In re First Fidelity Financial Services, Inc., Bankruptcy No. 82-00637-BKC-JAG
| Decision Date | 18 October 1983 |
| Docket Number | Bankruptcy No. 82-00637-BKC-JAG,82-0591-BKC-JAG-A.,Adv. No. 82-0417-BKC-JAG |
| Citation | 36 BR 508 |
| Parties | In re FIRST FIDELITY FINANCIAL SERVICES, INC., Debtor. Willa SCHIFTER, Plaintiff, v. FIRST FIDELITY FINANCIAL SERVICES, INC., Defendant. In re FIRST FIDELITY FINANCIAL SERVICES, INC., Debtor. Abe A. SCHULTZ, Plaintiff, v. A.W. BECK, Trustee, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Chad P. Pugatch, Cooper, Shahady, Frazier & Pugatch, Fort Lauderdale, Fla., for trustee.
A.W. Beck, Plantation, Fla., trustee.
Steven Friedman, Britton, Cohen, Kaufman & Schantz, P.A., Miami, Fla., for Abe A. Schultz.
The cases of Willa Schifter versus First Fidelity Financial Services and Abe Schultz versus the trustee have many factual differences, but ultimately turn on the same legal issue: whether or not a constructive trust can be imposed by this bankruptcy court in favor of these investors on property of the estate. Under the facts of the bankruptcy proceeding and the particular facts which these plaintiffs have been able to prove, the court concludes that the plaintiffs do not prevail.
Willa Schifter paid First Fidelity Financial Services $17,000 for an investment in a mortgage, with the stipulation that she be allowed to approve the specific mortgage before the assignment of it to her. She personally dealt with individuals at Balogh Securities. There was conflicting testimony about whether or not Balogh had commenced a merger with the debtor, but the evidence is clear that the Balogh personnel were acting as agents for First Fidelity in this transaction, and that the representations they made to Ms. Schifter were authorized by First Fidelity. Ms. Schifter's check for $17,030, ($30 was for the brokerage commission to Balogh,) was made payable to the First Fidelity Trust Account (Plaintiff's Exhibit No. 1).
The testimony of several witnesses, both pre-bankruptcy employees and post-bankruptcy management, make it clear that First Fidelity had a trust account for the deposit of funds received from investors. In fact, the title of the account was "Trust Account", as shown on bank statements (Plaintiff's Exhibit No. 7). However, the testimony and evidence also makes clear that the account was not treated exclusively as a trust fund, but was more nearly used as a general operating account. The testimony of William Planes, then chief operating officer of the debtor-in-possession and Defendants' Composite Exhibit D reveal that checks were written on the "trust" account not only to fund mortgages, but also for insurance, recording, intangible and documentary stamp taxes, brokerage commissions, payments on first mortgages (those senior to the First Fidelity mortgages), "interest" to investors whether or not mortgages had been assigned to them, mortgage payments forwarded to assignees, "consulting fees", payments to office personnel and substantial personal loans to Barry Nelson, then an officer of the debtor-corporation. The sources of funds to the account were also varied, so that other of the debtor's funds were commingled with the investors' funds.
A letter from Murray Stein, who had signed as vice-president of First Fidelity, acknowledged on behalf of First Fidelity the receipt of $17,000 from plaintiff Schifter, informed Ms. Schifter that the funds were deposited in the trust account, and told her that they could be refunded within seven days until placed in a mortgage (Plaintiff's Exhibit No. 4). After a month, when she still had not received an assignment of mortgage, Ms. Schifter wrote, on March 24, 1982, asking for the return of her funds (Plaintiff's Exhibit No. 5). Her investment was not returned to her, but she did receive a check for $155.60 dated March 25, 1982 (Defendants' Exhibit B). This was for eighteen days' "interest" even though her money had not yet been placed in a mortgage.
Ms. Schifter's money was deposited on March 1, 1982, as shown on the deposit tickets (Plaintiff's Exhibit No. 6) and the bank statement (Plaintiff's Exhibit No. 7). On March 1, 1982 the ending balance in the "trust" account was $614,905.08. On April 8, 1982, the day before the bankruptcy, the closing balance was $98,887.64.
