Cabrini Medical Center v. Padula et al

UNITED STATES BANKRUPTCY COURT 	NOT FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
:
In re 	: 	Chapter 11
:
CABRINI MEDICAL CENTER, 	: 	Case No. 09-14398 (AJG)
: 	Confirmed Case
Debtor. 	:
__________________________________________:
:
CABRINI MEDICAL CENTER, 	:
:
Plaintiff, 	:
v. 	: 	Adv. No. 11-02261 (AJG)
:
GUIDO PADULA, DILVA SALVIONI, 	:
ANGELO TARANTA, AND 	:
MANNUCCIO MANNUCCI, 	:
:
Defendants. 	:
__________________________________________:
:
MANNUCCIO MANNUCCI, 	:
GUIDO PADULA, DILVA SALVIONI, AND 	:
ANGELO TARANTA, 	:
:
Plaintiffs, 	:
v. 	: 	Adv. No. 11-02407 (AJG)
:
CABRINI MEDICAL CENTER, 	:
:
Defendant. 	:
__________________________________________:
OPINION CONCERNING MOTIONS FOR SUMMARY JUDGMENT
Before the Court are two consolidated adversary proceedings concerning a dispute
between Cabrini Medical Center (“Cabrini” or the “debtor”) and three retired doctors formerly
employed by Cabrini, as well as the widow of a fourth doctor (collectively, referred to as the
“doctors”) (certain references, however, include the period of time prior to the fourth doctor’s
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death and, therefore, in those instances, the reference includes the fourth doctor and not his
widow). The adversary proceedings concern certain deferred compensation agreements that
were entered into separately by Cabrini with each of the formerly employed doctors, prior to
their retirement. Cabrini and the doctors have each filed motions seeking summary judgment in
their favor, and have opposed the motion filed by the other.
Federal Rule of Civil Procedure (“Rule”) 56(a) incorporated into bankruptcy practice by
Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7056 provides that summary
judgment shall be rendered “if the movant shows that there no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
The summary judgment standard is interpreted in a way to support its primary goal of
“dispos[ing] of factually unsupported claims or defenses.” Celotex Corp. v. Catrett, 477 U.S.
317, 323-24, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). Where no triable issue of material
fact exists, applying the summary judgment procedure is not a disfavored procedural shortcut,
but an integral part of the Federal Rules. Id. at 327, 106 S. Ct. at 2555.
The Court has reviewed the pleadings and exhibits filed, and has considered the parties
arguments at the hearing. For the purposes of their motions, the Court incorporates the Joint
Stipulated Statement of Undisputed Material Facts submitted by the parties in support of their
respective motions for summary judgment.
The underlying dispute at issue concerns whether the funds subject to each deferred
compensation agreement is property of the debtor’s estate or whether it is excluded or exempted
from the debtor’s estate under sections 541(b)(7) and 547(d) of the Bankruptcy Code.
Parties’ Contentions
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Cabrini argues that the plain language of the agreements establish that the funds
accumulated pursuant to the deferred compensation agreements remained Cabrini’s property;
that the absence of trust language in the agreements establishes that the funds were not held in
trust for the doctors; that because the funds were not contributed or withheld from the doctors,
the funds are not excluded from the debtor’s estate pursuant to section 541(b)(7) of the
Bankruptcy Code; and, finally, that even if the funds were determined to be trust funds by statute
or under common law theories, the absence of a res precluded a trust from attaching.
The doctors argue that, pursuant to section 541(b)(7) Bankruptcy Code, the deferred
compensation funds are excluded from the debtor’s estate because they were part of a pension
benefit plan. Alternatively, the doctors argue that, pursuant to section 547(d) of the Bankruptcy
Code, the funds are exempted from the debtor’s estate because the funds were held by Cabrini in
trust for the doctors.
