Burtch v. Hydraquip, Inc. (In Re Mushroom Transportation Co.)

MEMORANDUM OPINION

The chapter 7 trustee of the consolidated entities known as Mushroom Transportation, Jeoffrey L. Burtch, has brought suit against a number of defendants including Fidelity Bank, 1 A-l Discount Company, A-l Discount Pension Plan, 2 and A-l Discount Company Profit Sharing Plan. In his complaint, the trustee asserts that these four defendants received the proceeds of property stolen from the estate of Mushroom Transportation by former counsel to the debtor, Jonathan Ganz. Further, the trustee averred that these four defendants “knew or reasonably should have known that the monies received” by them from Mr. Ganz did not belong to him. Complaint, ¶ 31. The trustee claimed that he was entitled to judgment against Fidelity Bank in the amount of $23,135.33 (plus interest, “lost opportunity costs” and “profits”). From one or more of the A-l defendants, the trustee demanded judgment in the amount of $62,241.00 (plus interest, “lost opportunity costs” and “profits”). His complaint sought this monetary relief in four separate counts: two in common law — conversion and constructive trust; and two statutory claims — • turnover (under 11 U.S.C. § 542 or 543) and “unauthorized transfer” pursuant to 11 U.S.C. §§ 549, 550.

In their opposition to the trustee’s claims, the four defendants asserted that they had *247 lent money to Mr. Ganz, they had been properly repaid by him, and there was no evidence that he had repaid them with money stolen from Mushroom Transportation. Further, Fidelity argued at trial that if it had been repaid with stolen money, it neither knew nor should have known of this fact and so were entitled to be treated as a good faith transferee who received the property for fair value. The A-l defendants agree and argue as an affirmative defense that the statute of limitations had run on all four claims raised by the trustee. 3

Trial was held in the above-captioned adversary proceeding on May 7, 1998 against these four defendants. 4 Based upon the evidence presented, all the defendants now maintain that as to each of the four counts in the complaint, the plaintiff either cannot meet his burden of proof or, in the alternative, that the defendants have proven valid affirmative defenses. The parties have had the opportunity to submit post-trial memo-randa, and the issues presented are ready for disposition.

I.

This consolidated bankruptcy estate has experienced a somewhat convoluted existence. While I need not describe in complete detail the bankruptcy case’s history, for clarity I shall provide some pertinent historical background.

This proceeding arises from the theft of estate funds by former bankruptcy counsel to the chapter 11 debtors: Mr. Jonathan Ganz. The actions of Mr. Ganz spanned a number of years and were not limited to the Mushroom bankruptcy cases. See, e.g., In re Summit Airlines, Inc., 160 B.R. 911 (Bankr.E.D.Pa.1993). The thefts from the Mushroom estate occurred while the debtors were chapter 11 debtors in possession. After conversion of these cases from chapter 11 to chapter 7, the first Mushroom trustee (who was elected by creditors under section 702), Mr. Michael Arnold, initiated at least four adversary proceedings raising numerous claims to recover the stolen funds and involving many defendants, including Mr. Ganz.

To further complicate matters and delay resolution of the various proceedings, Mr. Arnold was later convicted of embezzlement of Mushroom estate funds and removed as the bankruptcy trustee. See 11 U.S.C. § 324. Jeoffrey Burteh, Esquire, was then chosen by the United States trustee to be successor trustee. He succeeded Mr. Arnold as the plaintiff in this proceeding. See 11 U.S.C. § 325.

As I mentioned earlier, the successor bankruptcy trastee complains that the defendants in this proceeding received from Mr. Ganz some of the funds which he stole from the Mushroom estate. While the trustee does not suggest that the defendants actually knew that they were receiving stolen funds, the trustee contends either that they should have known or that their lack of knowledge was irrelevant.

