IN RE: COMPUTREX, INC. CASE NO. 01-53755 ADV. NO.02-5024
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
COMPUTREX, INC. CASE NO. 01-53755
LOCKHEED MARTIN CORPORATION
GREAT DANE TRAILERS LIMITED PARTNERSHIP PLAINTIFFS
VS. ADV. NO. 02-5024
COMPUTREX, INC. DEFENDANT
This adversary proceeding is submitted for ruling pursuant to order entered April 10, 2002 (Document # 21). The issues under consideration are whether this is a core or non-core proceeding, what the law of the case is, and whether a constructive trust in favor of the plaintiffs exists. In accordance with the order, the plaintiffs, Lockheed Martin Corporation ("Lockheed") and Great Dane Trailers Limited Partnership ("Great Dane"), and the trustee for the bankruptcy estate of Computrex, Inc. ("Computrex") have briefed the issues (Lockheed - Documents # 25, 27, and 28; Great Dane - Document # 31; the trustee - Document # 23) and have filed Proposed Findings of Fact and Conclusions of Law (Documents # 26, 32, & 22, respectively).
FINDINGS OF FACT:
Lockheed Martin is a Maryland corporation with its principal place of business in Bethesda, Maryland. Great Dane is a Delaware limited partnership with its principal place of business in Savannah, Georgia. Computrex is a Delaware corporation doing business in Nicholasville, Kentucky.
Computrex was in the business of providing freight bill auditing and payment services to companies with which it contracted. In June of 2001 Lockheed Martin entered into an agreement with Computrex entitled Freight Payment Services Contract under which Computrex agreed to provide freight bill processing and payment services for Lockheed Martin. In 1987 Computrex and Great Dane entered into a similar agreement, and in 1993 the agreement was renewed.
Under the terms of those agreements, Computrex received bills from freight carriers for Lockheed Martin and Great Dane, reviewed the invoices and bills of lading, and reported to the plaintiffs the amounts owed their freight carriers. In response to the report/ invoice from Computrex, the plaintiffs then wired sufficient funds to a Computrex account at Bank One so that the freight bills could be paid by Computrex. Both plaintiffs had the ability to access Computrex's database in order to determine what bills had been paid.
Lockheed Martin states that between October and December of 2001, Computrex and Lockheed Martin processed approximately $2.2 million in this manner. In December of 2001 Lockheed Martin became aware that $435,029.07 of the $2.2 million had been held by Computrex and not disbursed to Lockheed Martin freight carriers. Great Dane states that during October and November of 2001 it wire transferred Computrex a total of $780,395.65 to pay Great Dane freight carriers.
On November 28, 2001 Computrex notified its customers, which included the plaintiffs, that effective November 28, 2001 Computrex would no longer make carrier payments on their behalf and further that it would cease operations at the end of the year in anticipation of liquidating its business assets.
Lockheed Martin states that on November 30, 2001 it demanded that Computrex either disburse to Lockheed Martin freight carriers at least $435,029.07 in funds to satisfy outstanding freight bills or that return the funds immediately so that Lockheed Martin could pay the freight carriers directly.
Great Dane states that upon receiving word Computrex would no longer make carrier payments on its behalf, Great Dane reviewed the Computrex database, which indicated Great Dane invoices for October and November had been paid. Evidently to confirm this information, Great Dane then contacted Computrex and was advised October and November checks were being held. Communication between these parties over the next several days resulted in Great Dane's demand that Computrex return the funds wired for payment of the October and November invoices.
On December 4, 2001 Lockheed Martin filed in the U. S. District Court for the Eastern District of Kentucky its Verified Complaint for Breach of Contract, Conversion, Unjust Enrichment, Replevin and Preliminary and Permanent Injunctive Relief against Computrex, Case No. 01-489 (Document # 1, D.C. case). Contemporaneously with the filing of the complaint, a motion for temporary restraining order and preliminary injunction and for a writ of possession or attachment was filed.
