In re First Capital Mortg. Loan Corp.

• Decision Date: 24 April 1987
• Docket Number: No. 86-C-0622J.,86-C-0622J.
• Citation: 99 BR 462
• Parties: In re FIRST CAPITAL MORTGAGE LOAN CORPORATION, a Utah corporation, Debtor. RESEARCH-PLANNING, INC., a Utah corporation, Plaintiff-Appellant, v. Roger G. SEGAL, Trustee, Defendant-Appellee.
• Court: U.S. District Court — District of Utah

99 B.R. 462 (1987)

In re FIRST CAPITAL MORTGAGE LOAN CORPORATION, a Utah corporation, Debtor RESEARCH-PLANNING, INC., a Utah corporation, Plaintiff-Appellant, v. Roger G. SEGAL, Trustee, Defendant-Appellee.

No. 86-C-0622J.

United States District Court, D. Utah, Central Division.

April 24, 1987.

Claren Spencer, Spencer & Associates, Salt Lake City, Utah, for plaintiff-appellant.

Roger Segal, Cohne, Rappaport & Segal, Salt Lake City, Utah, for defendant-appellee.

MEMORANDUM OPINION AND ORDER

JENKINS, Chief Judge.

The issue in this bankruptcy appeal is whether money that the debtor received as an escrow agent, deposited in its general account and used to pay its debts should be returned to the escrow depositor after the bankruptcy trustee recovered the payments as preferential transfers.

The court heard arguments on this appeal on December 1, 1986. Claron C. Spencer appeared on behalf of Research-Planning, the plaintiff-appellant, and John T. Morgan represented Roger G. Segal, the bankruptcy trustee and defendant-appellee. The court reserved on the matter at that time and later allowed the plaintiff to file a supplemental memorandum. Now, after considering the arguments of counsel and the pertinent legal authorities, the court enters this memorandum opinion and order affirming the judgment of the bankruptcy court.

I.

The relevant facts are not disputed. In August 1980 Research-Planning agreed to loan $260,000 to R.K. Buie & Associates to enable Buie to acquire some property. The parties to the loan agreement executed a written escrow agreement by which they agreed to employ the debtor, First Capital Mortgage Loan Corporation, to act as escrow agent. Research-Planning gave First Capital a cashier's check for $260,000 made payable to the order of First Capital and Buie. The check was endorsed by both payees, and First Capital deposited it in its general account at the Bank of Utah. Some of the money went to cover two checks First Capital had written on its general account: the first, in the amount of $66,000, was made payable to First Security Bank of Utah or Bank of Utah and was endorsed "Credit to the Account of Named Payee" by the Bank of Utah; the second, in the amount of $2,489.66, was made payable to and endorsed by First Security Bank of Utah.

Some six weeks later a petition for involuntary bankruptcy was filed against First Capital. On October 15, 1980, an order for relief was entered, and Roger G. Segal was appointed trustee of the bankruptcy estate. He then brought two adversary proceedings against First Security Bank to recover as unlawful preferences the money it had received. In settlement of those actions, the trustee recovered $62,489.66. Research-Planning brought this adversary proceeding to recover that money from the trustee, claiming that he held the money subject to a trust in its favor. The bankruptcy court rejected Research-Planning's claim, relegating Research-Planning to the status of an unsecured creditor whose remedy was to share in the distribution of the debtor's assets along with other unsecured creditors. Research-Planning, Inc. v. Segal (In re First Capital Mortgage Loan Corp.), 60 B.R. 915 (Bankr.D.Utah 1986). This appeal followed.

II.

How the bankruptcy trustee currently holds the money depends in part on the effect of the various transactions by which the money came into his hands.

Research-Planning gave First Capital $260,000 in the form of a cashier's check to hold in escrow. An escrow agent is a fiduciary. 5 Debtor-Creditor Law ¶ 21.03C1 (T. Eisenberg ed. 1986).¹ First Capital had a fiduciary duty to deliver the money to Buie upon Buie's performance of the conditions of the escrow. First Capital breached that fiduciary duty by depositing the cashier's check in its general account with the Bank of Utah. Research-Planning had a claim against First Capital for breach of its fiduciary duty, see 5 Debtor-Creditor Law ¶ 21.03D1 & 2a, but that claim only made Research-Planning an unsecured creditor of First Capital.

