Nation-Wide Check Corp., Inc. v. Forest Hills Distributors, Inc.

• Decision Date: 15 November 1982
• Docket Number: Nos. 82-1281,NATION-WIDE,82-1285,s. 82-1281
• Citation: 692 F.2d 214
• Parties: 11 Fed. R. Evid. Serv. 1588 CHECK CORPORATION, INC., Plaintiff, Appellee, v. FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellants.CHECK CORPORATION, INC., Plaintiff, Appellant, v. FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 214

692 F.2d 214

11 Fed. R. Evid. Serv. 1588

NATION-WIDE CHECK CORPORATION, INC., Plaintiff, Appellee, v. FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellants.

NATION-WIDE CHECK CORPORATION, INC., Plaintiff, Appellant, v. FOREST HILLS DISTRIBUTORS, INC., et al., Defendants, Appellees.

Nos. 82-1281, 82-1285.

United States Court of Appeals,

First Circuit.

Argued Sept. 17, 1982.

Decided Nov. 15, 1982.

Ivor C. Armistead, III, with whom Daniel S. Margolies, and Widett, Slater & Goldman P.C., Boston, Mass., were on brief, for defendants Forest Hills Distributors, Inc., et al.

John Wall, with whom Cullen & Wall, and Harry C. Mezer, Boston, Mass., were on brief, for plaintiff Nation-Wide Check Corp.

Before DAVIS ^*, CAMPBELL and BREYER, Circuit Judges.

BREYER, Circuit Judge.

Appellants Joseph Braunstein, Stephen Gordon, and Victor Dahar (the "assignees") are assignees for the benefit of creditors of Forest Hills Distributors, Inc., and Forest Hills of New Hampshire, Inc. ("Forest Hills"). Appellee Nation-Wide Check Corporation ("Nation-Wide") sells money orders. Forest Hills sold Nation-Wide's money orders on Nation-Wide's behalf. After Forest Hills assigned its assets for the benefit of its creditors, Nation-Wide sued the assignees for the proceeds of the money order sales. The district court found in its favor. The assignees appeal, claiming that the court rested its decision in part upon an impermissible inference based upon the fact that the assignees allowed the destruction of certain Forest Hills documents in their possession. We believe the district court's inference was permissible, and we therefore affirm its decision.

I

In October 1973 Nation-Wide agreed with Forest Hills that Forest Hills would sell Nation-Wide's money orders to the public in return for a commission. The agreement specifically provided that Forest Hills would hold the sale proceeds apart from all its other assets and revenues, depositing those proceeds in a separate account with The First National Bank of Boston. This procedure, however, was not followed. Instead, the proceeds were deposited in various Forest Hills accounts in local banks near Forest Hills' stores, then transferred to various other Forest Hills accounts in Boston banks. From there, Forest Hills periodically remitted amounts due to Nation-Wide. Moreover, the proceeds were commingled with general Forest Hills revenues when they reached the Boston banks.

In late 1974 Forest Hills encountered financial difficulties and stopped sending money order proceeds to Nation-Wide. On December 18, Forest Hills executed an assignment of all its assets for the benefit of its creditors. At the time of the assignment, Forest Hills owed Nation-Wide $71,417.69 for money orders issued between early November (when Forest Hills stopped paying Nation-Wide) and December 18 (when the assignment took place and money order sales were halted).

The assignees quickly liquidated most of Forest Hills' assets. By the end of December 1974 they apparently accumulated a fund of more than $600,000. Nation-Wide with equal promptness told the assignees about its claim against Forest Hills. Nation-Wide said that its claim took precedence over the claims of Forest Hills' general unsecured creditors because of the "separate-fund" provisions in its 1973 money order agreement. Nation-Wide's lawyers spoke to assignee Gordon around December 19 and wrote to Gordon about their claim a few days later. The assignees rejected Nation-Wide's priority claim and Nation-Wide filed suit against the assignees and Forest Hills on April 1, 1975, seeking payment of its $71,000 out of the $600,000 the assignees had accumulated.

On April 11, Gordon, an associate in a Boston law firm, wrote a letter to a senior partner in the same office about Forest Hills' business records. He noted that the records were being stored at some expense and asked if they should be discarded. In accordance with advice he received from the firm's partner, he then abandoned many of the documents--including all 1974 checks--to the landlord of the storage premises. Gordon's act of abandonment lies at the center of the controversy on this appeal.

