Matter of Johnson, Bankruptcy No. 74-316-A.
| Decision Date | 11 July 1985 |
| Docket Number | Bankruptcy No. 74-316-A. |
| Parties | In the Matter of Robert D. JOHNSON, Bankrupt. |
| Court | Bankr. V.I. |
Elsie L. Munsell, U.S. Atty. for E.D. Va., Alexandria, Va., Robert L. Gordon, Tax Div. Dept. of Justice, Washington, D.C., for IRS.
Mark W. Foster, Stephen E. Leach, Zuckerman, Spaeder, Moore, Taylor & Kolker, Washington, D.C., Trustee.
MARTIN V.B. BOSTETTER, Jr., Bankruptcy Judge.
Robert D. Johnson, the bankrupt, was engaged in a fraudulent pyramid or Ponzi scheme whereby he induced investors to provide funds for the purchase, import and resale of nonextant Portugese industrial wine. In fact, the bankrupt neither purchased nor sold industrial wine. Instead, Johnson used the invested funds to partially pay off previous investors, to cover personal expenses and to invest in various business ventures. On August 26, 1974, Johnson pleaded guilty to federal crimes of securities fraud and of mail fraud and was subsequently incarcerated.
Three defrauded investors filed an involuntary petition against Johnson on June 13, 1974 pursuant to section 59b of the former Bankruptcy Act of 1898, as amended ("the Bankruptcy Act"). This Court subsequently adjudicated Johnson as a bankrupt.
Johnson's statement of affairs indicated unsecured debts in the amount of $21,282,443.00. As of February 28, 1985, the assets of the estate consisted of $1,604,274.38 in cash. The Internal Revenue Service ("IRS") and the Commonwealth of Virginia filed tax claims in the total amount of $4,230,090.17. The IRS filed a claim for unpaid income taxes for tax year 1972 on October 11, 1974. On December 10, 1974, the IRS filed an amended claim which included a claim for income taxes for both tax years of 1972 and 1973. Thereafter, on April 21, 1976, the IRS filed a claim for unpaid income taxes for 1974. Finally, on September 3, 1976, the Commonwealth of Virginia filed a claim for unpaid state income taxes for tax year 1974 in the amount of $141,664.79.
On August 28, 1984, the Trustee in Bankruptcy ("trustee") filed an objection to the three tax claims asserted by the IRS and to the single proof of claim filed by the Commonwealth of Virginia1. The trustee's objection is founded on the following assertions. First, the trustee objects to the proofs of claim in that they cannot be satisfied out of the assets of the bankruptcy estate. The trustee argues that the claims may not be satisfied because, under Virginia common law, the trustee holds the assets of the estate in a constructive trust for the defrauded investors. Additionally, the trustee claims that the IRS' claim for tax year 1974 and the Commonwealth of Virginia's claim were not timely filed.
In the response of the IRS to the trustee's objection, the Government argues that the trustee is not entitled to assert a constructive trust theory on behalf of the defrauded investors who have failed to take any action on their own behalf. The IRS maintains that the single question present in a proceeding initiated by the filing of an objection to a proof of claim is whether the bankrupt is liable for the income taxes claimed. In response to the trustee's second objection, the IRS argues that the 1974 amendment related back to the original claim which was filed timely2.
Seemingly in response to the IRS' argument that an objection to a proof of claim was not the proper vehicle by which to raise a constructive trust argument, the trustee filed a complaint for declaratory judgment on March 21, 1985. In its complaint, the trustee seeks a judgment of this Court declaring that the tax claims filed by the IRS for tax years 1972-74 cannot, as a matter of law, be satisfied out of the assets of the bankrupt's estate because said assets are held in a constructive trust for the defrauded investors.
Subsequently, the IRS filed a motion to dismiss trustee's complaint pursuant to Rule 712(b) of the Rules of Bankruptcy Procedure and Rule 12(b) of the Federal Rules of Civil Procedure. Specifically, the IRS moves to dismiss the complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(1); 12(b)(6). After noting that the trustee was seeking the same remedy under the complaint as he was under the objection to the IRS proofs of claim, the Government once again argues that the trustee does not have the requisite standing to raise a constructive trust argument in his own right.
Federal courts are courts of limited jurisdiction. See generally Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d § 3522, 60-81 (1984). Article III of the United States Constitution limits federal courts to adjudicating actual "cases" and "controversies." U.S. Const. art. III, § 2, cl. 1. One of the most important Article III doctrines is that the party invoking the federal court's jurisdiction must have standing. Warth v. Seldin, 422 U.S. 490, 498-99, 95 S.Ct. 2197, 2204-05, 45 L.Ed.2d 343 (1975); Centre for Independence of Judges v. Mabey, 19 B.R. 635, 639-40 (D.Utah 1982).