In the trustee’s view, parties that receive consideration for outstanding obligations have a duty to return that consideration if it is traceable to stolen property regardless of their knowledge of the theft. Alternatively, the trustee maintains that the defendants should have been suspicious about the source of funds because the payments were received from Mr. Ganz’s personal bank account, and that Ganz individually had no obligation to defendants to tender such payments. N.T., at 183,187. (As will be discussed below, this *248 assertion is incorrect. From the evidence presented, it is likely that Mr. Ganz was legally obligated to repay both Fidelity and A-l.)

In its posttrial submission, defendant Fidelity asserts that the trustee “abandoned his causes of action for the imposition of a constructive trust and for turnover under 11 U.S.C. § 542 and 543 by not addressing those claims in opening statement.” Fidelity’s Proposed Conclusions of Law, at 6, ¶ 3. This defendant argues that before me are only the trustee’s claims that he is entitled to recover under a common law conversion theory, count I of the complaint, and pursuant to 11 U.S.C. § 549, count IV.

I recognize that plaintiff counsel’s opening remarks at trial, to which the defendant refers in support of this assertion, does reflect that she referred to only these two theories of recovery. N.T. at 11. Moreover, counsel for Fidelity stated his understanding in closing remarks that the plaintiff was proceeding under these two causes of action; plaintiffs counsel did not take exception to this characterization of her case. N.T., at 155.

However, in his posttrial pleading the plaintiff does argue his right to recover pursuant to counts II and III of the complaint. See “Plaintiffs’ [sic] Proposed Post-Trial Findings of Fact and conclusions of Law,” at 22, ¶ 28. While it is certainly possible for a plaintiff to withdraw certain bases for recovery at trial during opening statements, see, e.g., Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339 (2d Cir.1994), I shall not conclude that the plaintiff has done so in the instant case.

The posttrial submission of the plaintiff is sufficiently clear that the plaintiff did not intend to abandon these two causes of action. Further, the four claims are sufficiently similar factually and legally that Fidelity can point to no evidence that it would have offered had plaintiffs counsel referred directly to all four claims in her opening remarks, rather than two. Therefore, I shall address the trustee’s entitlement to relief under all four claims referred to in his complaint. See Edelman v. National Bank of Washington, 297 F.2d 188, 190 (D.C.Cir.1961) (trial court wrongfully dismissed cause of action, even though “[plaintiffs counsel is not entirely without some blame for the view which the District Court adopted since his statements concerning the theory of his case were not models of clarity”).

II.

After trial held with the participation of the four above-named defendants, and after a careful examination of both the evidentiary record and the arguments of counsel, I make the following findings of fact. 5

1. Mushroom Transportation Company and its related entities — Robbey Realty, Inc., Penn York Realty Co., Inc., Leazit, Inc. and Trux Enterprises, Inc. — filed for bankruptcy protection under chapter 11 in June 1985.

2. The debtors in possession engaged Jonathan Ganz of the law firm of Pincus, Verlin, Hahn & Reich, P.C. to represent them in their reorganization bankruptcies.

3. The debtors’ reorganization efforts quickly evolved into the orderly liquidation of assets, which assets included real property and personal property, including vehicles and receivables.

4. In either 1991 or 1992, it came to the attention of the United States Justice Department that Mr. Ganz had embezzled funds from a number of bankruptcy estates. The Department of Justice began an investigation of those thefts.

5. Included in the investigation was an audit of various bank accounts belonging to Mr. Ganz. This audit, which was included in a report prepared for and submitted in Mr. Ganz’s criminal trial, reflected the theft of funds from possibly nineteen bankruptcy es *249 tates and which may total as much as $2,337,-892.48. Ex. P-1, at 3328. 6

6.Among the bankruptcy estates looted by Mr. Ganz was the estate of Mushroom Transportation. As reported in the Justice Department audit:

On June 25, 1985, Mushroom Transportation Co., Inc., Trux Enterprises, Inc., Penn York Co., and Robbey Realty, Inc. filed for relief under chapter 11 and shortly thereafter an order was entered that these cases be jointly administered. 7

The debtor ceased operations on January 10,1986, and began liquidation of its assets with court approval. Since the Continental Bank was a secured creditor and had a lien on all of the debtor’s assets, the proceeds from the sale of assets were remitted to the bank and applied to reduce their debt. Upon payment of the debt to Continental Bank, the balance of $966,624.49 was turned over to debtor’s counsel, Pincus, Verlin, Hahn & Reich, P.C., c/o Jonathan H. Ganz.

