1 16-2827 In re Dreier LLP



### UNITED STATES COURT OF APPEALS **FOR THE SECOND CIRCUIT**



## SUMMARY ORDER

**R ULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT**  **. C**  **ITATION TO A SUMMARY ORDER**

**FILED ON OR AFTER J** **ANUARY 1,**  **2007, IS PERMITTED AND IS GOVERNED BY**  **F EDERAL**  **R ULE OF**  **A PPELLATE**  **P ROCEDURE**  **32.1 AND THIS COURT**  **’ S**  **L OCAL**  **R ULE**  **32.1.1. W**  **HEN CITING A SUMMARY**

**ORDER IN**  **A DOCUMENT**  **FILED WITH**  **THIS COURT**  **, A**  **PARTY MUST**  **CITE EITHER**  **THE F**  **EDERAL A**  **PPENDIX**

**OR AN**  **ELECTRONIC DATABASE**  **( WITH**  **THE NOTATION**  **“ SUMMARY**  **ORDER ”).**  **A PARTY**  **CITING A**  **SUMMARY**

**ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL .** 
**At a stated term of the United States Court of Appeals for** 1 **the Second Circuit, held at the Thurgood Marshall United States** 2 **Courthouse, 40 Foley Square, in the City of New York, on the** 3 **21 st**  **day of March, two thousand seventeen.** 4
5 **PRESENT: DENNIS JACOBS,** 6 **ROBERT D. SACK,** 7 **Circuit Judges,** 8 **PAUL A. ENGELMAYER,** 9 **District Judge. 1**  10
11
- - - - - - - - - - - - - - - - - - - -X 12 **IN RE DREIER LLP,** 13 **Debtor.** 14 15 16 **COSMETIC PLUS GROUP LTD, ROBIN BARTOSH,** 17 **TOBY BARTOSH,** 18 **Claimants-Appellants,** 19
20 **-v.- 16-2827** 21
22
**SHEILA M.**  **GOWAN, in**  **her capacity**  **as Plan**  23 **Administrator for Dreier LLP,** 24 **Appellee.** 25

1 Judge Paul A. Engelmayer, United States District Judge for the Southern District of New York, sitting by designation.2 - - - - - - - - - - - - - - - - - - - -X 1 2 **FOR APPELLANTS:** HOWARD M. FILE, Staten Island, NY. 3
4 **FOR APPELLEE:** BRENDAN M. SCOTT, Klestadt Winters 5 Jureller Southard & Stevens, LLP, 6 New York, NY. 7 8 Appeal from a judgment of the United States District Court 9 for the Southern District of New York (Swain, J.). 10 11 **UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED AND** 12 **DECREED**that the judgment of the district court be **AFFIRMED**

. 13
14 Cosmetics Plus Group Ltd. (“CPG”) and its secured creditors, 15 Robin Bartosh and Toby Bartosh, appeal from the judgment of the 16 United States District Court for the Southern District of New 17 York (Swain, J.), which affirmed the order of the Bankruptcy 18 Court for the Southern District of New York (Bernstein, J.) 19 granting the plan administrator’s obje ctions and reclassifying 20 as unsecured claims the proofs of claim filed by appellants. 21 We assume the parties’ familiarity with the underlying facts, 22 the procedural history, and the issues presented for review. 23

This appeal arises in the bankruptcy of the law firm Dreier 24 LLP, but it stems from the 2001 bankruptcy of one of that firm’s 25 clients, CPG, which in 2003 filed an adversary proceeding against 26 its insurer. That suit settled, and in March 2008 the insurer 27 issued a check for $350,000 to Dreier LLP, as attorneys for CPG. 28 These funds were deposited in an attorney trust account that 29 commingled client funds with operating funds—as well as the 30 proceeds of attorney Mark Dreier’s note-fraud scheme. By 31 mid-August 2008, the account was depleted and had a negative 32 balance. 33

In October 2008, the bankruptcy judge in the CPG bankruptcy 34 dismissed the proceeding and directed CPG to pay various expenses 35 and fees and distribute the remaining cash to secured creditors 36 Robin and Toby Bartosh. By that time, the Dreier LLP account 37 had been replenished. However, no money was paid to the 38 Bartoshes out of the Dreier LLP trust account. On December 2, 39 2008, Mark Dreier was arrested. Dreier LLP partners Paul Traub 403 and Steven Fox (who represented CPG) consulted the firm about 1 releasing client funds, and on December 4, 2008, Dreier LLP 2 transferred $441,145.58 to an outside account—an amount that 3

was intended to include $350,000 for CPG. After Dreier LLP filed 4 a Chapter 11 petition (on December 16, 2008), the bankruptcy 5 trustee requested the return of the $441,145.58, which was 6 transferred to the trustee in February 2009. 7

