Court Opinion

ID: 1055691
Source: CourtListenerOpinion
Date Created: 2013-10-08 20:59:34.087336+00
Date Added: 2024-06-11T12:05:22.830973
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                                AT KNOXVILLE
                              March 23, 2004 Session

  DR. KENNETH F. FREELS, KENNETH F. FREELS, D.D.S., P.C., and
  KENNETH F. FREELS, D.D.S., P.C., DEFINED BENEFIT PENSION
TRUST, v. JOSEPH C. TAYLOR & ASSOCIATES, INC., and HOWARD G.
   HOGAN, SUCCESSOR RECEIVER FOR JOSEPH C. TAYLOR &
                       ASSOCIATES, INC.

                  Direct Appeal from the Chancery Court for Knox County
                     No. 128368-1    Hon. Daryl R. Fansler, Chancellor

                                       FILED MAY 26, 2004

                                 No. E2003-01788-COA-R3-CV

Plaintiffs sought recovery of cashier’s check on theory of bailment or resulting or constructive trust.
From an adverse Judgment by the Chancellor, plaintiffs appealed. We affirm.

Tenn. R. App. P.3 Appeal as of Right; Judgment of the Chancery Court Affirmed.

HERSCHEL PICKENS FRANKS , P.J., E.S., delivered the opinion of the Court, in which CHARLES D.
SUSANO, JR., J., and WILLIAM H. INMAN , SP ., J., joined.

Robert S. Stone, Knoxville, Tennessee, for Appellants.

James R. Moore, Knoxville, Tennessee, for Appellees.

                                             OPINION

             The dispositive issue in this action is the ownership of a $50,000.00 cashier’s check,
which was made out to “Joe Taylor and Assoc.” by plaintiff Freels.

               The check was found in the automobile of Joseph C. Taylor, a Knoxville
businessman, after he committed suicide in November, 1995. According to the Complaint, the check
was given to Taylor by plaintiff, Dr. Kenneth Freels, for the purchase of stock options as a part of
a pension plan Freels had established for his employees. The check was made out as Taylor directed
which was consistent with the parties’ past transactions. The check was delivered by Freels to
Taylor for the purpose of purchasing stock options and the Complaint further alleged that the check
was in the possession of the Knoxville Police Department.

                 Ultimately, all defendants were dismissed except Joseph C. Taylor & Associates, and
its receiver after the check was delivered to the Clerk of the Court.

                Plaintiffs filed a Motion for Partial Summary Judgment, stating that the check was
delivered to Taylor the day before he died and was never endorsed, negotiated or co-mingled. Thus,
plaintiffs’ claim there was a resulting or constructive trust created for plaintiffs’ benefit, or
alternatively, there was a bailment.

               Freels filed an affidavit stating that he was a dentist in Kingsport, Tennessee, and that
the Freels Trust was a pension trust organized for the benefit of his employees. Freels stated that
Joseph Taylor had made investments for Freels’ trust and purchased securities for the same. Freels
stated that he and his wife first met Taylor in 1982 and had an ongoing relationship regarding
investments and financial planning, and that he had complete trust and confidence in Taylor and
invested with him exclusively.

               Freels attached two exhibits to his affidavit, showing the transaction he had made
with Taylor, and further stated that Taylor contacted him just prior to November 2, 1995 and told
him that he had stock options available for Freels to invest and that Freels purchased the Cashier’s
check at issue and delivered the same to Taylor to purchase stock options for the Freels Trust, but
that Taylor died the next day without ever endorsing or negotiating the check.

                The receiver for Joseph C. Taylor & Associates filed a Response, stating that Taylor
was involved in a “ponzi” scheme, wherein he used the money for certain clients to “pay off” the
investment returns of other clients. The receiver stated that Freels was involved in this scheme, and
that on two occasions received incredible returns for a very short term investment. The receiver said
that Freels was no differently situated than any of Taylor’s many other clients who had been similarly
defrauded and that plaintiffs had no right to reclaim the cashier’s check because, in this jurisdiction,
cashier’s checks are treated as cash. The receiver concluded that plaintiff should be treated just like
every other creditor of Taylor & Associates, and receive a pro rata share of the bankruptcy estate.

               The receiver also filed an affidavit of William Hendon who stated that he was a
retired FBI agent who was now a bankruptcy trustee, and that he had investigated the dealings of
Taylor & Associates and found no legitimate investments.

