In re Mushroom Transp. Co., Inc.

• Decision Date: 12 November 1998
• Docket Number: Bankruptcy No. 85-02575,Adversary No. 94-1004.
• Citation: 227 BR 244
• Parties: In re MUSHROOM TRANSPORTATION COMPANY, INC., et al., Debtors. Jeoffrey L. BURTCH, Trustee, Plaintiff, v. HYDRAQUIP, INC. et al., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

227 B.R. 244 (1998)

In re MUSHROOM TRANSPORTATION COMPANY, INC., et al., Debtors Jeoffrey L. BURTCH, Trustee, Plaintiff, v. HYDRAQUIP, INC. et al., Defendants.

Bankruptcy No. 85-02575, Adversary No. 94-1004.

United States Bankruptcy Court, E.D. Pennsylvania, Philadelphia Division.

November 12, 1998.

COPYRIGHT MATERIAL OMITTED

Kent Cprek, Magdeline D. Coleman, Linda S. Fossi, Sagot, Jennings & Sigmond, Philadelphia, PA.

Thomas B. Fiddler, Ledgewood Law Firm, Philadelphia, PA.

Richard L. Hahn, Bala Cynwyd, PA.

MEMORANDUM OPINION

BRUCE FOX, Bankruptcy Judge.

The chapter 7 trustee of the consolidated entities known as Mushroom Transportation, Jeoffrey L. Burtch, has brought suit against a number of defendants including Fidelity Bank,¹ A-1 Discount Company, A-1 Discount Pension Plan,² and A-1 Discount Company Profit Sharing Plan. In his complaint, the trustee asserts that these four defendants received the proceeds of property stolen from the estate of Mushroom Transportation by former counsel to the debtor, Jonathan Ganz. Further, the trustee averred that these four defendants "knew or reasonably should have known that the monies received" by them from Mr. Ganz did not belong to him. Complaint, ¶ 31. The trustee claimed that he was entitled to judgment against Fidelity Bank in the amount of $23,135.33 (plus interest, "lost opportunity costs" and "profits"). From one or more of the A-1 defendants, the trustee demanded judgment in the amount of $62,241.00 (plus interest, "lost opportunity costs" and "profits"). His complaint sought this monetary relief in four separate counts: two in common law — conversion and constructive trust; and two statutory claims — turnover (under 11 U.S.C. § 542 or 543) and "unauthorized transfer" pursuant to 11 U.S.C. §§ 549, 550.

In their opposition to the trustee's claims, the four defendants asserted that they had lent money to Mr. Ganz, they had been properly repaid by him, and there was no evidence that he had repaid them with money stolen from Mushroom Transportation. Further, Fidelity argued at trial that if it had been repaid with stolen money, it neither knew nor should have known of this fact and so were entitled to be treated as a good faith transferee who received the property for fair value. The A-1 defendants agree and argue as an affirmative defense that the statute of limitations had run on all four claims raised by the trustee.³

Trial was held in the above-captioned adversary proceeding on May 7, 1998 against these four defendants.⁴ Based upon the evidence presented, all the defendants now maintain that as to each of the four counts in the complaint, the plaintiff either cannot meet his burden of proof or, in the alternative, that the defendants have proven valid affirmative defenses. The parties have had the opportunity to submit post-trial memoranda, and the issues presented are ready for disposition.

I.

This consolidated bankruptcy estate has experienced a somewhat convoluted existence. While I need not describe in complete detail the bankruptcy case's history, for clarity I shall provide some pertinent historical background.

This proceeding arises from the theft of estate funds by former bankruptcy counsel to the chapter 11 debtors: Mr. Jonathan Ganz. The actions of Mr. Ganz spanned a number of years and were not limited to the Mushroom bankruptcy cases. See, e.g., In re Summit Airlines, Inc., 160 B.R. 911 (Bankr. E.D.Pa.1993). The thefts from the Mushroom estate occurred while the debtors were chapter 11 debtors in possession. After conversion of these cases from chapter 11 to chapter 7, the first Mushroom trustee (who was elected by creditors under section 702), Mr. Michael Arnold, initiated at least four adversary proceedings raising numerous claims to recover the stolen funds and involving many defendants, including Mr. Ganz.

To further complicate matters and delay resolution of the various proceedings, Mr. Arnold was later convicted of embezzlement of Mushroom estate funds and removed as the bankruptcy trustee. See 11 U.S.C. § 324. Jeoffrey Burtch, Esquire, was then chosen by the United States trustee to be successor trustee. He succeeded Mr. Arnold as the plaintiff in this proceeding. See 11 U.S.C. § 325.

As I mentioned earlier, the successor bankruptcy trustee complains that the defendants in this proceeding received from Mr. Ganz some of the funds which he stole from the Mushroom estate. While the trustee does not suggest that the defendants actually knew that they were receiving stolen funds, the trustee contends either that they should have known or that their lack of knowledge was irrelevant.

