Cosmetic Plus Group Ltd. v. Gowan (In re Dreier LLP)

Case Type:
Business
Case Status:
Affirmed
Citation:
16-2827 (2d Circuit, Mar 21, 2017) (2nd Circuit, Mar 21,2017) Not Published
Tag(s):
Ruling:
The Second Circuit held that a claim against a law firm for settlement proceeds received by the law firm on behalf of the client was a general unsecured claim where the law firm dissipated the funds and the claim was, therefore, not for a traceable res. The Second Circuit also refused to impose a constructive trust on funds transferred from the law firm because the transferred funds were not traceable to the received settlement proceeds.
Procedural context:
The Bankruptcy Court (i) determined that, because plaintiffs could not trace the transfer to settlement proceeds received by the chapter 11 debtor, the transfer of $350,000 by the debtor was a preferential transfer, and (ii) held that the claim against the debtor was a general unsecured claim. The District Court affirmed.
Facts:
In 2003, Dreier LLP filed an adversary proceeding on behalf of CPG, a chapter 11 debtor. The adversary proceeding was settled and Dreier received the settlement funds. Dreier did not forward the funds to CPG, but commingled the funds with its operating funds. Subsequently, the Dreier account holding the settlement funds was reduced to $0, although later deposits later brought the account back above $350,000. Dreier transferred funds, including $350,000 intended for CPG, to an outside account, then filed its own Chapter 11 case within 90 days thereafter. The Bankruptcy Court determined that the transfer of the $350,000 was a preferential transfer, and held that the claim against Dreier was a general unsecured claim. The District Court affirmed.
Judge(s):
Dennis Jacobs, Robert D. Sack, and Paul A. Engelmayer (District Judge)

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