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Judge Carey Dismisses Third-Party Cross-Claim Asserting Delaware ‘Resulting Trust’

By Evan T. Miller

On February 12, 2013, Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware issued a Memorandum Opinion in Velocitel, Inc. v. Forman (In re Open Range Communications, Inc.), Adv. Proc. 12-50476 (KJC), granting the United States Department of Agriculture, Rural Utilities Services (“RUS”)’s motion to dismiss (the “Motion to Dismiss”) the cross-claim of G4S Technology LLC (“G4S”), a third-party defendant seeking a declaratory judgment that RUS had no interest in a particular deposit account (the “Deposit Account”) set up between the Debtor and RUS.

On October 6, 2011 (the “Petition Date”), the Debtor filed a voluntary chapter 11 bankruptcy petition, but the Debtor’s case was later converted to chapter 7 of the Bankruptcy Code. Prior to the Petition Date, RUS had entered into a loan agreement (the “Loan Agreement”) with the Debtor to provide up to $267 million for the Debtor’s construction of broadband services infrastructure (the “Project”). Pursuant to that agreement, RUS would deposit advances into the Deposit Account, out of which RUS would pay certain costs connected to construction of the broadband network when the Debtor met certain conditions. Shortly after the Petition Date, the Debtor transferred the funds in the Deposit Account to an escrow account (the “Escrow Account”) pursuant to a Court order.

The present action was initiated by Velocitel, Inc. (“Velocitel”), a third-party wireless infrastructure provider that provided services to the Debtor in connection with the Project, against the chapter 7 trustee (the “Trustee”) to determine the rights of parties to the Escrow Account. The Trustee responded with a third-party complaint which added G4S as a third-party defendant to the adversary proceeding; like Velocitel, G4S had a pre-petition agreement with the Debtor to provide materials and services in support of the Project, and was still owed more than $10 million at the time of the present action. As a result of being named in the third-party complaint, G4S filed a cross-claim against the Trustee and RUS, (a) alleging that funds in the Deposit Account were being held in trust for remittance to G4S; and (b) seeking a declaratory judgment that RUS had no interest in the Deposit Account because “(i) the Loan Agreement required that funds in the Deposit Account be used only for the purposes for which the advances were made, (ii) the Deposit Account was not property of the estate, (iii) G4S’s interest in the Deposit Account is senior to any interest of RUS or the Trustee.” Subsequently, RUS filed the Motion to Dismiss the claims alleged by Velocitel and G4S; Velocitel’s claims were resolved prior to oral argument on the present action, leaving only G4S’s for resolution.

Judge Carey rejected G4S’s arguments, finding no Delaware “resulting trust” in this case. Following Judge Sontchi’s framework for analyzing “resulting trusts” as set forth in Official Comm. of Unsecured Creditors v. Catholic Diocese of Wilmington, Inc. (In re Catholic Diocese of Wilmington, Inc.), 432 B.R. 135 (Bankr. D. Del. 2010), the Court found that mere evidence that RUS intended to limit the Debtor’s use of funds, without more, is insufficient to reflect any intent by the parties to create a trust in favor of third-party contractors such as G4S. The Court further held that, when the Loan Agreement was viewed in its entirety, it became clear that the loan advances were placed into a deposit account pledged to RUS as security for the loan. Since the Loan Agreement was unambiguous, Judge Carey granted the Motion to Dismiss.

A copy of the opinion can be found here.

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