Opinion ID: 693409
Heading Depth: 2
Heading Rank: 1

Heading: The Vehicle Auction Proceeds.

Text: 15
16 In 1988 the bankruptcy court entered a judgment in an interpleader action filed by Duck in which it appeared to order that money from the sale of the assets of GACC be distributed to creditors Wells Fargo and Credit Alliance Corporation. Northwestern claims that the judgment disposed of money from the sale of certain unencumbered vehicles which belonged to the business, and that deprives Walsh of standing. We disagree. 17 First, the record indicates that the parties to the stipulation which led to the judgment did not believe that the proceeds from the vehicle sale were included in the judgment. For instance, Duck wrote to Wells Fargo on February 23, 1987 informing it that the net balance of the auction was $216,342.11. The letter specifically mentioned that $62,960.00 of that money--proceeds from the sale of licenced vehicles--came from the sale of unsecured licensed vehicles. Attached to the letter was a [r]ecapitulation of GAAC's auction receipts. According to that document, the money available for properly secured creditors was $153,382.11. That specifically did not include the proceeds from the vehicles. In addition, when Duck sent Wells Fargo its check, he noted that [t]he total amount of money available for distribution was $153,382.11. There is no record of Wells Fargo's objection to Duck's assessment of the amount owed. If the judgment was truly meant to include the other funds, one would expect that Wells Fargo would have so stated. 18 If the 1988 judgment did not include the proceeds from the auction of the vehicles, then it has no bearing at all on the present litigation because it involves a different claim for separate funds. See, e.g., Blonder-Tongue Lab., Inc. v. University of Ill. Found., 402 U.S. 313, 323-24, 91 S.Ct. 1434, 1440, 28 L.Ed.2d 788 (1971) (res judicata requires the same claim, the same parties or their privies, and finality on the merits). 19 Second, if the 1988 judgment is binding on the present trustee, that conclusion does not aid Northwestern because that can only mean that the judgment ordered the trustee to distribute the money to certain creditors, not that the money must go unreimbursed by Duck or his surety. That would mean that Duck did not obey the order of the court and that he did not perform faithfully. It would also mean that the estate still owes money to Wells Fargo and that the court order continues to apply to Walsh, the new trustee. Since Walsh is the trustee, the money stolen by Duck should be returned to him. In addition, even if Wells Fargo has waived its entitlement to the vehicle proceeds, that does not bar Walsh's ability to sue for them now. The money belongs in the hands of Walsh, the current trustee, and the details of any later distribution to GACC, Wells Fargo, or others is not before us on this appeal. We need not parse the terms of the 1988 judgment, nor need we decide its current effect, beyond pointing out that whatever that might be, Walsh does have standing. As trustee, he can, indeed must, seek to maximize the value of the estate. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 353, 105 S.Ct. 1986, 1992-93, 85 L.Ed.2d 372 (1985). Were he to do less, he might well be held liable for breaching that duty. See In re Conchise College Park, Inc., 703 F.2d 1339, 1357 (9th Cir.1983); Restatement (Second) of Trusts Sec. 223(2)(a) (1959) (failure of successor trustee to take proper steps to redress a breach of trust committed by the predecessor). He had the authority to maintain this action. See 11 U.S.C. Sec. 1109(b); Bankr.R. 2010(b). He has wisely and properly exercised that authority. 20
21 We return, then, to the centerpiece of Northwestern's argument: it cannot be liable because the funds really came from GACC's assets. But the Bankruptcy Code charges trustees with broader duties than Northwestern's argument would allow. Trustees are required to be accountable for all property received. 11 U.S.C. Secs. 704(2) and 1106(a)(3). In addition, to be qualified as a trustee, the trustee must take out a bond which is conditioned on [his] faithful performance of ... official duties. 