NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 09-2321
IN RE: MUSHROOM TRANSPORTATION COMPANY;
PENN YORK REALTY COMPANY, INC.; ROBBEY REALTY, INC.;
TRUX ENTERPRISES, INC.; LEAZIT, INC.,
Debtors
JEOFFREY L. BURTCH, TRUSTEE, Trustee in Bankruptcy of
MUSHROOM TRANSPORTATION COMPANY, INC.,
successor to ROBBEY REALTY, INC.,
PENN YORK REALTY COMPANY, INC., and
TRUX ENTERPRISES, INC. and successor to Michael Arnold, former trustee
in bankruptcy for Mushroom Transportation Company, Inc., Robbey Realty, Inc.,
Penn York Realty Company, Inc., and Trux Enterprises, Inc.,
Appellant
v.
JONATHAN H. GANZ; PINCUS, VERLIN, HAHN & REICH, P.C.;
PINCUS, REICH, HAHN, DUBROFF & GANZ, P.C.;
MODELL, PINCUS, HAHN & REICH, P.C.;
PINCUS, VERLIN, BLUESTEIN, HAHN & REICH, P.C.;
ASTOR WEISS & NEWMAN;
RAWLE & HENDERSONL; CONTINENTAL BANK;
ERWIN L. PINCUS; RICHARD L. HAHN; PACE REICH;
JEROME J. VERLIN; ANDREW F. NAPOLI; RONALD BLUESTEIN;
HERMAN P. WEINBERG; DAVID N. BRESSLER; ALLEN B. DUBROFF
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(District Court No. 2-07-cv-02759)
District Judge: Hon. Eduardo C. Robreno
Submitted under Third Circuit LAR 34.1(a)
on July 13, 2010
Before: FUENTES, ALDISERT, and ROTH, Circuit Judges.
(Opinion Filed: July 27, 2010)
OPINION
ROTH, Circuit Judge:
Jeoffrey Burtch, Bankruptcy Trustee of the Mushroom Transportation
Company, Inc. (MTC), and plaintiff in this adversarial proceeding, appeals the
Bankruptcy Court’s judgment in favor of defendant Pincus, Verlin, Hahn & Reich
(PVHR) and the District Court’s affirmance. Both courts found PVHR not liable
for losses that occurred when its shareholder, Jonathan Ganz, embezzled from the
bankruptcy estate while serving as MTC’s counsel. We will affirm.
I. Background
Our last opinion in this case contains a full recitation of the facts, In re
Mushroom Transportation Co., Inc., 382 F.3d 325 (3d Cir. 2004), so a brief
recitation will suffice here.
On June 24, 1985, MTC and related entities filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code. MTC initially retained
its assets as debtor-in-possession, but within six months, MTC ceased operation
and began liquidating assets. During the bankruptcy proceeding, MTC remained
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under the leadership of Michael C. Arnold and Robert B. Cutaiar, both long-time
MTC executives. The Bankruptcy Court appointed Arnold as “Special Liquidation
Consultant” and approved Arnold’s compensation of $300 per day from the
bankruptcy estate. Arnold retained Jonathan Ganz and Ganz’s firm, PVHR, as
MTC’s counsel in the bankruptcy proceeding.1
MTC deposited the liquidation proceeds at Continental Bank, one of MTC’s
largest creditors. The Bankruptcy Court approved repayment of Continental
Bank’s secured claim from funds on deposit, leaving a balance of approximately
$1 million in MTC’s escrow account at Continental Bank. At Ganz’s request, in
July and August 1987, Continental Bank conveyed the escrow balance to the
bankruptcy estate by (1) issuing a $200,000 treasurer’s check payable to Ganz as
debtor’s counsel and (2) depositing $766,624,49 into a new MTC escrow account
opened by Ganz at Continental Bank. Although PVHR maintained its own escrow
accounts for client funds, Ganz opened a separate account because he intended to
1
The Bankruptcy Court explained the association between Arnold and Ganz:
Both Arnold and Ganz graduated from Villanova Law School. While at law
school Arnold met Ganz and even took a bankruptcy class with him. It was
Arnold who arranged for Mushroom to engage the Pincus law firm, and Pincus
was chosen because of Arnold’s association with Ganz and because of the
firm’s bankruptcy expertise. . . . . Arnold viewed his relationship with Ganz as
more than simply attorney-client. However, he had no social relationship with
Ganz, at least prior to engaging his firm to represent Mushroom in its
bankruptcy case. After the engagement, Arnold and Ganz became friendlier,
sharing season baseball tickets.