On December 7, 2001 a hearing was held at which time the parties indicated they would be tendering an agreed order. On December 12, 2001 Agreed Order was entered (Document # 8, D.C. case) which provides in part:
(1) No later than December 13, 2001, Computrex shall segregate and pay into a new interest-bearing escrow account(s) the sum of $435,029.07 for payment of claims asserted herein as of December 4, 2001 but not yet adjudicated. Said account(s) shall be denominated and identified as "Funds Escrowed Pursuant to Agreed Order Entered in Lockheed Martin Corporation v. Computrex, Inc., Case No. 2001-CV-KSF489, E.D.KY." By virtue of this segregation, [Lockheed Martin] does not concede or agree that Computrex has any right, title or interest in the escrowed funds, or that [Lockheed Martin's] claims are limited to this amount. Computrex does not concede or agree to the validity or amount of [Lockheed Martin's] claims, and by virtue of this segregation, does not concede or agree that [Lockheed Martin] has any right, title or interest in the escrowed funds. Neither the principal amount nor the interest thereon may be assessed, dissipated, transferred, assigned or otherwise depleted, or released by any third party holding the escrowed funds, except by agreement of both parties or by express order of the Court or the U.S. Bankruptcy Court for the Eastern District of Kentucky (the "Bankruptcy Court") upon notice and hearing, resolving the claims asserted by [Lockheed Martin];
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(4) The Court hereby assumes and exercises exclusive jurisdiction over all assets of the defendant, Computrex, pending the filing of the bankruptcy proceeding before the Bankruptcy Court[.]
Pursuant to the terms of the agreed order, on December 18, 2001 Computrex filed Defendant's Accounting of Current Assets which reflected escrow of a certificate of deposit in the amount of $20,000 and a separate escrow of $415,029.07.
On December 14, 2001 Great Dane filed Verified Intervening Complaint for Injunctive and Other Relief in the U. S. District Court for the Eastern District of Kentucky, Case No. 01-500. In the complaint Great Dane alleged that Computrex had wrongfully acquired and converted approximately $780,000 which Great Dane had deposited in order for Computrex to pay certain freight carriers. Great Dane also filed Verified Motion and Affidavit for a Temporary Restraining Order, Imposition of a Constructive Trust, and Writ of Possession.
A hearing was conducted on December 18, 2001, and on December 19, 2001 the court entered Temporary Restraining Order (Document # 12, D.C. case) which provides in part:
Great Dane has demonstrated the probable need for the imposition of a constructive trust with respect to the funds paid by Great Dane and entrusted to the defendant, which funds are now on deposit in Account Number XXXXX1658 at Bank One in Lexington, Kentucky, in the amount of $593,252.15; however, the Court does not, by this Order, impose a constructive trust at this time;
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(1) the defendant shall segregate and pay into the interest-bearing money market checking account identified as Account Number XX7838 at Stock Yards Bank & Trust Company, 1040 East Main Street, Louisville, Kentucky established pursuant to the Agreed Order entered by the Court on December 12, 2001 (the "Agreed Order"), additional funds in the amount of $158,223.08 that will bring the principal balance of that account to a total of $573,252.15, which deposit shall be made no later than December 20, 2001, and that defendant has already deposited $20,000.00 into a Certificate of Deposit identified as Account Number XXXXXXX2644 at Bank One in Lexington, Kentucky, for a total amount in these two accounts of $593,252.15;
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(4) the court continues to exercise exclusive jurisdiction over all the assets of the defendant until such time as the defendant files for bankruptcy protection before the United States Bankruptcy Court[.]
By separate order the court consolidated the Lockheed Martin and Great Dane actions. (Document # 10, D.C. case).
On December 20, 2001 an involuntary petition under chapter 7 of the U.S. Bankruptcy Code was filed in this court against Computrex by other interested parties. (Document # 1, Case No. 01-53755). James D. Lyon was duly appointed and qualified as trustee of the bankruptcy estate. (Document # 8, Case No. 01-53755). In its answer to the involuntary petition, Computrex consented to entry of an order for relief. (Document # 34, Case No. 01-53755). That same day, January 22, 2002, the order for relief was entered. (Document # 36, Case No. 01-53755).
