Omegas Group, Inc., In re

• Decision Date: 18 February 1994
• Docket Number: 92-5934,Nos. 92-5922,s. 92-5922
• Citation: 16 F.3d 1443
• Parties: , 25 Bankr.Ct.Dec. 413, Bankr. L. Rep. P 75,722, 1994 Fed.App. 51P In re OMEGAS GROUP, INC., Debtor. XL/DATACOMP, INC., Plaintiff-Appellant/Cross-Appellee, v. John R. WILSON, Trustee, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1443

16 F.3d 1443

62 USLW 2535, 25 Bankr.Ct.Dec. 413, Bankr.

L. Rep. P 75,722,

1994 Fed.App. 51P

In re OMEGAS GROUP, INC., Debtor.

XL/DATACOMP, INC., Plaintiff-Appellant/Cross-Appellee, v. John R. WILSON, Trustee, Defendant-Appellee/Cross-Appellant.

Nos. 92-5922, 92-5934.

United States Court of Appeals, Sixth Circuit.

Argued June 15, 1993.

Decided Feb. 18, 1994.

Philip W. Collier, Michael D. Risley (argued and briefed), Stites & Harbison, Louisville, KY, for XL/Datacomp, Inc.

John R. Wilson (argued), Ruck, Wilson & Cooper, Louisville, KY, Jonathan D. Goldberg, Cathy S. Pike, Goldberg & Simpson, Louisville, KY, J. Baxter Schilling (briefed), Louisville, KY, for John R. Wilson.

Before: GUY and BATCHELDER, Circuit Judges, and MILES, Senior District Judge. ^*

BATCHELDER, Circuit Judge.

Understandably, creditors of bankrupt debtors often feel like restaurant patrons who not only hate the food, but think the portions are too small. ¹ To press the analogy, they also don't like having to wait in line for a table, possibly being seated only to find out the kitchen has just closed. The bankruptcy court is a little like a soup kitchen, ladling out whatever is available in ratable portions to those standing in line; nonetheless, scarcity begets innovation in the hungry creditor's quest to get a little more than the next fellow. This case involves just such an effort. The creditor claimed the debtor defrauded it, and argued before the bankruptcy court, with partial success, that money paid to the debtor in the course of a business transaction was held in constructive trust since the debtor knew bankruptcy was imminent but assured the creditor otherwise. The district court agreed with this disposition. Since we hold that the bankruptcy court erred in applying the law of constructive trust to this bankruptcy situation, we reverse.

I.

While the parties do not generally dispute the underlying facts of this case, they do characterize them quite differently. Both parties, XL/Datacomp (Datacomp) and debtor Omegas ² (Debtor or Omegas) were "industry remarketers" (IRs) of "mid-range" IBM computers. The companies had "IR contracts" with IBM that enabled them to purchase IBM hardware at a discount, custom-tailor software for an individual purchaser, and then sell the "value-added" system to the retail purchaser.

In early 1990, the two companies entered into a course of business dealings that Datacomp describes as a "unique relationship" and a "type of joint venture" and which the Debtor describes as a "clandestine relationship." Both parties agree that Omegas agreed to act as a middleman of sorts, ordering IBMs on behalf of Datacomp, taking a percentage down payment, ordering the computers, then taking the rest of the payment and sending full payment to IBM at the time of delivery.

According to the Debtor, in early 1990, IBM paid Datacomp $8 million to terminate its IR agreement and sign on to a new IR agreement, which would eliminate the "competitive advantage which existed between the IRs and IBM's regular sales force." In order to come up with a new source of competitively priced IBMs, the Debtor explains, Datacomp approached Omegas (as well as other IRs still operating under the old IR agreements) and proposed that Omegas supply Datacomp with new IBM computers in exchange for a 4% of gross price commission. IBM would not know of this arrangement. Indeed, the Debtor claims that since Datacomp, as the purchaser from Omegas, the IR, would not be the "end-user" of the computers, this deal violated Omegas's IR agreement with IBM; for this reason, the Debtor points out, most of the transaction was arranged orally.

According to Datacomp, Omegas initially proposed this arrangement with Datacomp as a means to save itself from financial ruin. Datacomp explains that due to a misappropriation of funds within Omegas, Omegas owed IBM Credit Corp. (ICC) over $1.8 million. ICC declared the credit line to be in default on April 27, 1990. Omegas arranged a repayment schedule with ICC, but had to increase its volume of computer sales in order to make the payments. However, Omegas's order backlog with IBM had reached the limit IBM permitted it, some $1.5 million.

