Matter of Johnson

• Decision Date: 21 December 1987
• Docket Number: Bankruptcy No. 74-316-A.
• Citation: 80 BR 791
• Parties: In the Matter of Robert D. JOHNSON, Bankrupt. (Two cases) Lenora Johnson BROWN and Edmund G. Harrison and Bert B. Barnes and Kate Barnes and John E. Barnes and W.T. Barnes, Esquire, Plaintiffs v. Bruce GOLDSTEIN, Trustee in Bankruptcy, Defendant and United States of America, Intervenor-Defendant. Jack O. FRIEDMAN, Plaintiff, v. Bruce GOLDSTEIN, Trustee in Bankruptcy, Defendant, and United States of America, Invervenor-Defendant.
• Court: U.S. District Court — Virgin Islands, Bankruptcy Division

80 B.R. 791 (1987)

In the Matter of Robert D. JOHNSON, Bankrupt. (Two cases)

Lenora Johnson BROWN and Edmund G. Harrison and Bert B. Barnes and Kate Barnes and John E. Barnes and W.T. Barnes, Esquire, Plaintiffs v. Bruce GOLDSTEIN, Trustee in Bankruptcy, Defendant and United States of America, Intervenor-Defendant.

Jack O. FRIEDMAN, Plaintiff, v. Bruce GOLDSTEIN, Trustee in Bankruptcy, Defendant, and United States of America, Invervenor-Defendant.

Bankruptcy No. 74-316-A.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

December 21, 1987.

Stephen Leach, Zuckerman, Spaeder, Goldstein, Taylor & Kolker, Washington, D.C., for Bruce Goldstein, Trustee in Bankruptcy.

Bradley G. McDonald, John F. Karl, Jr., McDonald & Karl, Washington, D.C. and Philip Kellogg, Kellogg, Williams & Lyons, Washington, D.C. and David Ross Rosenfeld, Rosenfeld & Wohltman, P.C., Alexandria, Va., for W.T. Barnes.

Jack O. Friedman, Charleston, W. Va., pro se.

Robert O. Gordon, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for U.S.

MEMORANDUM OPINION

MARTIN V.B. BOSTETTER, Jr., Chief Judge.

We are once again called upon to make a determination in connection with the fraudulent pyramid investment scheme of bankrupt Robert D. Johnson, previously described by this Court in In re Johnson, 55 B.R. 800 (Bankr.E.D.Va.1985). The issue here arises upon cross motions for summary judgment. One such motion was filed by the plaintiffs, defrauded investors, who have also filed a motion for certification of the matter as a class action under Federal Rule of Civil Procedure 23, and the other by the Internal Revenue Service ("IRS" or "the government"), which has intervened as a defendant.¹ The complaint asserts that funds presently held by the Trustee are not part of the bankruptcy estate and should be returned to the plaintiffs, as representatives of the proposed class. The plaintiffs put forward two related theories in support of their claim, the first asserting that the debtor and, consequently, the trustee, holds the swindled funds subject to a constructive trust in favor of investors. The plaintiffs base their second theory on the principles of common law governing title to the property obtained by fraud. It is the plaintiffs' contention that because Johnson never acquired title to the swindled investments, title could not vest in the trustee. They assert, therefore, that the trustee possesses no power under the Bankruptcy Act to distribute the funds, so the funds should be returned to the plaintiffs for distribution to the class outside of bankruptcy. In its defense to this claim, the government asserts that the relevant statute of limitations bars the plaintiffs' complaint. Furthermore, the government argues that, even if the complaint is not barred, only funds traceable from an individual investor into the estate can qualify as assets that do not pass to the trustee and that, since none of the swindled investors is able to trace his or her individual investment, all funds held by the trustee must properly be administered in bankruptcy.

The threshold issue for resolution by this Court is the government's assertion in its motion for summary judgment that the complaint is barred by the statute of limitations codified at section 8.01-243(B) of the Virginia Code, which states, in pertinent part:

Every action for injury to property . . . shall be brought within five years next after the cause of action shall have accrued.

Va. Code § 8.01-243(B) (1984). The applicability of this statute to cases asserting a constructive trust is a settled matter of law in Virginia. See White v. Federal Deposit Insurance Corp., 122 F.2d 770, 744 (4th Cir.1941) (Virginia case law cited and summarized). The government notes that, under section 8.01-249(1) of the Code of Virginia, a cause of action for fraud is deemed to have accrued at the time the fraud is discovered or, by exercise of due diligence, ought to have been discovered. Va. Code § 8.01-249(1) (1984). The government concludes that the date of the involuntary petition in bankruptcy is the last possible date that the Court may find the fraud to have accrued, in that the petition operated as a general notice of the fraudulent pyramid scheme orchestrated by the bankrupt, and thus the complaint is time-barred.