DISCUSSION
A plan in which an employer agrees to pay an employee deferred compensation at a
specified time is considered unfunded where the employer does not set aside the funds in an
escrow, trust fund, or otherwise. Schroeder v. New Century Holdings, Inc. (In re New Century
Holdings, Inc.), 387 B.R. 95, 109 (Bankr. D.Del. 2008). Therefore, a plan is unfunded when it
will be paid from the general assets of the employer. In re Demery v. Extebank Deferred
Compensation Plan (B), 216 F.3d 283, 287 (2d Cir. 2000). “Amounts deferred into an unfunded
plan remain part of the general assets of the [employer] subject to the claims of general
unsecured creditors.” In re The Colonial Bancgroup, Inc. 436 B.R. 695, 712 (Bankr. M.D. Ala.
2010). As noted by the Colonial Bancgroup court, “if such were not the case, the amounts
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deferred would be taxed as income to the participants.” Id. at 712 n.26.
Therefore, the terms of a plan must be examined to determine whether it establishes that
the employee has greater rights than the general unsecured creditors of an employer to a specific
set of funds from which the deferred compensation will be paid. Id.
Although the agreements are substantially similar, there are certain distinctions in the
three formats that were utilized for the various plans. One agreement provides that the additional
compensation would be set aside in an account opened in Cabrini’s name to be invested in
securities and the securities would remain Cabrini’s property. Certain of the other agreements
provide that the deferred compensation money would be used to purchase mutual funds in
Cabrini’s name, and that the mutual funds would remain Cabrini’s property. In those
agreements, the parties could agree to substitute the mutual fund or investment medium that
served as the measured base. The third format provided that the amount of deferred
compensation would be “set aside” on Cabrini’s “books and records.” If consented to by
Cabrini, this third type of agreement allowed for a designation of a mutual fund that would
function as a measured base to determine the benefits payable under the agreement. In addition,
the parties could agree to substitute the mutual fund with another or a different investment
measure. Cabrini had the option to purchase shares of any such mutual fund, however, if such
shares were purchased, those shares were to remain Cabrini’s property. Further, there was no
obligation for Cabrini to purchase any such shares. In addition, all of the agreements purport to
place the employee’s interests in the deferred income outside of the reach of the creditors of the
employees.
The doctors argue that, although the agreements provide that the securities remain
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Cabrini’s property, the value of the securities should be separated from the ownership of the
securities and treated as property of the doctors. In support of this position, the doctors point to
the reference in certain of the agreements to the mutual fund or other investment medium serving
as the measured base for determining the amount payable to the doctors. The doctors further
note that Cabrini was not even obligated to purchase the designated mutual fund.
With respect to the plan where Cabrini had the option to purchase the shares of an
agreed-upon mutual fund, it is clear that the agreement did not require funds to be segregated.
The fact that any mutual fund or investment vehicle utilized was intended to serve as a notional
base and the absence of any requirement to purchase shares of even a designated mutual fund
make clear that the plan was unfunded. This particular plan clearly provides that Cabrini would
“set aside on its books and records” the requisite amount “for the purpose of providing the
benefits set forth [under the agreement].” The agreement afforded the employee an option to
designate a mutual fund to serve as a measuring base. However, any such designation required
Cabrini’s consent, and even if such consent were forthcoming, Cabrini still had the choice of
whether it purchased such securities or not. The agreement further clarified that even if Cabrini
purchased any securities, those shares would be belong to Cabrini. It appears that the set aside
for the doctor in that particular agreement was just a bookkeeping entry because Cabrini did not
even have to agree to designate a mutual fund or purchase any shares. If no shares were
purchased, whether a fund was designated or not, then any disbursements due the doctors would
have to come from general corporate assets. If shares were purchased, those shares would
belong to Cabrini. However, the fact that the designation of a mutual fund was merely to
provide a notional measure suggests that the doctors’ claim against Cabrini was a general claim
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1Although a “top hat” plan may provide for a trust into which the employer deposits funds to
pay any deferred compensation obligations to employees, nevertheless, as long as the employees have
no interest in the trust and the trust assets remain part of the employer’s general assets, the fact
that a trust was established does not affect the plan’s ‘‘unfunded’’ status.
