In re Michael Bogdan

Decision Date06 July 2005
Docket NumberNo. 04-1643.,04-1643.
PartiesIn re Michael BOGDAN, a/k/a Andrew Michael Bogdan; Inner City Management, LLC, Debtors. Sean C. Logan, Chapter 7 Trustee, Trustee-Appellant, v. JKV Real Estate Services; Fidelity National Title Insurance; Stewart Title Guaranty Company; John K. Voyatzis, Defendants-Appellees.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: Douglas Brooks Riley, Rosenberg, Martin, Funk & Greenberg, L.L.P., Baltimore, Maryland, for Appellant. Robert L. Ferguson, Jr., Ferguson, Schetelich & Ballew, P.A., Baltimore, Maryland; Richard L. Costella, Miles & Stockbridge, P.C., Baltimore, Maryland, for Appellees.

ON BRIEF: Lawrence J. Yumkas, Sedica Sawez, Rosenberg, Martin, Funk & Greenberg, L.L.P., Baltimore, Maryland, for Appellant. Ann Doherty Ware, Ferguson, Schetelich & Ballew, P.A., Baltimore, Maryland, for Appellees JKV Real Estate Services, Inc., and John K. Voyatzis; Robert Scott Brennen, Matthew G. Summers, John Robert Fischel, Miles & Stockbridge, P.C., Baltimore, Maryland, for Appellee Stewart Title Guaranty Company; Brian Charles Parker, Parker, Dumler & Keily, L.L.P., Baltimore, Maryland, for Appellee Fidelity National Title Insurance Company.

Before KING and SHEDD, Circuit Judges, and HENRY F. FLOYD, United States District Judge for the District of South Carolina, sitting by designation.

Reversed and remanded by published opinion. Judge SHEDD wrote the opinion, in which Judge FLOYD joined. Judge KING wrote an opinion concurring in part and dissenting in part.

OPINION

SHEDD, Circuit Judge.

This bankruptcy appeal requires us to determine whether the bankruptcy trustee has standing to sue, as the assignee of certain creditors, to recover on behalf of the bankruptcy estate for damages caused to these creditors by the debtor's alleged coconspirators. The bankruptcy court dismissed the trustee's amended complaint, concluding that the trustee lacked standing to assert claims against the alleged coconspirators. The district court affirmed the bankruptcy court's judgment. Based on the unique facts and circumstances of this case, we reverse the judgment of the district court and remand for further proceedings consistent with this opinion.

I.

In 2000, Michael Bogdan and his corporation, Inner City Management, LLC (referred to collectively as "Bogdan") filed petitions for bankruptcy relief. The bankruptcy court appointed Sean C. Logan (the "trustee") as trustee of the Bogdan estate.

In 2001, Bogdan pleaded guilty to a federal criminal information alleging a single count of conspiracy to commit mail and wire fraud and to make false statements relating to his participation in the real estate scheme that is the subject of this adversary proceeding. In 2002, after conducting an extensive review of Bogdan's business activities, the trustee determined that nearly fifty other persons and entities — real estate appraisers, settlement agents, mortgage brokers, and title insurance companies — also participated with Bogdan in the real estate "flipping scheme" that defrauded numerous mortgage lenders by obtaining under-collateralized mortgage loans to purchase properties in Baltimore City. Twelve of these mortgage lenders that were injured by this scheme unconditionally assigned to the trustee all of their claims against Bogdan and his alleged coconspirators.

The trustee then filed this adversary proceeding in the bankruptcy court as the assignee of these mortgage lenders, alleging claims for civil conspiracy, intentional misrepresentation, fraudulent concealment, negligence, and breach of contract against four of Bogdan's alleged coconspirators. According to the trustee, if he prevails on his claims against the alleged coconspirators, the mortgage lenders will not recover any money from the adversary proceeding. Instead, the mortgage lenders will recover, if at all, only as creditors of the estate on a pro rata basis with all other creditors.1 The trustee's amended complaint seeks nearly $1 million in actual damages and $500,000 in punitive damages relating to 39 mortgage loans.

II.

The bankruptcy court dismissed the trustee's amended complaint, concluding that the trustee lacked standing to sue Bogdan's coconspirators for two reasons. First, the court ruled that the mortgage lenders' causes of action belong exclusively to them and not Bogdan's trustee because the action is premised on injury to the creditors, not Bogdan. The assignments by the mortgage lenders to the trustee do not, the court decided, give the trustee standing to pursue claims against the alleged coconspirators. Second, the court ruled that the trustee lacked standing based on the doctrine of in pari delicto, which bars a wrongdoer — such as Bogdan — from recovering against his coconspirators for injuries they jointly caused.