Upon the receipt of the $966,624.49 from the Continental Bank, Ganz made payments of $196,894.46 for court-approved professional fees in the Mushroom Transportation Co., Inc. bankruptcy case. Another $200,000.00 was invested in a certificate of deposit at the Liberty Bank which matured on February 7, 1989 in the amount of $214,701.87. The proceeds from the certificate were deposited into another bank account entitled Mushroom Transportation — Debtor in Possession at the Provident Bank. The records of this account were not received at the time of this report and, therefore, these funds could not be verified as being misappropriated. The audit team was able to verify that $569,940.07 of Mushroom Transportation estate funds were transferred to Jonathan Ganz’s personal cheeking account and the funds spent for his personal use. The following is a chronological explanation of how the funds were misappropriated to his personal account.

Ex. P-1, at 3526.

7. The investigatory report, Ex. P-1, then notes the following transfers of Mushroom funds by Ganz:

First, on June 21,1987, a treasurer’s check for $200,000.00 was made payable to Mr. Ganz as counsel for the debtor in possession. This check was deposited into “his personal checking account # 069-454-7 at the Fidelity Bank on 7/28/87.”

Second, on August 3, 1987, Continental transferred the balance on hand — $766,-624.69 — into a new Continental Bank account in the name of “Mushroom Transportation Co., Inc. by Jonathan H. Ganz -Escrow Agent,” account # 104-016361-8.

Third, on March 3, 1988, Mr. Ganz withdrew $200,000.00 from this account and deposited these funds into “his personal checking account # 069-454-7 at the Fidelity Bank on 3/4/88.”

Fourth, on April 13, 1988, the above-mentioned Continental Bank account # 104-016361-8 was closed upon the withdrawal by Mr. Ganz of $169,940.07. These funds were deposited by him into “his personal checking account # 069-454-7 at the Fidelity Bank on 4/26/88.”

Ex. P-1, at 3527.

8. Although Mr. Ganz gained access to more than $900,000.00 of Mushroom funds, the report makes clear that not all of these funds were misappropriated by him. Some funds were paid by him to court-approved professionals after fees were allowed in their favor. Other funds were deposited into bank accounts owned by Mushroom and possibly used for legitimate purposes by the debtor. *250 The audit report verifies only that the sum of $569,940.07 of Mushroom funds was embezzled by Mr. Ganz over time. Ex. P-1, at 3526.

9. The Justice Department report, Ex. PI, traced the embezzled Mushroom funds as deposited by Mr. Ganz into a bank account maintained by him at Fidelity Bank — account # 0694547. Ex. P-1 contains a “reconstruction” of this account from the period June 4, 1986 through October 10, 1989. Id., at 3569-3602.

10. Mr. Ganz also deposited funds into this Fidelity bank account from sources other than Mushroom Transportation. Some of these sources were clearly legitimate. For example, he deposited fees payable to him from various clients. He deposited the proceeds of assets sold by him. Other sources of deposit were not legitimate; Mr. Ganz deposited the embezzled funds from bankruptcy cases distinct from Mushroom Transportation into this Fidelity account. Ex. P-1 contains columns in which the Justice Department verified the sources of many of the deposits into this Fidelity bank account. Each source which constituted embezzled funds is so denoted.

11. In 1985 or 1986, Mr. Ganz borrowed $60,000.00 from defendant A-l Discount Company Profit Sharing Plan in order to make a payment due under a divorce settlement. N.T., at 98. He planned to repay the loan from the proceeds of the sale of his home. Id. 8 The A-l defendants were not creditors of the Mushroom entities. Ex. Fidelity-1.

12. This loan was evidenced by a note and involved quarterly interest payments. N.T., at 97,100.

13. Mr. Ganz sold his home and received proceeds of about $110,000.00. These proceeds were deposited into the Fidelity account on May 1, 1987. Ex. P-1, at 3579; N.T., at 101-02. After this deposit, the bank account had an approximate balance of $189,-000.00. There were no embezzled funds derived from the estate of Mushroom Transportation which constituted any portion of this account balance. Ex. P-1, at 3569-3579. 9

14. By check dated January 29, 1988, Mr. Ganz paid $60,000.00 from funds drawn on this Fidelity account to A-l Discount Company Profit Sharing Plan. Ex. P-2. 10

15. The bank account reconciliation located in Ex. P-1 discloses many entries for deposits and withdrawals between the dates May 1, 1987 and January 29, 1988. However, the following excerpts are relevant to this proceeding (and include all references to misappropriated funds deposited into this account during this period of time 11 ):

*251 a. July 9, 1987- — deposit from misappropriation of Mushroom funds of $1,056.52 — creating a balance of $31,614.65

b. July 28, 1997 — deposit from misappropriation of Mushroom funds of $200,-000.00 — creating a balance of $285,858.19

c. August 28, 1987 — deposit from misappropriation of North Center Texas Railways funds of $147,963.70 12 — creating a balance of $420,532.58

d. September 9, 1987 — deposit from misappropriation of Mushroom funds of $1,359.50 — creating a balance of $412,-138.26

e. December 1, 1987 — deposit from misappropriation of Malone Transportation funds of $1,375.00 — creating a balance of $122,991.73

f. January 27, 1988 — deposit of $72,-000.00 from the sale of stock owned by him (N.T., at 138) — creating a balance of $211,-827.00

g. February 1, 1988 — payment to “A-l Profit Sharing Plan” of $60,000.00 — leaving a balance remaining of $80,236.14

16. There were no deposits made to this Fidelity bank account between January 27, 1988 and February 1, 1988. There were $71,591.26 in disbursements made during this period (excluding the $60,000.00 paid to defendant A-l).

17. To the extent that tracing presumptions applicable to commingled bank accounts are germane to this proceeding, then these presumptions are applied to Mr. Ganz’s Fidelity bank account as follows: misappropriated funds were disbursed by Mr. Ganz only after legitimate funds were used; the lowest intermediate balance rule applies; and misappropriated funds were disbursed on a first in/first out basis. The application of these presumptions yields the result that on February 1, 1988, immediately before Mr. Ganz paid to defendant A-l the sum of $60,000.00, the sources of the $140,236.14 then remaining in this account were from the estate of Malone Transportation ($1,375.00), from the estate of Mushroom Transportation ($1,359.50), and the balance from North Center Texas Railways, Inc. ($137,501.64). Furthermore, the source of the $60,000.00 payment to defendant A-l would be traced to the funds misappropriated from North Center Texas Railways, Inc., as these funds were deposited earlier than those from Mushroom or from Malone.

18. At some point prior to 1988, U-Rent Corporation, which was in the business of leasing equipment, obtained a loan from Fidelity Bank in an amount estimated to be between $150,000.00 and $250,000.00. N.T., at 110-111; 124. Fidelity Bank was not a creditor of the Mushroom entities. Ex. Fidelity-1; N.T., at 126.

19. Mr. Ganz was a shareholder of U-Rent and he and his wife guaranteed repayment of this loan. N.T., at 112 -113, 124. 13

20. The Fidelity loan was secured by the equipment and receivables of U-Rent, as well as by certain shares of stock owned by Mr. Ganz. N.T., at 113.

*252 21. U-Rent defaulted upon repayment of this loan. N.T., at 124. Fidelity then liquidated its collateral, including the shares pledged by Mr. Ganz. Id.

22. In addition, by a cheek dated December 20, 1988, and drawn on the above-mentioned Fidelity Bank account, Mr. Ganz paid to Fidelity the sum of $23,135.33. Ex. P-6; Ex. P-1, at 3598. This payment was made in connection with the loan guarantee given by Mr. Ganz. N.T., at 124-25,133.

