In Re: Mushroom

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
8-24-2004
In Re: Mushroom
Precedential or Non-Precedential: Precedential
Docket No. 02-3754
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PRECEDENTIAL JONATHAN H. GANZ;
PINCUS VERLIN HAHN
UNITED STATES & REICH, P.C.;
COURT OF APPEALS PINCUS REICH HAHN
FOR THE THIRD CIRCUIT DUBROFF & GANZ, P.C.;
____________ MODELL PINCUS HAHN
& REICH, P.C.;
No. 02-3754 PINCUS VERLIN BLUESTEIN
____________ HAHN & REICH, P.C.;
ASTOR WEISS & NEWMAN;
IN RE: RAWLE & HENDERSON;
MUSHROOM TRANSPORTATION CONTINENTAL BANK;
COMPANY, INC., ERWIN L. PINCUS;
Debtor RICHARD L. HAHN;
PACE REICH; JEROME J. VERLIN;
JEOFFREY BURTCH; ANDREW F. NAPOLI;
MUSHROOM TRANSPORTATION RONALD BLUESTEIN;
CO., INC.; HERMAN P. WEINBERG;
PENN YORK REALTY DAVID N. BRESSLER;
COMPANY, INC.; ALLEN B. DUBROFF
ROBBEY REALTY INC.;
TRUX ENTERPRISES; Jeoffrey Burtch, Trustee in
TEAMSTERS PENSION TRUST Bank ruptcy of M ushroom
FUND OF PHILADELPHIA; Transportation Company, Inc.,
CHARLES J. SCHAFFER, JR.; successor to Robbey Realty, Inc.,
WILLIAM J. EINHORN; Penn York Realty Company, Inc.,
RAYMOND A. HUBER; and Trux Enterprises, Inc. and
HUBERT C. DIETRICH; successor to Michael Arnold,
ROBERT J. EWANCO; former trustee in bankruptcy,
WILLIAM D. GROSS; Mushroom Tran sportation
THOMAS R. JOHNSTON; Company, Inc., Robbey Realty,
JOSEPH P. SANTONE; Inc., Penn York Realty Company,
WILLIAM J. DILLNER, JR.; Inc., and Trux Enterprises, Inc., the
JAMES H. HUTCHINSON, JR.; Teamsters Pension Trust Fund of
JOHN P. O’CONNOR; Philadelphia and Vicinity, Charles
ANTHONY R. SIMONES; J. Schaffer, Jr., in his official
FREIGHT DRIVERS & HELPERS capacity as a fiduciary, by his
LOCAL 557 PENSION FUND; successor in office, William J.
DANIEL L. SANDY Einhorn, Raymond A. Huber,
Herbert C. Dietrich, Robert J.
v. Ewanco, William D. Gross,
Thomas R. Johnston, Joseph P.
Santone, William J. Dillner, Jr., Kent Cprek (Argued)
James H. Hutchinson, Jr., John P. Jennings Sigmond
O’Connor and Anthony R . 510 Walnut Street, 16 th Floor
Simones, Trustees of the Western The Penn Mutual Towers
Pen nsylvania, Teamsters and Philadelphia, PA 19106-3683
Employers Pension Fund or their Attorney for A ppella nts,
successors, and Freight Drivers & Mushroom Transportation Co.,
Helpers Local 557 Pension Fund Inc.; Penn York Realty Co., Inc.;
and Daniel L. Sandy, a fiduciary, or Robbey Realty, Inc.; Jeoffrey L.
his successor and any other named Burtch; Trux Enterprises, Inc.;
or deemed plaintiff, substituted Freight Drivers & Helpers Local
plaintiff (by virtue of his office) or 557 Pension Fund; and Daniel L.
other successor, Sandy
Appellants
(Per Clerk’s Order of 2/4/03) Vincent P. Szeligo
____________ Wick, Streiff, Meyer, Metz & O’Boyle
1450 Two Chatham Center
On Appeal from the Pittsburgh, PA 15219-3427
United States District Court for the Attorney for Appellants, William J.
Eastern District of Pennsylvania Einhorn; Raymond A. Huber;
(D.C. No. 99-cv-03144) Hubert C. Dietrich; Robert J.
District Judge: Ewanco; William D. Gross;
Honorable Eduardo C. Robreno Thomas R. Johnston; Joseph P.
____________ Santone; William J. Dillner, Jr.;
James H. Hutchinson, Jr.; John P.
Argued May 27, 2004 O’Connor; and Anthony R. Simoes
Before: SCIRICA, Chief Judge,
FISHER and ALARCÓN,*
Circuit Judges. Pace Reich (Argued)
726 Meetinghouse Road
(Filed: August 24, 2004) Elkins Park, PA 19027
Attorney for Appellees, Pincus,
Verlin, Hahn & Reich, P.C.;
Pincus, Reich, Hahn, Dubroff &
* Ganz, P.C.; Pincus, Verlin,
The Honorable Arthur L. Alarcón,
Bluestein, Hahn & Reich, P.C.; and
Senior Judge, United States Court of
Pace Reich
Appeals for the Ninth Circuit, sitting by
designation.
2
Andrew F. Napoli Ernest J. Bernabei, III (Argued)
Hochberg, Napoli & Diamond Harvey, Pennington, Cabot,
1608 Walnut Street, 14 th Floor Griffith & Renneisen
Philadelphia, PA 19103 1835 Market Street
Attorney for Appellees, Pincus, Eleven Penn Center, 29th Floor
Verlin, Hahn & Reich, P.C.; and Philadelphia, PA 19103
Andrew F. Napoli Attorney for Appellee,
Herman P. Weinberg
Edward I. Swichar (Argued)
Blank Rome Allen B. Dubroff
One Logan Square Jaffe, Friedman, Schuman,
Philadelphia, PA 19103 Nemeroff, Applebaum & McCaffery
Attorney for Appellee, 7848 Old York Road, Suite 200
Continental Bank Elkins Park, PA 19027
Attorney for Appellee,
Allen B. Dubroff
Laura S. Clare
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square ____________
P.O. Box 636
Wilmington, DE 19899 OPINION OF THE COURT
Attorney for Appellee ____________
Edwin L. Pincus
FISHER, Circuit Judge.
This appeal requires us to consider
Richard L. Hahn a bankruptcy debtor-in-possession’s ability
321 Clairemont Road to invoke the discovery rule to toll the
Villanova, PA 19085 statutes of limitations on the debtor’s
Attorney for Appellee, claims arising out of its lawyer’s
Richard L. Hahn embezzlement of estate funds. The
bankruptcy and district courts here found
that despite the lawyer’s embezzlement
Arthur W. Lefco (Argued) and non-disclosure of such embezzlement
Marshall, Dennehey, Warner, to his client, the debtor, the debtor could
Coleman & Goggin not, as a matter of law, establish that it
1845 Walnut Street, 16 th Floor acted with reasonable diligence in ferreting
Philadelphia, PA 19103 out the embezzlement that formed the
Attorney for Appellee, basis of its causes of action.
Jerome J. Verlin
3
Because we believe that the “Appellants”), instituted claims in two
decisions below establish a policy that adversary proceedings against Continental
fosters lawyers’ abuse of their fiduciary Bank,1 Pincus, Verlin, Hahn & Reich, P.C.
relationships with their clients, and fail (“PVHR”) 2 (the law firm with which Ganz
adequately to protect the justifiable was a partner), and various of PVHR’s
reliance of clients on their lawyers’ probity i n d i v id u a l s h a r e h o l d er l a w y e rs
and trustworthiness, we will reverse and ( c o l le c t i v e l y “ D e f e n d a n t s ” a n d
remand for further proceedings concerning “Appellees”), seeking to hold them liable
the applicability of the discovery rule to for the consequences of Ganz’s
the debtor’s claims against its lawyer’s law embezzlement.
firm and the law firm’s individual
MTC and its related subsidiaries
shareholders. We will affirm the grant of
and entities filed petitions under Chapter
summary judgment in Continental Bank’s
11 of the Bankruptcy Code on June 24,
favor, however, on the alternative ground
1985. The bankruptcy court ordered that
that Pennsylvania’s Uniform Fiduciaries
the petitions of the related entities be
Act, which immunizes banks from liability
jointly administered. By virtue of the
arising out of good faith transfers of funds,
Chapter 11 petitions, Mushroom became
shields Continental from liability because
the debtor-in-possession, and remained
it transferred the eventually embezzled
such until December 1990, when the
funds in good faith to an authorized
bankruptcy was converted to a Chapter 7
recipient, the debtor’s lawyer. We will
proceeding. The events relevant to this
also affirm the grant of summary judgment
appeal occurred during the Chapter 11
in favor of Continental and the debtor’s
law firm on the breach of fiduciary duty
claims under ERISA.