In August 1979, when denying cross motions for summary judgment, the district court made clear just what Nation-Wide would have to prove to establish a preferred position vis-a-vis the general creditors and thereby to prevail. First, Nation-Wide would have to prove that Forest Hills breached a specific agreement to keep the money order sale proceeds separate. At that point Nation-Wide's claim would be like that of a secured creditor or a beneficiary of a trust, whose property the debtor or trustee has commingled with other property of his own. See In re Dexter Buick-GMC Truck Co., 2 B.R. 247, 250 (Bkrtcy.D.R.I.1980). Second, Nation-Wide would then have to trace the funds from the sales themselves into the final $600,000 accumulated by the assignees.

The first of these tasks was easy; the second was not quite as difficult as it sounds, for Nation-Wide, like a trust beneficiary seeking recovery from a "commingling" trustee, would benefit from liberal common law tracing presumptions. See 5 A. Scott, The Law of Trusts Sec. 517, at 3620-21 (1967) [hereinafter cited as Scott on Trusts ]. The district court found applicable, for example, the rule that when a trustee withdraws funds for his own purposes from a commingled account, he is presumed to have withdrawn his own money first. See, e.g., Farinha v. Commissioner of Banks, 303 Mass. 192, 21 N.E.2d 237 (1939); Bogert on Trust and Trustees Sec. 926, at 407-08 (2d rev. ed. 1982); Scott on Trusts Sec. 517. The effect of this presumption is to allow the beneficiary to recover the full value of the trust res from the commingled fund as long as the fund's value has never dipped below that of the trust res itself. Thus, if a trustee deposits ten dollars of his own money and ten dollars of trust money in a single account, and withdraws five dollars from the account subsequently, the withdrawal is treated as being taken entirely from the trustee's own money, and the beneficiary can recover the entire ten dollars from the balance. If the balance of the account were to dip below ten dollars on the other hand, the beneficiary would be entitled only to the "lowest intermediate balance." See Universal C.I.T. Credit Corp. v. Farmers Bank, 358 F.Supp. 317, 325-26 (E.D.Mo.1973); Scott on Trusts Sec. 517; 1 G. Palmer, The Law of Restitution Sec. 2.16, at 199 (1978).

We suspect, but do not decide, that the district court might have used other liberal presumptions as well, although there is no specific indication that it did so. For example, if a trustee commingles trust funds with other funds, then withdraws part of the commingled fund and preserves it but dissipates the balance, the trust attaches to the preserved fund despite the fact that it was the first sum withdrawn and hence would otherwise be considered the trustee's money under the first presumption. See Scott on Trusts Sec. 517.1. Under this presumption, if the trustee withdraws ten dollars from a commingled fund and uses it to buy a watch, or simply places it in another account, and then dissipates the balance of the commingled fund on other personal expenses, the beneficiary can recover against the watch or the new account rather than being consigned to the status of general creditor because the first account is empty.

In any event, we believe the court was operating on the assumption that, if Nation-Wide could demonstrate that the balances in the various bank accounts into which Forest Hills directly placed, or transferred, money order proceeds never declined below the level of the money order proceeds placed in them, it could recover the whole amount of the proceeds. More realistically, even if any local account did decline below the level of the proceeds placed in it, Nation-Wide might still recover the full amount, by showing that the shortfall was accounted for by a transfer to another account that did not itself subsequently fall below the required level and that reached the assignees. If it were able to produce records of inter-account transfers and account balances for the relevant period, Nation-Wide could effectively "trace" all of the proceeds from the initial sales through Forest Hills' various bank accounts into the hands of the trustees.

At trial, Nation-Wide was able to present only limited evidence of the money order proceeds' "path" through Forest Hills' various accounts--in part because it had no recourse to the documents that Gordon discarded, in part because most of the banks involved had scanty records or no records at all. Nation-Wide produced records of the dates, locations, and amounts of money order sales for the relevant period, along with testimony that the proceeds were systematically deposited within a relatively short time by each local Forest Hills' store in a local bank. Nation-Wide also produced a list of the local bank accounts in both Massachusetts and New Hampshire and a compilation of the statements of those accounts in Massachusetts indicating that the aggregate balance for the period was always roughly equal to or substantially above the level of proceeds from all stores. Finally, it showed that the assignees deposited over $450,000 of Forest Hills' money in a new account within twelve days of the assignment, although it was unable (with one exception) to prove where the money came from.

While this evidence was consistent with the final accumulated fund containing proceeds of the original sales, in only one case did Nation-Wide produce conclusive documentary evidence of the route of the proceeds--a transfer of $1,204.85 from the Seabrook, New Hampshire, store, through the Hampton National Bank and the New England Merchants' Bank, into the assignees' First National Bank of Boston account. The...