George W. Stevenson, etc. v. J.C. Bradford & Company, et al.

In this opinion we address two separate appeals from judgments
of the district court in an adversary proceeding commenced in the
bankruptcy of William Dunlap Cannon III. In the first (No.
00-5624), George W. Stevenson in his capacity as trustee of the
estate in bankruptcy sought to avoid certain fraudulent transfers
pursuant to 11 U.S.C. § 548 (the "core proceeding"). See
generally Stevenson v. J.C. Bradford & Co. (In re Cannon),
230 B.R. 546 (Bankr.W.D.Tenn. 1999). Following a bench trial the
bankruptcy court entered judgment in favor of the trustee for
$1,137,500 plus prejudgment interest. Id. at 599-600. See also
Stevenson v. J.C. Bradford & Co. (In re Cannon), 232 B.R. 701,
709 (Bankr.W.D.Tenn. 1999). On appeal the district court ruled
that the trustee had failed to establish that funds Cannon held
in trust for clients constituted "an interest of the debtor in
property" within the meaning of section 548(a) and reversed the
judgment of the bankruptcy court.

In the second (No. 00-5895), the trustee asserted several
claims under federal and
state law against the defendants (the "non-core proceeding").
After trial the bankruptcy court made proposed findings of fact
and conclusions of law recommending that the district court enter
judgment in favor of the trustee for $2,361,736 in compensatory
damages, $5 million in punitive damages, prejudgment interest,
and reasonable attorneys' fees and costs. Stevenson,
230 B.R. at 601; 232 B.R. at 708-09. The district court sustained the
defendants' objection that the trustee lacked standing to bring
the non-core proceeding because the debtor could not have brought
suit against the defendants. Accordingly, the district court
dismissed the non-core proceeding. Stevenson timely filed notices
of appeal from both judgments of the district court, and we
consolidated the appeals for purposes of oral argument. For the
reasons that follow, we will affirm the judgments of the district
court.

I. Statement of Facts

William Dunlap Cannon III practiced law in Memphis, Tennessee,
for over twenty years before filing for bankruptcy in February
1994. Cannon's practice consisted almost entirely of real estate
closings, and during the time periods relevant to this suit he
averaged between 120 and 150 closings per month. Cannon
maintained several escrow accounts to hold clients' funds
deposited in connection with real estate transactions. His
principal escrow account was at United American Bank ("UAB") and
titled "William Dunlap Cannon III - Real Estate Escrow Account
II." Cannon also maintained at least two similarly titled escrow
accounts with First Tennessee Bank ("First Tennessee"). As a
result of the volume of Cannon's closings, between $5 million and
$10 million per month flowed through these accounts. Cannon
understood that he was a fiduciary with respect to the funds
deposited in escrow and that the accounts served the sole purpose
of receiving and disbursing funds in connection with real estate
transactions. As a matter of practice, Cannon collected his legal
fees earned in connection with closings by depositing checks
drawn on the escrow accounts into his law office's separate
account maintained at First Tennessee.

By the mid-1980s, Cannon had begun to use funds in his escrow
accounts to pay various personal and business expenses.
Initially, Cannon misappropriated the "float" in the escrow
accounts.[fn1] By the Fall of 1986, the escrow accounts had a
deficiency of approximately $400,000 to $500,000; but, the size
of the float generated by the volume of Cannon's real estate
closing business concealed the shortfall.

In October 1986 Cannon opened a brokerage account with J.C.
Bradford Futures, Inc., a wholly owned subsidiary of J.C.
Bradford & Co. (collectively "Bradford"), to trade commodity
futures. Prior to opening his account with Bradford, Cannon met
with Charles Ross, the head of Bradford's Memphis office, and
Freddie Norman, who discussed with Cannon a system the two had
developed while at Merrill Lynch for forecasting trends in
commodities markets and timing trades. At their meeting Ross and
Norman explained their system, showed Cannon an impressive
hypothetical annual rate of return of 100% to 200%, advised
Cannon to take every trade recommended by the system, and
informed Cannon that he might
incur substantial short-term losses that he could readily recoup
by sticking with the system for a long period of time.

On the basis of these representations, Cannon opened an account
and gave Ross and Norman discretion to enter into commodities
transactions within the parameters recommended by the system.
Cannon's application for the Bradford commodity account shows
that Cannon had an annual income of more than $250,000 and a net
worth, excluding the value of his home, of between $500,000 and
$1 million. It also reveals that Cannon had no prior experience
in trading commodities. Although Bradford had a policy of not
accepting corporate checks, the record reflects that all of the
checks that Cannon deposited into his brokerage account with
Bradford came from one of his escrow accounts with UAB or First
Tennessee.

By early 1987 Cannon's account had lost over 50% of the funds
invested. After increasing the size of his positions, Cannon
recovered these losses over the next two years. In September 1990
Cannon ceased trading in his Bradford commodity account. By this
point in time, Cannon had realized a profit of $12,454,
representing an annual rate of return of approximately 3.3%.

As losses from Cannon's business ventures and other investments
mounted, the deficiency in the escrow accounts reached
approximately $1.5 million by the Spring of 1992. Cannon could no
longer rely on float to conceal the shortfall in the escrow
accounts, so he began to take more aggressive measures. First,
Cannon held closing checks to generate float.[fn2] As the
deficiency increased and Cannon became increasingly dependent on
new funds to cover the checks being held on prior closings,
Cannon began kiting checks to increase the balance in the escrow
accounts.[fn3] In addition to kiting between accounts with
UAB and First Tennessee, Cannon opened accounts with several
out-of-town banks.

