In re Northview Motors, Inc.

• Decision Date: 14 November 1996
• Docket Number: Bankruptcy No. 91-23375-MBM,Motion No. 96-2438-M.
• Parties: In re NORTHVIEW MOTORS, INC., Debtor. Frank P. CUDA, Joann Cuda, and Northview Motors, Inc., Movants, v. Joseph P. NIGRO, Trustee for the Estate of Northview Motors, Inc., Respondent.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

202 B.R. 389 (1996)

In re NORTHVIEW MOTORS, INC., Debtor Frank P. CUDA, Joann Cuda, and Northview Motors, Inc., Movants, v. Joseph P. NIGRO, Trustee for the Estate of Northview Motors, Inc., Respondent.

Bankruptcy No. 91-23375-MBM, Motion No. 96-2438-M.

United States Bankruptcy Court, W.D. Pennsylvania.

November 14, 1996.

COPYRIGHT MATERIAL OMITTED

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Robert G. Sable and Thomas M. Ferguson, Pittsburgh, PA, for Frank Cuda, Joann Cuda and Northview Motors, Inc.

James M. Malley, Pittsburgh, PA, for Joseph P. Nigro, Trustee.

James F.B. Daniels, Kansas City, KS, and Christine Donohue, Pittsburgh, PA, for Chrysler Corporation.

MEMORANDUM OPINION

M. BRUCE McCULLOUGH, Bankruptcy Judge.

STATEMENT OF FACTS

Frank P. and Joann Cuda (the Cudas), principals of Northview Motors, Inc. (Northview), the debtor in this bankruptcy case, bring this motion requesting that this Court order respondent, the Chapter 7 trustee in this case, to abandon to them¹ a lawsuit pending on behalf of the debtor against Chrysler Corporation (Chrysler). Such property presently constitutes property of the bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1). Prior to the filing of this motion, the trustee had filed with this Court a motion requesting that this Court approve a proposed settlement of said lawsuit with Chrysler for $150,659.97.² The trustee had entered into negotiations on behalf of the bankruptcy estate culminating in said proposed settlement. However, after several hearings on the motion for approval of the settlement, the Cudas bring this motion for abandonment because they assert that the lawsuit does not have any value to the estate. The Cudas support that contention by asserting that they have a security interest in the lawsuit, and that the value of said security interest exceeds the probable value of any proceeds from the lawsuit. At the time of the debtor's petition filing, Mellon Bank (Mellon) had a claim in this case for $574,998.94. The Cudas assert that Mellon also possessed, as collateral for this claim, a security interest in the lawsuit. However, the Cudas, who were secondarily liable with the debtor on Mellon's claim, satisfied said claim at some time prior to the hearing on the trustee's settlement motion. The Cudas now assert that, pursuant to 11 U.S.C. § 509(a), they are subrogated to the claim of, as well as the alleged security interest in the lawsuit held by, Mellon.³

Chrysler objects⁴ to the Cudas' motion because it contends that they do not presently possess a security interest in the lawsuit. Chrysler argues primarily that the Cudas could not have been subrogated to a secured position in the lawsuit because (a) one of the two remaining counts in the lawsuit in question, which sets forth a claim under the "Automobile Dealers Day in Court Act" (ADDCA), is essentially a tort claim, (b) it is impossible to obtain a security interest in a tort claim under Pennsylvania law pursuant to 13 Pa.C.S.A. § 9104(11), and thus (c) Mellon, the subrogor to the Cudas, never possessed a security interest in the ADDCA action. Chrysler also asserts that Mellon may not have possessed a security interest in the breach of contract action set forth in the other remaining count of the lawsuit. Chrysler finally maintains that the Cudas have not demonstrated their right to subrogation under § 509(a) because (a) subrogation is an equitable remedy and the equities in this case do not favor subrogation by the Cudas, (b) pursuant to § 509(b)(1)(C), subrogation is not possible in this case because the Cudas' claim for reimbursement should be subordinated under 11 U.S.C. § 510, and (c) the Cudas, in their motion for abandonment, did not offer proof as to the validity of the security interest held by Mellon, as well as the perfection of such interest at the time of this petition filing.

