Johnson, In re

• Decision Date: 18 October 1973
• Citation: 960 F.2d 396
• Parties: 26 Collier Bankr.Cas.2d 1054, 22 Bankr.Ct.Dec. 1276, Bankr. L. Rep. P 74,502 In re Robert D. JOHNSON, Debtor. CANAL CORPORATION, general partner of the limited partnership of The
• Court: U.S. Court of Appeals — Fourth Circuit

Page 396

960 F.2d 396

26 Collier Bankr.Cas.2d 1054, 22 Bankr.Ct.Dec. 1276,

Bankr. L. Rep. P 74,502

In re Robert D. JOHNSON, Debtor.

CANAL CORPORATION, general partner of the limited

partnership of The October 18, 1973 Group; The October 30,

1973 Group; The November 30, 1973 Group; The November 15,

1973 Group; The December 10, 1973 Group; The December 11,

1973 Group; The December 14, 1973 Group; The January 7,

No. 91-1403 1974 Group; The January 11, 1974 Group; The

January 31, 1974 Group; Resource Evaluation & Development,

Incorporated, general partner of the limited partnership of

the February 8, 1974 Group; The February 15, 1974 Group;

The March 5, 1974 Group; The March 11, 1974 Group; The

March 29, 1974 Group; The April 14, 1974 Group; The April

5, 1974 Group, Plaintiffs-Appellants, v. Robert E. FINNMAN; Gerald L. Sacks; Leonard Henschel;

Mrs. Leonard Henschel; Carl Starnes; Mrs. Carl Starnes;

Robert W. Froehlich; Alan B. Svedlow; Thomas W. Gilliam,

Jr.; Ruth Swart Young; Frederick M. Sorrell, Jr.; Richard

B. Hudson; Mrs. Richard B. Hudson; William A. Gore; Mrs.

William A. Gore, Plaintiffs-Appellees, and Lenora Johnson BROWN; Vail Pischke, Plaintiffs, v. Bruce GOLDSTEIN, Trustee, Defendant.

No. 91-1403.

United States Court of Appeals Fourth Circuit.

Argued Dec. 5, 1991.

Decided March 26, 1992.

Laurance James Ochs, Washington, D.C., argued (Alan Rosenblum, Rosenblum & Rosenblum, Alexandria, Va., on brief), for plaintiffs-appellants.

Calvin Davison, Crowell & Moring, argued (Melinda B. Thaler, on brief), Washington, D.C., for plaintiffs-appellees.

Before WILKINSON, WILKINS, and HAMILTON, Circuit Judges.

OPINION

HAMILTON, Circuit Judge:

The appellants, Canal Corporation (Canal) and Resource Evaluation and Development, Inc. (RED), appeal from the judgment of the district court affirming the decision of the United States Bankruptcy Court for the Eastern District of Virginia. The decision of the bankruptcy court excluded Canal and RED from participating on equal grounds with the appellees in the distribution of a constructive trust held by the trustee of the bankrupt estate of Robert D. Johnson. The bankruptcy resulted from the collapse of an illegal pyramid scheme which Robert Johnson perpetrated. The bankruptcy court permitted a class of plaintiffs, including the appellants and the appellees, to bring suit seeking a declaratory judgment that funds in the estate were held in constructive trust for them. The bankruptcy court, on December 21, 1987, held that the bulk of the funds in the estate were held in constructive trust for the defrauded investors. The bankruptcy court later ordered distribution of these funds to the appellees and excluded Canal and RED from this distribution. Canal and RED appealed this decision to the district court which affirmed the decision of the bankruptcy court. Canal and RED timely appealed to this court.

This appeal presents the issues of whether the bankruptcy court had jurisdiction to determine how to distribute the constructive trust held by the estate, whether it was error to distribute the constructive trust directly to individuals instead of through the general partners and the limited partnerships which were the investment vehicles in the scheme, and whether the bankruptcy court erred in considering an objection to the proposed distribution which was filed after the time period set by the bankruptcy court for such objections. Because we find that the bankruptcy court had jurisdiction to distribute the trust and that there was no error with respect to the remaining issues, we affirm the judgment of the district court.

I.

The debtor in bankruptcy, Robert D. Johnson, fraudulently induced parties to invest in an industrial wine import venture that was, in fact, a pyramid or Ponzi scheme. The wine did not exist and Johnson used the money for himself or to pay off previous investors in order to lure in more. The scheme ran from 1968 until 1974, raising about $26 million from about 400 investors. Much of the money was raised through limited partnerships. In 1973 and 1974, seventeen limited partnerships were set up under Virginia law in order to invest in Johnson's wine scheme. Canal was the general partner for ten of these limited partnerships, RED was general partner for the remaining seven. Mr. Finnman and other investors channeled their investments in the scheme through the limited partnerships.

