Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-01748/USCOURTS-ca10-87-01748-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

In re FIRST CAPITAL MORTGAGE LOAN 

CORPORATION, a Utah corporation, 

Debtor. 

RESEARCH-PLANNING, INC., a Utah 

corporation, 

FILED 

United States Court of Appeals 'fenth Cirenit 

MAR 2 71989 

ROBERT L. HOECKER 

Clerk 

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No. 87-1748 

Plaintiff-Appellant, 

v. 

ROGER SEGAL, Trustee of First 

Capital Mortgage Loan Corporation, 

a debtor, 

Defendant-Appellee. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF UTAH 

(D.C. No. 86-C-0622) 

Claron c. Spencer and Dale E. Anderson (with him on the briefs), 

of Spencer & Anderson, Salt Lake City, Utah, for PlaintiffAppellant. 

John T. Morgan and Julie A. Bryan (with him on 

Cohne, Rappaport & Segal, P.C., Salt Lake 

Defendant-Appellee. 

the 

City, 

brief), 

Utah, 

of 

for 

Before SEYMOUR and SETH, Circuit Judges, and SEAY, Chief Judge.* 

*Honorable Frank H. Seay, Chief Judge, United States District 

Court for the Eastern District of Oklahoma, sitting by 

designation. 

Appellate Case: 87-1748 Document: 01019300941 Date Filed: 03/27/1989 Page: 1 
PER CURIAM. 

This is an appeal from an order of the district court 

affirming the bankruptcy court's dismissal of the appellant's 

complaint. The facts of this case are fully set out in the 

bankruptcy court's opinion at 51 Bankr. 915. We reiterate only 

those facts that are necessary to our disposition of this appeal. 

The appellant, Research-Planning, Inc., argues that it was 

entitled to recover certain funds obtained by the appellee, Roger 

Segal, the trustee in bankruptcy for the estate of the First 

Capital Mortgage Loan Corporation, pursuant to his powers under 

11 U.S.C. § 547(b)(l982 and Supp. IV 1986). The funds were 

originally held in trust by First Capital, pending the closing of 

a real estate transaction between Research-Planning and a third 

party. Prior to the closing, however, First Capital deposited the 

funds in its general account at the Bank of Utah in violation of 

its agreement with Research-Planning. The funds then were paid 

out of that account on checks to First Security, a bona fide 

purchaser, to cover certain preexisting obligations of First 

Capital, and the monies in First Capital's general account were 

thereby depleted. After First Capital was declared bankrupt, the 

trustee recovered a portion of the transfers made to First 

Security in settlement of a suit asserting a preference under the 

bankruptcy laws. 

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Appellate Case: 87-1748 Document: 01019300941 Date Filed: 03/27/1989 Page: 2 
Research-Planning now contends that the funds so recovered 

are still its property and not part of the bankruptcy estate but 

instead are trust funds held by the debtor originating in the 

escrow agreement. See Gulf Petroleum, S.A. v. Collazo, 316 F.2d 

257 (lst Cir. 1963). Under S 541 of the Bankruptcy Code, such 

trust funds are not included in the bankruptcy estate, and the 

beneficiary of the trust is entitled to their return. See In re 

Mahan & Rowsey, Inc., 817 F.2d 682, 684 (lOth Cir. 1987). 

Research-Planning also argues that the recovered funds should 

be impressed with a constructive trust in Research-Planning's 

favor because it would be inequitable for the general creditors of 

the estate to profit from First Capital's misdeeds, at 

Research-Planning's expense. We do not reach the constructive 

trust issue. 

After reviewing the record below and the argument and 

authorities presented by the parties, we are convinced the 

bankruptcy and district courts' disposition of this case was in 

error. 

The trustee in bankruptcy was able to persuade First Security 

Bank, apparently in settlement of suits the trustee filed against 

the bank, to pay the amount in question to the trustee. The 

trustee had been able to demonstrate that the money came from the 

debtor originally, and there seems to be no question as to this 

source of the funds. The funds were held by the debtor who had 

control of them only pursuant to the escrow agreement with 

Research-Planning. The trial court took the position that the 

escrow agent had no title to the escrow funds, and if this is 

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Appellate Case: 87-1748 Document: 01019300941 Date Filed: 03/27/1989 Page: 3 
accepted there is no way they could be part of the debtor's 

estate. Under 11 u.s.c. § 547(b), the trustee only has authority 

to recover property in which the debtor has an interest. The 

escrow funds still were and are the property of Research-Planning. 

