Opinion
01-CV-0424E(Sr), 01-CV-0446E(Sr), (00-BK-12654K).
May 6, 2002
MEMORANDUM and ORDER
This is an appeal by the Committee of Unsecured Creditors of Rama Group of Companies, Inc. (the "Committee") in the above-captioned Chapter 11 proceeding from two orders by United States Bankruptcy Judge Michael J. Kaplan (collectively "Orders"). Judge Kaplan's first Order, entered on May 1, 2001, granted the broker/finder, Gottesman Company ("Gottesman"), an equitable lien on the assets of the debtor ("Rama") ("May 1, 2001 Order"). Judge Kaplan's second Order, entered on May 16, 2001, ruled the amount of Gottesman's equitable lien to be $199,000 and that Gottesman may file an unsecured pre-petition claim for the balance that Gottesman believes is still due ("May 16, 2001 Order"). For the reasons stated herein, these Orders will be affirmed, albeit on different grounds. The Bankruptcy Court found that an equitable lien was appropriate under the circumstances of this case. This Court, however, declines to find an equitable lien in this case of first impression, which more clearly implicates the doctrine of constructive trusts.
Familiarity with the underlying facts and the Orders is presumed and they are not discussed further herein. See In re Rama Group of Companies, 264 B.R. 267 (Bankr.W.D.N.Y. 2001).
This Court declines to decide this matter of first impression with respect to equitable liens under New York law. This, however, is not to say that Judge Kaplan's finding on this ground is erroneous, a question this Court does not reach in light of its affirmation on other grounds. See George Gleason Bogert et al., Trusts Trustees, § 32 Equitable Liens (2001) (noting that equitable liens are occasionally confused with constructive trusts and citing New York cases to that effect).
This Court reviews the Bankruptcy Court's legal conclusions de novo and its findings of fact for clear error. Gulf States Exploration Co. v. Manville Forest Prods. (In re Manville Forest Prods.), 896 F.2d 1384, 1388 (2d Cir. 1990) (citing Fed.R.Bankr.P. 8013).
No previous court in New York has extended the doctrine of equitable liens as far as would be required in order to find an equitable lien under the facts of this case. This Court declines the invitation to be the first to do so. In James v. Alderton Dock Yards, Ltd., 256 N.Y. 298, 303 (1931), the New York Court of Appeals held that a broker/finder was not entitled to an equitable lien on the proceeds of a sale that he procured because, inter alia, an agreement "to pay a debt out of a designated fund does not give an equitable lien upon the fund nor operate as an equitable assignment thereof." Likewise, Gottesman is not entitled to an equitable lien because there exists only an agreement to pay a commission. This type of agreement alone, however, does not give rise to an equitable lien.
The Committee contends that Gottesman is a "finder" rather than a "broker" and that this distinction is important because, the Committee contends, a pre-petition finder lacks standing to claim an equitable lien on the proceeds of a post-petition asset sale. In light of this Court's affirmation on different grounds, this distinction is irrelevant. In Sanyo Elec., Inc. v. Howard's Appliance Corp. (In re Howard's Appliance Corp.), 874 F.2d 88, 93 (2d Cir. 1989), the Second Circuit Court of Appeals held that
"[p]roperty in which the debtor holds only legal title and not an equitable interest, however, becomes property of the estate `only to the extent of a 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). That is, the bankruptcy estate does not include `property of others in which the debtor ha[s] some minor interest such as a lien or bare legal title,'" United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n. 8, 103 S.Ct. 2309, 2313 n. 8, 76 L.Ed.2d 515 (1983).
Accordingly, the constructive trust that arose here confers on Gottesman an equitable interest superior to that of Rama or the Committee, either of whom could be declared a constructive trustee. Although this Court need not address when the constructive trust arose here — cf. Cent. Manhattan Prop., Inc. v. D. A. Schulte, 91 F.2d 728 (2d Cir.) (noting that the imposition of an equitable lien or a constructive trust may relate back to time when debtor obtained equitable relief), cert. denied, 302 U.S. 743 (1937) — it nonetheless appears that when Gottesman procured the execution of the Asset Purchase Agreement ("APA"), it obtained an inchoate equitable right that ripened upon the closing of the sale transaction. Cf. In re L.D. Patella Constr. Corp., 114 B.R. 53, 59-60 (D.N.J. 1990).
