United States Court of Appeals
For the First Circuit
Nos. 08-1690; 08-1691
JOSEPH BRAUNSTEIN, Chapter 7 Trustee of
TMG Holdings, LLC and of Edwin A. McCabe,
Plaintiff, Appellee/Cross-Appellant,
v.
EDWIN A. MCCABE; KARREN K. MCCABE,
Defendants, Appellants/Cross-Appellees,
v.
CRAIG J. ZIADY,
Fourth-Party Defendant, Appellee,
DANN OCEAN TOWING, INC.,
Defendant.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Lynch, Chief Judge,
Torruella and Lipez, Circuit Judges.
Joseph H. Reinhardt for appellants/cross-appellees.
Mark W. Corner with whom Riemer & Braunstein LLP was on brief
for appellee/cross-appellant Joseph Braunstein and appellee Craig
J. Ziady.
June 26, 2009
LYNCH, Chief Judge. This appeal requires us to address
several issues of first impression in bankruptcy law in this
circuit. The first is whether there is a jury trial right under
the Seventh Amendment in actions by trustees to compel the turnover
of property to the estate under 11 U.S.C. § 542. The second
concerns what is meant by the "ordinary course of business" of a
debtor for purposes of 11 U.S.C. § 363, which allows trustees to
make ordinary expenditures necessary for the operation of a
business without involvement of the bankruptcy court. The third
concerns whether a cause of action for negligent misrepresentation
is stated by the debtors against the trustee's counsel.
The appeal arises from two actions brought by the
trustee, Joseph Braunstein, concerning the assets of the estate in
bankruptcy of a former lawyer, Edwin McCabe (whom we shall call
"McCabe"), his wife Karren, and various entities they controlled.
The trustee filed a turnover complaint to obtain $77,572.69 in
insurance proceeds which had been paid to McCabe in settlement of
claims arising from wake damage a maritime towing company caused to
the luxury houseboat on which the McCabes lived, and which was
owned by the estate.
The McCabes appeal from both the district court's denial
of their jury trial demand and from the $30,262.69 amount the court
ordered turned over, on the ground the court used the wrong legal
standard and used incorrect information about the balance in their
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bank account. The trustee cross-appeals and argues the court used
the wrong legal standard for "ordinary course of business" and that
the turnover amount is too small.
A separate issue is raised by the McCabes' appeal from
the district court's dismissal of their attempt to sue an attorney
representing the trustee, for negligent misrepresentation, in an
admiralty action the trustee brought against the towing company.
That admiralty action is not otherwise relevant to this appeal; a
jury heard the case and found in favor of the towing company.
The turnover action arose after McCabe, operating the
estate as debtor-in-possession, expended estate funds in a way that
actually decreased the value of the estate's primary asset, the
houseboat. Contrary to the district court, we hold that McCabe did
not make these expenditures within the ordinary course of business.
We reverse and remand on that issue. We affirm the court's denial
of a jury trial on the turnover claim and its dismissal of the
claim against the attorney working with the trustee.
I.
The McCabes lived on the houseboat, the Esperaunce, which
was berthed in Charlestown, Massachusetts. It was owned by a
limited liability company named TMG Holdings, LLC, ("Holdings").
The Esperaunce was Holdings' sole asset. Holdings was managed and
99% of its shares were owned by The McCabe Group, a professional
corporation through which McCabe and others provided legal
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services. McCabe was the sole shareholder in The McCabe Group and
held a 1% share in Holdings. Holdings chartered the Esperaunce to
The McCabe Group, which in turn subchartered the boat to the
McCabes. The McCabe Group and McCabe each filed for bankruptcy on
September 3, 2003, and Holdings filed on February 20, 2004. McCabe
functioned as debtor-in-possession in all three cases, which were
Chapter 11 filings.
After the initial filings, on December 18, 2003, the
Esperaunce was damaged by the wake of a tugboat owned by Dann Ocean
Towing. The McCabes filed a claim with Dann's insurance company,
which was settled for $95,230.95 on December 8, 2004. Under the
settlement agreement, $17,658.26 was earmarked for alternate living
arrangements for the McCabes while $77,572.69 was for damage to the
Esperaunce. The trustee does not dispute that the $17,658.26
belonged to the McCabes. While McCabe was the debtor-in-
possession, he did not open a separate account in that capacity.
Rather, he commingled the insurance funds with the funds in his and
his wife's personal account. The McCabes deposited all of the
insurance proceeds into that account, which was held in Karren's
name.
Without notifying the bankruptcy court or seeking its
approval, the McCabes arranged to have work done on the Esperaunce
from the insurance proceeds. They spent $47,310 to have the boat
towed to a marina in Gloucester, Massachusetts on October 30, 2004
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and to have initial repair work conducted. That work consisted of
dismantling or demolishing portions of the boat. The record shows
that this work was done to repair the wake damage, to enable
refurbishment of the houseboat's structure in order to address
water damage that predated the wake incident, and to make
structural improvements to the boat. Despite the wake damage, the
McCabes had continued to live on the houseboat while they settled
their claim with the insurer. The work actually done and paid for
decreased the value of the boat.
On February 16, 2005, the petitions for Holdings and
McCabe were converted to Chapter 7 liquidations and Braunstein was
appointed trustee (he had been appointed interim trustee in The
McCabe Group's case on November 5, 2004). McCabe ordered a halt to
the repair work on February 16 and Braunstein took possession of
the Esperaunce.
Braunstein received an offer to purchase the Esperaunce.
On October 26, 2005, before the sale was finalized, attorney Craig
J. Ziady, the trustee's counsel, emailed McCabe. He told McCabe
about the offer and wrote that if Braunstein "decides to move
forward, there will be a sale motion, with the customary counter-
offer procedures, etc., of which you will certainly be provided
notice." In November 2005, Braunstein conducted, with bankruptcy
court approval, a sale of the boat for $42,000. The McCabes were
not given notice as attorney Ziady had represented. They concede
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they were not actually entitled to notice because they did not file
an appearance and request for notice. See Fed. R. Bankr. P. 9010.
Braunstein filed a complaint against the McCabes in
bankruptcy court on February 28, 2005 requesting, under 11 U.S.C.
§ 542, a turnover and accounting of estate property in the McCabes'
possession, "including but not limited to certain insurance
settlement proceeds obtained by McCabe and Karren McCabe post-
petition and without bankruptcy court approval," as well as a
restraining order to prevent the McCabes from spending any more
estate funds. No claim was made of fraudulent transfer. The
McCabes asserted counterclaims alleging Braunstein initiated the
adversary proceeding in bad faith and was in breach of his
fiduciary duty as trustee. They also answered the turnover claim
and demanded a jury trial on it.
