2010 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit 7-27-2010 

# In Re M u shro om T ransp C o P r e c e de nt i al or N on-P r e c e de nt i al : N on-P r e c e de nt i al D ocke t N o . 09-2321

F o llow thi s and a dd it ion al work s at : http://d i git alc ommon s .l a w . vi ll anova . e du/thir dc ir c uit_2010

Thi s de c i sion i s br ou ght t o you for f r e e and ope n a c c e s s b y the O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit at V i ll anova U nive r sity S choo l of L a

w Di git al Reposit ory

. It h as be e n a c c ept e d for inclusion in 2010 D e c i sion s b y an authori z e d a dmini s tr at or of V i ll anova U nive r sity S choo l of L a

w Di git al Reposit ory

. F or mor e inform at ion, p le as e c ont a ct Be n j amin . C arl s on@l a

w . vi ll anova . e du . Re c omme nde d C it at ion
" In Re M ushr oom T

r an sp C o " (2010). 2010 D e cisio n s . P ape r 872. http://d i git alc ommon s .l a

w . vi ll anova . e du/thir dc ir c uit_2010/872NOT P RE CE DE NT I AL UN I TED STATES CO UR T OF A PP EALS F O R T H E T H IR D C IR C U IT
N o. 09- 2321
IN R E : M U S H R O O M T R A N S P O R T A T IO N C O M P A N Y ; P E N N Y O R K R E A L T Y C O M P A N Y , IN C .; R O B B E Y R E A L T Y , IN C .;

T R U X E N T E R P R IS E S , IN C .; L E A Z IT , IN C ., D eb tors J E O FFR E Y L . B U R T C H , T R U ST E E , T rus t ee i n B ankrupt cyof M U S H R O O M T R A N S P O R T A T IO N C O M P A N Y , IN C ., s u c c e s s o r t o R O B B E Y R E A L T Y , IN C ., PE N N Y O R K R E A L T Y C O M PA N Y , I N C . , and T R U X E N T E R PR I SE S, I N C . and s ucce s s ort o M i chae l A rnol d, form ertrus t ee in b a n k ru p tc yf

o r M u s h ro o m T ra n s p o rt a tio n C o m p a n y , In c ., R o b b e yR e a lty, In c ., P e n n Y o rk R e a lty C o m p a n y , In c ., a n d T ru x E n te rp ri s e s , In c ., A ppel l ant
v. J O N A T H A N H . G A N Z ; P IN C U S , V E R L IN , H A H N & R E IC H , P .C .; P IN C U S , R E IC H , H A H N , D U B R O F F & G A N Z , P .C .; M O D E L L , P IN C U S , H A H N & R E IC H , P .C .; P IN C U S , V E R L IN , B L U E S T E IN , H A H N & R E IC H , P .C .;

A S T O R W E IS S & N E W M A N ; R A W L E & H E N D E R S O N L ; C O N T IN E N T A L B A N K ; E R W IN L . P IN C U S ; R IC H A R D L . H A H N ; P A C E R E IC H ; JE R O M E J. V E R L IN ; A N D R E W F . N A P O L I; R O N A L D B L U E S T E IN ; H ER M A N P. W EI N BE RG ; D A V I D N . BR ESSLE R; A LLE N B. D U BR O FF

O n A p p ea l from the U n it ed S tat es D istri ct C o u rt forthe E as t ern D i s tr i ctof Penns y l vani a ( D i s tr i ctC our tN o. 2- 07- cv- 02759 ) D i s tr i ctJ udge: H on. E duar do C . R obr eno2 Subm i t t ed underT hi r d C i r cui tL A R 34. 1( a)

on J ul y13, 2010 B efore: F U E N T E S , A L D ISE R T , and R O T H , C i rcui tJudg es.