See also Williams v. Ingersoll, 89 N.Y. 508, 518 (1882) (same); Sec. Pac. Mortgage Real Estate Servs., Inc. v. Republic of the Philippines, 962 F.2d 204, 209-210 (2d Cir. 1992). Sec. Pac. Mortgage involved a contract for maintenance services and a subsequent promise to pay the debt, arising under the contract, from the rents and profits of the building. The court there, however, found no equitable lien because the promise to pay a debt from specific funds (i.e., rents and profits) is insufficient to give rise to an equitable lien. Likewise here, a mere promise to pay a debt/commission does not give rise to an equitable lien. Moreover, the argument for an equitable lien is even weaker here where there is arguably no "designated fund" from which the commission was to be paid. Although it may be contended that the sale proceeds constituted such a "designated fund," such is doubtful, and in any event, irrelevant.
Generally, brokers do not acquire an equitable lien upon either the subject property or the proceeds thereof. See James at 303; M. Lindheim Co. v. Central Nat'l Realty Constr. Co., 111 A.D. 275 (1st Dep't 1906); Thorne Real Estate, Inc. v. Nezelek, 100 A.D.2d 651, 652 (3d Dep't 1984); cf. Sec. Pac. Mortgage at 211. This general rule does not apply where the parties contract around it. Baker v. Cooper, 201 A.D. 639 (2d Dep't 1922) (finding an equitable lien upon the subject property where, inter alia, "under the agreement *** [the subject property] was intended to be security for the payment to [the broker], and for the debt and obligation which the [property owner] owed to him").
In order to give rise to an equitable lien, there must be an agreement that is intended by the parties to create a "lien upon specific property." James at 303. Indeed, James holds that an agreement giving rise to an equitable lien "must deal with some particular property either by identifying it or by so describing it that it can be identified and must indicate with sufficient clearness an intent that the property so described or rendered capable of identification is to be held, given or transferred as security for the obligation." Id. at 303. This Court has found no basis upon which to conclude that there was ever an intent, by anyone, to create a security interest in the sale proceeds in favor of Gottesman. Accordingly, no such agreement existed here.
See also Sec. Pac. Mortgage at 209 ("in establishing an equitable lien, plaintiff must show a particular agreement by defendant to confer a security interest in the property at issue") (emphasis added); Teichman v. Community Hosp. of W. Suffolk et al., 87 N.Y.2d 514, 520 (1996) (applying James and finding that a health insurer's contractual "right to a refund" for medical expenses paid did not give rise to an equitable lien on the insured's personal injury settlement proceeds).
The Bankruptcy Court's decision referred to the "arrangement" arrived at under its imprimatur at a hearing on June 13, 2000. In re Rama at 271. This "arrangement," however, does not appear to have intended a "lien upon specific property" where the Bankruptcy Court merely allowed the proposed asset sale to proceed "without prejudice to any and all claims that [Gottesman] may have to proceeds." Id. at 268 n. 1 (emphasis added). In other words, it is not apparent that the parties to this "arrangement" intended that the proceeds of the sale were "to be held, given or transferred as security for the obligation" to pay Gottesman. James at 303 (emphasis added). Moreover, it is questionable whether the sale proceeds here constitute "specific property," which is required in order for an equitable lien to arise. Id.; Sec. Pac. Mortgage at 209. Accordingly, under James and its progeny, no equitable lien could arise in this case. The Bankruptcy Court's decision is nonetheless affirmed, however, because it is supported by New York law governing the imposition of constructive trusts.
This Court is not prepared to find that the exchange between counsel and the Bankruptcy Court constituted the type of contract or agreement (express or implied) that is required for the imposition of an equitable lien. See e.g., Thorne Real Estate at 652.
Even assuming that the "arrangement" was an agreement that could support the imposition of an equitable lien, it is not clear which parties' intent would be required. Would it be sufficient for Rama, Gottesman, and the Bankruptcy Court approving the sale to agree that Gottesman shall receive a lien on the sale proceeds? Would the Committee have to be a party to such an agreement?