Desperate for a way out of his predicament, Cannon resumed
commodities trading in March 1992 based on representations that
Ross and Norman had improved their system. As Cannon again
sustained losses, he made margin calls and covered positions with
checks drawn on the escrow accounts at UAB and First Tennessee.
Cannon realized the impropriety and illegality of using the
escrow accounts in this way, and he depended upon deposits from
new closings to pay off the parties to earlier transactions. At
various points when Cannon experienced large losses, Ross and
other managers with Bradford sought explanations for Cannon's use
of checks drawn on the escrow accounts, but never confirmed
Cannon's verbal assurances that
the accounts contained his own money, even though Cannon had
previously indicated to Ross that he was trading with borrowed
funds. By February 1994 Cannon had sustained gross trading losses
of $2.36 million and net trading losses of more than $1 million.
In turn, the losses increased the pressure on Cannon's practice
to make up the deficit in the escrow accounts by delaying
payments on closings and kiting checks. Cannon's trades generated
brokerage commissions of $286,876 for Bradford.

Cannon's scheme came to an end when UAB informed Cannon on
February 3, 1994, that it would no longer cover overdrafts,
immediately credit his account upon presentation of a check, or
transfer funds among his accounts. See Lawyers Title Ins. Corp.
v. United Am. Bank of Memphis, 21 F.Supp.2d 785, 790-91
(W.D.Tenn. 1998) (stating the facts in a related civil case).
Shortly thereafter Cannon bounced two checks at First Tennessee,
which then returned all checks presented for payment on Cannon's
accounts and terminated Cannon's accounts on February 17, 1994.
See First Tenn. Bank, N.A. v. Stevenson (In re Cannon),
237 F.3d 716, 718 (6th Cir. 2001) (stating the facts in a related
case in which the trustee sought to avoid a preferential
transfer). As a result of these actions, Cannon voluntarily
suspended his license to practice law and filed a voluntary
petition for bankruptcy under Chapter 7 on February 25, 1994.
See Lawyers Title Ins. Corp., 21 F.Supp.2d at 791. The Supreme
Court of Tennessee disbarred Cannon effective August 1, 1994.
Id. In 1995 Cannon pleaded guilty in federal court to charges
of embezzlement, mail fraud, wire fraud, and bank fraud and began
serving a sentence of forty-two months imprisonment.[fn4]

A. The Condition of the Escrow Accounts When Cannon Filed for
Bankruptcy

At the time Cannon filed his petition for bankruptcy, the
deficiency in his escrow accounts had ballooned to over $3.5
million. This amount was owed to mortgage companies and
individuals on real estate closings. When Cannon filed for
bankruptcy, the UAB escrow account had a balance of $648.81, and
the First Tennessee accounts showed a balance of zero. At all
times Cannon commingled the funds of clients in the escrow
accounts. In addition, Cannon deposited some legal fees into the
escrow accounts in a vain attempt to repay the deficiency, and
the balance in the escrow accounts also increased due to Cannon's
check kiting.

During the year prior to filing for bankruptcy, Cannon wrote
twenty-one checks to Bradford from the escrow accounts totaling
$1,137,500. Jeffrey Graham, a certified public accountant
retained as an expert by the trustee, conducted an analysis of
the cash flows in and out of the escrow accounts to determine the
source of funds
Cannon used to pay Bradford. According to Graham's report, the
escrow checks came from an approximately $12 million pool of 242
deposits made at or near the time of checks written to Bradford.
Of this amount, Graham traced approximately $9.9 million, or 83%,
to funds from real estate closings; approximately $1.8 million,
or 15%, to kites; and $67,389.77 to Cannon's personal funds, with
the balance attributable to undetermined sources.

B. Commencement of the Adversary Proceeding in Bankruptcy Court

On February 23, 1996, Stevenson filed suit against J.C.
Bradford & Co., J.C. Bradford Futures, Inc., and Charles Ross.
Counts I through VII of the complaint alleged violations of
federal commodities laws, breach of fiduciary duties, fraud,
violations of state consumer protection laws, and failure to
supervise - all non-core proceedings under 28 U.S.C. § 157(b)(2).
In Count VIII the trustee sought to recover under 11 U.S.C. § 548
the $1,137,500 Cannon transferred to Bradford from the escrow
accounts, a core proceeding under 28 U.S.C. § 157(b)(2)(H). An
amended complaint contained a prayer for relief requesting
rescissionary and compensatory damages against all defendants,
jointly and severally, in the amount of $2 million plus $6
million in punitive damages and reasonable costs and attorneys'
fees on Counts I through VII. On Count VIII the trustee sought
$1,137,500, prejudgment interest, and costs.

In an amended answer to the amended complaint, Defendants
asserted several affirmative defenses. Of particular relevance to
this appeal, Defendants argued that (1) the funds transferred to
Bradford from the escrow accounts did not constitute "an interest
of the debtor in property," (2) Bradford accepted the checks
drawn on the escrow accounts for value and in good faith, and (3)
the trustee lacked standing to assert the claims raised in the
amended complaint because the victims of Cannon's
misappropriations are not creditors of the estate and had
received compensation through their insurance companies or
brought separate actions to recover their losses.

In a motion to dismiss Count VIII, the core proceeding,
Defendants argued that the funds transferred from the escrow
accounts did not constitute "an interest of the debtor in
property" within the meaning of section 548 and so did not come
within the trustee's avoidance power. After a hearing on the
partial-motion to dismiss, the bankruptcy court rejected
Defendants' arguments and denied the motion. Stevenson and
Defendants filed cross-motions for summary judgment. After
denying Defendants' motion and granting in part and denying in
part the motion of the trustee, the effect of which was to find
that the funds in the escrow accounts were property of the estate
under section 548, the bankruptcy court set the case for trial.
Stevenson, 230 B.R. at 588.