On February 19, 2002 the trustee filed Notice of Removal or in the Alternative Referral Under Local Rule 83.12 in the consolidated District Court action (Document # 19, D.C. case), and on February 28, 2002 the action was transferred to this court, where it became this adversary proceeding.
CONCLUSIONS OF LAW:
I. Core/ Non-core
The initial issue is whether this is a core or a non-core proceeding. The court concludes it is a core proceeding for the following reasons. 28 U.S.C. ' 157(b)(2) provides a list of subjects/ issues/ proceedings which are considered core, that is which may be heard and finally determined by a bankruptcy court. The list is not exhaustive-- core proceedings include "but are not limited to" those listed. Among the listed are (A) "matters concerning the administration of the estate," (I) "determinations as to the dischargeability of particular debts," and (O) "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor . . . relationship." Also listed are (B) "allowance or disallowance of claims against the estate,"(G) "motions to terminate, annul, or modify the automatic stay," and (K) "determinations of the validity, extent, or priority of liens."
The central issue of course is whether the funds in question are indeed property of the bankruptcy estate or are held in trust exclusively for these plaintiffs. Thus, this proceeding is one "concerning the administration of the estate" and "affecting the liquidation" of estate assets and "adjustment" of the parties' relationship. Certainly issues of the automatic stay are impacted since absent the automatic stay, creditors would be able to pursue their own remedies against the property, thus thwarting the bankruptcy purpose of ratable distribution. As noted previously, the plaintiffs allege conversion in their complaints. Although the debtor is a corporation and therefore its debts are non-dischargeable, 11 U.S.C. ' 727, this court is intimately familiar with conversion issues. (See 11 U.S.C. ' 523(a)(6).) Furthermore, the outcome of this adversary proceeding clearly concerns "allowance or disallowance of claims against the estate" as well as determination of the "validity, extent, or priority of liens." Therefore, given the involvement of multiple issues, and looking to the form and substance of the proceeding, it is apparent that this is a core proceeding and that uniformity in the administration of bankruptcy law would best be served by this court.
Plaintiffs' "dressed up" pleading style does not escape the court's attention. Language of the complaints, including the requests for relief, is crafted carefully so as to nominally provide Plaintiffs with the ability to argue "state law claim"and other non-core type of issues, thus playing for creation in District Court of a remedy that would elevate the claims to a status superior to that of other creditors, a result totally contrary to the intent of the Bankruptcy Code. The plaintiffs should not achieve preferred positions for their claims due primarily to the cleverness of their counsel, as well as the inaction of the debtor's counsel to initiate bankruptcy proceedings for the time period beginning with the institution of litigation in District Court (12/4/01) through the date the order for relief was entered in this court (1/22/02). This court is bound neither by the plaintiffs' characterization of their claims nor by their chosen titles for Causes of Action. Rather, the court is obligated to determine independently whether matters are core or non-core. 28 U.S.C. ' 157(b)(3).
II. Law of the Case
Lockheed Martin would have Maryland law as the law of the case. (Document # 28). Great Dane would have Georgia law. (Document # 31). The trustee asserts Kentucky law is the choice of law. (Document # 23). The parties have cited the Kentucky case of Rutherford v. Goodyear Tire and Rubber Company, 943 F.Supp. 789 (W.D.Ky. 1996), as support for their varied positions. Rutherford begins with the proposition that a federal court in determining which state's substantive law applies to a diversity action must apply the law of the state in which the court sits. Thus, this court, as the court in Rutherford, must look first to Kentucky law in order to determine what should be the law of the case. In Rutherford the court, after summarizing the line of Kentucky cases on choice of law, states:
Considering these cases together, no doubt Kentucky prefers the application of its own laws over those of another forum. But the inquiry does not end there. This Court should apply an interest analysis to determine whether it can justify use of Kentucky's laws. If their use can be justified, it should not matter than another state has a greater interest, though perhaps Kentucky's law could be displaced by the overwhelming interest of another state.
Rutherford, Id. at 792.
An "interest analysis" necessarily must be fact-intensive; the court must consider the facts of each case when analyzing the interests impacted.