366 B.R. 414, 418 (Bankr. E.D. Pa. 2007).
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convert the estate’s funds for his personal use and wanted to evade discovery by
PVHR. Ganz began embezzling from the estate in 1987.
In 1990, the Bankruptcy Court – still unaware of Ganz’s embezzlement –
converted the proceeding from Chapter 11 to Chapter 7 and appointed Arnold as
Trustee of the bankruptcy estate. In February 1992, the United States Trustee
advised Arnold that Ganz had embezzled from other bankruptcy estates. Arnold
examined MTC’s accounts and discovered that, indeed, funds were missing from
the estate. In 1992, Arnold brought this adversarial proceeding against PVHR to
recover funds stolen by Ganz, who later pleaded guilty to embezzlement.
In 1994, while this adversarial proceeding was pending, Arnold also began
embezzling funds from the MTC bankruptcy estate. Arnold resigned as
bankruptcy trustee in 1995 and pleaded guilty to a felony in 1996. Jeoffrey Burtch
succeeded Arnold as Trustee and continued this multi-count action against PVHR.
Count I asserts a claim for turnover of estate property under 11 U.S.C. §§ 542 and
543. Counts II through VII assert various common law claims.
The principal issue in this case is whether PVHR, which ordinarily would
be liable for embezzlement committed by its shareholder, should prevail on
affirmative defenses. PVHR contends the turnover claim is barred by laches and
the common law claims are barred by statutes of limitations. This adversarial
proceeding was filed October 5, 1992, more than four years after the
embezzlement began. The applicable dates of accrual are not in dispute, so absent
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tolling, the Trustee’s claims would be barred by laches or the statutes of
limitations. The Trustee argues the limitations period should be tolled because
Arnold and Cutaiar exercised reasonable diligence in ascertaining the existence of
injury to the bankruptcy estate.
The Bankruptcy Court, ruling on the affirmative defenses, granted summary
judgment in favor of PVHR because MTC failed to exercise reasonable diligence
in uncovering Ganz’s embezzlement. The District Court affirmed. On appeal, we
partially reversed the grant of summary judgment. There was “no question that
Mushroom, acting through its representatives Arnold and Cutaiar, had a fiduciary
duty to protect and maximize the estate’s assets.” 382 F.3d at 339. But whether it
was reasonable for Arnold and Cutaiar to relax their “vigilance in overseeing the
execution of the duties [they] delegated to Ganz” was a question of fact. Id. at
341. We explained that “where the wrongdoing underlying [a] cause[] of action
has been perpetrated by a fiduciary to the detriment of its principal, this fact
militates strongly against summary judgment on the issue of whether the principal
(here Mushroom) exercised reasonable diligence in failing to discover the
fiduciary’s malfeasance within the applicable statutes of limitations . . . . ‘To
require a principal to engage in aggressive oversight of its fiduciary’s conduct is to
deny the very essence of a fiduciary relationship.’” Id. at 341-42 (quoting Rubin
Quinn Moss Heaney & Patterson, P.C. v. Kennel, 832 F. Supp. 922, 935 (E.D. Pa.
1993). We remanded for determination of when the Trustee’s duty to investigate
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arose and issued the following guidance: “We should stress that we do not hold
here that the existence of a fiduciary, lawyer-client relationship between Ganz and
Mushroom, and Ganz’s abuse of that relationship, alone preclude judgment as a
matter of law in PVHR’s and its shareholders’ favor.” Id. at 342-43.
