In re Metromedia Fiber Network, Inc.

• Decision Date: 13 February 2003
• Docket Number: Bankruptcy No. 02-22741 (ASH).,Bankruptcy No. 02-22745(ASH).,Bankruptcy No. 02-22746(ASH).,Bankruptcy No. 02-22739 (ASH).,Bankruptcy No. 02-22749(ASH).,Bankruptcy No. 02-22744(ASH).,Bankruptcy No. 02-22736 (ASH).,Bankruptcy No. 02-22753(ASH).,Bankruptcy No. 02-22742(ASH).,[DO] Bankruptcy No. 02-22754(ASH).,Bankruptcy No. 02-22740 (ASH).,Bankruptcy No. 02-22751(ASH).,Adversary No. 02-05297A.,Bankruptcy No. 02-22752(ASH).,Bankruptcy No. 02-22738 (ASH).,Bankruptcy No. 02-22737 (ASH).
• Citation: 290 B.R. 487
• Parties: In re METROMEDIA FIBER NETWORK, INC., et al., Debtor. Metromedia Fiber Network Services, Plaintiff, v. Lexent, Inc., Hugh O'Kane Electric Co., LLC, and National Network Technologies, LLC, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 487

290 B.R. 487

In re METROMEDIA FIBER NETWORK, INC., et al., Debtor Metromedia Fiber Network Services, Plaintiff, v. Lexent, Inc., Hugh O'Kane Electric Co., LLC, and National Network Technologies, LLC, Defendants.

Bankruptcy No. 02-22736 (ASH).

Bankruptcy No. 02-22737 (ASH).

Bankruptcy No. 02-22738 (ASH).

Bankruptcy No. 02-22739 (ASH).

Bankruptcy No. 02-22740 (ASH).

Bankruptcy No. 02-22741 (ASH).

Bankruptcy No. 02-22742(ASH).

Bankruptcy No. 02-22744(ASH).

Bankruptcy No. 02-22745(ASH).

Bankruptcy No. 02-22746(ASH).

Bankruptcy No. 02-22749(ASH).

Bankruptcy No. 02-22751(ASH).

Bankruptcy No. 02-22752(ASH).

Bankruptcy No. 02-22753(ASH).

Bankruptcy No. 02-22754(ASH).

Adversary No. 02-05297A.

United States Bankruptcy Court, S.D. New York.

February 13, 2003.

Kronish Lieb Weiner & Hellman LLP, By Richard S. Kanowitz, Esq., Gregory G. Plotko, Esq., New York City, for Debtors/Plaintiff.

Ravin Greenberg PC, By Howard S. Greenberg, Esq., Chad Friedman, Esq., Roseland, NJ, for Defendants.

DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

ADLAI S. HARDIN, Jr., Bankruptcy Judge.

In this adversary proceeding debtor-plaintiff Metromedia Fiber Network Services, Inc. ("MFNS" or "debtor") seeks (among other relief) turnover under 11 U.S.C. § 542(a) of certain property (the "Equipment") currently in defendants' possession which is property of the debtor's estate and sanctions for violation of the automatic stay under 11 U.S.C. § 362(a)(3).

Defendants acknowledge lawful possession of, and assert a security interest in, the Equipment. It is defendants' position that they need not relinquish possession of the Equipment to MFNS unless and until the debtor provides adequate protection for defendants' security interest under 11 U.S.C. § 363(e).

As amplified below, MFNS is entitled to immediate turnover of the Equipment under Section 542(a). Failure to comply with Section 542(a) violates the automatic stay under Section 362(a)(3). Defendants have not moved for relief from the automatic stay under Section 363(f) nor argued that turnover before provision of adequate protection poses any risk of irreparable injury.

Jurisdiction

This Court has jurisdiction of this adversary proceeding pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b).

Background

MFNS and its debtor and non-debtor affiliated companies provide fiber optic infrastructure, high bandwidth internet connectivity and managed internet infrastructure services for its communications-intensive customers.

The complaint alleges that defendants and MFNS were parties to an agreement whereby defendants installed fiber optic cables for MFNS in the New York City area. The Equipment here in dispute, including several reels of cable and fiber, is alleged to be worth more than $1,450,000. The Equipment, purchased by MFNS for the purpose of such installation by defendants, was given to defendants to store at various of defendants' locations in the New York City area for the convenience of both parties.

The particulars of the parties' contractual arrangements and obligations are not germane to the outcome of these motions. Suffice it to say that MFNS acknowledges that under a "Modification Agreement" certain deferred payment obligations of $2,659,963 owed by MFNS to defendants "shall be secured with a second security interest ... in assets engineered, constructed, installed, acquired, leased, developed or improved by Defendants in performing the work for which the deferred payments are owed." (Complaint ¶ 18) The defendants claim that the Equipment is included within the "assets" subject to the second security interest. MFNS denies that the Equipment is part of the collateral subject to defendants' second security interest.

But MFNS argues that defendants' alleged secured position in the Equipment is immaterial, because the requirement of prompt turnover under Section 542(a) exists irrespective of the alleged security interest. In addition, MFNS argues that defendants' refusal to turn over the Equipment constitutes a violation of the automatic stay under Section 362(a)(3) of the Bankruptcy Code. Finally, MFNS argues that defendants' right to move for adequate protection under Section 362(e) does not relieve defendants of the obligation to promptly turn over property of the debtor's estate and that MFNS is entitled to sanctions for the cost of having to bring this adversary proceeding.