In re Washington Mutual,
Inc., 450 B.R. 490, 494 (Bankr. D. Del. 2011). Thus, as previously discussed, whether employees are
taxed on the amounts set aside would be an indication of whether they owned and controlled the
funds or whether the funds remained the property of the employer and part of its general assets.
New Century Holdings, 387 B.R. at 109-110.
2The debtor also argues that the funds at issue are not eligible for exemption from property of the estate
under section 547(b)(7) of the bankruptcy code because the funds were neither “withholdings” nor “contributions”
from the employee. In re Downey Regional Medical Center-Hospital, Inc., 441 B.R. 120, 130 (B.A.P. 9th Cir.
2010); but see Colonial Bancgroup, 436 B.R. at 712 (arguing that there are weaknesses in this theory). In light of
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against its assets. Nevertheless, there is an allegation that Cabrini did set up a segregated
accounts for this particular account.
With respect to the agreements that provided that the employer would purchase particular
mutual fund shares at the outset, the agreements provided that the employer would purchase
those shares in its name and they would be the property of the employer. In one instance, the
agreement also specified that the account would be in the employer’s name.
Although the debtors have made a strong case that the property remained the debtors,
including that there is no language giving the employees any rights to a particular fund or,
alternatively, that the plans were likely “top hat” plans1 not covered by ERISA, it is premature at
this stage to determine the owners of the funds.
There are factual issues concerning whether the plans were funded or unfunded, whether
the plans were “top hat” plans, or whether the plans qualified as ERISA plans. Although, there
are factual issues concerning those aspects, nevertheless, as will be described in the section on
constructive trusts, once the funds were commingled with Cabrini’s general operating funds, it
was necessary for the doctors to trace such funds to establish a constructive trust. The doctors
have not attempted to trace the funds but seek a relaxing of the tracing requirement. 2
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the Court’s ultimate determination concerning the implications of commingling the funds, the Court does not address
this argument.
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Express Trust
Turning to the trust argument, none of the agreements contain the language required to
establish a trust. An express trust requires four elements: (i) a designated beneficiary; (ii) a
designated trustee who is not the beneficiary; (iii) a fund or other property sufficiently
designated or identified to enable title thereto to pass to the trustee; and (iv) the actual delivery
of the fund or other property, or the legal assignment thereof to the trustee, with the intention of
passing legal title thereto to him or her as trustee. LFD Operating, Inc. v. Ames Dep’t. Stores,
Inc. (In re Ames Dep’t Stores, Inc.), 274 B.R. 600, 623 (Bankr. S.D.N.Y. 2002). Further,
pursuant to New York law, “if there is no distinct trust fund but merely a general obligation to
ultimately pay a sum of money, then there is no trust, but only a debt. Id. at 624 (citing, Petition
of Travers, 32 N.Y.S.2d 742, 743, 177 Misc. 1044, 1046 (Sup. Ct. Kings Co. 1941); and Warner-
Quinlan, 86 F.2d 103, 104 (2d Cir. 1936).
There is no trustee designated in any of the agreements. Nor is there any language
setting up an express trust. Section 541(a) provides that, with certain exceptions, a debtor’s
estate is comprised of “all legal or equitable interests of the debtor in property as of the
commencement of the case.” Although section 541(d) exempts from property of the estate any
equitable interest in property that the debtor does not hold, such as the equitable interest in
property held in trust for another, no express trust was established by the terms of the
agreements.
The doctors contend that the fact that their interests in the deferred compensation are not
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subject to forfeiture supports their position that they should not have the benefits taken from
them. The non-forfeiture provisions, however, relate to each doctor’s respective claim against
the estate. The doctors retain their claims against the estate, which have not been forfeited. See
Colonial Bancgroup, 436 at 706 (noting that a claim accrued when funds were deferred into the
plan and the claim remains despite the pending bankruptcy). With respect to their claims, the
doctors are general unsecured creditors on equal footing with all of the other general unsecured
creditors who will share in the assets of the estate.