C. The Bankruptcy Court's Order (No. 00-5624) and Proposed
Findings (No. 00-5895)

Upon the conclusion of a nine-day bench trial, the bankruptcy
court issued lengthy proposed findings of fact and conclusions of
law with respect to the counts alleged in the non-core
proceeding[fn5] and an opinion and order with respect to the
trustee's core proceeding to avoid the fraudulent transfer. See
generally Stevenson v. J.C. Bradford & Co. (In re Cannon),
230 B.R. 546 (Bankr.W.D.Tenn. 1999). In the non-core
proceeding, the bankruptcy court proposed that the district court
find Defendants liable for commodities fraud, fraud, violations
of Tennessee's consumer protection laws, breach of fiduciary
duties, and failure to supervise. Id. at 570-88. The bankruptcy
court recommended that the district court enter judgment in favor
of the trustee for $2,361,736 in compensatory damages and $5
million in punitive damages plus prejudgment interest. Id. at
601.

In the core proceeding, having previously determined that the
funds in the escrow accounts were property of the estate, the
bankruptcy court found that Cannon transferred funds from the
escrow accounts to Bradford with the intent to hinder, delay, and
defraud his creditors, id. 588-91, and that Bradford did not
receive the funds in good faith. Id. at 591-94. Therefore, the
bankruptcy court concluded that Cannon's disbursement of funds
from the escrow accounts to Bradford constituted fraudulent
transfers under section 548. Id. at 591, 594. On this basis the
bankruptcy court ruled that the trustee was entitled to recover
the $1,137,500, plus prejudgment interest, transferred to
Bradford in the year before Cannon filed for bankruptcy. Id. at
600, 601-02.

Defendants timely filed with the bankruptcy court objections to
the proposed findings of fact and conclusions of law in the
non-core proceeding and a motion to alter or amend the judgment
under Rule 9023 of the Federal Rules of Bankruptcy Procedure in
the core proceeding. Among the objections raised was Defendants'
renewal of the argument previously made in the amended answer to
the amended complaint that the trustee lacked standing to assert
claims related to Cannon's trading losses. In response to the
objections, the trustee asserted that Defendants had raised the
standing argument for the first time. Upon review of the
objections and responses, the bankruptcy court entered an order
amending the proposed findings of fact and conclusions of law
with respect to the non-core proceeding and an amended order in
the core proceeding. See generally Stevenson v. J.C. Bradford &
Co. (In re Cannon), 232 B.R. 701 (Bankr. W.D.Tenn. 1999). For
purposes of this appeal, these amendments made no material
changes to the bankruptcy court's initial judgment.

D. The District Court's Judgments

On appeal to the district court in the core proceeding,
Defendants argued that the bankruptcy court erred in finding that
the funds in escrow were property of the debtor and that the
trustee lacked standing to recover any funds fraudulently
transferred to Bradford from the escrow accounts because they
belonged to clients, not creditors. In an order dated March 31,
2000, the district court agreed with Defendants that the trustee
lacked standing to assert claims against Defendants under section
548. Because the trustee's standing implicated the court's
jurisdiction under Article III, the district court determined
that it could properly entertain the issue for the first time on
appeal. Reasoning that under Tennessee law the escrow accounts
were express trusts, the district court concluded that Cannon had
no equitable interest in the funds transferred to Bradford with
the result that the definition of "an interest of the debtor in
property" in section 548 excluded them from the estate in
bankruptcy. Therefore, the district court reversed the judgment
of the bankruptcy court in the core proceeding and entered
judgment in favor of Defendants.

In the non-core proceeding, the district court entered a
separate order on March 31, 2000, dismissing the trustee's claims
against Defendants. Because the money Bradford lost in
commodities trades came from escrow accounts Cannon maintained
for the benefit of his clients, the district court concluded that
Cannon himself suffered no distinct injury as a result of the
conduct of Defendants, fraudulent or otherwise. Therefore, the
court reasoned, Cannon would not have standing to sue Defendants
although his clients who lost money would.

II. The Core Proceeding (No. 00-5624)

As a threshold matter, Defendants argue that the trustee did
not have standing to seek avoidance of the transfers of funds in
the escrow accounts belonging to Cannon's clients to Bradford. In
response, the trustee assails the judgment of the district court
in the core proceeding on the ground that Defendants have
asserted for the first time on appeal the question of standing
and the argument that funds held in express trust for Cannon's
clients fall outside the scope of section 548.

Because 11 U.S.C. § 548(a)(1) grants the trustee the power to
"avoid any transfer of an interest of the debtor in property"
made within one year before the debtor filed a petition for
bankruptcy, we have difficulty comprehending Defendants' argument
that the trustee lacks Article III standing to seek to avoid
preferential transfers. Defendants likely advance this argument
to circumvent the general rule that a reviewing court will not
consider issues raised for the first time on appeal. See, e.g.,
Poss v. Morris, 260 F.3d 654, 663 (6th Cir. 2001); Michigan
Nat'l Bank v. Charfoos (In re Charfoos), 979 F.2d 390, 395 (6th
Cir. 1992); Pinney Dock & Transport Co. v. Penn Cent. Corp.,
838 F.2d 1445, 1461 (6th Cir. 1988). Whether to consider an issue
on which the trial court did not pass rests within the discretion
of the appellate court and depends upon the facts of individual
cases. Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868,
49 L.Ed.2d 826 (1976). Factors guiding the determination of whether
to consider an issue for the first time on appeal include:

1) whether the issue newly raised on appeal is a
question of law, or whether it requires or
necessitates a determination of facts; 2) whether the
proper resolution of the new issue is clear and
beyond doubt; 3) whether failure to take up the issue
for the first time on appeal will result in a
miscarriage of justice or a denial of substantial
justice; and 4) the parties' right under our judicial
system to have the issues in their suit considered by
both a district judge and an appellate court.

