Opinion
Case No, 00-CV-236-K(M)
August 28, 2003
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The above-styled case was tried to the Court without a jury on June 16, 2003. Post-trial briefing has been completed. After considering the pleadings, the testimony and exhibits admitted at trial, all of the briefs and arguments presented by counsel for the parties, and being fully advised in the premises, the Court enters the following Findings of Fact, Conclusions of Law and Judgment, in accordance with Federal Rule of Civil Procedure 52, as follows:
Findings of Fact
1. This is an action for tortious conversion against Defendant Todd Henshaw ("Henshaw") based upon a $20,000 cashier's check received by Henshaw from Robert D. Lowrance ("Lowrance") for payment of Henshaw's legal services provided in connection with Lowrance's Chapter 11 bankruptcy proceeding.
2. On or about December 4, 1995, Lowrance filed his federal income tax return for the year 1994, which reported a balance of tax due of $2,390,074. No payment was included with the return.
3. As a result of Lowrance's tax deficiency, the United States made several assessments against Lowrance and filed notices of federal tax liens in Oklahoma and Kansas.
4. On August 9, 1996, Lowrance filed for Chapter 11 Bankruptcy in the Northern District of Oklahoma, Case No. 96-03124.
5. Defendant Henshaw represented Lowrance in the bankruptcy case.
6. Henshaw had actual knowledge that federal tax liens had been filed in Oklahoma against Lowrance prior to the filing of Lowrance's Chapter 11 Bankruptcy. See Henshaw's Response to Request for Admission #2, attached as Exhibit 1 to the Third Trissell Declaration, filed in support of the United States' Motion for Summary Judgment against Todd Henshaw.
7. The filing of the Lowrance Chapter 11 bankruptcy operated as a stay applicable to the Plaintiff under 11 U.S.C. § 362 and the filing created a bankruptcy estate, that is, a separate legal entity from Lowrance under 11 U.S.C. § 541.
8. Lowrance, as debtor-in-possession, opened a checking account. The funds in the debtor-in-possession account ("DIPA") were to be the property of this separate legal entity.
9. The bankruptcy court authorized the sale of several parcels of real property and stock on which the United States had federal tax liens and instructed Lowrance to segregate the proceeds of these sales. Lowrance established a separately-segregated account ("SSA") for this purpose.
10. The bankruptcy court orders prohibited Lowrance from taking any funds out of the SSA, during and after the bankruptcy, without prior court approval and notice and opportunity to object to the IRS.
11. Despite the bankruptcy court's orders, Lowrance deposited proceeds from the sale of at least one piece of property and the interest earned from the SSA into the DIPA, thus commingling the two accounts.
12. By December 30, 1999, Henshaw was aware that Lowrance was commingling the two accounts.
13. Lowrance filed a motion to dismiss his bankruptcy, which the bankruptcy court orally granted on February 29, 2000 with the condition that the dismissal would not affect its prior order regarding the sale of assets and the liens established thereto.
14. Henshaw asked Lowrance to pay a portion of his attorney fees from the DIPA instead of submitting an application to the bankruptcy court for the payment of his attorney fees, as required by Section 330 of Chapter 11 of the Bankruptcy Code.
15. On February 20, 2000, Lowrance wrote five checks numbered 3341 through 3345 worth $664,675 on his DIPA. These checks were processed on March 1, 2000. Check number 3341 was written to the Bank of Oklahoma for $20,000 with "Todd Maxwell Henshaw" written in the memo line. Lowrance used this check to purchase a Bank of Oklahoma Official Check number 341315254 dated March 1, 2000 for $20,000 payable to Todd Maxwell Henshaw.
16. Also on March 1, 2000, Lowrance wrote a check for $700,000 out of the SSA and deposited in the DIPA to cover the five checks he had written.
17. Henshaw received and cashed the Official Check for $20,000 on or about March 1, 2000. Henshaw understood that the $20,000 check was in payment of his attorney fees for his representation of Lowrance during the bankruptcy case.
To the extent that any of these Findings of Fact constitute Conclusions of Law, they should be so considered.
CONCLUSIONS OF LAW
1. This is a civil action for tortious conversion. The Court has subject matter jurisdiction under 28 U.S.C. § 1345.2. The Court has personal jurisdiction over the parties and venue is proper.
3. In Oklahoma, the elements of the tort of conversion are "(1) that the plaintiff own certain property at the time of its conversion; (2) that defendant converted plaintiff's property by a wrongful act of disposition of the property; and (3) that damages are suffered by the plaintiff." Atwall v. Stifel, Nicolaus Co., Inc., No. CIV-91-107-C, 1991 U.S. Dist LEXIS 20043, at *6 (W.D, Okla. Apr. 15, 1991). See also Continental Oil Co. v. Berry, 103 P.2d 69, 72 (Okla. 1940); White v. Webber-Workman Co., 591 P.2d 348, 350 (Okla.Ct.App. 1979).