( O pi ni on Fi l ed: J ul y27, 2010)

O P I N I O N RO TH , C i r cui tJ udge: J eoff r eyB ur t ch, B ankrupt cyT rus t ee of the M us hr oom T r ans port at i on C om pany , I nc. ( M T C ) , and pl ai nt i ff i n thi s adver s ar i al pr ocee di ng, appea l s the B ankrupt cyC our t ’ s j udgm enti n favorof def endantPi ncus , V er l i n, H ahn & R ei ch (P V H R ) a n d th e D istric t C o u rt’s a f f irm a n c e . B o th c o u rts f

o u n d P V H R n o t li a b le forl os s es thatoccurr ed w hen i t s s har ehol der , J onathan G anz, embezzl ed fr om the b a n k ru p t c ye s t a t e wh i l e s e r v i n g a s M TC’ s c o u n s e l . W e wi l l a f f i r m. I . Backg r ound O u r l a s t o p in io n in th is c a s e c o n ta in s a f u ll r e c ita tio n o f

th e f a c ts , In re Mus hr oom Trans

por tat i on C o. , I

nc. , 382 F. 3d 325 ( 3d C i r . 2004) , s o a br i ef
re c ita tio n w ill s u f

f ic e h e re . O n J une 24, 1985, M T C and r el at ed ent i t i es fi l ed pet i t i ons for
r eor gani zat i on underC hapt er11 of the B ankrupt cyC ode. M T C i ni t i al l yr et ai ned i t s as s et s as debt or - i n- pos s es s i on, butw i thi n s i x m onths , M T C cea s ed oper at i on and bega n l i qui dat i ng as s et s . D ur i ng the bankrupt cypr ocee di ng, M T C r emai nedT he B ankrupt cyC our texpl ai ned the as s oci at i on betw een A rnol d and G anz: 1 B oth A r nol d and G anz gr aduat ed fr om V i l l anova Law School . W hi l e atl aw s chool A r nol d m etG anz a nd even t ook a bankrupt cycl as s w it h hi m . I tw as A rnol d w ho arr anged f

orM us hr oom t o engage the P i ncus l aw fi r m , and Pi ncus w as chos en bec aus e of A r nol d’ s as s oci at ion w it h G anz a nd beca us e of the fi r m ’ s bankrupt cyexpert i s e. . . . . A rnol d vi ew ed hi s r el at i ons hi p w i th G anz a s m o re th a n sim p lya tto rn e y -c lien t. H o w e v e r, h e h a d n o so c ial re latio n sh ip w ith G a n z , at le a st p r io r to e n g a g in g h is f irm to re p re se n t M u sh ro o m in its b an k rup tcyca se. A fter the en g ag em en t, A rno ld and G an z b ec am e f ri en d li er, shari ng season b asebal l t i ckets . 3 6 6 B . R . 4 1 4 , 4 1 8 (B an k r. E . D . P a. 20 0 7 ). 3 u n d e rth e l e a d e r s h i p o f

M i c h a e l C. Ar n o l d a n d Ro b e r tB. Cu t a i a r , b o th l o n g - t i me M T C exec ut i ves . T he B ankrupt cyC our tappoi nt ed A rnol d as “Speci al L i qui dat i on C ons ul t ant ” and appr oved A r nol d’ s compensa t i on of $300 perdayfr om the bankrupt cyes t at e. A r nol d r et ai ned J onathan G anz a nd G anz’ s fi r m , PV H R , as M T C ’ s couns el i n t he bankrupt cypr ocee di ng. 1 M T C d ep o sit ed the liqu idation p roc ee d s at C o n ti n en tal B an k , o n e o f M T C ’s l ar ges tcr edi t or s . T he B ankrupt cyC our tappr oved r epaym entof C ont i nent al B a n k ’s s e c u re d c laim f

ro m f u n d s o n d e p o sit, lea v in g a b a lan c e o f a p p ro x im a tely $ 1 m ill io n in M T C ’s e sc ro w a c c o u n t at C o n tin e n tal B a n k . A t G a n z ’s r e q u e st, in J ul yand A ugus t1987, C ont i nent al B ank conve y ed the es cr ow bal ance t o the bankrupt cyes t at e by( 1) i s s ui ng a $200, 000 tr eas ur er ’ s chec k pay abl e t o G anz a s debt or ’ s couns el and ( 2) depos i t i ng $766, 624, 49 i nt o a new M T C es cr ow acc ount opened byG anz a tC ont i nent al B ank. A l though PV H R m ai nt ai ned i t s ow n es cr ow a c c o u n ts f

o r c lien t f

u n d s, G a n z o p e n e d a se p a ra te a c c o u n t b e c a u se h e in ten d e d to4