Because Research-Planning retained title to the cashier's check, see supra note 1, if the Bank of Utah had kept the check, Research-Planning could have recovered it.² But the bank presumably did not keep the check but presented it to Walker Bank, the drawee, for payment. Walker Bank owned the money it used to pay the check and intended to pass ownership of the money, so the Bank of Utah obtained ownership of the proceeds of the check it collected. Cf. G.G. Bogert & G.T. Bogert, supra note 2, § 476 at 119-20 (a thief acquires title to the proceeds of stolen goods). Because First Capital's deposit of the check into its general account was a general deposit,³ the proceeds of the check technically became property of the bank. See 1 W. Schlichting, T. Rice & J. Cooper, Banking Law § 9.05 (1987). A general deposit is commingled with other money of the bank to form a single fund from which all depositors are paid. Id. §§ 9.021, 9.05 & 9.06. It creates a legal debt between the bank and the depositor; the bank is obligated to pay the amount deposited on the depositor's demand or order, but the depositor has no claim to the specific money deposited. Id. §§ 9.021 & 9.06.

Regardless of who had title to the proceeds of the cashier's check—First Capital or the Bank of Utah—as long as the funds remained in First Capital's general account, they could have been impressed with a constructive trust in favor of Research-Planning. See G.G. Bogert & G.T. Bogert, supra note 2, § 476 at 120; Restatement of Restitution § 160 comment j (1936); id. § 202 & comment g.

But the money did not remain in First Capital's general account. The parties have stipulated that the proceeds from the escrowed check went in part to pay the two checks written to First Security. In paying those checks, the Bank of Utah incurred no liability. Research-Planning, Inc. v. Bank of Utah, 690 P.2d 1130 (Utah 1984). See also Utah Code Ann. § 22-1-9 (1984) (if a fiduciary deposits to his personal credit funds he holds as fiduciary, the depositary bank is not liable to the principal for paying checks drawn on the account unless it has actual knowledge that the fiduciary is breaching his duty or knows such facts that its payment of the checks amounts to bad faith).

Similarly, First Security incurred no liability in receiving the payments. It is undisputed that First Security was a bona fide purchaser of the funds it received, that is, that it gave value for the transfers and had no notice that the deposit and transfers were in breach of First Capital's fiduciary duty as escrow agent. A bona fide purchaser who acquires title to property that would otherwise be subject to a constructive trust takes the property free from such a trust. Restatement of Restitution § 172. Thus, First Security held the funds outright. Research-Planning concedes that it could not have recovered the money as long as First Security held it.

But the money was recovered. The trustee's settlement of the two preference actions brought the money into the bankruptcy estate. The court must now decide who is entitled to it—Research-Planning or First Capital's unsecured creditors generally.

III.

The first question the court must decide is, What did the trustee recover—what the debtor had before the transfer, or what its transferee received?

Ordinarily, what the transferor gives up and what the transferee receives are the same. But this case presents the anomalous situation in which the transfer creates in the transferee a greater interest in the property transferred than the transferor had to convey. Before the transfer, First Capital had no title to the property transferred or, at most, had bare legal title.⁴ After the transfer, however, First Security, as a bona fide purchaser, had both legal and equitable title to the property; its claim to the money was superior to the claims of all the world (with the possible exception of the bankruptcy trustee).

One could argue that all the trustee's actions did was to "avoid," that is, undo, the transfers to First Security, putting the parties in the position they were in before the transfers. Since the trustee succeeds to the debtor's interest in property, the trustee should arguably have no better claim to the money than First Capital would have had before the transfers. Before the transfers, Research-Planning had a better claim to the money than anyone else. See Gulf Petroleum, S.A. v. Collazo, 316 F.2d 257, 261 (1st Cir.1963); Restatement of Restitution § 202 comment c & comment g & illustration 10; G.G. Bogert & G.T. Bogert, supra note 2, § 481 at 275-76. See also 11 U.S.C. § 541 (1982 & Supp. III 1985) (defining property of the bankruptcy estate).⁵ So arguably it should have a better claim to the money now, and the trustee should hold the money subject to its interest.

The court concludes, however, that what the trustee recovered was what First Security —not First Capital—had.

The bankruptcy trustee succeeds "to the rights of the transferee in the avoided transfer. . . ." Staats v. Barry (In re Barry), 31 B.R. 683, 686 (Bankr.S.D.Ohio 1983). See also In re Vermont Fiberglass, Inc., 44 B.R. 505, 511 (Bankr.D.Vt.1984) ("the trustee succeeds to such rights as he may defeat in the hands of the transferee of an avoided transfer"). Because First Security held the money free from any claim of Research-Planning, the trustee recovered the money free from such claims. Cf. Peters v. White County Farm Supply, Inc. (In re Templeton), 1 B.R. 245, 249 (Bankr. E.D.1979) (where property held by husband and wife as tenants by the entirety was transferred to a creditor of the husband and later recovered through a preference action, the trustee held the property free of the wife's interest). See also Elin v. Busche (In re Elin), 20 B.R. 1012, 1016-17 (D.N.J.1982) (assets recoverable under 11 U.S.C. § 544 become property of the bankruptcy estate notwithstanding third persons' equitable interests in the...