Friendly Farms v. Reliance Ins. Co., 79 F.3d 541, 545 (6th Cir.
1996) (citing Taft Broad. Co. v. United States, 929 F.2d 240,
245 (6th Cir. 1991)). We have also held that exceptional
circumstances may warrant a departure from the general rule.
Poss, 260 F.3d at 663-64; Foster v. Barilow, 6 F.3d 405, 407
(6th Cir. 1993).

The Supreme Court has committed the question of which
circumstances warrant a departure from the general rule to the
sound discretion of the appellate courts. Singleton,
428 U.S. at 121, 96 S.Ct. 2868. Even if Defendants raised the issue for
the first time on appeal to the district court, we would not
conclude that the district court abused its discretion by
considering for the first time on appeal a question of law
intimately bound up with the power of the trustee under the
bankruptcy code. Further, the record reflects that Defendants in
fact raised the argument that the funds transferred from the
escrow accounts to Bradford did not constitute "an interest of
the debtor in property" in an amended answer to the amended
complaint and in the motion to dismiss. In as much as Defendants
presented the matter
to the bankruptcy court and the issue concerns an important
question of law regarding the scope of the trustee's avoidance
power under section 548 of the bankruptcy code, we will consider
whether the funds Cannon deposited with Bradford constitute
fraudulent transfers within the meaning of 11 U.S.C. § 548.

A. Standard of Review

When we review appeals from the decisions of a district court
in a case originating in bankruptcy court, we directly review the
decision of the bankruptcy court rather than the district court's
review of the bankruptcy court's decision. In re M.J. Waterman &
Assocs., Inc., 227 F.3d 604, 607 (6th Cir. 2000). Because we
find ourselves in essentially the same position as the district
court in reviewing the bankruptcy court's decision, we accord no
deference to the district court's decision. Id. at 607. "[I]n
appeals from the decision of a district court on appeal from the
bankruptcy court, the court of appeals independently reviews the
bankruptcy court's decision, applying the clearly erroneous
standard to findings of fact and de novo review to conclusions of
law." In re Madaj, 149 F.3d 467, 468 (6th Cir. 1998) (internal
quotations and citations omitted).

Because a grant of summary judgment presents a pure question of
law, the district court reviews the bankruptcy court's grant of
summary judgment de novo, as do we in turn. In re Batie,
995 F.2d 85, 88-89 (6th Cir. 1993). Likewise the trustee's power to
avoid fraudulent transfers under section 548 presents a question
of law that we review de novo. See United States v. Hunter (In
re Walter), 45 F.3d 1023, 1027 (6th Cir. 1995) (citing In re
Caldwell, 851 F.2d 852, 857 (6th Cir. 1988), and In re Loretto
Winery Ltd., 898 F.2d 715, 718 (9th Cir. 1990)).

B. Section 548 and the Power of the Trustee

Under 11 U.S.C. § 548(a)(1), the trustee "may avoid any
transfer of an interest of the debtor in property" made within
one year before the debtor files a petition for bankruptcy.
Although the bankruptcy code does not define "property of the
debtor," section 541(a)(1) provides that the "property of the
estate" includes "all legal or equitable interests of the debtor
in property as of the commencement of the case." Section 541(d)
further provides:

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 under subsection (a) of this section 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.

The Supreme Court has interpreted these statutes as including in
a debtor's estate "that property that would have been part of the
estate had it not been transferred before the commencement of the
bankruptcy proceedings." Begier v. IRS, 496 U.S. 53, 58,
110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). However, "[b]ecause the debtor
does not own an equitable interest in property he holds in trust
for another, that interest is not `property of the estate.'"
Id. at 59, 110 S.Ct. 2258.

State law determines whether funds held in escrow constitute an
express trust excluded from the debtor's estate. Barnhill v.
Johnson, 503 U.S. 393, 398, 112 S.Ct. 1386, 118 L.Ed.2d 39
(1992) (noting that under the bankruptcy code "`property' and
`interests in property' are creatures of state law") (citing
McKenzie v. Irving Trust Co., 323 U.S. 365, 370, 65 S.Ct. 405,
89 L.Ed. 305 (1945), and Butner v. United States, 440 U.S. 48,
54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)). Under Tennessee
law, establishing the existence of an express trust requires
proof of three elements:

(1) a trustee who holds trust property and who is
subject to the equitable duties to deal with it for
the benefit of another, (2) a beneficiary to whom the
trustee owes the equitable duties to deal with the
trust property for his benefit, and (3) identifiable
trust property.

Kopsombut-Myint Buddhist Ctr. v. State Bd. of Equalization,
728 S.W.2d 327, 333 (Tenn.Ct.App. 1986) (citing G.G. BOGERT & G.T.
BOGERT, THE LAW OF TRUSTS AND TRUSTEES § 1 (rev.2d ed. 1984)
[hereinafter Bogert], and RESTATEMENT (SECOND) OF TRUSTS § 2 cmt.
h (1957)).