On May 23, 2006, Braunstein sued Dann, the owner of the
boat that caused the wake damage, for negligence in federal
district court in Massachusetts under the court's admiralty
jurisdiction. Dann brought a third-party claim for indemnification
against the McCabes. The McCabes counterclaimed against
Braunstein, alleging conversion and breach of fiduciary duty, and
filed a fourth-party complaint against attorney Ziady for negligent
misrepresentation based on his failure to give them notice of the
sale of the Esperaunce. On motion of the parties, the district
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court consolidated the negligence claim in admiralty and the
turnover claims in bankruptcy on December 12, 2006.
Attorney Ziady moved to dismiss the fourth-party
complaint against him on December 28, 2006. At the motion hearing,
the court stated it would dismiss because attorney Ziady owed no
legal duty to the McCabes, and on February 13, 2007, it entered an
electronic order granting the motion.1 The McCabes moved for
reconsideration, arguing that the existence of a legal duty is not
an element of a negligent misrepresentation claim. They also
sought leave to amend their fourth-party complaint to assert a
claim against attorney Ziady for promissory estoppel.2 The court
denied the motion on February 28, 2007.
On January 3, 2008, the court entered an order denying
the McCabes' jury trial demand in the turnover case. The
negligence case was tried first under the court's admiralty
jurisdiction. On January 10, the jury entered a verdict in favor
of Dann on Braunstein's negligence complaint against the company.
1
The McCabes sued attorney Ziady in state court on
September 9, 2007 for breach of contract. That court granted
summary judgment to attorney Ziady on res judicata grounds. McCabe
v. Ziady, No. ESCV2007-1679, 2009 WL 839102, at *3-5 (Mass. Super.
Ct. Mar. 16, 2009).
2
The McCabes characterized the claim as one for
"detrimental reliance." Promissory estoppel is the more common
name for the cause of action, but Massachusetts courts use both
names. See R.I. Hosp. Trust Nat'l Bank v. Varadian, 647 N.E.2d
1174, 1178-79 (Mass. 1995); Loranger Constr. Corp. v. E.F.
Hauserman Co., 384 N.E.2d 176, 179 (Mass. 1978).
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It concluded that McCabe had acted as Holdings' authorized agent in
settling with Dann and that the Holdings estate therefore did not
have a claim against Dann that Braunstein could assert.
The court held a bench trial on the turnover claim
immediately after the conclusion of the negligence case. At the
trial, McCabe testified that Holdings, the owner of the boat, "was
not in business" and that "there were no operations of Holdings."
The repairs were meant to "enhance" the value of the houseboat, and
there was a significant amount of work to be done not covered by
the insurance.
The reason for the repair of the houseboat, McCabe
testified, was that he and his wife loved it. He testified that he
considered that it was in the best interest of the creditors for
him to use the houseboat "as [his] principal residence," and to
"pay[] all the attendant costs." He did not intend to pay the
creditors from the operations of Holdings, since there were no
operations, but he hoped to pay the creditors personally.
The houseboat had been purchased primarily from funds
from The McCabe Group, which McCabe provided to The McCabe Group.
As a result, he paid no rent to Holdings, but rather took an offset
of $1600 a month against his contributions to the purchase price.
The court found the McCabes had incurred the repair
expenditures in good faith and that they "were reasonable,
necessary, and proper expenses." It found the expenditures were
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made in the ordinary course of business and that McCabe thus had
the authority, as debtor-in-possession, to enter into the
expenditures without notice to the court and creditors and a
hearing. The court ordered the McCabes to turn over the remaining
portion of the settlement funds -- $30,262.69 -- and, on the basis
that the McCabes had commingled the remaining estate funds with
their personal funds, considered whether to reduce the amount to be
turned over to the lowest intermediate balance of the combined
account. See Conn. Gen. Life Ins. Co. v. Universal Ins. Co., 838
F.2d 612, 619 (1st Cir. 1988). It ordered turnover of the full
$30,262.69 because it found the balance of the McCabes' account
never dropped below that level.
The McCabes appeal the denial of their jury trial demand,
the court's application of the lowest intermediate balance test to
the turnover amount, the dismissal of their claim against attorney
Ziady, and the refusal to allow them to amend their complaint to
add new claims against him. Braunstein cross-appeals the court's
order reducing the turnover amount by the amount the McCabes spent
repairing the Esperaunce.
II.
A. Whether There is a Seventh Amendment Right to a Jury
Trial in 11 U.S.C. § 542 Turnover Actions by Trustees
The McCabes challenge the district court's denial of
their jury trial demand in the turnover action. The jury trial
issue presents a legal question, which we review de novo. As best
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we can tell there is no circuit court of appeals case on this
point. The majority of the precedent, from the district and
bankruptcy courts, holds there is no jury trial right on a
trustee's turnover claim.3 We hold that no right to trial by jury
attaches to the statutory turnover action authorized by § 542.
Section 542 is captioned: "Turnover of property to the
estate." The trustee's suit was brought under subsection (a),
which provides: "an entity, other than a custodian, in possession,
custody, or control during the case of property" of the estate
"shall deliver to the trustee, and account for, such property or
the value of such property."4 11 U.S.C. § 542(a). The "property"
referred to is "property that the trustee may use, sell, or lease
under section 363" or that the debtor "may exempt under section
3
Compare Salven v. Lyons, No. CIV-F-06-1114, 2007 WL
470625, at *3-4 (E.D. Cal. Feb. 9, 2007), Walker v. Weese, 286 B.R.
294, 299 (D. Md. 2002), Keller v. Blinder (In re Blinder, Robinson
& Co.), 146 B.R. 28, 30-31 (D. Colo. 1992), Notinger v. Brown (In
re Simply Media, Inc.), No. 07-1030, 2007 WL 4264514, at *6 (Bankr.
D.N.H. Nov. 28, 2007), Gecker v. Gierczyk (In re Glenn), 359 B.R.
200 (Bankr. N.D. Ill. 2006), Welt v. Leshin (In re Warmus), 252
B.R. 584, 586-87 (Bankr. S.D. Fla. 2000), Allard v. Akhoff (In re
Ackhoff), 252 B.R. 396, 397-98 (Bankr. E.D. Mich. 2000), and
Anderson v. Simchon (In re S. Textile Knitters, Inc.), 236 B.R.
207, 213 (Bankr. D.S.C. 1999), with Stewart-Hall Mktg., Inc. v. Bob
Maddox Dodge, Inc. (In re Stewart-Hall Mktg., Inc.), Nos. 89-10275
et al., 1990 WL 10007428, at *2 (Bankr. S.D. Ga. 1990).
