Kennedy & Cohen, Inc., Matter of
| Decision Date | 29 February 1980 |
| Docket Number | No. 78-1545,78-1545 |
| Citation | 612 F.2d 963,6 B.C.D. 128 |
| Parties | , Bankr. L. Rep. P 67,347 In the Matter of KENNEDY & COHEN, INC., et al. STATE OF WISCONSIN et al., Plaintiffs-Appellants, v. Melvin REESE, Trustee, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Jonathan P. Siner, Asst. Atty. Gen., Milwaukee, Wis., Roger J. Schindler, Sp. Counsel, Miami, Fla., Alan A. Held, Sp. Asst. Atty. Gen., St. Paul, Minn., Joe Chumlea, Asst. Atty. Gen., Dallas, Tex., for plaintiffs-appellants.
Robert G. Hewitt, Miami, Fla., for Reese.
Appeal from the United States District Court for the Southern District of Florida.
Before THORNBERRY, RONEY and TATE, Circuit Judges.
AFFIRMED on the basis of the unreported opinions of the district court, dated January 30, 1978, and the bankruptcy court, dated May 5, 1977, the relevant portions of which are attached hereto as an appendix.
APPENDIX
PARTIAL SUMMARY JUDGMENT of Bankruptcy Court dated May 5, 1977
The case is here on motions for summary judgment filed by the plaintiffs and by the trustee in three adversary proceedings, which though not identical are sufficiently similar to be resolved together. The complaints were dismissed as to all counts except Count I. (C.P. No. 288I)
The cases are class actions seeking money damages from the trustee for customers of the bankrupt, a retailer of various appliances in various parts of Florida and several other states. The remaining count seeks (a) recovery of fees paid for maintenance contracts which cannot be performed, . . .
The major element in these actions is the first claim, for unperformed maintenance contracts. The bankrupt for some two years had accepted payment of from $50 to $300 from many customers in return for a commitment to repair specified merchandise for periods that varied from nine months to five years. As a result of bankruptcy liquidation, many of the contracts cannot be performed.
It is plaintiffs' theory that the bankrupt was under a legally implied duty to segregate these fees in order to ensure that funds would be available to perform these contracts. It is admitted that there was no express trust created by contract or statute. It is plaintiffs' alternative argument that, at some point to be fixed by proof, the bankrupt knew it would not be able to perform these contracts yet continued to sell them after that point.
Plaintiffs seek the imposition of a constructive trust by this court upon all the assets of the bankrupt for the satisfaction of these claims. Property held by a bankrupt in trust belongs to the beneficiary and never becomes a part of the bankruptcy estate. 4A Collier on Bankruptcy (14th ed.) Section 70.25(2). Such a holding would, therefore, entitle plaintiffs' classes to priority in payment as to all the assets of the bankrupt, ahead of the claims of creditors who have valid security interests, ahead of the administrative costs and expenses incurred in this court and ahead of all other priority and general creditors.
The feature of plaintiffs' case assumes practical significance, because it presently appears that little if anything will be available for distribution to the general creditors in this case. Distribution cannot be calculated or made until this litigation is concluded.
Plaintiffs have moved for summary judgment . . . .
The trustee has also moved for a summary judgment. (C.P. No. 1299I) The motion is addressed solely to those portions of the Wisconsin complaint (paragraphs 1-18, first claim for relief) and the Minnesota complaint (paragraphs 1-21, first claim for relief) and the Texas complaint (third claim for relief) dealing with maintenance contracts. The motion is granted.
A constructive trust is a tool of equity to prevent unjust enrichment. Its applicability to any part of the estate of this bankrupt requires that one of the plaintiffs establish some wrongdoing on the bankrupt's part either in Obtaining the funds sought or in Retaining them, if they were properly obtained. The degree of actual or constructive fraud required appears to change at state boundaries and with the passage of time.
I reject the argument that the sale of maintenance contracts, without more, creates a legal duty to segregate the funds received for that purpose and imposes a constructive trust upon them. I believe that it still remains a legislative and not a judicial prerogative to mandate such a duty.
The record before me negatives any allegation that the bankrupt knew before bankruptcy that it could not perform these contracts, therefore, sold them fraudulently. The record negatives any other suggestion of actual or constructive fraud or wrongdoing which might support a constructive trust.
. . . The maintenance contracts of this debtor were not legally different from any other executory contract made by this bankrupt which has been frustrated by its financial collapse and bankruptcy.
. . ., (F)rom the record before me it is established that there is no identifiable trust res to which the asserted constructive trust could attach. Plaintiffs cannot trace the funds that were paid for these contracts. Plaintiffs argue that the notion that funds must be traceable and the requirement that the res be identifiable are concepts of purely historical interest today, at least in the enlightened states of Wisconsin, Minnesota and Texas. There are decisions that support this contention of the plaintiffs, at least in certain contexts. However, it is a federal question whether a trust, whether express or constructive, which cannot be traced to specific assets, will attach to the creditors' general funds In bankruptcy.
In United States v. Randall, 401 U.S. 513, 91 S.Ct. 991, 28 L.Ed.2d 273 (1971) the Court held that the Bankruptcy Act is an overriding expression of federal policy which precludes...
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