Opinion
Case No. 00-CV-0236K (M)
October 17, 2002
ORDER
Before the Court is the Motion of the Plaintiff for Summary Judgment against Defendant Todd Henshaw.
Background Facts and Procedures
On or about December 4, 1995, Defendant's client, Robert Lowrance ("Lowrance"), filed his federal income tax return for the year 1994. The return showed a self-assessed balance of tax due of $2,390,074. The United States made several assessments against Lowrance for taxes or interest due. On the date of each assessment, a federal tax lien arose pursuant to 26 U.S.C. § 6321 and 6322 and attached to all property and rights to property belonging to Lowrance. Plaintiff filed notices of federal tax liens in Washington, Nowata, and Rogers Counties in Oklahoma and Ellis and Finney Counties in Kansas.
On August 9, 1996, Lowrance filed for Chapter 11 Bankruptcy in the Northern District of Oklahoma, Case No. 96-03124-M. Defendant represented Lowrance during the bankruptcy proceeding. During bankruptcy, the bankruptcy court authorized the sale of several parcels of real property and stock on which the United States had federal tax liens. The federal tax liens attached to the proceeds of these sales. The bankruptcy court orders authorizing the sale of these assets required Lowrance to deposit the proceeds into a separately-segregated account, and the bankruptcy court ordered Lowrance not to withdraw any funds from the separately-segregated account without the consent of the Internal Revenue Service ("IRS") or by court order. In the sale of one of the properties, Lowrance received a note calling for monthly payments. Lowrance then deposited every monthly payment into his debtor-in-possession account, instead of the separately-segregated account, as ordered by the bankruptcy court.
The bankruptcy court orally granted Lowrance's motion to dismiss his bankruptcy case at a hearing on February 29, 2000, conditioned on the fact that the dismissal would not affect the liens attached to the proceeds from the sale of the aforementioned assets. After the hearing, Defendant asked Lowrance to pay a portion of the attorney fees due to Defendant and instructed Lowrance to make the payment using Lowrance's debtor-in-possession account. The bankruptcy court signed the Order dismissing the bankruptcy case on March 13, 2000.
On February 29, 2000, Lowrance wrote checks numbered 3341 through 3345, worth $664,675 on his debtor-in-possession account. Check number 3341 was written to the Bank of Oklahoma for $20,000 with Defendant's name on the memo line. Lowrance used this check to purchase Bank of Oklahoma Official Check number 341315254 dated March 1, 2000, for $20,000 payable to Defendant. This Official Check is the subject of this action against Defendant. Defendant received the Official Cheek for $20,000 on or about March 1, 2000. Defendant understood that the $20,000 check was in payment of his attorney fees for his representation of Lowrance during the bankruptcy case. Also on March 1, 2000, Lowrance wrote a check for $700,000 out of the separately-segregated account and deposited it into his debtor-in-possession account.
In the present action, Plaintiff filed its Complaint in this Court on March 20, 2000, naming Robert D. Lowrance and Bruce Johnson as defendants in order to reduce a federal tax assessment against Robert D. Lowrance to judgment and to foreclose federal tax liens against personal property. Plaintiff added Defendant Todd Henshaw as a defendant on July 23, 2001, alleging conversion by Defendant. Plaintiff filed this Motion for Summary Judgment against Defendant to determine that Defendant is liable to the United States for tortious conversion of $20,000 plus interest.
Summary Judgment Standard
Summary judgment is appropriate if "their is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). The Court must view the evidence and draw any inferences in a light most favorable to the party opposing summary judgment, but that party must identify sufficient evidence which would require submission of the case to a jury. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-52 (1986); Mares v. ConAgra Poultry Co., 971 F.2d 492, 494 (10th Cir. 1992). Where the nonmoving party will bear the burden of proof at trial, that party must go beyond the pleadings and identify specific facts that demonstrate the existence of an issue to be trial by the jury. See Mares, 971 F.2d at 494.
Discussion
In Oklahoma, the elements of the tort of conversion are "(1) that the plaintiff own certain property at the time of its conversion; (2) that defendant converted plaintiff's property by a wrongful act of disposition of the property; and (3) that damages are suffered by the plaintiff" Atwall v. Stifel, Nicolaus Co., Inc., No. CIV-91-107-C, 1991 U.S. Dist. LEXIS 20043, at *6 (W.D. Okla. Apr. 15, 1991). See also Continental Oil Co. v. Berry, 103 P.2d 69, 72 (Okla. 1940); White v. Webber-Workman Co., 591 P.2d 348, 350 (Okla.Ct.App. 1979). "Before the issue of conversion can be decided, ownership of the money must be established." Brown v. Oklahoma State Bank Trust Co. of Vinita, 860 P.2d 230, 233 (Okla. 1993). The parties do not agree that Plaintiff originally owned the money in dispute.