4
In addition, under subsection (b), "an entity that owes
a debt that is property of the estate and that is matured, payable
on demand, or payable on order, shall pay such debt to, or on the
order of, the trustee." 11 U.S.C. § 542(b).
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522."5 Id. This requires everyone holding property of the estate
on the date of filing from which the trustee may benefit the estate
under § 363 to deliver the property to the trustee. This is
subject to an offset, and there are exceptions not involved here.6
Section 542 was added to the Bankruptcy Code as part of
the Bankruptcy Reform Act of 1978. Congress added the section to
expand the trustee's power to "bring into the estate property in
which the debtor did not have a possessory interest at the time the
bankruptcy proceedings commenced," ensuring that a broad range of
property is included in the estate in order to promote the
congressional goal of encouraging reorganizations. United States
v. Whiting Pools, Inc., 462 U.S. 198, 205, 207-08 (1983).
The trustee's claim here, under § 542(a), was limited in
nature. He sought only turnover and an accounting from the
McCabes, as well as a restraining order to prevent the McCabes from
spending any more estate funds. Braunstein did not bring a claim
5
This encompasses items such as cash and property that may
be used in the operation of a business, see 11 U.S.C. § 363, as
well as real property used as a residence, and certain types of
household and personal property of an individual, see id. § 522(d).
6
Other provisions of § 542 protect transferors of estate
property who act in good faith and without awareness of the filing
of the petition, 11 U.S.C. § 542(c), protect good faith transferors
who use estate property to pay life insurance premiums in certain
circumstances, id. § 542(d), and govern the turnover of recorded
information, such as documents, records, or papers, id. § 542(e).
See also United States v. Whiting Pools, Inc., 462 U.S. 198, 206
n.12 (1983).
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alleging a fraudulent transfer or seek recovery under state law.
He did not seek damages from the McCabes.
No statute gives a jury trial right in § 542 turnover
actions by the trustee in the district court,7 and the Bankruptcy
Code is silent on the issue.8 See 28 U.S.C. §§ 157(e), 1411; see
also 1 Collier on Bankruptcy ¶ 3.08[1][a] (A.N. Resnick & H.J.
Sommer eds., 15th rev. ed. 2009). As a result, McCabe makes a
purely constitutional claim under the Seventh Amendment to a jury
trial. Three jury trial right decisions from the Supreme Court set
the general framework -- Granfinanciera, S.A. v. Nordberg, 492 U.S.
33 (1989), held that a defendant in an action in bankruptcy under
§ 548 and § 550 to recover a fraudulent transfer has a Seventh
Amendment right to a jury trial, and two later jury trial right
cases, not in the bankruptcy area: Feltner v. Columbia Pictures
Television, Inc., 523 U.S. 340 (1998), a copyright case, and
Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996), a
patent case -- which we describe later.
7
Our question does not concern whether there is a jury
trial right in the bankruptcy court. We note that 28 U.S.C.
§ 157(e) governs the procedure by which a bankruptcy court may
conduct a jury trial if a party is entitled to a jury trial.
8
Before engaging in the Seventh Amendment analysis, the
court must determine whether it is fairly possible there is a
construction of the statute by which the constitutional question
may be avoided. Feltner v. Columbia Pictures Television, Inc., 523
U.S. 340, 345 (1998); see also Visible Sys. Corp. v. Unisys Corp.,
551 F.3d at 65, 78 (1st Cir. 2008).
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First, we look to the Supreme Court's several decisions
which address the question of a jury trial right in bankruptcy
actions. Those decisions shed light on our issue. Granfinanciera
held that the Seventh Amendment encompasses "suits in which legal
rights were to be ascertained and determined, in contradistinction
to those where equitable rights alone were recognized, and
equitable remedies were administered." Granfinanciera, 492 U.S. at
41 (quoting Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 447 (1830))
(internal quotation marks omitted). The Court concluded that
actions to set aside fraudulent conveyances and preferences have
clear analogues in actions brought at law in England in the late
18th century, id. at 43, and involve remedies that are purely legal
in nature, id. at 48-49 & n.7.9
Granfinanciera, in turn, distinguished Katchen v. Landy,
382 U.S. 323 (1966), as involving powers equitable in nature. See
Granfinanciera, 492 U.S. at 57 (stating that Katchen "turned . . .
9
Similarly, in Schoenthal v. Irving Trust Co., 287 U.S. 92
(1932), the Court characterized an action to recover a preference
as legal, not equitable. The court noted that in England,
litigants brought common-law actions to recover preferential
payments. Id. at 94. The court also said such actions are not
part of the proceedings in bankruptcy "but concern controversies
arising out of it," and could be brought in state courts. Id. at
94-95; see also Granfinanciera, 492 U.S. at 57-58 & n.13 (noting
that, under Schoenthal, a jury trial is required in a preference
action if the defendant presents no claim in the bankruptcy
proceeding, but that the issue is an equitable one if it arises as
part of the claims allowance process). Construing the remedy
sought, the Court stated the case did not call for an accounting or
other equitable relief. Schoenthal, 287 U.S. at 95.
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on the bankruptcy court's having 'actual or constructive
possession' of the bankruptcy estate, and its power and obligation
to consider objections by the trustee in deciding whether to allow
claims against the estate" rather than on the fact that bankruptcy
courts are courts of equity because of their summary
jurisdiction).10 Because, in Katchen, the creditor had filed a
claim against the estate, thereby submitting to the bankruptcy
court's equitable jurisdiction over the claims allowance process,
the creditor did not have a jury trial right. See id. at 58 n.13.
In other cases, the court held no jury trial right exists
for actions which were part of the broad equitable jurisdiction of
the bankruptcy courts. In re Wood, 210 U.S. 246 (1908), holds that
no jury trial right exists in actions for disgorgement of excessive
fees by counsel because such a claim was within "a special
jurisdiction in a bankruptcy proceeding," to allow the court to
restore and administer the estate. Id. at 258.
10
The Court had said, in Taubel-Scott-Kitzmiller Co. v.
Fox, 264 U.S. 426 (1924), that constructive possession existed, and
the bankruptcy court could exercise summary jurisdiction, where:
[T]he property was in the physical possession of the
debtor at the time of the filing of the petition in
bankruptcy, but was not delivered by him to the trustee;
where the property was delivered to the trustee, but was
there after wrongfully withdrawn from his custody; where
the property is in the hands of the bankrupt's agent or
bailee; where the property is held by some other person
who makes no claim to it; and where the property is held
by one who makes a claim, but the claim is colorable
only.
Id. at 432-33 (footnotes omitted), cited in Katchen, 382 U.S. at
327.
