United States v. McConnell (In Re Flying Boat, Inc.)United States v. McConnell (In Re Flying Boat, Inc.)
MEMORANDUM OPINION ON APPEAL AND CROSS-APPEAL
This is an appeal from an Opinion and Order of the Hon. Robert C. McGuire, United States Bankruptcy Judge. Judge McGuire’s Opinion of November 30, 1999
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addressed the objection of Michael A.
On January 11, 1999, an involuntary petition under Chapter 7 of the Bankruptcy Code was filed against Flying Boat, Inc. (“Debtor”). Thereafter, the USDA and the INS filed proofs of claim against Debtor for user fees collected by Debtor in connection with airline ticket sales. The INS filed a claim for international passenger inspection user fees pursuant to 8 U.S.C. § 1356, and the USDA filed a claim for user fees pursuant to 21 U.S.C. § 136a. Both agencies claimed that the fees were collected and held in trust by Debtor for the benefit of the agencies, and thus were not property of the estate under 11 U.S.C. § 541. The Trustee objected to the trust claims of the INS and USDA. The Bankruptcy Court, sustaining the Trustee’s objection to the trust claim of the INS, held that the fees held by the Debtor, but claimed by the INS, were not held by the Debtor in express or constructive trust. In contrast, the Bankruptcy Court, denying the Trustee’s objection to the trust claims of the USDA, ruled that the user fees claimed by the USDA were held by the Debtor in express trust for the USDA. Additionally, the Bankruptcy Court held that the USDA adequately traced those trust funds into the Debtor’s accounts, by application of the lowest intermediate balance test. In an alternative ruling, the Bankruptcy Court stated that if its ruling regarding the INS user fees was incorrect, and those fees were held by the Debtor in trust for the INS, then the INS likewise satisfied its tracing obligation. In accordance with its Memorandum Opinion, on December 15, 1999, the Bankruptcy Court entered an Order allowing the INS a general unsecured claim for user fees of $35,434, and allowing the USDA a priority claim for user fees of $12,006.
In its appeal, the United States argues that the Bankruptcy Court erred in finding that the INS user fees were not held by the Debtor in trust. The Trustee cross-appeals, arguing that the Bankruptcy Court erred in its application of the lowest intermediate balance test to tracing of the USDA user fees, since in so doing it combined Bahamian accounts with United States accounts, although the evidence showed that the Bahamian accounts never contained user fees collected in the United States. This Court will address each argument in turn, analyzing factual disputes on a clearly erroneous basis, and the law on -a
de novo
standard of review. FED. R. BANKR. P. 8013;
In re CompuAdd Corp.,
A. INS User Fees
Section 541(a) of the Bankruptcy Code provides that the commencement of a bankruptcy case creates an estate comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Section 541(d) provides that property “in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... becomes property of the estate ... only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.” 11 U.S.C. § 541(d). A debtor “does not own an equitable interest in property he holds in trust for another, [so] that interest is not ‘property of the estate.’ ”
Begier v. I.R.S.,
The INS is authorized to collect from passengers arriving at ports of entry in the United States a fee of $6 per individual, for immigration inspections of each passenger. 8 U.S.C. § 1356(d). The entity that issues the ticket to the passenger, in this case the Debtor, collects the fee from
This case is very similar to the Third Circuit case of
In re Columbia Gas Sys., Inc.,
The Third Circuit began its analysis of whether the funds at issue were held in trust by deciding to apply federal common law. The Third Circuit noted that, while federal law governs questions involving the interpretation of a federal statute, federal courts applying federal law can “either fashion a uniform federal common law rule or adopt state law as the federal rule of decision.”
Id.
at 1055. To determine whether uniform federal common law or state law would apply, the Third Circuit stressed that such a determination “depends on the nature and importance of the government interest at issue and the effect of applying state law.”
Id.
(citing
United States v. Kimbell Foods, Inc.,
Looking at the first prong of the analysis, the court in Columbia Gas held that a national uniform law was necessary, since the monies at issue were collected as a result of orders of a federal agency, pursuant to federal law, and private parties could not alter the orders by contract. “Because [the funds] arise directly from federal law and implement the central objective of [the federal statute], the property rights Columbia has in these [funds] should not be subject to the vagaries of state trust law.” Id.
Noting that federal common law generally provides a more expansive definition of an implied trust than does state law,
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the Third Circuit, in applying the second prong of
Kimbell Foods,
found that applying state law to the determination of Columbia’s property rights would frustrate the objectives of the federal program at issue.
Id.
at 1056. The purpose of that federal program was to provide natural gas to the public at reasonable rates, and state law that would only recognize a con
Addressing the third and final prong of Kimbell Foods, the Third Circuit determined that application of federal common law would not upset commercial expectations that state law would govern. “Creditors cannot reasonably assume that state law will allocate various parties’ interests in federally created property rights.” Id.
