In re Joliet-Will County Community Action Agency, Bankruptcy No. 84 B 13298.
| Decision Date | 03 April 1986 |
| Docket Number | Bankruptcy No. 84 B 13298. |
| Citation | 58 BR 973 |
| Parties | In re JOLIET-WILL COUNTY COMMUNITY ACTION AGENCY, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Debbie Ebner, Cooper & Cooper, Ltd., Chicago, Ill., Trustee.
Joel R. Nathan, Sp. Ass't. Atty. Gen., Revenue Litigation Div., Chicago, Ill., for State of Ill.
This matter comes to be heard on the motion of the trustee to sell certain purported assets of the estate pursuant to 11 U.S.C. § 363, to pay administrative expenses pursuant to 11 U.S.C. § 506(c), and for allowance of interim compensation and reimbursement of expenses pursuant to 11 U.S.C. § 330. Subsequent to the applications of the trustee, all of which were objected to by the State of Illinois, Department of Commerce and Community Affairs ("DCCA"), a joint motion was presented by DCCA, the Illinois Department of Public Health, the Illinois State Board of Education, and Action, Inc. (hereinafter collectively referred to as the "Grantor Agencies") to compel the trustee pursuant to 11 U.S.C. § 554 to abandon the subject property as burdensome and of no benefit to the estate. The resolution of the present motions, which the parties have submitted with supporting memoranda for ruling by the court, require the court to determine what interest the estate has in the grant funds and grant property held by the debtor at the time of filing its petition for relief.1 For the reasons set forth below, the court denies the motion of the Grantor Agencies to compel abandonment.
The Joliet-Will County Community Action Agency ("debtor") was a non-profit community service organization created to alleviate poverty in the Joliet-Will County area. In furtherance thereof, the debtor was funded exclusively by various granting agencies.2 The grant funds distributed were to be used solely in accordance with the respective grant agreements entered into by the debtor prepetition. In addition, the debtor expended some of the grant funds to purchase certain grant property.
On October 22, 1984, the debtor filed its voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On that date, the debtor had certain funds on deposit with various financial institutions. The trustee has secured possession over these funds and deposited them into two accounts at the Albany Bank & Trust Co., N.A., for the benefit of the estate.3 These funds were transferred by the Grantor Agencies pursuant to the grant agreements.4 All other property described in the debtor's schedules and/or in the trustee's possession, with the exception of a limited number of items,5 is grant property. The debtor did not complete any of the project purposes described in the grant documents.
Prior to filing its petition and at the time it terminated operations, the debtor voluntarily surrendered certain grant property identified as weatherization material, which was purchased with grant funds supplied by DCCA, to DCCA for the limited purpose of protecting it. The trustee now contends that the weatherization material, the proceeds from a sale of vehicles title to which was in the debtor's name, and the aforementioned funds on deposit are among the assets of the estate. The Grantor Agencies have timely filed proofs of claim in this proceeding, the aggregate value of which claims exceed the aggregate value of the grant property and grant funds. These entities all claim equitable liens in the unexpended grant funds on deposit. DCCA further claims an equitable lien in the weatherization material.
Section 541(a)(1) of the Bankruptcy Code provides that property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). What constitutes a legal or equitable interest of the debtor is broadly construed. See, e.g., United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983); In re Wegner Farms Co., 49 B.R. 440 (Bankr.N.D.Iowa 1985). The underlying theory of section 541(a)(1) is to bring into the estate all interests of the debtor in property as of the date the case is commenced. 4 L. King, Collier on Bankruptcy ¶ 541.06 (15th ed. 1985). Nevertheless, to the extent a legal or equitable interest of the debtor in property is limited in the debtor's hands, it is equally limited in the hands of the trustee. Section 541(a) does not vest the trustee with any greater property rights than the debtor holds at the time the petition is filed. In re Mortg. Funding, Inc., 48 B.R. 152, 154-55 (Bankr.D.Nev.1985). There exists in this regard a necessary reliance on non-bankruptcy law to determine the existence and nature of a debtor's interest in property. 4 L. King, Collier on Bankruptcy ¶ 541.06 (15th ed. 1985).