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No Supreme Court case directly answers the question of a
jury trial right under § 542, so we turn to the guideposts analysis
dictated by Granfinanciera, Feltner, and Markman, which establish
a three-part test.
First, the court must "compare the statutory action to
18th-century actions brought in the courts of England prior to the
merger of the courts of law and equity." Granfinanciera, 492 U.S.
at 42 (quoting Tull v. United States, 481 U.S. 412, 417 (1987)).
The Seventh Amendment "applies to actions brought to enforce
statutory rights that are analogous to common-law causes of action
ordinarily decided in English law courts in the late 18th century."
Id.
Second, the court must "examine the remedy sought and
determine whether it is legal or equitable in nature." Id.
(quoting Tull, 481 U.S. at 417-18) (internal quotation mark
omitted). This stage of the analysis is more important than the
first stage. Id.
Third, if the first two factors indicate a party has a
jury trial right, the court "must decide whether Congress may
assign and has assigned resolution of the relevant claim to a
non-Article III adjudicative body that does not use a jury as
factfinder." Id.; see also id. at 42 n.4 (noting that the question
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turns on whether the legal claim at issue is a private or a public
right).11
Further, the outcome of this analysis is not governed by
whether the particular bankruptcy issue is a core proceeding, as a
turnover is, 28 U.S.C. § 157(b)(2)(E), or not. See Granfinanciera,
492 U.S. at 36, 41-42.
The turnover claim made in this case by the trustee under
§ 542(a) is for most of the insurance proceeds paid post-petition
to the debtor-in-possession for loss on property, which concededly
belongs to the estate. There is no real question that the
insurance proceeds were the property of the estate; the turnover
issue is whether the debtor-in-possession properly spent down those
proceeds in the ordinary course of business under § 363.
We start, then, with history to see if there was a
precise action for "turnover" sounding in common law in England
before the enactment of the Seventh Amendment, or whether there
was, if not precisely a "turnover" action, an analogous action at
law. We conclude that there was no common law turnover action and
to the extent any analogy may be made (for there was no common law
11
Since Granfinanciera was decided, Congress added 28
U.S.C. § 157(e) to the Bankruptcy Code, which authorizes bankruptcy
courts to conduct jury trials in cases where a jury trial right
exists, answering many of the questions the third prong of
Granfinanciera addresses. See 1 Collier on Bankruptcy, supra,
¶ 3.08[3], at 3-89 to -91; see also, e.g., Pereira v. Farace, 413
F.3d 330, 337 (2d Cir. 2005) (applying Granfinanciera as a two-step
test to the analysis of whether a jury right attaches to a
trustee's claim for breach of fiduciary duty).
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equivalent) the action was equitable in nature. We also conclude
that the nature of the remedy is equitable. Because we decide the
issue under the first two parts of the test, we do not reach the
third part.
1. History
As noted by one bankruptcy court in 1990:
In 18th-century England bankruptcy was
essentially a creditor's remedy involving the
equitable distribution of the bankrupt's
estate. Today, the bankruptcy estate is
distributed in accordance with the scheme of
priorities set out in the Bankruptcy Code, and
the nature of bankruptcy is equity.
Comm. of Unsecured Creditors of N.C. Hosp. Ass'n Trust Fund v.
Mem'l Mission Med. Ctr., Inc. (In re N.C. Hosp. Ass'n Trust Fund),
112 B.R. 759, 762 (Bankr. E.D.N.C. 1990) (citation omitted).12 This
observation provides background but does not itself answer the jury
right question under § 542.
The trustee's gathering of the "property" of the estate,
as both that property and the exclusions have been defined by
Congress, is inherently an equitable task.13
12
The first bankruptcy statute in England was enacted in
1543, and by 1624 there were four statutes. W.J. Jones, The
Foundations of English Bankruptcy: Statutes and Commissions in the
Early Modern Period, Transactions of the Am. Phil. Soc'y, July
1979, at 8, 11.
13
In Cuevas-Segarra v. Contreras, 134 F.3d 458 (1st Cir.
1998) (per curiam), this court upheld a bankruptcy court's order
requiring the disgorgement of attorneys fees under 11 U.S.C.
§§ 105(a), 542, and 549. The Cuevas-Segarra court based its
holding on § 105(a) alone, but described the court's powers under
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Earlier decisions of this court and others so hold. The
inherent power in the court to order turnover predated Chapter X of
the Bankruptcy Act of 1898 (as amended in 1938), and was present in
the earlier reorganization statutes such as § 77B. See United
States v. Whiting Pools, Inc., 674 F.2d 144, 150-52 (2d Cir. 1982)
(Friendly, J.), aff'd 462 U.S. 198 (1983) (citing Cont'l Ill. Nat'l
Bank & Trust Co. of Chi. v. Chi., R.I. & P. Ry. Co., 294 U.S. 648,
675-76 (1935)). The Supreme Court, in Continental Illinois
National Bank & Trust Co., described the bankruptcy court's powers
generally under the early reorganization statutes as equitable.
294 U.S. at 676 ("[C]ourts of bankruptcy are invested with such
authority in equity as will enable them to exercise original
jurisdiction in bankruptcy proceedings, including the power to make
such orders, issue such process, and enter such judgments in
addition to those specifically provided for as may be necessary for
the enforcement of the provisions of this act." (internal quotation
marks omitted)).
In the 1800s, the Court in Ex parte Christy, 44 U.S. (3
How.) 292 (1845), construed what was effectively a turnover action
by an assignee in bankruptcy, proceeding under the Bankruptcy Act
of 1841.14 The assignee sued to recover land that had been in the
all three sections as equitable ones. Id. at 459-60.
14
Prior to the Bankruptcy Act of 1898, the powers of
trustees and debtors-in-possession were exercised by assignees.
Bardes v. First Nat'l Bank of Hawarden, Iowa, 178 U.S. 524, 526
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debtor's possession when he filed for bankruptcy but that had
subsequently been sold by a bank, which held a mortgage on the
land. The bank objected that the district court lacked
jurisdiction to adjudicate the claim. See id. at 309-10. The
Court held that Congress had validly granted the court jurisdiction
over such claims, to be exercised in the nature of summary
proceedings in equity. Id. at 31-12.
Under the Act of 1898 (as amended in 1938), § 2a(21), the
court could authorize receivers to take possession of the property.