11 U.S.C. Sec. 322(a). As we have said, Northwestern's bond ensured that the trustee would faithfully and truly account for all the moneys, assets and effects of the estate ... which shall come into his hands and possession, and shall [in] all respects faithfully perform all his official duties as said [trustee].Not surprisingly, courts have often held that trustees' duties extend beyond tending the undisputed assets of the estate. See, e.g., In re Sierra Trading Corp., 486 F.2d 191, 193 (10th Cir.1973) (per curiam) (trustee was required to account for amounts earned from investment of money belonging to third parties in an adversary proceeding by those parties); In re San Juan Hotel Corp., 847 F.2d 931, 936-38 (1st Cir.1988) (there is a broad power to surcharge trustees for forbidden acts which injure the estate or profit the trustee at the estate's expense); In re Reich, 54 B.R. 995, 1003, 1008-09 (Bankr.E.D.Mich.1985) (trustee's surety will be held liable where trustee had actual possession of the property; whether an asset was technically in or out of an estate was immaterial). In the instant case the GACC vehicles auctioned off were in the possession of Duck. Because he was trustee, he accessed them and sold them in an auction. Then he recognized that he held the assets for the estate and subject to the bankruptcy court orders. But he deposited the money into his commingled trustee account and finally misappropriated the funds to his own personal use. Northwestern does not really dispute this, and it is fatal to Northwestern's argument. 22 San Juan, from which Northwestern seeks solace, put its finger on the principle at stake here. As it said, citing Mosser v. Darrow, 341 U.S. 267, 274, 71 S.Ct. 680, 683, 95 L.Ed. 927 (1951), the Supreme Court has established the general proposition that bankruptcy trustees may be held personally liable for breaches of fiduciary duty.... 'The most effective sanction for good administration is personal liability for the consequences of forbidden acts.'  847 F.2d at 937 (citations omitted). 23 Here, as in San Juan and Mosser, a defense is being mounted in which it is argued on behalf of Duck (and his surety) that no loss has been suffered by the estate. But as the First Circuit, in discussing the Supreme Court's reaction to that argument, said: 24 To that, the Court responded by noting that determining the amount of damage the trustee caused, if any, was difficult; the Court then added: But equity has sought to limit difficult and delicate fact-finding tasks concerning its own trustee by precluding such transactions for the reason that their effect is often difficult to trace, and the prohibition is not merely against injuring the estate--it is against profiting out of the position of trust. Mosser, 341 U.S. at 273, 71 S.Ct. at 683. With this passage, we think, the Court clearly rejected the idea that a proven, quantifiable loss to the estate is a prerequisite to personal liability for trustees. 25 Id. at 937. 26 Ah, says Northwestern, but in San Juan the court also decided that if the faithless trustee did not injure the estate but only injured third party creditors of the estate, there could be no recovery on the estate's behalf. Id. at 938. The court expressed a concern that faithless trustees might otherwise be subjected to litigation by the estate and by the creditors. Id. We need not consider whether the court should have had that concern because even were we to accept it, the outcome would be no different here. In San Juan, the court was referring to a situation where the creditors suffered a direct harm and the estate suffered no harm at all. Here it cannot be said that a direct injury has been perpetrated upon creditors, nor can it be said that there could be no harm to the estate. Ferrante guaranteed the obligations of GACC and to the extent that those were not discharged there could be a claim against the estate itself. The taking of funds from GACC could not, therefore, be ignored. If, as Northwestern argues, Wells Fargo has given up all of its rights, that surely does not mean that the peculated funds should not be returned to the estate's trustee, especially since the estate itself is the sole shareholder of GACC. Whether GACC should or can be liquidated or whether it could or will sue the estate is not the point. In San Juan, the items which were disallowed were such things as union dues which went unpaid. At least in the short run, that benefited the estate by increasing its assets. Id. at 940-54. But here the actions of Duck did not benefit the estate at all. Had he simply retained the GACC funds in the estate it might have been so. He did not, and now he must return them, as must his surety. 27 In sum, when Duck's tenure ended he was accountable for funds that came into his hands as trustee of the estate. He was obligated to turn over those funds to the new trustee. When he failed so to do he and his surety became liable. Whether the estate will be able to retain the funds or will have to relinquish them in whole or in part is no business of Duck or his surety. That determination must be made in later proceedings. What is clear is that the funds must be turned over. 28