The Grantor Agencies concede that the grant funds and grant property constitute property of the estate but contend that the estate acquired a limited interest, one which was circumscribed by the grant agreements into which the debtor entered prepetition. Essentially, the Grantor Agencies maintain that the trustee has acquired debtor's mere possessory interest in the grant funds and grant property subject to the equitable rights of the Grantor Agencies since any application of the funds outside the narrow, specified purposes of the grant would warrant reversion to the Grantor Agencies. Therefore, the Grantor Agencies contend that the trustee's intended uses of the grant funds and grant property exceed the interest of the debtor's estate.
In support of their position, the Grantor Agencies rely on Palmiter v. Action, Inc., 548 F.Supp. 1166 (N.D.Ind.1982) aff'd 733 F.2d 1244 (7th Cir.1984), a case similarly involving a non-profit community service organization funded almost exclusively by federal and state grants. The court there found it necessary to determine the grantor's interest in grant funds in order to resolve whether or not such funds are immune from garnishment proceedings instituted by a judgment creditor of the grantee. The court in Palmiter ultimately held that the federal moneys held by such a grantee organization are not subject to garnishment proceedings until the funds are paid out for the purposes for which they were appropriated. The court's rationale was based on the fact that the pervasive federal supervision of expenditures of grant funds fulfilled a determinative criterion for creation of an equitable lien, a principle enunciated in Henry v. First Nat. Bank of Clarksdale, 424 F.Supp. 633, (N.D.Miss.1976), aff'd 595 F.2d 291 (5th Cir.1979). Therefore, the court found that the federal government retains an equitable, reversionary interest in federal grant moneys given to private, non-profit organizations when such funds can no longer be used for authorized federal grant purposes. 733 F.2d at 1250 (emphasis added).
The language utilized in Palmiter necessitates a bifurcated analysis of the debtor's interest in the grant funds and grant property since a distinction exists between the creation of an equitable lien and the existence of a reversionary interest, with different outcomes resulting therefrom.6 An equitable lien is defined as "the right, not recognized at law, to have a fund or specific property, or its proceeds, applied to the payment of a debt," In re Hart, 50 B.R. 956, 959-60 (Bankr.D.Nev. 1985), and will arise where an intention to create an equitable lien clearly appears from the language and surrounding circumstances. In re O.P.M. Leasing Services, Inc., 23 B.R. 104, 119 (Bankr.S.D.N.Y. 1982). In the present situation, the continuing interest and tight control that the Grantor Agencies retained in the grant funds meet the criteria for creation of an equitable lien. See In re Madison County Econ. Opportunity Comm., 53 B.R. 541 (Bankr.S.D.Ill.1985). Moreover, the Grantor Agencies possess an equitable lien in any grant property to the extent that grant funds were used in the purchase thereof, id., and to the extent the specific grant documents have not vested title in the grantee/debtor to carry out the provisions of the grant. Nevertheless, the court holds that any equitable lien in favor of the Grantor Agencies is subordinate to the rights of a trustee in bankruptcy under section 544(a).7See In re O.P.M. Leasing Services, Inc., 23 B.R. 104, 119-20 (Bankr. S.D.N.Y.1982). Accord, Cherno v. Dutch American Mercantile Corporation, 353 F.2d 147 (2d Cir.1965); Rosenbaum v. Century Indemnity Co., 168 F.2d 917 (2d Cir. 1948), cert. den. 335 U.S. 885, 69 S.Ct. 238, 93 L.Ed. 424 (1948). See also In re Finkle, 38 B.R. 101 (Bankr.D.Md.1984). In holding the rights of the trustee as a perfect lien creditor superior to any equitable lien of the Grantor Agencies, the court necessarily concludes that the funds, having become property of the bankruptcy estate, have been paid out for the purposes for which they were appropriated, thereby distinguishing the trustee in bankruptcy from an ordinary prepetition judgment creditor.
The Grantor Agencies do not squarely face this aspect of the holding in Palmiter but instead focus on the reversionary interest in the grant funds and grant property that the grant documents vest, under certain circumstances, in the Grantor Agencies. The Grantor Agencies maintain that the trustee holds this property of the estate subject to the Grantor Agencies' right of reversion which they now seek to assert. This reversionary interest is at the heart of the controversy between the trustee and the Grantor Agencies, the resolution of which requires the court to balance the conflicting aims and purposes of the Bankruptcy Code with those of the Grantor Agencies. See In re DiPiazza, 29 B.R. 916, 920 (Bankr.N.D.Ill.1983).
Section 541(a) of the Code was intended to be broad, precisely because one of the prime purposes of the Code, particularly in a Chapter 7 case, is the marshalling of the debtor's assets to satisfy the claims of...
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