The parties agree that Plaintiff's liens attached to the funds in the separately-segregated account that arose from the sale of the real property and stocks. The parties also agree that the filing of Lowrance's bankruptcy operated as a stay applicable to the Plaintiff under 11 U.S.C. § 362 (2000) and that the filing created a bankruptcy estate, which is a separate legal entity from Lowrance under 11 U.S.C. § 541 (2000). The funds in the debtor-in-possession account were the property of this separate legal entity, not Plaintiff, with the possible exception of the monthly payments Lowrance received from the sale of property encumbered by the Plaintiff's lien and deposited by Lowrance into his debtor-in-possession account, instead of the separately-segregated account, as ordered by the bankruptcy court. The $20,000 paid to Defendant originated from Lowrance's debtor-in-possession account.
This is where the disagreement begins. Since Lowrance made the payment to Defendant from his debtor-in-possession account, which contained property to which the Plaintiff's lien attached and property to which it did not, the parties disagree about whether the $20,000 was encumbered by Plaintiff's lien or net. The answer to this question depends on the accounting method used to track the funds as they entered and left the debtor-in-possession account. "The goal of `tracing' is to establish what portion of a commingled account constitutes proceeds of the collateral." Farmers Merchants Nat'l Bank v. Sooner Cooperative, Inc., 766 P.2d 325, 329 (Okla. 1998).
There are essentially four accounting methods that courts employ in tracking funds — the lowest intermediate balance approach; the last-in-first-out (LIFO) approach; the pro-rata approach; and the first-in-first-out approach. See United States v. Banco Cafetero Panama, 797 F.2d 1154, 1159 (2d Cir. 1986); Chase Manhattan Bank v. Power Products, Inc., 27 V.I. 126 (V.I. 1992). Plaintiff advocates the LIFO approach while Defendant advocates the lowest intermediate balance approach. Use of the different approaches yields different results as to the ownership of the $20,000. Courts have used the lowest intermediate balance test most often when tracing in a conversion action. However, in 2001, the Tenth Circuit Court of Appeals limited the instances in which use of the lowest intermediate balance test is appropriate. In re Foster, 275 F.3d 924, 927 (10th Cir. 2001). "The lowest intermediate balance rule is an equitable fiction that should not be employed where equity does not warrant the result. Courts refuse to employ the lowest intermediate balance fiction where the commingled account is comprised largely of finds acquired from other fraud victims." Id.
See Meyer v. Norwest Bank Iowa, 112 F.3d 946, 951 (8th Cir. 1997) (finding that the lowest intermediate balance approach is "a tool to permit the calculation of damages at the time of conversion"); Stockmen's Livestock Mkt., Inc. v. Norwest Bank of Sioux City, 135 F.3d 1236, 1241 (8th Cir. 1997) (applying the lowest intermediate balance test); Security State Bank v. Firstar Bank Milwaukee, 965 F. Supp. 1237, 1244 (N.D. Iowa 1997) (finding that the Iowa Supreme Court used the lowest intermediate balance approach to trace proceeds in a commingled account).
There is some authority that the Court should give the government leeway in making the decision of which approach to use. "[W]hen tracing commingled funds, the government is accorded flexibility to choose among various accounting approaches." In re Moffitt, Zwerling, Kemler, P.C., 875 F. Supp. 1152, 1159-60 (E.D. Va. 1995). However, the Virginia court goes on to explain that "[t]he government's choices among accounting alternatives need not be blindly accepted by courts, for `which approach reflects reality in any particular case will depend on the circumstances.'" Id. at 1160 (citation omitted). See also United States v. Banco Cafetero Panama, 797 F.2d 1154, 1160 (2d Cir. 1986). This case-by-case/ circumstantial "standard" sets forth no real legal standard for the Court to follow as to which accounting method is proper in these circumstances. Therefore there is a genuine factual dispute that the Court cannot resolve and that makes summary judgment in this case inappropriate. This Court does not reach the issue of whether Defendant converted funds because the initial matter of ownership of the funds, element one of a conversion claim, cannot be here resolved.
Defendant, in his Response and Brief in Support Thereof to Plaintiff's Motion for Summary Judgment (dkt #91), asserts that pursuant to FED. R. CIV. P. 54(c), "the Court has the power to enter judgment for any party shown by the undisputed material facts to be entitled to judgment as a matter of law" and that pursuant to this power, the Court should grant Defendant judgment. The Court declines to do so finding there are material facts in dispute.
Conclusion
Because there is a genuine factual dispute, summary judgment is inappropriate. It is the Order of the Court that the Plaintiff's Motion for Summary Judgment (dkt #79) is hereby DENIED.
ORDERED.