Court Opinion

ID: 3016090
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:15:07.971595+00
Date Added: 2024-06-11T12:26:40.654181
License: Public Domain

____________

                        Nos. 95-1251/1288
                           ____________

In re: Rine & Rine Auctioneers, *
Inc.,                           *
                                *
      Debtor                    *
________________________        *
                                *
Natkin & Company,               *
                                * Appeals from the United States
      Appellee/Cross-appellant, * District Court for the
                                * District of Nebraska
      v.                        *
                                *
Richard D. Myers, Trustee of    *
The Bankruptcy Estate of Rine & *
Rine Auctioneers, Inc.,         *
                                *
      Appellant/Cross-appellee. *

                            ____________

                  Submitted:   September 13, 1995

                      Filed: January 22, 1996
                          ____________

Before McMILLIAN, HEANEY and MURPHY, Circuit Judges.
                           ____________

McMILLIAN, Circuit Judge.

     Richard D. Myers (Trustee), trustee of the bankruptcy estate
of Rine & Rine Auctioneers, Inc. (Debtor), appeals from an order
entered in the United States District Court for the District of
Nebraska, affirming the judgment of the bankruptcy court in favor
of Natkin & Company (Natkin) in an adversary proceeding brought by
Natkin, seeking to recover $32,680.00 in proceeds from an auction
sale conducted by Debtor on behalf of Natkin.     Natkin & Co. v.
Myers (In re Rine & Rine Auctioneers, Inc.), No. 8:94cv352 (D. Neb.
Dec. 20, 1994), aff'g No. BK92-80770/A92-8149 (Bankr. D. Neb.
Apr. 20, 1994).      For reversal, the Trustee argues that the
bankruptcy court erred in holding that the auction proceeds were
held by Debtor as an agent for its principal, Natkin, and therefore
the funds were not property of Debtor's estate.      Natkin cross-
appeals, arguing that the bankruptcy court erred in granting
prejudgment interest at the rate earned by the Trustee, rather than
the statutory rate of 12%. For the reasons discussed below, we
reverse the order of the district court with respect to the issue
raised in the Trustee's appeal, dismiss Natkin's cross-appeal as
moot, and remand the case to the district court with instructions.

     On this day, we have simultaneously filed an opinion in an
appeal from another adversary proceeding arising out of Debtor's
bankruptcy filing, involving a customer unrelated to Natkin. Rine
& Rine Auctioneers, Inc. v. Douglas County Bank & Trust Co. (In re
Rine & Rine Auctioneers, Inc.), No. 95-1158 (Jan. 22, 1996)
(DCB&T).

                            Background

     The underlying facts are summarized as follows. Debtor was
a corporation in the business of auctioning personal property for
its customers. Natkin employed the services of Debtor to conduct
an auction sale to dispose of certain personal property (sheet
metal machinery and equipment) owned by Natkin. Debtor and Natkin
entered into a written agreement whereby Natkin agreed to make the
property available to Debtor, and Debtor agreed to advertise and
conduct the sale, collect the proceeds, and remit the net proceeds
to Natkin within ten days after the sale.

     Debtor advertised and conducted the auction sale as agreed.
The sale took place on March 25, 1992.       Debtor deposited the
proceeds from the sale in an account at the First National Bank of
Omaha (hereinafter the First National account) which Debtor had
specifically created for the purpose of holding auction proceeds.

                               -2-
The net proceeds from the Natkin auction sale were not remitted to
Natkin within ten days after the sale.

