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In re Health Partners Medical Group

United States Bankruptcy Court, N.D. Texas, Fort Worth Division
Jun 14, 2001
Case No. 99-43649-BJH-7, Adv. Pro. No. 00-4180 (Bankr. N.D. Tex. Jun. 14, 2001)

Opinion

Case No. 99-43649-BJH-7, Adv. Pro. No. 00-4180

June 14, 2001


FINDINGS OF FACT AND CONCLUSIONS OF LAW


Pursuant to the Pretrial Order filed by the parties and entered by the Court on May 23, 2001, the Court was asked to resolve this dispute on the stipulated facts set forth in the Pretrial Order. See generally Pretrial Order. After reviewing the evidence and arguments contained in the Pretrial Order, the Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, made applicable here by Federal Rule of Bankruptcy Procedure 7052.

I. FINDINGS OF FACT

1. On February 28, 1997, Debtor Health Partners Medical Group, P.A., ("Debtor" or "HPMG"), Plaintiffs Jay C. Story, M.D., Steven P. Gellman, M.D., John Mitchell Arthur, M.D., Lynn M. Myers, M.D., and Diana Coxsey, M.D. (collectively, the "Plaintiffs"), and certain other entities and individuals entered into a Settlement Agreement and Release (the "Settlement Agreement"). See Pretrial Order Exhibit 1. The Settlement Agreement resolved certain claims those parties had "made against each other with respect to various matters involving the practice of medicine, the occupancy of real estate, employment agreements, and merger and stock purchase agreements." See id. at ¶ A.

2. Under the terms of the Settlement Agreement, the Plaintiffs and Tony Swaldi, M.D. (not a plaintiff here), were to execute a promissory note in favor of FPCNT, Inc. ("FPCNT") in the amount of $130,000 (the "Promissory Note"). See id. at ¶ 1, 1(a). In addition to executing the Promissory Note, each of the Plaintiffs was to contribute cash (aggregating $51,000) to an "escrow account." See id. at ¶ 1(b). Specifically, the Settlement Agreement provided that:

In addition to the $130,000.00 payable as provided above, each of Story, Gellman, Arthur and Myers agree to pay $12,000.00 in cash and Coxsey agrees to pay $3,000.00 in cash, on or before March 7, 1997. The amounts shall be paid into an escrow account in the name of HPMG, but shall require the approval of Steve Fandre for withdrawals, which approval will not be unreasonably withheld. These amounts will be held in that account until the determination of the amount payable for each of them to the 401(k) plan of HPMG is made. Any excess (net of amounts, if any, due HPMG under paragraph 3.d. below, and after applying any remaining amount to any unpaid balance on the promissory note to FPCNT) shall be paid to each payor by March 31, 1997. If the total of the amounts payable from the cash deposits described above exceeds the cash from each payor, that payor shall replenish the amount necessary to fully fund the amounts payable by or for that individual by March 18, 1997.

See id. Thus, according to the Settlement Agreement, the Funds were to be held in "escrow" and used to satisfy (i) the amounts payable for each of the Plaintiffs to the 401(k) plan of HPMG (the "Plan"), (ii) the amounts due to HPMG under paragraph 3.d. of the Settlement Agreement, and (iii) any balance owing on the Promissory Note. Any excess funds were to be returned to the Plaintiffs.

3. On March 13, 1997, the Coppell Family Medical Center caused a cashier's check in the amount of $51,000.00 to be issued that was payable to the Debtor (the "Funds"). See Pretrial Order Exhibit 2. Although a party to the Settlement Agreement, Coppell Family Medical Center was not one of the parties required to make a cash payment to be held in the "escrow account" under the terms of the Settlement Agreement. See id. at ¶ 1(b). However, the evidence is undisputed that Coppell Family Medical Center caused the cashier's check payable to the Debtor to be issued in "payment of the obligations of the Plaintiffs pursuant to Paragraph 1.b. of the Settlement Agreement." See Pretrial Order at ¶ 19; Pretrial Order Exhibit 7 (Affidavit of Jay C. Story, M.D.).

