In Re: Mushroom

Opinions of the United

2004 Decisions States Court of Appeals

for the Third Circuit

8-24-2004

In Re: Mushroom

Precedential or Non-Precedential: Precedential

Docket No. 02-3754

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PRECEDENTIAL JONATHAN H. GANZ;

PINCUS VERLIN HAHN

UNITED STATES & REICH, P.C.;

COURT OF APPEALS PINCUS REICH HAHN

FOR THE THIRD CIRCUIT DUBROFF & GANZ, P.C.;

____________ MODELL PINCUS HAHN

& REICH, P.C.;

No. 02-3754 PINCUS VERLIN BLUESTEIN

____________ HAHN & REICH, P.C.;

ASTOR WEISS & NEWMAN;

IN RE: RAWLE & HENDERSON;

MUSHROOM TRANSPORTATION CONTINENTAL BANK;

COMPANY, INC., ERWIN L. PINCUS;

Debtor RICHARD L. HAHN;

PACE REICH; JEROME J. VERLIN;

JEOFFREY BURTCH; ANDREW F. NAPOLI;

MUSHROOM TRANSPORTATION RONALD BLUESTEIN;

CO., INC.; HERMAN P. WEINBERG;

PENN YORK REALTY DAVID N. BRESSLER;

COMPANY, INC.; ALLEN B. DUBROFF

ROBBEY REALTY INC.;

TRUX ENTERPRISES; Jeoffrey Burtch, Trustee in

TEAMSTERS PENSION TRUST Bank ruptcy of M ushroom

FUND OF PHILADELPHIA; Transportation Company, Inc.,

CHARLES J. SCHAFFER, JR.; successor to Robbey Realty, Inc.,

WILLIAM J. EINHORN; Penn York Realty Company, Inc.,

RAYMOND A. HUBER; and Trux Enterprises, Inc. and

HUBERT C. DIETRICH; successor to Michael Arnold,

ROBERT J. EWANCO; former trustee in bankruptcy,

WILLIAM D. GROSS; Mushroom Tran sportation

THOMAS R. JOHNSTON; Company, Inc., Robbey Realty,

JOSEPH P. SANTONE; Inc., Penn York Realty Company,

WILLIAM J. DILLNER, JR.; Inc., and Trux Enterprises, Inc., the

JAMES H. HUTCHINSON, JR.; Teamsters Pension Trust Fund of

JOHN P. O’CONNOR; Philadelphia and Vicinity, Charles

ANTHONY R. SIMONES; J. Schaffer, Jr., in his official

FREIGHT DRIVERS & HELPERS capacity as a fiduciary, by his

LOCAL 557 PENSION FUND; successor in office, William J.

DANIEL L. SANDY Einhorn, Raymond A. Huber,

Herbert C. Dietrich, Robert J.

v. Ewanco, William D. Gross,

Thomas R. Johnston, Joseph P.

Santone, William J. Dillner, Jr., Kent Cprek (Argued)

James H. Hutchinson, Jr., John P. Jennings Sigmond

O’Connor and Anthony R . 510 Walnut Street, 16 th Floor

Simones, Trustees of the Western The Penn Mutual Towers

Pen nsylvania, Teamsters and Philadelphia, PA 19106-3683

Employers Pension Fund or their Attorney for A ppella nts,

successors, and Freight Drivers & Mushroom Transportation Co.,

Helpers Local 557 Pension Fund Inc.; Penn York Realty Co., Inc.;

and Daniel L. Sandy, a fiduciary, or Robbey Realty, Inc.; Jeoffrey L.

his successor and any other named Burtch; Trux Enterprises, Inc.;

or deemed plaintiff, substituted Freight Drivers & Helpers Local

plaintiff (by virtue of his office) or 557 Pension Fund; and Daniel L.

other successor, Sandy

Appellants

(Per Clerk’s Order of 2/4/03) Vincent P. Szeligo

____________ Wick, Streiff, Meyer, Metz & O’Boyle

1450 Two Chatham Center

On Appeal from the Pittsburgh, PA 15219-3427

United States District Court for the Attorney for Appellants, William J.

Eastern District of Pennsylvania Einhorn; Raymond A. Huber;

(D.C. No. 99-cv-03144) Hubert C. Dietrich; Robert J.

District Judge: Ewanco; William D. Gross;

Honorable Eduardo C. Robreno Thomas R. Johnston; Joseph P.

____________ Santone; William J. Dillner, Jr.;

James H. Hutchinson, Jr.; John P.

Argued May 27, 2004 O’Connor; and Anthony R. Simoes

Before: SCIRICA, Chief Judge,

FISHER and ALARCÓN,*

Circuit Judges. Pace Reich (Argued)

726 Meetinghouse Road

(Filed: August 24, 2004) Elkins Park, PA 19027

Attorney for Appellees, Pincus,

Verlin, Hahn & Reich, P.C.;

Pincus, Reich, Hahn, Dubroff &

* Ganz, P.C.; Pincus, Verlin,

The Honorable Arthur L. Alarcón,

Bluestein, Hahn & Reich, P.C.; and

Senior Judge, United States Court of

Pace Reich

Appeals for the Ninth Circuit, sitting by

designation.

2

Andrew F. Napoli Ernest J. Bernabei, III (Argued)

Hochberg, Napoli & Diamond Harvey, Pennington, Cabot,

1608 Walnut Street, 14 th Floor Griffith & Renneisen

Philadelphia, PA 19103 1835 Market Street

Attorney for Appellees, Pincus, Eleven Penn Center, 29th Floor

Verlin, Hahn & Reich, P.C.; and Philadelphia, PA 19103

Andrew F. Napoli Attorney for Appellee,

Herman P. Weinberg

Edward I. Swichar (Argued)

Blank Rome Allen B. Dubroff

One Logan Square Jaffe, Friedman, Schuman,

Philadelphia, PA 19103 Nemeroff, Applebaum & McCaffery

Attorney for Appellee, 7848 Old York Road, Suite 200

Continental Bank Elkins Park, PA 19027

Attorney for Appellee,

Allen B. Dubroff

Laura S. Clare

Skadden, Arps, Slate, Meagher & Flom

One Rodney Square ____________

P.O. Box 636

Wilmington, DE 19899 OPINION OF THE COURT

Attorney for Appellee ____________

Edwin L. Pincus

FISHER, Circuit Judge.

This appeal requires us to consider

Richard L. Hahn a bankruptcy debtor-in-possession’s ability

321 Clairemont Road to invoke the discovery rule to toll the

Villanova, PA 19085 statutes of limitations on the debtor’s

Attorney for Appellee, claims arising out of its lawyer’s

Richard L. Hahn embezzlement of estate funds. The

bankruptcy and district courts here found

that despite the lawyer’s embezzlement

Arthur W. Lefco (Argued) and non-disclosure of such embezzlement

Marshall, Dennehey, Warner, to his client, the debtor, the debtor could

Coleman & Goggin not, as a matter of law, establish that it

1845 Walnut Street, 16 th Floor acted with reasonable diligence in ferreting

Philadelphia, PA 19103 out the embezzlement that formed the

Attorney for Appellee, basis of its causes of action.

Jerome J. Verlin

3

Because we believe that the “Appellants”), instituted claims in two

decisions below establish a policy that adversary proceedings against Continental

fosters lawyers’ abuse of their fiduciary Bank,1 Pincus, Verlin, Hahn & Reich, P.C.

relationships with their clients, and fail (“PVHR”) 2 (the law firm with which Ganz

adequately to protect the justifiable was a partner), and various of PVHR’s

reliance of clients on their lawyers’ probity i n d i v id u a l s h a r e h o l d er l a w y e rs

and trustworthiness, we will reverse and ( c o l le c t i v e l y “ D e f e n d a n t s ” a n d

remand for further proceedings concerning “Appellees”), seeking to hold them liable

the applicability of the discovery rule to for the consequences of Ganz’s

the debtor’s claims against its lawyer’s law embezzlement.

firm and the law firm’s individual

MTC and its related subsidiaries

shareholders. We will affirm the grant of

and entities filed petitions under Chapter

summary judgment in Continental Bank’s

11 of the Bankruptcy Code on June 24,

favor, however, on the alternative ground

1985. The bankruptcy court ordered that

that Pennsylvania’s Uniform Fiduciaries

the petitions of the related entities be

Act, which immunizes banks from liability

jointly administered. By virtue of the

arising out of good faith transfers of funds,

Chapter 11 petitions, Mushroom became

shields Continental from liability because

the debtor-in-possession, and remained

it transferred the eventually embezzled

such until December 1990, when the

funds in good faith to an authorized

bankruptcy was converted to a Chapter 7

recipient, the debtor’s lawyer. We will

proceeding. The events relevant to this

also affirm the grant of summary judgment

appeal occurred during the Chapter 11

in favor of Continental and the debtor’s

law firm on the breach of fiduciary duty

claims under ERISA.

