Memorandum of Decision Re: Defalcation of Trustee

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re FOODSOURCE, INC.,                                           No. 1-84-00703      Debtor. ___________________________/ In re FOODSOURCE SALES CORPORATION,             No. 1-84-00869      Debtor. ___________________________/ CHARLES E. SIMS, Trustee,      Plaintiff,    v.                                                                              A.P. No. 1-89-0248 CHARLES DUCK, et al.,      Defendant. ______________________________/
Memorandum of Decision
     The original trustee in this case is serving a prison term for embezzlement. Two accountants have gone over his records independently, and both have identified $13,899,923.05 in receipts and $8,972,304.59 in disbursements during his trusteeship. Since only $3,346,478.35 was turned over to the successor trustee, there is a shortfall of $1,581,140.11. This adversary proceeding has been brought by the successor trustee to recover the amount of the original trustee's defalcation from the two bonding companies, Fidelity and Deposit Company of Maryland and Transamerica Insurance Company.      Now before the court is the Trustee's motion for a partial summary judgment seeking an order that the defendant bonding companies prepare the original trustee's final account. He also seeks a determination of their liability for interest on the missing funds.      The interest dispute is not ripe for adjudication, and the court accordingly declines to make a ruling on those issues. For the guidance of the parties, the court comments that it is the responsibility of the bonding companies to make the estate whole for the trustee's defalcations, but that interest on top of that amount may not be appropriate. This does not mean that the bonding companies are not liable for interest, but it does mean that any interest for which they are liable must be interest that the estate lost due to defalcation. If the trustee embezzled funds from the estate, and if it would have been a defalcation for him to fail to earn interest on the funds had he not embezzled them (or if he earned interest on the funds for himself), then the loss of interest is part of the defalcation and the bonding companies must make the estate whole. Prejudgment interest on the total amount owed by the bonding companies on account of the trustee's defalcations is a matter for the discretion of the court.      The dispute over who must do the accounting is merely a dispute over the burdens of proof. Once there is competent evidence of a trustee's wrongdoing, the burden shifts to the trustee to establish that all funds which came into his possession are offset by proper credits; every item he cannot prove is correct and proper must be disallowed. 90 C.J.S., Trusts, section 414, p.785. Since the embezzlement of the trustee in this case has already been established, the burden is on the defendant bonding companies, as sureties for the trustee, to either account for $13,899,923.05 and justify all disbursements or make the estate whole for whatever balance remains unaccounted for. It is therefore incumbent upon the bonding companies to prepare an accounting not because they are required to do so by any rule or statute, but because they are automatically liable for whatever they cannot account for.      Because Transamerica does not oppose that part of the Trustee's motion which seeks to have it prepare an accounting, that part of the motion will be granted as to Transamerica only. The court will not order Fidelity to participate in the accounting if it does not wish to do so, but will reserve the issue of its liability for a portion of the cost of the accounting. That issue will be resolved as equity dictates after the cost of the accounting and the liabilities of the parties have been determined.      Counsel for the Trustee shall submit an appropriate form of order which counsel for Transamerica and Fidelity have approved as conforming to this decision. No mention of interest shall be made in the order, except to say that those issues are reserved.
Dated: December 12, 1990                                                                          _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy