Opinion ID: 501184
Heading Depth: 1
Heading Rank: 3

Heading: lopez's liability

Text: 26 Both CG and Universal assert claims against Lopez, in his official capacity as trustee for the bankrupt corporation. We first consider CG's claim that it is entitled to a priority claim to the remaining assets of the corporation because the insurance proceeds received by Rodriguez were impressed with a constructive trust. Before getting into the merits of that claim, however, one brief initial point bears discussion. There is no dispute here, as least as between CG and Lopez, that Rodriguez in fact violated the stipulation by failing to notify CG of the fire, by collecting the full insurance proceeds, and by depositing them into a hotel operating account. Lopez thus concedes that CG is entitled to become a general creditor of the hotel corporation to the extent that CG cannot recover from Universal the insurance proceeds to which it was entitled under the stipulation. The only remaining issue is whether CG is entitled to a priority claim to the bankrupt corporation's assets by virtue of a constructive trust. This Lopez denies. 27 When a debtor is in possession of property impressed by a trust--express or constructive--the bankrupt estate holds the property subject to the outstanding interest of the beneficiaries. American Service Co. v. Henderson, 120 F.2d 525, 531 (4th Cir.1941); 4 Collier on Bankruptcy p 541.13, at 541-73 (L. King 15th ed. 1987). In order to establish such a right as trust beneficiary, a claimant must make two showings: first, the claimant must prove the existence and legal source of a trust relationship; second, the claimant must identify the trust fund or property and, where the trust fund has been commingled with general property of the bankrupt, sufficiently trace the property or funds--the res. American Service Co., 120 F.2d at 531; 4 Collier on Bankruptcy, supra, p 541.13, at 541-73 to 74. While the former is usually a question of state law, the latter, because it pertains to distribution of assets from an entity in federal bankruptcy procedings, is exclusively a question of federal law. Matter of Kennedy & Cohen, Inc., 612 F.2d 963, 965-66 (5th Cir.), cert. denied, 449 U.S. 833, 101 S.Ct. 103, 66 L.Ed.2d 38 (1980). Here, we need not address whether CG has met its burden in establishing a trust relationship, because we agree with the district court that CG has failed adequately to trace the trust fund res. 28 It is true, as CG asserts, that mere commingling of the trust property with other property of the bankrupt corporation--as occurred here--does not defeat CG's claim. In re Mahan & Rowsey, Inc., 817 F.2d 682, 684 (10th Cir.1987); American Service Co., 120 F.2d at 531; 4 Collier on Bankruptcy, supra, p 541.13, at 541-75 to 76. On the other hand, [t]here can be no recovery ... where all that can be shown is enrichment of the trustee. [The trust property] must be clearly traced and identified in specific property. It is insufficient to show that trust property went into the general estate and increased the amount and value thereof. In re United Cigar Stores Co., 70 F.2d 313, 316 (2d Cir.1934) (citations omitted). 29 In the present case, CG's efforts to trace the $418,217 insurance payment can be summarized as follows. First, through the financial reports filed by Rodriguez and through the testimony of a CPA who had examined the hotel books, CG established that the hotel corporation had twelve operating accounts and that the insurance check was deposited into one of them on September 30, 1982. Second, CG showed that money from one account was sometimes transferred to another and that the total combined deposits in those accounts, at least between the period of September 1982 and March 1984, never dropped below $287,276. It was also brought out at trial that, after the deposit of the insurance check, the cash in the particular account into which it had been deposited was completely depleted. CG presented evidence to the effect that shortly after the proceeds were deposited into the first account, $390,000 was withdrawn from that account and placed into a certificate of deposit. CG made no effort to specifically trace the $390,000 in the latter account, however, and according to the report prepared by CG's own witness, the hotel corporation's total deposits in certificates of deposit have, since the $390,000 deposit, been as low as $10,573. 30 The normal rule for construing trust proceeds commingled in a bank account is known as the lowest intermediate balance test. 4 Collier on Bankruptcy, supra, p 541.13, at 541-77. Under that test, set down by the Supreme Court in Schuyler v. Littlefield, 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806 (1914), and Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924), a court will follow the trust fund and decree restitution from an account where the amount on deposit has at all times since the commingling of the funds equaled or exceeded the amount of the trust fund. See 4 Collier on Bankruptcy, supra, p 541.13, at 541-76. Where, however, after the commingling, all the money is withdrawn, the trust fund is treated as lost, even though later deposits are made into the account. Should the amount on deposit be reduced below the amount of the trust fund but not depleted, the claimant is entitled to the lowest intermediate balance in the account. This is based on the fiction that the trustee would withdraw non-trust funds first, retaining as much as possible of the trust fund in the account. See Cunningham, 265 U.S. at 12, 44 S.Ct. at 426. 