                                                                                                                           Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-19-2005

In Re:Strategic Tech
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-3149




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Recommended Citation
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http://digitalcommons.law.villanova.edu/thirdcircuit_2005/821


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                                                          NOT PRECEDENTIAL

                  UNITED STATES COURT OF APPEALS
                       FOR THE THIRD CIRCUIT
                            ___________

                                NO. 04-3149
                                ___________

                IN RE: STRATEGIC TECHNOLOGIES, INC.

                                                        Debtor

                   GULFSTREAM AEROSPACE CORP.

                                                        Appellant
                                      v.

                      ANTHONY R. CALASCIBETTA

                                ___________

               On Appeal from the United States District Court
                          for the District of New Jersey
                               (Civil No. 03-5079)
                District Judge: Honorable Katharine S. Hayden
                                  ___________

              Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
                               July 14, 2005

       BEFORE: VAN ANTWERPEN, ALDISERT and WEIS, Circuit Judges

                            (Filed : July 19, 2005)
                                 ___________

                                 OPINION
                                ___________
VAN ANTWERPEN, Circuit Judge

                                  I. FACTS
       Debtor Strategic Technologies, Inc. (“STI”) was in the business of providing

shipping-related services to freight carrier customers. STI’s clients employed the

company to audit their freight carrier invoices and inform them of the charges. The

clients then could pay their bills by depositing funds with STI, which would then forward

the funds to the carrier. STI generally commingled its customers’ funds in “funding

accounts,” maintained at different banks, but it did not maintain records to match or

reconcile monies that customers deposited with monies that STI paid out to the freight

carriers.

       STI maintained one of these funding accounts at Fleet Bank (the “Fleet Account”).

This account was essentially a pooled account into which STI deposited checks from its

customers until it withdrew those funds to pay their freight charges. As a pooled account,

the customers’ funds were commingled in this account, but STI did not keep accurate

records to track individual deposits and withdrawals on behalf of individual customers.

       On June 11, 2002, STI stopped using the Fleet Account and began using an

account maintained by Commerce Bank (the “Commerce Funding Account”). The Fleet

Account was subsequently closed and the remaining funds totaling $5,132,456.02 were

transferred into the Commerce Funding Account by July 5, 2002. On July 11, 2002, the

Commerce Funding Account had a negative balance of $2,371,223.54. Later that day, an

STI customer deposited $2,983,841.05 leaving a positive balance of $612,617.51.

Appellant Gulfstream Aerospace Corp. (“Gulfstream”), one of STI’s clients, deposited

$208,436.89 into the Commerce Funding Account on July 15, 2002. Several more

                                             2
deposits and withdrawals were made by STI and its clients and, on July 17, the ending

balance was $3,130,576.44. The next day, STI filed for bankruptcy protection under

Chapter 11.

       As it turns out, no later than 1993, STI had begun using monies in the client

funding accounts for purposes unrelated to paying its customers’ freight bills. For

instance, STI tapped its funding accounts to fund payroll and operating accounts, and

Marc Cooper, the company’s president and sole shareholder, diverted money for his own

personal use. STI covered its misappropriations by engaging in what was essentially a

kiting scheme. As it depleted the funding accounts, STI relied on newer funds deposited

from customers to pay earlier, overdue freight bills of other customers. Eventually the

receipts from customers became insufficient to cover the shortfall in the funding

accounts, and on July 18, 2002, STI filed for bankruptcy protection under Chapter 11.

       On July 31, 2002, the United States Bankruptcy Court for the District of New

Jersey converted STI’s Chapter 11 proceeding into a Chapter 7 liquidation proceeding

and appointed Appellee Anthony Calascibetta as the bankruptcy trustee (the “Trustee”).

On August 14, 2002, the Bankruptcy Court ordered the Trustee to place all funds

remaining in STI’s various bank accounts, including the Commerce Funding Account,

into an interest-bearing “segregated account.” The Trustee complied by depositing

$3,634,438 into the segregated account. On September 24, 2002, the Bankruptcy Court

directed the Trustee to pay $255,468.03 from the segregated account to Knoll, Inc., one of




                                             3
STI’s former customers who mistakenly transferred that amount to STI after STI had filed

for bankruptcy.