See 5 Collier on Bankruptcy, supra, ¶ 542.LH, at 542-25. In 1881,
the Court in Barton v. Barbour, 104 U.S. 126, 134 (1881), discussed
the courts' power to appoint receivers. The Court held that a
receiver appointed to operate the business of an insolvent railroad
corporation could not be sued without the permission of the court
that appointed him. Id. at 127. It based this holding on the fact
that the power of the appointing court to manage the estate of the
insolvent business and determine the distribution of its assets is
an equitable one. Id. at 136. This power, the Court held,
included the power to appoint the receiver and to require that the
court's consent be obtained before the receiver could be sued. Id.
In Pepper v. Litton, 308 U.S. 295 (1939), the Court
discussed the statutory jurisdiction of the bankruptcy courts, and
(1900) ("By the [Bankruptcy Act of 1898] trustees in bankruptcy
. . . take the place and are vested with the powers of assignees in
bankruptcy under former bankrupt acts.").
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noted that "for many purposes 'courts of bankruptcy are essentially
courts of equity, and their proceedings inherently proceedings in
equity.'" Id. at 304 (quoting Local Loan Co. v. Hunt, 292 U.S.
234, 240 (1934)). The Court noted that Congress had given
bankruptcy courts a broad range of powers, and said that the courts
had "exercised these equitable powers in passing on a wide range of
problems arising out of the administration of bankrupt estates."
Id. Among the situations the Court listed was the recovery of
assets of the estate. Id. at 304 & n.11.15
In 1948, in Maggio v. Zeitz, 333 U.S. 56 (1948), the
Court discussed in dicta the nature of turnover orders in deciding
a case involving constraints on the use of civil contempt powers
for failure to comply with a turnover order. The Court noted that:
15
In In re Lilyknit Silk Underwear Co., 73 F.2d 52 (2d Cir.
1934), cited in Pepper, the Second Circuit had held that a trustee
could recover funds that had been paid out as dividends under a
reorganization plan that was later reversed on appeal. The court
acknowledged the "duty of the trustee to gather in all assets
belonging to the estate," id. at 53, and held that while there was
no statutory provision authorizing the trustee's actions, they were
valid, id. at 53-54. The court said:
One of the basic principles which permeates the act is
the duty of the trustee to administer all of the
bankrupt's estate, which is not exempt, in accordance
with the bankruptcy law. In the exercise of a duty
imposed by the bankruptcy law, the trustee may invoke
such general equitable principles as are applicable.
Id. at 54; see also Barton, 104 U.S. at 134 ("[I]n cases of
bankruptcy, many incidental questions arise in the course of
administering the bankrupt estate, which would ordinarily be pure
cases at law, and in respect of their facts triable by jury, but,
as belonging to the bankruptcy proceedings, they become cases over
which the bankruptcy court, which acts as a court of equity,
exercises exclusive control.").
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The turnover procedure is one not expressly
created or regulated by the Bankruptcy Act. It
is a judicial innovation by which the court
seeks efficiently and expeditiously to
accomplish ends prescribed by the statute,
which, however, left the means largely to
judicial ingenuity.
Id. at 61. The Court stated, "this procedure is one primarily to
get at property rather than to get at a debtor," and noted the
theoretical basis for the remedy had a rough analogy to actions to
recover possession, but the modern remedy did not follow ancient
procedures. Id. at 63. The Court characterized turnover as
"essentially a proceeding for restitution." Id. Restitution is an
equitable remedy where, as here, the action seeks the recovery of
particularly identified property or funds. See Sereboff v. Mid
Atl. Med. Servs., Inc., 547 U.S. 356, 363 (2006); see also Great-
West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213-14 & n.2
(2002) (noting that the remedy of an accounting of profits is
equitable restitution even if the plaintiff cannot identify
specific property in the defendant's possession). While some
actions which may appear to be in restitution actually sound in
law, see, e.g., Todisco v. Verizon Commc'ns, Inc., 497 F.3d 95, 99-
100 (1st Cir. 2007), these circumstances are not present here.
In Bank of Marin v. England, 385 U.S. 99 (1966), the
Supreme Court held that the exercise of the court's power to compel
turnover was subject to equitable constraints, including when there
was a lack of notice. It held that funds paid out on a check drawn
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before bankruptcy but not presented for payment until after the
filing were not part of the bankruptcy estate and not subject to
turnover. The Court noted that "[t]here is an overriding
consideration that equitable principles govern the exercise of
bankruptcy jurisdiction." Id. at 103.
Even before § 542(a) was enacted as part of the 1978
Bankruptcy Reform Act, this court had held that a bankruptcy court
had the power to order turnover to reorganization trustees of the
debtor's merchandise inventory held in the possession of a
creditor, RFC, as a pledge under the debtor's loan agreement. See
Reconstruction Fin. Corp. v. Kaplan, 185 F.2d 791 (1st Cir. 1950)
(Magruder, J.). This court noted that reorganization cases under
Chapter X of the Bankruptcy Act involved broad powers in the court
appropriate to accomplish the task of rehabilitation and
reorganization of the debtor. Id. at 794 ("In contrast with the
provisions of law relating to straight bankruptcy, Chapter X, like
its earlier counterpart [§ 77B], contemplates the rehabilitation of
financially ailing business corporations under plans of
reorganization which may deal with claims of creditors, secured as
well as unsecured, and embrace all of the debtor's property,
however encumbered with outstanding security interests. In keeping
with this objective, appropriate broad powers are conferred upon
the reorganization court."). In particular, the turnover process
was supported by section 115 of the Act, which provided that the
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court would have all the powers "which a court . . . would have if
it had appointed a receiver in equity of the property of the
debtor." Id. (quoting Chapter X of the Bankruptcy Act).
The enactment of § 542 as part of the 1978 Bankruptcy Act
did not alter the essentially equitable nature of those powers to
collect the assets of the estate. That history is set forth in
Judge Friendly's decision in Whiting Pools. It shows that § 542
was meant to expand the turnover power of the bankruptcy courts in
at least two ways: to reach property in the hands of secured
creditors and to expand the turnover power beyond reorganization to
liquidation cases (as recommended by the National Bankruptcy
Conference). Whiting Pools, 674 F.2d at 153-55. Secured creditors
were given other forms of protection. Whiting Pools, 462 U.S. at
203-04; see also id. at 207 ("The Bankruptcy Code provides secured
creditors various rights, including the right to adequate
protection, and these rights replace the protection afforded by
possession.").