I. Background 1
PNC Bank, N.A., Continental’s
The claims in this appeal arise out successor, advocates C ontinen tal’s
of the embezzlement of funds belonging to position in this appeal. Because the events
the bankruptcy estates of Mushroom in question occurred prior to the
Transportation Company, Inc. (“MTC”) succession, we will refer to the bank
and related debtor companies, Robbey defendant as Continental throughout this
Realty, Inc., Penn York Realty Company, opinion.
Inc., Trux Enterprises, Inc. and Leazit, Inc. 2
Mushroom also brought suit
(collectively “Mushroom”) by Jonathan
against a number of additional law firms
Ganz, legal counsel to the bankruptcy
who are successors of PVHR. Because the
estates. Mushroom, through its trustee,
identities of these additional firms are
and various pension plans and their
immaterial to our resolution of this appeal,
adm inistrators (the “Pension Plan
we will refer only to PVHR as the law firm
Plaintiffs”) (together with the trustee,
defendant.
4
bankruptcy, prior to the Chapter 7 Arnold anticipated a “further reduction” in
conversion. his (Arnold’s) involvement in the
bankruptcy proceedings by March of 1987.
Mushroom retained the services of
Ganz responded to Arnold’s letter by
PVHR, through Ganz, to provide legal
correspondence dated February 17, 1987,
representation during the course of the
which stated that Continental held
bankruptcy proceedings. Within six
approximately $986,000 “in various
months of the filing of the Chapter 11
escrow accounts,” and that PVHR held
petitions, Mushroom ceased operations
additional funds for the final real estate
and began to liquidate assets. On February
settlements in “escrow accounts.”
27, 1986, the bankruptcy court appointed
Michael C. Arnold, MTC’s executive vice In June 1987, Continental and
presid ent, “Special Liq uidatio n PVHR, as counsel to Mushroom, entered
Consultant” to assist in the liquidation, and into a bankruptcy court-approved payment
Mushroom proceeded under his leadership stipulation (the “Stipulation”), which Ganz
to liquidate a significant portion of assets. signed on behalf of PVHR as “Counsel to
Debtors.” The Stipulation provided for the
Mushroom allocated a large
repayment of the balance of the debt owed
percentage of the liquidation proceeds to
to Continental from the funds held in the
satisfying a substantial debt owed to
escrow account at Continental. Once
Continental, a secured creditor who held a
Mu shro om satisfied its debt t o
perfected security interest in all of
Continental, the Stipulation required
Mushroom’s assets. On June 16, 1986,
Continental to turn over any remaining
following repayment of some of the debt
funds in the escrow account to PVHR, “to
to Continental, the bankruptcy court, with
be held in escrow for the benefit of the
the consent of the parties, authorized the
Debtor’s estate... . ” In September 1987, at
opening of an escrow account at
Ganz’s urging, the bankruptcy court
Continental to hold the balance of
excused Mushroom from the statutory
proceeds generated from the sale of
requirement to file monthly operating
Mushroom’s assets not yet paid to
statements.
Continental.
Pursuant to the Stipulation, and
In a letter to Ganz dated February
following satisfaction of the debt owed to
12, 1987, Arnold informed Ganz that he
it, Continental issued a $200,000
(Arnold) and Robert B. Cutaiar, MTC’s
treasurer’s check dated July 21, 1987,
president, were handling the day-to-day
payable to Ganz, “Council [sic] for Debtor
operations of the debtors. The letter
in Possession.” On August 3, 1987,
requested an accounting of the proceeds of
Continental deposited the remaining
one of Mushroom’s realty sales and a
$766,624.49 balance into an escrow
report of Mushroom’s assets held by
account at Continental that had been
Continental, and informed Ganz that
opened by Ganz under the name of MTC,
5
with Jonathan Ganz, c/o PVHR, as escrow about the amount and location of the
agent for Mushroom. funds.
Between August 3, 1987 and April In January 1992, the bankruptcy
26, 1988, Ganz misappropriated more than court approved the subs tantiv e
one-half million dollars of the transferred consolidation of MTC and its related
funds. In the interim, Arnold had entities, at which time Arnold was
contacted Ganz on several occasions prepared to distribute the proceeds from
inquiring about the transferred funds. In the sale of Mushroom’s assets. Arnold
late 1987 or early 1988, Arnold requested called Ganz to request that Ganz start
from Ganz an accounting of the liquidating the certificates of deposit and
Mushroom estate’s assets. Ganz escrow accounts he had said were held on
responded by sending Arnold a copy of the behalf of Mushroom by PVHR, but
Stipulation in a February 2, 1988, received no response. At the end of
correspondence. Arnold replied on February 1992, the United States Trustee
February 19, 1988, writing that Ganz’s advised Arnold that Ganz was reportedly
response – merely sending a copy of the involved in the defalcation of other
Stipulation – “[did] not clear up the bankruptcy estates he had served as legal
problem of how much is being held and by counsel. Acting upon this information,
whom.” Arnold’s correspondence also set Arnold subsequently learned that Ganz had
forth his estimates of the assets remaining absconded with the Mushroom funds
based on Mushroom’s records and other under Ganz’s control.
numbers, and asked Ganz to confirm the
II. The Adversary Actions
numbers.
On October 5, 1992, Arnold, by
There appears to have been some
now the trustee (hereinafter the “Trustee”)3
oral communication between Arnold and
following Mushroom’s conversion to
Ganz following the February 19, 1988,
Chapter 7 bankruptcy, filed adversary
correspondence in which Ganz assured
action no. 92-1043 (the “First Adversary
Arnold “that the assets were invested in
Action”) on behalf of Mushroom against
passbook certificates of deposit at various
Ganz and PVHR. Arnold later moved to
banks... .” Ganz testified that in this
amend his complaint to add Continental as
communication, he told Arnold that “there
a defendant; the bankruptcy court granted
were funds in an approximate amount – I
the motion, but refused to relate the
wouldn’t recall the exact number – and
amendment back to the date of the original
they were in CDs and we were holding
them. I was holding them.” It is
undisputed that Arnold failed to request 3
Arnold resigned as trustee on
written confirmation of, or otherwise
January 23, 1995, and was replaced by the
attempt to verify, Ganz’s representations
current trustee, Jeoffrey Burtch, on March
15, 1995.
6
complaint. The bankruptcy court also assets); and Count VIII (by the Trustee and
denied Arnold’s motion to add PVHR’s Pension Plan Plaintiffs against PVHR and
individual shareholders as defendants, and Continental, alleging breach of fiduciary
refused to allow the Pension Plan Plaintiffs duty under § 1109(a) of ERISA as
to join the action as plaintiffs.4 Arnold, custodians of plan assets).
joined by the Pension Plan Plaintiffs who
Defendants moved for summary
had been prohibited from joining as
judgment on all counts in both adversary
plaintiffs in the First Adversary Action,
actions. Defendants argued that all of the
filed a second adversary action, no. 94-
claims were barred by the applicable
0003 (the “Second Adversary Action”), on
statutes of limitations and laches, and
January 3, 1994.
Continental and PVHR argued that the
Together, the virtually identical ERISA claim was legally insufficient
complaints in the two adversary actions because neither was a fiduciary within the
advanced eight claims against Ganz, meaning of the relevant ERISA provision,
PVHR, PVHR’s individual shareholders, 29 U.S.C. § 1109(a).
and Continental, seven5 of which are the
In separate opinions dated August
subject of this appeal: Count I (by the
24, 1998 and October 1, 1999, the
Trustee against PVHR and Ganz, seeking
bankruptcy court granted summary
turnover of estate property); Count II (by
judgment in favor of all Defendants. The
the Trustee against PVHR, alleging breach
bankruptcy court found that the applicable
of fiduciary duty as escrow agent); Counts
statutes of limitations and laches principles
III and V (by the Trustee against
under Pennsylvania law barred the
Continental, alleging breach of fiduciary
Trustee’s turnover and common law
duty for releasing property to Ganz, and
claims, and that Mushroom had failed to
wrongful conversion of estate property);
e xe rcise re a sona ble dilige nc e in
Count VI (by the Trustee against PVHR
uncovering these claims so as to toll the
and Continental, alleging breach of
statutes of limitations and preclude laches.
contract for violating the Stipulation);
Moreover, the bankruptcy court concluded,
Count VII (by the Trustee against PVHR’s
neither Continental nor PVHR were
individual shareholders, alleging negligent
fiduciaries susceptible to suit under
failure to ensure preservation of client
ERISA.
