In re Foodsource, Inc.
| Decision Date | 16 July 1991 |
| Docket Number | Bankruptcy Appeal No. C-90-2336 EFL. |
| Citation | 130 BR 549 |
| Court | U.S. District Court — Northern District of California |
| Parties | In re FOODSOURCE, INC., Debtor. In re FOODSOURCE SALES CORPORATION, Debtor. Charles E. SIMS, et al., Plaintiffs, v. Charles DUCK, et al., Defendants. |
Timothy A. Colvig, Lempres & Wulfsberg, Oakland, Cal., for Charles E. Sims, trustee.
David Bordon, Sedgwick, Detert, Moran & Arnold, San Francisco, Cal., for Fidelity and Deposit Co. of Maryland.
Peter C. Haley, Knecht, Haley, Lawrence & Smith, San Francisco, Cal., for Trans-America Ins. Co.
This case involves a dispute between sureties and a bankruptcy trustee over liability for certain defalcations that Charles E. Duck committed during his term as Chapter 11 trustee in the FoodSource consolidated bankruptcy proceedings. It comes on appeal from an interlocutory order of the federal bankruptcy court for the Northern District of California. This Court has jurisdiction pursuant to 28 U.S.C. section 158(a).
The issue on appeal is whether a surety that issues a Chapter 11 bankruptcy trustee bond subsequent to the filing of the initial trustee bond is liable for defalcations committed prior to the time it issued the latter bond. Based upon its review of the relevant bankruptcy statutes, bankruptcy rules, common law decisions, and the circumstances of this case, the Court affirms the decision of the bankruptcy court in part, reverses in part, vacates in part, and remands the case for further findings in accordance with this Opinion.
On January 29, 1985, Mr. Charles E. Duck was appointed Chapter 11 trustee in the consolidated bankruptcy proceedings of FoodSource, Inc. and FoodSource Sales Corporation. Over the course of the next five days, Insurance Company of North America ("INA") issued two trustee bonds as surety for the performance of Duck's duties as trustee, pursuant to Bankruptcy Code section 322. Their aggregate sum was $67,500.
About two years later, the first surety whose liability is now at issue entered the picture. On December 18, 1987, Fidelity Deposit Company of Maryland ("F & D" or one of the "Sureties"), issued trustee bonds, in aggregate amount of $3 million, as surety to Duck as trustee in the FoodSource proceedings. They were filed and approved by the bankruptcy court twelve days later. They stated, in pertinent, part:
"Charles Duck . . . shall obey such orders as said Court may make in relation to said trust, and shall faithfully and truly account for all the moneys, assets, and effects of the estate of the said Bankruptcy which shall come into his hands and possession and shall in all respects faithfully perform all his official duties as said trustee. . . . "
According to Judge Jaroslovsky, Duck posted the F & D bonds in conformity with the bankruptcy court's requirement, at that time, that a trustee's bond be increased to match any increases in cash brought into the estate. See Haley, et al. v. Duck, et al., A.P. No. 1-89-0248, memo. of decision at 1 . A few months earlier, in an order dated September 28, 1987, Judge Jaroslovsky had authorized Duck to sell some assets of the FoodSource estate that would result in the receipt of approximately $1.8 million in cash.
The second surety whose liability is at issue became involved about two years later. On February 17, 1989, Transamerica (one of the "Sureties") issued two bonds in the aggregate amount of $2 million as surety for Duck as trustee in the Food-source bankruptcy proceeding. Their pertinent language was identical to that of the F & D bonds quoted supra.1
Duck embezzled extensively from the FoodSource bankruptcy estate during his term as trustee. He resigned the position on or about May 16, 19892 and plead guilty to two counts of embezzlement by trustee in violation of 18 U.S.C. section 153 on January 19, 1990.
It is undisputed, based on financial reviews conducted by certified public accountants, that Mr. Duck's modus operandi was to commingle funds from various bankruptcy estates, including funds of FoodSource at least as early as April, 1987, in a separate account at the Exchange Bank. Although he did make payments out of the Exchange Bank account on behalf of FoodSource bankruptcy estates, he also siphoned off significant sums from the commingled Exchange Bank account either to personal accounts or for personal use.
