* Pursuant to Fifth Circuit Rule 47.5, the Court has determined that this opinion should not

be published and is n o t precedent except under the limited circumstances set forth in Fifth Circuit UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

_________________

No. 00-50358

(Summary Calendar)

_________________

In The Matter Of: VAUGHN MOTORS, INC.

Debtor.

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS,

Appellee,

versus

JIM WEATHERS,

Appellant.

Appeal from the United States District Court

For the Western District of Texas, San Antonio

SA-98-CV-595

January 25, 2001

Before EMILIO M. GARZA, STEWART and PARKER, Circuit Judges.

PER CURIAM: *Rule 47.5.4.

-2-

Jim Weathers (“Weathers”) appeals the district court’s application of the lowest intermediate

balance rule in apportioning among th e creditors the commingled account held by the debtor,

Vaughan Motors, Inc. (“Vaughan Motors”). We affirm.

Vaughan Motors acquired and resold used vehicles in Kerrville, Tex as. It operated by

entering into contracts with outside investors who financed the wholesale purchase of used vehicles.

Sometimes, Vaughan Motors would finance the purchase itself. When Vaughan Motors resold a

vehicle, it would receive a cash down-payment and a promissory note (referred to as a contract). It

would then forward the contract, along with the down-payment as well as subsequent payments, to

the investor(s) who had financed that particular car. Vaughan Motors made its profit by receiving a

percentage of those payments. One of the outside investors was Weathers.

Vaughan Motors began encountering financial difficulties. As a result, it stopped forwarding

payments to its outside investors, and instead used them to keep its business afloa t. Eventual l y

,

Vaughan Motors filed for Chapter 11 bankruptcy on May 1, 1996. At the time it filed its bankruptcy

petition, it had about 25 outstanding contracts with outside investors. In addition to failing to make

t hese payments, Vaughan Motors apparently did not pay sales taxes on its vehicles. The Texas

Comptroller of Public Accounts (“Comptroller”) filed a state tax lien against Vaughan Motor’s assets

on November 21, 1995.

As a Chapter 11 debtor, Vaughan Motors continued to receive payments for the outstanding

contracts. But it failed to segregate the contract payments owed to each outside investor, and instead

commingled them in its account. It also continued using these payments for its own operations. The

Comptroller informed Vaughan Motors on May 6, 1996 that it had a perfected lien against all of the1 The Comptroller did not contest the $25,736.56 traceable to Weathers.

-3- company’s assets, and ordered it not to use its cash collateral.

About two weeks later, Weathers filed a motion to prevent Vaughan Motors from using his

cash collateral under 1 1 U.S.C. § 363. On July 18, 1996, Weathers signed an agreement

(“Segregation Agreement”) to reset the hearing on its motion on the condition that Vaughan Motors

segregate the payme nt s it received on his contracts. Despite this agreement, it failed to do so. A

bankruptcy court finally barred Vaughan Motors from using any of th e co mmingled funds, and

ordered it, to no avail, to segregate Weather’s funds . Vaughan Motors’ Chapter 11 bankruptcy

proceeding was ultimately converted into a Chapter 7 liquidation process in August.

Weathers filed suit against Vaugh an Motors i n bankruptcy court to recover hi s owed

payments of $59,9 0 3.16. The Comptroller intervened to protect its interests of $119,704.06 in

unpaid state sales taxes. Morgan Trust, another outside investor, similarly intervened. About $66,000

remained in the commingled account. The bankruptcy court directly traced and awarded $34,427.88

to Weathers: $8,691.32 was from the funds received by Vaughan Motors on his contracts from the

Segregation Agreement until the Chapter 7 conversion; another $25 ,736.56 came from the funds

received on his contracts after the conversion. The bankruptcy court then equally divided the

remaining untraceable $32,837.05 among the three creditors.