convertthe es t at e’ s funds forhi s per s onal us e and w ant ed t o evade di s coveryby PV H R . G anz be gan embezzl i ng fr om the es t at e i n 1987. In 1 9 9 0 , the B a n k ru p tcy C o u rt – still u n a w a re o f G a n z ’s e m b e z z lem e n t – convert ed the pr ocee di ng fr om C hapt er11 t o C hapt er7 and appoi nt ed A rnol d as T rus t ee of

the bankrupt cyes t at e. I n February1992, the U ni t ed St at es T rus t ee a d v ise d A rn o ld th a t G a n z h a d e m b e z z led f ro m o th e r b a n k ru p tcy es tate s. A rn o ld exami ned M T C ’ s acc ount s and di s cover ed that , i ndeed, funds w er e mi s s i ng fr om th e e sta te. In 1 9 9 2 , A rn o ld b ro u g h t th is a d v e rsa ria l p ro c e e d in g a g a in st P V H R to re c o v e r f u n d s s to len b yG a n z , w h o late r p lea d e d g u iltyto e m b e z z lem e n t. I n 1994, w hi l e thi s adver s ar i al pr ocee di ng w as pendi ng, A rnol d al s o began embezzl i ng funds fr om the M T C bankrupt cyes t at e. A rnol d r es i gned as bankrupt cytrus t ee i n 1995 and pl eade d gui l tyt o a fe l onyi n 1996. J eoff r eyB ur t ch
s u c c e e d e d A rn o ld a s T ru s te e a n d c o n tin u e d th is m u lti- c o u n t a c tio n a g a in s t P V H R . C ountI as s ert s a cl ai m forturnoverof es t at e pr opertyunder11 U . S. C . §§ 542 and 5 4 3 . C o u n ts II th ro u g h V II a s s e rt v a ri o u s c o m m o n la w c la im s . T h e p rin c ip a l issu e in th is c a se is w h e th e r P V H R , w h ich o rd in a rilyw o u ld be l i abl e forembezzl ementcomm i t t ed byi t s s har ehol der , s houl d pr evai l on aff i r m at i ve def

ens es . PV H R cont ends the turnovercl ai m i s barr ed byl ache s and the comm on l aw cl ai m s ar e barr ed bys t atut es of l i m i t at i ons . T hi s adver s ar i al pr ocee di ng w as fi l ed O ct ober5, 1992, m or e than foury ear s aft erthe embezzl ementbegan. T he appl i cabl e dat es of ac crual ar e noti n di s put e, s o abs ent5

t ol l i ng, the Trus t ee’ s cl ai m s w oul d be barr ed byl ache s orthe s t atut es of l i m i t at i on s. T he T rust ee argues t he li m i t at i on s peri od shou l d b e t oll ed b ecause A rnol d and C ut ai arexer ci s ed r eas onabl e di l i gence i n as cert ai ni ng the exi s t ence of i nj uryt o t he bankrupt cyes t at e. T h e B an k rup tcyC o u rt , ruli n g o n the a ff irm ati v e d ef

en ses, gra n ted s u m m ary j udgm enti n favorof PV H R beca us e M T C fai l ed t o exer ci s e r eas onabl e di l i gence i n u n c o v e r i n g Ga n z ’ s e mb e z z l e me n t . T h e Di s tr i c tCo u r ta f f i r me d . On a p p e a l , we part i al l yr ever s ed the gr antof s um m aryj udgm ent . T her e w as “no ques t i on that M u sh roo m , ac ti n g thro u g h it s rep rese n tat ives A rno ld an d C u tai ar, ha d a f idu ciary d u tyto p ro tec t an d m a x im ize th e e sta te’ s a ss e ts.” 3 8 2 F .3 d a t 3 3 9 . B u t w h e th e r it
w as r eas onabl e forA r nol d and C ut ai art o r el ax thei r“vi gi l ance i n over s eei ng the
e x e c u tio n o f