On appeal, the district court
4
Arnold filed the amended affirmed on essentially the same bases
complaint in the First Adversary Action on relied upon by the bankruptcy court.
May 27, 1994.
5
Count IV, raising a conversion
claim against Ganz only, is not at issue in
this appeal.
7
III. Appellate Jurisdiction intention to appeal the unspecified order is
apparent and the opposing party is not
Continental suggests that we lack
prejudiced and has a full opportunity to
appellate jurisdiction over the district
brief the issues.” Id. (citation omitted). In
court’s disposition of Appellants’ appeal in
determining whether a notice encompasses
the Second Adversary Action because
an unspecified order, we follow a “policy
Appellants failed to specify in their notice
of liberal construction of notices of appeal
the district court’s order supposedly
... where the intent to appeal an
disposing of the Second Adversary Action.
unmentioned or mislabeled ruling is
There is no question that Appellants’
apparent and there is no prejudice to the
notice of appeal does not unmistakably
adverse party.” Nationwide Mut. Ins. Co.
indicate an intention to appeal from both
v. Cosenza, 258 F.3d 197, 202 n. 1 (3d Cir.
of the district court’s orders affirming the
2001) (citations omitted).
bankruptcy court’s disposition of the two
adversary actions. The notice specifies Despite the notice’s failure to
only the district court’s order dated specify the order entered September 6, we
September 4, 2002, and entered by the will exercise appellate jurisdiction over
clerk on September 5, 2002, which both orders for several reasons. First, the
affirmed the bankruptcy court’s August caption of the notice references the
1998 order; the notice fails to specify the bankruptcy court docket numbers for both
district court’s order dated September 4, adversary actions, reflecting an intent to
2002, and entered by the clerk on appeal the district court’s disposition of
September 6, 2002, which affirmed the the bankruptcy court’s rulings in both
bankruptcy court’s October 1999 order. actions. Moreover, the body of the notice
identifies all plaintiffs and defendants in
“When an appeal is taken from a
both of the adversary actions as Appellants
specified judgment only or from a part of
and Appellees, respectively. Because the
a specified judgment, the court of appeals
claims in both adversary actions are
acquires thereby no jurisdiction to review
virtually identical, and were disposed of by
other judgments or portions thereof not so
the district court based on the same
specified or otherwise fairly to be inferred
reasoning, Appellees cannot contend that
from the notice as intended to be presented
they are prejudiced by having to address an
for review on the appeal.” Lusardi v.
appeal concerning the district court’s order
Xerox Corp., 975 F.2d 964, 972 (3d Cir.
entered September 6.
1992) (quoting Elfman Motors, Inc. v.
Chrysler Corp., 567 F.2d 1252, 1254 (3d Guided by our “liberal policy” in
Cir. 1977)). But we may exercise construing notices of appeal, we conclude
appellate jurisdiction over an order not that the notice of appeal adequately
specified in a notice of appeal where communicates Appellants’ intent to appeal
“there is a connection between the the district court’s order entered
specified and unspecified order, the September 6, and find no prejudice to
8
Appellees from an exercise of our even if the claims were federal, state law
jurisdiction over that order. We will would supply the applicable statutes of
therefore exercise appellate jurisdiction limitations pursuant to the Supreme
over both of the district court’s orders Court’s directive that “when Congress has
entered in this matter. failed to provide a statute of limitations for
a federal cause of action, a court ‘borrows’
IV. Standards of Review
or ‘absorbs’ the local time limitation most
We apply plenary review to a analogous to the case at hand.” Lampf,
district court’s grant of summary judgment Pleva, Lipkind, Prupis & Petigrow v.
and assess the record using the same Gilbertson, 501 U.S. 350, 355 (1991)
standards for summary judgment employed (citations omitted). This borrowing
by the district court. Farrell v. Planters principle applies equally to federal
Lifesavers Co., 206 F.3d 271, 278 (3d Cir. common law actions. Oneida County,
2000) (citation omitted). Summary N.Y. v. Oneida Indian Nation of New
judgment is appropriate where the moving York State, 470 U.S. 226, 240 (1985).
party can demonstrate “that there is no Along with state statutes of limitations, a
genuine issue as to any material fact and borrowing court “must also borrow from
the moving party is entitled to judgment as state law the relevant tolling principles.”
a matter of law.” Fed. R. Civ. P. 56(c). Island Insteel Systems, Inc. v. Waters, 296
We must view the evidence in the light F.3d 200, 210 n. 4 (3d Cir. 2002) (citations
most favorable to the non-movant, omitted).
“draw[ing] all reasonable inferences in
The Court in Oneida Indian Nation
favor of the non-moving party.” Fields v.
pointed out that borrowing would be
Thompson Printing Co., Inc., 363 F.3d
impermissible where the borrowed state
259, 265 (3d Cir. 2004) (citation omitted).
limitations period interfered with federal
V. Discussion policies. Oneida Indian Nation, 470 U.S.
at 240. See also Island Insteel Systems,
A. What law supplies the statutes of
Inc., 296 F.3d at 207 (“if borrowing an
limitations applicable to the
analogous statute of limitations from state
common law claims?
law would ‘frustrate or interfere with the
As a preliminary matter, the Trustee implementation of national policies,’
submits that because the estate’s claims courts must look to federal law for an
arise out of the wrongful transfer and analogous limitations period”) (citations
subsequent embezzlement of a bankruptcy omitted). The Trustee directs us to no
estate’s escrowed funds, they are governed authority suggesting that application of
by a federal common law of bankruptcy. state statutes of limitations to the common
The bankruptcy court noted that whether law claims here – common law claims
or not the Trustee’s claims were state or asserted post-bankruptcy petition and
federal in nature was unimportant because based on post-petition wrongdoing –
9
frustrates any national policy in effecting statutes of limitations, we must assess the
the administration and reorganization of a accuracy of those which they applied. In
bankruptcy estate. To the contrary, the short, the bankruptcy and district courts
Bankruptcy Code itself imposes a two-year correctly held that various two-year
limitations period on post-petition claims statutes of limitations governed Counts II
seeking to avoid post-petition transfers of and III (breach of fiduciary duty), V
property of the bankruptcy estate. See 11 (wrongful conve rsion) and V II
U.S.C. § 549(d). Thus, the suggestion that (negligence) in each adversary proceeding,
imposing state-law limitations periods of and that a four-year statute of limitations
two or more years on common law claims period governed Count VI (breach of
asserted post-petition, and based on post- contract). 7 Maillie v. Greater Delaware
petition misconduct, interferes with federal
bankruptcy principles – where the
Bankruptcy Code itself imposes a two-year 7
The bankruptcy and district courts
limitations period on certain post-petition
also correctly concluded that the ERISA
claims based on post-petition misconduct
breach of fiduciary duty claim in Count
– is simply without merit. We therefore
VIII was subject to the six-year statute of
agree with the bankruptcy and district
limitations set forth in 29 U.S.C. §
courts that state law, specifically
1113(1). Neither court found that the
Pennsylvania law,6 supplies the statutes of
statute had run on this claim. There is no
limitations applicable to the Trustee’s
question that the statute of limitations had
common law claims.
not yet expired as to the ERISA claim
B. The applicable statutes of against PVHR, as it was set forth in the
limitations and laches principles original complaint filed in 1992. It is not
so clear, however, whether the statute of
Having determined that the
limitations had run on the ERISA claim
bankruptcy and district courts correctly
against Continental, which was first
chose to apply (or borrow) Pennsylvania’s
advanced in the amended complaint filed
on May 27, 1994. Since the bankruptcy
court refused to relate the claims against
6
Given that Pennsylvania is the Continental back to the date of the original
forum state, and has the most extensive complaint, there is an argument that the
contacts with the litigants and the facts at six-year limitations period applicable to
issue in this litigation, it is the proper the ERISA claim had expired by the date
source of the applicable statutes of of the filing of the amended complaint.