In the middle of 1974, the pyramid scheme collapsed and Johnson pled guilty to various fraud charges and was sentenced to six years imprisonment. The wine scheme and its demise generated numerous cases that ended up in this court, the District Court for the Eastern District of Virginia, the Bankruptcy Court for the Eastern District of Virginia, and the United States Tax Court.

An involuntary bankruptcy petition was filed against Johnson in 1974, under the Bankruptcy Act (Title 11), by some of the defrauded investors. Canal and RED filed proofs of claim in Johnson's bankruptcy case on behalf of the limited partnerships. Both the Internal Revenue Service (IRS) and the Commonwealth of Virginia filed tax claims in the case as well. The trustee sought a declaration that the assets could not be used for the tax claims because they were held in constructive trust for the defrauded investors. Though the bankruptcy court dismissed the trustee's action for lack of standing, In re Johnson, 55 B.R. 800 (Bankr.E.D.Va.1985), it allowed the investors to file suit against the trustee for a determination of the same issue. The bankruptcy court ultimately certified the matter as a class action for the benefit of the defrauded investors and held that the funds were the property of the plaintiff class, in constructive trust, and not subject to tax claims. In re Johnson, 80 B.R. 791 (Bankr.E.D.Va.1987). The bankruptcy court made this finding subject to its approval of the equitable distribution of the funds. The IRS appealed this decision to the district court, which affirmed the bankruptcy court. The IRS subsequently appealed to this court; however, it dismissed the appeal under Fed.R.App.P. 42(b) before a decision was reached.

The bankruptcy court then set about to determine the proper method of distribution. On December 20, 1989, the bankruptcy court entered its first distribution order. This order defined the plaintiff class as consisting of all persons who invested in Johnson's wine scheme and who had not been repaid prior to June 13, 1974. The order provided that: (1) claims filed by the general partners on behalf of the limited partnerships would be paid to the general partners, and (2) class members' pro rata share of the funds owing would, absent objection, be paid to the general partners for distribution to the limited partners, subject to claims for expenses and indemnification incurred on behalf of the limited partnerships by the general partners. This was made subject to the right of the limited partners to object to this form of distribution by February 28, 1990. Canal and RED filed claims for expenses and indemnification on behalf of the limited partnerships which were in excess of the total amount available for distribution. At this point, the interests of Canal and RED and the limited partners diverged.

Ten individual limited partners timely filed objections to this proposed distribution. Robert Finnman filed his objection on May 10, 1990. The bankruptcy court held a hearing on these objections and denied Canal and RED's claims for expenses and indemnification. On May 31, 1990, it ordered counsel for the class plaintiffs to pay appropriate pro rata shares directly to the individual partners who had filed objections. ¹ Canal and RED appealed the May 31, 1990 order to the district court. After a hearing, the district court affirmed the judgment of the bankruptcy court in a ruling from the bench. Canal and RED noticed a timely appeal and the district court stayed its judgment pending appeal.

II.

Findings of fact by the bankruptcy court in proceedings within its full jurisdiction are reviewable only for clear error and legal questions are subject to de novo review. Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988); In re Crouthamel Potato Chip Co., 786 F.2d 141, 144 (3d Cir.1986) (court of appeals reviews issues implicating interpretation and application of the Bankruptcy Code and Rules de novo ).

III.

The preeminent issue raised in this appeal concerns the jurisdiction of the bankruptcy court to enter the December 20, 1989 and May 31, 1990 orders. Canal and RED do not contest the bankruptcy court's jurisdiction to make the initial determination on December 21, 1987, that the funds were held in constructive trust; however, they argue that once the bankruptcy court determined that the funds were held in constructive trust, the bankruptcy court was without jurisdiction to determine who was entitled to distribution from the trust.

Federal bankruptcy courts, like the federal district courts, are courts of limited jurisdiction. Their jurisdiction is defined by 28 U.S.C. §§ 157 and 1334. Three classes of controversy can arise before a bankruptcy court: core proceedings, non-core related proceedings, and non-core unrelated proceedings. See, e.g., In re M. Paolella & Sons, Inc., 85 B.R. 965, 969 (Bankr.E.D.Pa.1988). Federal bankruptcy judges are authorized to enter appropriate orders and judgments in core proceedings. 28 U.S.C. § 157(b). Bankruptcy judges may also hear non-core related proceedings, but they may not enter final orders; in such cases they are usually required to submit proposed findings and conclusions to the district court where they are subject to de novo review. 28 U.S.C. § 157(c).

Canal and RED initially point out that the bankruptcy court did not make an explicit finding that its proceedings connected to the December 20, 1989 order and the May 31, 1990 order were or were not core matters. They contend that such a finding is...