23. The bank account reconciliation located in Ex. P-1 discloses many entries for deposits and withdrawals between the dates July 19, 1988 and December 20,1988. However, the following entries are relevant to this proceeding (and include all misappropriated funds deposited into this account during this period of time):

a. July 19, 1988 — deposit from misappropriated funds of Wicaco Machine Corp. of $46,679.94 — creating a balance of $214,-086.09

b. September 26, 1988 — deposit from misappropriated funds of Wicaco Machine Corp. of $5,044.33 — creating a balance of $90,717.18

c. October 27, 1988 — deposit from misappropriation of funds from the estate of L.K. Lobron in the amount of $21,104.87— creating a balance of $59,592.23

d. November 14, 1988 — deposit from Horizon Financial of $43,537.20 — creating a balance of $96,107.53

e. November 25, 1988 — payment to “Alan S.C? & ” of $1,000.00 — leaving a balance of $18,120.46

f. December 9, 1988 — deposit from Douglas H. Weiss of $26,000.00 — creating a balance of $50,540.36

g. December 20, 1988 — payment to Jerome Verlin of $250.00 — leaving a balance of $35,462.43

h. December 20, 1988 — payment to Fidelity Bank of $23,135.33 — leaving a balance of $12,327.10

Ex. P-1, at 3592-3598.

24. To the extent that tracing presumptions applicable to commingled bank accounts are germane to this proceeding, then these presumptions are applied to Mr. Ganz’s Fidelity bank account as follows: misappropriated funds were disbursed by Mr. Ganz only after legitimate funds were used; the lowest intermediate balance rule applies; and misappropriated funds were disbursed on a first in/first out basis. The application of these presumptions yields the result that on December 20, 1988, the funds on hand used to repay Fidelity Bank would be derived from the estate of L.K. Lobron ($21,104.87) and from the estate of Wicaco Machine Corp. ($14,357.56). No Mushroom funds would be traceable to this payment.

25. The Fidelity account # 0694547 was closed on October 10, 1989 when the last of its funds was disbursed. Ex. P-1, at 3602.

26. There was no evidence that either the A-l defendants or defendant Fidelity Bank had reason to suspect that the source of the payments received by them were from funds stolen by Mr. Ganz.

27. There was no evidence that either the A-l defendants or defendant Fidelity Bank retained possession of the funds transfeired to them by Mr. Ganz at the time this adversary proceeding commenced.

III.

I reach the following legal conclusions in this proceeding.

1. Pennsylvania law would determine whether the proceeds of funds stolen from the Mushroom estate were transferred to defendants.

2. Pennsylvania law would determine whether the plaintiff has proven a cause of action under conversion or constructive trust.

3. In order to demonstrate a valid statutory claim under turnover or improper transfer, as well as valid common law claims for conversion or constructive trust against these defendants, the plaintiff must trace the proceeds of funds stolen from the consolidated Mushroom estate to the defendants.

4. Even if proceeds of stolen funds from Mushroom are traceable to the defendants, the plaintiff cannot prevail if the defendants received these proceeds for fair value and *253 neither knew or should have known of their illegal origins.

5. Pennsylvania applies the tracing presumption of the intermediate balance rule to commingled trust funds in a bank account. It also applies the presumption of first-in/ first-out when there are only trust funds in a bank account.

6. The plaintiff did not demonstrate that proceeds of Mushroom property were transferred to any of these four defendants. '

7. The evidence shows that these defendants received payments from Mr. Ganz for fair value and neither knew nor should have known that the source of the payments was stolen property.

IV.

A.