limitations and laches principles. Gluck v. Because we agree with the bankruptcy and
Unisys Corp., 960 F.2d 1168, 1179-80 (3d district courts that neither PVHR nor
Cir. 1992) (applying general rule that Continental are fiduciaries subject to suit
statute of limitations should be borrowed under 29 U.S.C. § 1109, we need not
from forum state). resolve whether the statute of limitations
10
Valley Health Care, Inc., 628 A.2d 528, The Bankruptcy Code does not impose a
532 (Pa. Commw. 1993) (breach of statute of limitations on turnover claims
fiduciary duty); Bednar v. Marino, 646 arising under these provisions. In re
A.2d 573, 578 (Pa. Super. 1994) Midway Airlines, Inc., 221 B.R. 411, 458
(conversion); 42 Pa.C.S.A. § 5524(2) (Bankr. N.D. Ill. 1998) (“Bankruptcy Code
(citation omitted) (negligence); 42 does not contain a statute of limitations for
Pa.C.S.A. § 5525(a) (breach of contract). turnover actions pursuant to § 542”); In re
Bookout Holsteins, Inc., 100 B.R. 427,
The bankruptcy and district courts
432 (Bankr. N.D. Ind. 1989) (same); In re
also correctly determined the laches
De Berry, 59 B.R. 891, 898 (Bankr.
principles governing the turnover claim.
E.D.N.Y. 1986) (same). Because turnover
The turnover claim set forth in Count I
claims are equitable in nature, see Walker
arises under 11 U.S.C. §§ 542 and 543.8
v. Weese, 286 B.R. 294, 299 (D. Md.
2002) (turnover claim “fairly characterized
bars Appellants’ ERISA claim against as an equitable claim”); In re Warmus, 252
Continental. B.R. 584, 587 (Bankr. S.D. Fla. 2000)
(turnover claims, “firmly rooted in
8
11 U.S.C. § 542(a) provides that: protecting and preserving property of the
[estate], ... are clearly and uniquely
Except as provided in subsection
equitable claims under the Bankruptcy
(c) or (d) of this section, an entity,
Code”) (citations omitted); In re Kabler,
other than a cus tod ian, in
230 B.R. 525, 526 (Bankr. E.D.N.C. 1999)
possession, custody, or control,
(“Turnover is an equitable remedy”), they
during the case, of property that the
are subject to laches. Algrant v. Evergreen
trustee may use, sell, or lease under
Valley Nurseries Ltd. Partnership, 126
section 363 of this title, or that the
F.3d 178, 186 n. 3 (3d Cir. 1997) (“An
debtor may exempt under section
action brought in equity is governed by the
522 of this title, shall deliver to the
doctrine of laches.”) (citing Russell v.
trustee, and account for, such
Todd, 309 U.S. 280, 287 (1940)). See also
property or the value of such
Erkins v. Bryan, 785 F.2d 1538, 1543
property, unless such property is of
(11th Cir. 1986) (“Policies underlying the
inconsequential value or benefit to
creation of federal equitable claims are not
the estate.
11 U.S.C. § 543(b)(1) provides that:
or profits of such property, that is
(b) A custodian shall–
in such custodian’s possession,
(1) deliver to the trustee any custody, or control on the date that
property of the debtor held by or such custodian acquires knowledge
transferred to such custodian, or of the commencement of the case[.]
proceeds, product, offspring, rents,
11
well served by applying rigid limitations; estate property. Section 549(a) claims are
therefore, federal courts considering subject to § 549(d), which provides that §
federal equitable claims should rely on 549(a) claims “may not be commenced
equitable principles.”) (citing Holmberg v. after the earlier of – (1) two years after the
Armbrecht, 327 U.S. 392, 395 (1946)). date of the transfer sought to be avoided;
or (2) the time the case is closed or
“The party asserting laches as a
dismissed.” 11 U.S.C. § 549(d). The
defensive bar must establish (1) an
Trustee’s turnover claim targets a post-
inexcusable delay in bringing the action
petition transfer of funds by Continental to
and (2) prejudice.” United States Fire Ins.
Ganz. Section 549(a) expressly creates a
Co. v. Asbestospray, Inc., 182 F.3d 201,
cause of action by which to seek avoidance
208 (3d Cir. 1999) (citations omitted).
of post-petition transfers, a cause of action
“To establish prejudice, the party raising
clearly analogous to the turnover claim
laches must demonstrate that the delay
here. Consequently, Great Atlantic &
caused a disadvantage in asserting and
Pacific Tea Co. dictates that we consult the
establishing a claimed right or defense; the
statute of limitations applicable to a §
mere loss of what one would have
549(a) claim – the two-year period set
otherwise kept does not establish
forth in § 549(d) – in determining whether
prejudice.” Id. (citation omitted). While
to shift to the Trustee the burden of
statutes of limitations do not directly apply
proving excusable delay and the absence
to equitable claims such as the turnover
of prejudice.
claim, a limitations period on an analogous
claim for legal relief is highly relevant to a C. Did Mushroom fail as a matter of
laches analysis. As we said in E.E.O.C. v. law to exercise reasonable
Great Atlantic & Pacific Tea Co., 735 F.2d diligence in uncovering Ganz’s
69 (3d Cir. 1984), “[i]f a statutory embezzlement?
limitations period that would bar legal
The bankruptcy and district courts
relief has expired, then the defendant in an
correctly found that, absent application of
action for equitable relief enjoys the
tolling principles, the common law tort and
benefit of a presumption of inexcusable
contract claims accrued no later than
delay and prejudice. In that case, the
August of 1987, when Continental
burden shifts to the plaintiff to justify its
completed the transfer of funds to Ganz
delay and negate prejudice.” 735 F.2d at
per the Stipulation. The bankruptcy and
80 (citations omitted).
district courts further concluded correctly
The bankruptcy and district courts that the limitations period on the claim at
concluded that the claim at law analogous law analogous to the turnover claim –
to the Trustee’s turnover claim arises relevant to a laches analysis under Great
under 11 U.S.C. § 549(a), which creates a Atlantic & Pacific Tea Co. – began to run
cause of action in a trustee to avoid an no later than April 26, 1988, the date on
unauthorized post-petition transfer of
12
which Ganz completed his embezzlement January-February 1992, when Arnold and
of the transferred funds. Mushroom first discovered Ganz’s
defalcation of the funds. The bankruptcy
The Trustee’s primary argument 9
and district courts held that, as a matter of
against the application of the statutes of
law, Mushroom (through Arnold and
limitations and laches is that the discovery
Cutaiar) failed to exercise due diligence in
rule and/or equitable tolling suspended the
superintending Ganz’s oversight of the
running of the statutes of limitations (and
funds, and therefore could not invoke
thereby precluded the onset of laches) until
either the discovery rule or equitable
tolling to preserve its claims against all
9 Defendants. For the reasons that follow,
The Trustee also contends that
we find that there are genuine issues of
Continental and PVHR were trustees of an
material fact concerning Mushroom’s
express trust (the escrow bank account),
reasonable diligence for the fact-finder to
and that since causes of action against such
determine.
trustees do not accrue until the trust is
“repudiated,” the limitations periods Under Pennsylvania’s discovery
should not have begun to run until rule, the statute of limitations will not
November-December 1992, when Arnold begin to run until “the plaintiff reasonably
first made a demand on Ganz for tender of knows, or reasonably should know: (1)
estate property in the escrow account. The that he has been injured, and (2) that his
district court correctly rejected this injury has been caused by another party’s
contention. Pennsylvania law makes clear conduct.” In re TMI Litig., 89 F.3d 1106,
that the key element in a trust is that the 1116 (3d Cir. 1996) (quoting Cathcart v.
trustee possesses legal title to property. Keene Indus. Insulation, 471 A.2d 493,
Schellentrager v. Tradesmens Nat’l Bank 500 (Pa. Super. 1984)) (internal quotation
& Trust Co., 88 A.2d 773, 774 (Pa. 1952). marks omitted). The discovery rule will
None of the relevant documents (including only toll the statute of limitations where
the Stipulation) reflects any intent to the plaintiff shows that he or she has
convey title in Mushroom’s funds to exercised “‘reasonable diligence’ in
Continental or PVHR. Rather, the ascertaining the existence of the injury and
Stipulation rendered Continental and its cause.” Bohus v. Bellof, 950 F.2d 919,
PVHR escrow agents w ho, under 925 (3d Cir. 1991).