Defendants counter that, although there is a split of authority, the better reasoned decisions hold, in substance, that Section 542 must give way to Section 363(e) and that a secured party need not turn over possession of its collateral until the debtor has provided adequate protection, either voluntarily or pursuant to court order. Moreover, defendants deny that mere retention of possession of the debtor's property (i.e., maintenance of the status quo) violates the automatic stay provided under any of the subdivisions of Section 362(a).

Discussion

Turnover under Section 542

Section 542, entitled "Turnover of property to the estate", provides in subsection (a), in relevant part: "... an entity ... in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title ... shall deliver to the trustee ... such property ..." (emphasis supplied).¹

The statute on its face is clear and unambiguous, and it mandates that a party holding property of the debtor's estate "shall" deliver the property to the debtor or trustee. No exception is made in the statute for property in which the party-in-possession holds a security interest.

Not surprisingly, the case law holds that even a secured party must turn over possession of property of the debtor's estate. United States v. Whiting Pools, Inc., 462 U.S. 198, 202-208, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) (in affirming the Second Circuit's decision holding that a turnover order could issue against the Internal Revenue Service under Section 542(a), the Supreme Court determined that the Bankruptcy Code generally authorizes the turnover of a debtor's property seized by a secured creditor prior to the commencement of reorganization proceedings); Carr v. Security Savings & Loan Association, 130 B.R. 434, 436 (D.N.J.1991) ("A secured creditor who is in possession of repossessed collateral in which a debtor in bankruptcy has an interest is required to turn the collateral over to the debtor's trustee upon the filing of the bankruptcy petition") (citing Matter of M. Frenville, Co., Inc., 744 F.2d 332 (3d Cir.1984)); In re Sharon, 200 B.R. 181, 187 (Bankr.S.D.Ohio 1996), aff'd, 234 B.R. 676 (6th Cir. BAP 1999) (court determined that secured creditor "who has lawfully seized a vehicle prepetition, but refuses to turn over the vehicle upon a chapter 13 debtor's postpetition demand, violates the automatic stay.").

Automatic stay under Section 362(a)(3)

Section 362(a) provides in subsection (3) in relevant part that the filing of a petition operates as a stay of "any act ... to exercise control over property of the estate...."

This Court agrees with those decisions holding that refusal to turn over property of a debtor's estate to the debtor upon demand constitutes an "exercise of control" over the debtor's property within the scope of Section 362(a)(3). See In re Knaus, 889 F.2d 773, 775 (8th Cir.1989) ("The failure to [turn over], regardless of whether the original seizure was lawful, constitutes a prohibited attempt to `exercise control over the property of the estate' in violation of the automatic stay."); In re Sharon, 200 B.R. at 187-88 ("This court holds that the phrase `exercise control' encompasses acts of a creditor in denying a chapter 13 debtor possession and use of a debtor's vehicle when the return of the property has been requested. As the phrase implies, actual possession consists of the exercise of dominion or control over property." (citations omitted)); Foust v. Seal (In re Foust), 2000 WL 33769159, *6, 2000 Bankr.LEXIS 1146 *18-19 (Bankr.S.D.Miss. July 18, 2000) ("This court agrees with other courts that have held that postpetition retention of estate property without court authority following a prepetition seizure constitutes an exercise of control over property of the estate and is a violation of the automatic stay"); In re Zaber, 223 B.R. 102 (Bankr.N.D.Tex.1998) (follows In re Sharon); 3 COLLIER ON BANKRUPTCY ¶ 362.03[5], at 362-20 (Lawrence P. King et. al eds., 15th ed. rev.) ("Section 362(a)(3) stays all actions, whether judicial or private, that seek to obtain possession of property of the estate or of property from the estate to exercise control over property of the estate. (footnote omitted) ... This requires that no entity seek to interfere ... by taking possession of or exercising control over property of the estate."). See also, General Motors Acceptance Corp. v. Ryan, 183 B.R. 288, 289 (M.D.Fla.1995) ("A creditor's failure to voluntarily turn over property taken lawfully prepetition, when so requested by the debtor postpetition, is a violation of the automatic stay."); Brooks v. World Omni (In re Brooks), 207 B.R. 738, 742 (Bankr.N.D.Fla.1997) ("This court finds that a willful violation occurred — not when the vehicle was originally repossessed [prepetition] — but when, after defendant had knowledge of the bankruptcy, the vehicle was not returned to the debtors' possession where it was repossessed but, instead, was made available for the debtors' retrieval."); Carr v. Security Savings & Loan Association, 130 B.R. 434, 438 (D.N.J.1991) ("[The secured creditor's] failure to turn over debtor's car upon the filing of debtor's bankruptcy petition constituted a violation of the automatic stay.").

For a contrary view, see In re Young, 193 B.R. 620 (Bankr.D.D.C.1996); In re Massey, 210 B.R. 693 (Bankr.D.Md.1997); In re Deiss, 166 B.R. 92 (Bankr.S.D.Tex.1994).

Adequate protection under Section 363(e)

Section 363 deals with the...