I. Background 1

PNC Bank, N.A., Continental’s

The claims in this appeal arise out successor, advocates C ontinen tal’s

of the embezzlement of funds belonging to position in this appeal. Because the events

the bankruptcy estates of Mushroom in question occurred prior to the

Transportation Company, Inc. (“MTC”) succession, we will refer to the bank

and related debtor companies, Robbey defendant as Continental throughout this

Realty, Inc., Penn York Realty Company, opinion.

Inc., Trux Enterprises, Inc. and Leazit, Inc. 2

Mushroom also brought suit

(collectively “Mushroom”) by Jonathan

against a number of additional law firms

Ganz, legal counsel to the bankruptcy

who are successors of PVHR. Because the

estates. Mushroom, through its trustee,

identities of these additional firms are

and various pension plans and their

immaterial to our resolution of this appeal,

adm inistrators (the “Pension Plan

we will refer only to PVHR as the law firm

Plaintiffs”) (together with the trustee,

defendant.

4

bankruptcy, prior to the Chapter 7 Arnold anticipated a “further reduction” in

conversion. his (Arnold’s) involvement in the

bankruptcy proceedings by March of 1987.

Mushroom retained the services of

Ganz responded to Arnold’s letter by

PVHR, through Ganz, to provide legal

correspondence dated February 17, 1987,

representation during the course of the

which stated that Continental held

bankruptcy proceedings. Within six

approximately $986,000 “in various

months of the filing of the Chapter 11

escrow accounts,” and that PVHR held

petitions, Mushroom ceased operations

additional funds for the final real estate

and began to liquidate assets. On February

settlements in “escrow accounts.”

27, 1986, the bankruptcy court appointed

Michael C. Arnold, MTC’s executive vice In June 1987, Continental and

presid ent, “Special Liq uidatio n PVHR, as counsel to Mushroom, entered

Consultant” to assist in the liquidation, and into a bankruptcy court-approved payment

Mushroom proceeded under his leadership stipulation (the “Stipulation”), which Ganz

to liquidate a significant portion of assets. signed on behalf of PVHR as “Counsel to

Debtors.” The Stipulation provided for the

Mushroom allocated a large

repayment of the balance of the debt owed

percentage of the liquidation proceeds to

to Continental from the funds held in the

satisfying a substantial debt owed to

escrow account at Continental. Once

Continental, a secured creditor who held a

Mu shro om satisfied its debt t o

perfected security interest in all of

Continental, the Stipulation required

Mushroom’s assets. On June 16, 1986,

Continental to turn over any remaining

following repayment of some of the debt

funds in the escrow account to PVHR, “to

to Continental, the bankruptcy court, with

be held in escrow for the benefit of the

the consent of the parties, authorized the

Debtor’s estate... . ” In September 1987, at

opening of an escrow account at

Ganz’s urging, the bankruptcy court

Continental to hold the balance of

excused Mushroom from the statutory

proceeds generated from the sale of

requirement to file monthly operating

Mushroom’s assets not yet paid to

statements.

Continental.

Pursuant to the Stipulation, and

In a letter to Ganz dated February

following satisfaction of the debt owed to

12, 1987, Arnold informed Ganz that he

it, Continental issued a $200,000

(Arnold) and Robert B. Cutaiar, MTC’s

treasurer’s check dated July 21, 1987,

president, were handling the day-to-day

payable to Ganz, “Council [sic] for Debtor

operations of the debtors. The letter

in Possession.” On August 3, 1987,

requested an accounting of the proceeds of

Continental deposited the remaining

one of Mushroom’s realty sales and a

$766,624.49 balance into an escrow

report of Mushroom’s assets held by

account at Continental that had been

Continental, and informed Ganz that

opened by Ganz under the name of MTC,

5

with Jonathan Ganz, c/o PVHR, as escrow about the amount and location of the

agent for Mushroom. funds.

Between August 3, 1987 and April In January 1992, the bankruptcy

26, 1988, Ganz misappropriated more than court approved the subs tantiv e

one-half million dollars of the transferred consolidation of MTC and its related

funds. In the interim, Arnold had entities, at which time Arnold was

contacted Ganz on several occasions prepared to distribute the proceeds from

inquiring about the transferred funds. In the sale of Mushroom’s assets. Arnold

late 1987 or early 1988, Arnold requested called Ganz to request that Ganz start

from Ganz an accounting of the liquidating the certificates of deposit and

Mushroom estate’s assets. Ganz escrow accounts he had said were held on

responded by sending Arnold a copy of the behalf of Mushroom by PVHR, but

Stipulation in a February 2, 1988, received no response. At the end of

correspondence. Arnold replied on February 1992, the United States Trustee

February 19, 1988, writing that Ganz’s advised Arnold that Ganz was reportedly

response – merely sending a copy of the involved in the defalcation of other

Stipulation – “[did] not clear up the bankruptcy estates he had served as legal

problem of how much is being held and by counsel. Acting upon this information,

whom.” Arnold’s correspondence also set Arnold subsequently learned that Ganz had

forth his estimates of the assets remaining absconded with the Mushroom funds

based on Mushroom’s records and other under Ganz’s control.

numbers, and asked Ganz to confirm the

II. The Adversary Actions

numbers.

On October 5, 1992, Arnold, by

There appears to have been some

now the trustee (hereinafter the “Trustee”)3

oral communication between Arnold and

following Mushroom’s conversion to

Ganz following the February 19, 1988,

Chapter 7 bankruptcy, filed adversary

correspondence in which Ganz assured

action no. 92-1043 (the “First Adversary

Arnold “that the assets were invested in

Action”) on behalf of Mushroom against

passbook certificates of deposit at various

Ganz and PVHR. Arnold later moved to

banks... .” Ganz testified that in this

amend his complaint to add Continental as

communication, he told Arnold that “there

a defendant; the bankruptcy court granted

were funds in an approximate amount – I

the motion, but refused to relate the

wouldn’t recall the exact number – and

amendment back to the date of the original

they were in CDs and we were holding

them. I was holding them.” It is

undisputed that Arnold failed to request 3

Arnold resigned as trustee on

written confirmation of, or otherwise

January 23, 1995, and was replaced by the

attempt to verify, Ganz’s representations

current trustee, Jeoffrey Burtch, on March

15, 1995.

6

complaint. The bankruptcy court also assets); and Count VIII (by the Trustee and

denied Arnold’s motion to add PVHR’s Pension Plan Plaintiffs against PVHR and

individual shareholders as defendants, and Continental, alleging breach of fiduciary

refused to allow the Pension Plan Plaintiffs duty under § 1109(a) of ERISA as

to join the action as plaintiffs.4 Arnold, custodians of plan assets).

joined by the Pension Plan Plaintiffs who

Defendants moved for summary

had been prohibited from joining as

judgment on all counts in both adversary

plaintiffs in the First Adversary Action,

actions. Defendants argued that all of the

filed a second adversary action, no. 94-

claims were barred by the applicable

0003 (the “Second Adversary Action”), on

statutes of limitations and laches, and

January 3, 1994.