The Bankruptcy Court below differentiated
Columbia Gas
as being “concerned with the protection of public rights, consumer rights, or [a] specific industr[y].”
In re Flying Boat,
The INS user fees involved in the instant case were prescribed by federal statutes and regulations, and private parties have no power to alter any such fees. The fees are designed to implement an essential duty of the INS, conducting immigration inspections. Varying state laws should not create a property right in the collecting party with respect to these fees. As the Fifth Circuit held in another context:
[I]f the adoption of state law as the federal rule would frustrate federal policies or otherwise interfere with the authority and duties of the United States ... federal common law must be applied irrespective of state interests.... The most obvious example in which the authority and duties of the United States as sovereign would be intimately involved is a controversy whose outcome will have an immediate effect on the federal treasury.
Bynum v. FMC Corp.,
As to the second Kimbell Foods prong, application of state law in this instance would frustrate the objectives of the INS user fee statute. The immigration inspection fees are used to facilitate the inspection of passengers entering the United States. If Texas law were applied in situations like the one at hand, the objectives of the federal program would be frustrated, and Congress’s objective of having monies collected in order to pay for the inspection of passengers would thereby be subverted.
Finally, as in
Columbia Gas,
“[c]reditors cannot reasonably assume that state law will allocate various parties’ interests in federally created property rights.”
The three prongs of the Kimbell test having been satisfied, this Court must next determine whether federal common law would impose a constructive trust based on the facts of the present case. Congress has specifically addressed the issue of whether an entity is a conduit for such funds:
Situations occasionally arise where property ostensibly belonging to the debtor will actually not be property of the debt- or, but will be held in trust for another. For example, if the debtor has incurred medical bills that were covered by insur-anee, and the insurance company had sent the payment of the bills to the debtor before the debtor had paid the bill for which the payment was reimbursement, the payment would actually be held in constructive trust for the person to whom the bill was owed.
H.R. REP. No. 95-595 (1977),
reprinted in
1978 U.S.C.C.A.N. 5963, 6324,
quoted in Columbia Gas,
In determining that the debtor in
Columbia Gas
was holding funds in constructive trust, the Third Circuit considered a number of factors.
Columbia Gas,
B. Tracing of Funds
As the court held in
Columbia Gas,
the party claiming the existence of a trust “bear[s] the burden of identifying and tracing [the] trust property.”
Columbia Gas,
On behalf of the agencies, the United States also complains of the Bankruptcy Court’s tracing analysis, contending that the user fees are not subject to common-law tracing principles like the lowest intermediate balance test, but rather are subject to the “reasonable assumption” standard set forth in
Begier,
The bankruptcy trustee sought to avoid the tax payments as preferences. The United States Supreme Court affirmed the Third Circuit’s holding that the funds were not the debtor’s property, and thus a payment to the IRS was not an avoidable preference. The Court concluded that it was a “reasonable assumption” that a voluntary pre-petition payment of taxes out of the debtor’s assets is not a transfer of the debtor’s property.
Id.
at 66,
The Bankruptcy Court correctly held that since this case does not involve a § 7501 or a similar trust,
Begier
is distinguishable. The INS user fees were held in a constructive trust under federal common law and the applicable statute created an express trust in the USDA “fees collected.” 21 U.S.C. § 136a(a)(3). Further, this Court agrees with those courts that have held that a voluntary pre-petition payment is necessary in order to apply the “reasonable assumption” standard of
Begier. See, e.g., In re Wellington Foods, Inc.,
This Court agrees that the lowest intermediate balance test is applicable here. In cases where trust funds have been commingled with other funds, courts have applied that test to determine if the funds can be properly traced.
In re Dameron,
The issue before this Court is whether all of Debtor’s accounts should be consolidated for purposes of applying the lowest intermediate balance test. Debtor had seven accounts — a money market account, a MasterCard/VISA account, an American Express account, an operating account, a payroll account, and two Royal Bank of Canada accounts (one U.S. and one Bahamian). The money market account was rarely used and it had negligible balances during most of the relevant period. When a user fee was charged as part of a credit card sale, the money was deposited into the Debtor’s credit card accounts. The balance in the credit card accounts flowed to the operating accounts. Payrolls were funded from the operating accounts. The Bahamian account included cash sales made in the Bahamas, which included user fees.
The Trustee argues that the Bahamian account should not have been considered
The potential for manipulation of accounts, would exist if Debtor’s accounts, including the Bahamian operation account, were looked at separately. The lowest intermediate balance of the combined accounts never dipped below the combined amount of the INS and USDA trust claims. Therefore, the United States is granted a priority trust claim for the INS fees in the amount of $35,434 and for the USDA fees in the amount of $12,006.
SO ORDERED.
Notes
. See
. The court below found, and this Court agrees, that under Texas law, for a constructive trust to exist there must be a breach of fiduciary relationship or actual fraud.
See In re Haber Oil Co.,