The McCabes' argument, in response, attempts to draw an
analogy between a § 542 turnover action and the common law cause of
action for trover or conversion, which would have been tried to a
jury. This argument misconstrues the nature of a § 542 turnover
action. An action for conversion (formerly known as trover) was an
action for a forced judicial sale, which allowed recovery in the
nature of damages. See W.P. Keeton et al., Prosser and Keeton on
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the Law of Torts § 15, at 89-90 (5th ed. 1984). Such an action was
tried before a jury in the English courts and did not involve
equitable remedies such as an accounting. See Granfinanciera, 492
U.S. at 44 (citing 1 G. Glenn, Fraudulent Conveyances and
Preferences § 98, at 183-184 (rev. ed. 1940)). Beyond that, the
Supreme Court has explicitly rejected the McCabes' analogy to
trover, saying the theoretical basis for a turnover remedy is not
found in "actions in trespass or trover to recover damages for the
withholding or for the value of the property." Maggio, 333 U.S. at
63.
A turnover action is not an action to recover damages for
the taking of estate property but an action to recover possession
of property belonging to the estate at the time of the filing. See
5 Collier on Bankruptcy, supra, ¶ 542.02. It invokes the court's
most basic equitable powers to gather and manage property of the
estate.
The McCabes have not proposed any other possible common
law analogues for a turnover action. They were not entitled to a
jury trial under the first step of the three-pronged analysis.
2. Remedies
In addition to the historically equitable nature of the
turnover powers, the nature of the remedies provided also supports
the conclusion that there is no jury trial right.
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The statutory cause of action expressly calls for an
accounting remedy, see 11 U.S.C. § 542(a) (stating that an entity
holding property of the estate "shall . . . account for such
property or the value of such property"), which the Court has
recognized is an inherently equitable remedy, see Granfinanciera,
492 U.S. at 49 n.7 (describing an accounting as a "specifically
equitable form of relief"); see also Visible Sys. Corp., 551 F.3d
at 78. The fact that the statutory action incorporates an
accounting remedy is enough to establish that the plaintiff would
not, at common law, have had an adequate legal remedy and would
have proceeded in equity. See Granfinanciera, 492 U.S. at 47-48.
The Court's decision in Maggio, in discussing turnover,
refers to the remedy of restitution. Maggio, 333 U.S. at 63. In
Tull v. United States, 481 U.S. 412 (1987), the Court distinguished
between actions involving remedies, such as restitution or
disgorgement of improper profits, which are "limited to 'restoring
the status quo and ordering the return of that which rightfully
belongs'" to the plaintiff, id. at 424 (quoting Porter v. Warner
Holding Co., 328 U.S. 395, 402 (1946)), from those intended to
punish the defendant, id. at 423-24. The former are equitable
claims, for which a jury right does not attach, while the latter
are legal. Id. at 422; see also Feltner, 523 U.S. at 352 (noting
that actions for remedial goals such as compensation and punishment
are "traditionally associated with legal relief").
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Further, a court issuing a turnover order has the power
to order injunctive relief to allow the trustee to gather the
property of the estate. See Reconstruction Fin. Corp., 185 F.2d at
795 (analogizing a turnover order under the statutory precursor to
§ 542 to an injunction preventing secured creditors from disposing
of assets they had seized (citing Cont'l Ill. Nat'l Bank & Trust
Co., 294 U.S. at 675)). Such relief is inherently equitable
The McCabes argue that, because the district court's
judgment was framed in monetary terms, the remedy was legal, not
equitable. That the turnover remedy sought was in the form of
monetary relief is not determinative of the jury trial issue. See
Chauffeurs, Teamsters, and Helpers, Local No. 391 v. Terry, 494
U.S. 558, 570 (1990) ("This Court has not . . . held that 'any
award of monetary relief must necessarily be 'legal' relief.'"
(emphasis in original) (quoting Curtis v. Loether, 415 U.S. 189,
196 (1974))). A monetary award may be an equitable remedy when the
award is "restitutionary, such as in 'action[s] for disgorgement of
improper profits,'" id. (alteration in original) (quoting Tull, 481
U.S. at 424), or when it is "incidental to or intertwined with
injunctive relief," id. at 571 (quoting Tull, 481 U.S. at 424)
(internal quotation marks omitted). The remedy provided also
establishes there is no right to a jury trial.16
16
We do not reach Braunstein's argument that any jury trial
rights were waived because the McCabes should be treated as
creditors who filed proof of claims. See Langenkamp v. Culp, 498
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Finally, our conclusion that there is no jury trial right
in a turnover action under § 542 is supported by analogy to court
decisions under § 549 of the Bankruptcy Code, under which a trustee
may avoid certain post-petition transfers. Courts have held that
§ 549 actions are equitable rather than legal and do not include a
jury trial right.17
B. The Amount Awarded in the Turnover Order
The insurance proceeds for the damage to the Esperaunce
were, aside from the houseboat, essentially the sole assets of the
estate. The turnover order sought was for the insurance proceeds
of $95,230.95, less $17,658.26 for living expenses, or $77,572.69.
U.S. 42, 44 (1990). The argument is based on the fact that McCabe
himself is a 1% shareholder of Holdings and Holdings filed a proof
of claim. Braunstein does not separately address Karren McCabe,
who did not file a proof of claim.
We also need not reach Braunstein's argument that even if
the district court erred in holding the McCabes were not entitled
to a jury trial, any error was harmless. See Segrets, Inc. v.
Gillman Knitwear Co., 207 F.3d 56, 64 (1st Cir. 2000) ("The denial
of a jury trial is harmless error if the evidence meets the
standard for a directed verdict.").
17
In In re M & L Business Machine Co. v. Youth Benefits
Unlimited, Inc. (In re M & L Business Machine Co.), 59 F.3d 1078
(10th Cir. 1995), for example, the Tenth Circuit held that
Granfinanciera did not require a jury trial in a trustee's action
to recover an unauthorized post-petition transfer of funds to the
defendant company. The court held that § 549 is "a provision
clearly designed to protect the bankruptcy estate following its
inception," that establishes "a procedure which is equitable in
nature." Id. at 1082. The court held that there was no underlying
legal claim in the case and the jury right did not attach. See id.
Like § 549 actions, § 542 turnover actions are designed to protect
the property of the estate and establish a procedure by which the
court may exercise its equitable powers to gather the property of
the estate and administer claims.
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The insurance proceeds were commingled into the McCabes' personal
account. The court awarded only $30,262.69, accepting McCabe's
argument that $47,310 should not be turned over.
The McCabes argued that the $47,310 costs incurred in
towing the Esperaunce and dismantling it for repairs after the wake
damage were in the ordinary course of business. See 11 U.S.C.
§ 363(b)(1); In re Roth Am., Inc., 975 F.2d 949, 952 (3d Cir.
1992).18 The McCabes did not inquire or seek permission from the
court before authorizing the expenditures on the repairs, nor did
they give notice under § 363(b). The district court held that the
McCabes had ordered the repairs in good faith and that they were
made in the ordinary course of business. It did so by analogizing
Holdings' business to companies formed to own and operate
residential real estate.