Continental and PVHR argued that the

Together, the virtually identical ERISA claim was legally insufficient

complaints in the two adversary actions because neither was a fiduciary within the

advanced eight claims against Ganz, meaning of the relevant ERISA provision,

PVHR, PVHR’s individual shareholders, 29 U.S.C. § 1109(a).

and Continental, seven5 of which are the

In separate opinions dated August

subject of this appeal: Count I (by the

24, 1998 and October 1, 1999, the

Trustee against PVHR and Ganz, seeking

bankruptcy court granted summary

turnover of estate property); Count II (by

judgment in favor of all Defendants. The

the Trustee against PVHR, alleging breach

bankruptcy court found that the applicable

of fiduciary duty as escrow agent); Counts

statutes of limitations and laches principles

III and V (by the Trustee against

under Pennsylvania law barred the

Continental, alleging breach of fiduciary

Trustee’s turnover and common law

duty for releasing property to Ganz, and

claims, and that Mushroom had failed to

wrongful conversion of estate property);

e xe rcise re a sona ble dilige nc e in

Count VI (by the Trustee against PVHR

uncovering these claims so as to toll the

and Continental, alleging breach of

statutes of limitations and preclude laches.

contract for violating the Stipulation);

Moreover, the bankruptcy court concluded,

Count VII (by the Trustee against PVHR’s

neither Continental nor PVHR were

individual shareholders, alleging negligent

fiduciaries susceptible to suit under

failure to ensure preservation of client

ERISA.

On appeal, the district court

4

Arnold filed the amended affirmed on essentially the same bases

complaint in the First Adversary Action on relied upon by the bankruptcy court.

May 27, 1994.

5

Count IV, raising a conversion

claim against Ganz only, is not at issue in

this appeal.

7

III. Appellate Jurisdiction intention to appeal the unspecified order is

apparent and the opposing party is not

Continental suggests that we lack

prejudiced and has a full opportunity to

appellate jurisdiction over the district

brief the issues.” Id. (citation omitted). In

court’s disposition of Appellants’ appeal in

determining whether a notice encompasses

the Second Adversary Action because

an unspecified order, we follow a “policy

Appellants failed to specify in their notice

of liberal construction of notices of appeal

the district court’s order supposedly

... where the intent to appeal an

disposing of the Second Adversary Action.

unmentioned or mislabeled ruling is

There is no question that Appellants’

apparent and there is no prejudice to the

notice of appeal does not unmistakably

adverse party.” Nationwide Mut. Ins. Co.

indicate an intention to appeal from both

v. Cosenza, 258 F.3d 197, 202 n. 1 (3d Cir.

of the district court’s orders affirming the

2001) (citations omitted).

bankruptcy court’s disposition of the two

adversary actions. The notice specifies Despite the notice’s failure to

only the district court’s order dated specify the order entered September 6, we

September 4, 2002, and entered by the will exercise appellate jurisdiction over

clerk on September 5, 2002, which both orders for several reasons. First, the

affirmed the bankruptcy court’s August caption of the notice references the

1998 order; the notice fails to specify the bankruptcy court docket numbers for both

district court’s order dated September 4, adversary actions, reflecting an intent to

2002, and entered by the clerk on appeal the district court’s disposition of

September 6, 2002, which affirmed the the bankruptcy court’s rulings in both

bankruptcy court’s October 1999 order. actions. Moreover, the body of the notice

identifies all plaintiffs and defendants in

“When an appeal is taken from a

both of the adversary actions as Appellants

specified judgment only or from a part of

and Appellees, respectively. Because the

a specified judgment, the court of appeals

claims in both adversary actions are

acquires thereby no jurisdiction to review

virtually identical, and were disposed of by

other judgments or portions thereof not so

the district court based on the same

specified or otherwise fairly to be inferred

reasoning, Appellees cannot contend that

from the notice as intended to be presented

they are prejudiced by having to address an

for review on the appeal.” Lusardi v.

appeal concerning the district court’s order

Xerox Corp., 975 F.2d 964, 972 (3d Cir.

entered September 6.

1992) (quoting Elfman Motors, Inc. v.

Chrysler Corp., 567 F.2d 1252, 1254 (3d Guided by our “liberal policy” in

Cir. 1977)). But we may exercise construing notices of appeal, we conclude

appellate jurisdiction over an order not that the notice of appeal adequately

specified in a notice of appeal where communicates Appellants’ intent to appeal

“there is a connection between the the district court’s order entered

specified and unspecified order, the September 6, and find no prejudice to

8

Appellees from an exercise of our even if the claims were federal, state law

jurisdiction over that order. We will would supply the applicable statutes of

therefore exercise appellate jurisdiction limitations pursuant to the Supreme

over both of the district court’s orders Court’s directive that “when Congress has

entered in this matter. failed to provide a statute of limitations for

a federal cause of action, a court ‘borrows’

IV. Standards of Review

or ‘absorbs’ the local time limitation most

We apply plenary review to a analogous to the case at hand.” Lampf,

district court’s grant of summary judgment Pleva, Lipkind, Prupis & Petigrow v.

and assess the record using the same Gilbertson, 501 U.S. 350, 355 (1991)

standards for summary judgment employed (citations omitted). This borrowing

by the district court. Farrell v. Planters principle applies equally to federal

Lifesavers Co., 206 F.3d 271, 278 (3d Cir. common law actions. Oneida County,

2000) (citation omitted). Summary N.Y. v. Oneida Indian Nation of New

judgment is appropriate where the moving York State, 470 U.S. 226, 240 (1985).

party can demonstrate “that there is no Along with state statutes of limitations, a

genuine issue as to any material fact and borrowing court “must also borrow from

the moving party is entitled to judgment as state law the relevant tolling principles.”

a matter of law.” Fed. R. Civ. P. 56(c). Island Insteel Systems, Inc. v. Waters, 296

We must view the evidence in the light F.3d 200, 210 n. 4 (3d Cir. 2002) (citations

most favorable to the non-movant, omitted).

“draw[ing] all reasonable inferences in

The Court in Oneida Indian Nation

favor of the non-moving party.” Fields v.

pointed out that borrowing would be

Thompson Printing Co., Inc., 363 F.3d

impermissible where the borrowed state

259, 265 (3d Cir. 2004) (citation omitted).

limitations period interfered with federal

V. Discussion policies. Oneida Indian Nation, 470 U.S.

at 240. See also Island Insteel Systems,

A. What law supplies the statutes of

Inc., 296 F.3d at 207 (“if borrowing an

limitations applicable to the

analogous statute of limitations from state

common law claims?

law would ‘frustrate or interfere with the

As a preliminary matter, the Trustee implementation of national policies,’

submits that because the estate’s claims courts must look to federal law for an

arise out of the wrongful transfer and analogous limitations period”) (citations

subsequent embezzlement of a bankruptcy omitted). The Trustee directs us to no

estate’s escrowed funds, they are governed authority suggesting that application of

by a federal common law of bankruptcy. state statutes of limitations to the common

The bankruptcy court noted that whether law claims here – common law claims

or not the Trustee’s claims were state or asserted post-bankruptcy petition and

federal in nature was unimportant because based on post-petition wrongdoing –

9

frustrates any national policy in effecting statutes of limitations, we must assess the

the administration and reorganization of a accuracy of those which they applied. In

bankruptcy estate. To the contrary, the short, the bankruptcy and district courts

Bankruptcy Code itself imposes a two-year correctly held that various two-year

limitations period on post-petition claims statutes of limitations governed Counts II

seeking to avoid post-petition transfers of and III (breach of fiduciary duty), V

property of the bankruptcy estate. See 11 (wrongful conve rsion) and V II

U.S.C. § 549(d). Thus, the suggestion that (negligence) in each adversary proceeding,

imposing state-law limitations periods of and that a four-year statute of limitations

two or more years on common law claims period governed Count VI (breach of

asserted post-petition, and based on post- contract). 7 Maillie v. Greater Delaware

petition misconduct, interferes with federal

bankruptcy principles – where the

Bankruptcy Code itself imposes a two-year 7

The bankruptcy and district courts

limitations period on certain post-petition

also correctly concluded that the ERISA

claims based on post-petition misconduct

breach of fiduciary duty claim in Count

– is simply without merit. We therefore

VIII was subject to the six-year statute of

agree with the bankruptcy and district

limitations set forth in 29 U.S.C. §

courts that state law, specifically

1113(1). Neither court found that the

Pennsylvania law,6 supplies the statutes of

statute had run on this claim. There is no

limitations applicable to the Trustee’s

question that the statute of limitations had

common law claims.

not yet expired as to the ERISA claim

B. The applicable statutes of against PVHR, as it was set forth in the

limitations and laches principles original complaint filed in 1992. It is not

so clear, however, whether the statute of

Having determined that the

limitations had run on the ERISA claim

bankruptcy and district courts correctly

against Continental, which was first

chose to apply (or borrow) Pennsylvania’s

advanced in the amended complaint filed

on May 27, 1994. Since the bankruptcy

court refused to relate the claims against

6

Given that Pennsylvania is the Continental back to the date of the original

forum state, and has the most extensive complaint, there is an argument that the

contacts with the litigants and the facts at six-year limitations period applicable to

issue in this litigation, it is the proper the ERISA claim had expired by the date

source of the applicable statutes of of the filing of the amended complaint.

limitations and laches principles. Gluck v. Because we agree with the bankruptcy and

Unisys Corp., 960 F.2d 1168, 1179-80 (3d district courts that neither PVHR nor

Cir. 1992) (applying general rule that Continental are fiduciaries subject to suit

statute of limitations should be borrowed under 29 U.S.C. § 1109, we need not

from forum state). resolve whether the statute of limitations

10

Valley Health Care, Inc., 628 A.2d 528, The Bankruptcy Code does not impose a

532 (Pa. Commw. 1993) (breach of statute of limitations on turnover claims

fiduciary duty); Bednar v. Marino, 646 arising under these provisions. In re

A.2d 573, 578 (Pa. Super. 1994) Midway Airlines, Inc., 221 B.R. 411, 458

(conversion); 42 Pa.C.S.A. § 5524(2) (Bankr. N.D. Ill. 1998) (“Bankruptcy Code

(citation omitted) (negligence); 42 does not contain a statute of limitations for

Pa.C.S.A. § 5525(a) (breach of contract). turnover actions pursuant to § 542”); In re

Bookout Holsteins, Inc., 100 B.R. 427,

The bankruptcy and district courts

432 (Bankr. N.D. Ind. 1989) (same); In re

also correctly determined the laches

De Berry, 59 B.R. 891, 898 (Bankr.

principles governing the turnover claim.

E.D.N.Y. 1986) (same). Because turnover

The turnover claim set forth in Count I

claims are equitable in nature, see Walker

arises under 11 U.S.C. §§ 542 and 543.8

v. Weese, 286 B.R. 294, 299 (D. Md.

2002) (turnover claim “fairly characterized

bars Appellants’ ERISA claim against as an equitable claim”); In re Warmus, 252

Continental. B.R. 584, 587 (Bankr. S.D. Fla. 2000)

(turnover claims, “firmly rooted in

8

11 U.S.C. § 542(a) provides that: protecting and preserving property of the

[estate], ... are clearly and uniquely

Except as provided in subsection

equitable claims under the Bankruptcy

(c) or (d) of this section, an entity,

Code”) (citations omitted); In re Kabler,

other than a cus tod ian, in

230 B.R. 525, 526 (Bankr. E.D.N.C. 1999)

possession, custody, or control,

(“Turnover is an equitable remedy”), they

during the case, of property that the

are subject to laches. Algrant v. Evergreen

trustee may use, sell, or lease under

Valley Nurseries Ltd. Partnership, 126

section 363 of this title, or that the

F.3d 178, 186 n. 3 (3d Cir. 1997) (“An

debtor may exempt under section

action brought in equity is governed by the

522 of this title, shall deliver to the

doctrine of laches.”) (citing Russell v.

trustee, and account for, such

Todd, 309 U.S. 280, 287 (1940)). See also

property or the value of such

Erkins v. Bryan, 785 F.2d 1538, 1543

property, unless such property is of

(11th Cir. 1986) (“Policies underlying the

inconsequential value or benefit to

creation of federal equitable claims are not

the estate.

11 U.S.C. § 543(b)(1) provides that:

or profits of such property, that is

(b) A custodian shall–

in such custodian’s possession,

(1) deliver to the trustee any custody, or control on the date that

property of the debtor held by or such custodian acquires knowledge

transferred to such custodian, or of the commencement of the case[.]

proceeds, product, offspring, rents,

11

well served by applying rigid limitations; estate property. Section 549(a) claims are

therefore, federal courts considering subject to § 549(d), which provides that §

federal equitable claims should rely on 549(a) claims “may not be commenced

equitable principles.”) (citing Holmberg v. after the earlier of – (1) two years after the

Armbrecht, 327 U.S. 392, 395 (1946)). date of the transfer sought to be avoided;

or (2) the time the case is closed or

“The party asserting laches as a

dismissed.” 11 U.S.C. § 549(d). The

defensive bar must establish (1) an

Trustee’s turnover claim targets a post-

inexcusable delay in bringing the action

petition transfer of funds by Continental to

and (2) prejudice.” United States Fire Ins.

Ganz. Section 549(a) expressly creates a

Co. v. Asbestospray, Inc., 182 F.3d 201,

cause of action by which to seek avoidance

208 (3d Cir. 1999) (citations omitted).

of post-petition transfers, a cause of action

“To establish prejudice, the party raising

clearly analogous to the turnover claim

laches must demonstrate that the delay

here. Consequently, Great Atlantic &

caused a disadvantage in asserting and

Pacific Tea Co. dictates that we consult the

establishing a claimed right or defense; the

statute of limitations applicable to a §

mere loss of what one would have

549(a) claim – the two-year period set

otherwise kept does not establish

forth in § 549(d) – in determining whether

prejudice.” Id. (citation omitted). While

to shift to the Trustee the burden of

statutes of limitations do not directly apply

proving excusable delay and the absence

to equitable claims such as the turnover

of prejudice.

claim, a limitations period on an analogous

claim for legal relief is highly relevant to a C. Did Mushroom fail as a matter of

laches analysis. As we said in E.E.O.C. v. law to exercise reasonable

Great Atlantic & Pacific Tea Co., 735 F.2d diligence in uncovering Ganz’s

69 (3d Cir. 1984), “[i]f a statutory embezzlement?

limitations period that would bar legal

The bankruptcy and district courts

relief has expired, then the defendant in an

correctly found that, absent application of

action for equitable relief enjoys the

tolling principles, the common law tort and

benefit of a presumption of inexcusable

contract claims accrued no later than

delay and prejudice. In that case, the

August of 1987, when Continental

burden shifts to the plaintiff to justify its

completed the transfer of funds to Ganz

delay and negate prejudice.” 735 F.2d at

per the Stipulation. The bankruptcy and

80 (citations omitted).

district courts further concluded correctly

The bankruptcy and district courts that the limitations period on the claim at

concluded that the claim at law analogous law analogous to the turnover claim –

to the Trustee’s turnover claim arises relevant to a laches analysis under Great

under 11 U.S.C. § 549(a), which creates a Atlantic & Pacific Tea Co. – began to run

cause of action in a trustee to avoid an no later than April 26, 1988, the date on

unauthorized post-petition transfer of

12

which Ganz completed his embezzlement January-February 1992, when Arnold and

of the transferred funds. Mushroom first discovered Ganz’s

defalcation of the funds. The bankruptcy

The Trustee’s primary argument 9

and district courts held that, as a matter of

against the application of the statutes of

law, Mushroom (through Arnold and

limitations and laches is that the discovery

Cutaiar) failed to exercise due diligence in

rule and/or equitable tolling suspended the

superintending Ganz’s oversight of the

running of the statutes of limitations (and

funds, and therefore could not invoke

thereby precluded the onset of laches) until

either the discovery rule or equitable

tolling to preserve its claims against all

9 Defendants. For the reasons that follow,

The Trustee also contends that

we find that there are genuine issues of

Continental and PVHR were trustees of an

material fact concerning Mushroom’s

express trust (the escrow bank account),

reasonable diligence for the fact-finder to

and that since causes of action against such

determine.

trustees do not accrue until the trust is

“repudiated,” the limitations periods Under Pennsylvania’s discovery

should not have begun to run until rule, the statute of limitations will not

November-December 1992, when Arnold begin to run until “the plaintiff reasonably

first made a demand on Ganz for tender of knows, or reasonably should know: (1)

estate property in the escrow account. The that he has been injured, and (2) that his

district court correctly rejected this injury has been caused by another party’s

contention. Pennsylvania law makes clear conduct.” In re TMI Litig., 89 F.3d 1106,

that the key element in a trust is that the 1116 (3d Cir. 1996) (quoting Cathcart v.

trustee possesses legal title to property. Keene Indus. Insulation, 471 A.2d 493,

Schellentrager v. Tradesmens Nat’l Bank 500 (Pa. Super. 1984)) (internal quotation

& Trust Co., 88 A.2d 773, 774 (Pa. 1952). marks omitted). The discovery rule will

None of the relevant documents (including only toll the statute of limitations where

the Stipulation) reflects any intent to the plaintiff shows that he or she has

convey title in Mushroom’s funds to exercised “‘reasonable diligence’ in

Continental or PVHR. Rather, the ascertaining the existence of the injury and

Stipulation rendered Continental and its cause.” Bohus v. Bellof, 950 F.2d 919,

PVHR escrow agents w ho, under 925 (3d Cir. 1991).

Pennsylvania law, did not acquire legal

Similarly, equitable tolling will

title to Mushroom’s funds. Paul v.

suspend the running of the statute of

Kennedy, 102 A.2d 158, 159 (Pa. 1954)

limitations “(1) where the defendant has

(under escrow arrangement, legal title

actively misled the plaintiff respecting the

remains in a depositor until a condition

plaintiff’s cause of action; (2) where the

precedent is satisfied) (citations omitted).

plaintiff in some extraordinary way has

Accordingly, this argument is without

been prevented from asserting his or her

merit.

13

rights; or (3) where the plaintiff has timely includes the “‘duty to protect and conserve

asserted his or her rights mistakenly in the property in its possession for the benefit of

wrong forum.” Oshiver v. Levin, creditors.’” In re Marvel Entertainment

Fishbein, Sedran & Berman, 38 F.3d 1380, Grp., Inc., 140 F.3d 463, 474 (3d Cir.

1387 (3d Cir. 1994) (citations omitted). 1998) (citation omitted). Thus, there is no

Like the discovery rule, equitable tolling question that Mushroom, acting through its

requires the plaintiff to demonstrate “that representatives Arnold and Cutaiar, had a

he or she could not, by the exercise of fiduciary duty to protect and maximize the

reasonable diligence, have discovered estate’s assets.

essential information bearing on his or her

This duty formed the foundation for

claim.” Id. at 1390 (citation omitted).

the bankruptcy and district courts’

In assessing the finding that reasonable diligence analysis. Indeed, the

Mushroom failed as a matter of law to bankruptcy and district courts essentially

exercise reasonable diligence for purposes equated the fiduciary duty to safeguard

of the discovery rule and equitable tolling, assets with the duty of reasonable

we are guided by the general rule that such diligence and, finding a breach of the

determinations are typically within the former, therefore found a breach of the

jury’s province unless “the facts are so latter. Moreover, the courts held,

clear that reasonable minds cannot Mushroom could not escape the statutory

differ ... .” Melley v. Pioneer Bank, N.A., fiduciary duty to protect and maximize by

834 A.2d 1191, 1201 (Pa. Super. 2003) delegating such duty to legal counsel,

(citation omitted). During the time of where the delegation amounted to an

Ganz’s defalcations, Mushroom was in abdication of that duty. The district court

Chapter 11 bankruptcy, and was therefore explained its distinction between

a debtor-in-possession. See 11 U.S.C. § permissible delegation and impermissible

1101(1). As we recently pointed out, “[i]n abdication:

Chapter 11 cases where no trustee is

Although delegation of duties is

appointed, [11 U.S.C.] § 1107(a) provides

o n e t h i n g , a b d i c a ti o n o f

that the debtor-in-possession, i.e., the

responsibility is quite another. In

debtor’s management, enjoys the powers

this case, the debtors not only

that would otherwise vest in the

“delegated” to Ganz the duty to

bankruptcy trustee. Along with those

collect the funds generated from the

powers, of course, comes the trustee’s

sale of assets, deposit them into the

fiduciary duty to maximize the value of the

escrow account pursuant to an

bankruptcy estate.” Official Committee of

order of the court, and transfer the

Unsecured Creditors of Cybergenics Corp.

funds to the law firm account to be

v. Chinery, 330 F.3d 548, 573 (3d Cir.

maintained pending further order of

2003) (en banc). The debtor-in-

the Bankruptcy Court, but rather

possession’s fiduciary duty to maximize

they surrendered totally their

14

obligation to oversee the funds embezzled by Ganz. The district

liquidation of the estate or to court found that summary judgment in the

supervise, even in the most bank’s favor on the issue of reasonable

relaxed fash ion, the diligence and the statute of limitations was

activities of a retained inappropriate for several reasons. First,

professional. The the court noted, delegation of debtor duties

Bankruptcy Code – including those performed, or intended

commands the debtor in to be performed, by Ganz here – is

possession (or the trustee) to perfectly appropriate under, and indeed

be the captain of the debtor encouraged by, the Bankruptcy Code.

ship. See 11 U.S.C. § 1108. Accordingly, “a reasonable debtor in

Wh ile the debto r in p o s s e s s io n w o u l d , i n ce r t a in

possession may assign to circumstances, entrust the care of liquid

others specific duties, it may assets to a court-appointed lawyer.” Id. at

not surrender the helm and 403 (citation omitted). Therefore, “there is

let the debtor ship sail under no legal basis to conclude that the

someone else’s captaincy. delegation of core trustee duties to court-

appointed counsel for the estate by a

Burtch v. Ganz (In re Mushroom Transp.

debtor in possession is per se sufficient to

Co., Inc.), 282 B.R. 805, 825 (E.D. Pa.

show that the debtors in possession failed

2002) (footnote omitted). Because

to exercise due diligence.” Id.

Mushroom abdicated its statutory duty to

preserve the estate’s assets, the bankruptcy The district court then reviewed the

and district courts held, it could not record and found that “in light of the fact

possibly demonstrate reasonable diligence that reliance on counsel is inherent in the

for purposes of the discovery rule. Id. bankruptcy code, ... the bankruptcy court

invaded the province of the fact finder by

In Burtch v. Security Pacific Bank

depreciating the evidence that could

Oregon (In re Mushroom Transp. Co.,

persuade a trier of fact that a reasonable

Inc.), 247 B.R. 395 (E.D. Pa. 2000), a

person in the circumstances of the

related case involving the same facts

Mushroom debtors in possession would

respecting Ganz’s embezzlement and

have relied on counsel and consequently

Mushroom’s oversight, Judge Reed of the

failed to discover the thefts by Ganz until

District Court for the Eastern District of

a later date.” Id. at 404. Several aspects

Pennsylvania reached a conclusion on

of the record led the court to this

reasonable diligence and the statute of

conclusion. First, the distribution of estate

limitations directly contrary to the one

assets was not an issue from early 1986

reached by the bankruptcy and district

through August 1988 (when Ganz had

courts here. There, the Trustee filed

completed his embezzlement) because the

various claims against one of the banks

bankruptcy proceedings were focused on

that had allegedly received some of the

15

motions to consolidate. Rather, Arnold of administration.” Boldt v. United States

and Cutaiar devoted their energies to Trustee (In re Jenkins), 130 F.3d 1335,

priority claims, which, according to 1340 (9th Cir. 1997) (citations and internal

Arnold, were the source of major quotation marks omitted). A fact-finder

uncertainty concerning Mushroom’s could thus conclude that Mushroom’s

financial condition. Second, Arnold’s decision to entrust its lawyer, Ganz, with

inquiries to Ganz in February 1988 could the task of safeguarding its assets was

have led a reasonable trier of fact to within the bounds of reasonableness.

conclude that Arnold’s efforts went

Still further, the bankruptcy court

beyond abdication of the debtor’s duty to

had issued two orders in June and

preserve the estate’s assets and in fact

September of 1987 entrusting Mushroom’s

constituted reasonable diligence for

assets to Ganz. The June 1987 order

purposes of the discovery rule. Finally, the

approved the Stipulation pursuant to which

bankruptcy court’s two orders in June and

Mushroom’s assets were to be turned over

September 1987 provided Ganz with

to Ganz to hold in escrow. In Arnold’s

nearly exclusive control over Mushroom’s

view, the June 1987 order prompted him to

assets and removed any mechanism by

believe that Mushroom’s assets were being

which the court could monitor use of those

“invested in accordance with the special

funds. In the district court’s, a reasonable

rules applicable to bankruptcy.” The

fact-finder could find that a reasonably

September 1987 order granted Ganz’s

diligent person in these circumstances

motion to excuse M ushroom from filing

would have acted precisely as Mushroom

operating reports otherwise required by the

and its Trustee did here.

