Dixon v. Bennett

ROSALYN B. BELL, Judge. Phyllis Sachs Dixon, appellant, filed suit in the Circuit Court for Anne Arundel County against Craig A. Bennett and CBZ Construction and Management Company. Her complaint was later amended to include A.A. Utility Operations Company. Appellant, an unsecured creditor of Richard B. Rice, alleged that transfers made by Rice to Bennett, CBZ and Utility were fraudulent under the Maryland Uniform Fraudulent Conveyance Act (MUFCA).

She sought to recover those assets fraudulently conveyed or damages. Appellant arrived at her position as an unsecured creditor in a convoluted way. Campanelli, Inc. held a one-half interest in Wincamp Partnership. Campanelli assigned all its rights, title and interest in Wincamp to Rice and W. Dudley Dixon, Trustee.

The general partners of Wincamp, Rice, W. Dudley Dixon, Trustee, and William E. Dixon, 1 agreed to indemnify Campanelli, Inc. from all obligations, damages or claims arising out of Wincamp. When Win-camp failed, Campanelli, Inc. was required to pay in excess of $450,000 and at argument was still liable for an additional sum of approximately $400,000. In accordance with the indemnity agreement, that liability created a claim in favor of Campanelli, Inc. against Rice, W. Dudley Dixon, Trustee, and William E. Dixon. ⁶²³ Rice filed a petition for relief under Chapter 7 of the Bankruptcy Code in October of 1982. The permanent bankruptcy trustee was appointed in November of 1982.

Rice’s discharge was granted in March of 1983. Approximately five weeks later, Campanelli, Inc. assigned the claim against Rice, W. Dudley Dixon, Trustee, and William E. Dixon to appellant for an unspecified consideration. Neither Campanelli, Inc. nor appellant, the assignee, elected to file a claim as an unsecured creditor in the distribution of Rice’s bankruptcy estate. The parties agree that the trustee’s right to sue to avoid fraudulent transfers expired in November of 1984.

Thereafter, appellant brought suit claiming, pursuant to the MUFCA, Md.Com.Law Code Ann. §§ 15-204, 15-205, 15-206, 15-207 (1975, 1983 Repl.Vol., 1987 Cum. Supp.), that Rice or corporations or entities under his direction and control had fraudulently transferred assets to Bennett, CBZ and Utility. 2 Appellees denied appellant’s claim that they had received any fraudulent conveyances from Rice or any Rice entities. They moved for summary judgment contending that appellant’s state law claim was barred because the bankruptcy trustee had the exclusive right to bring an action to set aside any alleged fraudulent transfers by Rice. The Circuit Court for Anne Arundel County agreed and granted summary judgment in favor of Bennett, CBZ and Utility.

During the discovery stage of the dispute, appellant sought an order to compel Bennett, Rice’s accountant and an appellee here, to produce certain documents. The order ⁶²⁴ was granted. Bennett then moved for a protective order. That motion was granted based upon the accountant-client privilege.

On a motion to reconsider, the court conducted, with counsel present, four in camera hearings. Appellant’s request that a court reporter be present at those hearings was denied. The court then granted appellees’ protective order finding that a majority of the documents were privileged because they were used, directly or indirectly, by Bennett in performing accounting work or services. On appeal, appellant contests both the granting of the summary judgment and the motion fór a protective order.

Appellant claims that the failure of the bankruptcy trustee to avoid fraudulent transfers within the two-year period provided by federal bankruptcy law does not preclude an unsecured creditor, whose applicable state limitations has not expired, from subsequently bringing a state cause of action against the transferee of property fraudulently conveyed by the debtor. Appellant also claims that the accountant-client privilege does not protect documents either created by or disseminated to third parties or documents prepared in anticipation of a fraudulent scheme in which the accountant participated as a principal. We hold that appellant is not barred from bringing a cause of action based on the state fraudulent conveyance laws once the federal bankruptcy trustee is precluded from suing to recover assets fraudulently transferred by the debtor. In addition, we hold that the Maryland accountant-client privilege cannot be invoked to avoid production of documents prepared in contemplation of a fraud in which the accountant allegedly participated.

THE BANKRUPTCY CODE The Bankruptcy Code has been amended several times since its most recent enactment in 1978. Those changes have not substantively affected the application of the Code provisions relevant to this case. Although this case was ⁶²⁵ subject to the 1982 amendments, we use in this opinion the 1978 Code as a reference point. 3 Under § 541 of the 1978 Bankruptcy Code, 11 U.S.C. § 541 (1978), the filing of a petition in bankruptcy creates an estate made up of all the property of the debtor. Any action against property of the estate is automatically stayed under § 362 of the Bankruptcy Code, 11 U.S.C. § 362 (1978), until such time as the property is no longer property of the estate.