On remand, the Bankruptcy Court held a five-day trial and issued more than
100 pages of factual findings and legal conclusions. The Bankruptcy Court held
that PVHR, as counsel to the bankruptcy estate, breached its fiduciary duties and
contractual obligations owed to the Trustee. However, the Bankruptcy Court
found PVHR was not liable for turnover because the “funds misappropriated by
Ganz were never channeled through the law firm escrow account, but were
transferred directly by Continental Bank to bank accounts titled in Ganz’s name
alone.” 366 B.R. 414, 439 (Bankr. E.D. Pa. 2007). The Bankruptcy Court
enforced the statute of limitations on the Trustee’s common law claims because
Arnold and Cutaiar failed to exercise reasonable diligence as fiduciaries
representing MTC’s interests. The Bankruptcy Court held that Arnold, in
particular, acted unreasonably:
Although Arnold testified that he communicated with Ganz
“numerous times” about the Mushroom assets, beginning in 1987, 1
N.T. at 57, such testimony to the extent it implies that Arnold was
attentive to or interested in the protection of Mushroom assets for the
benefit of its creditors is not credible. There is no written
communication after February 1988. Arnold was working full-time
for a New Jersey firm and later for a Pittsburgh company beginning
in 1987. He never sought any bank account or interest statements, or
other corroborative or relevant tax information. Although Ganz
provided a written reply to Arnold’s accounting request in February
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1987, he did not do so with a similar request in February 1988, and
Arnold did not press him for information. Arnold expressed no
concern about the assets after Ganz joined another firm. And even
after he became trustee in February 1991, and was not represented by
the Pincus firm, and after he received information from the United
States trustee about his duty to obtain control of estate property, he
never sought any information or attempted to collect the assets from
Ganz or Pincus. He attempted no recovery after the substantive
consolidation order was entered. And, as trustee, he also embezzled
estate property.
366 B.R. at 434. The District Court affirmed. The Trustee appeals both findings
and requests reassignment to a different bankruptcy judge on remand.
II. Discussion
The District Court had jurisdiction pursuant to 28 U.S.C. § 158 over the
appeal from the Bankruptcy Court, which had jurisdiction pursuant to 28 U.S.C. §
157(b). We have jurisdiction over this appeal pursuant to 28 U.S.C. §§ 1291 and
158(d). The District Court’s determinations are subject to plenary review. In re
Prof’l Ins. Mgmt., 285 F.3d 268, 282-83 (3d Cir. 2002). The Bankruptcy Court’s
factual determinations are reviewed for clear error and its legal determinations are
reviewed de novo. Id.
The Trustee argues (1) the Trustee is entitled to turnover of assets
embezzled by Ganz and (2) the statute of limitations should be tolled because
Arnold and Cutaiar acted reasonably in relying on advice of counsel. Both
arguments challenge factual findings without any demonstration of how those
findings were clearly erroneous. We have reviewed the record and find no error of
fact or law.
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The turnover claim is without merit because the Bankruptcy Court found
the funds embezzled by Ganz were not channeled through PVHR’s accounts.
There was no property for PVHR to turnover because Ganz converted the funds
from Continental Bank to a separate account under his control and not the firm’s.
The evidence adduced at trial supports the Bankruptcy Court’s finding that
Arnold completely abdicated his responsibility to preserve and protect the
bankruptcy estate’s assets, partly because of his friendly relationship with Ganz.
After learning that Ganz had embezzled from the bankruptcy estate, Arnold then
proceeded to pilfer the bankruptcy estate as well. It is clear that Arnold did not act
with reasonable diligence to ascertain the existence of an injury, so the Trustee is
not entitled to tolling of the limitations period.
III. Conclusion
For the reasons stated above, we will affirm the judgments of the
Bankruptcy Court and District Court. The request for reassignment is moot.
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