[A]t a minimum, there must be a grantor or settlor
who intends to create a trust; a corpus (the
subject property); a trustee; and a beneficiary. The
trustee holds legal title and in that sense, owns the
property, holding it for the benefit of the
beneficiary who owns the equitable title. While the
grantor may retain either of these interests, no one
may solely hold both as the purpose of separating the
two would be defeated.

Myers v. Myers, 891 S.W.2d 216, 218-19 (Tenn.Ct.App. 1994)
(citations omitted).

Under these principles of Tennessee law, we conclude that the
funds Cannon held in escrow for his clients were without question
maintained in an express trust. In this case, purchasers of real
estate deposited funds in segregated escrow accounts, which
Cannon maintained subject to fiduciary duties for the benefit of
parties to real estate sales who would receive the money or for
whose benefit the money would be paid out upon closing.
Accordingly, all of the conditions necessary for creation of an
express trust are present in this arrangement. "[W]here a person
has or accepts possession of personal property with the express
or implied understanding that he is not to hold it as his own
absolute property, but is to hold and apply it for certain
specific purposes or for the benefit of certain specified
persons, a valid and enforceable express trust exists." In re
Elrod, 42 B.R. 468, 473 (Bankr. E.D.Tenn. 1984). See also
Emerson v. Marty (In re Mark Benskin & Co.), 135 B.R. 825, 834
(Bankr.W.D.Tenn. 1991) ("If the intention is that the money shall
be kept or used as a separate fund for the benefit of the payor
or a third person, a trust is created.") (quoting In re Property
Leasing & Mgmt., Inc., 50 B.R. 804, 807-08 (Bankr.E.D.Tenn.
1985)).

The Tennessee Supreme Court's rules confirm this conclusion:
"Attorneys who practice law in Tennessee shall deposit all funds
held in trust in this jurisdiction in accounts clearly identified
as `trust' or `escrow' accounts, referred to herein as `trust
accounts[.]'" TENN. SUP.CT. R. 9, § 29.1(A)(1). Therefore, at all
times prior to the filing of his petition for bankruptcy, Cannon
possessed only legal title to the funds in escrow while equitable
title remained vested in his clients. See also Lawyers Title
Ins. Co., 21 F.Supp.2d at 803 (concluding that Cannon owed
fiduciary duties to the beneficiaries of the escrow accounts).
Although Tennessee law generally treats claimants of an insolvent
trust as general creditors rather than beneficiaries unless they
trace their property among commingled funds, Bragg v. Osborn,
147 Tenn. 381, 248 S.W. 19 (1923), McDowell v. McDowell,
144 Tenn. 452, 234 S.W. 319 (1921), in this situation the commingled
client funds in the escrow accounts retain their character as
property held subject to an express trust. This is so because in
Tennessee a lawyer who holds funds belonging to a client must
"maintain all such funds in a pooled . . . account for deposit of
client funds that are . . . expected to be held for a short
period."

TENN. SUP.CT. R. 8, DR-9-102(C)(2). See also Formal Ethics Op.
No. 84-F-68, 1984 WL 262035, at *1 (Tenn.Bd.Prof. Resp. May 29,
1984) ("Because of the impracticality of establishing a separate
account for each client, all client funds generally are
commingled in the lawyer's trust account."); RESTATEMENT (SECOND)
OF TRUSTS § 179 cmt. f (1959) ("[O]rdinarily an attorney . . .
can properly deposit in a single trust account the funds of all
his clients. . . ."). Accordingly, the commingling of funds held
in express trust in the escrow accounts does not alter their
character, and these funds remain outside the estate under
section 548.

When Cannon deposited his own funds, small as they were, into
the escrow accounts, he obtained no interest under Tennessee law
in the trust corpus that would allow the bankruptcy trustee to
avoid the transfers to Bradford as fraudulent. According to the
undisputed facts, Cannon deposited personal funds in the escrow
account in a vain effort to attempt to repay the misappropriated
funds. Under general common law principles, these funds became a
part of the escrow account and are added to the sums held in
express trust on behalf of Cannon's clients. See BOGERT § 929
(explaining that a trustee's later deposits of his own money into
a trust account are presumed to be restitution for his stolen
funds when the account is expressly labeled a trust account);
RESTATEMENT (SECOND) OF TRUSTS § 202 cmt. m; RESTATEMENT OF
RESTITUTION § 212 cmt. c (1937). Accord Goldberg v. New Jersey
Lawyers' Fund for Client Prot., 932 F.2d 273, 280 (3d Cir.
1991); Kupetz v. United States (In re California Trade Technical
Schs., Inc.), 923 F.2d 641, 646 (9th Cir. 1991).

In addition, when Cannon misappropriated funds from the escrow
accounts he obtained no interest in the funds that the trustee
can seek to avoid. Under Tennessee law when a fiduciary
misappropriates trust funds for personal use, he has converted
the funds rather than obtained voidable title by fraud. See,
e.g., Treadwell v. McKeon, 66 Tenn. 201 (1874). Accord 222
Liberty Assocs. v. Prescott Forbes Real Estate Corp. (In re 222
Liberty Assocs.), 110 B.R. 196, 201 (Bankr.E.D.Pa. 1990) ("A
breach of the duty to deliver the escrowed property in the manner
described in the agreement has been termed a conversion of the
property not delivered.") (citing 28 AM.JUR.2D Escrow § 27
(1966)). For this reason, one who obtains property by conversion
acquires no title, voidable or otherwise, to the property
converted. Godwin v. Taenzer, 122 Tenn. 101, 119 S.W. 1133,
1133-34 (1909); Huffman v. Hughlett & Pyatt, 79 Tenn. 549
(1883). See also United Brake Sys., Inc. v. American Envtl.
Prot., Inc., 963 S.W.2d 749, 755 (Tenn.Ct.App. 1997) ("As a
converter, [the defendant] obtained no title to the [property]
and could not have transferred any title[.]"). On the undisputed
facts, clients deposited funds into Cannon's escrow accounts,
which they understood to be express trusts. Under Tennessee law
when Cannon converted these funds he acquired no title to them.
Therefore, his estate in bankruptcy has no interest in the escrow
accounts that brings them within the trustee's avoidance power
under section 548.