The Com ptrol ler appealed to the district court, which reversed the $8,691.32 awarded to

Weathers, and the equal division of the remaining $32,837.05. 1 The district court hel d that the

bankruptcy court improperly used its equitable powers to trace the $8,691.32 to Weathers. Instead,

the bankruptcy court should have applied the lowest intermediate balance rule, which states that only

the lowest balance amount in the commingled account is recoverable. This rule would have reduced-4-

Weathers’ recovery to $20.63 in regards to the disputed $8,691.32 amount. Furthermore, the district

court held that the Comptroller had a priority claim as to the remaining untraceable amount because

of its perfected state tax lien. Given that its claim of $119,704.06 exceeded the remaining funds in

the commingled account, Comptroller was entitled to the entire untraceable amount. The district

court, however, noted that the bankruptcy court did not make any findings about the validity of the

Comptroller’s tax lien, and thus remanded it to determine if t he t ax lien notice complied with the

§ 113.001 et seq. of the Texas Tax Code and if the tax claim is entitled to priority under § 726 of the

Bankruptcy Code.

We review t he dist rict court’s findings of fact for clear error and its conclusions of law d e

novo

. See Matter of Crowell

, 138 F.3d 1031, 1033 (5th Cir. 1998) (holding that we review the

district court’s decision under the same standard as it would review a bankruptcy court’s order).

We hold that the district court correctly applied the lowest intermediate ba lance rule in

determining how much of Weathers’ contract payments deposited into Vaughan Motor’s acco unt

during the period between the Segregation Agr eement and the Chapter 7 conversion could be

recovered.

A s a preliminary manner, we note that the district court properly held that t he bankruptcy

court had implicit ly impressed a constructive trust upon Vaughan Motor when it failed to segregate

contract payments owed to Weathers, as required by the Segregation Agreement and the court order.

See In the Matter of Kennedy & Cohen, Inc.

, 612 F.2d 963, 965 (5th Cir. 1980) (holding that a court

will establish a constructive trust if there has been “some wrongdoing on the bankrupt’s part either

in [o]btaining the funds sought or in [r]etaining them.”) Put another way, the trust funds held by

Vaughan Motor for the benefit of Weathers are not part of the of the bankruptcy estate and thus not-5-

subject to the Comptroller’s tax lien. See 11 U.S.C. § 541(d).

Thus, the main question posed here is whether the dis t rict court correctly determined the

amount of commingled funds that was impressed to this constructive trust. Courts generally apply

the lowest intermediate balance rule when trust proceeds are commingled with non-trust proceeds

in a debtor’s account. S ee, e.g., Conn. General Life Ins. Co. v. Universal Ins. Co.

, 838 F.2d 612 (1st

Cir. 1988); In re Mahan & Rowsey, Inc.

, 817 F.2d 682 (10th Cir. 1987); In re Thomas H. Dameron

,

155 F.3d 718 (4th Cir. 1998); In the Matter of Al Copeland Enter

., 991 F.2d 233 (5th Cir. 1993);

In re United States Lines, Inc.

, 79 B.R. 542 (Bankr. S.D.N.Y. 1987). The rule states that when a

trust beneficiary’s funds, despite being traceable into t he debtor’s account, are “commingled in

accounts that were drawn upon, the trust beneficiary’s recovery [is] limit ed to the lowest balance

between the time of deposit of the overpayments and the filing of the [bankruptcy] petition.” In re

Mahan & Rowsey, Inc.

, 817 F.2d at 683-84. The rule is intended to allow a trustee beneficiary to

trace properly his funds in a commingled account. It is “grounded in the fiction that, when faced with

the need to withdraw funds from a commingled account, the trustee withdraws non-trust funds first,

thus maint aining as much of the trust’s funds as possible.” In re Dameron

, 155 F.3d at 724 (citations

omitted). This rule, however, cuts both ways: if the commingled fund has been reduced “below the

level of the trust fund but not depleted, the claimant is entitled to the lowest intermediate balance in

the account.” Id

. (quoting Cunningham v. Brown

, 265 U.S. 1, 12 (1924)). In other words, the trust

beneficiary is “entitled to the lowest intermediate balance, without the benefit of any deposits made

after such balance was reached.” Id.

In Connecticut General Life, a Chapter 11 bankruptcy trustee of a hotel received insurance

proceeds when the hotel suffered fire damages. S ee 838 F.2d at 615. The trustee was contractually-6-

obligated to forward the insurance payments to Connecticut General, but he failed to segregate the

payments and instead commingled them in his account. S ee id

. At one point, the trustee’s account

had fallen to zero. Applying the lowest intermediate balance rule, the court held that Connecticut

General could not recover any funds because the commingled account had been depleted. See Conn.