                Subsequently, the Court issued a Memorandum Opinion and Order and held that
plaintiffs’ claim of bailment sounded in contract law, and thus, if a bailment was created, plaintiffs
would be in no different position than any other creditor of the bankruptcy estate. The Court also
found that equity required that the plaintiffs’ claim be satisfied pro rata along with the other creditors
similarly situated, and that plaintiffs were not entitled to the return of the cashier’s check. At the

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behest of the plaintiffs, the Court’s Judgment was made final pursuant to Tenn. R. App. P., rule
54.02, and this appeal ensued.

                Plaintiffs present four issues which advance theories of bailment and resulting or
constructive trust which entitled the return of the cashier’s check.

                The Supreme Court has recognized that “cashier’s checks are commonly perceived
and circulated in the commercial world as cash.” Stringfellow v. First American National Bank, 878
S.W.2d 940 (Tenn. 1994). The Court has thus declared that in Tennessee, cashier’s checks are to
be treated as a cash equivalent, and that an issuing bank has no right to refuse to pay same when
presented. Id.

                In jurisdictions which follow the cash equivalent approach to cashier’s checks, it has
been said that “until delivery of the cashier’s check to the named payee, the purchaser remains the
‘owner’ and retains the right to cancel” but “the delivery of the cashier’s check to [a payee] had the
same effect as a delivery of the cash itself which it represented.” Mutual Savings and Loan v.
National Bank of Detroit, 462 N.W.2d 797 (Mich. Ct. App. 1990); Pikeville Nat. Bank & Trust Co.
v. Shirley, 135 S.W.2d 426 (Ky. Ct. App. 1940). Applying these principles to this case, delivery of
the cashier’s check by Freels to Taylor was tantamount to Freels giving Taylor cash. Thus, the
existence of a cashier’s check given to Taylor by Freels affords plaintiffs no superior right to the
return of the cashier’s check than they would have if cash had been found in Taylor’s possession.

                Plaintiffs argue that the check should be returned to them pursuant to either a
resulting or constructive trust theory, since the check was given to Taylor to invest for the benefit
of the Freels trust. This argument ignores the fact that basically all assets received by Taylor &
Associates were held in this same manner. Plaintiffs’ argument also ignores the basic tenets of the
bankruptcy code, which provides that “all legal or equitable interests of the debtor in property” are
to be made a part of the bankruptcy estate to be distributed by the bankruptcy court. 11 U.S.C. §541.
This provision is broadly construed, such that it would extend to all property wherever located and
by whomever held, and would include all of the debtor’s legal, equitable, and possessory interests.
See Matter of Continental Airlines, Inc., 134 B.R. 536 (Bankr. D. Del. 1991). As such, there can be
no question that cash or a cashier’s check in the possession of Taylor at the time of his death would
be included in the bankruptcy estate for disposition by the bankruptcy court. (Similarly, this claim
seeking return of property included in the bankruptcy estate would arguably be subject to the
automatic stay provisions in the bankruptcy code, found at 11 U.S.C. §362(a).)

                Some cases have recognized the existence of a constructive trust in certain funds held
by a bankruptcy debtor. However, it is clear that in these cases it is the bankruptcy court which
properly decided the outcome of this issue by looking to state law. See, e.g., In re Wrinkle, 128 B.R.
529 (Bankr. S. D. Ohio 1991); In re North American Coin & Currency, Ltd., 767 F.2d 1573 (9th Cir.
1985); In re Fox, 5 B.R. 317 (Bankr. N. D. Tex. 1980). By applying State law, it was proper for the
Trial Court to rule that plaintiffs were similarly situated to the other creditors of Joseph C. Taylor
& Associates, and thus plaintiffs should assert their claims in the bankruptcy proceeding and receive

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their proper pro rata share.

                Plaintiffs concede in their brief that resulting and constructive trusts are judicial
creations basically found to exist as an equitable remedy to prevent unjust enrichment. In this case,
the Trial Court found that equity would not be served by imposing a trust on these funds for
plaintiffs’ benefit, because, as the Chancellor said:

                In accordance with the equitable maxim “equity delights in equality”, a court of
                Chancery will divide a common fund equally between those entitled, and if the fund
                is not sufficient to pay all in full, a pro rate distribution will be ordered. Gibson’s
                Suits in Chancery §23, 7th Edition.

                We conclude that the Chancellor resolved the competing equities in the appropriate
manner.

                Finally, plaintiffs’ claim regarding a bailment is without merit. Plaintiffs concede that
a bailment sounds in contract and thus would not put plaintiffs in any greater position than any other
creditor with a contractual claim, as the Trial Court found.

               For the foregoing reasons, we affirm the Judgment of the Trial Court and remand,
with the cost of the appeal assessed to Dr. Kenneth F. Freels.

                                                        ______________________________
                                                        HERSCHEL PICKENS FRANKS , P.J. E.S.

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