Because Cannon held the funds deposited into his escrow
accounts in express trust for his clients, we hold that these
monies are not part of his estate in bankruptcy and so not
subject to the trustee's avoidance power under section 548.
XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.),
16 F.3d 1443, 1449 (6th Cir. 1994) ("A debtor that served prior to
bankruptcy as trustee of an express trust generally has no right
to the assets kept in
trust, and the trustee in bankruptcy must fork them over to the
beneficiary."). See also United States v. Whiting Pools, Inc.,
462 U.S. 198, 205 n. 10, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983)
("Congress plainly excluded [from the bankruptcy estate] property
of others held by the debtor in trust at the time of the filing
of the petition."). Since the funds in the escrow accounts are
not a part of the estate in bankruptcy, they are not "an interest
of the debtor in property." Therefore, the trustee simply has no
power to avoid the transfers to Bradford.

III. The Non-Core Proceeding (No. 00-5895)

We next turn to the district court's ruling that the trustee
lacks standing to maintain the causes of action alleged in the
non-core proceeding. We have an independent obligation to ensure
our jurisdiction over a case even when the parties have not
disputed the issue. See, e.g., Bender v. Williamsport Area Sch.
Dist., 475 U.S. 534, 541, 106 S.Ct. 1326, 89 L.Ed.2d 501 (1986)
("[E]very federal appellate court has a special obligation to
`satisfy itself not only of its own jurisdiction, but also that
of the lower courts in a cause under review,' even though the
parties are prepared to concede it.") (quoting Mitchell v.
Maurer, 293 U.S. 237, 244, 55 S.Ct. 162, 79 L.Ed. 338 (1934));
Douglas v. E.G. Baldwin & Assocs., Inc., 150 F.3d 604, 607 (6th
Cir. 1998) ("[F]ederal courts have an independent obligation to
investigate and police the boundaries of their own
jurisdiction."). Because constitutional standing "is always a
threshold inquiry" that a court must consider before exercising
jurisdiction, Newsome v. Batavia Local Sch. Dist.,
842 F.2d 920, 922 (6th Cir. 1988) (internal quotation and alteration
omitted), the district court cannot have committed error - as the
trustee contends - by addressing the trustee's standing to bring
the non-core proceeding even if Defendants did not raise such a
challenge before the bankruptcy court. We review questions of
standing de novo. Johnson v. Economic Dev. Corp. of the County
of Oakland, 241 F.3d 501, 507 (6th Cir. 2001) (citing Warth v.
Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343
(1975)).

A. Constitutional and Prudential Principles of Standing

To establish standing under the "case or controversy"
requirement of Article III of the United States Constitution, a
plaintiff:

(1) must have suffered some actual or threatened
injury due the to alleged illegal conduct (the
"injury in fact element"); (2) the injury must be
fairly traceable to the challenged action (the
"causation element"); and (3) there must be a
substantial likelihood that the relief requested will
redress or prevent [plaintiff]'s injury (the
"redressability element").

Grendell v. Ohio Supreme Court, 252 F.3d 828, 832 (6th Cir.
2001), cert. denied, ___ U.S. ___, 122 S.Ct. 355,
151 L.Ed.2d 269 (U.S. Oct. 9, 2001) (No. 01-402) (quoting Coyne v. American
Tobacco Co., 183 F.3d 488, 494 (6th Cir. 1999)). As a rule, a
party must have a "personal stake in the outcome of the
controversy" to satisfy Article III. Warth, 422 U.S. at 498-99,
95 S.Ct. 2197 (quoting Baker v. Carr, 369 U.S. 186, 204,
82 S.Ct. 691, 7 L.Ed.2d 663 (1962)). A "plaintiff must show that he
personally has suffered some actual or threatened injury as a
result of the putatively illegal conduct of the defendant."
Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99,
99 S.Ct. 1601, 60 L.Ed.2d 66 (1979) (citations omitted). When a
plaintiff asserts standing based on a threatened injury, he must
show that the threatened injury is so imminent as to be
"certainly impending."

Whitmore v. Arkansas, 495 U.S. 149, 155-58, 110 S.Ct. 1717,
109 L.Ed.2d 135 (1990). Therefore, the alleged injury cannot be
"conjectural" or "hypothetical." Id. at 155, 110 S.Ct. 1717.

Even when a case falls within the parameters of Article III
jurisdiction, a party claiming standing must also demonstrate
that prudential considerations do not further limit the exercise
of a court's power to hear a case. See, e.g., Warth,
422 U.S. at 498, 95 S.Ct. 2197. "[A]ny inquiry into a litigant's standing
to sue involves examination of both constitutional limitations
and prudential restrictions." Allstate Ins. Co. v. Thrifty
Rent-A-Car Sys., Inc., 249 F.3d 450, 456 (6th Cir. 2001)
(citation omitted). Broadly speaking, there are three prudential
limits on standing ordinarily counseling against the exercise of
jurisdiction: (1) alleging a generalized grievance not particular
to the plaintiff; (2) asserting the legal rights and interests of
a third party; and (3) claiming an injury outside the zone of
interests of the statute providing the cause of action. See,
e.g., Valley Forge Christian Coll. v. Americans United for
Separation of Church & State, Inc., 454 U.S. 464, 474-75,
102 S.Ct. 752, 70 L.Ed.2d 700 (1982).