The doctors also contend that because their interest in the deferred compensation has
vested, the debtor is precluded from depriving them of their property interest. Although an
employee with a vested interest against his employer does not lose that interest upon termination
of his employment, nevertheless, in the context of an insolvent employer, what the employee
retains for his vested interest is his claim against the estate. The doctors still have that claim.
However, that “vested” claim was subject to the risk of the employer’s insolvency. See Colonial
Bancgroup, 436 at 707 (noting that “vested” and “funded” are distinct concepts and the payment
of a vested claim is subject to risks, including the insolvency of an employer at which point the
employee holds a general unsecured claim).
Pursuant to the plain language of the agreements, there were no express trusts created and
no assets held in trust for the doctors that would be exempted from the estate pursuant to section
541(d) of the Bankruptcy Code.
Alternatively, the doctors argue that even if the funds were initially Cabrini’s property
pursuant to the terms of the agreements, those funds became the doctors property upon their
retirement - two doctors in 1980, one in 1995, and the third in 2000. The doctors contend that
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because the distributions were not made when required under the terms of the plan, the employer
became a trustee of the funds and a constructive trust should be imposed upon the funds. The
doctors further contend that Cabrini funded the doctors interests when it set up the respective
Merrill Lynch accounts in 1998 for the doctors. The doctors also reference the duplicate
statements that they received on those accounts.
The fact that Cabrini opened the separate Merrill Lynch accounts reflecting the doctor’s
names and that the doctors periodically received duplicate statement accounts reflecting the
balances would not change the legal ownership of the funds. See Colonial Bancgroup, 436 B.R.
at 708. If the doctors had no control over either the accounts or the funds in the accounts, then
the separate accounts would serve as a record-keeping mechanism to facilitate the debtor’s
ability to comply with its obligations under the terms of the plan.
Finally, even if the funds were part of a funded plan subject to ERISA or later became the
doctor’s property when placed in the Merrill Lynch accounts, prior to their being swept into and
commingled with the debtor’s general operating funds, the doctors acknowledge that such
commingling occurred in 2006 and 2007. Thereafter, Cabrini used the operating funds and, at
the time of the filing, only approximately $221,000 remained in the debtor’s account.
Constructive Trust
Pursuant to New York law, to impose a constructive trust, four elements must be
established: (i) a confidential relationship or fiduciary relationship; (ii) a promise, express or
implied; (iii) a transfer made in reliance on that promise; and (iv) unjust enrichment. Ames, 274
B.R. at 625. In addition, the claimant must “establish proof of a res to which the constructive
trust could attach and . . . [must] trace the property. Id. at 625 n. 16. See also In re Washington
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Mutual, Inc., 450 B.R. 490, 503-04 (D. Del 2011).
The debtor argues that the doctors fail to establish a constructive trust under New York
law because they fail to establish a res. The debtor notes that, at most, there was only
approximately $221,000 at the time of filing and the doctors fail to trace their funds to that
amount. The debtor asserts that the monies used to fund the debtor’s operation post-petition
came from the post-petition DIP financing and the monies used to fund the debtor’s plan came
from the sale of the real estate.
The doctors argue that they can trace the funds to the debtor’s real property because the
funds attributable to their deferred compensation funds were transferred to the debtor’s general
operating account, from which account mortgage payments were made on the properties that
were subject to the sale. Therefore, the doctors seek to impress a constructive trust upon the
proceeds of the sale of the debtor’s real property.
Here, to the extent the doctors’ argument for a constructive trust is premised on the
written agreement, such agreement precludes a claim for a constructive trust. First Central
Superintendent of Ins. v. Ochs (In re First Central Fin. Corp.), 377 F.3d 209, 213-15 (2d Cir.
2004).