Section 541 defines “property of the estate” as all legal or equitable interests of the debtor in property. 11 U.S.C. § 541 (a)(1) (1978). Here, Rice retained an equitable interest in any property fraudulently transferred since equitable title in property fraudulently transferred remains in the transferor. In re Mortgage America Corp., 714 F.2d 1266, 1275 (5th Cir.1983). Section 541(a)(3) of the Bankruptcy Code provides that “interest in property that the trustee recovers under [his avoidance powers]” becomes property of the estate. 11 U.S.C. § 541 (a)(3) (1978) (emphasis added).

Neither appellant nor appellees challenge the lower court’s finding that the property presently being held by appellees was never recovered by the trustee and is therefore not property of the estate. The trustee possessed as distinct property of the estate the “right to sue” to recover fraudulently transferred assets because the phrase “all legal and equitable interests” also includes “rights of action.” In re Mortgage America Corp., 714 F.2d at 1274 . The trustee’s right to pursue an action to recover transferred property is governed by §§ 548 and 544(b) of the Bankruptcy Code. 11 U.S.C. §§ 548 , 544(b) (1978). Section 548 is the federal fraudulent transfer avoidance power.

Section 544(b) vests in the trustee the rights of unsecured creditors of the debtor. Both sections are subject to the time limitations of 11 U.S.C. ⁶²⁶ § 546(a) (1978). Section 546(a) limits the bringing of an action or proceeding under either §§ 548 or 544 to the earlier of two years after the appointment of a trustee or the time the case is closed or dismissed. § 546(a). In the case sub judice, the permanent trustee was appointed on November 15, 1982.

Thus, the trustee had until November 15, 1984 to bring suit to set aside the fraudulent conveyances. Appellees concede that, because the trustee failed to take action against the conveyance within the time period proscribed under § 546(a), the trustee was barred under that statute from bringing suit to recover the property for the estate. Appellees do claim that the lower court was correct in its finding that the power to set aside fraudulent transfers rests exclusively with the bankruptcy trustee. Therefore, they argue that § 546(a), which after two years bars the trustee from bringing suit to avoid the transfers, also precludes any attempt by an unsecured creditor to recover the fraudulently transferred assets.

With this we disagree. —Trustee’s Statute of Limitations Before 1978— The precept of the trustee’s statute of limitations, now codified in § 546(a), can be traced back to the Bankruptcy Act of 1867. A brief examination of the textual and substantive changes made between 1867 and 1978 reveals that, under pre-1978 bankruptcy law, the trustee’s limitation period was coterminous with or greater than the statutory period allowed for creditors under state statutes of limitations. Thus, the unsecured creditor’s right to set aside fraudulent conveyances would always be preempted by the trustee’s right. The Bankruptcy Act of 1867 vested in the assignee title to “all the property conveyed by the bankrupt in fraud of his creditors.” Bankruptcy Act of 1867, Ch. 176, 14 Stat. 517 , § 14, repealed by Act of June 7, 1878, 20 Stat. 99 . 4 Under ⁶²⁷ § 2 of the Act, the right to avoid fraudulent transfers was vested in the assignee for a period of two years, after which all rights to file suits affecting property were barred.

This bar encompassed the right of creditors to sue. Section two of that Act provided: “[N]o suit at law or in equity shall in any case be maintainable by or against such assignee, or by or against any person claiming an adverse interest, touching the property and rights of property aforesaid, in any court whatsoever, unless the same shall be brought within two years from the time the cause of action accrued, for or against such assignee____” Bankruptcy Act of the Act of 1867, § 2. Under that provision, all suits “by ... the assignee” or “against any person claiming an adverse interest, touching the property and rights of property” not brought within the two-year period were forever barred. Because the assignee had the exclusive right to recover fraudulent property during the statutory two-year period, Glenny v. Langdon, 98 U.S. (8 Otto) 20, 27-28, 25 L.Ed. 43 (1878), the unsecured creditor was precluded from bringing suit in his own name to recover the property.

In addition, because the fraudulent transferee was a “person claiming an adverse interest” in the property, the unsecured creditor was also denied the opportunity to bring suit against the transferee. This two-year limitation was consistent with one of the basic principles underlying the bankruptcy law, the speedy disposition of the bankrupt’s assets. Bailey v. Glover, 88 U.S. (21 Wall.) 342 , 22 L.Ed. 636 (1874). In Bailey , the Court said: “Congress has said to the assignee, you shall commence no suit two years after the cause of action has accrued to you, nor shall you be harassed by suits when the cause of action has accrued more than two years against you.