Pennsylvania law, did not acquire legal
Similarly, equitable tolling will
title to Mushroom’s funds. Paul v.
suspend the running of the statute of
Kennedy, 102 A.2d 158, 159 (Pa. 1954)
limitations “(1) where the defendant has
(under escrow arrangement, legal title
actively misled the plaintiff respecting the
remains in a depositor until a condition
plaintiff’s cause of action; (2) where the
precedent is satisfied) (citations omitted).
plaintiff in some extraordinary way has
Accordingly, this argument is without
been prevented from asserting his or her
merit.
13
rights; or (3) where the plaintiff has timely includes the “‘duty to protect and conserve
asserted his or her rights mistakenly in the property in its possession for the benefit of
wrong forum.” Oshiver v. Levin, creditors.’” In re Marvel Entertainment
Fishbein, Sedran & Berman, 38 F.3d 1380, Grp., Inc., 140 F.3d 463, 474 (3d Cir.
1387 (3d Cir. 1994) (citations omitted). 1998) (citation omitted). Thus, there is no
Like the discovery rule, equitable tolling question that Mushroom, acting through its
requires the plaintiff to demonstrate “that representatives Arnold and Cutaiar, had a
he or she could not, by the exercise of fiduciary duty to protect and maximize the
reasonable diligence, have discovered estate’s assets.
essential information bearing on his or her
This duty formed the foundation for
claim.” Id. at 1390 (citation omitted).
the bankruptcy and district courts’
In assessing the finding that reasonable diligence analysis. Indeed, the
Mushroom failed as a matter of law to bankruptcy and district courts essentially
exercise reasonable diligence for purposes equated the fiduciary duty to safeguard
of the discovery rule and equitable tolling, assets with the duty of reasonable
we are guided by the general rule that such diligence and, finding a breach of the
determinations are typically within the former, therefore found a breach of the
jury’s province unless “the facts are so latter. Moreover, the courts held,
clear that reasonable minds cannot Mushroom could not escape the statutory
differ ... .” Melley v. Pioneer Bank, N.A., fiduciary duty to protect and maximize by
834 A.2d 1191, 1201 (Pa. Super. 2003) delegating such duty to legal counsel,
(citation omitted). During the time of where the delegation amounted to an
Ganz’s defalcations, Mushroom was in abdication of that duty. The district court
Chapter 11 bankruptcy, and was therefore explained its distinction between
a debtor-in-possession. See 11 U.S.C. § permissible delegation and impermissible
1101(1). As we recently pointed out, “[i]n abdication:
Chapter 11 cases where no trustee is
Although delegation of duties is
appointed, [11 U.S.C.] § 1107(a) provides
o n e t h i n g , a b d i c a ti o n o f
that the debtor-in-possession, i.e., the
responsibility is quite another. In
debtor’s management, enjoys the powers
this case, the debtors not only
that would otherwise vest in the
“delegated” to Ganz the duty to
bankruptcy trustee. Along with those
collect the funds generated from the
powers, of course, comes the trustee’s
sale of assets, deposit them into the
fiduciary duty to maximize the value of the
escrow account pursuant to an
bankruptcy estate.” Official Committee of
order of the court, and transfer the
Unsecured Creditors of Cybergenics Corp.
funds to the law firm account to be
v. Chinery, 330 F.3d 548, 573 (3d Cir.
maintained pending further order of
2003) (en banc). The debtor-in-
the Bankruptcy Court, but rather
possession’s fiduciary duty to maximize
they surrendered totally their
14
obligation to oversee the funds embezzled by Ganz. The district
liquidation of the estate or to court found that summary judgment in the
supervise, even in the most bank’s favor on the issue of reasonable
relaxed fash ion, the diligence and the statute of limitations was
activities of a retained inappropriate for several reasons. First,
professional. The the court noted, delegation of debtor duties
Bankruptcy Code – including those performed, or intended
commands the debtor in to be performed, by Ganz here – is
possession (or the trustee) to perfectly appropriate under, and indeed
be the captain of the debtor encouraged by, the Bankruptcy Code.
ship. See 11 U.S.C. § 1108. Accordingly, “a reasonable debtor in
Wh ile the debto r in p o s s e s s io n w o u l d , i n ce r t a in
possession may assign to circumstances, entrust the care of liquid
others specific duties, it may assets to a court-appointed lawyer.” Id. at
not surrender the helm and 403 (citation omitted). Therefore, “there is
let the debtor ship sail under no legal basis to conclude that the
someone else’s captaincy. delegation of core trustee duties to court-
appointed counsel for the estate by a
Burtch v. Ganz (In re Mushroom Transp.
debtor in possession is per se sufficient to
Co., Inc.), 282 B.R. 805, 825 (E.D. Pa.
show that the debtors in possession failed
2002) (footnote omitted). Because
to exercise due diligence.” Id.
Mushroom abdicated its statutory duty to
preserve the estate’s assets, the bankruptcy The district court then reviewed the
and district courts held, it could not record and found that “in light of the fact
possibly demonstrate reasonable diligence that reliance on counsel is inherent in the
for purposes of the discovery rule. Id. bankruptcy code, ... the bankruptcy court
invaded the province of the fact finder by
In Burtch v. Security Pacific Bank
depreciating the evidence that could
Oregon (In re Mushroom Transp. Co.,
persuade a trier of fact that a reasonable
Inc.), 247 B.R. 395 (E.D. Pa. 2000), a
person in the circumstances of the
related case involving the same facts
Mushroom debtors in possession would
respecting Ganz’s embezzlement and
have relied on counsel and consequently
Mushroom’s oversight, Judge Reed of the
failed to discover the thefts by Ganz until
District Court for the Eastern District of
a later date.” Id. at 404. Several aspects
Pennsylvania reached a conclusion on
of the record led the court to this
reasonable diligence and the statute of
conclusion. First, the distribution of estate
limitations directly contrary to the one
assets was not an issue from early 1986
reached by the bankruptcy and district
through August 1988 (when Ganz had
courts here. There, the Trustee filed
completed his embezzlement) because the
various claims against one of the banks
bankruptcy proceedings were focused on
that had allegedly received some of the
15
motions to consolidate. Rather, Arnold of administration.” Boldt v. United States
and Cutaiar devoted their energies to Trustee (In re Jenkins), 130 F.3d 1335,
priority claims, which, according to 1340 (9th Cir. 1997) (citations and internal
Arnold, were the source of major quotation marks omitted). A fact-finder
uncertainty concerning Mushroom’s could thus conclude that Mushroom’s
financial condition. Second, Arnold’s decision to entrust its lawyer, Ganz, with
inquiries to Ganz in February 1988 could the task of safeguarding its assets was
have led a reasonable trier of fact to within the bounds of reasonableness.
conclude that Arnold’s efforts went
Still further, the bankruptcy court
beyond abdication of the debtor’s duty to
had issued two orders in June and
preserve the estate’s assets and in fact
September of 1987 entrusting Mushroom’s
constituted reasonable diligence for
assets to Ganz. The June 1987 order
purposes of the discovery rule. Finally, the
approved the Stipulation pursuant to which
bankruptcy court’s two orders in June and
Mushroom’s assets were to be turned over
September 1987 provided Ganz with
to Ganz to hold in escrow. In Arnold’s
nearly exclusive control over Mushroom’s
view, the June 1987 order prompted him to
assets and removed any mechanism by
believe that Mushroom’s assets were being
which the court could monitor use of those
“invested in accordance with the special
funds. In the district court’s, a reasonable
rules applicable to bankruptcy.” The
fact-finder could find that a reasonably
September 1987 order granted Ganz’s
diligent person in these circumstances
motion to excuse M ushroom from filing
would have acted precisely as Mushroom
operating reports otherwise required by the
and its Trustee did here.
