that property. The trustee's powers in § 544(a) must be read in conjunction with 11 U.S.C. § 541(d), which states:

Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor\'s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.

The effect of this provision is that the interest in property to which the trustee succeeds can be no greater than that which the debtor itself had. Georgia Pacific Corp. v. Sigma Service Corp., 712 F.2d 962 (5th Cir.1983); 4 Collier on Bankruptcy, ¶ 541-13, 541-66 (15th ed. 1983). Thus, if a creditor holds an equitable interest in property, the trustee may not avoid that interest by resorting to § 544(a). In re Quality Holstein Leasing, 752 F.2d 1009, (5th Cir.1985).

A constructive trust is a classic example of an equitable interest in property. The party requesting such relief admits that the legal title to property may be in another; but because the property was wrested from the movant by improper means, a court of equity should invoke a legal fiction and declare that the current owner holds only bare legal title for the benefit of the injured party. Arndt v. Vos, 83 Mich.App. 484, 268 N.W.2d 693 (1978); 22 M.L.P., Trusts § 51 (West, 1958).4 Courts have recognized that a creditor of the estate who can prove the elements necessary to establish a constructive trust under state law may withstand the trustee's attempts to avoid the creditor's interest. In re Quality Holstein Leasing, supra.

Thus, the CCC's theory does have some merit as a plausible affirmative defense to the trustee's demand for return of the proceeds if it can prove the existence of facts which would give rise to a constructive trust under Michigan law. But before the government may have an opportunity to make its case, it must survive the trustee's motion for summary judgment.

II. EXCUSABLE NEGLECT

In attempting to respond to the trustee's objection to admission, the government offered no extraordinary circumstances which precluded it from submitting the affidavits to the Court and opposing counsel. Instead, the failure to do so was claimed to be totally inadvertent. The Assistant U.S. Attorney candidly admitted that he was theretofore ignorant of the requirement that affidavits be submitted at least one day prior to a hearing and that had he been aware of it, he most certainly would have complied. Counsel further represented that the last-minute production of the affidavits was in no way intended to surprise the plaintiff. The...

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