B. Standing of the Trustee

"As a creature of statute, the trustee in bankruptcy has only
those powers conferred upon him by the Bankruptcy [Code]."
Cissell v. American Home Assurance Co., 521 F.2d 790, 792 (6th
Cir. 1975) (citations omitted). The trustee stands in the shoes
of the debtor and has standing to bring any action that the
bankrupt could have brought had he not filed a petition for
bankruptcy. Melamed v. Lake County Nat'l Bank, 727 F.2d 1399,
1404 (6th Cir. 1984); Cissell, 521 F.2d at 792. See also
Mediators, Inc. v. Manney (In re The Mediators, Inc.),
105 F.3d 822, 825-26 (2d Cir. 1997) (citing 11 U.S.C. §§ 541 & 542 and
Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 429,
92 S.Ct. 1678, 32 L.Ed.2d 195 (1972)). Therefore, the prudential
principles of standing under Article III and the trustee's powers
under the bankruptcy code are coextensive:

[T]he "case or controversy" requirement coincides
with the scope of the powers the Bankruptcy Code
gives a trustee, that is, if a trustee has no power
to assert a claim because it is not one belonging to
the bankrupt estate, then he also fails to meet the
prudential limitation that the legal rights asserted
must be his own.

Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d
Cir. 1991).

Under 11 U.S.C. § 704(1), a Chapter 7 trustee "shall collect
and reduce to money the property of the estate. . . ." Among the
"legal and equitable interests of the debtor" included within the
"property of the estate" under section 541 are causes of action
belonging to the debtor. Spartan Tube & Steel, Inc. v.
Himmelspach (In re RCS Engineered Prods.), 102 F.3d 223, 225
(6th Cir. 1996) (citation omitted). Because causes of action
belong to the estate, section 704(1) grants the trustee the
exclusive right to assert the debtor's claims. Honigman v.
Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6th
Cir. 1997) (citing Schertz-Cibolo-Universal City, Indep. Sch.
Dist. v. Wright (In re Educators Group Health Trust),
25 F.3d 1281, 1284 (5th Cir. 1994)). If a cause of action belongs solely
to the estate's creditors, however, then the trustee has no
standing to pursue the claim. Id.

Whether a particular cause of action belongs to the debtor so
that it constitutes "property of the estate" depends upon state
law. In re RCS Engineered Prods., 102 F.3d at 225 (citing
Butner, 440 U.S. at 48, 99 S.Ct. 914).

"However, if the debtor could have raised a state claim at the
commencement of the bankruptcy case, then that claim is the
exclusive property of the bankruptcy estate and cannot be
asserted by a creditor." In re Van Dresser Corp.,
128 F.3d at 947 (citing In re Educators Group Health Trust,
25 F.3d at 1284). "Conversely, if the cause of action does not explicitly or
implicitly allege harm to the debtor, then the cause of action
could not have been asserted by the debtor as of the commencement
of the case, and thus is not property of the estate." Id.
Therefore, if Cannon himself could have pursued the claims the
trustee asserted against Defendants in the non-core proceeding,
then the trustee has standing to maintain the non-core
proceeding.

With regard to the law of trusts, Tennessee generally follows
the common law. See Mayfield v. First Nat'l Bank of Chattanooga,
Tenn., 137 F.2d 1013, 1018-19 (6th Cir. 1943). Cf. New
Hampshire Ins. Co. v. Jones (In re Jones), 158 B.R. 731, 733
(Bankr.E.D.Tenn. 1993) (citing Kopsombut-Myint Buddhist Ctr.,
728 S.W.2d at 333). Under the common law, a trustee can maintain
an action in law or equity against a third person to remedy an
injury with respect to trust property as if he held the property
free of the trust; generally, beneficiaries of the trust cannot.
See, e.g., Third Nat'l Co. v. Commerce Union Bank,
181 Tenn. 509, 512, 181 S.W.2d 759, 760 (1944); Louisville & Nashville
Terminal Co. v. Lellyett, 114 Tenn. 368, 85 S.W. 881, 885
(1905); Coleson v. Blanton, 4 Tenn. (3 Hayw.) 152 (1816) (per
curiam). See also RESTATEMENT (SECOND) OF TRUSTS §§ 280-82;
BOGERT § 869. When a trustee commits a breach of trust, the
trustee is personally liable to the trust's beneficiaries.
Morgan v. Elam, 12 Tenn. (4 Yer.) 375 (1833).

[I]t has long been settled that when a trustee in
breach of his fiduciary duty to the beneficiaries
transfers trust property to a third person, the third
person takes the property subject to the trust,
unless he has purchased the property for value and
without notice of the fiduciary's breach of duty.

Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc.,
530 U.S. 238, 250, 120 S.Ct. 2180, 147 L.Ed.2d 187 (2000) (applying
common-law principles in the interpretation of the Employee
Retirement Income Security Act of 1974) (citations omitted). See
also, e.g., Cardwell v. Cheatham, 39 Tenn. (2 Head.) 14 (1858)
(stating that a bona fide purchaser for value without notice of a
breach of trust takes free of the trust) (citations omitted);
Covington v. Anderson, 84 Tenn. (16 Lea) 310 (1886) (holding
that a third party who receives trust property on inquiry notice
that a trustee has misappropriated trust funds is also liable for
breach of trust). On the facts presented, which indicate that all
the checks Cannon deposited into his commodities account with
Bradford came from the escrow accounts and clearly identified the
source of the funds, Bradford cannot claim to have accepted the
trust property without actual or constructive knowledge of
Cannon's breach of his fiduciary duties. Stevenson,
230 B.R. at 593-94 (summarizing the evidence that Bradford knew or recklessly
did not know that Cannon had appropriated funds from the escrow
accounts to trade commodities).

Whether a third party commits an independent wrong against the
trust or participates in the trustee's breach of fiduciary duty,
a trustee who has committed a breach of trust can nonetheless
pursue a cause of action against the third party, although in
this circumstance the beneficiary may as well. Harris Trust &
Sav. Bank, 530 U.S. at 252, 120 S.Ct. 2180. See
also RESTATEMENT (SECOND) OF TRUSTS § 294; BOGERT §§ 954 &
955.[fn6]

Although the trustee bases his cause of action upon
his own voluntary act, and even though the act was
knowingly done in breach of his duty to the
beneficiary, he is permitted to maintain the action,
since the purpose of the action is to recover money
or other property for the trust estate, and whatever
he recovers he will hold subject to the trust.

Harris Trust & Sav. Bank, 530 U.S. at 252, 120 S.Ct. 2180
(quoting RESTATEMENT (SECOND) OF TRUSTS § 294 cmt. c). See also
Terrell v. Terrell, 200 Tenn. 289, 296, 292 S.W.2d 179, 182-83
(1956) ("A person may not predicate an estoppel in his favor on,
or assert such estoppel for the purpose of making effective,
obtaining the benefit of, or shielding himself from the results
of his own fraud[.]") (quoting 31 C.J.S. Estoppel § 75).

Although under this rule the bankruptcy trustee would have
standing to pursue the causes of action asserted in the non-core
proceeding because Cannon, had he not filed for bankruptcy, could
have brought them notwithstanding Cannon's misappropriation of
trust property, the presence of the express trust in this case
complicates matters. Since Bradford did not accept the trust
funds as a bona fide purchaser for value and without notice of
Cannon's breach of trust, under general common-law principles the
funds Cannon misappropriated remain subject to the express trust.
See, e.g., Harris Trust & Sav. Bank, 530 U.S. at 252,
120 S.Ct. 2180 ("[W]hatever [the trustee] recovers he will hold subject to
the trust."). Consequently, the trustee's recovery, if any, in
this case will benefit Cannon's clients - not the general
creditors of the estate. As we previously discussed, section 541
excludes from the debtor's estate property held in an express
trust for another. Begier, 496 U.S. at 59, 110 S.Ct. 2258.
Therefore, any action brought by the trustee against Defendants
would not bring property into the estate for the benefit of the
creditors. Instead, such a suit would recover misappropriated
trust property for Cannon's clients, the beneficiaries of the
express trust who lost their money upon the collapse of his
schemes. Accordingly, because the trustee asserts causes of
action in the non-core proceeding alleging harm to the
beneficiaries of the express trust, he lacks standing to maintain
this suit against Defendants. See In re Van Dresser Corp.,
128 F.3d at 947.

We find support for our conclusion in several cases from the
Second and Eleventh Circuits. See Hirsch v. Arthur Andersen &
Co., 72 F.3d 1085 (2d Cir. 1995) (holding that a trustee had no
standing to pursue claims of fraud against the debtor's
accountant because under Connecticut law those claims belonged to
investors); Shearson Lehman Hutton, Inc. v. Wagoner,
944 F.2d 114 (2d Cir. 1991) (holding that the trustee had standing to
pursue an action for churning against the debtor's broker
relating to transactions in a discretionary account, but did not
have standing to bring a suit for fraud since that cause of
action accrued to creditors under New York law); E.F. Hutton &
Co. v. Hadley, 901 F.2d 979 (11th Cir. 1990) (concluding
that the trustee of a corporate debtor that defrauded its
customers did not have standing to pursue an action for fraud
against a broker because the claims belonged to the defrauded
customer creditors). While none of these cases involves a
situation in which the third party sued by the bankruptcy trustee
participated in or committed an independent wrong against trust
property managed by the fiduciary of an express trust, they all
demonstrate the limits the bankruptcy code places on the power of
the trustee to collect money not owed to the estate. Because the
code precludes a recovery that benefits anyone other than the
estate, the trustee lacks standing to maintain an adversary
proceeding seeking such a recovery. We are mindful that our
decision in this case might allow Defendants to profit from their
fraud; but, the beneficiaries of the escrow accounts and the
insurers to whom they are subrogated can pursue remedies in state
court, and we are simply unwilling to set aside the settled
principles of the law of trusts because of the result in a
particular case.

* * *

http://www.ca6.uscourts.gov/opinions.pdf/02a0026p-06.pdf

In the non-core proceeding (No. 00-5895), we hold that the
trustee lacks standing to bring suit against Defendants. Although
Cannon could have brought suit against the Defendants in his
capacity as the trustee of the escrow accounts had he not filed
for bankruptcy, the bankruptcy code does not allow the trustee to
collect money not owed to the estate. Because any recovery that
the trustee might obtain in this adversary proceeding would
benefit the clients Cannon defrauded, not the general creditors
of the estate, the trustee lacks standing to proceed. Therefore,
we affirm the judgment of the district court and reverse the
judgment of the bankruptcy court.