Neither party has briefed the standard of appellate
review of the district court's decision that the expenditures were
in the ordinary course of business. The burden of showing the
expenditures were in the ordinary course of business falls on the
McCabes. See Aalfs v. Wirum (In re Straightline Invs., Inc.), 525
F.3d 870, 881 (9th Cir. 2008). The amount of the expenditures is
not in dispute nor are there disputed factual issues about the
18
The repairs were to accomplish the dismantling of the
structural aspects of the boat and their replacement and redesign
to address overall water damage. The wake damage did not render
the houseboat uninhabitable or in danger of sinking. Rather,
because of leakage, there was danger of rot in the superstructure.
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reasons for the expenditures. The issue before us is a mixed
question of fact and law, invoking a sliding standard of review,
tending more toward de novo review at the law end. The district
court itself characterized this turnover question as a mixed
question of fact and law. The question in this case does not
involve the district court's fact-finding function so much as it
involves whether the court correctly applied the legal standards to
the facts. We conclude it did not, whether we apply de novo review
or clear error review.19
Section 363 of the Bankruptcy Code states that the
trustee, "may use, sell, or lease" property of the estate without
notice and a hearing if doing so is "in the ordinary course of
business." 11 U.S.C. § 363(b)(1), (c)(1). Section 1107(a) grants
debtors-in-possession nearly all of the rights, powers, and duties
of a trustee. 11 U.S.C. § 1107(a). These include the trustee's
fiduciary duties, see generally Commodity Futures Trading Comm'n v.
Weintraub, 471 U.S. 343, 355-56 (1985), and the statutory
requirement to "be accountable for all property received," 11
U.S.C. § 704(a)(2).
19
There is an unusual wrinkle. At the time of the
expenditures the petition was for reorganization; by the time of
the turnover claim, the petition had been converted to a Chapter 7
liquidation. Giving McCabe the benefit of the doubt that the case
was properly a reorganization case, we consider the expenditures in
the context of a reorganization.
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In determining whether a transaction satisfies the
ordinary course of business test, courts have applied two tests,
which reflect the different points of view of the debtor-in-
possession or trustee and of the creditors. The first is a
horizontal dimension test; the second is a vertical dimension, or
"creditor expectation," test. Aalfs, 525 F.3d at 879; see also In
re Roth Am., 975 F.2d at 953-53; 3 Collier on Bankruptcy, supra,
¶ 363.03[1]. The First Circuit has little law thus far on this
issue; we think the tests are useful. The purpose of both tests is
to determine whether a transaction is so out of the ordinary as to
entitle creditors to notice and a hearing beforehand. See
Burlington N. R.R. Co. v. Dant & Russell, Inc. (In re Dant &
Russell, Inc.), 853 F.2d 700, 705 (9th Cir. 1988) ("[S]ome
transactions either by their size, nature or both are not within
the day-to-day operations of a business and are therefore
extraordinary." (quoting Johnston v. First St. Cos. (In re
Waterfront Cos., Inc.), 56 B.R. 31, 35 (Bankr. D. Minn. 1985)
(internal quotation marks omitted))). The expenditures on the
Esperaunce meet neither test; indeed, Holdings had no business at
all and this undercuts the premise that it had or could have had
ordinary operating expenses.
1. Horizontal Test
Under the horizontal test, courts ask "whether, from an
industry-wide perspective, the transaction is of the sort commonly
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undertaken by companies in that industry." In re Roth Am., 975
F.2d at 953. This analysis is aimed at determining whether the
challenged transaction is abnormal or unusual for the industry.
See 3 Collier on Bankruptcy, supra, ¶ 363.03[1], at 363-25; see
also Aalfs, 525 F.3d at 881 ("The purpose of the horizontal test is
'to assure that neither the debtor nor the creditor [did] anything
abnormal to gain an advantage over other creditors." (alteration in
original) (quoting Burlington N. R.R. Co., 853 F.2d at 704)).
First, we disagree with the district court that the
analogy for Holdings is to a company which is the commercial owner
of residential spaces. The analogy fails. Commercial owners seek
to obtain a profit or benefit from their ownership of property
which is occupied by others. Holdings' sole residential property
was the houseboat, from which it received no income. The purported
"rental" payment was no more than a monthly credit to McCabe
against his contribution to the purchase price. McCabe admitted on
the witness stand that Holdings had no business operations and that
Holdings existed to maintain the houseboat so that he and his wife
could live on it. He testified that he had no expectation that the
estate's creditors would be paid from Holdings' earnings from its
operations. Instead, McCabe said, he intended to pay creditors
from his own earnings.
The houseboat was not owned or operated in a way common
to the commercial real estate industry. Nor were these
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expenditures ordinary ones for "repairs." This was a major
dismantling and reconstruction, designed not only to repair but to
improve.
2. Vertical Test
Under the vertical test, courts analyze the challenged
transaction from a hypothetical creditor's point of view and ask
whether it "subjects a creditor to economic risks of a nature
different from those he accepted when he decided to extend credit."
Aalfs, 525 F.3d at 879 (quoting Burlington N. R.R. Co., 853 F.2d at
705) (internal quotation mark omitted). The test is intended to
"measure[] the types of risks that creditors impliedly agreed to
when they extended credit to the debtor" and to determine whether
the transaction falls within that range. 3 Collier on Bankruptcy,
supra, ¶ 363.03[1], at 363-26. "The primary focus . . . is on the
debtor's pre-petition business practices and conduct," though a
court must be aware of changing circumstances. In re Roth Am., 975
F.2d at 953.
The transaction fails the creditor expectation test. The
district court found that Holdings' creditors were on notice that
the company might enter into this transaction because its operating
agreement allowed it to contract with third parties in order to
maintain the Esperaunce and because of the natural desire to repair
property that has been damaged. The question the creditor
expectation test asks is not whether a transaction is unexpected,
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but whether the transaction is ordinary within the context of the
debtor/creditor relationship. See Aalfs, 525 F.3d at 880; see also
Burlington N. R.R. Co., 853 F.2d at 705. The record discloses no
pre-petition activity by Holdings that is comparable to the
refurbishment of the Esperaunce. See Aalfs, 525 F.3d at 879-80
(noting that major transactions may fall outside the ordinary
course of business if the debtor had not entered into comparable
pre-petition transactions); see also In re Roth Am., 975 F.2d at
954.
Moreover, the settlement funds and the Esperaunce were
major assets of the debtor. The transaction resulted in the
depletion of one asset, the settlement, in a way that decreased the
value of the other, the Esperaunce. Cf. Holta v. Zerbetz (In re
Anchorage Nautical Tours, Inc.), 145 B.R. 637, 642 (B.A.P. 9th Cir.