       The Trustee commenced an adversary proceeding naming all of STI’s customer-

creditors as defendants. Through the entry of default judgments and consent orders, the

Trustee was able to resolve many of the claims against STI. Eventually, it resolved the

claims of all but four of the interested parties through a settlement agreement.

       On August 11, 2003, the Bankruptcy Court entered the consent order embodying

the settlement agreement. The order called for the distribution of $423,155.73 from the

segregated account to Knoll, representing funds mistakenly transferred to STI after the

bankruptcy case was filed. The remaining funds were distributed pro rata to the settling

defendants, with a portion set aside to cover the costs of administration of the bankruptcy

estate and other priority claims. The agreement was to become effective upon entry of a

final order granting summary judgment in the Bankruptcy Court in favor of the Trustee

with respect to any non-settling defendant.

       On August 13, 2003, the Trustee filed a motion for summary judgment against the

four hold-out defendants. Prior to the return date of that motion, all but Gulfstream

agreed to the settlement. Gulfstream filed a cross-motion for partial summary judgment

seeking return of $208,436.89 that it had deposited into the Commerce Funding Account

on July 15, 2002, three days before STI filed for bankruptcy. Gulfstream offered three

arguments in support of its motion: 1) none of the money in the funding account is

property of the bankruptcy estate and therefore it can only be used to pay the beneficial

                                              4
owners; 2) although the trust money is commingled, the universe of co-owners of the

money is determinable; and 3) the Trustee erred in preferring the claim of Knoll over

Gulfstream.1

       The District Court rejected Gulfstream’s arguments and affirmed the decision of

the Bankruptcy Court. Gulfstream timely appealed.

                     II. JURISDICTION & STANDARD OF REVIEW

       The District Court derives its jurisdiction over bankruptcy matters from 28 U.S.C.

§ 1334 (2005). This section confers upon the District Court “original and exclusive

jurisdiction of all cases under title 11” and “original but not exclusive jurisdiction over all

civil proceedings arising under title 11, or arising in or related to cases under title 11.” Id.

at (a)-(b). Section 157(a) of the Bankruptcy Code allows a district court to refer most of

these matters to a bankruptcy court. 28 U.S.C. § 157(a) (2005); see In re Combustion

Eng'g, Inc., 391 F.3d 190, 226 (3d Cir. 2004).

       We have jurisdiction over this appeal pursuant to 28 U.S.C. §§ 158(d) and 1291.

“[T]his Court reviews ‘the Bankruptcy Court's findings of fact for clear error and

exercises plenary review over the Bankruptcy Court's legal determinations.’” Zinchiak v.

CIT Small Bus. Lending Corp. (In re Zinchiak), 406 F.3d 214, 221-22 (3d Cir. 2005)

(citing Duke Energy Royal, LLC v. Pillowtex Corp. (In re Pillowtex, Inc.), 349 F.3d 711,

716 (3d Cir. 2003)).

   1
       Although Gulfstream compares its claim to Knoll’s, it does not argue on appeal
that Knoll was not entitled to the return of funds it deposited after STI filed for
bankruptcy.

                                               5
                                      III. ANALYSIS

       Gulfstream seeks the return of funds it entrusted to STI shortly before STI filed for

bankruptcy. To support its case, Gulfstream relies on two alternative principles. First,

Gulfstream, argues that all of the money in the Commerce Funding Account amounted to

trust assets and therefore the Bankruptcy Court had no jurisdiction to direct the

disposition of those funds. In the alternative, Gulfstream argues that if the money in the

Commerce Funding Account was commingled, the Court was obligated to apply the

Lowest Intermediate Balancing Test. For the reasons set forth below, we reject both

theories and affirm.

           A. The Court had Jurisdiction Over the Commerce Funding Account

       Gulfstream’s initial argument is that the Bankruptcy Court and the Trustee agree

that the money in the Commerce Funding Account was primarily customer money held in

a constructive trust, and therefore, the Bankruptcy Court did not have jurisdiction to

direct the disposition of those funds. We find two flaws with this theory.