4. On March 14, 1997, the Funds were deposited in Account No. 07100834820 at Texas Commerce Bank (the "Account"). See Pretrial Order Exhibit 5. According to the signature card for the Account, the Account was opened on March 13, 1997 in the name of "Health Partners Medical Group, P.A. — Coppell Special Account." See Pretrial Order Exhibit 3. The signatories on the Account were Don R. Liedtke and Steven Fandre. See id. The Account was established pursuant to a Secretary's Certificate and Resolutions to Govern Handling of Accounts (Corporation — Association) (the "Resolution"), which provided that any withdrawal of funds from the Account required the signatures of both Don R. Liedtke (who was the Director of Finance for FPCNT) and Steven Fandre (who was the Administrator of the Coppell Family Medical Center). See Pretrial Order Exhibit 4.

5. Another Secretary's Certificate and Resolutions to Govern Handling of Accounts (Corporation — Association) (the "Supplemental Resolution") was signed regarding the Account. See Pretrial Order Exhibit 6. While the Supplemental Resolution still required two signatures to withdraw any funds from the Account, the list of authorized signatories was changed to Karl A. Hardesty (Sr. Vice Pres CFO), Steven Fandre (Administrator of the Coppell Family Medical Center), and Kirby Kelley (Regional CFO). See id. While the Supplemental Resolution references a "meeting held on the 28th day of July, 1997," the Supplemental Resolution was not signed until March 5, 1998. See id.

While titles for Hardesty (Sr. Vice Pres CFO) and Kelley (Regional CFO) are recited in the Supplemental Resolution, there is no evidence in the record with respect to what entities they held those positions. See Pretrial Order Exhibit 6.

6. HPMG filed a chapter 7 bankruptcy case on July 9, 1999 (the "Petition Date"). See Pretrial Order at ¶ 1. Jeffrey H. Mims was appointed as the chapter 7 trustee (the "Trustee" or "Defendant"). See Pretrial Order at ¶ 2. The section 341 meeting was held on August 9, 1999. See id.

7. Upon the request of the Trustee, Texas Commerce Bank paid the Funds to the Trustee. See Pretrial Order at ¶ 18.

8. On December 20, 2000, Plaintiffs initiated this adversary proceeding by filing their Complaint to Compel Trustee to Turn Over Funds to Plaintiffs (the "Complaint"). The Plaintiffs contend that the Funds are not property of the estate (specifically contending that the Funds were held in trust and/or in an escrow account for the Plaintiffs' benefit) and request their return, plus any accrued interest, and attorneys' fees. See generally Complaint; see also Pretrial Order at pp. 1-2.

9. The Trustee responded to the Complaint on February 14, 2001, denying that the Plaintiffs were entitled to the Funds in the Account. Specifically, the Trustee contends that the Account was not a valid escrow account, that no trust exists, and that the Funds are property of the estate. See generally Trustee's Response to Complaint to Compel Trustee to Turn Over Funds to Plaintiffs; see also Pretrial Order at pp. 2-3. Alternatively, the Trustee contends that his, and therefore the estate's, interest in the Funds is superior to the Plaintiffs' interest pursuant to the strong-arm powers reserved to the Trustee by section 544(a)(1) of the Bankruptcy Code. See id.

10. The parties have stipulated that (i) no contributions were made to the Plan from the Funds, see Pretrial Order at ¶ 14, (ii) the Promissory Note was paid in full and no unpaid balance is due, see Pretrial Order at ¶ 15, and (iii) no amounts are due from the Plaintiffs to HPMG under Paragraph 3.d. of the Settlement Agreement, see Pretrial Order at ¶ 16. While the parties have stipulated to these facts, there is no evidence of when (i) it was determined that no contributions needed to be made to the Plan or why no contributions were made to the Plan, (ii) the Promissory Note was paid, and/or (iii) it was determined that no amounts were due to HPMG pursuant to Paragraph 3.d. of the Settlement Agreement.