The four causes of action stated against the defendants have a common evi-dentiary element: each of them requires a showing that the proceeds of funds stolen from the now consolidated estate of Mushroom Transportation were paid to the defendants. That is, the plaintiff here cannot prevail unless he can establish that the proceeds of estate funds from the debtor were transferred by Mr. Ganz to the defendants. This is as true for the federal statutory causes here alleged, 11 U.S.C. § 549(a); 11 U.S.C. §§ 542 and 543, as it is for the common law theories of conversion and constructive trust. See generally, e.g., In re Gray Electric Co., 142 F.3d 433 [Table], 1998 WL 109989, * 1 (6th Cir.1998) (“the critical question [under § 549 is]... whether the transferred funds were property of the bankrupt estate”); Western United Life Assur., Co. v. Hayden, 64 F.3d 833, 836 n. 3 (3d Cir.1995) (noting that the debtor sought turnover under section 542, but relief was denied as the debtor had no interest in the property sought to be recovered); First Federal of Michigan v. Barrow, 878 F.2d 912, 915 (6th Cir.1989) (inability to trace funds precluded imposition of constructive trust for purpose of removing funds from bankruptcy estate); Baram v. Farugia, 606 F.2d 42, 43-44 (3d Cir.1979) (discussing the Pennsylvania common law claim of conversion). Thus, the ability of the trustee to trace the stolen funds of the Mushroom bankruptcy estate into the possession of the defendants is an initial evidentiary burden of persuasion common to all of his stated causes of action.

Here, of course, Mr. Ganz deposited the funds he stole from the Mushroom estate into his personal bank account with Fidelity Bank. These funds were then commingled with other deposits (both before and after the thefts) and used to pay a large number of individuals and entities. Many of the other deposits were derived from legitimate sources; some were derived from thefts from other bankruptcy estates.

Obviously, Mr. Ganz, by his embezzlement of Mushroom funds, converted property of the bankruptcy estates to his own use as a matter of Pennsylvania law. Pennsylvania law would apply in this adversary proceeding because the theft of funds arose from Pennsylvania corporations, occurred in Pennsylvania, and the misappropriated funds were deposited in Pennsylvania. See Western United Life Assur., Co. v. Hayden, 64 F.3d, at 837. 14 Since the proceeding here does not involve competing creditor claims to bankruptcy estate property, there are no federal bankruptcy policies which suggest that state law should be preempted. See Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d 487, 492 (3d Cir.1997) (“the Bankruptcy Code was written with the expectation that it would be applied in the context of state law and that federal courts are not licensed to disregard interests created by state law when that course is not clearly required to effectuate federal interests”) (quoting Matter of Roach, 824 F.2d 1370, 1374 (3d Cir.1987)); see generally Atherton v. Federal Deposit Insurance Corp., 519 U.S. 213, 117 S.Ct. 666, 670, 136 L.Ed.2d *254 656 (1997). 15 Thus, the bankruptcy trustee, acting on behalf of the Mushroom estate, has a claim against Mr. Ganz due to his theft of property. See generally In re Erie Trust Co. of Erie, 326 Pa. 198, 201, 191 A. 613 (1937).

Under state law, the bankruptcy estates, acting through the bankruptcy trustee, had the right to claim that the funds stolen by Mr. Ganz were held in trust by the thief on their behalf. See Appeal of Mehler, 310 Pa. 25, 28, 164 A. 619 (1932). Such a claim would prefer them to other creditors of Mr. Ganz. That is, even if Mr. Ganz were insolvent, the bankruptcy trustee could validly assert under .Pennsylvania law that he should be repaid first from all funds stolen by Mr. Ganz and still in his possession, because those funds as a matter of state law were held by Mr. Ganz in trust for the Mushroom estate. E.g., Appeal of Mehler, 310 Pa. at 28. However, in order to prevail on any trust claim against Ganz, the bankruptcy trustee must “trace the proceeds received from the conversion and identify them as contained in some specific fund or property in possession [of the wrongdoer.]” Id., at 29. If the stolen funds were no longer in the possession of Mr. Ganz when the bankruptcy trustee made demand for their return, no such recovery would be ordered and the bankruptcy trustee would hold but a general unsecured claim against Ganz for conversion. See Fischbach & Moore v. Philadelphia Nat. Bank, 134 Pa.Super. 84, 3 A.2d 1011 (1939).

