Rosenberg v. Collins

• Decision Date: 21 August 1980
• Docket Number: No. 79-1315,79-1315
• Citation: 624 F.2d 659
• Parties: , Bankr. L. Rep. P 67,584, 6 Fed. R. Evid. Serv. 1065 David H. ROSENBERG, Trustee in Bankruptcy, Plaintiff-Appellee, v. Charles E. COLLINS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 659

624 F.2d 659

6 Bankr.Ct.Dec. 1043, Bankr. L. Rep. P 67,584,

6 Fed. R. Evid. Serv. 1065

David H. ROSENBERG, Trustee in Bankruptcy, Plaintiff-Appellee, v. Charles E. COLLINS, Defendant-Appellant.

No. 79-1315.

United States Court of Appeals Fifth Circuit.

Aug. 21, 1980.

William J. Ruhe, Jr., Richardson, Tex., for defendant-appellant.

Alan H. Cooper, Ben L. Krage, David B. Winn, Dallas, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before TJOFLAT, POLITZ and HATCHETT, Circuit Judges.

HATCHETT, Circuit Judge:

Appellants, former customers of the bankrupt Arata & Co., appeal a district court judgment for the bankruptcy trustee, setting aside certain transfers of cash by the bankrupt to appellants within one year preceding the filing of a voluntary petition in bankruptcy. Appellants received cash transfers in excess of the total cash deposits they had made with the bankrupt. The district court found the transfers to be in violation of section 67(d) of the Bankruptcy Act. (11 U.S.C. § 107). ¹ Central to the judgment for the bankruptcy trustee was the finding that each customer whose total cash withdrawal was less than his total cash deposit was a creditor within the meaning of section 67(d)(1)(c). Because we hold that the transfers were in violation of section 67(d), that certain customers were creditors, and that a summary of computer records was properly admitted as business records, we affirm.

FACTS

The bankrupt, Robert L. Arata, operated a sole proprietorship known as Arata & Co., a purported commodities investments business. Over 900 customers invested $2,400,000 with Arata & Co. The bankrupt's customers entered into individual written contracts with the bankrupt, under which they made cash deposits for commodity investments; profits were to be divided between the bankrupt and the customers; the losses were to be borne by the customers alone. All of the cash deposits of the customers were placed in a single checking account and used by the bankrupt for investments, personal purposes, and business purposes unrelated to commodity investments. The bankrupt sent fictitious quarterly statements to all customers claiming to show specific commodity trades made on behalf of individual customers, profits and losses on those trades, additional cash deposits and cash withdrawals, if any, by the customers, and a balance for the individual customer. The balance was fictitious. No commodity trades were made in the name of any individual customer, and the quarterly statements were fictitious insofar as they purported to show that commodity trades were made in the name of individual customers.

The bankrupt testified that he used a computer to make commodity trades based on a program he formulated with his background in computer programming. The bankrupt himself made all business decisions as to what commodities were bought and sold. He ceased commodities trading on December 7, 1973, when the S.E.C. directed him to stop trading. On January 24, 1974, he filed for bankruptcy. Subsequently, he pleaded guilty to violations of Texas securities laws.

According to the district court, the bankrupt was insolvent, within the meaning of section 67(d) of the Bankruptcy Act at all times during the year immediately preceding the filing of his voluntary petition in bankruptcy. During this year preceding filing for bankruptcy, cash withdrawals were transferred to customers from the funds in the bank account. Some customers received no payments, others received payments less than their deposits, and some customers received cash payments in excess of their deposits. Appellants come from this latter group. The bankruptcy trustee, appellee Rosenberg, brought suit seeking to recover the excess received by the appellants in the year prior to bankruptcy. Of the ninety-two original cases, all were consolidated for trial. ² At trial, the bankruptcy trustee attempted to show the financial condition of the bankrupt during the year preceding filing of the voluntary petition through the submission of, among other things, computer records. The trial judge admitted these records over the objection of appellants. The trial judge found that the transfers of cash withdrawals to each of the appellants in excess of their total cash deposits, respectively, were without fair consideration, and were transfers of property of the bankrupt within the meaning of section 67(d) of the Bankruptcy Act. The trial judge further found that each customer of the bankrupt whose total cash withdrawal was less than such customer's total cash deposit was a creditor of the bankrupt under section 67(d).

