493 B.R. 421
Bankr. S.D.N.Y.2013Background
- In 2004 Entegra’s predecessors paid Dewey Ballantine a $300,000 retainer; the retainer was deposited into Dewey’s general operating account and was never applied to fees.
- The Entegra predecessors emerged from Chapter 11 in June 2005; it is disputed whether Entegra succeeded to their rights in the retainer.
- The attorney‑client relationship between Entegra and Dewey terminated prepetition in May 2012 (parties dispute the exact date); Dewey filed Chapter 11 on May 28, 2012.
- Entegra demanded return of the unused retainer in July 2012; Dewey declined and treated Entegra as an unsecured creditor.
- Entegra sued in bankruptcy court seeking declaratory relief, a constructive trust, and recovery of the $300,000; both sides moved for judgment on the pleadings.
- The bankruptcy court denied both motions, finding material factual disputes (e.g., whether Entegra succeeded to predecessor rights; whether the retainer was a security retainer or an advance payment retainer; tracing and constructive‑trust issues).
Issues
| Issue | Plaintiff's Argument (Entegra) | Defendant's Argument (Dewey) | Held |
|---|---|---|---|
| Whether Entegra succeeded to the predecessors’ rights in the retainer | Entegra asserts it is successor and therefore entitled to retainer recovery | Dewey pleads lack of sufficient knowledge; disputes succession | Disputed fact; Entegra has not established succession on the pleadings — motion denied |
| Nature of the retainer (security vs. advance payment) | Retainer was a security retainer (client retained equitable title) | Retainer is an advance payment retainer (title passed to attorney; may be comingled) | Disputed fact; cannot be resolved on pleadings — motion denied |
| Whether the retainer is property of the bankruptcy estate under §541 | If security retainer, not estate property; if advance retainer, likely estate property but unearned portion may give rise to equitable claims | Because funds were comingled in operating account, presumption is estate property; Entegra is general unsecured creditor | Court: unresolved on pleadings; §541(d) does not automatically exclude comingled advance retainers from estate; factual development required |
| Availability of a constructive trust and tracing | If retainer was a security retainer (or fiduciary breach with traceable funds), constructive trust should be imposed and funds excluded from estate | Constructive trust disfavored in bankruptcy; comingling and inability to trace preclude relief; would disrupt creditor priority | Court: constructive trust requires factual showing (including tracing, unjust enrichment); cannot be granted on the pleadings; relief may be available if facts later proved |
Key Cases Cited
- Sellers v. M.C. Floor Crofters, Inc., 842 F.2d 639 (2d Cir.) (standard for judgment on the pleadings)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for pleading)
- Hayden v. Paterson, 594 F.3d 150 (2d Cir.) (Rule 12(c) treated like Rule 12(b)(6))
- In re King, 392 B.R. 62 (Bankr. S.D.N.Y.) (advance payments treated as attorney fees absent agreement)
- In re First Cent. Fin. Corp., 377 F.3d 209 (2d Cir.) (constructive trusts in bankruptcy require caution; may conflict with Bankruptcy Code priorities)
- In re Flanagan, 503 F.3d 171 (2d Cir.) (property held in constructive trust excluded from estate under §541(d))
- Koreag, Controle et Revision S.A. v. Refco F/X Assocs. (In re Koreag), 961 F.2d 341 (2d Cir.) (constructive trust doctrine and equitable flexibility)
- Ruberto v. DeFilippo, 913 N.Y.S.2d 889 (N.Y. App. Div.) (advance retainers not client property but ethical duty to return unearned portion)