Were a third party to receive the converted funds from Ganz with knowledge that they were converted (either actual or presumed knowledge) then the bankruptcy trustee could recover the converted property from the third party recipient on the common law claims of conversion or constructive trust. Accord, e.g., Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Ninth Bank & Trust Co., 306 Pa. 148, 158 A. 251 (1932); Solomon v. Gibson, 419 Pa.Super. 284, 288, 615 A.2d 367 (1992).

The fact that Ganz deposited the stolen funds into a bank account does not preclude the imposition of a constructive trust being established. See, e.g., Central Nat. Bank v. Connecticut Mut. Life Ins. Co., 104 U.S. 54, 66, 26 L.Ed. 693 (1881) (“If the money deposited belonged to a third person, and was held by the depositor in a fiduciary capacity, its character is not changed by being placed to his credit in his bank account”); In re Martin Fein & Co., Inc., 43 B.R. 623 (Bankr.S.D.N.Y.1984). However, it is necessary that the stolen funds be traced into that particular account. See In re Erie Trust Co. of Erie, 326 Pa. at 201; Appeal of Mehler, 310 Pa. at 29:

Where improperly converted assets of a trust estate are traced into the fund for distribution, a preference has always been allowed on the theory that such assets *255 have never become a part of those of the trustee but at all times have remained, whether in their original or substituted form, the property of the cestui que trust, and therefore the trustee’s general creditors are not entitled to any share in their distribution.

The fact that Ganz commingled the stolen Mushroom funds by depositing other funds, derived from both legitimate and illegitimate sources, into this bank account does not by itself preclude the imposition of a trust. See In re Erie Trust Co. of Erie, 326 Pa. at 206-07; Central Nat. Bank v. Connecticut Mut. Life Ins. Co. However, tracing the amount of stolen funds remaining in the account at any given time involves the application of a number of common law presumptions.

As a general rule, in tracing the origins of funds withdrawn from a bank account, Pennsylvania applies the rule established in Clayton’s Case, 1 Merrival 572 (Ch. 1816), that the funds first deposited are the funds first withdrawn. City of Pittsburgh v. Rhodes, 230 Pa. 397, 399, 79 A. 634 (1911); Fischbach & Moore v. Philadelphia Nat. Bank, 134 Pa.Super. at 91-92, 3 A.2d 1011 (refusing to impose a constructive trust on a bank account because the funds belonging to the plaintiff which had been deposited were withdrawn under the first-in, first out principle); see also Empire State Surety Co. v. Carroll County, 194 F. 593, 603 (8th Cir.1912) (“Applying the settled rule that, in the absence of affirmative evidence to the contrary, where payments are made out of a common fund, the presumption is that the earliest in are the earliest out”).

This principle has been modified by application of the presumptions articulated in English common law in In re Hallett’s Estate [Knatchbull v. Hallett], 13 Ch.D. 696 (1879) when tracing funds which have been commingled by a tortfeasor into a bank account. See Central Nat. Bank v. Connecticut Mut. Life Ins. Co., 104 U.S. at 68-69; In re Erie Trust Co. of Erie, 326 Pa. at 204. There are two related presumptions derived from Hallett’s Estate and accepted in Pennsylvania (and federal) common law. First, if the fiduciary (i.e., tortfeasor/depositor) has a choice of withdrawing either the proceeds of trust funds or legitimate funds, then the fiduciary will withdraw the legitimate funds. Central Nat. Bank v. Connecticut Mut. Life Ins. Co., 104 U.S. at 68; In re Erie Trust of Erie, 326 Pa. at 206; In re Columbia Gas Systems, Inc., 997 F.2d at 1063. Second, once the proceeds of the trust (i.e., stolen funds) are spent by the fiduciary, new deposits made are not treated as replenishing the trust proceeds. See Appeal of Mehler, 310 Pa. at 29; Fischbach & Moore v. Philadelphia Nat. Bank, 134 Pa.Super. at 91; In re Columbia Gas Systems, Inc., 997 F.2d, at 1063; see generally In re Mahan & Rowsey, Inc., 817 F.2d 682, 684 (10th Cir.1987). 16 Together, these two tracing presumptions are sometimes referred to as the “lowest intermediate balance” rule.