       First, despite its statements that the amount of STI money in the Commerce

Funding Account was negligible, the Bankruptcy Court specifically found that

Gulfstream’s funds were commingled in a single account with other clients’ funds and

STI funds. (Appellant App. at A349.) Neither party has demonstrated that this finding

was clearly erroneous. See Zinchiak, 406 F.3d at 221-22.

       When funds are commingled, and a trust recipient claims a right in those funds, “a

claimant must make two showings: (1) demonstrate that the trust relationship and its legal

                                             6
source exist, and (2) identify and trace the trust funds if they are commingled.” Goldberg

v. N.J. Lawyers’ Fund for Client Prot., 932 F.2d 273, 280 (3d Cir. 1991). Because

Gulfstream could not sufficiently identify its funds in the commingled account, all of the

Commerce Account Funds are presumed to be part of the bankruptcy estate.

       Moreover, the question of whether the funds were part of the bankruptcy estate is

distinct from the question of whether the Bankruptcy Court had jurisdiction over the

disposition of the funds. Even if Gulfstream were able to establish that all of the funds in

the Commerce Funding Account were trust assets, the Bankruptcy Court would still retain

jurisdiction to return those funds to their rightful owners. See Canal Corp. v. Finnman (In

re Johnson), 960 F.2d 396, 402 (4th Cir. 1992).

                   B. The Court Properly Ordered Pro Rata Distribution

       Gulfstream claims that once the Bankruptcy Court determined that the assets were

commingled assets, the Court was required to apply the Lowest Intermediate Balancing

Test (“LIBT”) to allow it to trace its funds in the trust account. “The LIBT is a judicial

construct that some federal courts have applied to ease a beneficiary’s tracing burden

when ‘a trustee commingles trust funds with other monies in a single account.’” City of

Farrell v. Sharon Steel Corp., 41 F.3d 92, 102 (3d Cir. 1994) (quoting In re Columbia Gas

Sys., 997 F.2d 1039, 1063 (3d Cir. 1993)). Under the LIBT, a court assumes that trust

funds are the last monies withdrawn from a commingled account. Id. However, once

trust money is removed (i.e. the balance of the commingled account dips below the total

amount of money claimed as trust funds), that money is not replenished, even if more

                                             7
funds are deposited. Id. “Therefore, the lowest intermediate balance in a commingled

account represents trust funds that have never been dissipated and which are reasonably

identifiable.” Id. (emphasis added).

       Gulfstream argues that, applying the LIBT, it can trace $208,436.89 of its money

in the Commerce Funding Account. However, Gulfstream ignores the fact that its funds

were not only commingled in an account with STI’s assets, but also with the trust assets

of other STI customers.

       While the LIBT is helpful in identifying one party’s assets commingled with the

trustee, its value is significantly lessened when the assets are commingled with many

other similarly situated individuals. City of Farrell, 41 F.3d at 102 (“[T]he lowest

intermediate balance in a commingled account represents trust funds which are

reasonably identifiable.”) If the Bankruptcy Court had applied the LIBT to identify

Gulfstream’s funds, it would have done so at the possible expense of other customers

similarly situated. In situations such as this one, when one party is claiming assets that

are commingled with the assets of someone similarly situated, this Court has indicated a

preference for a pro rata distribution. See Goldberg, 932 F.2d at 280 (“In general, courts

favor a pro rata distribution of funds when such funds are claimed by creditors of like

status.”). Therefore, the Bankruptcy Court properly determined that all of the assets

originating in the Commerce Funding Account should be distributed pro rata.

                 C. The Bankruptcy Court did not Err in Paying Expenses




                                              8
       Finally, Gulfstream argues that the Bankruptcy Court should not have used client

trust funds to pay the expenses of the bankruptcy. However, as discussed above, the

funds that Gulfstream alleges are held in trust cannot be adequately traced. “[T]o

establish rights as a trust recipient, a claimant must . . . identify and trace the trust funds if

they are commingled.” Goldberg, 932 F.2d at 280. Since Gulfstream cannot identify and

trace the trust assets, the Court’s distribution was proper.

                                      IV. CONCLUSION

       For the reasons set forth above, we affirm.




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