Opinion
Bky. No. 03-3174-B, Adv. Pro. No. 04-80105.
July 29, 2005
ORDER
This matter comes before the Court upon Defendant's Motion for Summary Judgment and upon Plaintiff's Motion for Partial Summary Judgment as to the issues of Defendant's fiduciary duty to creditors and his breach thereof. Based on the arguments and briefs of counsel as well as the supporting documentation submitted by counsel, this Court makes the following Findings of Fact and Conclusions of Law pursuant to Fed.R.Civ.P. 52, made applicable in bankruptcy proceedings by Fed.R.Bankr.P. 7052.
FINDINGS OF FACT
1. The debtor, Tucker Trucking Sons, Inc., filed for relief under Chapter 11 of the Bankruptcy Code on March 14, 2003.
2. Plaintiff is a creditor holding a claim secured in part by the debtor's accounts receivable.
3. The debtor was authorized by final order entered April 23, 2003, to use cash collateral subject to the terms of said order.
4. Under the terms of the Cash Collateral Order, the debtor was to provide a budget of its expenditures to the Plaintiff; if the Plaintiff raised no objection, then the Plaintiff would be deemed to have consented to the expenditures.
5. The Plaintiff never objected to the debtor's proposed budgets or any expenditures during the Chapter 11 case.
6. The debtor's DIP bank account was with First Citizens Bank.
7. The debtor's president, Sammie Tucker, met with First Citizens Bank when opening the DIP account and gave the bank personal notice of the debtor's Chapter 11 filing.
8. The debtor paid its operational expenses out of the DIP account.
9. The case was converted to a case under Chapter 7 on October 3, 2003.
10. Defendant was appointed Chapter 7 trustee on October 8, 2003.
11. On November 5, 2003, 33 days after the case was converted, the debtor filed its amended schedules and statement of affairs, disclosing to the Defendant for the first time its interest in the DIP account with First Citizens Bank.
12. At the time the case was converted to Chapter 7, the DIP account had a balance of $27,549.00.
13. After conversion, the debtor deposited into the DIP account checks totaling in excess of $15,000.00, at least a portion of which arose from payment of accounts receivable.
14. Cash collateral expenditures, evidenced by checks written while the debtor was in Chapter 11 pursuant to the Cash Collateral Order, were honored post-conversion by these post-conversion deposits.
15. The balance on hand in the debtor's DIP account as of the date of Defendant's appointment as trustee was $4,767.42.
16. The debtor's schedules indicated that the debtor's accounts receivable were subject to multiple liens, on which the Plaintiff had one, in excess of $450,019.28.
17. Upon the conversion of the case there was no equity in the DIP account for the benefit of the estate.
18. The Defendant did not notify First Citizens Bank of the conversion of the bankruptcy case to one under Chapter 7.
19. The Defendant did not collect the funds on deposit in the DIP account.
20. The first meeting of creditors for the converted case was held on November 14, 2003. At that time, the only asset abandoned from the debtor's estate was a motor vehicle.
21. By the end of November, 2003, the debtor's DIP account held a balance of less than $75.00.
22. On December 5, 2003, 58 days after his appointment, the Defendant declared the debtor's case to be a No Asset case and abandoned all assets.
Assuming, without deciding, that the Plaintiff has a first lien on accounts receivable, which status is a prerequisite for its standing to bring this action, this Court makes the following:
CONCLUSIONS OF LAW
Rule 56(c) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Summary judgment is a favored mechanism "to secure the 'just, speedy and inexpensive determination' of a case."Thompson Everett, Inc. v. Nat'l Cable Adver., L.P., 57 F.3d 1317, 1322-23 (4th Cir. 1995) (quoting Fed.R.Civ.P. 1). Rule 56(e) of the Federal Rules of Civil Procedure provides that the party opposing a motion for summary judgment "may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). It is noted at the outset that, while Defendant submitted the affidavit of W. Ryan Hovis as to his expert opinion regarding the trustee's performance of his duties, no supporting affidavits were submitted by the Plaintiff either in its motion or in its opposition to Defendant's motion. Since both parties seek summary judgment, it appears that neither party contends that any material issue of fact remains disputed.
A Chapter 7 trustee's duties are set forth in 11 U.S.C. § 704. They include the following which are applicable to this matter:
(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest;
(2) be accountable for all property received. . . . .
11 U.S.C. § 704(1), (2).
A number of courts have addressed the obligations and duties that this code section places on a bankruptcy trustee. "First and foremost, the Trustee has a legal duty and obligation to preserve the assets of the debtor's estate. . . . In this regard, trustees are bound to use due diligence in the discharge of their duty to collect and reduce to money the property of the estates for which they are trustees and to secure possession of all the debtor's property and collect all debts." In re Chicago Art Glass, Inc., 155 B.R. 180, 187 (Bankr. N.D. Ill. 1993). In accordance with subsection (1) of Section 704, "a trustee has a duty to preserve estate assets in such a manner as to be compatible with the best interests of parties in interest." In re Slack, 164 B.R. 19, 22 (Bankr. N.D.N.Y. 1994).