Applying the "interest analysis" to the facts of this case, the court concludes that Kentucky law should be the law of the case. The plaintiffs filed their complaints in the U. S. District Court for the Eastern District of Kentucky. Computrex filed its bankruptcy petition in the U. S. Bankruptcy Court for the Eastern District of Kentucky. Computrex's business was located in Nicholasville, Kentucky. The money at issue was wired to a Computrex bank account in Kentucky and presently is being held in escrow by the bankruptcy trustee. In accordance with Rutherford, "use" of Kentucky's laws is "justified."
III. Constructive Trust
Having decided that Kentucky law is applicable here, the court turns to the issue of whether a constructive trust exists. Counsel has cited four Kentucky cases concerning constructive trusts. In chronological order they areB XL/Datacomp, Inc. V. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir. 1994), McCafferty v. McCafferty (In re McCafferty), 96 F.3d 192 (6th Cir. 1996), Kitchen v. Boyd (In re Newpower), 233 F.3d 922 (6th Cir. 2000), and Poss v. Morris (In re Morris), 260 F.3d 654 (6th Cir. 2001). Of the four cases cited Omegas is the closest factually to this adversary proceeding. Indeed it is similar factually. Stated another way, this court is not presented with an Ohio divorce decree, as was the court in McCafferty; or with a Michigan guilty plea of embezzlement, as was the court in Newpower; or with Ohio law regarding real property and a "cognovit note" between "longtime" friends, as was the court in Morris. The facts presented here, as in Omegas, concern business dealings under Kentucky law.
Imposition of a constructive trust necessarily begins with acknowledgment of the inherent conflict between Bankruptcy Code Section 544(a), which provides the bankruptcy trustee with "strong arm" powers, and Section 541(d), which allows for recognition of a constructive trust in the context of a bankruptcy. Thus, to exclude property from a debtor's estate as being subject to a constructive trust is to recognize the "equitable interest" as superior to that of the trustee. "Congress did not mean to authorize a bankruptcy estate to benefit from property the debtor did not own." Omegas, 16 F.3d at 1449, quoting from In re Quality Holstein Leasing, 752 F.2d 1009, 1013 (5th Cir. 1985). This "common-law remedy in equity," this "legal fiction" was created as a remedy for "unjust enrichment." Certainly a court of equity, a bankruptcy court, is the appropriate forum for a constructive trust to be recognized.
As so adequately stated by the court in Omegas:
The distribution of assets in a bankruptcy case is based on an identification of what assets and liabilities the debtor has "as of commencement of the case," this being the exact moment the debtor files. Shirkey v. Leake, 715 F.2d 859, 863 (4th Cir. 1983). A debtor that served prior to bankruptcy as trustee of an express trust generally has no right to the assets kept in trust, and the trustee in bankruptcy must fork them over to the beneficiary. However, a claim filed in bankruptcy court asserting rights to certain assets "held" in "constructive trust" for the claimant is nothing more than that: a claim. Unless a court has already impressed a constructive trust upon certain assets or a legislature has created a specific statutory right to have particular kinds of funds held as if in trust, [FN6] the claimant cannot properly represent to the bankruptcy court that he was, at the time of the commencement of the case, a beneficiary of a constructive trust held by the debtor.
FN6. The legislatures of a number of states have created such a right with regard to construction funds paid to contractors. See discussion infra p. 1451.
Omegas, 16 F.3d at 1449.
This Sixth Circuit rule for excluding property from the debtor's bankruptcy estate as a constructive trust has not changed in the seven years from Omegas to Morris, the court's most recent look at the issue.
With regard to a constructive trust, we have been clear that this section does not authorize bankruptcy courts to recognize a constructive trust based on a creditor's claim of entitlement to one; rather, section 541(d) only operates to the extent that state law has impressed property with a constructive trust prior to its entry into bankruptcy.
Morris, 260 F.3d at 666.