4. As to the first element, ownership of the money, since Lowrance made the payment to Defendant from the DIPA, which contained property to which the Plaintiff's Hen attached and property to which it did not, the parties disagree about whether the $20,000 was encumbered by Plaintiff's lien or not. The answer to this question depends on the accounting method used to track the funds as they entered and left the DIPA.
5. "The goal of `tracing' is to establish what portion of a commingled account constitutes proceeds of the collateral." Farmers Merchants Nat'l Bank v. Sooner Cooperative, Inc., 766 P.,2d 325, 329 (Okla. 1988). There are essentially four accounting methods that courts employ in tracking funds. See United States v. Banco Cafetero Panama, 797 F.2d 1154, 1159 (2d Cir. 1986); Chase Manhattan Bank v. Power Products, Inc., 27 V.I. 126 (V.I. 1992).
6. Because Henshaw knew of the commingling of the two accounts but still asked for payment of his fees out of the DIPA instead of going through the proper mechanisms in the bankruptcy court to receive payment of his fees, equity does not warrant using the lower intermediate balance approach, as advocated by Henshaw. See In re Foster, 275 F.3d 924, 927 (10th Cir. 2001).
7. The Court is persuaded that the last-in-first-out ("LEFO") method, advocated by Plaintiff, is the proper method to employ here. "[W]hen tracing commingled funds, the government is accorded flexibility to choose among various accounting approaches," In re Moffitt, Zwerling, Kemler, P.C., 875 F. Supp. 1152, 1159-60 (E.D, Va. 1995). Additionally, when faced with a situation of deposits and withdrawals similar in amount and related chronologically, LTFO is an appropriate approach. See United States v. Banco Cafetero Panama, 797 F.2d 1154, 1160 (2d Cir. 1986); United States v. Intercontinental Indus., Inc., 635 F.2d 1215, 1219-20 (6th Cir. 1980); Taubman v. United States, 499 F. Supp. 1133, 1144-45 (E.D. Mich. 1978).
8. Using the LIFO approach, the $20,000 was encumbered by the government's liens because it is traceable to the money transferred by Lowrance from the SSA into the DIPA. Lowrance's use of a cashier's check to pay Henshaw had no effect on the attachment of the federal tax lien because Henshaw had actual notice of the liens. See 26 U.S.C. § 6323(h)(6) (2002); United States v. LMS Holding Co., 50 F.3d 1256 (10th Cir. 1995), Therefore, element one of the tort of conversion is satisfied.
9. Element two requires that Henshaw converted Plaintiff's property by a wrongful act of disposition of the property. Conversion is "any act of dominion wrongfully exerted over another's personal property in denial of or inconsistent with his rights therein." Steenbergen v. First Fed. Sav. Loan of Chicasha, 753 P.2d 1330, 1332 (Okla. 1987) (citation omitted). See also Atwall, 1991 U.S. Dist. LEXIS at *6-7. To be wrongful, the conversion must be done with notice or knowledge. See Installment Finance Corp. v. Hudiburg Chevrolet, Inc., 794 P.2d 751 (Okla. 1990); RESTATEMENT (SECOND) OF TORTS § 222A(2).
10. Because Henshaw knew of the federal tax liens and of the commingling of the two accounts but still asked for payment of his fees out of the DIP A instead of going through the proper mechanisms in the bankruptcy court to receive payment of his fees, his disposition of the $20,000 was wrongful.
11. Finally, element three requires that damages are suffered by Plaintiff. Henshaw's actions reduced the value of the federal tax lien by the amount he received since Lowrance's tax liabilities exceeded his assets.
12. The Plaintiff requests prejudgment interest from March 1, 2000. Henshaw presents no argument in opposition of this. "The purpose of prejudgment interest is "`to compensate the wronged party for being deprived of the monetary value of his loss from the time of the loss to the payment of judgment."'" Guides, Ltd. v. Yarmouth Group, 295 F.3d 1065, 1078 (10th Cir. 2002) (citations omitted).
"Although prejudgment interest is ordinarily awarded in a federal case, it is not recoverable as a matter of right." Instead, a two step analysis governs the determination of such an award. "First, the trial court must determine whether an award of prejudgment interest would serve to compensate the injured party. Second, when an award would serve a compensatory function, the court must still determine whether the equities would preclude the award of prejudgment interest."Malloy v. Monaham, 73 F.3d 1012, 1019 (10th Cir. 1996). The Court finds the award of prejudgment interest is appropriate here as it would compensate Plaintiff and Defendant has not asserted any equities that would preclude such an award.
13. The Court concludes that the United States suffered damages as a result of Henshaw's wrongful act of disposition of its property in the amount of $20,000, plus prejudgment interest from March 1, 2000.
To the extent that any of these Conclusions of Law constitute Findings of Fact, they should be so considered.
It is the Order of the Court that judgment be entered in favor of the plaintiff.