th e d u tie s [ th e y ] d e le g a te d to G a n z ” w a s a q u e s tio n o f f a c t. Id
. at 341. W e expl ai ned that“w her e the w r ongdoi ng under l y i ng [a] caus e[] of ac t i on has been pe rpetr at ed bya fi duci aryt o the detr i m entof i t s pr i nci pal , thi s fac t
m i l i t at es s tr ongl yagai ns ts um m aryj udgm enton the i s s ue of w hetherthe pr i nci pal ( her e M us hr oom ) exer ci s ed r eas onabl e di l i gence i n fai l i ng t o di s coverthe f i d u c i a r y ’ s ma l f

e a s a n c e wi th i n th e a p p l i c a b l e s t a tu t e s o f l i mi t a t i o n s . . . . ‘ To
re q u ire a p rin c ip a l to e n g a g e in a g g re ss iv e o v e rsig h t o f its f id u c iar y ’s c o n d u c t is to denythe veryes s ence of a f i duci aryr el at i ons hi p. ’ ” I d. at341- 42 ( quot i ng R u b in Q ui nn Mos s Heaney & Pat t ers on, P
. C
. v. Kennel , 832 F. Supp. 922, 935 ( E . D . Pa. 1 9 9 3 ). W e re m a n d e d f

o r d e ter m in a tio n o f

w h e n th e T ru ste e ’s d u tyto in v e stig a te6

ar os e and i s s ued the fol l ow i ng gui dance : “W e s houl d s tr es s thatw e do n o t h o ld her e thatthe exi s t ence of a f i duci ary , l aw y er - cl i entr el at i ons hi p betw een G anz a nd M ushroom , and G anz’s abuse of that r el at i on shi p, al on e precl ud e j ud gm ent as a m att erof l aw i n PV H R ’ s and i t s s har ehol der s ’ favor . ” I d. at342- 43. O n r emand, the B ankrupt cyC our thel d a fi ve- daytr i al and i s s ued more than 1 0 0 p a g e s o f

f a c tu a l f in d in g s a n d leg a l co n c lu sio n s. T h e B a n k ru p tcy C o u rt h e ld thatPV H R , as couns el t o t he bankrupt cyes t at e, br eac hed i t s fi duci arydut i es and
co n tr ac tual o b li g ati o n s o w ed to the T rustee . H o w ev er, th e B an k rup tcyC o u rt found PV H R w as notl i abl e forturnoverbeca us e the “f unds m i s appr opr i at ed by G an z w ere n ev er c h an n eled thro u g h the law firm esc row ac co u n t, b u t w ere tr a n s f e r r e d d i r e c t l yb yCo n t i n e n t a l Ba n k t o b a n k a c c o u n t s t i t l e d i n Ga n z ’ s n a me alon e.” 3 6 6 B . R . 4 1 4 , 4 3 9 (B an k r. E . D . P a. 20 0 7 ). T h e B an k rup tcyC o u rt enfo rced the st atute of l i m i t at i on s on the T rust ee’s com m on l aw cl ai m s becau se A rnol d and C ut ai arfai l ed t o exer ci s e r eas onabl e di l i gence as fi duci ar i es re p re se n tin g M T C ’s in ter e sts . T h e B a n k ru p tcy C o u rt h e ld th a t A rn o ld , in p a r t i c u l a r , a c t e d u n r e a s o n a b l y: A l though A r nol d t es t i fi ed thathe comm uni cat ed w i th G anz “ n u m e ro u s tim e s ” a b o u t th e M u s h ro o m a s s e ts , b e g in n in g in 1 9 8 7 , 1 N . T . at57, s uch t es t i m onyt o the ext enti ti m pl i es thatA rnol d w as att ent i ve t o ori nt er es t ed i n the pr ot ect i on of M us hr oom as s et s forthe benef i tof i t s cr edi t or s i s notcr edi bl e. T her e i s no w r i tt en c o mmu n i c a t i o n a f

t e rF e b ru a ry1 9 8 8 . Arn o l d wa s wo r k i n g f u l l
- t i me fora N ew J er s eyfi r m and l at erfora Pi t t s bur gh companybegi nni ng i n 1987. H e neve rs oughtanybank ac countori nt er es ts t at ement s , or othercorr obor at i ve orr el evantt ax i nform at i on. A l though G anz p rov ided a w ri tt en rep lyto A rno ld’s ac co u n ti n g req u est i n F eb rua ry7 1987, he di d notdo s o w i th a s i m i l arr eques ti n February1988, and A r nol d di d notpr es s hi m fori nform at i on. A rnol d expr es s ed no conce r n aboutthe as s et s aft erG anz j oi ned anotherfi r m . A nd even aft erhe bec ame t rus t ee i n February1991, and w as notr epr es ent ed by the Pi ncus fi r m , and af

