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In re Koenecke

April 2, 1979

IN THE MATTER OF F. W. KOENECKE & SONS, INC., BANKRUPT. APPEAL OF GLENN R. HEYMAN, TRUSTEE, PLAINTIFF, APPEAL OF ALEX R. BIRNIE, DEFENDANT.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 69 B 1647 -- Hubert L. Will, Judge.

Before Sprecher and Bauer, Circuit Judges, and Hoffman,*fn* Senior District Judge.

Author: Bauer

This appeal arises from a judgment of the district court which reversed in part and affirmed in part an order of a bankruptcy judge in proceedings involving the F. W. Koenecke corporation. The bankruptcy judge entered a judgment for the trustee in bankruptcy against several named defendants as a result of misappropriation of funds from the corporation shortly before it discontinued operations. The district court affirmed as to several defendants but reversed as to the accounting firm employed by the trustee. The trustee now appeals from that portion of the district court's order which exonerated the accounting firm. The individual accountant assigned to do the work of the accounting firm appeals from that portion of the order which established a constructive trust in favor of the trustee on real property acquired and placed in the joint names of the individual accountant and his wife, in which appeal the wife joins.

I.

As a first step in reviewing the decision of the district court, we must briefly outline the factual background. The appellant and cross-appellee Glenn R. Heyman is the trustee in bankruptcy of F. W. Koenecke & Sons, a bankrupt corporation that has been one of the largest distributors of cigarettes in the Midwest. Robert Koenecke was the sole shareholder and president of Koenecke, while Clifford Kahler was the sales manager and assistant treasurer. The accounting firm of James T. Wilkes & Company acted for many years as the outside accountant for Koenecke. Alex R. Birnie was the senior accountant on Wilkes' staff who had been in charge of all assignments undertaken on behalf of the Koenecke corporation. In addition, Birnie was privately employed by Koenecke, and this employment was apparently unknown to Wilkes.

The business operations of Koenecke were closed on February 25, 1969. On February 18 and 22, 1969, Clifford Kahler caused three checks to be drawn on the corporation's account in the amounts of $15,000, $100,000 and $200,000. These checks were used to purchase three cashier's checks as follows:

Payee Amount

Robert F. Koenecke $200,000.00

Clifford E. Kahler 100,000.00

Clifford E. Kahler 15,000.00

$315,000.00

On April 10, 1969, the $200,000 check payable to Robert Koenecke was endorsed and delivered to Kahler, with the following legend written by Birnie: "Pay to Clifford E. Kahler as return of deposit for purchase in full." On May 6, 1969, Birnie and Kahler opened an account at the First National Bank of Chicago Heights in Birnie's name as nominee for Kahler and deposited the $200,000 check.

In March, 1969, Birnie advised the trustee that the books of the bankrupt corporation were not complete for the months of February and March. Pursuant to a court order entered on March 27, 1969, the trustee retained James T. Wilkes & Company "to complete the postings of all cash disbursements for February and March, 1969, and for recording and posting all receipts to the proper subsidiary ledger, to correct entries to reflect dishonored items, returned merchandise and other not yet recorded items."

Birnie was designated by Wilkes to head this assignment, and he performed or supervised virtually all of the accounting services. In May or June, 1969, the books and accounting records were returned to the trustee. They did not, however, accurately reflect the transactions involving the $315,000 paid to Kahler and Koenecke. On the contrary, the records contained certain false entries that had been made by Birnie in an effort to conceal the fraud. As ...


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