     On April 27, 1992, Debtor filed for relief under Chapter 7 of
the United States Bankruptcy Code.       At that time, the First
National account held the proceeds from the Natkin sale as well as
proceeds from other auction sales. Since the date on which the
proceeds from the Natkin sale were deposited in the First National
account, the balance had remained above the full amount of net
proceeds from that sale, which, according to the bankruptcy court's
findings, was $32,680.00.     The balance in the First National
account on the date of Debtor's bankruptcy filing was $45,403.00.1

     Natkin filed an adversary proceeding in the bankruptcy court,
requesting an order from that court directing the Trustee to remit
the proceeds from the Natkin sale, plus interest.      The Trustee
opposed Natkin's request. The bankruptcy court held a hearing on
Natkin's adversary complaint on February 8, 1994, and rendered its
decision in a memorandum order dated April 20, 1994.            The
bankruptcy court stated that the relationship between an auctioneer
and its customer is that of an agent and principal. Slip op. at 2
(quoting Edwin Bender & Sons v. Ericson Livestock Comm'n Co., 421
N.W.2d 766, 770-71 (Neb. 1988) (Bender & Sons) ("An auctioneer, in
selling property for another at auction, is the agent of the
seller, and [the auctioneer's] rights and liabilities, in the
absence of an applicable statute changing them, are governed by the
general principals of the law of agency.")). The bankruptcy court
further noted that, as a general rule, an agency relationship ends
when the purpose of the relationship has been achieved. Slip op.
at 2. Because the purpose of the relationship between Debtor and
Natkin would not be achieved until the auction proceeds were

     1
      The bankruptcy court found that the maximum amount of funds
necessary to pay all of the auction customers whose auction
proceeds had been deposited in the First National account was
$51,765.00. Slip op. at 2.

                               -3-
remitted to Natkin, the bankruptcy court reasoned, the agency
relationship still existed at the time Debtor filed for bankruptcy,
notwithstanding the fact that Debtor had breached its duty under
the agreement to remit the auction proceeds within ten days. Id.
at 2-3. Thus, the bankruptcy court entered judgment for Natkin,
ordering the Trustee to turn over $32,680.00 plus a proportionate
share of the interest earned by the Trustee since taking possession
of the funds. Id. at 3-4.

     The Trustee appealed the bankruptcy court's ruling to the
district court.      Natkin cross-appealed, claiming that the
bankruptcy court erred in failing to order payment of interest at
the rate of 12% under Neb. Rev. Stat. § 45-104, for the period
beginning on the date the auction proceeds were due, April 4, 1992.
Upon review, the district court affirmed the bankruptcy court's
decision in all respects. This appeal and cross-appeal followed.

                            Discussion

      When a bankruptcy court's judgment is appealed to the district
court, the district court acts as an appellate court and reviews
the bankruptcy court's legal determinations de novo and findings of
fact for clear error. Wegner v. Grunewaldt, 821 F.2d 1317, 1320
(8th Cir. 1987).    As the second court of appellate review, we
conduct an independent review of the bankruptcy court's judgment,
applying the same standards of review as the district court. Id.
State law controls questions concerning the nature and extent of
the debtor's interest in property. N.S. Garrott & Sons v. Union
Planters Nat'l Bank (In re N.S. Garrott & Sons), 772 F.2d 462, 466
(8th Cir. 1985) (Garrott).      Therefore, in the present case,
Nebraska law governs the question of whether an agency relationship
existed between Debtor and Natkin at the time Debtor filed its
petition.   The controlling legal issue in the present case is
whether the bankruptcy court erred in holding that the proceeds
from the Natkin auction were not property of Debtor's estate.

                                -4-
First, however, we must review de novo the bankruptcy court's
holding that, under Nebraska law, the relationship between Debtor
and Natkin was that of agent and principal at the time Debtor filed
for bankruptcy. See DCB&T, slip op. at 5-6 & n.3 (once we examine
the debtor's interest in the subject property under state law,
federal bankruptcy law determines the extent to which the subject
property is property of the debtor's estate) (citing Garrott, 772
F.2d at 466).

