Court Opinion

ID: 151674
Source: CourtListenerOpinion
Date Created: 2010-07-27 19:58:52+00
Date Added: 2024-06-11T15:01:46.722308
License: Public Domain

NOT PRECEDENTIAL

                  UNITED STATES COURT OF APPEALS
                       FOR THE THIRD CIRCUIT

                                No. 09-2321

        IN RE: MUSHROOM TRANSPORTATION COMPANY;
   PENN YORK REALTY COMPANY, INC.; ROBBEY REALTY, INC.;
             TRUX ENTERPRISES, INC.; LEAZIT, INC.,
                                                   Debtors

        JEOFFREY L. BURTCH, TRUSTEE, Trustee in Bankruptcy of
           MUSHROOM TRANSPORTATION COMPANY, INC.,
                   successor to ROBBEY REALTY, INC.,
                PENN YORK REALTY COMPANY, INC., and
  TRUX ENTERPRISES, INC. and successor to Michael Arnold, former trustee
in bankruptcy for Mushroom Transportation Company, Inc., Robbey Realty, Inc.,
         Penn York Realty Company, Inc., and Trux Enterprises, Inc.,

                                                            Appellant

                                     v.

    JONATHAN H. GANZ; PINCUS, VERLIN, HAHN & REICH, P.C.;
         PINCUS, REICH, HAHN, DUBROFF & GANZ, P.C.;
             MODELL, PINCUS, HAHN & REICH, P.C.;
       PINCUS, VERLIN, BLUESTEIN, HAHN & REICH, P.C.;
                  ASTOR WEISS & NEWMAN;
        RAWLE & HENDERSONL; CONTINENTAL BANK;
       ERWIN L. PINCUS; RICHARD L. HAHN; PACE REICH;
  JEROME J. VERLIN; ANDREW F. NAPOLI; RONALD BLUESTEIN;
 HERMAN P. WEINBERG; DAVID N. BRESSLER; ALLEN B. DUBROFF

               On Appeal from the United States District Court
                   for the Eastern District of Pennsylvania
                     (District Court No. 2-07-cv-02759)
                  District Judge: Hon. Eduardo C. Robreno
                     Submitted under Third Circuit LAR 34.1(a)
                                 on July 13, 2010

            Before: FUENTES, ALDISERT, and ROTH, Circuit Judges.

                            (Opinion Filed: July 27, 2010)

                                    OPINION

ROTH, Circuit Judge:

       Jeoffrey Burtch, Bankruptcy Trustee of the Mushroom Transportation

Company, Inc. (MTC), and plaintiff in this adversarial proceeding, appeals the

Bankruptcy Court’s judgment in favor of defendant Pincus, Verlin, Hahn & Reich

(PVHR) and the District Court’s affirmance. Both courts found PVHR not liable

for losses that occurred when its shareholder, Jonathan Ganz, embezzled from the

bankruptcy estate while serving as MTC’s counsel. We will affirm.

I. Background

       Our last opinion in this case contains a full recitation of the facts, In re

Mushroom Transportation Co., Inc., 382 F.3d 325 (3d Cir. 2004), so a brief

recitation will suffice here.

       On June 24, 1985, MTC and related entities filed petitions for

reorganization under Chapter 11 of the Bankruptcy Code. MTC initially retained

its assets as debtor-in-possession, but within six months, MTC ceased operation

and began liquidating assets. During the bankruptcy proceeding, MTC remained

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   under the leadership of Michael C. Arnold and Robert B. Cutaiar, both long-time

