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In re Nevins Brothers Auction Co.

December 29, 1999

LINDA MCMAKIN, TRUSTEE, APPELLANT,
V.
PINE BUSH EQUIPMENT CO., INC., APPELLEE.
IN RE NEVINS BROTHERS AUCTION CO., INC., DEBTOR.



BANKRUPTCY CASE NO. 97-18658 (GMB)

The opinion of the court was delivered by: Orlofsky, District Judge:

FOR PUBLICATION

HON. STEPHEN M. ORLOFSKY

OPINION

Linda McMackin ("Trustee"), Trustee of the bankruptcy estate of Nevins Brothers Auction Co., Inc. ("Debtor"), appeals from the judgment entered by Bankruptcy Judge Gloria M. Burns in the United States Bankruptcy Court for the District of New Jersey ordering the Trustee to turn over the sum of $34,871.66 to Pine Bush Equipment Co., Inc. ("Pine Bush"), free and clear of all liens and equitable and legal interests. See In re Nevins Bros. Auction Co., Inc., No. 97-18658 (Bankr. D. N.J. filed Jan. 5, 1999). On appeal, the Trustee contends that the Bankruptcy Court erred in determining that the $34,871.66 was held by the Debtor in a resulting trust for the benefit of Pine Bush. The issue presented on appeal, one of first impression in this Circuit, is whether, following an auction sale, the auctioneer remains an agent who is liable to his principal for the proceeds of the sale, or, conversely, becomes a debtor, who is indebted to the former principal for the amount of the proceeds of the sale, minus a commission. Because this inquiry is intensely fact-specific and dependent upon the facts and circumstances surrounding the agreement and the intent of the parties and because I find the factual record before the Bankruptcy Court to be insufficiently developed, I shall vacate the Bankruptcy Court's Order of January 5, 1999, and remand this case to the Bankruptcy Court with instructions to make the requisite findings of fact in accordance with the legal principles described below.

I. BACKGROUND

The parties allege that the Debtor, an auctioneer of construction equipment, entered into an oral contract with Pine Bush for the sale of three items of heavy equipment at a public auction. See Trustee Designation of the Record ("DOR") doc. 107 (Phil Stanbro, Pine Bush Credit Manager, Cert.) at ¶ 4; DOR doc. 140 (attached Nevins Dep.) at 74. Although the issue was not discussed by the Bankruptcy Court, the terms of the alleged contract are disputed. Specifically, Pine Bush alleges that the Debtor was to hold the proceeds of the equipment in escrow, see Stanbro Cert. at ¶ 4, while Joseph Nevins, President of the Debtor, testified in his deposition that the arrangements with Pine Bush, which was a regular customer of the Debtor, varied and "went back and forth." See Nevins Dep. at 74. *fn1

The parties allege that on July 26, 1997, buyer Tony DePaul & Sons successfully bid on two pieces of Pine Bush equipment, the price of which is disputed, *fn2 and equipment by another customer of the Debtor, Phillips Construction. See Appellant Br. at 4; Appellee Br. at 3. It is alleged that the unsold third piece of equipment was returned to Pine Bush. See Appellee Br. at 3.

Pine Bush contends that a few months after the auction, the Debtor tendered to Pine Bush a check from its escrow account for the proceeds of the July 26, 1997 sale of the equipment but that on September 23, 1997, the check was dishonored for insufficient funds. See Appellee Br. at 3. Shortly thereafter, on September 26, 1997, the Debtor filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. *fn3 See DOR doc. 1 at 1. The Trustee alleges that four days later, on September 30, 1997, the Debtor deposited into its escrow account a check from Tony DePaul & Sons in the amount of $54,590.00, $37,500.00 of which was payment for the July 26, 1997, purchase of the Pine Bush Equipment, with the remainder due Phillips Construction. See Appellant Br. at 5. The Trustee submits that this check was commingled with other auction proceeds in the escrow account, which was used to pay the Debtor's employees and others. See Appellant Br. at 5 n. 1. It is further alleged that this was the last deposit in the Debtor's escrow account; the funds were thereafter transferred to a debtor-in-possession account at another financial institution during the Debtor's Chapter 11 proceeding. See id.

According to the Bankruptcy Court docket, over the course of the ensuing months, a slew of creditors filed motions for turnover of the funds deposited in the debtor-in-possession account. Relevant to this appeal are the motions made by the Trustee and Pine Bush, each alleging entitlement to the funds. Before Bankruptcy Judge Burns, Pine Bush argued that since the oral agreement between the parties required the Debtor to hold the proceeds of the auction sale in trust for Pine Bush and since the funds were clearly identifiable as the last deposit made, a constructive trust arose, thereby entitling Pine Bush to $37,500.00, less commission, or a total of $34,871.66. On the other hand, the Trustee argued that because there was no agreement that the funds would be held in trust for Pine Bush, there was a commingling of funds, and the Debtor used the escrow account for personal business use and not solely for auction proceeds, following the sale of the Pine Bush equipment, a debtor-creditor relationship arose and therefore the $37,500.00 is part of the bankruptcy estate.

Judge Burns held two hearings to determine the entitlement to the funds, each time reserving her decision until a later date. *fn4 At a third hearing, on July 27, 1998, however, Judge Burns stated that "I had already ruled that I thought that the resulting trust had resulted from the facts and circumstances of this case which set up a trust in which Pine Bush was entitled to the funds in the account." See Hearing Tr. at 3 (July 27, 1998). A review of the transcripts of the prior two hearings, however, reveals no such ruling. *fn5

On July 27, 1998, Judge Burns stated that she "wanted to consider that debtor/creditor argument that was made" and then stated that "I still don't see anything different than what I ruled before. So Pine Bush is entitled, to the extent the funds are there, from that last check that went in, they're entitled to those monies, as they're not property of the estate, they're in trust for them." Hearing Tr. at 4-5 (July 27, 1998). Judge Burns memorialized her conclusions in a January 5, 1999 Order which provided that:

WHEREAS, Linda L. McMackin, Bankruptcy Trustee, is in

possession of $37,500.00 proceeds of the sale of equipment owned by Pine Bush ...


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