Ostensibly, the Bankruptcy Court did not deem that the APA (or any other contract) provided a basis for Gottesman's equitable lien. In re Rama at 271. A contrary finding, however, would not alter this Court's decision because no contract or agreement in the record created a "lien upon specific property."
The New York Court of Appeals has held that a
"constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him to a trustee." Simonds v. Simonds, 45 N.Y.2d 233, 241 (1978) (quoting Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 386 (1919)).
Preventing unjust enrichment is the primary purpose of this doctrine. Simonds at 242 (stating that unjust enrichment "does not require the performance of any wrongful act by the one enriched"). Accordingly, when applying this doctrine, courts in New York endeavor to "identify a party who is holding property `under such circumstances that in equity and good conscience he ought not to retain it.'" Counihan v. Allstate Ins. Co., 194 F.3d 357, 361 (2d Cir. 1999) (quoting Miller v. Schloss, 218 N.Y. 400, 407 (1916)).
The New York Court of Appeals has delineated four factors that serve as guideposts for application of a constructive trust. These factors are: "(1) a confidential or fiduciary relation, (2) a promise, (3) a transfer in reliance thereon and (4) unjust enrichment." Sharp v. Kosmalski, 40 N.Y.2d 119, 121 (1976). The Sharp factors, however, "are not to be applied with mathematical rigidity, for `[a] constructive trust will be erected whenever necessary to satisfy the demands of justice [and] its applicability is limited only by the inventiveness of men who find new ways to enrich themselves unjustly by grasping what should not belong to them.'" Federation Internationale Du Sport Universitaire v. Greater Buffalo Athletic Corp., No. 93-CV-0635E(F), 1994 WL 411908, at *3 (W.D.N.Y. Aug. 4, 1994) (quoting Latham v. Father Divine, 299 N.Y. 22, 27 (1949)). To that end, courts in New York have noted that, "[a]lthough these [Sharp] factors provide important guideposts, the constructive trust doctrine is equitable in nature and should not be `rigidly limited.'" Controle et Revision S.A. v. Refco F/X Assoc., (In re Koreag), 961 F.2d 341, 352 (2d Cir. 1992) (quoting Simonds at 241). Rather than applying the Sharp factors talismanically, courts in New York have imposed constructive trusts where "property is held under circumstances that render unconscionable and inequitable the continued holding of the property and that the remedy is essential to prevent unjust enrichment." Counihan at 362 (imposing a constructive trust on insurance proceeds, despite the lack of a fiduciary relationship, an express promise, or a transfer in reliance thereon, because the most significant factor — unjust enrichment — existed where a house, which the United States was about to seize, was destroyed by arson and the owner of the house attempted to retain the insurance proceeds).
To deny Gottesman its commission from Rama would unjustly enrich Rama and, indirectly, its unsecured creditors. Rama agreed pre-petition to pay Gottesman a commission if it procured a buyer that successfully purchased Rama's assets. Gottesman undisputedly procured Metro, Inc., who entered the APA and purchased Rama's assets. But for Gottesman, there would be no sale proceeds. Rama's bankruptcy proceeding was contemplated by all the parties when the APA was executed 11 days before Rama's petition was filed. Therefore, it is equitable and just that Gottesman should get a commission as promised. 27A Am. Jur. 2d, Equity § 116 (1996) ("[E]quity regards as done that which ought to be done in fairness and good conscience. *** [T]he court has the power to compel the parties to do that which ought to be done and which was contemplated by the parties at the time of the transaction.") This Court declines to disturb the Bankruptcy Court's ruling that Rama shall pay Gottesman $199,000 and that Gottesman maintains the right to file an unsecured pre-petition claim for the balance, if any, owed by Rama.
As a practical matter, Gottesman could have objected to the sale procedure and the Bankruptcy Court could have required Gottesman to get its commission "at the closing." Such commissions are a cost of doing business and it is doubtful that the Bankruptcy Court would intentionally leave Gottesman out in the cold when approving Rama's asset sale. Moreover, Gottesman should not be punished for not holding the sale hostage over the timing of its commission from Rama.
Accordingly, it is hereby ORDERED that the Orders of the United States Bankruptcy Court are hereby affirmed on other grounds.