Bankruptcy Code. In Arnold’s view, the
We find much of Judge Reed’s September 1987 order gave him “no
analysis persuasive. First, the Bankruptcy reason to expect that the absence of such
Code contemplates and encourages the reporting indicated that a lawyer had
retention of professionals by debtors to absconded with escrow funds... .” Just as
facilitate a Chapter 11 reorganization. they in fact appeared to lead Arnold to
Section 327 states that “the trustee [and, believe that the assets were safe and there
therefore, the debtor in possession], with was no need to monitor them closely, these
the court’s approval, may employ one or orders could have led a reasonable person
more attorneys ... to represent or assist the to believe that there was no need to
trustee in carrying out the trustee’s duties monitor them on his or her own.
under this title.” 11 U.S.C. § 327(a). The
In addition to these aspects of Judge
Code also provides for the compensation
Reed’s analysis, and perhaps most
of such attorneys. 11 U.S.C. § 329. These
importantly, we find highly relevant the
provisions reflect Congress’s desire “to
fact that the genesis of this action is
encourage trustees to delegate their duties
Ganz’s abuse of his fiduciary, lawyer-
where such delegation would lower costs
client relationship with Mushroom, an
16
abuse which very well could have caused is in prohibits the principal from
Mushroom to relax its vigilance in uncovering the fraud. Furthermore,
overseeing the execution of the duties it the fiduciary, because of his
delegated to Ganz. Neither Judge Robreno position of trust, would have an
nor Judge Reed expressly mentioned the affirmative duty to the principal to
principle manifesting itself in decisions disclose the fraud. Absent a
from courts in this circuit (and numerous disclosure, the fiduciary commits
other state and federal courts) that where an act of continual covering up of
the wrongdoing underlying causes of the fraud.
action has been perpetrated by a fiduciary
Id. at 403. The court noted that letters sent
to the detriment of its principal, this fact
by counsel for the creditors to the trustee
militates strongly against summary
urging the trustee to investigate matters
judgment on the issue of whether the
pertaining to the purloined funds might
principal (here Mushroom) exercised
have imposed a duty to inquire upon the
reasonable diligence in failing to discover
trustee, but “whether or not the letters
the fiduciary’s malfeasance within the
imposed a duty upon the trustee to
applicable statutes of limitations.
investigate is a question of fact, which
Many judges in this Circuit have must be resolved by a trier of fact.” Id.
recognized the impact of a fiduciary
The District Court for the Eastern
relationship, and abuse of that relationship
District of Pennsylvania subsequently
by the fiduciary, on a discovery rule
addressed Schw artz in Gurfein v.
analysis. In Schwartz v. Pierucci, 60 B.R.
Sovereign Group, 826 F. Supp. 890 (E.D.
397 (E.D. Pa. 1986), the trustee asserted
Pa. 1993). Plaintiffs, investors and
claims against a bank in an effort to
partners in real estate limited partnerships,
recover funds improperly drawn by
brought fraud, breach of fiduciary duty and
principals and officers of the debtor from
related claims against some of their
the debtor’s account at the bank. The
general partners and related entities. In
district court denied the bank’s motion for
response to defendants’ statute of
su m m a ry judgment, rejecting its
limitations defense, plaintiffs argued that
contention that the statute of limitations
because defendants were plaintiffs’
barred certain of the claims against it.
fiduciaries, plaintiffs’ causes of action did
Specifically, the court found that the
not accrue until they acquired actual
officers’ wrongful conduct tolled the
knowledge of their injury. The district
applicable limitations period, reasoning
court found that we had not yet
that:
“recognized an exception to the discovery
Where a fiduciary commits an act rule in the fiduciary-defendant context.”
of fraud against his principal, the Id. at 918. Nonetheless, he acknowledged
statute of limitations will be tolled, that “[t]he existence of a fiduciary
since the very position the fiduciary relationship is relevant to the question of
17
when a cause of action accrued. Because To require a principal to engage in
of a fiduciary’s unique position of trust, aggressive oversight of its
the presence of a fiduciary relationship fiduciary’s conduct is to deny the
would be pertinent to the question of when very essence of a fiduciary
a plaintiff’s duty to investigate arose.” Id. relationship.
at 919 n. 31 (citing, inter alia, Schwartz).
Id. at 935 (citation omitted and first two
The Eastern District recognized the alterations and emphasis supplied) .10
relevance of a fiduciary relationship to a
discovery rule/reasonable diligence
10
analysis in Rubin Quinn Moss Heaney & The Eastern District is by no
Patterson, P.C. v. Kennel, 832 F. Supp. means alone in subscribing to this view:
922 (E.D. Pa. 1993). The plaintiff law numerous courts have enunciated a similar
firm sued one of its partners who had approach. See, e.g., Rieff v. Evans, 630
misappropriated client funds. The N.W.2d 278, 290 (Iowa 2001) (statute
defendant asserted a limitations defense to tolled where plaintiff proves that “a
plaintiff’s breach of fiduciary duty claim. confidential or fiduciary relationship exists
The district court held that the discovery between the person concealing the cause
rule preserved the breach of fiduciary duty of action and the aggrieved party,
claim largely because of the fiduciary combined with proof that defendant
relationship existing between the firm and breached the duty of disclosure”) (citation
its partners. The court concluded that: and internal quotation marks omitted); Ray
v. Queen, 747 A.2d 1137, 1142 (D.C.
Given Defendant’s position as a
2000) (“In determining whether the
fiduciary of the firm, and the
plaintiff exercised reasonable diligence,
complexity of the real estate
the courts should consider, inter alia,
transactions which gave rise to the
whether there was a fiduciary relationship
Real Estate Accounts, the Court
between the parties.”) (citation omitted);
concludes that Plaintiff did exercise
Willis v. Maverick, 760 S.W.2d 642, 645
due diligence in its oversight of
(Tex. 1988) (“The client must feel free to
Defendant’s management of the
rely on his attorney’s advice. Facts which
accounts. ... First as an employee,
might ordinarily require investigation
and later as a partner, [Defendant]
likely may not excite suspicion where a
sought and was accorded in return
fiduciary relationship is involved.”)
the trust of [the firm’s] partners.
(citation omitted); Hobbs v. Bateman
Ironically, it is this type of very
Eichler, 210 Cal. Rptr. 387, 404 (Cal. Ct.
special relationship that enables a
App. 1985) (“W here a fiduciary
wayward fiduciary to engage in
relationship exists, facts which ordinarily
acts of concealment that “cause the
require investigation may not incite
[principal] to relax vigilance or
suspicion ... and do not give rise to a duty
deviate from the right of inquiry.”
of inquiry....”) (citations omitted). Other
18
We should stress that we do not inquiry on the principal’s part into its
hold here that the existence of a fiduciary, fiduciary’s behavior.
lawyer-client relationship between Ganz
Here, Mushroom, through Arnold,
and Mushroom, and Ganz’s abuse of that
questioned Ganz directly concerning the
relationship, alone preclude judgment as a
whereabouts of the transferred funds.
matter of law in PVHR’s and its
Arnold’s letter to Ganz set forth estimates
shareholders’ favor. 11 But as the district
of Mushroom’s assets based on
court noted in Gurfein, “the presence of a
Mushroom’s records and other numbers.
fiduciary relationship would be pertinent
According to Arnold, Ganz responded to
to the question of when a plaintiff's duty to
Ganz’s letter “that the assets were invested
investigate arose.” 826 F. Supp. at 919 n.
in passbook certificates of deposit at
31 (citation omitted). Ganz was no
various banks... .” Ganz himself testified
stranger to Mushroom and Arnold – he
that he told Arnold that there was a certain
was Mushroom’s lawyer, bound by
amount of assets under his supervision,
professional rules of ethics to the highest
though he could not recall the exact
duties of honesty and probity in his
number he conveyed to Arnold.
dealings with his client. As the cases
discussed above illustrate, the existence of We do not suggest that Arnold’s
a fiduciary relationship is relevant to a inquiries should serve as a model of
discovery rule analysis precisely because it vigilance for similarly situated debtors-in-
entails such a presumptive level of trust in possession. However, we believe that the
the fiduciary by the principal that it may facts here – particularly the Bankruptcy
take a “smoking gun” to excite searching Code’s encouragement that debtors-in-
possession retain lawyers and other
pr of e ssionals t o a s s ist in th e ir
reorganization, and the existence of a
courts have gone even further in holding lawyer-client relationship which Ganz
that where there is a fiduciary relationship, employed to conceal his defalcations at his
only the actual discovery of the client’s (and its creditors’) expense –
wrongdoing starts the running of the create genuine factual issues for the fact-
limitations period. See, e.g., Community finder concerning whether Arnold and
Title Co. v. U.S. Title Guaranty Co., Inc., Mushroom exercised reasonable diligence
965 S.W.2d 245, 252 (Mo. Ct. App. 1998) in uncovering Ganz’s embezzlement. 12
(citations omitted).
