In re General Coffee Corp.

• Decision Date: 21 August 1984
• Docket Number: Bankruptcy No. 83-00889-BKC-TCB,Adv. No. 84-0028-BKC-TCB-A.
• Parties: In re GENERAL COFFEE CORPORATION, Debtor. CITY NATIONAL BANK OF MIAMI and City National Banking Corporation, Plaintiffs, v. GENERAL COFFEE CORPORATION, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

41 B.R. 781 (1984)

In re GENERAL COFFEE CORPORATION, Debtor.

CITY NATIONAL BANK OF MIAMI and City National Banking Corporation, Plaintiffs, v. GENERAL COFFEE CORPORATION, Defendant.

Bankruptcy No. 83-00889-BKC-TCB, Adv. No. 84-0028-BKC-TCB-A.

United States Bankruptcy Court, S.D. Florida.

August 21, 1984.

Michael Josephs, Coral Gables, Fla., Robert Schatzman, Coral Gables, for plaintiffs.

Alan Kluger, Miami, Fla., for defendant.

David Levine, Miami, Fla., for debtor/defendant.

Bert Hellman, Miami, Fla., for City National.

MEMORANDUM DECISION

THOMAS C. BRITTON, Bankruptcy Judge.

Plaintiffs ask that a constructive trust be imposed for their benefit as creditors against the assets of the chapter 11 debtor. The predicate for the relief sought is alleged conversion, fraud, breach of fiduciary duty and unjust enrichment. The debtor has answered and counterclaimed seeking avoidance of the asserted lien under 11 U.S.C. § 544. Shawmut Boston International Banking Corporation, a major secured creditor, has intervened and supports the debtor's position. The matter was tried on August 10. The facts are undisputed.

In March 1982, the debtor expanded its coffee roasting business by purchasing the Chase & Sanborn division in New Orleans, Louisiana from Standard Brands. The purchase price consisted of $3 million cash, a note in the amount of $4.75 million, and an amount equal to the value of the inventory of coffee on the day before the closing. The amount paid for the inventory was $6,488,011. General Coffee paid this sum by a check drawn on its account at City National Bank of Miami.

The funds upon which this check was drawn are those funds which plaintiffs claim were wrongfully taken from them by a series of events which began with the bank's purchase in March 1982 of an $8 million certificate of deposit from Banco Exterior S.A. (Panama). The purchase was made on the recommendation of Camilio Bautista, who was simultaneously an officer and director of both Domino Investments, Ltd., which controlled General Coffee, and the plaintiff bank. The $8 million certificate was pledged by Bautista, without the plaintiffs' authorization, as collateral for an $8 million loan from Banco Exterior to Domino. Domino then transferred the $8 million to General Coffee and the money was deposited into its account at City National Bank of Miami.

Neither Domino nor General Coffee has repaid any part of the debt owed Banco Exterior, which has set off the certificate of deposit against the delinquent account. Plaintiffs have also sued Banco Exterior for the $8 million in an action pending in another court.

The Chase & Sanborn assets acquired by General Coffee through the agreement with Standard Brands included not only the inventory of coffee, which has been turned over numerous times since 1982, but also a plant in New Orleans, equipment and trademarks.

The debtor argues that plaintiffs have failed to trace their money into the hands and property of the debtor and, therefore, for that reason alone relief must be denied. The debtor points to the fact that the inventory of coffee purchased with money which may be traced back to the plaintiffs was sold long ago, and contends that plaintiffs have not discharged their burden of tracing the proceeds to specific assets presently under the debtor's control. I agree with the debtor that plaintiffs have the burden of tracing the trust res to specific assets when they seek the imposition of a constructive trust in bankruptcy. Matter of Kennedy & Cohen, Inc., 612 F.2d 963, 965 (5th Cir.1980). However, I find that the trust res in the amount of $6,488,011 has been traced by the plaintiffs in its original or substituted form to assets presently within the control of the debtor. Plaintiffs have failed, however, to trace the remainder of the $8 million which is in question here.

For the purposes of this action, I also find that plaintiffs have proved a factual basis to justify resort to imposition of a constructive trust.

Debtor's primary contention, asserted in its counterclaim, is that a constructive trust imposed upon any asset of a bankruptcy estate after the date of bankruptcy can be avoided under 11 U.S.C. § 544(a). That section, the strong-arm clause, gives the trustee and a chapter 11 debtor-in-possession the right to avoid any obligation that would be voidable by a judgment creditor with a judicial lien on all property subject to a judicial lien at the commencement of the bankruptcy case. The trustee and, therefore, the debtor-in-possession is charged only with such notice as appeared on the public record at that time and is not charged with the debtor's actual knowledge of the circumstances relied upon by the plaintiffs. The purpose of this provision, of course, is to protect the debtor's creditors from secret liens concealed from them at the time they extended credit to the debtor. The constructive trust asserted here is indistinguishable from any other secret lien asserted for the first...