In March 2009, CPG and Robin and Toby Bartosh filed proofs 8 of claim in the Dreier bankruptcy, each asserting a $350,000 9 secured claim based upon Dreier’s retention of CPG’s settlement 10 proceeds. The plan administrator objected on the ground that 11 the proceeds had become “hopelessly commingled” with other funds 12 and that the claims should therefore be reclassified as general 13 unsecured claims. Following a trial, the bankruptcy court 14 sustained the objection and reclassified the claims as 15 unsecured. The district court affirmed. 16

On appeal from the district court, we make an independent 17 and plenary review of the bankruptcy court’s decision. Celli 18

v. First Nat’l Bank, 460 F.3d 289, 292 (2d Cir. 2006). We review 19 conclusions of law de novo and findings of fact for clear error. 20 Id. 21

**1.** Appellants’ principal argument is that the bankruptcy 22
court (and the district court) erred by holding that Dreier LLP’s 23 December 4, 2008, transfer of funds to an outside account was 24 an avoidable preference under 11 U.S.C. § 547(b). That 25 bankruptcy provision allows a trustee to avoid any transfer (i) 26 of property of the debtor, (ii) made for benefit of a creditor, 27 (iii) for an antecedent debt, (iv) while the debtor was 28 insolvent, (v) within 90 days of filing for bankruptcy, (vi) 29 allowing the creditor to receive more than it would receive in 30 Chapter 7 liquidation if the transfer had not been made. 31

The bankruptcy court held that all elements were satisfied 32 and that the December 4 transfer was therefore properly avoided. 33 Appellants argue that the transferred funds were never the 34 “property of the debtor,” but were instead held in trust for 35 CPG as proceeds of litigation settlement. We disagree. 36

It is not disputed that in March 2008 Dreier LLP received 37 $350,000 of settlement proceeds to be held in trust for CPG. 384 But Dreier failed to honor that obligation: the bankruptcy court 1 found that, by mid-August 2008, the account into which those 2 funds were deposited had a negative balance. That finding is 3 supported by bank records and is not clearly erroneous. It 4 follows that well before the December 1 transfer, the settlement 5 proceeds had been converted, and were gone. Although CPG was 6 injured by this dissipation of funds, and has a claim for its 7 injury, that claim is not for a traceable res. The funds that 8 later replenished the Dreier LLP account and which were 9 transferred on December 4 to satisfy the debt to CPG are not 10 traceable to CPG’s settlement proceeds. They are from other 11 sources, and were at the time of the transfer Dreier LLP’s 12 property. Appellants have no greater right to those particular 13 funds than other unsecured creditors. 14

All of the § 547(b) elements are satisfied, and Dreier LLP’s 15 December 4 transfer was an avoidable preference. We find no 16 error in the holding of the bankruptcy court and district court. 17

**2.** Appellants argue that the bankruptcy and district 18 courts should have imposed a constructive trust on what they 19 characterize as “the settlement funds transferred” on December 20 4, 2008. This argument fails for the reason already discussed. 21 “It is hornbook law that before a constructive trust may be 22 imposed, a claimant to a wrongdoer’s property must trace his 23 own property into a product in the hands of the wrongdoer.” 24 United States v. Benitez, 779 F.2d 135, 140 (2d Cir. 1985). 25 Appellants mischaracterize the December 4 transfer as being a 26 transfer of the settlement funds. By mid-August 2008, the 27 settlement funds had been dissipated. No part of the funds 28 transferred on December 4 was traceable to them. Those funds 29

are properly a part of Dreier LLP’s estate, subject to the claims 30 of all of its creditors; imposing a constructive trust would 31 merely advantage appellants at the expense of other creditors. 32

Accordingly, and finding no merit in appellants’ other 33 arguments, we hereby **AFFIRM** the judgment of the district court. 34

FOR THE COURT: 35 CATHERINE O’HAGAN WOLFE, CLERK 36