To the extent their argument is premised upon rights concerning the funds under ERISA,
those funds were transferred from the Merrill Lynch accounts to the debtor’s general operating
account in 2006 and 2007. Thereafter, Cabrini operated the hospital for more than two years
after the funds were transferred, using the funds in the general account for all expenses and
continuing operations. In addition, during that period, the general account was replenished with
new flows of income from various sources. The doctors have not attempted to trace the funds,
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3The doctors argue that as a wrongdoer, Cabrini should be presumed to have spent its own money first,
thereby allowing the doctors to assert their claims against any funds remaining in the general operating account.
However, even if Cabrini were to have breached its fiduciary duty rendering it a “wrongdoer,” the theory advanced
is inapplicable if at any time after the commingling, the account is depleted. Here, the doctors have not established
that the amount of cash in the general operating account was not entirely depleted at any time after their funds were
commingled but prior to the filing date. Inasmuch as, prior to the filing, funds were flowing in and out of the
account for years, the balance in that account could have been depleted and replenished several time during that
period, with subsequent cash flows resulting in the approximate $221,000 balance at the time of filing.
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and acknowledge that they could not trace their funds to either mortgage payments or to the
$221,000 remaining on hand at the petition date. 3
Although the doctors concede that they could not trace the funds, they have asked that
the Court “relax” the tracing requirement. In support, the debtors cite certain cases in which
courts have indicated that, under certain circumstances, it would be appropriate to relax the
requirement for tracing assets.
The party seeking to impose a constructive trust is required to trace its interest to
“identifiable property” held by the alleged constructive trustee. Wilde v. Wilde, 576 F.Supp. 2d
598, 605 (S.D.N.Y. 2008). Where the purported misappropriated funds are commingled with
other funds, “the constructive trust extends only to the portion traceable to the misappropriated
funds.” Id. The Wilde court noted, however, that “in limited situations the tracing requirement
may be relaxed.” Id.
In Wilde the court required the plaintiffs, who had been defrauded by a relative to whom
they had given a power of attorney, to meet the tracing requirement in most instances,
notwithstanding the fact that the defrauded plaintiffs could only trace a fraction of their losses.
The court only permitted a relaxing with respect to a small portion of the amount attributable to
certain automobiles and jewels that had been purchased with the aggrieved party’s funds, once
the plaintiffs had traced the greater portion of the purchase price to their funds. Id. at 607.
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The concept of softening the harsh consequences of the tracing requirement stems from
Simonds v. Simonds, 45 N.Y.2d 233, 239-40, 408 N.Y.S.2d 359 (N.Y. 1978), and Rogers v.
Rogers, 63 N.Y.2d 582, 586, 483 N.Y.S.2d 976 (N.Y. 1984). In each of these cases, after a
divorce, a husband had been obligated to maintain an insurance policy to benefit the first wife.
After the husband’s death, it was discovered that the policy had been allowed to lapse and the
first wife sought to impose a constructive trust on a policy that the husband had purchased,
subsequent to his purchase of the first policy, for the benefit of the second wife.
The courts in Simonds and Rogers reasoned that the subsequently-purchased policies,
although not technical replacements for the earlier policies, served the purpose of a replacement
or substitute for the lapsed policy, and the courts relaxed the tracing requirement to impose the
constructive trust. Simonds, 45 N.Y.2d at 239, Rogers 63 N.Y.2d at 587. A major distinction
between those cases and this case is that in the lapsed-policy cases, the earlier purchased policies
were not liquidated. There were no funds that emanated from the prior-lapsed policy to trace.
Instead, those policies merely ceased to exist after the husband stopped making payments. Thus,
those courts reasoned that the later-purchased policies should be considered substitutes for the
earlier policies.
Moreover, none of the cases where the tracing requirements were relaxed involved a
large operational business where funds were integrated into the business and flowed in and out
of the general operating account that funded the continuation of the business for a substantial
period of time.