t erhe r ece i ved i nform at i on fr om the U ni t ed St at es trus t ee a bouthi s dutyt o obt ai n contr ol of es t at e pr operty , he nevers oughtanyi nform at i on oratt empt ed t o col l ectthe as s et s fr om G anz orPi ncus . H e att empt ed no r ecove ryaft erthe s ubs t ant i ve cons ol i dat i on or derw as ent er ed. A nd, as trus t ee, he al s o embezzl ed e s t a t e p r o p e r ty. 366 B . R . at434. T he D i s tr i ctC our taff i r m ed. T he Trus t ee appeal s both fi ndi ngs and r eques t s r eas s i gnm entt o a di ffe r entbankrupt cyj udge on r emand. I I . D i s cus s i on T he D i s tr i ctC our thad j ur i s di ct i on pur s uantt o 28 U . S. C . § 158 overthe
a p p e a l f ro m th e B a n k ru p tc yC o u rt , w h ic h h a d ju ri s d ic tio n p u rs u a n t to 2 8 U .S .C . § 157( b) . W e have j ur i s di ct i on overthi s appea l pur s uantt o 28 U . S. C . §§ 1291 and 1 5 8 (d ). T h e D is tr ic t C o u rt ’s d e te rm in a tio n s a re s u b je c t to p le n a ry re v ie w . In re P ro f’l In s. M

g m t. , 2 8 5 F . 3 d 2 6 8 , 2 8 2 -83 (3d C ir . 2 0 0 2 ). T h e B an k rup tcyC o u rt ’s fa ctua l determ ination s are rev iew ed fo r clear e rror an d it s leg al de term ination s are r evi ew ed de novo . I

d. T h e T ru ste e a rg u e s (1 ) th e T ru ste e is e n tit led to tu rn o v e r o f a ss e ts em bezzled byG anz an d (2) the st atute of l i m i t at i on s should be tol l ed b ecause A rn o ld a n d C u taia r a c ted re a so n a b lyin re ly in g o n a d v ice o f c o u n se l. B o th argum ents chall eng e factual fi nd i ng s w i tho ut anydem on strat i on of h ow tho se fi ndi ngs w er e cl ear l yerr oneous . W e have r evi ew ed the r ecor d and fi nd no err orof f a c t o r l a w .8 T he turnovercl ai m i s w i thoutm er i tbeca us e the B ankrupt cyC our tfound th e f u n d s e m b e z z le d b yG a n z w e re n o t c h a n n e le d th ro u g h P V H R ’s a c c o u n ts . T her e w as no pr opertyforPV H R t o turnoverbeca us e G anz c onvert ed the funds f ro m C o n tin e n ta l B a n k to a s e p a ra te a c c o u n t u n d e r h is c o n tr o l a n d n o t th e f ir m ’s . T he evi dence adduce d attr i al s uppor t s the B ankrupt cyC our t ’ s fi ndi ng that A rnol d compl et el yabdi cat ed hi s r es pons i bi l i tyt o pr es erve and pr ot ectthe b a n k ru p tc ye s ta te ’s a s s e ts , p a rt ly b e c a u s e o f h is f ri e n d ly re la tio n s h ip w ith G a n z . A ft erl earni ng thatG anz ha d embezzl ed fr om the bankrupt cyes t at e, A rnol d then pr ocee ded t o pi l ferthe bankrupt cyes t at e as w el l . I ti s cl earthatA rnol d di d notact
w ith re a so n a b le d ili g e n c e to a sc e rta in th e e x iste n c e o f a n in ju ry , so th e T ru ste e is notent i t l ed t o t ol l i ng of the l i m i t at i ons per i od. I I I . C oncl usi on Forthe r eas ons s t at ed above , w e w i l l aff i r m the j udgm ent s of the B a n k ru p tcy C o u rt a n d D istric t C o u rt. T h e re q u e st f o r re a ss ig n m e n t is m o o t.