Two certified public accountants have prepared financial reviews or audit reports that examine the financial activity of the FoodSource bankruptcy estate during Duck's trustee term. One report, prepared by Mr. Larry Carr, a certified public accountant retained by the successor trustee, indicates that Duck, prior to the date the Sureties' bonds came on, disbursed FoodSource funds to professionals without court approval, a potential violation of 11 U.S.C. section 327. In addition, the report indicated that the amount of FoodSource bankruptcy estate funds paid in that could not be accounted for at the end of Mr. Duck's term was, at a minimum, $1,581,000. A second audit report, conducted by Mr. Don VanLandingham, Sr., a certified public accountant retained by the United States Trustees, indicates an identical shortfall. Additionally, it indicates that: (1) Duck commingled funds from the FoodSource bankruptcy estate with those of other bankruptcy estates in the Exchange Bank account and (2) misappropriated amounts greater than $1,000 dollars from the Exchange Bank account to his personal account or use at least twenty-five times prior to the issuance of the Sureties' bonds at issue.
On December 14, 1989, the successor trustee of the FoodSource estate filed a complaint for, inter alia, breach of their respective bond contracts by INA and the Sureties for failure to pay unconditionally the entire amount of $1,581,000 embezzled by Duck. F & D and Transamerica had made payments to the successor trustee of $667,599.72 and $231,862.40, apparently upon the assumption that they were not liable for defalcations committed by Duck prior to their bonds' issuance. The first amended complaint prayed for, inter alia, damages for breach and a declaratory judgment of the extent to which each surety was liable for losses due to Duck's defalcations.
Trustee Sims and the Sureties filed cross-motions for summary judgment before the bankruptcy court on the issue of liability for defalcations committed prior to issuance of their bankruptcy trustee bonds. In Memoranda of Decision dated May 29, 1990 and May 31, 1990, the Honorable Alan Jaroslovsky held, as a matter of law, that the Sureties were liable for the defalcations committed prior to the issuance of their bonds. The Sureties, appellants herein, properly appealed to the U.S. district court pursuant to 28 U.S.C. section 158(a). At hearing on the matter on February 22, 1991, this Court sua sponte raised the question of whether the issue adjudicated by the bankruptcy court had been ripe for determination. The Court instructed the parties to file supplemental memoranda addressing the question of ripeness as well as the substantive issue determined by the bankruptcy court. They have been received and reviewed. Accordingly, to those issues the Court now turns.
The district court reviews the bankruptcy court conclusions of law de novo. In re New England Fish Co., 749 F.2d 1277, 1280 (9th Cir.1984). The proper task of a district court reviewing a partial summary judgment of the bankruptcy court is, viewing the evidence in the light most favorable to the non-moving party, to determine under a de novo standard (1) whether there is no genuine issue of material fact and (2) whether the moving party was entitled to judgment as a matter of law. Id. at 1280; M/V American Queen v. San Diego Marine Constr. Corp., 708 F.2d 1483, 1487 (9th Cir.1983).
The issue presented is ripe for determination because it is clear, even before a final accounting of Duck's trustee term is rendered, that the Court's opinion will not be advisory, but rather will affect the rights and liabilities of the parties. A fundamental limitation on federal judicial power is Article III's prohibition upon advisory opinions. The Supreme Court explained the purposes served by the rule in Flast v. Cohen, 392 U.S. 83, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968), stating that:
the rule against advisory opinions implements the separation of powers and also recognizes that such suits often are not pressed before the Court with that clear concreteness provided when a question emerges precisely framed and necessary for decision from a clash of adversary argument exploring every aspect of a multifaceted situation embracing conflicting and demanding interests.
Id. at 96-98, 88 S.Ct. at 1950-51. Consequently, justiciability requires that (1) there be an actual dispute between adverse litigants and (2) there be a substantial likelihood that the federal court's decision will "have some effect" or bring about change. See generally, E. Chemerinsky, Federal Jurisdiction, § 2.2 (1989).
The instant appeal satisfies the first requirement. The successor trustee has sued F & D and Transamerica for breach of their respective bond contracts. The Sureties have made only partial payment of amounts embezzled by Duck, based on their position that they are not liable for defalcations that occurred prior to their bonds' issuance. Thus, the two sides are in controversy over whether liability extends to funds misappropriated prior to the issuance of the Sureties' bonds, and a determination is material to the existence and to the extent of a breach of their bond contracts.
The second requirement of justiciability is met because this order will have effect. Both parties acknowledge that a final accounting of Duck's trustee term,...
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