While the term "parties in interest" is not defined in the Bankruptcy Code, "the phrase has generally been interpreted in a Chapter 7 case to refer to creditors of the debtor who have claims against the estate and whose pecuniary interests are directly affected by the bankruptcy proceedings." Slack, 164 B.R. at 22. This interpretation would clearly include both secured and unsecured creditors. As stated by the court in In re Peckinpaugh, 50 B.R. 865 (Bankr. Ohio 1985), the trustee "represents the secured creditors as a custodian of the property upon which they have a lien" and is obligated to preserve that property. 50 B.R. at 869. This Court concludes that a Chapter 7 trustee does owe a fiduciary duty to secured creditors.
The question now becomes whether the Defendant in the present case breached his duty as set forth in 11 U.S.C. § 704. According to the Court of Appeals for the Fourth Circuit, ". . . the statute itself provides the necessary standard of care. The issue is not whether [the trustee] acted reasonably in general,. . . . but whether she acted 'as expeditiously as [was] compatible with the best interests' of the [debtors] and the other interested parties." In re Hutchinson, 5 F.3rd 750, 754 (Ct.App. 4th Cir. 1993).
Plaintiff argues that Defendant never undertook any action to preserve the DIP account. To the contrary, Defendant followed this Court's Cash Collateral Order entered on April 23, 2003 which allowed for the use of cash collateral for Chapter 11 expenditures. Pursuant to the Cash Collateral Order, the debtor was authorized to use available cash collateral for payment of operating expenses necessary for the continuation of business operations. Under the terms of the Cash Collateral Order, the debtor was to provide a budget of its expenditures to the secured parties, of which Plaintiff was one, and if no party objected then the party would be deemed to have consented to the budget. The debtor's President, Sammie Tucker (Tucker) testified in his deposition that Plaintiff never objected to the debtor's proposed budgets or to any expenditures by the debtor. Although Plaintiff objected to the debtor's motion to use cash collateral initially, its objection was overruled, and by the terms of the Cash Collateral Order, Plaintiff consented to the Chapter 11 debtor's budget and expenditures. The Defendant was bound by the terms of the Cash Collateral Order and therefore could not take funds on deposit at the time of his appointment. This Court speculates that had pre-conversion checks, pursuant to the Cash Collateral Order, not been honored post-conversion because of any action taken either by the debtor's bank or by the trustee to freeze debtor's bank account, this Court upon motion of any aggrieved payee in all likelihood would have directed payment from post-conversion deposits.
In support of its argument that Defendant has breached his duty under 11 U.S.C. § 704, Plaintiff cites the case of In re Bidlofsky, 57 B.R. 883 (E.D. Mich. 1985). Although asserted to be similar to the present case, it is not. In Bidlofsky, the court stated that "in the case of a bank account that is clearly property of the estate, a trustee breaches [his obligation under Section 704] when for nearly two months after notice of the account, all the trustee does is send a letter requesting a 'freeze'; plainly 11 U.S.C. § 704 requires the trustee to 'collect' the property, not request that others hold it for him." 57 B.R. at 900. The Bidlofsky trustee sought the turnover of funds on deposit from the debtor's bank pursuant to 11 U.S.C. § 542. Since § 542 provides for turnover of property of the estate "unless such property is of inconsequential value or benefit to the estate," one would presume that the bank funds in theBidlofsky case had value for the estate. There is no mention in the case that there were any liens held against the funds on deposit. In the present case, there was a balance of $4,767.42 in the DIP account on the day the Plaintiff was appointed trustee. The schedules showed liens in excess of $400,000.00 against the debtor's accounts. Thus there was clearly no value or equity in the DIP account at the time of Defendant's appointment. Thus the Defendant's failure to collect the funds in the DIP account did not constitute a breach of his duties under Section 704.
Further, it appears to this Court that a time period of 58 days from the Defendant's appointment as trustee until his "No Asset" declaration and abandonment of all scheduled assets is not unreasonable. Thus it appears that the Defendant acted as expeditiously as compatible with the best interests of all parties concerned and therefore has fulfilled his duties pursuant to 11 U.S.C. § 704 in administering and closing this estate.
Plaintiff also asserts that the Defendant breached his obligation under Fed.R.Bankr.P. 2015 by failing to "give notice of the case" to the debtor's bank. The rule clearly excepts such notice requirement when the entity in question "has knowledge or has previously been notified of the case." Fed.R.Bankr.P. 2015(a)(4). Plaintiff has provided no evidence whatsoever that the debtor's bank did not have prior notice or knowledge of the debtor's bankruptcy filing. The rule imposes no duty to notify such parties of the conversion of a case.
For all of the foregoing reasons, this Court denies Plaintiff's motion for partial summary judgment and grants Defendant's motion for summary judgment, thus ending this adversary proceeding.
AND IT IS SO ORDERED.