ISSUES

Appellants contend that:

(1) The trial judge erred in holding that the cash withdrawals received by each appellant within the one year preceding the filing of a voluntary petition which were in excess of each appellants' cash deposits were transfers of property of the bankrupt within the meaning of section 67(d);

(2) the trial judge erred in holding that each customer of the bankrupt whose total cash withdrawals were less than such customers' total cash deposits was a creditor of the bankrupt within the meaning of section 67(d); and,

(3) the trial judge erred in admitting into evidence, over the objection of appellants, computer records which were not properly authenticated as business records, without which there was a complete absence of any evidence to show that the bankrupt was insolvent at the time the transfers were made.

DISCUSSION

I

Contending that there was no transfer of property within the meaning of the Bankruptcy Act, appellants claim that under section 67(d), the bankruptcy trustee only acquires the interest in the property of the bankrupt; that neither legal nor equitable title to the funds deposited by the customers passed to the bankrupt; that the language of the contractual agreement and the intent of the parties indicate either an express trust, a resulting trust, or a constructive trust relationship between the bankrupt and the customers. Therefore, appellants argue that no transfers of property can occur.

We disagree. Appellants' argument that the cash payments to them were not transfers of property of the bankrupt under section 67(d) of the Act erroneously assumes that the bankrupt held the funds under either an express or implied trust. To succeed on their theory, appellants must first establish the existence of a trust under Texas law. 4 A Collier on Bankruptcy, the P 70.25(1) (14th Ed. J. Moore 1975).

Under Texas law, trusts are categorized as express, implied, and constructive. Mills v. Gray, 147 Tex. 33, 210 S.W.2d 985 (1948).

An express trust comes into existence only by the execution of an intention to create it. Mills v. Gray. The terms of the agreement between the bankrupt and his customers evidence no intent to create a trust. Rather, the terms of the agreement reveal an intent of the customers to purchase, on a contingency basis, the bankrupt's services as an expert in commodity trading. The agreement stipulated that profits would be shared, and losses would be absorbed by the customers. The bankrupt was solely responsible for all details of the operation, and all decisions as to what commodities were bought and sold were made by the bankrupt.

The contract entered into by the bankrupt and his customers created, not an express trust, but an investment contract. Under Texas law, an investment contract is:

a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter, or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.

Clayton Brokerage Co. of St. Louis, Inc. v. Mouer, 520 S.W.2d 802 at 806 (Tex.Civ.App.1975), dism'd as moot, 531 S.W.2d 805 (Tex.1976). There, the court defined common enterprise as "one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment of third parties." Id. at 807.

Under Texas law, both resulting and constructive trusts are types of implied trusts. Mills v. Gray. Resulting trusts are created in circumstances not applicable here. "A resulting trust arises by operation of law when title is conveyed to one person but the purchase is paid by another." Tolle v. Sawtelle, 246 S.W.2d 916 at 919 (Tex.Civ.App.1952). Here, there is no dispute as to the ownership of property purchased with the funds in question.

Under Texas law, a constructive trust may be created regardless of the intention of the parties where equity and justice demand. 57 Tex.Jur.2d, Trusts § 447 (1964). A constructive trust is usually found where property is acquired by fraud. Mills v. Gray. A constructive trust, however, can only attach to some identifiable property which can be traced back to the original property acquired by fraud. Meadows v. Bierschwale, 516 S.W.2d 125 (Tex.1974).

Further, even if a trust relationship was established, the inability of the customers of the bankrupt to trace their own property would defeat appellants' assertion of a trust. To establish a trust relationship that excludes property from the bankruptcy estate, a claimant must: (1) prove the existence of the trust; and (2) trace the identity of his property. Schuyler v. Littlefield, 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806 (1914); 4 A Collier on Bankruptcy, P 7025(1) (14th Ed. J. Moore 1975). Under the present circumstances, none of the customers of the bankrupt could successfully trace his or her funds so as to sustain a claim for reclamation in the bankruptcy on a constructive trust theory because all of the funds from the 900 customers of the bankrupt were co-mingled in a single back account, which was used for personal and business purposes of the bankrupt, as well as...