General Life Ins. , 838 F.2d at 619.

In our case, Vaughan Motors, the (constructive) trustee for Weathers, withdrew funds from

its commingled accou nt , which contained unsegregated payments from the various investors’

contracts. The part ies do not dispute that the commingled account, at one point, fell to $20.63,

before it was partially replenished. Application of the lowest intermediate balance rule means that

Weathers can recover only $20.63 out of his $8,691.32 in trust funds be cause the comm i ngl ed

account had been depleted to $20.63. The record reflects that the bankruptcy court did not apply

this rule. On appeal, the district court correctly applied the lowest intermediate balance rule.

Weathers opposes the ap p lication of the lowest intermediate balance rule on equitable

grounds. He maintains that the bankruptcy court had the equitable power to award the trust fund

amount of $8,691.32 to him because it can “issue any order, process, or judgment that is necessary

or appropri ate to carry out the provisions” of the bankruptcy code pursuant to 11 U.S.C. § 105(a).

Weathers further argues that it “is ludicrous to suggest that by ignoring the duty to segregate

[Weathers’] funds, the debtor may be relieved of his obligations,” allowing the Comptroller to“reap

a benefit from the debtor’s wrongdoing.”

Weathers’ equitable argument fails for two key reasons. First, he misapprehends the nature

of this bankruptcy proceeding. We do not have a situation where a debtor has unfairly shirked his

obligations at the expense of a sole creditor. Rather, we have competing creditors ) ) who were-7-

equally wronged by the debtor )) all vying for the same limit ed amount of funds avail able in the

commingled account. It is inaccurate to claim that the a particular creditor reaps an undeserved

benefit here, or that the debtor is being relieved of its obligations.

Second, while 11 U.S.C. § § 105(a) gives ban kruptcy courts some discretionary power, it

“does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable

under applicable law, or constitute a roving commission to do equity.” S ee United States v. Sutton

,

786 F.2d 1305, 1308 (5th Cir. 1986); see also In the Matter of Oxford Mgmt., Inc.

, 4 F.3d 1329 (5th

Cir. 1993) (holding that the district court improperly used its § 105(a) equity powers in ordering the

debtor to make commission payments). Weathers has not cited one case which holds that § 105(a)

trumps the lowest intermediate balance rule. The cases cited by Weathers are inapposite, as none of

them involves the lowest intermediate balance rule or constructive trusts. The cases simply provide

little support for his argument. For example, I n re Trans-Texas Petroleum Corp.

, 33 B.R. 67 (Bankr.

N.D.Tex. 1983) does not even discuss § 105(a). Similarly, I n re Aerosmith Denton Corp.

, 36 B.R.

116 (Bankr. N.D. Tex. 1983) fails to support the argument that a bankruptcy court can award

commingled funds to a creditor without considering the lowest intermediate balance rule. Finally, In

re R.H. Williams , 61 B.R. 567 (Bankr. N.D.Tex. 1986), only held that a court can use § 105(a) to

ratify an administrative freeze on an account.

Applying the lowest intermediate balance rule, we hold that only $20.63 of the $8,691.32 was

traceable as a constructive trust on behalf of Weathers. For the balance of this claim as well as the

untraceable $32,837.05, Weathers, like Morgan Trust, stands as a general unsecured creditor. On

the other hand, the Comptroller's perfected prepetition tax lien likely acts as a secured claim. And

since the amount of Comptroller's claim exceeds the remaining funds in the commingled account, it-8-

effectively means that neither Weathers nor Morgan Trust can recover on their general unsecured

claims. Furthermore, it renders moot Weathers’ claim that a pro rata distribution of the untraceable

$32,837.05 was inequitable.

However, as the district court noted, the bankruptcy court curiously failed to recognize the

Comptroller’s tax lien as a secured claim and instead treated it as a general unsecured claim. Thus,

we agree with the district c o urt that this case should be remanded to the bankruptcy court to

determine whether the tax lien notice complied with § 113.001 et. seq . of the Texas Tax Code and

whether the tax claim deserves priority under 11 U.S.C. § 726.

AFFIRMED.