In order for a party to have the standing necessary to invoke federal jurisdiction, the plaintiff must have suffered actual or threatened injury, the injury must be traceable to the defendant's conduct and the injury must likely be redressed by the requested relief. Allen v. Wright, 468 U.S. 737, ___, 104 S.Ct. 3315, 3324-25, 82 L.Ed.2d 556 (1984); Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 758, 70 L.Ed.2d 700 (1982).
In those instances in which the plaintiff has alleged an injury sufficient to support a finding of an Article III "case" or "controversy," the Supreme Court of the United States clearly has held that the plaintiff must be asserting his own legal rights and interests and not those of a third party not before the court. Warth v. Seldin, 422 U.S. at 499-500, 95 S.Ct. at 2205. In other words, the plaintiff must have a personal stake in the outcome of the litigation. See, e.g., Simon v. Eastern Ky. Welfare Rights Organization, 426 U.S. 26, 41-42, 96 S.Ct. 1917, 1925-26, 48 L.Ed.2d 450 (1976); Baker v. Carr, 369 U.S. 186, 204, 82 S.Ct. 691, 703, 7 L.Ed.2d 663 (1962).
In the case sub judice, the trustee argues in his opposition to the IRS' motion to dismiss that he has the requisite personal interest in the outcome of the lawsuit. In support of this position, the trustee maintains that "if the trustee were arguably to misapply the funds in this estate by paying them over to the Internal Revenue Service when in fact title had not passed from the defrauded investors to the debtor, and therefore to the trustee, the trustee could be held personally liable for his misapplication." In other words, the trustee is concerned about a possible personal liability to the defrauded investors should he turn the assets over to the IRS.
A trustee in bankruptcy has the duty to act in the best interest of the bankrupt's estate. Matter of Washington Group, Inc., 476 F.Supp. 246, 250 (M.D.N.C.1979), aff'd sub nom. Johnston v. Gilbert, 636 F.2d 1213 (4th Cir.1980), cert. denied, 452 U.S. 940, 101 S.Ct. 3084, 69 L.Ed.2d 954 (1981). An integral part of the trustee's duty is to collect, preserve and liquidate the assets of the estate, thereby maximizing the value of the estate for a proper distribution to creditors. Commodity Futures Trading Comm. v. Weintraub, ___ U.S. ___, 105 S.Ct. 1986, 85 L.Ed.2d 372, 12 BCD 1247, 1251 (1985); 1 Collier on Bankruptcy ¶ 2.34, 241-42 (14th ed. 1974).
In some instances, trustees have been held liable either in their official capacity or personally for damages which have resulted from the trustee's failure to perform his duties properly. See e.g., In re Kuhn Brothers, 234 Fed. 277, 281 (7th Cir.), cert denied, 242 U.S. 629, 37 S.Ct. 14, 61 L.Ed. 536 (1916); In re P-R Holding Corporation, 84 F.Supp. 467, 471 (S.D.N.Y. 1949); In re Webster Loose Leaf Filing Co., 252 Fed. 959, 959-60 (D.N.J.1918). A trustee may be held personally liable, however, only if he "acts willfully and deliberately in violation of his fiduciary duties. . . ." Sherr v. Winkler, 552 F.2d 1367, 3 BCD 193, 198 (10th Cir.1977). Furthermore, a trustee may be held liable in his official capacity only "if he fails to exercise that degree of care required of an ordinarily prudent person serving in such capacity." Id.
The Supreme Court of the United States has recognized that trustees in bankruptcy may find themselves in a difficult position as they attempt to deal with the various competing interests involved in a bankruptcy proceeding. See Mosser v. Darrow, 341 U.S. 267, 274, 71 S.Ct. 680, 683, 95 L.Ed. 927 (1951). Although the Mosser case was a reorganization proceeding, rather than a liquidation proceeding, the Court's discussion is applicable equally to both situations. In the opinion by Justice Robert H. Jackson, the Mosser Court recognized that there are ways by which a trustee may protect himself against personal liability. Id. at 273-74, 71 S.Ct. at 683. The Court noted that "the practice is well established by which trustees seek instructions from the court, given upon notice to creditors and interested parties, as to matters which involve difficult questions of judgment." Id.
As discussed earlier, the trustee has taken two procedurally different, but substantively similar, actions in response to the IRS' proofs of claim. The trustee's objection to proofs of claim and the complaint for declaratory judgment are similar attempts to procure guidance from this Court concerning the dilemma which the trustee perceives he is in. The decision before the Court is somewhat complex because of the unusual procedural positions of the parties in this case. In both matters before the Court, the trustee is seeking a ruling that the tax claims filed by the United States and the Commonwealth of Virginia are...
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