Provencher v. Berman, s. 82-1422

• Decision Date: 03 February 1983
• Docket Number: 82-1454,Nos. 82-1422,s. 82-1422
• Parties: Leroy A. PROVENCHER, et al., Defendants, Appellees, v. Eugene B. BERMAN, Trustee, Plaintiff, Appellant. Leroy A. PROVENCHER, et al., Defendants, Appellants, v. Eugene B. BERMAN, Trustee, Plaintiff, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 568

699 F.2d 568

Leroy A. PROVENCHER, et al., Defendants, Appellees, v. Eugene B. BERMAN, Trustee, Plaintiff, Appellant.

Leroy A. PROVENCHER, et al., Defendants, Appellants, v. Eugene B. BERMAN, Trustee, Plaintiff, Appellee.

Nos. 82-1422, 82-1454.

United States Court of Appeals, First Circuit.

Argued Nov. 3, 1982.

Decided Feb. 3, 1983.

Louis Kerlinsky, P.C., Springfield, Mass., for Eugene Berman, trustee.

David D. Patterson, Boston, Mass., with whom Albert F. Cullen, Jr., and Cullen & Wall, Boston, Mass., were on brief, for Leroy A. Provencher, et al.

Before BROWN, ^* Senior Circuit Judge, BOWNES and BREYER, Circuit Judges.

BREYER, Circuit Judge.

This court first considered this case three years ago. See Berman v. Provencher, 614 F.2d 823 (1st Cir.1980) (Provencher I ). In an opinion that criticized the bankruptcy court's decision, the state of the record, and the parties' briefs, we wrote that the bankrupt Provenchers had improperly failed to disclose to the trustee Berman one of their important assets--namely, an equitable interest in a corporation called Ramblewood Associates, Inc. (Ramblewood). Ramblewood apparently served as a Provencher alter ego. The Provenchers had deposited in a Ramblewood bank account money that rightfully belonged to the bankruptcy estate and had used that money to help buy land and build a house for themselves. The trustee, not the Provenchers, was entitled to that money.

In our earlier opinion, we decided three points of law. First, we held that the trustee's action to recover the improperly withheld funds was not barred by the statute of limitations. We noted that in December 1972 the Provenchers gave the trustee an income tax return listing earned income from Ramblewood and that the trustee did not bring this suit until January 1975. Nevertheless, we wrote that given the Provenchers' misstatements and concealment, the two-year statute of limitations in Sec. 11(e) of the former Bankruptcy Act, 11 U.S.C. Sec. 29(e) (1976), superseded by Bankruptcy Code, Pub.L. No. 95-598, 92 Stat. 2549 (1978), did not bar the action. Second, we rejected the trustee's claim to the entire property. We noted that in buying the land and building the house, estate funds had been commingled with the Provenchers' own funds; we held that the trustee was therefore entitled to some but not all of the real property. Third, we gave explicit directions about how to proceed on remand. We stated that the trustee could either assert a lien against the house for the amount of the estate money invested in it or "to the extent that [the trustee] can follow the [estate] funds into the real estate, ... he may claim the proportionate share of the real estate attributable thereto." Provencher I, 614 F.2d at 825.

On remand, despite these explicit holdings, the parties again became embroiled in complex arguments. For one thing, the parties strongly contested whether each of the many items of value (e.g., checks, cash, labor provided in kind) that went into the creation of the house properly belonged to the estate or were earned by (or given to) the Provenchers after the filing of the bankruptcy petition. The bankruptcy judge eventually decided that 47.9 percent of the property investment (not attributable to the mortgages on the property) had been contributed by the trustee. For another thing, the trustee asked the bankruptcy judge to convey his interest (i.e., 47.9 percent) to him directly in the form of an undivided interest in the property. Instead, the bankruptcy judge valued the house at $70,000 and gave the trustee a money judgment equal to approximately 47.9 percent of this amount less the face value of the outstanding mortgage. In doing so, the bankruptcy court appears in effect to have partitioned the property and to have used only the Provenchers' testimony to determine its value. (The trustee presented no appraisal evidence.) Finally, the parties contested several more minor matters, such as whether the Provenchers owed the trustee rent and whether the trustee should be assessed for a fraction of the Provenchers' mortgage payments.

The district court affirmed the judgment of the bankruptcy court, and both parties appeal from that judgment. The trustee challenges the bankruptcy court's decision on nearly every point. The Provenchers seek to reargue their statute of limitations claim. And, many of the points raised are better suited for decision by an accountant than a judge. Nonetheless, to expedite this litigation, we shall decide as many of the issues as possible.