   MTC executives. The Bankruptcy Court appointed Arnold as “Special Liquidation

   Consultant” and approved Arnold’s compensation of $300 per day from the

   bankruptcy estate. Arnold retained Jonathan Ganz and Ganz’s firm, PVHR, as

   MTC’s counsel in the bankruptcy proceeding.1

           MTC deposited the liquidation proceeds at Continental Bank, one of MTC’s

   largest creditors. The Bankruptcy Court approved repayment of Continental

   Bank’s secured claim from funds on deposit, leaving a balance of approximately

   $1 million in MTC’s escrow account at Continental Bank. At Ganz’s request, in

   July and August 1987, Continental Bank conveyed the escrow balance to the

   bankruptcy estate by (1) issuing a $200,000 treasurer’s check payable to Ganz as

   debtor’s counsel and (2) depositing $766,624,49 into a new MTC escrow account

   opened by Ganz at Continental Bank. Although PVHR maintained its own escrow

   accounts for client funds, Ganz opened a separate account because he intended to

      1
          The Bankruptcy Court explained the association between Arnold and Ganz:

      Both Arnold and Ganz graduated from Villanova Law School. While at law
      school Arnold met Ganz and even took a bankruptcy class with him. It was
      Arnold who arranged for Mushroom to engage the Pincus law firm, and Pincus
      was chosen because of Arnold’s association with Ganz and because of the
      firm’s bankruptcy expertise. . . . . Arnold viewed his relationship with Ganz as
      more than simply attorney-client. However, he had no social relationship with
      Ganz, at least prior to engaging his firm to represent Mushroom in its
      bankruptcy case. After the engagement, Arnold and Ganz became friendlier,
      sharing season baseball tickets.

366 B.R. 414, 418 (Bankr. E.D. Pa. 2007).

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convert the estate’s funds for his personal use and wanted to evade discovery by

PVHR. Ganz began embezzling from the estate in 1987.

      In 1990, the Bankruptcy Court – still unaware of Ganz’s embezzlement –

converted the proceeding from Chapter 11 to Chapter 7 and appointed Arnold as

Trustee of the bankruptcy estate. In February 1992, the United States Trustee

advised Arnold that Ganz had embezzled from other bankruptcy estates. Arnold

examined MTC’s accounts and discovered that, indeed, funds were missing from

the estate. In 1992, Arnold brought this adversarial proceeding against PVHR to

recover funds stolen by Ganz, who later pleaded guilty to embezzlement.

      In 1994, while this adversarial proceeding was pending, Arnold also began

embezzling funds from the MTC bankruptcy estate. Arnold resigned as

bankruptcy trustee in 1995 and pleaded guilty to a felony in 1996. Jeoffrey Burtch

succeeded Arnold as Trustee and continued this multi-count action against PVHR.

Count I asserts a claim for turnover of estate property under 11 U.S.C. §§ 542 and

543. Counts II through VII assert various common law claims.

      The principal issue in this case is whether PVHR, which ordinarily would

be liable for embezzlement committed by its shareholder, should prevail on

affirmative defenses.   PVHR contends the turnover claim is barred by laches and

the common law claims are barred by statutes of limitations. This adversarial

proceeding was filed October 5, 1992, more than four years after the

embezzlement began. The applicable dates of accrual are not in dispute, so absent

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tolling, the Trustee’s claims would be barred by laches or the statutes of

limitations. The Trustee argues the limitations period should be tolled because

Arnold and Cutaiar exercised reasonable diligence in ascertaining the existence of

injury to the bankruptcy estate.

       The Bankruptcy Court, ruling on the affirmative defenses, granted summary

judgment in favor of PVHR because MTC failed to exercise reasonable diligence

in uncovering Ganz’s embezzlement. The District Court affirmed. On appeal, we

partially reversed the grant of summary judgment. There was “no question that

Mushroom, acting through its representatives Arnold and Cutaiar, had a fiduciary

duty to protect and maximize the estate’s assets.” 382 F.3d at 339. But whether it

was reasonable for Arnold and Cutaiar to relax their “vigilance in overseeing the

execution of the duties [they] delegated to Ganz” was a question of fact. Id. at

341. We explained that “where the wrongdoing underlying [a] cause[] of action

has been perpetrated by a fiduciary to the detriment of its principal, this fact

militates strongly against summary judgment on the issue of whether the principal

(here Mushroom) exercised reasonable diligence in failing to discover the

fiduciary’s malfeasance within the applicable statutes of limitations . . . . ‘To

require a principal to engage in aggressive oversight of its fiduciary’s conduct is to

deny the very essence of a fiduciary relationship.’” Id. at 341-42 (quoting Rubin

Quinn Moss Heaney & Patterson, P.C. v. Kennel, 832 F. Supp. 922, 935 (E.D. Pa.