11. Any Finding of Fact may also be construed as a Conclusion of Law.

II. CONCLUSIONS OF LAW

1. The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 157 and 1334. This is a core proceeding. See 28 U.S.C. § 157 (b)(2)(A).

2. The burden of proof shifts when deciding the issues presented here. First, the Trustee must establish that the Account and the Funds are property of the estate. See Yaquinto v. Greer, 81 B.R. 870, 87 (N.D.Tex. 1988) ("The trustee had the initial burden to prove that the property in issue was the property of the estate."); Williams v. American Bank of the Mid-cities, N.A. (In re Williams), 61 B.R. 567, 570 (Bankr.N.D.Tex. 1986) ("The Debtor has the initial burden of proving that the property in issue is property of the estate under Section 541.") If the Trustee satisfies his burden and demonstrates that the Account and the Funds are property of the estate, the burden of proof will shift to the Plaintiffs to establish that their interests in the Account and the Funds are superior to the Trustee's interest in the Account and the Funds. Specifically, the Plaintiffs must establish the existence of a "trust" relationship with respect to the Account and the Funds or the existence of a valid escrow agreement governing the disposition of the Funds from the Account by a preponderance of the evidence. See Putaturo v. Crook, 653 F.2d 1027, 1029 (5th Cir. 1981) ("In short, a party having the burden of proof in a Texas civil case need not ever demonstrate more than a `preponderance of the evidence' before the jury. An instruction to the jury that an issue requires a standard of proof greater than a preponderance of the evidence has itself been held erroneous.") (citations omitted); see also Chiasson v. Matherne and Associates (Matter of Oxford Management, Inc.), 4 F.3d 1329, 1335 (5th Cir. 1993) ("When the property of an estate is alleged to be held in trust, the burden of establishing the trust's existence rests with the claimants."); Friedman v. Stern, No. 91-CIV-0985 (LJF), 1992 WL 58878, *2 (S.D.N.Y. Mar. 13, 1992) ("In an action based on the breach of an alleged escrow agreement, the party claiming that another party acted as his escrow agent must prove the existence of the escrow agreement by a fair preponderance of the credible evidence."). If the Plaintiffs are successful, the burden of proof will then shift back to the Trustee to establish that his rights under section 544(a)(1) of the Bankruptcy Code trump the Plaintiffs' interests in the Account and the Funds.

A. Are the Funds Property of the Estate?

3. Section 541 of the Bankruptcy Code provides that upon the filing of a bankruptcy petition an estate is created comprising "all legal or equitable interests of the debtor in property as of the commencement of the case." See 11 U.S.C. § 541(a)(1). The scope of property rights and interests included in a bankruptcy estate is very broad, and property is not excluded from the estate merely because it is conditional, future, speculative, or equitable in nature. See Affiliated Computer Systems, Inc. v. Sherman (In re Kemp), 52 F.3d 546, 550 (5th Cir. 1995) ("The conditional, future, speculative, or equitable nature of an interest does not prevent it from being property of the bankruptcy estate."); Haber Oil Co. v. Swineheart, 12 F.3d 426, 435 (5th Cir. 1994); cf. Georgia Pac. Corp. v. Sigma Serv. Corp., 712 F.2d 962, 967-68 (5th Cir. 1983) (finding that funds subject to an equitable lien or constructive trust were still property of the estate that must be turned over to the trustee, subject to the court's power to later recognize an equitable interest). The nature and extent of a debtor's interest in property is analyzed by reference to the applicable state law. Butner v. United States, 440 U.S. 48, 54-56 (1979) ("Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding."); In re Missionary Baptist Foundation of America, Inc., 792 F.2d 502 (5th Cir. 1986).

4. Thus, the nature and extent of the Debtor's (and now the Trustee's) interest in the Account and the Funds will be decided under Texas state law. In turn, that analysis will determine whether the Account and the Funds are property of the estate.

