In the Matter of WHOLESALE FURNITURE MART, INC., Debtor.
Leo HILL, Petitioner,
v.
I.I. OZAR, Trustee in Bankruptcy, Respondent and Third-Party Petitioner,
v.
Richard GRAY and Pamela Gray, Third-Party Respondents.
Bankruptcy No. 80-01035-3, Adv. No. 82-0629-3.
United States Bankruptcy Court, W.D. Missouri, W.D.
September 22, 1982.*241 James R. Schurman, Kansas City, Mo., for I.I. Ozar.
Stephen B. Strayer, Kansas City, Mo., for Richard Gray.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND FINAL JUDGMENT FOR PLAINTIFFS AGAINST THE DEBTOR CORPORATION AND RESPONDENTS GRAY IN VARIOUS SUMS
DENNIS J. STEWART, Bankruptcy Judge.
This is an action initiated by a customer of the debtor corporation who, as of the time of the conversion of these former chapter 11 proceedings to chapter 7 proceedings, had paid all or part of the price of certain merchandise but never received that merchandise. The court of bankruptcy has treated the action thus initiated as a class action in favor of all customers who had paid the chapter 11 debtor for merchandise which they did not receive.[1]
*242 The hearings and inquiries which have accordingly been conducted by the court to determine (1) the membership of the plaintiff class and the amount each has paid for merchandise which he or she has not received and (2) the disposition of these monies.
It has been the contention of the trustee in bankruptcy throughout these proceedings (1) that the class action is improper and (2) that, even if monies paid by members of the plaintiff class can in fact be traced into the bankruptcy estate, the class members must nevertheless be relegated to status of general unsecured claimants.[2]
The court, nevertheless, in the exercise of its duty and power to ensure that a class action is properly prosecuted, even in the temporary absence of a proper class representative,[3] has made successive efforts to ascertain the composition of the class and to trace the monies which they paid for merchandise which they did not receive into the estate or elsewhere. To this end, the court has set successive hearings, but has been frustrated at several junctures in the proceeding, first by the withdrawal of counsel for the defendants Gray and then by the refusal of the defendants Gray to retain any successor counsel.
At last, at the hearing set by the court for June 28, 1982, the defendant Richard Gray appeared before the court without counsel and submitted records which purported to show the list of persons who made payments for merchandise which they did not receive. That list is reproduced in the marginal note.[4] It was his contention that the monies thus paid are shown to be traceable to the same $18,500.00 which were in the debtor corporation's bank account as of the date of the conversion of chapter 11 proceedings to chapter 7 proceedings.
A review of the records which were submitted by Mr. Gray only purports to show that the monies collected from the members of the plaintiff class went into the bank account which had the above balance of $18,500.00 in it as of the date of the conversion. But these records hardly purport to show that the monies paid in by the members of the plaintiff class were the same monies as those which remained in the bank account as of the date of conversion. Rather, they only show that those monies went into the bank account; that they were there commingled with other monies; that operating and other expenses were paid out of the bank account, and that, of a much larger total deposited in the bank account over the period of time purporting to be *243 covered by the records, the sum of $18,500.00 remained in the bank account as of the date of conversion.
These facts compel the court to conclude that the monies paid by the would-be purchasers of merchandise from the debtor cannot be traced into the bankruptcy estate and such tracing is the necessary condition for recovery from the estate. See 4A Collier on Bankruptcy ¶ 70.25, pp. 346, 348 (1978), to the following effect:
"Money paid to the bankrupt prior to bankruptcy under a mistake of fact is impressed with a constructive trust that follows it into the hands of the bankruptcy trustee . . . A trust relationship may also be created by conduct . . . One of the more common forms of constructive or involuntary trusts created by conduct is that of the trust ex maleficio that is, created by wrongdoing. Such a trust usually arises out of the conversion of money or property belonging to another. Where the existence of the trustee will be ordered to turn over the property or proceeds, subject, of course, to the beneficiary's discharging the burden of tracing the trust property." (Emphasis added.)