Within that time the estate ought to be nearly settled up and your functions discharged, and we ⁶²⁸ close the door to all litigation not commenced before it has elapsed.” (Emphasis added.) Bailey, 88 U.S. (21 Wall.) at 347 . The next major revision of the Bankruptcy Act occurred in 1898. Section 11(d) of that Act provided that “[s]uits shall not be brought by or against a trustee of a bankrupt estate subsequent to two years after the estate has been closed.” Bankruptcy Act of 1898, Ch. 541, 30 Stat. 544 (amended 1938). An estate was “closed” not when the bankrupt was discharged, but rather when the final decree approving the trustee’s account and discharging him was entered. 1A Collier on Bankruptcy, If 11.12(2) at 1212 (14th ed. 1978).

As appellant correctly points out, years could pass before an estate was closed, and the trustee’s cause of action to recover fraudulent conveyances would still not expire for an additional two years. As a result, the likelihood that an unsecured creditor would “beat” the statute of limitations under a state law claim was virtually eliminated. In Bilafsky v. Abraham, 183 Mass. 401 , 67 N.E. 318 (1903), the estate was reopened more than two years after it had been closed because it had not been fully administered. The issue was whether the trustee was barred by § 11(d) from bringing suit upon a right of action belonging to the estate.

The Court, in upholding the trustee’s right to institute a cause of action said: “It seems to us that the word ‘closed’ in this provision means properly and finally closed, and if, upon proceedings in the court of bankruptcy, it appears that the order closing the estate was made under a mistake, and that an order should be entered reopening the estate for the purpose of having it further administered, it should be held, after the reopening, that the estate is open for the purpose of bringing suits, even though more than two years have elapsed since the entry of the original erroneous order. In this way, we think, effect will best be ⁶²⁹ given to the purpose of the Congress to provide for a full and proper administration of the estates of bankrupts.” Bilafsky, 67 N.E. at 319 . Under § 546(a) of the 1978 Act, this would not be the case. Section 546(a) restricts the period for bringing suit to the earlier of two years after the trustee is appointed or the closing of the estate.

Therefore, regardless of the later reopening of the estate, the trustee ordinarily cannot institute a cause of action after two years have elapsed from the date of the trustee’s appointment. Rameker v. Berning Garage, Inc., 39 B.R. 902 , 904 (Bankr.W.D.Wis.1984); 4 Collier on Bankruptcy, ¶ 546.02 at 546-9 (15th ed. 1987). In 1938, the Bankruptcy Act of 1898 was amended by the Chandler Act. Section 11(e) of that Act allowed the trustee to: “[W]ithin two years subsequent to the date of adjudication or within such further period of time as the Federal or State law may permit, institute proceedings in behalf of the estate____” Chandler Act, 52 Stat. 840 (1938).

Section 11(e) gave the trustee the power to invoke any state or federal law, including fraudulent conveyance law, under which an actual creditor might have attacked the transaction. The Chandler Act eliminated the closing of the estate as a time factor and extended the period beyond the two-year zone if an applicable state law gave a longer period. 1 Garrard, Fraudulent Conveyances and Preferences 188 (1940). Therefore, if the trustee’s cause of action arose under the state fraudulent conveyance law and if the state period of limitation expired after the two-year period of § 11(e), then the state statute of limitations applied. Banister v. Solomon, 126 F.2d 740, 742 (2nd Cir.1942); 1A ⁶³⁰ Collier on Bankruptcy ¶ 11.13 at 1217 (14th ed. 1978), and cases cited therein. 5 —Trustee’s Statute of Limitations Under the 1978 Code— Appellees argue that the bankruptcy trustee has the exclusive right to set aside fraudulent transfers.

Therefore, they contend that, when the trustee’s right to bring a suit expired under § 546(a), all claims under both the bankruptcy and state law were thereafter barred. In the case sub judiee, the trustee never invoked the right, under either the bankruptcy or state law, to avoid the transfers that appellant now seeks to set aside under MUFCA. Despite that fact, appellees contend that the expiration of the time period of § 546(a) now precludes appellant from bringing her state law claim. We disagree.

The plain language of § 546(a) belies appellees’ argument. That provision is limited to specific Bankruptcy Code actions which for a limited period create avoidance powers exclusively in the bankruptcy trustee. Section 546 provides: “(a) An action or proceeding under section 544, 547, 548, or 553 of this title may not be commenced after the earlier of— (1) two years after the appointment of a trustee under section 702, 1104, 1163, or 1302 of this title; and (2) the time the case is closed or dismissed.” 11 U.S.C. § 546 (1987). 6 Had the trustee sought to bring the suit, he or she would have had to proceed under § 544(b) or § 548. The trustee did not do so within the time specified by § 546(a).