     As noted above, the bankruptcy court assumed that, under
Bender & Sons, the relationship between Debtor and Natkin would
remain that of agent and principal until such time as Debtor were
to remit the auction proceeds to Natkin. The Trustee maintains
that Bender & Sons is inapplicable to the present case. Relying
instead upon Wright & Souza, Inc. v. DM Properties, 510 N.W.2d 413
(Neb. Ct. App. 1993) (Wright & Souza), the Trustee maintains that
the no agency relationship existed between Debtor and Natkin.
Furthermore, the Trustee argues, even if an agency relationship had
existed at the time of the auction sale under Bender & Sons, that
relationship terminated upon conclusion of the sale and thereafter
became a debtor-creditor relationship.

     Natkin's response to the Trustee's arguments essentially
follows the reasoning of the bankruptcy court. Natkin argues that
Bender & Sons is controlling because it stands for the general
proposition that an auctioneer acts as the agent for its customers.
Natkin argues that the appropriate measure for determining when
such an agency relationship ends is the contract itself. Thus,
because the written agreement between Debtor and Natkin provided
that Debtor was obligated to remit the proceeds to Natkin, the
agent-principal relationship continued as long as the agreement
creating that relationship remained in effect, in other words,
until payment occurred. Because Debtor never paid Natkin, Natkin
argues, the auction proceeds never became part of the bankruptcy
estate. Natkin also maintains that its net auction proceeds were

                               -5-
properly traced to the First National account. Natkin claims that
its monetary interest was never compromised because the balance in
the First National account remained at or above the full amount of
its net proceeds. Brief for Appellee at 11 (citing Cessna Finance
Corp. v. Millard Aviation, Inc. (In re Turner), 13 B.R. 15, 22
(Bankr. D. Neb. 1981)).2

     We agree with the Trustee that Bender & Sons is not
dispositive in the present case. In Bender & Sons, the Nebraska
Supreme Court noted generally that an auctioneer, in selling

    2
     Because we hold that the net proceeds from the Natkin auction
were part of the estate, we need not reach the issue of whether the
proceeds were properly traced to the First National account.
However, to clarify the issue, we note that the bankruptcy court
did not make a specific finding that the funds were properly
traced. Moreover, Cessna Finance Corp. v. Millard Aviation, Inc.
(In re Turner), 13 B.R. 15, 22 (Bankr. D. Neb. 1981) (Turner),
cited by Natkin, Brief for Appellee at 4, 11, does not conclusively
establish the traceability of the disputed funds in the present
case. In Turner, the bankruptcy court stated the well-settled rule
that

        [w]here a secured party's cash proceeds are commingled
        in a general bank account, the secured party has
        successfully identified the proceeds by tracing them
        into the account or accounts into which the deposit was
        made. . . . At that point, a presumption arises that
        general payments are first made from general funds and
        that the security interest is only eroded as the balance
        in the account drops below the amount of proceeds
        deposited.
13 B.R. at 22 (citations omitted). The above-stated rule refers to
the relationship between a secured creditor and general creditors
vis-a-vis the funds in a debtor's general bank account. The rule
does not apply under the facts of the present case because Natkin
did not have a secured interest in funds in the First National
account, nor is there any evidence to suggest that its interest was
somehow superior to the interests of other customers for whom
Debtor deposited auction proceeds in that account.          Rather,
Natkin's claim was presumably on equal footing with other potential
claims. Thus, in light of the bankruptcy court's implicit finding
that the funds in the First National account were insufficient to
satisfy all potential claims, slip op. at 2, Natkin's tracing
argument is not supported by the facts or the law.

                                  -6-
property for another at an auction, acts as the agent for its
customer, and therefore the auctioneer's rights and liabilities
arising out of the auction sale are governed by the general
principles of agency law. 421 N.W.2d at 770-71. The question of
law regarding the relationship between an auctioneer and its
customer arose because the auctioneer in Bender & Sons had made a
materially false statement regarding auctioned property and was
being sued by an auction bidder for misrepresentation.         The
Nebraska Supreme Court held that the auctioneer's statements
regarding the attributes of the auctioned property were made as an
agent for its principal (i.e., the customer) and therefore the
potential liability of the auctioneer depended on whether the
misrepresentation had been authorized by the customer.     Id. at
771-72.   Thus, the holding in Bender & Sons is limited to its
context: an auctioneer ordinarily acts as the agent for its
customer in making representations regarding the customer's assets
before or during the sale of those assets. So limited, the holding
in Bender & Sons is inapplicable to the facts of the present case.
See DCB&T, slip op. at 8.