1. We deal first with the most important point of law: the trustee says that he was entitled to an undivided interest in the real property rather than a money judgment reflecting the value of the property. The trustee is correct. This court in Provencher I explicitly stated that the trustee, if he chose, could "claim the proportionate share of the real estate." See Provencher I, 614 F.2d at 825. We did not say he could claim only a proportionate share of the "value" of the real estate. This statement is the "law of the case." Cf. Cochran v. M & M Transportation Co., 110 F.2d 519, 521-22 (1st Cir.1940); 1B Moore's Federal Practice p 0.404 (1965). Moreover, in our previous opinion we followed the analysis of Professor Scott, which we explicitly cited. See 5 A. Scott, The Law of Trusts (3d ed. 1967). We described the trustee's rights as Professor Scott and the Restatement describe the rights of an innocent party against a "conscious wrongdoer" who uses commingled funds to buy property, see Restatement of Restitution Sec. 202 (1937); 5 A. Scott, supra, at Sec. 508. In such a situation, the innocent party can choose either to enforce a lien on the property for the value of the estate's funds or to enforce a constructive trust on the property. This is a virtually universal rule as described in 5 A. Scott, supra, at Sec. 516, and the Restatement of Restitution Sec. 210. It is supported by prominent authorities. See, e.g., Primeau v. Granfield, 184 F. 480 (S.D.N.Y.) (L. Hand, J.), rev'd on other grounds, 193 F. 911 (2d Cir.1911), cert. denied, 225 U.S. 708, 32 S.Ct. 889, 56 L.Ed. 1267 (1912); Ames, Following Misappropriated Property into its Product, 19 Harv.L.Rev. 511, 511-12 (1906); see also, e.g., Sears v. Grover, 116 N.J.Eq. 111, 172 A. 525, 527 (1934); G & M Motor Co. v. Thompson, 567 P.2d 80, 83-84 (Okl.1977); Mace v. Young, 231 S.W.2d 722, 726 (Tex.Civ.App.1950), writ of error dismissed or refused. Given the compelling criticism of the only Massachusetts authority we have found to the contrary, Bresnihan v. Sheehan, 125 Mass. 11, 13 (1878), and the failure of the Massachusetts courts to cite Bresnihan since 1947, we believe, even were it not the "law of the case", that this universal rule applies in Massachusetts as well. See Mason v. American Emery Wheel Works, 241 F.2d 906, 909 (1st Cir.) ("A decision may become so overloaded with illogical exceptions that by erosion of time it may lose its persuasive or binding force even in the inferior courts of the same jurisdiction."), cert. denied, 355 U.S. 815, 78 S.Ct. 17, 2 L.Ed.2d 32 (1957).

Further, Professor Scott explains precisely how courts treat property held subject to a constructive trust. The holders of the property, here the Provenchers, have "an equitable duty to convey it " to the beneficiary, here the trustee. 5 A. Scott, supra, at Sec. 462 (emphasis added); see Loring v. Baker, 329 Mass. 63, 66-67, 106 N.E.2d 434 (1952); Berry v. Kyes, 304 Mass. 56, 59, 22 N.E.2d 622 (1939); Restatement of Restitution Sec. 160; 1 G. Palmer, The Law of Restitution Sec. 1.3 (1978). The trustee as beneficiary is entitled to an undivided share of the property equivalent to the proportion which his funds bore to the total amount (other than mortgage loans) used by the Provenchers to buy the house. See Restatement of Restitution Sec. 210; 5 A. Scott, supra, at Sec. 516. The trustee would be entitled to the entire property only if the Provenchers had used solely estate funds (or estate funds plus borrowed funds) to buy the property--not the case here. See Restatement of Restitution Sec. 210 comment f; 5 A. Scott, supra, at Sec. 516.2. Where, as in this case, the holder used commingled funds to buy the property subject to a mortgage, according to the authorities we cited the beneficiary of the constructive trust (here the trustee in bankruptcy) may take title to a proportionate share of the entire property, subject to the mortgage. See Sears v. Grover, supra; 5 A. Scott, supra, at Sec. 516.2.

On remand, however, the bankruptcy court not only determined the parties' relative interests in the property, it went on to award a money judgment to the trustee against his will. In doing so the court acted contrary to the authority just cited. And, if it was doing so by virtue of some inherent power to partition real property among owners of undivided interests, we believe it erred. For one thing, the parties had not formally petitioned for a partition of the property. For another thing, this case arose under the Bankruptcy Act of 1898 which, unlike the present Bankruptcy Code of 1978, contains no provision for partition or a partition-like remedy. Cf. Bankruptcy Code Sec. 363, 11 U.S.C.A. Sec. 363 (1979). To the contrary, considerable authority suggests that bankruptcy courts lacked this power under the old Act. Some courts held that partition was not within the administrative functions of the bankruptcy court. See First National Bank of Chicago v. Chicago Title & Trust Co., 198 U.S. 280, 25 S.Ct. 693, 49 L.Ed. 1051 (1905) (contest over title to property not administrative matter); Bardes v. Hawarden Bank, 178 U.S. 524, 532, 20 S.Ct. 1000, 1003, 44 L.Ed. 1175 (1900) (same); In re Victor, 218 F.Supp. 218, 220 (S.D.Ill.1963) (trustee with undivided interest in property may "have a partition of the real estate by a proceeding in an appropriate state court" if division is necessary to obtain fair value...