Datacomp stresses that while Omegas was initiating this deal with Datacomp, it at no time disclosed to Datacomp any of these goings-on with ICC. Datacomp describes Omegas's relationship to it as "fiduciary," with Datacomp relying on Omegas's trustworthiness and on the truth of its representations. The problems arose, Datacomp argues, because of Omegas's inability to convince IBM to lift or extend the firm ceiling on Omegas's credit line with ICC; without such an extension, Omegas could not process the orders Datacomp had placed. Omegas claims that ICC orally promised it a credit increase to $15 million at the time repayment was arranged, and that the Omegas principals/shareholders signed personal guarantees covering the $15 million credit line.

Between August 6 and 15, 1990, Datacomp sent Omegas orders for new IBM computers and down payments totalling $259,137. On August 29, Omegas sent Datacomp invoices totalling $618,759; Datacomp sent Omegas $587,763 by September 10. Shortly thereafter, Datacomp sent Omegas the balance due on the computers it had ordered; the total it paid reached $1,149,042. On September 12, Omegas's President, Jeffery Sanford, ordered the termination of all payments to IBM for computers on order. On September 19, representatives from the two companies met in Chicago; at the meeting Omegas informed Datacomp of its "financial problems," and that Omegas was considering the option of filing bankruptcy. At the meeting, Omegas suggested that Datacomp lend it $1.6 million, which loan would, according to Omegas, "remove the prospects of bankruptcy ... and allow [it] to fulfill its contractual agreements with Datacomp." Datacomp describes this suggestion as being more of a demand: "Omegas was holding Datacomp's funds and would not pay IBM unless Datacomp loaned Omegas [the money]."

After the meeting, Datacomp's counsel sent Omegas a letter accusing Omegas of fraud and demanding the return of the money already paid. On October 15, without Datacomp's knowledge or consent, Omegas requested that IBM cancel all deliveries. Omegas claims that this cancellation was necessary to render IBM's 5% cancellation fee a prepetition debt.

Omegas filed bankruptcy on October 16, 1990. Datacomp filed its complaint in this adversary proceeding in the bankruptcy court on October 26, 1990, seeking to recover the $1.1 million it paid Omegas by arguing that Omegas's fraud rendered all money it received pursuant to the deal subject to a constructive trust in Datacomp's favor, and thus not part of the bankruptcy estate, citing 11 U.S.C. Sec. 541(d).

After an expedited bench trial, the bankruptcy court held that Datacomp could recover $302,142 as held in a constructive trust by Omegas. In short, the bankruptcy court found that Datacomp entered into the agreement described above with Omegas, establishing a relationship which it characterized as "in a sense a joint venture," and that, while Omegas was having some difficulty sorting out its credit line with IBM, things went more or less according to plan for a while. The court found, however, that on September 12, 1990, Jeffery Sanford, the president of Omegas, "realized he was in serious financial straits with IBM" and that Omegas would not be able to complete the deal. The court found that "on September 12, [sic] 13th and/or 14th," Sanford terminated all further payments to IBM, but that after those dates Omegas continued to invoice Datacomp for the computers on order, and deposited a Datacomp check on September 17th. The court concluded that on September 12, "Sanford realized that Omegas was not going to be able to operate in its ordinary course of business with regard to its dealings with Datacomp," and that this development gave rise to an affirmative "duty to disclose its financial problems to Datacomp." The court therefore imposed a constructive trust on "all funds received [by Omegas] after September 12."

Datacomp moved to amend the judgment to recover the full amount it had paid; the court denied this motion on February 13, 1991. The parties cross-appealed, the debtor seeking reversal and Datacomp continuing to argue that the entire amount paid should be included in the constructive trust and excluded from the Debtor's estate. The district court affirmed on June 16, 1992.

II.

On appeal from district court review, this Court reviews a bankruptcy court decision for clear error as to findings of fact, and de novo as to conclusions of law. Bankr.R. 8013; Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1166 (6th Cir.1985). The court accords discretion in reviewing only the original bankruptcy court findings, not those included in the decision rendered by the district court, since "[t]his court is 'in as good a position to review the bankruptcy court's decision as is the district court.' " In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir.1991) (quoting Sambo's Restaurants, Inc. v. Wheeler (In re Sambo's Restaurants, Inc.), 754 F.2d 811, 814 (9th Cir.1985)).

III.

A.

The bankruptcy court's disposition of Datacomp's action, and the district court's affirmance, left no one satisfied. On appeal, Datacomp defends the judgment of the bankruptcy court, but argues that the court should have imposed the constructive trust on the entire amount of funds it tendered to Omegas prior to Omegas's filing for bankruptcy. Under Kentucky law, Datacomp contends, money "wrongfully" appropriated from an innocent party does not become the property of the recipient, but is considered to be held in constructive trust for the benefit of the aggrieved party. Datacomp maintains that it did not have merely a debtor/creditor relationship with Omegas, but a joint venture arrangement that imposed fiduciary duties on Omegas, which Omegas...