Accordingly, the plaintiffs cannot recover from the bankruptcy estate.[5]
Rather, the right of the plaintiffs to recover exists directly against the defendants Gray. The monies paid to the debtor corporation by the would-be purchaser of merchandise was paid subject to return in the event the merchandise were not delivered. As such, it constituted a special fund which should not have been commingled with the other monies of the debtor corporation before the delivery of the merchandise.[6] Under the governing authorities, such commingling constituted conversion of the money of the plaintiffs.[7] Even though the money was converted to the use and benefit of the debtor corporation, the managing officers and agents of the corporation, the Grays, who effected the conversion, are jointly and severally liable to the plaintiffs for the conversion. See Matter of Transport Clearings-Midwest, Inc., 16 B.R. 890, 895, 896 (Bkrtcy.W.D.Mo. 1979), to the following effect:
"`By the great weight of authority it is recognized that officers of a corporation are personally liable, or are jointly liable with the corporation, to one whose money or property has been misappropriated or converted by them to the uses of the corporation, although they derived no personal benefit therefrom and acted merely as agents of the corporation the theory being that an agent cannot escape the consequences of his tort by the fact that he committed the tort as agent for his principal.' Anno., Personal Liability of Corporate Directors or Officers to Third Persons for Restitution, or for Damages for Conversion, Under Circumstances Rendering the Corporation Itself Liable, 152 A.L.R. 696, 705 (1944).
"`Of course, defendant's liability did not depend upon his having derived any personal benefit from the alleged conversion.' Darling & Co., v. Fry, supra, [24 S.W.2d] at 724. A corporate officer was held liable for conversion of the plaintiff's money to pay other corporate debts for which the officer bore no personal liability in Patrons Bank & Trust Co., v. Shapiro, 215 Kan. 856, 528 P.2d 1198 (1974). `The debt . . . would seem to have been created by his appropriation or defalcations while acting as an officer of the bankrupt corporation . . . whether or *244 not he profited personally by the transaction.' Kaufman v. Lederfine, 49 F. Supp. 144, 145 (S.D.N.Y.1943)."
In this case, it was the defendants Gray who determined during the relevant time periods how the monies in the custody of the corporation should be handled and disposed of. Consequently, they participated in the tort of conversion and are therefore liable to the plaintiffs for the value converted.[8]
The court in this action has not been able to conduct a hearing to determine whether the conversion was wilful and malicious within the meaning of § 523(a)(2) of the Bankruptcy Code. Further, that issue has not been relevant to the action at bar because the defendants Gray are not themselves debtors in title 11 proceedings. If it becomes relevant, a hearing on the issue may be conducted at a later time and a judgment on any future issue of dischargeability rendered.
It is therefore, for the foregoing reasons,
ADJUDGED that the plaintiff's claims for reclamation of any monies or property directly from the estate in bankruptcy be, and they are hereby, denied. It is further
ADJUDGED that the plaintiff class members, and each of them, have and recover from the respondent debtor corporation and from Thomas Gray and Pamela Gray, jointly and severally, the sums set out in the marginal note,[9] and that, with respect to the debtor corporation, the indebtedness be, and it is hereby, declared to be nondischargeable in bankruptcy.[10]
EXHIBIT "A"