Writing for the court in Morris, Judge Batchelder acknowledged that although McCafferty recognized a constructive trust, it was in a different context within the bankruptcy setting, a divorce context, or "when property in bankruptcy [is] not subject to distribution to creditors and so [does] not implicate the rationale of ratable distribution." Morris, 260 F.3d at 666. Judge Batchelder went on to discuss the next case in this line of Sixth Circuit pronouncements on constructive trust, Newpower, as a case addressing the circumstances in which lifting the automatic stay is appropriate. In summary, the law is clear in this circuit as to when a constructive trust may be recognized within the bankruptcy setting as stated by the court in Morris, citing from Omegas, "in certain very limited circumstances" in which a court or the state legislature "has already impressed" a constructive trust upon certain assets.
Such is not the case here. The District Court specifically declined to impose a constructive trust on the funds at issue here. In its Temporary Restraining Order of December 19, 2001, the District Court states that although Great Dane demonstrated "probable need" for imposition of a constructive trust, "the Court does not, by this Order, impose a constructive trust at this time." The order goes on to state that the court's exclusive jurisdiction continues "until such time as the defendant files for bankruptcy protection before the United States Bankruptcy
The court and the parties recognized that bankruptcy was imminent. On November 28, 2001 Computrex announced the likelihood of a bankruptcy filing in communication to its customers. In Agreed Order of December 12, 2001, neither Lockheed Martin nor Computrex conceded either had "right, title, or interest" to the escrowed funds, in fact the order states that the funds-- principal and interest-- are not to be accessed "except by agreement of both parties or by express order of the Court or the U.S. Bankruptcy Court for the Eastern District of Kentucky."
The case before this court presents a classic example of creditor rush to the courthouse, and a classic example of how the Bankruptcy Code works to provide "ratable distribution" to all creditors. The court in Omegas stated:
As we have endeavored to explain, ' 523 of the Code specifically provides the remedy of declaring nondischargeable debts arising from various types of fraud and deceit committed by the debtor. The Code endows the trustee with generous powers to bring property of the imperfect title or disputed ownership into the debtor's estate for distribution according to each creditor's ability to prove its entitlement and priority in accordance with the dictates of the Code. To permit a creditor, no matter how badly he was "had" by the debtor, to lop off a piece of the estate under a constructive trust theory is to permit that creditor to circumvent completely the Code's equitable system of distribution.
Omegas, 16 F.3d at 1453.
In sum, the picture presented by this adversary proceeding is that of "creditors pushing to a place at the head of the line." Morris, 260 F.3d at 667.
In conclusion, the court finds that this adversary proceeding is a core proceeding, that the law of the case is Kentucky law, and that a constructive trust on the funds at issue does not exist.
By the court B
JOSEPH M. SCOTT, JR.
U. S. BANKRUPTCY JUDGE
Patrick W. Michael, Esq.
Raymond J. Pikna, Jr., Esq.
John O. Morgan, Jr., Esq.
Gregory R. Schaaf, Esq.
U. S. Trustee
 The trustee has filed a motion to be substituted as defendant to this adversary proceeding. (Document # 34).
 None of these D.C. pleadings have been made a part of the record of this adversary proceeding, but copies have been provided by Great Dane as exhibits to Document # 31.
 For discussion of constructive trust litigation as a core proceeding, see Lieber Enterprises, Inc. v. Morris (In re Morris), 55 B.R. 615, 616 (Bankr. N.D.Texas 1985).
 For discussion of Congressional intent that the automatic stay protect both the debtor and his creditors, see Benedor Corporation v. Conejo Enterprises (In re Conejo Enterprises, Inc.), 96 F.3d 346, 351-52 (9th Cir. 1996).
 BN1 Telecommunications v. Lomaz (In re BN1 Telecommunications, Inc.), 246 B.R. 845, 849 (6th Cir. BAP 2000), quoting from In re Wood, 825 F.2d 90, 97 (5th Cir. 1987) (Court must look to both form and substance of proceeding to determine whether core status exists).
 "A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law." 28 U.S.C. ' 157(b)(3).
 It is worth noting that Judge Batchelder wrote the opinions in both Morris and Omegas and therefore was acutely aware of the facts and issues in both cases.
 For discussion of these goals in the context of a Ponzi scheme and preference action, see Danning v. Bozek (In re Bullion Reserve of North America), 836 F.2d 1214, 1217 (9th Cir. 1988).