      Wright & Souza, on the other hand, although factually not on
point, is more instructive in its statement of the applicable law.
In Wright & Souza, a loan broker sued a prospective borrower for
anticipatory breach of contract and prevailed before a jury. 510
N.W.2d at 415-16. On appeal, the borrower argued that the trial
court erred in failing to give a jury instruction regarding the
loan broker's alleged duties as the borrower's agent. The Nebraska
Court of Appeals held that no error had occurred because the
borrower had failed to establish the existence of an agency
relationship. Id. at 417. In reaching its decision, the Nebraska
appellate court identified several factors to be considered in
determining whether an agency relationship exists: (1) the extent
of control the alleged principal exercises over the details of the
alleged agent's work; (2) whether the work is done with or without
the supervision of the alleged principal; (3) whether payment is by

                               -7-
the hour or by the job; (4) whether the work performed by the
alleged agent is part of the regular business of the alleged
principal; (5) whether the alleged principal is in the type of
business performed by the alleged agent; and (6) whether the
alleged agent is engaged in a distinct occupation or business. Id.
In applying the above factors to the facts of the case before it,
the Nebraska Court of Appeals held that no agency relationship
existed because the borrower exercised no control over the loan
broker; the loan broker was engaged in a distinct occupation which
was usually done without supervision; the method of payment was not
based on an hourly rate; and the services performed by the loan
broker were not a regular part of the borrower's business. Id.

     Likewise, in the case before us, application of the Wright &
Souza factors indicates that Debtor was not Natkin's agent once the
auction proceeds were deposited in the First National account.
Debtor was engaging in a distinct occupation, unsupervised by
Natkin and entirely independent of Natkin's business. The method
of payment was not based on an hourly rate but was determined by
the extent to which Debtor successfully performed its services.
While it is true that the auction proceeds were segregated from
Debtor's general funds (by contrast to the facts in DCB&T), they
were nevertheless deposited in an account where they were
intermingled with the funds of other auction customers and lacked
any indicia of Natkin's ownership.     We therefore hold that the
bankruptcy court erred in concluding that, at the time Debtor filed
for relief in bankruptcy, the net proceeds from the Natkin auction
sale were held by Debtor as Natkin's agent under Nebraska law.

     Having determined that the bankruptcy court erred in holding
that, under Nebraska law, Debtor acted as Natkin's agent at the
time Debtor filed its bankruptcy petition, we consider the
alternative theories advanced by Natkin to support its claim that
the auction proceeds were nevertheless not property of the estate.
Natkin maintains that Debtor never acquired any legal or equitable

                               -8-
interest in the auction proceeds because they were held by Debtor
in an express trust for Natkin. In support of this express trust
theory, Natkin states that evidence presented to the bankruptcy
court showed that Natkin and Debtor entered into an oral agreement
prior to signing the written contract and, in that oral agreement,
Debtor agreed to segregate Natkin's auction proceeds. Thus, Natkin
argues, the oral and written agreements together established an
express trust. Alternatively, Natkin maintains that the auction
proceeds were not property of Debtor's estate because they were
held by Debtor in a constructive trust for Natkin. In support of
this constructive trust theory, Natkin relies on two related
decisions of the bankruptcy court for the Southern District of New
York, Dolph Clothiers, Inc. v. Salomon (In re Martin Fein & Co.),
34 B.R. 333 (Bankr. S.D.N.Y. 1983) (Fein I), and Varon v. Salomon
(In re Martin Fein & Co.), 43 B.R. 623 (Bankr. S.D.N.Y. 1984) (Fein
II).