Bankruptcy Code. In Arnold’s view, the

We find much of Judge Reed’s September 1987 order gave him “no

analysis persuasive. First, the Bankruptcy reason to expect that the absence of such

Code contemplates and encourages the reporting indicated that a lawyer had

retention of professionals by debtors to absconded with escrow funds... .” Just as

facilitate a Chapter 11 reorganization. they in fact appeared to lead Arnold to

Section 327 states that “the trustee [and, believe that the assets were safe and there

therefore, the debtor in possession], with was no need to monitor them closely, these

the court’s approval, may employ one or orders could have led a reasonable person

more attorneys ... to represent or assist the to believe that there was no need to

trustee in carrying out the trustee’s duties monitor them on his or her own.

under this title.” 11 U.S.C. § 327(a). The

In addition to these aspects of Judge

Code also provides for the compensation

Reed’s analysis, and perhaps most

of such attorneys. 11 U.S.C. § 329. These

importantly, we find highly relevant the

provisions reflect Congress’s desire “to

fact that the genesis of this action is

encourage trustees to delegate their duties

Ganz’s abuse of his fiduciary, lawyer-

where such delegation would lower costs

client relationship with Mushroom, an

16

abuse which very well could have caused is in prohibits the principal from

Mushroom to relax its vigilance in uncovering the fraud. Furthermore,

overseeing the execution of the duties it the fiduciary, because of his

delegated to Ganz. Neither Judge Robreno position of trust, would have an

nor Judge Reed expressly mentioned the affirmative duty to the principal to

principle manifesting itself in decisions disclose the fraud. Absent a

from courts in this circuit (and numerous disclosure, the fiduciary commits

other state and federal courts) that where an act of continual covering up of

the wrongdoing underlying causes of the fraud.

action has been perpetrated by a fiduciary

Id. at 403. The court noted that letters sent

to the detriment of its principal, this fact

by counsel for the creditors to the trustee

militates strongly against summary

urging the trustee to investigate matters

judgment on the issue of whether the

pertaining to the purloined funds might

principal (here Mushroom) exercised

have imposed a duty to inquire upon the

reasonable diligence in failing to discover

trustee, but “whether or not the letters

the fiduciary’s malfeasance within the

imposed a duty upon the trustee to

applicable statutes of limitations.

investigate is a question of fact, which

Many judges in this Circuit have must be resolved by a trier of fact.” Id.

recognized the impact of a fiduciary

The District Court for the Eastern

relationship, and abuse of that relationship

District of Pennsylvania subsequently

by the fiduciary, on a discovery rule

addressed Schw artz in Gurfein v.

analysis. In Schwartz v. Pierucci, 60 B.R.

Sovereign Group, 826 F. Supp. 890 (E.D.

397 (E.D. Pa. 1986), the trustee asserted

Pa. 1993). Plaintiffs, investors and

claims against a bank in an effort to

partners in real estate limited partnerships,

recover funds improperly drawn by

brought fraud, breach of fiduciary duty and

principals and officers of the debtor from

related claims against some of their

the debtor’s account at the bank. The

general partners and related entities. In

district court denied the bank’s motion for

response to defendants’ statute of

su m m a ry judgment, rejecting its

limitations defense, plaintiffs argued that

contention that the statute of limitations

because defendants were plaintiffs’

barred certain of the claims against it.

fiduciaries, plaintiffs’ causes of action did

Specifically, the court found that the

not accrue until they acquired actual

officers’ wrongful conduct tolled the

knowledge of their injury. The district

applicable limitations period, reasoning

court found that we had not yet

that:

“recognized an exception to the discovery

Where a fiduciary commits an act rule in the fiduciary-defendant context.”

of fraud against his principal, the Id. at 918. Nonetheless, he acknowledged

statute of limitations will be tolled, that “[t]he existence of a fiduciary

since the very position the fiduciary relationship is relevant to the question of

17

when a cause of action accrued. Because To require a principal to engage in

of a fiduciary’s unique position of trust, aggressive oversight of its

the presence of a fiduciary relationship fiduciary’s conduct is to deny the

would be pertinent to the question of when very essence of a fiduciary

a plaintiff’s duty to investigate arose.” Id. relationship.

at 919 n. 31 (citing, inter alia, Schwartz).

Id. at 935 (citation omitted and first two

The Eastern District recognized the alterations and emphasis supplied) .10

relevance of a fiduciary relationship to a

discovery rule/reasonable diligence

10

analysis in Rubin Quinn Moss Heaney & The Eastern District is by no

Patterson, P.C. v. Kennel, 832 F. Supp. means alone in subscribing to this view:

922 (E.D. Pa. 1993). The plaintiff law numerous courts have enunciated a similar

firm sued one of its partners who had approach. See, e.g., Rieff v. Evans, 630

misappropriated client funds. The N.W.2d 278, 290 (Iowa 2001) (statute

defendant asserted a limitations defense to tolled where plaintiff proves that “a

plaintiff’s breach of fiduciary duty claim. confidential or fiduciary relationship exists

The district court held that the discovery between the person concealing the cause

rule preserved the breach of fiduciary duty of action and the aggrieved party,

claim largely because of the fiduciary combined with proof that defendant

relationship existing between the firm and breached the duty of disclosure”) (citation

its partners. The court concluded that: and internal quotation marks omitted); Ray

v. Queen, 747 A.2d 1137, 1142 (D.C.

Given Defendant’s position as a

2000) (“In determining whether the

fiduciary of the firm, and the

plaintiff exercised reasonable diligence,

complexity of the real estate

the courts should consider, inter alia,

transactions which gave rise to the

whether there was a fiduciary relationship

Real Estate Accounts, the Court

between the parties.”) (citation omitted);

concludes that Plaintiff did exercise

Willis v. Maverick, 760 S.W.2d 642, 645

due diligence in its oversight of

(Tex. 1988) (“The client must feel free to

Defendant’s management of the

rely on his attorney’s advice. Facts which

accounts. ... First as an employee,

might ordinarily require investigation

and later as a partner, [Defendant]

likely may not excite suspicion where a

sought and was accorded in return

fiduciary relationship is involved.”)

the trust of [the firm’s] partners.

(citation omitted); Hobbs v. Bateman

Ironically, it is this type of very

Eichler, 210 Cal. Rptr. 387, 404 (Cal. Ct.

special relationship that enables a

App. 1985) (“W here a fiduciary

wayward fiduciary to engage in

relationship exists, facts which ordinarily

acts of concealment that “cause the

require investigation may not incite

[principal] to relax vigilance or

suspicion ... and do not give rise to a duty

deviate from the right of inquiry.”

of inquiry....”) (citations omitted). Other

18

We should stress that we do not inquiry on the principal’s part into its

hold here that the existence of a fiduciary, fiduciary’s behavior.

lawyer-client relationship between Ganz

Here, Mushroom, through Arnold,

and Mushroom, and Ganz’s abuse of that

questioned Ganz directly concerning the

relationship, alone preclude judgment as a

whereabouts of the transferred funds.

matter of law in PVHR’s and its

Arnold’s letter to Ganz set forth estimates

shareholders’ favor. 11 But as the district

of Mushroom’s assets based on

court noted in Gurfein, “the presence of a

Mushroom’s records and other numbers.

fiduciary relationship would be pertinent

According to Arnold, Ganz responded to

to the question of when a plaintiff's duty to

Ganz’s letter “that the assets were invested

investigate arose.” 826 F. Supp. at 919 n.

in passbook certificates of deposit at

31 (citation omitted). Ganz was no

various banks... .” Ganz himself testified

stranger to Mushroom and Arnold – he

that he told Arnold that there was a certain

was Mushroom’s lawyer, bound by

amount of assets under his supervision,

professional rules of ethics to the highest

though he could not recall the exact

duties of honesty and probity in his

number he conveyed to Arnold.

dealings with his client. As the cases

discussed above illustrate, the existence of We do not suggest that Arnold’s

a fiduciary relationship is relevant to a inquiries should serve as a model of

discovery rule analysis precisely because it vigilance for similarly situated debtors-in-

entails such a presumptive level of trust in possession. However, we believe that the

the fiduciary by the principal that it may facts here – particularly the Bankruptcy

take a “smoking gun” to excite searching Code’s encouragement that debtors-in-

possession retain lawyers and other

pr of e ssionals t o a s s ist in th e ir

reorganization, and the existence of a

courts have gone even further in holding lawyer-client relationship which Ganz

that where there is a fiduciary relationship, employed to conceal his defalcations at his

only the actual discovery of the client’s (and its creditors’) expense –

wrongdoing starts the running of the create genuine factual issues for the fact-

limitations period. See, e.g., Community finder concerning whether Arnold and

Title Co. v. U.S. Title Guaranty Co., Inc., Mushroom exercised reasonable diligence

965 S.W.2d 245, 252 (Mo. Ct. App. 1998) in uncovering Ganz’s embezzlement. 12

(citations omitted).

