     16-2827
     In re Dreier LLP

                         UNITED STATES COURT OF APPEALS
                             FOR THE SECOND CIRCUIT

                                  SUMMARY ORDER
     RULINGS  BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER
     FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
     APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY
     ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX
     OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY
     ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

 1        At a stated term of the United States Court of Appeals for
 2   the Second Circuit, held at the Thurgood Marshall United States
 3   Courthouse, 40 Foley Square, in the City of New York, on the
 4   21st day of March, two thousand seventeen.
 5
 6   PRESENT: DENNIS JACOBS,
 7            ROBERT D. SACK,
 8                          Circuit Judges,
 9            PAUL A. ENGELMAYER,
10                          District Judge.1
11
12   - - - - - - - - - - - - - - - - - - - -X
13   IN RE DREIER LLP,
14            Debtor.
15
16
17   COSMETIC PLUS GROUP LTD, ROBIN BARTOSH,
18   TOBY BARTOSH,
19             Claimants-Appellants,
20
21                -v.-                                           16-2827
22
23   SHEILA M. GOWAN, in her capacity as Plan
24   Administrator for Dreier LLP,
25             Appellee.

     1
       Judge Paul A. Engelmayer, United States District Judge for the
     Southern District of New York, sitting by designation.

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 1   - - - - - - - - - - - - - - - - - - - -X
 2
 3   FOR APPELLANTS:              HOWARD M. FILE, Staten Island, NY.
 4
 5   FOR APPELLEE:                BRENDAN M. SCOTT, Klestadt Winters
 6                                Jureller Southard & Stevens, LLP,
 7                                New York, NY.
 8
 9        Appeal from a judgment of the United States District Court
10   for the Southern District of New York (Swain, J.).
11
12        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED AND
13   DECREED that the judgment of the district court be AFFIRMED.
14
15        Cosmetics Plus Group Ltd. (“CPG”) and its secured creditors,
16   Robin Bartosh and Toby Bartosh, appeal from the judgment of the
17   United States District Court for the Southern District of New
18   York (Swain, J.), which affirmed the order of the Bankruptcy
19   Court for the Southern District of New York (Bernstein, J.)
20   granting the plan administrator’s objections and reclassifying
21   as unsecured claims the proofs of claim filed by appellants.
22   We assume the parties’ familiarity with the underlying facts,
23   the procedural history, and the issues presented for review.

24        This appeal arises in the bankruptcy of the law firm Dreier
25   LLP, but it stems from the 2001 bankruptcy of one of that firm’s
26   clients, CPG, which in 2003 filed an adversary proceeding against
27   its insurer. That suit settled, and in March 2008 the insurer
28   issued a check for $350,000 to Dreier LLP, as attorneys for CPG.
29   These funds were deposited in an attorney trust account that
30   commingled client funds with operating funds—as well as the
31   proceeds of attorney Mark Dreier’s note-fraud scheme. By
32   mid-August 2008, the account was depleted and had a negative
33   balance.

34        In October 2008, the bankruptcy judge in the CPG bankruptcy
35   dismissed the proceeding and directed CPG to pay various expenses
36   and fees and distribute the remaining cash to secured creditors
37   Robin and Toby Bartosh. By that time, the Dreier LLP account
38   had been replenished. However, no money was paid to the
39   Bartoshes out of the Dreier LLP trust account. On December 2,
40   2008, Mark Dreier was arrested. Dreier LLP partners Paul Traub

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 1   and Steven Fox (who represented CPG) consulted the firm about
 2   releasing client funds, and on December 4, 2008, Dreier LLP
 3   transferred $441,145.58 to an outside account—an amount that
 4   was intended to include $350,000 for CPG. After Dreier LLP filed
 5   a Chapter 11 petition (on December 16, 2008), the bankruptcy
 6   trustee requested the return of the $441,145.58, which was
 7   transferred to the trustee in February 2009.

 8        In March 2009, CPG and Robin and Toby Bartosh filed proofs
 9   of claim in the Dreier bankruptcy, each asserting a $350,000
10   secured claim based upon Dreier’s retention of CPG’s settlement
11   proceeds. The plan administrator objected on the ground that
12   the proceeds had become “hopelessly commingled” with other funds
13   and that the claims should therefore be reclassified as general
14   unsecured claims. Following a trial, the bankruptcy court
15   sustained the objection and reclassified the claims as
16   unsecured. The district court affirmed.

17        On appeal from the district court, we make an independent
18   and plenary review of the bankruptcy court’s decision. Celli
19   v. First Nat’l Bank, 460 F.3d 289, 292 (2d Cir. 2006). We review
20   conclusions of law de novo and findings of fact for clear error.
21   Id.

22        1. Appellants’ principal argument is that the bankruptcy
23   court (and the district court) erred by holding that Dreier LLP’s
24   December 4, 2008, transfer of funds to an outside account was
25   an avoidable preference under 11 U.S.C. § 547(b). That
26   bankruptcy provision allows a trustee to avoid any transfer (i)
27   of property of the debtor, (ii) made for benefit of a creditor,
28   (iii) for an antecedent debt, (iv) while the debtor was
29   insolvent, (v) within 90 days of filing for bankruptcy, (vi)
30   allowing the creditor to receive more than it would receive in
31   Chapter 7 liquidation if the transfer had not been made.

32        The bankruptcy court held that all elements were satisfied
33   and that the December 4 transfer was therefore properly avoided.
34   Appellants argue that the transferred funds were never the
35   “property of the debtor,” but were instead held in trust for
36   CPG as proceeds of litigation settlement. We disagree.

37        It is not disputed that in March 2008 Dreier LLP received
38   $350,000 of settlement proceeds to be held in trust for CPG.

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 1   But Dreier failed to honor that obligation: the bankruptcy court
 2   found that, by mid-August 2008, the account into which those
 3   funds were deposited had a negative balance. That finding is
 4   supported by bank records and is not clearly erroneous. It
 5   follows that well before the December 1 transfer, the settlement
 6   proceeds had been converted, and were gone. Although CPG was
 7   injured by this dissipation of funds, and has a claim for its
 8   injury, that claim is not for a traceable res. The funds that
 9   later replenished the Dreier LLP account and which were
10   transferred on December 4 to satisfy the debt to CPG are not
11   traceable to CPG’s settlement proceeds. They are from other
12   sources, and were at the time of the transfer Dreier LLP’s
13   property. Appellants have no greater right to those particular
14   funds than other unsecured creditors.

15        All of the § 547(b) elements are satisfied, and Dreier LLP’s
16   December 4 transfer was an avoidable preference. We find no
17   error in the holding of the bankruptcy court and district court.

18        2. Appellants argue that the bankruptcy and district
19   courts should have imposed a constructive trust on what they
20   characterize as “the settlement funds transferred” on December
21   4, 2008. This argument fails for the reason already discussed.
22   “It is hornbook law that before a constructive trust may be
23   imposed, a claimant to a wrongdoer’s property must trace his
24   own property into a product in the hands of the wrongdoer.”
25   United States v. Benitez, 779 F.2d 135, 140 (2d Cir. 1985).
26   Appellants mischaracterize the December 4 transfer as being a
27   transfer of the settlement funds. By mid-August 2008, the
28   settlement funds had been dissipated. No part of the funds
29   transferred on December 4 was traceable to them. Those funds
30   are properly a part of Dreier LLP’s estate, subject to the claims
31   of all of its creditors; imposing a constructive trust would
32   merely advantage appellants at the expense of other creditors.

33        Accordingly, and finding no merit in appellants’ other
34   arguments, we hereby AFFIRM the judgment of the district court.

35                                FOR THE COURT:
36                                CATHERINE O’HAGAN WOLFE, CLERK




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