The doctors also argue that the tracing requirement should be relaxed in the event that it
were determined that Cabrini breached a fiduciary duty to them. However, the alleged breach in
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commingling the funds occurred in 2006 and 2007. The doctors should have acted sooner to
protect their interests by seeking injunctive relief soon after the funds were allegedly
commingled.
The doctors contend that they took action in that they first telephoned Cabrini to try to
get information and later - starting in September 2007 - sent letters asking for information and
inquiring as to the status of their funds. However, the doctors did not seek any injunctive relief
in state court to segregate the funds or to prevent the funds from being dissipated. Therefore,
they did not preserve the integrity of the alleged trust.
Moreover, although the doctors’ claims are not sufficient to warrant the imposition of a
constructive trust under traditional state law requirements, they are seeking a relaxing of the
requirements based upon equitable considerations. However, in the cases where the tracing
requirement was relaxed, there was a nexus between the previous equitable interest and either
the property that replaced it or the subsequent equivalent wealth. Here, with the breadth and
scope of the debtor’s business, combined with the long period during which the funds were
integrated into this large complex business enterprise, there is not a sufficient nexus between the
funds in the Merrill Lynch accounts and either the real property or the $221,000 held by the
debtor at the time it filed the bankruptcy petition. The Court concludes that a relaxing of the
tracing requirements is not warranted in this case.
Moreover, in the bankruptcy context, it is important “to act very cautiously to minimize
conflict with the goals of the Bankruptcy Code,” even while recognizing the requirement of
applying constructive trust law, see First Central, 377 B.R. at 217 (citations and internal
quotations omitted). Here, where the doctors have not met the traditional standard for a
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constructive trust, it would be inequitable to deprive the general creditors of this value. Rather,
it is more equitable to treat all creditors of the debtor ratably.
CONCLUSION
The Court concludes that, with respect to the agreements, there are factual disputes
concerning whether they meet the ERISA standards for a funded plan or whether the plans are
unfunded. Moreover, even if a trust were created, there are factual issues concerning whether
the plans, nevertheless, are unfunded “top hat” plans.
The Court further concludes that, pursuant to the plain language of the agreements, there
were no express trusts created and no assets held in trust for the doctors that would be exempted
from the estate pursuant to section 541(d) of the Bankruptcy Code.
Notwithstanding these conclusions, even if the doctors were able to establish that the
plans met the requirement for funded plans pursuant to ERISA and that Cabrini had fiduciary
obligations to the doctors, once the funds were commingled with the funds in the debtor’s
general operating account, the doctors would be required to trace their funds to an identifiable
res. The doctors acknowledge that they cannot trace such funds.
The Court further concludes that, to the extent that the doctors seek to impose a
constructive trust based upon the written agreements, such agreements precludes a claim for
constructive trust. To the extent that the claim to impose the constructive trust is premised upon
rights concerning the funds under ERISA, once those funds were commingled with the debtor’s
general operating account, the doctors did not adequately trace the funds as required to impose a
constructive trust.
The Court further concludes that relaxing the tracing requirements is not warranted in
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this case. First, the facts of this case are not similar to those in which the tracing requirement
was relaxed because there is no nexus between the doctor’s previous interest and either the real
property or the $221,000 held by the debtor at the time it filed the bankruptcy petition. The
commingled funds were integrated into a large complex business enterprise, which continued to
operate for several years. Further, although the doctors took some actions once they became
aware of the commingling, they did not seek immediate relief to segregate the funds to prevent
them from being dissipated.
Therefore, because the funds were commingled and the tracing requirement is not met,
summary judgment is granted to Cabrini and each of the doctors’ claims is allowed as an
unsecured claim. The parties indicated that there was a discrepancy concerning the actual
amount of the claims. The parties should confer concerning that issue, however, if they are not
able to resolve it, they should contact Chambers to schedule a hearing on the issue.
The doctors’ motion for summary judgment is denied.
Counsel for the debtors is to settle an order consistent with this Opinion.
Dated: New York, New York
February 16, 2012
s/Arthur J. Gonzalez
Chief United States Bankruptcy Judge
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