## Facts

- Mushroom Transportation Company, Inc. (Mushroom) filed for bankruptcy, and Jeoffrey L. Burtch was appointed trustee.
- Mushroom’s former bankruptcy counsel, Jonathan Ganz, stole funds belonging to Mushroom’s estate.
- Ganz deposited the stolen estate funds into his personal bank account, where they were commingled with other money, including legitimate deposits and funds misappropriated from other bankruptcy estates.
- From that commingled personal account, Ganz made payments to third parties, including Fidelity Bank and A‑1 Discount Company and A‑1’s pension and profit‑sharing plans (collectively, the A‑1 entities).
- Fidelity and the A‑1 entities asserted that they had extended loans or credit to Ganz and that the payments they received were repayments of Ganz’s own obligations, not payments made with identifiable Mushroom estate property.
- The account’s transaction history showed that, by the time Ganz made payments to Fidelity and the A‑1 entities, the account had substantial inflows and outflows from multiple sources; over time, withdrawals exceeded the amount stolen from Mushroom, and the account later reached a zero balance.
- Burtch sued Fidelity and the A‑1 entities asserting (1) state common‑law theories such as conversion and constructive trust and (2) Bankruptcy Code claims seeking turnover and recovery of allegedly unauthorized transfers, contending the defendants received Mushroom estate property or its proceeds.
- Fidelity argued, among other defenses, that it took in good faith and for value because it received payment on bona fide obligations owed by Ganz without notice that the funds were tied to any theft from Mushroom.

## Issues

1. Whether the trustee could recover from Fidelity and the A‑1 entities by proving that the payments they received were identifiable proceeds of Mushroom’s stolen estate funds, despite commingling in Ganz’s personal account and later depletion of that account.
2. Whether the trustee’s state‑law claims (conversion and constructive trust) failed absent proof that defendants received specific, traceable property belonging to Mushroom’s estate.
3. Whether the trustee’s Bankruptcy Code claims for turnover and recovery of allegedly unauthorized transfers failed because the trustee could not show the defendants received “property of the estate” (or traceable proceeds).
4. Whether Fidelity (and similarly situated transferees) was protected as a good‑faith transferee for value where it received repayment of bona fide debt without notice of the theft.

## Decision

- The court ruled for Fidelity and the A‑1 entities and against the trustee.
- The court held the trustee did not carry the required burden to trace the payments received by Fidelity and the A‑1 entities to Mushroom’s stolen estate funds after those funds were deposited into, and mixed within, Ganz’s personal account.
- Because the commingled account’s withdrawals exceeded the amount stolen from Mushroom and the account later fell to a zero balance, the court concluded the trustee could not establish that the defendants received identifiable estate property (or identifiable proceeds) as required by the asserted theories.
- The court therefore rejected the trustee’s efforts to impose liability through conversion or a constructive trust and denied recovery under the Bankruptcy Code turnover/unauthorized transfer theories as pleaded.
- The court also accepted that Fidelity’s status as a recipient for value and in good faith supplied an additional barrier to recovery on the trustee’s theories directed at downstream transferees.

## Legal Principles

- A plaintiff seeking to recover stolen funds from a downstream recipient must prove that the recipient obtained the claimant’s property (or its proceeds); where funds have been commingled, recovery depends on recognized tracing rules and competent proof connecting the payment to the claimant’s funds.
- When misappropriated funds are placed into a commingled account and later withdrawals reduce the balance below the amount of the misappropriation (and especially where the balance later reaches zero), tracing may fail because the claimant cannot show that the particular transfer at issue consisted of the claimant’s funds.
- Turnover and similar Bankruptcy Code remedies generally require proof that the defendant possesses (or received) property of the estate; a trustee cannot obtain turnover or recovery merely by showing that estate money at one time passed through the same commingled account used to make the challenged payment.
- A constructive trust is not imposed without an identifiable res or traceable proceeds; commingling and depletion can defeat the ability to identify specific property subject to such a remedy.
- A transferee that receives payment in good faith and for value—such as repayment of bona fide debt without notice of wrongdoing—may be protected from restitutionary recovery aimed at recapturing misappropriated property.

## Conclusion

In In re Mushroom Transportation Co., the bankruptcy court rejected the trustee’s attempt to recover from Fidelity Bank and the A‑1 entities based on payments made by the debtor’s former counsel out of a commingled personal account, holding that the trustee could not trace the defendants’ receipts to identifiable Mushroom estate funds after the account’s activity and depletion, and that good‑faith receipt for value further supported judgment for the defendants.


In re Mushroom Transportation Co., 227 B.R. 244 (1998)