11
At the same time, however, we
12
would not foreclose the possibility that in The bankruptcy and district courts
some instances, the nature of a fiduciary found that laches barred the Trustee’s
relationship might be such that the turnover claim solely because the statute of
relationship alone would be sufficient to limitations on the analogous claim at law
trigger application of the discovery rule. under 11 U.S.C. § 549(a) had expired,
19
We therefore, with the exception of limitations and laches, Continental has
Continental,13 will reverse the grant of asserted numerous alternative grounds
summary judgment in Appellees’ favor on supporting affirmance. Of course, we may
the non-ERISA claims and remand with affirm the district court on grounds
instructions to the district court to remand different from those relied on by the
the non-ERISA claims to the bankruptcy district court. Kabakjian v. United States,
court for further proceedings consistent 267 F.3d 208, 213 (3d Cir. 2001) (citation
with this opinion. omitted). And we will affirm summary
judgment in Continental’s favor because
D. Is Continental entitled to summary
Pennsylvania’s Uniform Fiduciaries Act
judgment on the alternative ground
(“UFA”) immunizes Continental from any
that Pennsylvania’s Uniform
liability flowing from its transfer of funds
Fiduciaries Act shields it from
to Ganz.
liability?
Continental bases its argument on §
While PVHR and its shareholders
6361 of the UFA, which provides that:
have advanced no arguments in support of
affirmance beyond the statutes of A person who, in good faith, pays
or transfers to a fiduciary any
money or other property, which the
creating a presumption of inexcusable fiduciary as such is authorized to
delay and prejudice that the Trustee receive, is not responsible for the
presumably did not rebut. Because we proper application thereof by the
find here that the applicable statutes of fiduciary, and any right or title
limitations have not expired as a matter of acquired from the fiduciary in
law, we necessarily reverse the bankruptcy consideration of such payment or
and district courts’ conclusion that the tr a nsfer is not inva lid in
presumption of inexcusable delay and consequence of a misapplication by
prejudice had arisen as to Appellees’ the fiduciary.
laches defense, and remand as to laches as
well. 7 P.S. § 6361. A payment or transfer of
money “is done ‘in good faith,’ within the
13
Because we conclude in the meaning of this act, when it is in fact done
following section that summary judgment honestly, whether it be done negligently or
in Continental’s favor should be affirmed not.” Id. § 6351(2).
on the alternative basis of the Pennsylvania
In the leading case on § 6361, the
Uniform Fiduciaries Act’s immunity
Supreme Court of Pennsylvania held that
provision, we decline to decide whether
a bank in virtually the same position as
the bankruptcy and district courts properly
Continental could not be liable on a breach
granted sum mary jud gm ent in
of contract theory. See Robinson
Continental’s favor on the basis of the
Protective Alarm Co. v. Bolger & Picker,
statutes of limitations.
20
516 A.2d 299 (Pa. 1986). There, a law to him will aid a breach of trust,
firm opened an escrow account in its name then the bank will be held to have
on behalf of its client, Robinson Protective acted in “bad faith.”
Alarm. Three partners of the law firm
Id. at 304 (citations omitted).
executed the signature card for the
account. One of these partners eventually Applying this view, the court noted
embezzled hundreds of thousands of that the embezzling lawyer was a fiduciary
dollars from the account. After as to the escrow funds in question, and was
compensating Robinson for the embezzled empowered to receive them from the bank.
funds, the law firm brought an action for After setting forth the purpose of § 6361 –
indemnity or contribution against the bank. “to facilitate banking transactions by
relieving a depositary of the responsibility
The Court of Common Pleas of
of seeing that an authorized fiduciary will
Philadelphia County and the Pennsylvania
use entrusted funds for proper purposes” –
Superior Court both held that the bank, by
the court concluded that “[t]o apply a
not obtaining endorsements prior to
theory which would hold a payor liable for
redeeming certificates relating to the
a minuscule and irrelevant departure from
account, had violated the redemption
the prescribed procedure, where he has
provisions set forth on the certificates, and
acted honestly in releasing money to a
had thereby committed a breach of
known authorized fiduciary, without
contract. The Pennsylvania Supreme
knowledge of the latter’s intent to
Court reversed, finding that § 6361
subsequently embezzle those funds, would
shielded the bank from liability because it
clearly not contribute to the smooth flow
disbursed funds from the account to the
of commerce sought to be achieved by the
embezzling lawyer in good faith. The
UFA.” Id. “Indeed,” the court continued,
court began its analysis by distinguishing
“in the absence of contrary knowledge on
“good faith” in this context from “bad
the depositary’s part, it [the bank] is
faith”:
entitled, if not bound, to presume that a
Even a failure to inquire under fiduciary will properly apply funds
suspicious circumstances will not released to him.” Id. at 304-05 (citations
negate “good faith,” unless the omitted).
failure to do so is due to a
Here, the Trustee has not directed
deli berate desire to eva de
us to any evidence in the record
knowledge because of a belief or
demonstrating that Continental acted in
fear that inquiry would disclose a
bad faith in transferring the funds to Ganz,
vice or defect in the transaction.
nor could we locate any on our own. The
Conversely, if a bank has
Trustee does suggest, however, that
knowledge that a fiduciary intends
Continental is not entitled to the UFA’s
to appropriate trust funds to his
immunity because only PVHR itself, not
own use, and that to release funds
21
Ganz, was authorized to receive the “Pennsylvania courts define apparent
transferred funds. Section 6361 requires authority as that authority which, although
that the transfer at issue be made to a not actually granted, the principal
fiduciary who “as such is authorized to knowingly permits the agent to exercise, or
receive” the transfer before one can be holds him out as possessing.” D & G
immunized from liability for making the Equip. Co., Inc. v. First Nat’l Bank of
transfer. Continental naturally contends Greencastle, 764 F.2d 950, 954 (3d Cir.
that “Ganz was a fiduciary authorized to 1985) (citing, inter alia, Revere Press, Inc.
receive the funds at issue[,]” pointing to v. Blumberg, 246 A.2d 407, 410 (Pa.
admissions in the complaints that “at the 1968)). “Apparent authority can exist only
time of the transfer of the funds, Ganz was to the extent that it is reasonable for the
a member of PVHR and acted as legal third party dealing with the agent to
representative of M ushroom.” Moreover, believe the agent is authorized.” Id. at 954
Continental continues, “it is undisputed (citation omitted). “The test for
that Ganz was the only signatory on behalf determining whether an agent possesses
of PVHR on the Stipulation and signed as apparent authority is whether ‘a man of
counsel of record for Mushroom.” ordinary prude nce, d iligence and
discretion would have a right to believe
The Stipulation required that the
and would actually believe that the agent
escrow funds be turned over “to Debtor’s
possessed the authority he purported to
counsel, Pincus, Verlin, Hahn & Reich,
exercise.’” Universal Computer Systems,
P.C., to be held in escrow for the benefit of
Inc. v. Medical Svcs. Ass’n of Pa., 628
the Debtor’s estate....” The issue for us is
F.2d 820, 823 (3d Cir. 1980) (citation
whether this fact – that the Stipulation
omitted).
required Continental to turn the escrow
funds over to PVHR, and not Ganz We find that the actions of PVHR –
specifically – precludes affirmance on this holding Ganz out as one of the firm’s
alternative basis because it creates a
genuine issue of material fact concerning
the applicability of § 6361. receive the funds on PVHR’s behalf. See
Volunteer Fire Co. of New Buffalo v.
We conclude that the undisputed
Hilltop Oil Co., 602 A.2d 1348, 1351-52
facts of record demonstrate as a matter of
(Pa. Super. 1992) (noting that acts of agent
law that Ganz was authorized to receive
can bind principal upon showing of
the funds within the meaning of § 6361
“express authority directly granted by the
because, as an agent of PVHR, he had at
principal to bind the principal as to certain
least apparent authority to do so.14
matters [ ] or implied authority to bind the
principal to those acts of the agent that are
necessary, proper and usual in the exercise
14
Indeed, a strong case could be of the agent’s express authority”) (citation
made that Ganz had actual authority to omitted).