11

At the same time, however, we

12

would not foreclose the possibility that in The bankruptcy and district courts

some instances, the nature of a fiduciary found that laches barred the Trustee’s

relationship might be such that the turnover claim solely because the statute of

relationship alone would be sufficient to limitations on the analogous claim at law

trigger application of the discovery rule. under 11 U.S.C. § 549(a) had expired,

19

We therefore, with the exception of limitations and laches, Continental has

Continental,13 will reverse the grant of asserted numerous alternative grounds

summary judgment in Appellees’ favor on supporting affirmance. Of course, we may

the non-ERISA claims and remand with affirm the district court on grounds

instructions to the district court to remand different from those relied on by the

the non-ERISA claims to the bankruptcy district court. Kabakjian v. United States,

court for further proceedings consistent 267 F.3d 208, 213 (3d Cir. 2001) (citation

with this opinion. omitted). And we will affirm summary

judgment in Continental’s favor because

D. Is Continental entitled to summary

Pennsylvania’s Uniform Fiduciaries Act

judgment on the alternative ground

(“UFA”) immunizes Continental from any

that Pennsylvania’s Uniform

liability flowing from its transfer of funds

Fiduciaries Act shields it from

to Ganz.

liability?

Continental bases its argument on §

While PVHR and its shareholders

6361 of the UFA, which provides that:

have advanced no arguments in support of

affirmance beyond the statutes of A person who, in good faith, pays

or transfers to a fiduciary any

money or other property, which the

creating a presumption of inexcusable fiduciary as such is authorized to

delay and prejudice that the Trustee receive, is not responsible for the

presumably did not rebut. Because we proper application thereof by the

find here that the applicable statutes of fiduciary, and any right or title

limitations have not expired as a matter of acquired from the fiduciary in

law, we necessarily reverse the bankruptcy consideration of such payment or

and district courts’ conclusion that the tr a nsfer is not inva lid in

presumption of inexcusable delay and consequence of a misapplication by

prejudice had arisen as to Appellees’ the fiduciary.

laches defense, and remand as to laches as

well. 7 P.S. § 6361. A payment or transfer of

money “is done ‘in good faith,’ within the

13

Because we conclude in the meaning of this act, when it is in fact done

following section that summary judgment honestly, whether it be done negligently or

in Continental’s favor should be affirmed not.” Id. § 6351(2).

on the alternative basis of the Pennsylvania

In the leading case on § 6361, the

Uniform Fiduciaries Act’s immunity

Supreme Court of Pennsylvania held that

provision, we decline to decide whether

a bank in virtually the same position as

the bankruptcy and district courts properly

Continental could not be liable on a breach

granted sum mary jud gm ent in

of contract theory. See Robinson

Continental’s favor on the basis of the

Protective Alarm Co. v. Bolger & Picker,

statutes of limitations.

20

516 A.2d 299 (Pa. 1986). There, a law to him will aid a breach of trust,

firm opened an escrow account in its name then the bank will be held to have

on behalf of its client, Robinson Protective acted in “bad faith.”

Alarm. Three partners of the law firm

Id. at 304 (citations omitted).

executed the signature card for the

account. One of these partners eventually Applying this view, the court noted

embezzled hundreds of thousands of that the embezzling lawyer was a fiduciary

dollars from the account. After as to the escrow funds in question, and was

compensating Robinson for the embezzled empowered to receive them from the bank.

funds, the law firm brought an action for After setting forth the purpose of § 6361 –

indemnity or contribution against the bank. “to facilitate banking transactions by

relieving a depositary of the responsibility

The Court of Common Pleas of

of seeing that an authorized fiduciary will

Philadelphia County and the Pennsylvania

use entrusted funds for proper purposes” –

Superior Court both held that the bank, by

the court concluded that “[t]o apply a

not obtaining endorsements prior to

theory which would hold a payor liable for

redeeming certificates relating to the

a minuscule and irrelevant departure from

account, had violated the redemption

the prescribed procedure, where he has

provisions set forth on the certificates, and

acted honestly in releasing money to a

had thereby committed a breach of

known authorized fiduciary, without

contract. The Pennsylvania Supreme

knowledge of the latter’s intent to

Court reversed, finding that § 6361

subsequently embezzle those funds, would

shielded the bank from liability because it

clearly not contribute to the smooth flow

disbursed funds from the account to the

of commerce sought to be achieved by the

embezzling lawyer in good faith. The

UFA.” Id. “Indeed,” the court continued,

court began its analysis by distinguishing

“in the absence of contrary knowledge on

“good faith” in this context from “bad

the depositary’s part, it [the bank] is

faith”:

entitled, if not bound, to presume that a

Even a failure to inquire under fiduciary will properly apply funds

suspicious circumstances will not released to him.” Id. at 304-05 (citations

negate “good faith,” unless the omitted).

failure to do so is due to a

Here, the Trustee has not directed

deli berate desire to eva de

us to any evidence in the record

knowledge because of a belief or

demonstrating that Continental acted in

fear that inquiry would disclose a

bad faith in transferring the funds to Ganz,

vice or defect in the transaction.

nor could we locate any on our own. The

Conversely, if a bank has

Trustee does suggest, however, that

knowledge that a fiduciary intends

Continental is not entitled to the UFA’s

to appropriate trust funds to his

immunity because only PVHR itself, not

own use, and that to release funds

21

Ganz, was authorized to receive the “Pennsylvania courts define apparent

transferred funds. Section 6361 requires authority as that authority which, although

that the transfer at issue be made to a not actually granted, the principal

fiduciary who “as such is authorized to knowingly permits the agent to exercise, or

receive” the transfer before one can be holds him out as possessing.” D & G

immunized from liability for making the Equip. Co., Inc. v. First Nat’l Bank of

transfer. Continental naturally contends Greencastle, 764 F.2d 950, 954 (3d Cir.

that “Ganz was a fiduciary authorized to 1985) (citing, inter alia, Revere Press, Inc.

receive the funds at issue[,]” pointing to v. Blumberg, 246 A.2d 407, 410 (Pa.

admissions in the complaints that “at the 1968)). “Apparent authority can exist only

time of the transfer of the funds, Ganz was to the extent that it is reasonable for the

a member of PVHR and acted as legal third party dealing with the agent to

representative of M ushroom.” Moreover, believe the agent is authorized.” Id. at 954

Continental continues, “it is undisputed (citation omitted). “The test for

that Ganz was the only signatory on behalf determining whether an agent possesses

of PVHR on the Stipulation and signed as apparent authority is whether ‘a man of

counsel of record for Mushroom.” ordinary prude nce, d iligence and

discretion would have a right to believe

The Stipulation required that the

and would actually believe that the agent

escrow funds be turned over “to Debtor’s

possessed the authority he purported to

counsel, Pincus, Verlin, Hahn & Reich,

exercise.’” Universal Computer Systems,

P.C., to be held in escrow for the benefit of

Inc. v. Medical Svcs. Ass’n of Pa., 628

the Debtor’s estate....” The issue for us is

F.2d 820, 823 (3d Cir. 1980) (citation

whether this fact – that the Stipulation

omitted).

required Continental to turn the escrow

funds over to PVHR, and not Ganz We find that the actions of PVHR –

specifically – precludes affirmance on this holding Ganz out as one of the firm’s

alternative basis because it creates a

genuine issue of material fact concerning

the applicability of § 6361. receive the funds on PVHR’s behalf. See

Volunteer Fire Co. of New Buffalo v.

We conclude that the undisputed

Hilltop Oil Co., 602 A.2d 1348, 1351-52

facts of record demonstrate as a matter of

(Pa. Super. 1992) (noting that acts of agent

law that Ganz was authorized to receive

can bind principal upon showing of

the funds within the meaning of § 6361

“express authority directly granted by the

because, as an agent of PVHR, he had at

principal to bind the principal as to certain

least apparent authority to do so.14

matters [ ] or implied authority to bind the

principal to those acts of the agent that are

necessary, proper and usual in the exercise

14

Indeed, a strong case could be of the agent’s express authority”) (citation

made that Ganz had actual authority to omitted).