In addition to this account the debtor held real property and numerous mortgages which had not been assigned to other investors. At the time of the Schifter trial accountants for the debtor-in-possession had only begun to piece together the many financial and property records which had been left in shambles, both physically and from an accounting standpoint. In a subsequent hearing one of the accountants testified that the interrelated debtor companies had innumerable bank accounts which were opened and closed on an almost daily basis. Apparently funds were freely transferred among bank accounts, in and out of mortgages, and to and from investors.
There was no precise evidence as to other claims to the trust account. However, Planes testified that there were "a couple hundred" people in a position similar to Schifter in terms of having paid in investment funds without receiving an assignment of mortgage. He estimated that their claim totaled over $1,000,000.
Plaintiff Schifter's complaint sought modification of the automatic stay to permit her to proceed against the debtor in state court, and that relief was denied (C.P. No. 25).
The case of plaintiff Abe Schultz was submitted on stipulated facts, including a stipulation to the facts proved in the Schifter adversary case. Schultz is in a similar position to plaintiff Schifter in that he gave funds to First Fidelity and received no assignment of mortgage in return. In his case, however, there was an additional problem. He initially gave a check for $10,000 to Murray Stein on March 5, 1982. Then on March 7, 1982 he gave a second check to the debtor, with the understanding that the first would be returned. Instead, the debtor deposited both. Schultz seeks to have a trust impressed at a minimum as to one $10,000 amount because of the mistake which occurred, and because plaintiff had no intention of investing more than $10,000.
Each plaintiff here claims to be more than a mere creditor of the estate. Each seeks to have the court impose a trust in his or her favor in order that the property be excluded from the debtor's estate, as property in which the debtor has only bare legal title, and not the equitable interest pursuant to 11 U.S.C. § 541.
From the testimony of witnesses in the Schifter trial, the court concludes that an express, although unwritten, trust existed in favor of each investor upon delivery of funds by the investor to First Fidelity. First Fidelity had established a trust account, and the court finds that it was the intention of all parties that investment funds were to be placed in that account and held in trust until used to fund or purchase mortgages which would be simultaneously assigned to the investors.
The difficulty for investors is that the fund trustee, the debtor, failed to preserve the trust funds intact and separate from its own funds. This breach of fiduciary duty having occurred, the express trust no longer exists. Instead, the investors would have, at most, an interest in a constructive trust. There are many bases for the imposition of a constructive trust under state law, including fraud. However, a classic reason for the creation of a constructive trust is the misappropriation, misuse, conversion or commingling of trust property by a trustee (here, the debtor), so this court need not look for other grounds. See 33 Fla.Jur. "Trusts" § 72-78, and cases cited therein.
The reason for imposing a constructive trust is to avoid unjust enrichment to the recipient of the windfall, and to do equity for the party whose property has been misused. But a desire to do equity alone is not enough. The essence of the equitable remedy of imposing a constructive trust, as opposed to the legal remedy of damages, is the concept that the very property in question can be returned to its rightful owner. The law gradually broadened so that proceeds of the original property may be pursued, e.g., Sewell v. Sewell Properties, Inc., 30 So.2d 361, 159 Fla. 570 (1947) but the basic requirement of tracing the original property, albeit in its various forms, remains an element of proof for constructive trusts. Myers v. Matusek, 125 So. 360, 98 Fla. 1126 (1929). Likewise, a consideration of the equities to all parties concerned is involved; the court may not focus solely on the equities from the standpoint of the person wronged. The precise conflict faced by this court was summarized in Matusek, 125 So. at 365:
. . . the right of a cestui que trust to reclaim trust funds in specie or impress the trust upon other property in the hands of the trustee . . . is founded on the right of property and not on the ground of compensation for its loss, and hence the beneficiary of a trust fund is not entitled, solely because of the character of his claim, to the payment of the same in full out of the assets of the insolvent trustee\'s estate, to the exclusion of general creditors. On the other hand, general creditors have no right to have their claims paid out of property or its proceeds which never actually belonged to the insolvent trustee, if they can be sufficiently identified or traced as to justify their separation from the corpus of the trustee\'s estate, and their return, in specie or in value, to the owner.
Although the tracing requirement is universally accepted, the interpretation of "tracing" varies among courts in cases where there was a commingling of the funds of one or more trust beneficiaries and the funds of the trustee. In many cases the "tracing" amounts to the application of legal presumptions, although it may not be labeled as such.
A summary of many such cases is found in the...
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