The plaintiffs counter with section 11(d) of the Bankruptcy Act as the applicable statute of limitations:

Suits shall not be brought against a person who has acted as a receiver or trustee of a bankrupt estate, upon any matter arising in connection with the administration thereof, subsequent to two years after the estate has been closed.

11 U.S.C. § 29 (repealed 1978). On its face, section 11(d) appears to include actions to reclaim property in the possession of the trustee but not within the estate of the bankrupt, because reclamation actions are matters "arising in connection with the administration" of the bankruptcy estate. The government, however, urges a narrow construction of section 11(d), suggesting that the section applies only to actions brought against the trustee personally for malfeasance in carrying out his statutory duty, asserting that any other interpretation permits the initiation of disputes over substantive bankruptcy matters well after the closing of the bankruptcy estate.

We find the statutory language of section 11(d) sufficiently broad to cover both the action presently at bar and those asserting personal liability on the part of the trustee. We cannot accept, therefore, the government's position that the applicability of the section to the latter actions forecloses any application to the former.

In its original form, section 11(d) governed suits initiated by and against the trustee or receiver:

d. Suits shall not be brought by or against a trustee of a bankrupt estate subsequent to two years after the estate has been closed.

Section 11(d) of the Bankruptcy Act of 1898. In 1938, Congress limited section 11(d) to suits against a trustee, clarified the scope of the section to "any matter arising in connection with the administration" of the estate, and drafted section 11(e) governing suits initiated by the trustee. The enactment of section 11(e) significantly curtailed the time period within which the trustee might press claims held within the bankruptcy estate to two years after the date of adjudication, rather than two years after the estate was closed. See 14 Collier on Bankruptcy § 11.01 (1978).

We find this Congressional amendment of the section instructive for the task of statutory interpretation before us. Particularly notable for our purposes is the failure of Congress to alter the time period within which plaintiffs may assert claims against the trustee. In view of the revision of the time limitation for actions covered by section 11(e), we must conclude that Congress was fully cognizant of the broad range of litigation permissible under section 11(d). Nevertheless, Congress did not alter the statute as it applied to suits brought against a trustee except to explicitly require a connection with the administration of the estate. The statutory language of this limitation clearly contemplates actions against the trustee that involve the merits of the bankruptcy.

The case cited by the IRS, In re Schreiber, 23 F.2d 428 (2d Cir.1928), poses no bar to our ruling. After granting the debtor in Schreiber a discharge, the court closed his bankruptcy case. More than three years later, the court granted ex parte a creditor's petition to reopen the estate in order to administer assets discovered subsequent to the closing of the case. The debtor moved to vacate the order reopening the case, asserting that the two-year limitation contained in section 11(d) constrained the court's exercise of its power to reopen cases not fully administered. The United States Court of Appeals for the Second Circuit rejected the debtor's argument, finding that section 11(d) had no bearing on the court's power to reopen a case improvidently closed.

The government cites the Second Circuit's opinion in Schreiber in support of the proposition that actions affecting the merits of the bankruptcy need be preceded by an order reopening the case, if the case is closed. The IRS concludes that because section 11(d) contemplates causes of action filed after the closing of the bankruptcy case, it cannot apply to any action involving substantive issues affecting the bankrupt or his estate.

At the outset, we note that the Schreiber court considered the version of section 11(d) enacted in 1898, and was thus without the benefit of the explanatory phrase "upon any matter arising in connection with the administration of a bankrupt estate". Section 11(d) (emphasis added). Collier's has characterized the inclusion of this phrase in the 1938 revision of section 11(d) as a "clarification of the application of the subdivision," a description with which we concur. The section 11(d) applicable to this case, then, differs from that considered by the Schreiber court by virtue of the section's explicit description of the range of cases it governs.

We concur with the government's position noting the implication that, under proper practice, a closed case must be reopened in order to address matters affecting the administration of the bankruptcy estate. However, we see no conflict between this procedure and the time limitation codified in section 11(d). The Schreiber court explicitly noted that compliance with procedural propriety governing reopening of the case did not settle, or even touch upon, the two-year limitation contained in section 11(d):

The notion which underlies the bankrupt\'s argument is really that section 11(d) bars any proceeding which the trustee hereafter to be elected may bring to compel the bankrupt to account, and therefore there is no unadministered asset, without which the reopening of an estate is not only futile, but unauthorized. It would seem to be a

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