22

bankruptcy lawyers and permitting him to WL 96006, at *2 n. 7 (E.D. Pa. Feb. 24,

handle Mushroom’s bankruptcy – would 1999) (breach of contract, breach of

have led an ordinarily prudent bank in f id u c ia r y d u t y a n d n e g l ig e n c e ).

Continental’s position to “have a right to Accordingly, we will affirm the grant of

believe and [ ] actually believe that [Ganz] summary judgment in Continental’s favor

possessed the authority” to receive the on all of the Trustee’s non-ERISA claims15

transferred funds on PVHR’s behalf. against it.

Ganz himself signed the Stipulation on

E. Are Continental and PVHR

behalf of PVHR, giving Continental even

fiduciaries within the meaning of

more reason to believe that Ganz had

29 U.S.C. § 1002(21)(A)(i) so as to

apparent authority to receive funds

be susceptible to Appellants’

pursuant to the Stipulation. Thus, by

breach of fiduciary duty claim

transferring the funds to Ganz, Continental

under 29 U.S.C. § 1109(a)?

transferred the funds to one authorized to

receive them within the meaning of § Appellants’ breach of fiduciary duty

6361. claim arises under 29 U.S.C. § 1109(a) of

ERISA, which creates liability for “[a]ny

The final issue is the scope of

person who is a fiduciary with respect to a

immunity the UFA confers on Continental.

plan w ho br ea ch es an y of the

There is no question that Continental’s

responsibilities, obligations, or duties

allegedly wrongful transfer of funds to

imposed upon fiduciaries by this

Ganz forms the basis of the Trustee’s non-

subchapter[.]” 29 U.S.C. § 1109(a). A

ERISA claims against it. In Robinson

person is a fiduciary of an ERISA plan to

Protective Alarm, the Pennsylvania

the extent that such person “exercises any

Supreme Court stated that “[t]here is

discretionary authority or discretionary

nothing on the face of [§ 6361], or in any

control respecting management of such

other provision of the UFA, that would

plan or exercises any authority or control

restrict the immunity from liability to suits

respecting management or disposition of

based on negligence – or preclude its

its assets... .” 29 U.S.C. § 1002(21)(A)(i).

applicability merely because a claim for

recovery rests on a contract theory.” 516 The district court found that neither

A.2d at 304. Following this dictate, Continental nor PVHR were fiduciaries

Pennsylvania courts have applied § 6361 within the meaning of § 1002(21)(A)(i),

to all manner of common law claims, and therefore that § 1109(a) did not apply

including, pertinently, breach of contract, to them. We concur. In Board of Trustees

breach of fiduciary duty, and conversion of Bricklayers & Allied Craftsmen Local 6

claims. See id. (breach of contract); Jones of New Jersey Welfare Fund v. Wettlin

v. Van Norman, 522 A.2d 503 (Pa. 1987)

(conversion); Harris v. Police & Fire Fed.

15

Credit Union, No. Civ. A. 98-5175, 1999 The Trustee did not assert its

turnover claim against Continental.

23

Assocs., Inc., 237 F.3d 270 (3d Cir. 2001), lead us to conclude that Continental was

we made clear that one need not have not a fiduciary within the meaning of §

discretion in exercising authority or 1002(21)(A)(i). We therefore will affirm

control over the man agem ent or the grant of summary judgment in

disposition of plan assets in order to Continental’s favor on Appellants’ breach

qualify as a fiduciary under § of fiduciary duty claim under ERISA.

1002(21)(A)(i). 237 F.3d at 274.

We have not yet addressed whether

Nonetheless, although we reversed the

a law firm in PVHR’s position here

district court’s grant of the defendant-

constitutes a § 1002(21)(A)(i) fiduciary.

bank’s motion to dismiss because the

Appellants have not alleged, nor does the

complaint had alleged the bank’s “day to

evidence establish, that PVHR had any

day responsibility to control, manage,

legal right or discretion to dispose of

hold, safeguard, and account for the

Mushroom’s escrowed funds. Indeed,

Fund’s assets and income[,]” id. at 275

Appellants’ amended complaint made

(internal quotation marks omitted), we

clear that the escrowed funds were to be

stated that we were “inclined to agree that

paid to the trustee on demand. The

ERISA does not consider as a fiduciary an

Stipulation provides that PVHR’s role with

entity such as a bank when it does no more

respect to the alleged “plan assets” (the

than receive deposits from a benefit fund

escrowed funds) was to hold them in

on which the fund can draw checks.” Id.

escrow for the benefit of the Mushroom

(emphasis supplied).

estate.

Neither the allegations nor the

We agree with the bankruptcy and

evidence here suggest that Continental did

district courts that in its role as holder of

anything more than serve as the holder of

Mushroom’s escrowed funds, PVHR

assets placed there pursuant to the

simply was not a fiduciary within the

Stipulation. Our dictum in Wettlin

meaning of § 1002(21)(A)(i). As noted

Assocs., and the views of many of our

above, many of our sister circuits have

sister circuits, see Beddall v. State Street

held that mere custody or possession over

Bank & Trust Co., 137 F.3d 12, 20 (1st

plan assets, without more, does not render

Cir. 1998) (“mechanical administrative

one a fiduciary. Beddall, 137 F.3d at 20;

responsibilities (such as retaining the

Southern Council of Indus. Workers, 83

assets and keeping a record of their value)

F.3d at 968-69. Moreover, imposing

are insufficient to ground a claim of

ERISA fiduciary duties to the Pension Plan

fiduciary status”) (citations omitted);

Plaintiffs where PVHR already had clearly

Southern Council of Indus. Workers v.

d e f i n e d f i d u c ia r y d u t ie s u n d e r

Ford, 83 F.3d 966, 968 (8th Cir. 1996)

Pennsylvania law to both the debtor and all

(lawyer “did not become a plan fiduciary

merely by ... related control over the

settlement proceeds”) (citation omitted),

24

of the debtor’s creditors 16 would place Appellants’ breach of fiduciary duty claim

PVHR in a potentially conflicted position. under ERISA.

Southern Council of Indus. Workers, 83

VI. Conclusion

F.3d at 969 (recognizing potential

“irreconcilable obligations” if ERISA For the foregoing reasons, we will

fiduciary duties to plan imposed on reverse the grant of summary judgment in

insurance company with fiduciary duties to favor of all Appellees except Continental

its shareholders and clients) (citation on the non-ERISA counts, and remand

omitted); Chapman v. Klemick, 3 F.3d with instructions to the district court to

1508, 1511 (11th Cir. 1993) (recognizing remand the non-ERISA counts to the

potential conflict betw een ER ISA bankruptcy court for further proceedings

fiduciary duties imposed on bank and consistent with this opinion; we will affirm

bank’s fiduciary duties to shareholders and the grant of summary judgment in

customers). This potential conflict further Continental’s favor on the non-ERISA

militates against finding PVHR to be a common law counts on the alternative

fiduciary under ERISA. Accordingly, we ground that the UFA immunizes

also will affirm the grant of summary Continental from those counts; and we will

judgment in PVHR’s favor as to affirm the grant of summary judgment in

favor of Continental and PVHR on

Appellants’ breach of fiduciary duty

16 claims under ERISA.

As escrow agent and legal counsel

to Mushroom, PVHR had fiduciary duties ________________________

under Pennsylvania law to the entire

Mushroom estate, including the estate’s

creditors. Knoll v. Butler, 675 A.2d 1308,

1312 (Pa. Commw. 1996) (“An ordinary

escrow agreement creates a fiduciary

relationship between the agent [the

d e p o s i t o r y i n s ti t u ti o n ] a n d t h e

transferor.”); Maritrans GP Inc. v. Pepper,

Hamilton & Scheetz, 602 A.2d 1277, 1283

(Pa. 1992) (“Our common law imposes on

attorneys the status of fiduciaries vis a vis

their clients[.]”). Further, the Bankruptcy

Code forbids counsel to the estate from

holding any interest adverse to the estate.

See 11 U.S.C. § 327(a). Continental also

had fiduciary duties to the estate as an

escrow agent, so the potential conflict

rationale applies equally to it.

25