5. The signature card for the Account establishes that the Account was titled in the Debtor's name. See Pretrial Order Exhibit 3. The Resolution states that "Texas Commerce Bank National Association ("Bank"), be and is hereby selected as a depository for the funds of Company [HPMG]. . . ." See Pretrial Order Exhibit 4 (emphasis added). The deposit slip shows that the Account was in the name of the Debtor. See Pretrial Order Exhibit 5. Finally, the Supplemental Resolution contains the same recitation that the Funds belong to the Debtor quoted in the Resolution. See Pretrial Order Exhibit 6. Based upon this evidence, the Court concludes that the Debtor had legal title to the Account (and the Funds in the Account) on the Petition Date. Accordingly, the Account and the Funds are property of the estate under section 541 of the Bankruptcy Code.

6. However, notwithstanding the Debtor's legal title to the Account and the Funds on the Petition Date, if the Debtor held the Funds in trust for the Plaintiffs or pursuant to a valid escrow agreement, the Plaintiffs could have rights to the Funds that the Court would be compelled to recognize.

B. Were the Funds Held in Trust for Plaintiffs?

7. The Plaintiffs initially contend that because the Funds, or a part of the Funds, could have been contributed to the Plan, the Funds were held by HPMG in trust for the Plaintiffs. See Pretrial Order at pp. 8-10. As authority for this contention, the Plaintiffs rely on Board of Trustees of the Air Conditioning and Refrigeration Industry Health and Welfare Trust Fund v. J.R.D. Mechanical Services, Inc., 99 F. Supp.2d 1115 (C.D.Cal. 2000).

8. In that case, the defendant was a signatory to a collective bargaining agreement which required it to remit contributions to health, retirement, and 401(k) funds. See id. at 116. The payments into these funds were to come from a combination of employee wage withholdings and employer matching contributions. See id. The court held that the sole shareholder of the company, who had diverted both the employee wage withholdings and the employer matching contributions to pay company creditors, was a "fiduciary" under the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq. ("ERISA") and thus, could be held personally liable for unpaid contributions to the trust funds. See, generally, id.

9. In coming to this holding, the J.R.D. court analyzed two issues: (i) were the unpaid contributions plan assets, and (ii) had the sole shareholder exercised authority or control over those plan assets, thereby becoming a fiduciary. See J.R.D. Mechanical Services, 99 F. Supp. 2d at 1120. The court determined that the unpaid employee contributions were plan assets, finding that employee wage deductions intended as plan contributions "are plan assets, regardless of whether such money is ever in fact conveyed to the plan." See id. The court did not draw a distinction between contributions withheld from employee wages and employer matching contributions and concluded that both types of contributions were held in trust at the time the employees earned their wages. See J.R.D. Mechanical Services, Inc., 99 F. Supp.2d at 1120 ("The Court rejects defendants' contention that there is a distinction between employer contributions in the form of employee wage deductions and other employer contributions. Although the Trust Agreements do not specify that unpaid employer contributions are vested assets of the Trust Funds, such contributions, regardless if they are deducted from wages, are due and owing on the tenth day of the month following the month in which the responsibility for such contributions are incurred. Inherent in the Trust Agreements is the concept that employer contributions become trust assets immediately after employees earn their wages."); see also United States v. LaBarbara, 129 F.3d 81 (2d Cir. 1997) (finding, in a criminal action, that delinquent employer contributions were plan assets).

10. The Eleventh Circuit reached the same conclusion with respect to employee withheld contributions in United States v. Grizzle, 933 F.2d 943 (11th Cir. 1991), cert. denied 502 U.S. 897 (1991). In Grizzle, a corporate employer and its president were convicted of embezzling funds withheld from employees' paychecks but not paid into an ERISA-governed employee vacation plan. The defendants argued that because the wrongly withheld funds were not contributed to the plan, the funds never became plan assets and, as a result, the defendants could not be convicted of embezzling plan assets. See id. 946. In affirming the conviction, the court cited to a 1989 Department of Labor regulation which provided in pertinent part that "the assets of [an ERISA] plan include amounts . . . that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets. . . ." See id. at 947 (quoting 29 C.F.R. § 2510.3-102). Applying this regulation, the Eleventh Circuit found that the withheld contributions were plan assets. See Grizzle, 933 F.2d at 947 ("Thus, the assets of employee benefit plans subject to ERISA include employee contributions to benefit plans which are withheld from employees' paychecks and for deposit into their benefit plans, even though the contributions have not actually been delivered to the benefit plan.")