1992) (holding that debtors' surrender of a ship was not within the
ordinary course of their business because the vessel was a major
asset of the debtors). This was not an expenditure within
Holdings' day-to-day operations; it was a major transaction and
Holdings' creditors were entitled to notice and a hearing.
In a murky argument, the McCabes appear to be asserting
that because McCabe commingled the insurance proceeds with his
personal assets, he should not be obligated to turnover to the
trustee the additional sum of $47,310, but only a smaller sum, even
if the expenditures were not in the ordinary course of business.
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The smaller sum, they argue, results from application of the lowest
intermediate balance test, described in Connecticut General Life
Insurance Co. v. Universal Insurance Co., supra.
That test applies when a debtor in possession "is in
possession of property impressed by a trust -- express or
constructive" and "the bankrupt estate holds the property subject
to the outstanding interest of the beneficiaries." 838 F.2d at
618. No such trust is involved here and the test has no
applicability.
C. The Fourth-Party Complaint Against Attorney Ziady
The McCabes' final challenge is to the district court's
orders granting attorney Ziady's motion to dismiss the McCabes'
fourth-party complaint for negligent misrepresentation and denying
the McCabes' motion for reconsideration of that order and for leave
to amend to substitute a claim for detrimental reliance.
We review the court's dismissal de novo, see S.B.T.
Holdings, LLC v. Town of Westminster, 547 F.3d 28, 30, 33 (1st Cir.
2008), and the denial of the motion for leave to amend for abuse of
discretion, ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 55-
56 (1st Cir. 2008).
1. Negligent Misrepresentation
In general, to establish the elements of a negligent
misrepresentation claim under Massachusetts law, a party must show
that the defendant "(1) in the course of his business, (2) supplied
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false information for the guidance of others (3) in their business
transactions, (4) causing and resulting in pecuniary loss to those
others (5) by their justifiable reliance on the information, and
that he (6) failed to exercise reasonable care or competence in
obtaining or communicating the information." Gossels v. Fleet
Nat'l Bank, 902 N.E.2d 370, 371-72 (Mass. 2009).
The district court based its dismissal of the fourth-
party complaint on a finding that attorney Ziady owed no legal duty
to the McCabes. The McCabes argue this was error because their
complaint stated all of the Gossels elements, which do not list
"duty" among them.
The McCabes are wrong to apply the general law of
negligent misrepresentation involving non-attorney defendants, who
do not owe legal duties to others, to an attorney defendant. The
McCabes' claim is foreclosed by Massachusetts law on negligent
misrepresentation claims against attorneys, under Miller v. Mooney,
725 N.E.2d 545 (Mass. 2000). While it is true that under state law
"[a]n attorney may owe a duty to a non-client 'who the attorney
knows will rely on the services rendered,'" id. at 550 (quoting
Robertson v. Gaston Snow & Ely Bartlett, 536 N.E.2d 344, 349-50
(Mass. 1989)), that duty can arise only in certain circumstances
not present here. Under state law, this duty will not be imposed
if "such an independent duty would potentially conflict with the
duty the attorney owes to his or her client." One Nat'l Bank v.
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Antonellis, 80 F.3d 606, 609 (1st Cir. 1996) (quoting Lamare v.
Basbanes, 636 N.E.2d 218, 276 (Mass. 1994) (internal quotation mark
omitted)). The McCabes are not merely non-clients, they are
adversaries of Ziady's client. The positions of the trustee, for
whom attorney Ziady worked, were in direct and actual conflict with
those of the McCabes, who opposed the turnover order the trustee
sought.
Adoption of the McCabes' approach, that the trustee's
counsel owed them duties, would conflict with attorney Ziady's duty
to the estate as counsel to the trustee. It would also run
contrary to the efficient administration of the estate under the
federal bankruptcy laws. The McCabes could have easily obtained
notice for themselves of the sale, and so it is simply not
reasonable to think they would rely on Ziady for notice. Under
Fed. R. Bankr. Proc. 9010, a party may appear in the bankruptcy
case and, through its attorney's filing of a notice of appearance,
receive notices from the court. The Bankruptcy Court's local rules
in Massachusetts provide that a party who wishes to receive copies
of all notices and pleadings, need only have their attorney "file
an appearance with a specific request to be so served" and serve a
copy of the request on the trustee or debtor-in-possession and his
or her counsel. Bankr. D. Mass. R. 9010-3(c). The McCabes failed
to do so.
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2. Detrimental Reliance
The McCabes also argue that the district court abused its
discretion in denying their motion to amend the fourth-party
complaint to add a claim for detrimental reliance.20
This court defers to the district court's denial of a
motion for leave to amend if any adequate reason for the decision
is apparent in the record. ACA Fin. Guar. Corp., 512 F.3d at 55.
Here the record shows that the McCabes' proposed amendment -- to
assert a claim against attorney Ziady for promissory estoppel --
would have been futile.
Under Massachusetts law, a plaintiff claiming promissory
estoppel must show that the defendant made a promise that he or she
intended would be a legally binding commitment. See R.I. Hosp.
Trust Nat'l Bank v. Varadian, 647 N.E.2d 1174, 1178-79 (Mass. 1995)
("[A] promise made with an understood intention that it is not to
be legally binding, but only expressive of a present intention, is
not a contract." (quoting Kuzmeskus v. Pickup Motor Co., 115
N.E.2d 461, 463 (Mass. 1953)) (internal quotation marks omitted)).
There is nothing in the record to show that attorney Ziady intended
the email legally to bind him to provide notice to the McCabes.
See also id. at 1179 (noting a related but independent ground for
20
The McCabes also argue that the court abused its
discretion in denying their motion for reconsideration because the
denial was also based on attorney Ziady's owing no legal duty to
the McCabes. The court's ruling was correct.
-37-
denying a similar claim -- because there was no promise in the
contractual sense, any reliance by the plaintiffs, who were
experienced businessmen, would have been unreasonable as a matter
of law).
III.
The judgment of the district court finding that the
McCabes' expenditure of $47,310.00 was made in the ordinary course
of business and ordering the McCabes to turn over no more than
$30,262.69 is reversed, and the case is remanded for entry of an
order that the turnover amount is $77,572.69, with pre-judgment
interest in a sum to be determined by the district court. Fed. R.
App. P. 37(b). The orders of the district court denying the
McCabes' jury trial demand, dismissing the fourth-party complaint
against attorney Ziady, and denying the McCabes' motion for
reconsideration and for leave to amend are affirmed. Costs are
awarded to Joseph Braunstein, Chapter 7 Trustee.
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