In re Mushroom Transp. Co., Inc.

382 F.3d 325

In re: MUSHROOM TRANSPORTATION COMPANY, INC., Debtor Jeoffrey Burtch; Mushroom Transportation Co., Inc.; Penn York Realty Company, Inc.; Robbey Realty Inc.; Trux Enterprises; Teamsters Pension Trust Fund of Philadelphia; Charles J. Schaffer, Jr.; William J. Einhorn; Raymond A. Huber; Hubert C. Dietrich; Robert J. Ewanco; William D. Gross; Thomas R. Johnston; Joseph P. Santone; William J. Dillner, Jr.; James H. Hutchinson, Jr.; John P. O'Connor; Anthony R. Simones; Freight Drivers & Helpers Local 557 Pension Fund; Daniel L. Sandy v. Jonathan H. Ganz; Pincus Verlin Hahn & Reich, P.C.; Pincus Reich Hahn Dubroff & Ganz, P.C.; Modell Pincus Hahn & Reich, P.C.; Pincus Verlin Bluestein Hahn & Reich, P.C.; Astor Weiss & Newman; Rawle &

Henderson; Continental Bank; Erwin L. Pincus; Richard L. Hahn; Pace Reich; Jerome J. Verlin; Andrew F. Napoli; Ronald Bluestein; Herman P. Weinberg; David N. Bressler; Allen B. Dubroff Jeoffrey Burtch, Trustee in Bankruptcy of Mushroom Transportation Company, Inc., successor to Robbey Realty, Inc., Penn York Realty Company, Inc., and Trux Enterprises, Inc. and successor to Michael Arnold, former trustee in bankruptcy, Mushroom Transportation Company, Inc., Robbey Realty, Inc., Penn York Realty Company, Inc., and Trux Enterprises, Inc., the Teamsters Pension Trust Fund of Philadelphia and Vicinity, Charles J. Schaffer, Jr., in his official capacity as a fiduciary, by his successor in office, William J. Einhorn, Raymond A. Huber, Herbert C. Dietrich, Robert J. Ewanco, William D. Gross, Thomas R. Johnston, Joseph P. Santone, William J. Dillner, Jr., James H. Hutchinson, Jr., John P. O'Connor and Anthony R. Simones, Trustees of the Western Pennsylvania, Teamsters and Employers Pension Fund or their successors, and Freight Drivers & Helpers Local 557 Pension Fund and Daniel L. Sandy, a fiduciary, or his successor and any other named or deemed plaintiff, substituted plaintiff (by virtue of his office) or other successor, Appellants.

No. 02-3754.

United States Court of Appeals, Third Circuit.

Argued May 27, 2004.

Filed: August 24, 2004.

Appeal from the District Court, Eduardo C. Robreno, J.

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Kent Cprek (Argued), Jennings Sigmond, The Penn Mutual Towers, Philadelphia, PA, for Appellants, Mushroom Transportation Co., Inc.; Penn York Realty Co., Inc.; Robbey Realty, Inc.; Jeoffrey L. Burtch; Trux Enterprises, Inc.; Freight Drivers & Helpers Local 557 Pension Fund; and Daniel L. Sandy.

Vincent P. Szeligo, Wick, Streiff, Meyer, Metz & O'Boyle, Pittsburgh, PA, for Appellants, William J. Einhorn; Raymond A. Huber; Hubert C. Dietrich; Robert J. Ewanco; William D. Gross; Thomas R. Johnston; Joseph P. Santone; William J. Dillner, Jr.; James H. Hutchinson, Jr.; John P. O'Connor; and Anthony R. Simoes.

Pace Reich (Argued), Elkins Park, PA, for Appellees, Pincus, Verlin, Hahn & Reich, P.C.; Pincus, Reich, Hahn, Dubroff & Ganz, P.C.; Pincus, Verlin, Bluestein, Hahn & Reich, P.C.; and Pace Reich.

Andrew F. Napoli, Hochberg, Napoli & Diamond, Philadelphia, PA, for Appellees, Pincus, Verlin, Hahn & Reich, P.C.; and Andrew F. Napoli.

Edward I. Swichar (Argued), Blank Rome, Philadelphia, PA, for Appellee, Continental Bank.

Laura S. Clare, Skadden, Arps, Slate, Meagher & Flom, Wilmington, DE, for Appellee Edwin L. Pincus.

Richard L. Hahn, Villanova, PA, for Appellee, Richard L. Hahn.

Arthur W. Lefco (Argued), Marshall, Dennehey, Warner, Coleman & Goggin, Philadelphia, PA, for Appellee, Jerome J. Verlin.

Ernest J. Bernabei, III (Argued), Harvey, Pennington, Cabot, Griffith & Renneisen, Philadelphia, PA, for Appellee, Herman P. Weinberg.

Allen B. Dubroff, Jaffe, Friedman, Schuman, Nemeroff, Applebaum & McCaffery, Elkins Park, PA, for Appellee, Allen B. Dubroff.

Before SCIRICA, Chief Judge, FISHER and ALARCÓN,^* Circuit Judges.

OPINION OF THE COURT

FISHER, Circuit Judge.

