Yonkers Bd. of Educ. v. Richmond Children's Center, 85 Civ. 5561-CLB.

• Decision Date: 06 January 1986
• Docket Number: No. 85 Civ. 5561-CLB.,85 Civ. 5561-CLB.
• Parties: YONKERS BOARD OF EDUCATION, Plaintiff, v. RICHMOND CHILDREN'S CENTER, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

58 B.R. 980 (1986)

YONKERS BOARD OF EDUCATION, Plaintiff, v. RICHMOND CHILDREN'S CENTER, INC., Defendant.

No. 85 Civ. 5561-CLB.

United States District Court, S.D. New York.

January 6, 1986.

Lawrence W. Thomas, Gregory Keefe, Anderson, Banks, Moore, Curran & Hollis, Mount Kisco, N.Y., for plaintiff.

Edward S. Rudofsky, Zane & Rudofsky, New York City, for Richmond Children's Center.

Kevin Nash, Finkel, Goldstein & Berzow, New York City, for Creditor's Committee.

MEMORANDUM AND ORDER

BRIEANT, District Judge.

Yonkers Board of Education (hereinafter "Yonkers") appeals from an order of the Bankruptcy Court (Schwartzberg, J.) denying a turnover of funds to it by the Debtor in this Chapter 11 proceeding, Richmond Children's Center, Inc. ("Debtor" or "Richmond"). Familiarity of the reader with Judge Schwartzberg's decision dated May 14, 1985 is assumed.

Richmond cares for children who are mentally retarded and maintains a so-called "intermediate care facility" for resident treatment in the City of Yonkers. The public education of such children is governed by New York State Education Law § 3202(5). Certain of the patients resident in Richmond's facility attend the Yonkers public schools, although not domiciled in Yonkers. They are charged tuition by Yonkers, billed in the first instance to Richmond, which in turn checks the invoice to verify the attendance and submits it to the New York State Department of Education. That Department in the 1982-83 year issued checks to Richmond, accompanied by letters of transmittal which informed Richmond that "this is a `pass-through' payment to the Yonkers P.S." The State Education Department provides 100% reimbursement and that Department in turn charges back in part against the school districts in which the children cared for at Richmond are domiciled. All this is accomplished under a statutory scheme both detailed and convoluted, which need not concern us directly at this time.

The Bankruptcy Court found that on May 2, 1983 Richmond deposited a check from the State Education Department payable to its order in the amount of $141,499.65, accompanied by the letter informing Richmond that it was a "pass-through"; that it commingled this money with other funds in its bank account; and that it filed its petition on June 10, 1983, listing Yonkers as an unsecured creditor.

There were no disputed issues of fact in the proceedings before the Bankruptcy Judge. Yonkers sought to impose a constructive trust on this "pass-through" payment and the Bankruptcy Judge found that:

"The relevant subsections of New York Education Law § 3202(5)(d) do not create an express statutory trust on reimbursement funds received by Richmond . . . from the State Education Department. Additionally, the contract for educational services between Richmond and the City of Yonkers, the letter from the Education Department describing the reimbursement as a `pass-through payment,\' and the statutory obligation on the City to educate Richmond\'s children do not form the basis for the imposition of a constructive trust for the City\'s benefit." (Conclusion of Law No. 2). Emphasis added.

The Judge accordingly concluded that Yonkers was a general, unsecured creditor.

This Court believes that the legal conclusion reached misinterprets the total effect of the circumstances surrounding this reimbursement payment. The Bankruptcy Court recognized that under the legislative history of the Code, which is cited in relevant part in its opinion, a constructive trust, determined in accordance with state law, is not a part of the Debtor's estate. The example given in the Congressional history and quoted in the opinion below is as follows:

"For example, if the debtor has incurred medical bills that were covered by insurance and the insurance company had sent the payment of the bills to the debtor before the debtor had paid the bill, for which the payment was reimbursement, the payment would actually be held in a constructive trust for the person to whom the bill was owed." See 1978 U.S. Code Cong. & Adm.News, 5787, 5868, 6324.

This is just such a case. The children are not Richmond's children. They are specific children entitled to a public education in their own right at the expense of the State of New York and the school districts of their domicile, for whose medical care Richmond is being separately paid by others under a separate contract. By attending this care...