31 Here, there is no dispute that the lowest intermediate balance in the account into which the insurance proceeds were deposited is zero. CG attempts to overcome the obvious conclusion that it is thus entitled to take nothing by arguing, in essence, that the hotel corporation had not twelve separate bank accounts, but one general cash-in-banks account. CG bases this fictional combined bank account on the hotel's financial statements, which list cash as a single item. The fact that multiple accounts are consolidated for accounting purposes on a single line of the financial statement does not, of course, mean that they are effectively one account. Nor does it obviate the need for tracing the assets in any particular account. The point of tracing is to follow the particular entrusted assets, not simply to identify some assets. The Second Circuit faced a similar situation in In re United Cigar Stores Co., 70 F.2d 313 (2d Cir.1934). There, the claimant was a joint venturer of the bankrupt and asserted a trust interest in several of the bankrupt's bank accounts. The court rejected the claim, both on grounds that a trust relationship was not proven, and because the trust funds were not traced. On the issue of tracing, the court noted that, while the aggregate balance of the bank accounts had been shown to be above the alleged trust amount at all times, the claimant had failed to trace the specific assets of any particular account, which might well have been depleted at some point. As in United Cigar Stores, CG has not directed this court to any particular asset of the hotel corporation where the alleged trust fund remains, even partially, intact. See also Johnson v. Morris, 175 F.2d 65, 67 (10th Cir.1949) (claimant must trace his 'property in its original or converted form into specific or identifiable property in the possession of the receiver' ) (citations omitted). CG has shown only a general enrichment of the hotel's accounts. The district court's judgment dismissing CG's claim is affirmed. 32 Universal has also filed a cross-claim against Lopez, as trustee, arguing that it has the right to restitution from the corporation for any money it erroneously paid to Rodriguez. Universal does not specify whether it is asserting a priority claim, as does CG, or whether it simply seeks to become a general creditor. We hold that it is entitled to neither. 33 The only asserted legal basis for Universal's claim against Lopez is section 1795 of the Civil Code of Puerto Rico, which provides: 34 Restitution of thing improperly received. If a thing is received when there was no right to claim it and which, through an error, has been unduly delivered, there arises an obligation to restore the same. 35 P.R. Laws Ann. tit. 31, Sec. 5121. Although the language of the statute would seem to encompass any erroneous payment, the Supreme Court of Puerto Rico, in construing the statute, has consistently limited it to errors of fact, and refused to apply it to errors of law. E.g., Cartagena de Jesus v. Estado Libre Asociado de Puerto Rico, 85 J.T.S. 22 (Mar. 29, 1985); Heirs of Choisne v. Municipality of Vieques, 100 P.R.R. 499, 502 (1972). Here, despite Universal's protestations to the contrary, its payment of the insurance proceeds to Rodriguez was not premised on a mistaken understanding of the facts, but on an erroneous interpretation of the law, and thus is not compensable under section 1795. 36 Universal has not claimed that it was provided with erroneous information in settling the claim from the hotel fire or that it was unaware that CG had an interest in the policy. Indeed, Universal's claims adjuster testified at trial that he had reviewed the policy, including the mortgagee clause and schedule, and had noted that CG was listed as mortgagee. The reason he accepted a proof of loss which did not protect CG's interest, and the reason that he authorized payment to Rodriguez, was also stated: Because it was my clear understanding that Mr. Rodriguez Estrada was acting on behalf of all the creditors. The claims adjuster's handling of the case was based on a legal misunderstanding relating to the representative capacity of a bankruptcy trustee. Universal nowhere proved that the legal misunderstanding arose out of some incorrect factual information provided to it by Rodriguez--or anyone else, for that matter. 37 In Cartagena de Jesus, 85 J.T.S. 22, a recipient under a Puerto Rico program for nutritional aid informed the administering agency that she had two granddaughters living with her and that their mother provided eighty dollars monthly for food. Based on that information--which was never disputed--the agency increased the recipient's monthly benefits. Later, however, the agency determined that the increase had been erroneously authorized because of an agency policy of not separating minors from their parents. The agency then demanded that the recipient return the money that she had erroneously received for five months. The Supreme Court of Puerto Rico rejected that claim. The court noted that the agency had always had before it the correct factual information relating to the recipient's eligibility, but had made a determination contrary to its own regulations. Section 1795 is inapplicable to such a mistake, the court said. Likewise, here, Universal had all the pertinent facts before it when it handled the fire loss claim, yet it paid the the entire proceeds to Rodriguez because it believed he legally represented the interests of CG. The district court's dismissal of Universal's cross-claim is affirmed.