This appeal requires us to consider a bankruptcy debtor-in-possession's ability to invoke the discovery rule to toll the statutes of limitations on the debtor's claims arising out of its lawyer's embezzlement of estate funds. The bankruptcy and district courts here found that despite the lawyer's embezzlement and non-disclosure of such embezzlement to his client, the debtor, the debtor could not, as a matter of law, establish that it acted with reasonable diligence in ferreting out the embezzlement that formed the basis of its causes of action.

Because we believe that the decisions below establish a policy that fosters lawyers' abuse of their fiduciary relationships with their clients, and fail adequately to protect the justifiable reliance of clients on their lawyers' probity and trustworthiness, we will reverse and remand for further proceedings concerning the applicability of the discovery rule to the debtor's claims against its lawyer's law firm and the law firm's individual shareholders. We will affirm the grant of summary judgment in Continental Bank's favor, however, on the alternative ground that Pennsylvania's Uniform Fiduciaries Act, which immunizes banks from liability arising out of good faith transfers of funds, shields Continental from liability because it transferred the eventually embezzled funds in good faith to an authorized recipient, the debtor's lawyer. We will also affirm the grant of summary judgment in favor of Continental and the debtor's law firm on the breach of fiduciary duty claims under ERISA.

I. Background

The claims in this appeal arise out of the embezzlement of funds belonging to the bankruptcy estates of Mushroom Transportation Company, Inc. ("MTC") and related debtor companies, Robbey Realty, Inc., Penn York Realty Company, Inc., Trux Enterprises, Inc. and Leazit, Inc. (collectively "Mushroom") by Jonathan Ganz, legal counsel to the bankruptcy estates. Mushroom, through its trustee, and various pension plans and their administrators (the "Pension Plan Plaintiffs") (together with the trustee, "Appellants"), instituted claims in two adversary proceedings against Continental Bank,¹ Pincus, Verlin, Hahn & Reich, P.C. ("PVHR")² (the law firm with which Ganz was a partner), and various of PVHR's individual shareholder lawyers (collectively "Defendants" and "Appellees"), seeking to hold them liable for the consequences of Ganz's embezzlement.

MTC and its related subsidiaries and entities filed petitions under Chapter 11 of the Bankruptcy Code on June 24, 1985. The bankruptcy court ordered that the petitions of the related entities be jointly administered. By virtue of the Chapter 11 petitions, Mushroom became the debtor-in-possession, and remained such until December 1990, when the bankruptcy was converted to a Chapter 7 proceeding. The events relevant to this appeal occurred during the Chapter 11 bankruptcy, prior to the Chapter 7 conversion.

Mushroom retained the services of PVHR, through Ganz, to provide legal representation during the course of the bankruptcy proceedings. Within six months of the filing of the Chapter 11 petitions, Mushroom ceased operations and began to liquidate assets. On February 27, 1986, the bankruptcy court appointed Michael C. Arnold, MTC's executive vice president "Special Liquidation Consultant" to assist in the liquidation, and Mushroom proceeded under his leadership to liquidate a significant portion of assets.

Mushroom allocated a large percentage of the liquidation proceeds to satisfying a substantial debt owed to Continental, a secured creditor who held a perfected security interest in all of Mushroom's assets. On June 16, 1986, following repayment of some of the debt to Continental, the bankruptcy court, with the consent of the parties, authorized the opening of an escrow account at Continental to hold the balance of proceeds generated from the sale of Mushroom's assets not yet paid to Continental.

In a letter to Ganz dated February 12, 1987, Arnold informed Ganz that he (Arnold) and Robert B. Cutaiar, MTC's president, were handling the day-to-day operations of the debtors. The letter requested an accounting of the proceeds of one of Mushroom's realty sales and a report of Mushroom's assets held by Continental, and informed Ganz that Arnold anticipated a "further reduction" in his (Arnold's) involvement in the bankruptcy proceedings by March of 1987. Ganz responded to Arnold's letter by correspondence dated February 17, 1987, which stated that Continental held approximately $986,000 "in various escrow accounts," and that PVHR held additional funds for the final real estate settlements in "escrow accounts."

In June 1987, Continental and PVHR, as counsel to Mushroom, entered into a bankruptcy court-approved payment stipulation (the "Stipulation"), which Ganz signed on behalf of PVHR as "Counsel to Debtors." The Stipulation provided for the repayment of the balance of the debt owed to Continental from the funds held in the escrow account at Continental. Once Mushroom satisfied its debt to Continental, the Stipulation required Continental to turn over any remaining funds in the escrow account to PVHR, "to be held in escrow for the benefit of the Debtor's estate...." In September 1987, at Ganz's urging, the bankruptcy court excused Mushroom from the statutory requirement to file monthly operating statements.

Pursuant to the Stipulation, and following satisfaction of the debt owed to it, Continental issued a $200,000 treasurer's check dated July 21, 1987, payable to Ganz, "Council [sic] for Debtor in Possession." On August 3, 1987, Continental deposited the remaining $766,624.49 balance into an escrow account at Continental that had been opened by Ganz under the name of MTC, with Jonathan Ganz, c/o PVHR, as escrow agent for Mushroom.

Between August 3, 1987 and April 26, 1988, Ganz misappropriated more than one-half million dollars of the transferred funds. In the interim, Arnold had contacted Ganz on several occasions inquiring about the transferred funds. In late 198...