In the trustee's view, parties that receive consideration for outstanding obligations have a duty to return that consideration if it is traceable to stolen property regardless of their knowledge of the theft. Alternatively, the trustee maintains that the defendants should have been suspicious about the source of funds because the payments were received from Mr. Ganz's personal bank account, and that Ganz individually had no obligation to defendants to tender such payments. N.T., at 183, 187. (As will be discussed below, this assertion is incorrect. From the evidence presented, it is likely that Mr. Ganz was legally obligated to repay both Fidelity and A-1.)

In its posttrial submission, defendant Fidelity asserts that the trustee "abandoned his causes of action for the imposition of a constructive trust and for turnover under 11 U.S.C. § 542 and 543 by not addressing those claims in opening statement." Fidelity's Proposed Conclusions of Law, at 6, ¶ 3. This defendant argues that before me are only the trustee's claims that he is entitled to recover under a common law conversion theory, count I of the complaint, and pursuant to 11 U.S.C. § 549, count IV.

I recognize that plaintiff counsel's opening remarks at trial, to which the defendant refers in support of this assertion, does reflect that she referred to only these two theories of recovery. N.T. at 11. Moreover, counsel for Fidelity stated his understanding in closing remarks that the plaintiff was proceeding under these two causes of action; plaintiff's counsel did not take exception to this characterization of her case. N.T., at 155.

However, in his posttrial pleading the plaintiff does argue his right to recover pursuant to counts II and III of the complaint. See "Plaintiffs' sic Proposed Post-Trial Findings of Fact and conclusions of Law," at 22, ¶ 28. While it is certainly possible for a plaintiff to withdraw certain bases for recovery at trial during opening statements, see, e.g., Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339 (2d Cir. 1994), I shall not conclude that the plaintiff has done so in the instant case.

The posttrial submission of the plaintiff is sufficiently clear that the plaintiff did not intend to abandon these two causes of action. Further, the four claims are sufficiently similar factually and legally that Fidelity can point to no evidence that it would have offered had plaintiff's counsel referred directly to all four claims in her opening remarks, rather than two. Therefore, I shall address the trustee's entitlement to relief under all four claims referred to in his complaint. See Edelman v. National Bank of Washington, 297 F.2d 188, 190 (D.C.Cir.1961) (trial court wrongfully dismissed cause of action, even though "plaintiff's counsel is not entirely without some blame for the view which the District Court adopted since his statements concerning the theory of his case were not models of clarity").

II.

After trial held with the participation of the four above-named defendants, and after a careful examination of both the evidentiary record and the arguments of counsel, I make the following findings of fact.⁵

1. Mushroom Transportation Company and its related entities — Robbey Realty, Inc., Penn York Realty Co., Inc., Leazit, Inc. and Trux Enterprises, Inc. — filed for bankruptcy protection under chapter 11 in June 1985.

2. The debtors in possession engaged Jonathan Ganz of the law firm of Pincus, Verlin, Hahn & Reich, P.C. to represent them in their reorganization bankruptcies.

3. The debtors' reorganization efforts quickly evolved into the orderly liquidation of assets, which assets included real property and personal property, including vehicles and receivables.

4. In either 1991 or 1992, it came to the attention of the United States Justice Department that Mr. Ganz had embezzled funds from a number of bankruptcy estates. The Department of Justice began an investigation of those thefts.

5. Included in the investigation was an audit of various bank accounts belonging to Mr. Ganz. This audit, which was included in a report prepared for and submitted in Mr. Ganz's criminal trial, reflected the theft of funds from possibly nineteen bankruptcy estates and which may total as much as $2,337,892.48. Ex. P-1, at 3328.⁶

6. Among the bankruptcy estates looted by Mr. Ganz was the estate of Mushroom Transportation. As reported in the Justice Department audit:

On June 25, 1985, Mushroom Transportation Co., Inc., Trux Enterprises, Inc., Penn York Co., and Robbey Realty, Inc. filed for relief under chapter 11 and shortly thereafter an order was entered that these cases be jointly administered.⁷

The debtor ceased operations on January 10, 1986, and began liquidation of its assets with court approval. Since the Continental Bank was a secured creditor and had a lien on all of the debtor\'s assets, the proceeds from the sale of assets were remitted to the bank and applied to reduce their debt. Upon payment of the debt to Continental Bank, the balance of $966,624.49 was turned over to debtor\'s counsel, Pincus, Verlin, Hahn & Reich, P.C., c/o Jonathan H. Ganz.

Upon the receipt of the $966,624.49 from the Continental Bank, Ganz made payments of $196,894.46 for court-approved professional fees in the Mushroom Transportation Co., Inc. bankruptcy case.

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