11. However, as noted by the J.R.D. court, several other courts have held that employer contributions are held in trust only if the contracts and trust documents state that such contributions are vested or due and owing to the plan. This issue was recently discussed in Trustees of the National Elevator Industry Pension v. Lutyk, ___ F. Supp.2d ___, No. CIV.A.00-2301, 2001 WL 491929 (E.D.Pa. May 4, 2001). In Lutyk, the court was deciding whether the sole director and shareholder of a company was personally liable for the corporation's unpaid contributions to the company's employee's ERISA fund. See id. at *1. The Lutyk court reasoned that for the plaintiffs to recover, they would have to establish either that (i) under the terms of the parties' agreements, the unpaid contributions were "plan assets," or (ii) the circumstances of the case justified a piercing of the corporate veil so as to impose liability for corporate obligations on the shareholder personally. See id.

12. After observing that the Third Circuit did not have a general rule conferring fiduciary status solely on the basis of delinquent employer contributions, the court noted that it must make its determination based upon the terms of the agreement under which the obligation to pay the contributions arose. See id. at *7 ("To answer whether unremitted contributions are `assets' for the purpose of liability under 29 U.S.C. § 1109(a), courts in the Third Circuit look to the terms of the agreement under which the obligation to pay the contributions arise."); see also PMTA-ILA Containerization Fund v. Rose, No. 94-5635, 1995 WL 461269, at *4 (E.D.Pa. Aug. 2, 1995) (holding that delinquent contributions were assets of the trust where the agreement stated that monies "accrued to" the fund were "vested" in the fund trustees); Young v. West Coast Indus. Relations Ass'n, Inc., 763 F. Supp. 64, 75 (D.Del. 1991), aff'd, 961 F.2d 1570 (3d Cir. 1992) (finding that delinquent contributions were merely debts, rather than vested assets, where agreement stated that employer was liable for "all arrears in payment" of ERISA plan contributions); see also Galgay v. Gangloff, 677 F. Supp. 295, 301-02 (M.D.Pa. 1987), aff'd, 932 F.2d 959 (3d Cir. 1991) (observing that "the court by no means holds as a general rule that employers may be liable under ERISA as fiduciaries merely because of delinquent contributions," but finding that delinquent contributions were assets of the fund pursuant to the terms of the wage agreement). After reviewing the actual documents, the Lutyk court found that there was no plain language in the documents which made unremitted employer contributions a "trust asset." However, with respect to employee wage deductions, the court quoted the same regulation as the Grizzle court, and found "employee wage deductions that have been withheld by the employer but not remitted to the fund became plan `assets' at the time specified by the regulations." See id. at *8.

The Lutyk court actually reached this decision in a prior Memorandum Opinion. See Trustees of the National Elevator Industry Pension v. Lutyk, ___ F. Supp.2d ___, No. CIV.A.00-2301, 2001 WL 418045 (E.D.Pa. April 13, 2001).

13. Here, the Funds were not withheld from the Plaintiffs' wages or salaries by the Debtor for contribution to the Plan. Rather, the Funds were paid to the Debtor by the Coppell Family Medical Center (on Plaintiffs' behalf) and were deposited by the Debtor into the Account to be used for those purposes set forth in the Settlement Agreement. As previously noted, while one of those purposes was to hold the Funds in the Account "until the determination of the amount payable for each of them [Plaintiffs] to the 401(k) plan of HPMG is made," that was not the only purpose for which the Funds were paid to the Debtor. See supra at p. 2, ¶ 2.