      We reject Natkin's express trust theory because, based upon
the bankruptcy court's findings, there is no basis to conclude that
the parties manifested an intent to create such a trust.        See
Rankin v. City National Bank of Crete, 153 N.W.2d 869, 871 (Neb.
1967) ("[i]n order to create a trust, it must clearly appear that
such was the intention of the parties").        Nor do we find it
necessary or appropriate for the bankruptcy court to make any
further findings on this issue on remand. The bankruptcy court's
determination that "the trustee had at least a colorable argument
that the funds held in the account on the petition date were
property of the estate and were not property of Natkin," slip op.
at 3, logically precludes the possibility that the bankruptcy court
could also have found that it "clearly appeared" that the parties
intended to create an express trust.

     We also reject Natkin's constructive trust theory because, as
explained above, Natkin and Debtor were not in an agency
relationship; therefore, Natkin cannot establish any equitable

                               -9-
basis for imposing a constructive trust in the present case. See
Balfany v. Balfany, 476 N.W.2d 681, 684 (Neb. 1991) (to establish
a constructive trust, the court must find by clear and convincing
evidence that legal title was obtained by fraud, misrepresentation,
or an abuse of an influential or confidential relationship, and
that, under the circumstances, the party holding legal title is not
equitably entitled to hold and enjoy the property) (quoting In re
Estate of Lienemann, 222 Neb. 169, 177, 382 N.W.2d 595, 601
(1986)). Moreover, while we certainly are not bound by Fein I and
Fein II, we note that our holding today is not inconsistent with
those decisions. In Fein I, the bankruptcy court held that, under
New York law, the debtor-auctioneer acted as agent for its auction
customers at all relevant times and thus auction proceeds that were
segregated and traceable could not be included in the debtor's
estate. 34 B.R. at 337. The bankruptcy court therefore held that
funds physically segregated by the debtor in envelopes marked with
its customers' names were not part of the estate. Id. at 335, 337.
Fein I is distinguishable from the present case for several
reasons; not only were the customers' funds physically segregated
by the debtor, they were recovered by the trustee in the original
form of cash and checks received by the debtor from the auction
bidders. Id. at 335. In Fein II, the bankruptcy court further
held that proceeds from an unrelated auction sale, which were
deposited in the debtor's general corporate account, also were not
part of the auctioneer's bankruptcy estate.      Fein II, although
factually more similar to the present case, is also distinguishable
in several important respects. Fein II was premised upon the state
law determination that the debtor-auctioneer was the agent for its
auction customers at all relevant times.      Thus, the bankruptcy
court held that, as a result of the agency relationship, auction
proceeds were held in a constructive trust by the debtor for its
customers and, when the debtor commingled a customer's funds with
its own money, the commingling was wrongful.        Therefore, the
auction customer, as the beneficiary of the constructive trust, had
an equitable lien or charge upon the entire account in which the

                               -10-
trust res had been wrongfully deposited. 43 B.R. at 626-28. By
contrast, in the present case, Debtor was not Natkin's agent under
Nebraska law at the time Debtor filed for bankruptcy. Therefore,
no constructive trust was implied by the relationship. See DCB&T,
slip op. at 14 n.5.

                              Conclusion

      In sum, we hold that the bankruptcy court erred in concluding
that, under Nebraska law, an agency relationship existed between
Debtor and Natkin at the time Debtor filed its bankruptcy petition.
We further hold that Natkin failed to establish any legal basis for
its claim that the funds in dispute were not property of the
bankruptcy estate at the time of Debtor's filing. The order of the
district court affirming the judgment of the bankruptcy court is
therefore reversed and Natkin's cross-appeal is dismissed as moot.
The case is remanded to the district court with instructions to
remand to the bankruptcy court for further proceedings consistent
with this opinion.

     A true copy.

           Attest:

                     CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

                                 -11-