The district court affirmed based largely on the same reasoning as the bankruptcy court. In particular, the district court determined that the mortgage lenders, not the trustee, were the real parties in interest and that the trustee does not have standing to assert causes of action on behalf of creditors notwithstanding the assignments. The trustee now appeals.

III.

We review the judgment of a district court sitting in review of a bankruptcy court de novo, applying the same standards of review that were applied in the district court. In re Merry-Go-Round Enters., 400 F.3d 219, 224 (4th Cir.2005). Specifically, "we review the bankruptcy court's factual findings for clear error, while we review questions of law de novo." Loudoun Leasing Dev. Co. v. Ford Motor Credit Co. (In re K & L Lakeland, Inc.), 128 F.3d 203, 206 (4th Cir.1997).

IV.
A.

In affirming the dismissal of the amended complaint, the district court ruled that the trustee does not have standing to assert claims that belonged to the mortgage lenders, even though the mortgage lenders formally assigned their claims to the trustee. This ruling effectively establishes a per se ban on claims by trustees as assignees of creditors. The district court relied on the Supreme Court's opinion in Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972), to support its ruling. We conclude, however, that Caplin is distinguishable for several reasons.

More than a decade before commencement of its bankruptcy proceedings, the debtor in Caplin issued debentures through Marine Midland Trust Company ("Marine"). One of the debtor's critical obligations under its agreement with Marine was that it maintain an asset-liability ratio of 2 to 1. This obligation was intended to protect the debenture holders from loss on their investments. The debtor was also required to file annual reports with Marine verifying its compliance with its obligations. Marine promised to exercise due care and skill in monitoring the debtor's compliance. Id. at 417-18, 92 S.Ct. 1678.

For several years after issuing the debentures, the debtor incurred such substantial financial losses that by the time it entered bankruptcy, the debtor had roughly three times more liabilities than assets, a clear violation of its debenture obligation. Id. at 418-19, 92 S.Ct. 1678. After conducting his investigation into the debtor's financial affairs, the trustee of the debtor's estate determined that Marine had either willfully or negligently failed to fulfill its duty to monitor the debtor's compliance with its obligations. The trustee filed an action against Marine on behalf of the debenture holders, not the debtor's estate. Id. at 420, 92 S.Ct. 1678. The district court dismissed the complaint, concluding that the trustee lacked standing to pursue claims on behalf of the debenture holders, and the Second Circuit affirmed. Caplin v. Marine Midland Grace Trust Co., 439 F.2d 118 (2d Cir.1971).

The Supreme Court affirmed for three reasons. First, the Court concluded that there was no provision in the bankruptcy laws allowing a trustee to assume the responsibility of suing on behalf of creditors of the estate. The Court held that a trustee is not authorized to "collect money not owed to the estate." Caplin, 406 U.S. at 428, 92 S.Ct. 1678. Second, the Court reasoned that the debenture holders, rather than the trustee, should be allowed to decide whether to sue Marine. These holders, the Court stated, "are capable of deciding for themselves whether or not it is worthwhile to seek to recoup whatever losses they may have suffered by an action against" Marine. Id. at 431, 92 S.Ct. 1678. Third, the Court concluded that because the debenture holders would not be bound by the judgment in the trustee's action against Marine, they would be able to sue Marine directly in a separate suit, thereby increasing the amount and complexity of litigation relating to the losses suffered by the debenture holders. Id. at 432, 92 S.Ct. 1678. For these reasons, the Court held that the trustee lacked standing to sue Marine. Id. at 432-34, 92 S.Ct. 1678.

The facts of this case and Caplin are substantially different. It does not follow from the reasons advanced by the Court in Caplin that the trustee lacks the necessary standing in this case to assert his claims against Bogdan's alleged coconspirators on behalf of Bogdan's estate. First, while the trustee in Caplin attempted to assert claims directly on behalf of the debtor's creditors, Bogdan's trustee is not making any claim on behalf of the creditors. By taking unconditional assignments from the creditors, the trustee, as assignee, is making his claim on behalf of Bogdan's estate, not on behalf of the mortgage lenders. The mortgage lenders will recover nothing directly from any recovery attained from the trustee's adversary proceeding against Bogdan's alleged coconspirators. The mortgage lenders will recover, if at all, like any other creditor of the estate, by sharing from the assets the trustee is able to collect on behalf of the estate.

Second, unlike the debenture...

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