14. On this record, the Court concludes that the Plaintiffs failed to carry their burden of proof that the Funds were deposited into the Account in trust for the Plaintiffs. For example, there is no evidence in the record from which the Court can determine the precise nature of the relationship between the Plaintiffs and the Debtor. Obviously, there was a relationship, and that relationship led to the disputes that were resolved pursuant to the Settlement Agreement, but none of the underlying documents were made a part of the record. See, generally, Pretrial Order Exhibits. If Plaintiffs were employees of the Debtor, the employment agreements were not admitted into evidence. The Plan was not admitted into evidence. While the Settlement Agreement contemplates that some, all, or none of the Funds may be paid into the Plan, there is no evidence as to why monies might be due to the Plan or on what basis the determination of the amount "payable for each of them" to the Plan would be made.

15. Because the documents that governed the pre-settlement relationship between the Plaintiffs and the Debtor were not made a part of the record, and the record does not otherwise address these issues, the Court cannot determine that the Funds were held in the Account in trust for the Plaintiffs.

C. Were the Funds Held in Escrow for Plaintiffs?

16. Although in a decision not designated for publication and therefore not binding authority, a state court of appeals recently addressed the creation of valid escrows in Texas. See Williams v. Land Title Co. of Dallas, No. 05-96-00039-CV, 1997 WL 196345 (Tex.App.-Dallas April 23, 1997). In describing the prerequisites for creating an escrow, the Williams court examined prior state court cases and found that

Although Texas Rule of Appellate Procedure 47.7 provides, inter alia, that "[o]pinions not designated for publication by the court of appeals have no precedential value," see TEX. R. APP. P. 47.7, the case provides a good discussion of the requirements for establishing valid escrows in Texas.

To create an escrow, the parties to an underlying transaction must deposit instruments or funds with a neutral third party and agree on the terms on which the third party is to make delivery of the items deposited. See Smith v. Daniel, 288 S.W. 528, 531 (Tex.Civ.App.-Beaumont 1926, no writ). There must be a valid underlying contract to support an escrow agreement. La Roe v. Davis, 333 S.W.2d 222, 224 (Tex.Civ.App.-Amarillo 1960, no writ). An escrow agreement must be clear and definite. Tanner v. Imle, 253 S.W. 665, 669 (Tex.Civ.App. — San Antonio 1923, writ dismissed). An agreement concerning the conditions on which an instrument is placed in escrow may be oral or written. See Simpson v. Green, 231 S.W. 375, 377 (Tex. 1921); Tanner, 253 S.W. at 669-70. However, an escrow agreement customarily is a written instrument containing a carefully drawn list of instructions that defines the duties of the escrow agent, and it is signed by the escrow agent and the parties to the underlying transaction. See Lacy v. Ticor Title Ins. Co., 794 S.W.2d 781, 785 (Tex.App.-Dallas 1990), writ denied per curiam, 803 S.W.2d 265 (Tex. 1991); Campbell v. Barber, 272 S.W.2d 750, 753 (Tex.Civ.App. — Fort Worth 1954, no writ).

See id. at *5; see also Starkey v. Texas Farm Mortgage Co., 45 S.W.2d 999, 1000 (Tex.App.-Waco 1932, no writ) ("In order to constitute a valid escrow agreement the parties must actually contract, and the deposit of the instrument in pursuance of the agreement must be absolute and be beyond the control of the depositor. A deposit made by the depositor alone will not be sufficient to constitute a valid escrow. It must be made by the mutual agreement of all of the parties to the instrument. In order for an escrow agreement to be binding, the parties must agree that the very contract in question is delivered to a third party to be held and delivered subject to some condition or contingency, and that upon the happening of the condition or contingency, the contract as written shall become binding upon both parties.") (citations omitted).