Appellant, however, brought suit against appellees under MUFCA. She did not bring suit under §§ 544, 545, 548 or 553 of the Bankruptcy Code. Section 546(a) does not apply to appellant. ⁶³¹ A similar issue arose in In re Britton, 66 B.R. 572 (Bankr.E.D.Mich.1986). The question before the bankruptcy court in Britton was whether the debtor could avoid a contract which could have been but was not avoided during bankruptcy.

The trustee’s right to avoid the contract pursuant to the Bankruptcy Code provisions had expired in accordance with § 546(a). Subsequently, the debtor brought suit pursuant to a state law cause of action against his creditor to avoid the contract. The creditor claimed that the debtor’s suit was barred because the trustee’s right to avoid expired under § 546(a) of the Bankruptcy Code. The court rejected the creditor’s argument that the provision of the Code that governed the trustee’s time to avoid was also applicable to the debtor for two reasons.

The first reason stated by the court was that § 546(a) limits the bringing of avoidance actions by trustees and the plaintiff was a debtor, not a trustee. Britton, 66 B.R. at 575 . Secondly, “[B]y its own terms, § 546 applies only to actions brought under §§ 544, 545, 547, 548 and 553. This lawsuit does not arise under any of those sections.

Instead, it is an action to vindicate an independent state-law created right which was and is cognizable without the filing of a bankruptcy petition. Only causes of action arising under the avoidance powers of the trustee are barred by the two-year statute of limitations.” Britton, 66 B.R. at 575 (emphasis in original). Similarly, in the case sub judice, the appellant is not a trustee and her cause of action did not arise under the trustee’s avoidance powers. She brought her suit to avoid transfers received by the appellees pursuant to MUFCA which creates rights in creditors to set aside or disregard fraudulent conveyances that are independent of the trustee’s right under the Bankruptcy Code.

This Court found no case law or language in the Bankruptcy Code itself which prevents an unsecured creditor from bringing a state cause of action in state court once the trustee’s two-year time limitation has passed. What the Bankruptcy Code does prohibit is a suit by an unsecured ⁶³² creditor to recover against fraudulent transferees after the debtor files a bankruptcy petition and until the trustee’s cause of action expires. On the other hand, before the bankruptcy petition is filed and after the expiration of the trustee’s cause of action, a fraudulent transferee may be subject to suit by an unsecured creditor under state law as long as its statute of limitations has not yet expired. When Congress was faced with the task of rewriting the bankruptcy law in 1978, it had before it § 11(e) of the 1938 Bankruptcy Act.

That section, as written and interpreted, not only provided the trustee with the two-year limitation but also gave the trustee the power to invoke a plethora of state and federal statutes along with their statutes of limitations. As a result, the trustee’s statutory time period could always be either as long or longer than that of the unsecured creditor. Section § 546(a) no longer affords the trustee the benefit of the state law statute of limitations. If Congress had wanted to continue to extend the trustee’s statutory time period and in turn restrict the unsecured creditor’s ability to maintain an independent cause of action, it could have done so.

We cannot do what Congress has chosen not to do. Therefore, we hold that, once the trustee’s statutory time period has expired, an unsecured creditor can bring an action against a fraudulent transferee under state law provided the state statute of limitations has not yet expired. Appellees rely heavily on two cases decided under the 1867 Bankruptcy Act. In Glenny v. Langdon, 98 U.S. (8 Otto) 20, 25 L.Ed. 43 (1878), the unsecured creditor attempted to invoke the assignee’s power under the Bankruptcy Act to avoid fraudulent transfers because the assignee refused to do so.

At the time, the assignee’s cause of action was still viable. The court held that the creditor’s suit was barred because the cause of action created by the Bankruptcy Act was expressly vested solely in the assignee who still had a viable cause of action. In the second case, Trimble v. Woodhead, 102 U.S. (12 Otto) 647, 26 L.Ed. 290 (1880), an unsecured creditor at ⁶³³ tempted to avoid a fraudulent transfer subsequent to the expiration of the assignee’s cause of action. The creditor did not have a state law right to avoid fraudulent transfers and attempted to use the assignee’s powers under the Bankruptcy Act.

The Court held that failure of the assignee to sue within two years did not transfer the assignee’s right of action to the unsecured creditor. We have no argument with appellees’ interpretation of either the Glenny or Trimble case. What we do reject is their relevance and applicability to the case sub judice. Both cases were decided under the 1867 Bankruptcy Act which is substantially different from the 1978 Code governing this case.

As discussed earlier, one of the most important purposes of the 1867 Act was the speedy disposition of the bankrupt’s assets. Consistent with that policy, § 2 of the Act prohibited the institution of a suit “by or against such assignee, or by or against any person claiming an adverse interest ... unless the same shall be brought within two years—” Bankruptcy Act of 1867, § 2 (emphasis added). Under the 1867 Act, this appellant would also have been barred from maintaining her state claim against the fraudulent transferee because it was “by ... any