1993). We remanded for determination of when the Trustee’s duty to investigate

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arose and issued the following guidance: “We should stress that we do not hold

here that the existence of a fiduciary, lawyer-client relationship between Ganz and

Mushroom, and Ganz’s abuse of that relationship, alone preclude judgment as a

matter of law in PVHR’s and its shareholders’ favor.” Id. at 342-43.

       On remand, the Bankruptcy Court held a five-day trial and issued more than

100 pages of factual findings and legal conclusions. The Bankruptcy Court held

that PVHR, as counsel to the bankruptcy estate, breached its fiduciary duties and

contractual obligations owed to the Trustee. However, the Bankruptcy Court

found PVHR was not liable for turnover because the “funds misappropriated by

Ganz were never channeled through the law firm escrow account, but were

transferred directly by Continental Bank to bank accounts titled in Ganz’s name

alone.” 366 B.R. 414, 439 (Bankr. E.D. Pa. 2007). The Bankruptcy Court

enforced the statute of limitations on the Trustee’s common law claims because

Arnold and Cutaiar failed to exercise reasonable diligence as fiduciaries

representing MTC’s interests. The Bankruptcy Court held that Arnold, in

particular, acted unreasonably:

       Although Arnold testified that he communicated with Ganz
       “numerous times” about the Mushroom assets, beginning in 1987, 1
       N.T. at 57, such testimony to the extent it implies that Arnold was
       attentive to or interested in the protection of Mushroom assets for the
       benefit of its creditors is not credible. There is no written
       communication after February 1988. Arnold was working full-time
       for a New Jersey firm and later for a Pittsburgh company beginning
       in 1987. He never sought any bank account or interest statements, or
       other corroborative or relevant tax information. Although Ganz
       provided a written reply to Arnold’s accounting request in February

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       1987, he did not do so with a similar request in February 1988, and
       Arnold did not press him for information. Arnold expressed no
       concern about the assets after Ganz joined another firm. And even
       after he became trustee in February 1991, and was not represented by
       the Pincus firm, and after he received information from the United
       States trustee about his duty to obtain control of estate property, he
       never sought any information or attempted to collect the assets from
       Ganz or Pincus. He attempted no recovery after the substantive
       consolidation order was entered. And, as trustee, he also embezzled
       estate property.

366 B.R. at 434. The District Court affirmed. The Trustee appeals both findings

and requests reassignment to a different bankruptcy judge on remand.

II. Discussion

       The District Court had jurisdiction pursuant to 28 U.S.C. § 158 over the

appeal from the Bankruptcy Court, which had jurisdiction pursuant to 28 U.S.C. §

157(b). We have jurisdiction over this appeal pursuant to 28 U.S.C. §§ 1291 and

158(d). The District Court’s determinations are subject to plenary review. In re

Prof’l Ins. Mgmt., 285 F.3d 268, 282-83 (3d Cir. 2002). The Bankruptcy Court’s

factual determinations are reviewed for clear error and its legal determinations are

reviewed de novo. Id.

       The Trustee argues (1) the Trustee is entitled to turnover of assets

embezzled by Ganz and (2) the statute of limitations should be tolled because

Arnold and Cutaiar acted reasonably in relying on advice of counsel. Both

arguments challenge factual findings without any demonstration of how those

findings were clearly erroneous. We have reviewed the record and find no error of

fact or law.

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       The turnover claim is without merit because the Bankruptcy Court found

the funds embezzled by Ganz were not channeled through PVHR’s accounts.

There was no property for PVHR to turnover because Ganz converted the funds

from Continental Bank to a separate account under his control and not the firm’s.

       The evidence adduced at trial supports the Bankruptcy Court’s finding that

Arnold completely abdicated his responsibility to preserve and protect the

bankruptcy estate’s assets, partly because of his friendly relationship with Ganz.

After learning that Ganz had embezzled from the bankruptcy estate, Arnold then

proceeded to pilfer the bankruptcy estate as well. It is clear that Arnold did not act

with reasonable diligence to ascertain the existence of an injury, so the Trustee is

not entitled to tolling of the limitations period.

III. Conclusion

       For the reasons stated above, we will affirm the judgments of the

Bankruptcy Court and District Court. The request for reassignment is moot.

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