17. The Fifth Circuit considered escrows in the context of a bankruptcy case in In re Kemp, 52 F.3d 546 (5th Cir. 1995), and found that under Texas law, "an escrow is only created when the parties come to a clear and definite agreement directing that the funds be deposited with a third party and specifying the terms and conditions on which the third party is required to deliver the funds." See id. at 551. In Kemp, the debtor, prior to filing for bankruptcy, had been employed under a contract for which he received a salary plus certain commissions. See id. at 549. Following one transaction, the debtor's employer withheld a portion of the commission ($50,000 of $200,000) pending the resolution of a lawsuit surrounding a previous transaction. See id. When the employer paid the debtor the balance of the commission, it sent a letter agreement to him explaining that it was holding the $50,000 until the results of the pending lawsuit were determined, and the debtor signed that letter agreement. See id. After the debtor filed his chapter 7 bankruptcy case, the chapter 7 trustee sought to recover the $50,000 withheld by the employer. See id. The bankruptcy court concluded that the withheld funds were property of the estate and the district court affirmed. See id. On further appeal, the Fifth Circuit also affirmed, concluding that the letter agreement between the debtor and his employer did not create a valid escrow agreement. See id. at 551. Specifically, the court concluded that no valid escrow agreement had been established because (i) there were no terms or conditions to be fulfilled before the funds were to be delivered to the debtor or anyone else and (ii) the funds were held by the employer rather than being deposited with a neutral third party. See id. As a result, the court held that the funds were property of the estate. See id. at 554 ("We agree with the bankruptcy court's holding that the $50,000 withheld by ACS from Kemp's earned commission was, at the time of Kemp's filing, property of the bankruptcy estate and was thus required to be turned over to the Trustee pursuant to 11 U.S.C. § 542(a).").

18. Applying these requirements here, the Court concludes that the Settlement Agreement did not create a valid escrow under Texas law for at least two reasons. First, the Funds were held by the Debtor (a stakeholder), in its own name (albeit with joint signatures required before withdrawals could occur), rather than by a neutral third party. Second, no neutral third party, or "escrow agent," signed the Settlement Agreement or a separate escrow agreement that would govern the release of the Funds upon the satisfaction of the conditions of the escrow. See Starkey, 45 S.W.2d at 1000 ("In order for an escrow agreement to be binding, the parties must agree that the very contract in question is delivered to a third party to be held and delivered subject to some condition or contingency, and that upon the happening of the condition or contingency, the contract as written shall become binding upon both parties."); cf. Thomas M. Byrne, Escrows and Bankruptcy, 48 BUS. LAW. 761, 762 (1993) ("To be valid, a delivery in escrow must be made with instructions to a third party who takes delivery and agrees to act as escrow agent."); 28 AM. JUR., 2d Escrow § 3 (2000) ("For an instrument to operate as an "escrow," there must be (a) an agreement as to the subject matter and the delivery of the instrument, (b) a third-party depository, (c) a delivery of the instrument to third party conditioned upon performance of some act, and (d) on the happening of this event, the relinquishment by the depository.") (citations omitted).

19. For these reasons, the Court concludes that the Funds were not held by the Debtor "in escrow" for the Plaintiffs. Because no valid escrow existed under Texas state law, the Debtor did not hold the Funds in any fiduciary capacity.

Because the Court finds that the Plaintiffs failed to prove the existence of either a trust or a valid escrow, it does not need to reach the Trustee's alternative argument that his strong-arm powers under 11 U.S.C. § 544(a)(1) would cut off the Plaintiffs' interest in the Funds.

20. Any Conclusion of Law may also be construed as a Finding of Fact.

A Judgment consistent with these Findings of Fact and Conclusions of Law will be entered concurrently herewith.


Summaries of

In re Health Partners Medical Group

United States Bankruptcy Court, N.D. Texas, Fort Worth Division
Jun 14, 2001
Case No. 99-43649-BJH-7, Adv. Pro. No. 00-4180 (Bankr. N.D. Tex. Jun. 14, 2001)
Case details for

In re Health Partners Medical Group

Case Details

Full title:IN RE HEALTH PARTNERS MEDICAL GROUP, P.A., Debtor. JAY C. STORY, M.D.…

Court:United States Bankruptcy Court, N.D. Texas, Fort Worth Division

Date published: Jun 14, 2001

Citations

Case No. 99-43649-BJH-7, Adv. Pro. No. 00-4180 (Bankr. N.D. Tex. Jun. 14, 2001)