As summarized by the Third Circuit Court of Appeals:

The lowest intermediate balance rule, a legal construct, allows trust beneficiaries to assume that trust funds are withdrawn last from a commingled account. Once trust money is removed, however, it is not replenished by subsequent deposits. Therefore, the lowest intermediate balance in a commingled account represents trust funds that have never been dissipated and which are reasonably identifiable.

In re Columbia Gas Systems, Inc., 997 F.2d, at 1063; accord, e.g., In re Mahan & Rowsey, Inc., 817 F.2d at 684-85: L.King, 5 Collier on Bankruptcy, ¶ 541.11[5] at 541-54.7 (15th ed.rev.1998):

The situation frequently occurs where trust funds have been traced into a general bank account of the debtor. The following general principles have been applied. The bankruptcy court will follow the trust fund and decree restitution where the amount of the deposit has at all times since the inter *256 mingling of funds equaled or exceeded the amount of the trust fund. But where, after the transfer into the bank account and mingling, all of the moneys are withdrawn, the equity of the beneficiary is lost, although moneys from other sources are ultimately deposited in the same account. In the intermediate case where the account is reduced to a smaller sum than the trust fund, the latter must be regarded as dissipated, except as to the balance, and funds subsequently added from other sources cannot be subjected to the equitable claim of the beneficiary. If new money is deposited before the balance is reduced, the reduction should be considered from the new money and not from the monies held in trust. This analysis may be referred to as the “lowest intermediate balance test.”

(footnote omitted).

Counsel for the trustee in this adversary proceeding assumed at the end of the trial that certain commingled bank account presumptions, which as a matter of equity were established to resolve disputes regarding claims to property held by a tortfeasor, were applicable to the instant litigation. That is, the tracing decisions cited above generally involved disputes over claims to funds remaining on deposit in bank accounts still in the possession of the tortfeasor, rather than to claims against innocent third parties who dealt with the tortfeasor. Here, the application of the intermediate balance rale in any claim by the trustee for a constructive trust against Mr. Ganz would result in a conclusion that he no longer held any funds in trust, since his account balance reached zero on October 10,1989 — years before this litigation commenced. See, e.g., In re Drexel Burnham Lambert Group, Inc., 142 B.R. 633, 638 (S.D.N.Y.1992).

Nonetheless, if I accept plaintiffs position, arguendo, and apply commingled bank account tracing presumptions to this dispute, there remain two defects to his claims against these four defendants on the evidence presented.

First, the evidence does not support the bankruptcy trustee’s argument that the defendants here received the proceeds of funds stolen from the Mushroom estate. Not only does the plaintiff overlook the intermediate balance rule, but he also ignores the principle accepted in Pennsylvania that when trust funds from various estates are commingled, there is a presumption that they are treated on a “first in, first out” basis. See Fischbach & Moore v. Philadelphia Nat. Bank, 134 Pa.Super. at 91; see also Empire State Surety Co. v. Carroll County:

Where a trustee has mingled in a common fund the moneys of many separate cestuis que trastent and then made payments out of this common fund, the legal presumption is that the moneys were paid out in the order in which they were paid in, and the cestuis que trastent are equitably entitled to any allowable preference in the inverse order of the times of their respective payments into the fund.

194 F. at 605.

Recently, the Pennsylvania Superior Court was faced with competing claims of two fraud victims to the remaining funds in a bank account of a tortfeasor who had deposited funds wrongfully obtained from both victims. Certain withdrawals had been made leaving a balance insufficient to repay both claimants. The appellate court concluded that, under Pennsylvania law (citing, inter alia, Empire State Surety Co. and Fischbach & Moore), the funds withdrawn were derived from the first victim only based upon the “first in, first out” presumption:

In attempting to trace funds, the rale in Pennsylvania is “first in, first out.” Pursuant to this rule, “the legal presumption is that the moneys were paid out in the order which they were paid in, and [the parties