PRIOR TO CHAPTER 11 PETITION DEPOSITS
Amy Armstrong Claim incurred $222.40
500 E. 3rd St., Apt. 9 March 23, 1980
Lee's Summit, Mo. 64063
W.H. Benton Claim incurred 412.00
11308 E. 44th St. March 7, 1980
Kansas City, Mo. 64133
Terry Lee Boone Claim incurred 418.56
1508 E. 43rd St. March 2, 1980
Indep., Mo. 64055
Troy Brantley Claim incurred -0-
24401 W. 86th Terr. March 26, 1980
Olathe, Ks. 66061
Anthony Brzezinski Claim incurred 792.00
2404 W. 38th Ave. September 6, 1979
Kansas City, Ks. 66103
Faye and Nick Cavlovich Claim incurred 256.68
9132 E. 43rd Terr. January 28, 1980
Kansas City, Mo. 64133
Bob DeMay Claim incurred -0-
3901 Queen Ridge February 22, 1980
Indep., Mo. 64055
W.E. Dummit Claim incurred 568.63
Route 1, Box 275 December 10, 1979
Gardner, Ks. 66030
David Etter Claim incurred -0-
16005 W. 154th St. December 14, 1979
Olathe, Ks. 66061
Kyle and Brenda Fitzgerald Claim incurred 422.83
8917 W. 101st St. January 18, 1980
Overland Park, Ks. 66212
Judy Galate Claim incurred 500.00
509 Myrtle March 13, 1980
Kansas City, Mo. 64124
Patricia C. Hanks Claim incurred 200.00
10812 W. 56th Terr. October 30, 1979
Shawnee Mission, Ks. 66203
Omar Hazley Claim incurred 300.00
8600 E. 50th Terr. January 10, 1980
Kansas City, Mo. 64129
John Heath Claim incurred 501.72
9409 E. 84th St. February 17, 1979
Raytown, Mo. 64138
Patricia Henderson Claim incurred 100.00
7820 Grant, # 14 March 30, 1980
Overland Park, Ks. 66201
Thomas J. Houston Claim incurred 848.65
1902 Peach October 21, 1979
Higginsville, Mo. 64037
Kansas City Foreign Car Claim incurred 900.00
Parts & Salvage February 28, 1980
1301 N. Century Dr.
Kansas City, Mo. 64120
Joseph Martinez Claim incurred 54.75
2112 Taylor Dr. May 1, 1980
Olathe, Ks. 66062
Gayle Newman Claim incurred 219.75
12613 W. 104th Terr. December 18, 1979
Olathe Park, Ks.
Susan Prather Claim incurred 367.24
13401 Winchester February 2, 1980
Grandview, Mo. 64030
*245
EXHIBIT "A"
PRIOR TO CHAPTER 11 PETITION DEPOSITS
Robert L. Smith Claim incurred 33.76
5103 Long Dr. January 4, 1979
Shawnee, Ks. 66216
Jesse T. or Anita Stenner Claim incurred 226.27
Route 1, Box 169 December 7, 1979
Kearney, Mo. 64060
William R. and Kathleen Venable Claim incurred 65.00
3941 W. 98th St. January 12, 1980
Overland Park, Ks. 66207
Nancy C. Victor Claim incurred 206.99
7013 Gillette January 30, 1980
Shawnee Mission, Ks. 66212
Alan W. Viebrock Claim incurred 206.56
4815 W. 55th March 21, 1980
Roeland Park, Ks. 66205
C.R. Warren Claim incurred 114.96
16601 Lamar February 17, 1980
Stilwell, Ks. 66085
AFTER CHAPTER 11 PETITION DEPOSITS
Steve Able Claim incurred $186.15
7708 W. 60th Terr. August 1, 1980
Overland Park, Ks. 66202
G.R. Allan Claim incurred 100.00
9510 Halsey, Apt. 204 May 5, 1980
Lenexa, Ks. 66215
Robert Baker Claim incurred 100.00
5225 Brookwood August 1, 1980
Kansas City, Mo. 64130
H. Bass Claim incurred 400.00
Box 224 September 27, 1980
Mayview, Mo. 64071
H. Berry Claim incurred 120.00
5607 Garfield September 21, 1980
Kansas City, Mo. 64130
Roger Betts Claim incurred 280.00
6018 E. 127th June 3, 1980
Grandview, Mo. 64030
Susan L. Brown Claim incurred
6624 Grand August 29, 1980
Kansas City, Mo. 64113
Sylvester Brown Claim incurred 35.00
7350 State July 19, 1980
Kansas City, Ks. 66112
Mark Carter Claim incurred 46.00
6112 E. 126th St. June 20, 1980
Grandview, Mo. 64030
Charles W. Coffman Claim incurred 202.00
4800 W. 64th St. September 1, 1980
Prairie Village, Ks. 66208
Mike N. Connors Claim incurred 122.00
10506 W. 73rd November 6, 1980
Shawnee Mission, Ks. 66203
David Deutscher Claim incurred 102.00
12122 W. 97th St. May 17, 1980
Lenexa, Ks. 66215
Ben Douglas Claim incurred 200.00
5314 N. Lydia August 10, 1980
Kansas City, Mo. 64118
Lillian Frankenfield Claim incurred 55.92
508 S. Hospital Dr. November 22, 1980
Paola, Ks. 66071
Lillian Frankenfield Claim incurred 19.76
508 S. Hospital Dr. November 22, 1980
Paola, Ks. 66071
Dee Dee Glover Claim incurred 20.00
1009 A. Dennis Ct. January 2, 1980
Olathe, Ks. 66061