22
bankruptcy lawyers and permitting him to WL 96006, at *2 n. 7 (E.D. Pa. Feb. 24,
handle Mushroom’s bankruptcy – would 1999) (breach of contract, breach of
have led an ordinarily prudent bank in f id u c ia r y d u t y a n d n e g l ig e n c e ).
Continental’s position to “have a right to Accordingly, we will affirm the grant of
believe and [ ] actually believe that [Ganz] summary judgment in Continental’s favor
possessed the authority” to receive the on all of the Trustee’s non-ERISA claims15
transferred funds on PVHR’s behalf. against it.
Ganz himself signed the Stipulation on
E. Are Continental and PVHR
behalf of PVHR, giving Continental even
fiduciaries within the meaning of
more reason to believe that Ganz had
29 U.S.C. § 1002(21)(A)(i) so as to
apparent authority to receive funds
be susceptible to Appellants’
pursuant to the Stipulation. Thus, by
breach of fiduciary duty claim
transferring the funds to Ganz, Continental
under 29 U.S.C. § 1109(a)?
transferred the funds to one authorized to
receive them within the meaning of § Appellants’ breach of fiduciary duty
6361. claim arises under 29 U.S.C. § 1109(a) of
ERISA, which creates liability for “[a]ny
The final issue is the scope of
person who is a fiduciary with respect to a
immunity the UFA confers on Continental.
plan w ho br ea ch es an y of the
There is no question that Continental’s
responsibilities, obligations, or duties
allegedly wrongful transfer of funds to
imposed upon fiduciaries by this
Ganz forms the basis of the Trustee’s non-
subchapter[.]” 29 U.S.C. § 1109(a). A
ERISA claims against it. In Robinson
person is a fiduciary of an ERISA plan to
Protective Alarm, the Pennsylvania
the extent that such person “exercises any
Supreme Court stated that “[t]here is
discretionary authority or discretionary
nothing on the face of [§ 6361], or in any
control respecting management of such
other provision of the UFA, that would
plan or exercises any authority or control
restrict the immunity from liability to suits
respecting management or disposition of
based on negligence – or preclude its
its assets... .” 29 U.S.C. § 1002(21)(A)(i).
applicability merely because a claim for
recovery rests on a contract theory.” 516 The district court found that neither
A.2d at 304. Following this dictate, Continental nor PVHR were fiduciaries
Pennsylvania courts have applied § 6361 within the meaning of § 1002(21)(A)(i),
to all manner of common law claims, and therefore that § 1109(a) did not apply
including, pertinently, breach of contract, to them. We concur. In Board of Trustees
breach of fiduciary duty, and conversion of Bricklayers & Allied Craftsmen Local 6
claims. See id. (breach of contract); Jones of New Jersey Welfare Fund v. Wettlin
v. Van Norman, 522 A.2d 503 (Pa. 1987)
(conversion); Harris v. Police & Fire Fed.
15
Credit Union, No. Civ. A. 98-5175, 1999 The Trustee did not assert its
turnover claim against Continental.
23
Assocs., Inc., 237 F.3d 270 (3d Cir. 2001), lead us to conclude that Continental was
we made clear that one need not have not a fiduciary within the meaning of §
discretion in exercising authority or 1002(21)(A)(i). We therefore will affirm
control over the man agem ent or the grant of summary judgment in
disposition of plan assets in order to Continental’s favor on Appellants’ breach
qualify as a fiduciary under § of fiduciary duty claim under ERISA.
1002(21)(A)(i). 237 F.3d at 274.
We have not yet addressed whether
Nonetheless, although we reversed the
a law firm in PVHR’s position here
district court’s grant of the defendant-
constitutes a § 1002(21)(A)(i) fiduciary.
bank’s motion to dismiss because the
Appellants have not alleged, nor does the
complaint had alleged the bank’s “day to
evidence establish, that PVHR had any
day responsibility to control, manage,
legal right or discretion to dispose of
hold, safeguard, and account for the
Mushroom’s escrowed funds. Indeed,
Fund’s assets and income[,]” id. at 275
Appellants’ amended complaint made
(internal quotation marks omitted), we
clear that the escrowed funds were to be
stated that we were “inclined to agree that
paid to the trustee on demand. The
ERISA does not consider as a fiduciary an
Stipulation provides that PVHR’s role with
entity such as a bank when it does no more
respect to the alleged “plan assets” (the
than receive deposits from a benefit fund
escrowed funds) was to hold them in
on which the fund can draw checks.” Id.
escrow for the benefit of the Mushroom
(emphasis supplied).
estate.
Neither the allegations nor the
We agree with the bankruptcy and
evidence here suggest that Continental did
district courts that in its role as holder of
anything more than serve as the holder of
Mushroom’s escrowed funds, PVHR
assets placed there pursuant to the
simply was not a fiduciary within the
Stipulation. Our dictum in Wettlin
meaning of § 1002(21)(A)(i). As noted
Assocs., and the views of many of our
above, many of our sister circuits have
sister circuits, see Beddall v. State Street
held that mere custody or possession over
Bank & Trust Co., 137 F.3d 12, 20 (1st
plan assets, without more, does not render
Cir. 1998) (“mechanical administrative
one a fiduciary. Beddall, 137 F.3d at 20;
responsibilities (such as retaining the
Southern Council of Indus. Workers, 83
assets and keeping a record of their value)
F.3d at 968-69. Moreover, imposing
are insufficient to ground a claim of
ERISA fiduciary duties to the Pension Plan
fiduciary status”) (citations omitted);
Plaintiffs where PVHR already had clearly
Southern Council of Indus. Workers v.
d e f i n e d f i d u c ia r y d u t ie s u n d e r
Ford, 83 F.3d 966, 968 (8th Cir. 1996)
Pennsylvania law to both the debtor and all
(lawyer “did not become a plan fiduciary
merely by ... related control over the
settlement proceeds”) (citation omitted),
24
of the debtor’s creditors 16 would place Appellants’ breach of fiduciary duty claim
PVHR in a potentially conflicted position. under ERISA.
Southern Council of Indus. Workers, 83
VI. Conclusion
F.3d at 969 (recognizing potential
“irreconcilable obligations” if ERISA For the foregoing reasons, we will
fiduciary duties to plan imposed on reverse the grant of summary judgment in
insurance company with fiduciary duties to favor of all Appellees except Continental
its shareholders and clients) (citation on the non-ERISA counts, and remand
omitted); Chapman v. Klemick, 3 F.3d with instructions to the district court to
1508, 1511 (11th Cir. 1993) (recognizing remand the non-ERISA counts to the
potential conflict betw een ER ISA bankruptcy court for further proceedings
fiduciary duties imposed on bank and consistent with this opinion; we will affirm
bank’s fiduciary duties to shareholders and the grant of summary judgment in
customers). This potential conflict further Continental’s favor on the non-ERISA
militates against finding PVHR to be a common law counts on the alternative
fiduciary under ERISA. Accordingly, we ground that the UFA immunizes
also will affirm the grant of summary Continental from those counts; and we will
judgment in PVHR’s favor as to affirm the grant of summary judgment in
favor of Continental and PVHR on
Appellants’ breach of fiduciary duty
16 claims under ERISA.
As escrow agent and legal counsel
to Mushroom, PVHR had fiduciary duties ________________________
under Pennsylvania law to the entire
Mushroom estate, including the estate’s
creditors. Knoll v. Butler, 675 A.2d 1308,
1312 (Pa. Commw. 1996) (“An ordinary
escrow agreement creates a fiduciary
relationship between the agent [the
d e p o s i t o r y i n s ti t u ti o n ] a n d t h e
transferor.”); Maritrans GP Inc. v. Pepper,
Hamilton & Scheetz, 602 A.2d 1277, 1283
(Pa. 1992) (“Our common law imposes on
attorneys the status of fiduciaries vis a vis
their clients[.]”). Further, the Bankruptcy
Code forbids counsel to the estate from
holding any interest adverse to the estate.
See 11 U.S.C. § 327(a). Continental also
had fiduciary duties to the estate as an
escrow agent, so the potential conflict
rationale applies equally to it.
25