It makes no difference how the trustee obtained the funds, 

and the fact he may have asserted they were received by First 

Security as a preference makes no difference. He obtained 

possession of the funds. The procedure in settling the preference 

suits did not change the ownership of the funds--only who had 

possession of them. They did not become part of the debtor's 

estate just because the trustee obtained possession. He has 

possession of property not part of the debtor's estate. He 

established the source of the funds--the debtor's escrow 

agreement. The trustee was able to identify the several transfers 

and payments and to so obtain possession of the funds. He may 

have obtained possession in his capacity as trustee, but again, 

this did not make the funds any more part of the debtor's estate 

than they were when in the original escrow. 

The trial court's analysis does not recognize the basic 

ownership of the funds. Instead, by a series of applications of 

separate doctrines it is assumed that there was a metamorphosis as 

the funds were transferred depending on who had possession. 

However, the basic rights of the plaintiff did not change. First 

Security's status as a bona fide purchaser did not divest the 

plaintiff of ownership of the funds. Instead, it merely shielded 

~irst Security from any claim for the funds that the plaintiff 

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Appellate Case: 87-1748 Document: 01019300941 Date Filed: 03/27/1989 Page: 4 
might have asserted. First Security's status as a bona fide 

purchaser is irrelevant now that it no longer possesses the funds. 

Again, the bankruptcy trustee followed the funds through the 

several changes in possession and the status of who was in 

possession from time to time. This was an interesting journey but 

it only becomes significant for our purposes when the funds came 

into the hands of the trustee. The record developed the origin of 

the funds as the escrow and the ownership in plaintiff. All of 

this demonstrated that the trustee in bankruptcy held the funds 

not as part of the estate but for the benefit of plaintiff. 

REVERSED. 

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Appellate Case: 87-1748 Document: 01019300941 Date Filed: 03/27/1989 Page: 5 
No. 87-1748, In re First Capital Mortgage Loan Corporation 

SEYMOUR, Circuit Judge, dissenting: 

I respectfully dissent. I am convinced that the disposition 

of this case by the bankruptcy and district courts was correct. 

The majority overlooks the fact that after ResearchPlanning's funds were deposited by First Capital into its general 

account with the Bank of Utah, all of the commingled funds in the 

account were depleted through a series of transactions. See 

Research-Planning, Inc. v. Bank of Utah, 690 P.2d 1130, 1131 (Utah 

1984). Under long-standing rules, when commingled trust funds are 

wrongfully transferred by the trustee to a bona fide purchaser, 

the beneficiary of the trust cannot trace its trust funds into the 

hands of the bona fide purchaser. Turley v. Mahan & Rowsey, Inc. 

(In re Mahan & Rowsey, Inc.), 817 F.2d 682, 684 (lOth Cir. 1987). 

The beneficiary may only proceed against the trustee. 

As in this case, where the trustee's transfer to a bona fide 

purchaser has depleted all of the funds in the commingled account, 

the beneficiary's only recourse against the trustee (First 

Capital) is a general claim for damages arising out of the 

trustee's misfeasance. See 4 Collier on Bankruptcy ,, 541.13 at 

541-76 to -77 (L. King 15th ed. 1988); G. Bogert & G. Bogert, The 

Law of Trusts and Trustees, 921 at 368-69 (2d ed. 1982). 

Consequently, from the time the funds in First Capital's general 

account were depleted, Research-Planning had only a general, 

unsecured claim against First Capital for the amount of the funds 

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Appellate Case: 87-1748 Document: 01019300941 Date Filed: 03/27/1989 Page: 6 
it had deposited into escrow with First Capital. With the advent 

of First Capital's bankruptcy, Research-Planning's position did 

not change. It remained a general, unsecured creditor of First 

Capital. In re Mahan & Rowsey, Inc., 817 F.2d at 684; ~also 

G. Bogert & G. Bogert, § 862 at 34. 

The majority suggests that the trustee's subsequent recovery 

of certain funds from the Bank of Utah in settlement of a 

preference action was a recovery of Research-Planning's original 

escrowed funds which had never become a part of the bankruptcy 

estate. While it is true that funds held in trust by the debtor 

are not included in the bankruptcy estate, 11 u.s.c. § 541 (1982 & 

Supp. IV 1986), the beneficiary of the trust must be able to trace 

its funds into some assets held by the debtor at the time of 

bankruptcy. See 4 Collier on Bankruptcy ,, 541.13 at 541-74 

to -76. Research-Planning could not do this since its funds were 

transferred to a bona fide purchaser and no funds remained in the 

commingled account. That the bankruptcy trustee succeeded in 

obtaining some of these funds back from the Bank of Utah, for 

whatever reason, should not change Research-Planning's position as 

a general, unsecured creditor of First Capital. The bankruptcy 

trustee's powers are exercised for the benefit of the estate as a 

whole, not individual creditors. Consequently, it is not 

inequitable that Research-Planning should now be treated as a 

general creditor of the estate in bankruptcy. 

For the reasons stated so aptly by the district court, I 

would affirm its order denying recovery of the funds to 

Research-Planning. 

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