W. Harries Claim incurred 200.00
6563 W. 49th September 11, 1980
Mission, Ks. 66202
Bill Helms Claim incurred 616.00
3107 N.E. 65th Terr. November 8, 1980
Gladstone, Mo. 64119
Bill Helms Claim incurred 156.00
3107 N.E. 65th Terr. December 6, 1980
Gladstone, Mo. 64119
Eagle Enterprises (Leo Hill) Claim incurred 100.00
5311 Hardey July 12, 1980
Raytown, Mo. 64133
Lunnell Hollinshed Claim incurred 104.16
1908 Washington Ave. August 6, 1980
Kansas City, Ks. 66102
Greg Joens Claim incurred 325.00
4030 W. 98th Terr. October 26, 1980
Overland Park, Ks. 66207
Steve Joens Claim incurred 200.00
4030 W. 98th Terr. October 24, 1980
Overland Park, Ks. 66207
Jackie Johnson Claim incurred 161.04
9244 Wedd February 19, 1981
Overland Park, Ks. 66212
Raymond J. Kerrin Claim incurred 150.00
1113 Palmer Circle September 21, 1980
Olathe, Ks. 66061
D. Knudson Claim incurred 382.00
441 N. 83rd Terr. September 5, 1980
Kansas City, Ks. 66112
Marquita Lee Claim incurred 300.00
8540 Walmer January 16, 1981
Overland Park, Ks. 66212
Jack Lewis Claim incurred 125.00
2959 Jackson October 6, 1980
Kansas City, Mo. 64128
Albert J. Lowe, III Claim incurred 600.20
5121 Oakleaf Dr. August 13, 1980
Kansas City, Mo. 64129
Albert J. Lowe, III Claim incurred
5121 Oakleaf Dr. August 13, 1980
Kansas City, Mo. 64129
Virginia McGrew Claim incurred 150.00
R.R. 3, 259C June 10, 1980
Leavenworth, Ks. 66048
Stephen McGuckin Claim incurred 80.00
1118 Penntower September 30, 1980
3100 Broadway
Kansas City, Mo. 64111
Phyllis J. Mejia Claim incurred 60.00
966 S. 65th St. September 19, 1980
Kansas City, Ks. 66111
Louise Mimms Claim incurred 100.00
9901 Rosehill Rd. June 1, 1980
Lenexa, Ks. 66215
*246
EXHIBIT "A"
AFTER CHAPTER 11 PETITION DEPOSITS
Louise Mimms Claim incurred 10.00
9901 Rosehill Rd. June 1, 1980
Lenexa, Ks. 66215
Cheryle Mitchell Claim incurred 25.00
8258 Monroe Dr. Apt. A October 23, 1980
Kansas City, Ks. 66112
Harold Monlowe Claim incurred 50.00
7119 Myrtle August 13, 1980
Kansas City, Mo. 64132
Walter Randolph Claim incurred 100.00
8800 Bristol June 23, 1980
Kansas City, Mo. 64138
Bobby Richardson Claim incurred 200.00
Sue Blackburn December 1, 1980
8816 Flora
Kansas City, Mo. 64131
D. Reed Claim incurred 50.00
7218 E. 87th Terr., Apt. 302 September 14, 1980
Kansas City, Mo. 64138
Mary Reed Claim incurred 30.56
13917 Summertree August 30, 1980
Olathe, Ks. 66061
Michael Rodman Claim incurred 150.00
Box 354 October 26, 1980
LaCygne, Ks. 66040
T. Smith Claim incurred 203.76
Route 2, South Madison September 18, 1980
Raymore, Mo. 64083
Gary Stamps Claim incurred 100.00
5629 E. 40th July 7, 1980
Kansas City, Mo. 64130
Shirley Standrys Claim incurred 458.00
7508 W. 63rd St. June 16, 1980
Overland Park, Ks. 66202
Richard Stroud Claim incurred 276.00
619 E. 3rd St. November 17, 1980
Garnett, Ks. 66032
Greg Taylor Claim incurred 250.00
4425 Lane January 16, 1981
Olathe, Ks. 66061
Dee Vincent Claim incurred 50.00
6925 Cener August 19, 1980
Shawnee, Ks. 66216
Bobbie R. Watts Claim incurred 50.00
7200 Norton June 11, 1980
Kansas City, Mo. 64132
Larry Wise Claim incurred 350.00
9220 Rose Hill, Apt. 7 August 1, 1980
Lenexa, Ks. 66215
NOTES
[1] The defendants Richard and Pamela Gray have objected to the institution of this action by means of a show cause order rather than by means of the process described in Rule 704 of the Rules of Bankruptcy Procedure. But it has long been recognized in the bankruptcy context that show cause orders are sufficient substitutes for process, conferring all the notice which is necessary. "(A)n order to show cause (is) . . . in the nature of process." 2 Collier on Bankruptcy para. 24.39(1), p. 796 (1976). In actions which are brought to gain judgment for money or property against a debtor or an officer or director of a debtor corporation, it has been held that "(t)he referee may make the essential investigation . . . and for such purpose may cite the claimant to show cause." 2 Collier on Bankruptcy para. 23.07, p. 524 (1976).
The court also finds that the prerequisites for a class action exist in this case as they are set out in Rule 23, F.R.Civ.P. The class representative has filed a complaint for relief and has thereby adequately prosecuted the class action. Although he failed to appear for the subsequent hearings, it was never shown that he was not a proper class representative and maintenance of the class action in his name was therefore proper. See, e.g., Goodman v. Schlesinger, 584 F.2d 1325, 1332, 1333 (4th Cir.1978). The only requirement for the class action certification which offers any trouble in this case is numerosity of the class. In this respect, as to the number of claimants which warrant the class certification, "no hard and fast number rule can or should be stated, since `numerosity' is tied to `impracticability' of joinder under the specific circumstances." 3B Moore's Federal Practice para. 23.05(1), pp. 23-150, 23-151 (1982). In this case, the impracticability of joinder, when the members of the class are all claimants of relatively small sums which, if sought individually, would likely be consumed by the costs of litigation, is the crucial issue requiring class certification in this case. Further, since this action is basically one affecting the dischargeability of an indebtedness, it is basically one in equity and the judgment is in the form of one declaring the indebtedness to be nondischargeable in bankruptcy. Therefore, the class may be, and is hereby, certified under the provisions of Rule 23(b)(2), F.R.Civ.P., as one in which "the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final . . . declaratory relief with respect to the class as a whole." In ruling on the dischargeability of the judgment with respect to the corporation, the court also has jurisdiction to rule on the liability and, therefore, on the joint and several liability of the co-defendants before the court as a matter ancillary to the dischargeability determination. See sections 1471(b), (c), Title 28, United States Code. Both Richard and Pamela Gray are before the court by reason of the service of the show cause order upon their counsel, who then represented them both, even though he has since withdrawn as their counsel.
[2] There is authority for the position of the trustee in this respect. See 4A Collier on Bankruptcy para. 70.25, pp. 346, 348 (1978), to the following effect: "Money paid to the bankrupt prior to bankruptcy under a mistake of fact is impressed with a constructive trust that follows it into the hands of the bankruptcy trustee . . . A trust relationship may also be created by conduct . . . One of the more common forms of constructive or involuntary trusts created by conduct is that of the trust ex maleficio that is, created by wrongdoing. Such a trust usually arises out of the conversion of money or property belonging to another. Where the existence of the trust has been established, the bankruptcy trustee will be ordered to turn over the property or proceeds, subject, of course, to the beneficiary's discharging the burden of tracing the trust property." But, as is further noted in the text of this memorandum, the monies paid by the members of the plaintiff class cannot unfailingly be traced with any certainty into the monies which are currently in the estate. "Where the property involved, or its proceeds, has been intermingled with other goods or funds of the debtor's, the owner must definitely trace that which he claims is contained in the assets of the estate. It is not enough to show generally that the property or the money representing sales of the property was added to the debtor's assets at the time of acquisition. The goods sought to be recovered must be definitely traced into the property of the estate, or the proceeds thereof must be traced to a particular fund or to specific property in which it was invested. Upon failure to do this, the bailor, principal, or consignor becomes only a general creditor with the same rights appertaining to other general creditors." 4 Collier on Bankruptcy para. 541.08, p. 541-44 (1982).
[3] See note 1, supra.
[4] See Exhibit "A" attached hereto.
[5] See also 4 Collier on Bankruptcy para. 541.08, p. 541-44 (1982), the relevant substance of which is quoted in marginal note 2, supra.
[6] The money which was paid to the corporation and the defendants Gray by the would-be purchasers could not become the property of the corporation until delivery of the furniture. It was only on deposit with them as bailees of the money. See, e.g., Breece v. Jett, 556 S.W.2d 696 (Mo.App.1977), to the effect that money can constitute a subject of conversion if it is money in a special fund designated for a special purpose.
[7] "The act of wrongfully mixing the property of one person with that of another so that the property cannot be identified is an act of conversion, especially where coupled with the defendant's use of the mixed property . . ." 18 Am.Jur.2d Conversion para. 51, p. 189 (1965).
[8] The measure of damages is the amount of money converted. Further, in order to give the injured party full indemnity, interest may be allowed from the date of conversion. Independence Flying Service, Inc. v. Ailshire, 409 S.W.2d 628 (Mo.1966).
[9] Plus interest at the legal rate from the respective dates on which the claims were incurred. See Exhibit "A" attached.
[10] See section 727 of the Bankruptcy Code generally denying discharges to corporate debtors.