The Cudas counter Chrysler's objections by asserting that (a) the debtor's claim under the "Automobile Dealers Day in Court Act" is not a tort action but rather is one based upon the franchise contract between the debtor and Chrysler, (b) because the ADDCA claim is a contract action and not grounded in tort, Mellon possessed a security interest in that action, (c) Mellon also possessed a security interest in the breach of contract action pleaded in the other remaining count of the lawsuit, and (d) they are entitled to subrogation via § 509(a) because the equities favor such subrogation, their claim for reimbursement should not be subordinated under § 510, and the security interest of Mellon is valid and unavoidable under other provisions of the Bankruptcy Code.

The trustee made certain concessions at the hearing on this motion, and the Court understands such concessions to be that (a) the Cudas had paid the claim of Mellon, (b) the Cudas were secondarily liable on such debt with the debtor, and (c) Mellon's security agreement covered, inter alia, general intangibles and choses in action of the debtor. The Court is not aware of any objection by Chrysler on the first two of these points, and will overrule any objection by Chrysler as to the validity of Mellon's security agreement based upon the Court's own examination of the instrument, which was attached as part of Exhibit C to the Cudas' response in Motion No. 96-1330-M, which is a related motion in this case. However, the Court is not certain whether the trustee's concession also extends to the Cudas' assertions that any security interest held by Mellon (a) is valid pursuant to 13 Pa.C.S.A. § 9203(a) (ie., attachment had occurred),⁵ and (b) was perfected at the time of the commencement of this case, thereby immunizing said interest from avoidance by the trustee. The only issue that the Court can detect regarding validity of Mellon's security interest revolves around the value of said interest (ie., was Mellon's entire claim secured by said lawsuit).⁶ With respect to perfection, the Court cannot make any determination on the basis of the documentation that it presently has. Because these particular points also appear to be a subject of contention by Chrysler, the Court will delay a ruling regarding them. As a practical matter, the lawsuit cannot be abandoned until these points have been sufficiently resolved. However, the remaining issues in this motion may be resolved at this time.

DISCUSSION

As set forth in the trustee's settlement motion, the trustee proposes a settlement of the lawsuit between the bankruptcy estate in this case and Chrysler for $150,659.97. This Court is convinced that abandonment of the lawsuit to the Cudas is required pursuant to 11 U.S.C. § 554(b)⁷ if they actually (a) possess an unavoidable security interest therein, and (b) said interest is actually valued, as they assert, at $574,998.94 (i.e., their claim for reimbursement for payment of Mellon's claim).⁸ The Court arrives at this conclusion because, if the Cudas possess said interest, the lawsuit simply will not generate any funds for unsecured creditors and would, therefore, be "of inconsequential value and benefit to the estate." The Court cites In re Lehal Realty Associates, 184 B.R. 205 (Bankr.S.D.N.Y.1993), which dealt with a similar situation, as support for this holding. See also In re Dewsnup, 908 F.2d 588, 590 (10th Cir.1990), aff'd 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) ("Property abandoned under . . . section 554 ceases to be part of the estate and, thus, . . . reverts to the debtor and stands as if no bankruptcy petition was filed. . . . Following abandonment, `whoever had the possessory right to the property at the filing of bankruptcy again reacquires that right.'"). Therefore, excepting for the issues of value and perfection discussed above, the lone issue for decision is whether the Cudas possess a security interest in the lawsuit.

I. Whether the lawsuit has already been settled and the claims therein reduced to proceeds, thereby rendering unenforceable any security interest that the Cudas might have in the claims?

Before proceeding to determine whether the Cudas possess a security interest in the lawsuit, the Court shall dispose of this preliminary issue, which was raised by Chrysler in its response and objection but which it did not advance at the hearing on this motion. Chrysler asserts that both claims have been liquidated and reduced to proceeds because the lawsuit has already been settled, subject only to a ministerial approval of the proposed settlement by this Court. Because of said settlement, Chrysler asserts that, even accepting that the Cudas may have possessed a security interest in the breach of contract action, said interest is no longer enforceable because the proceeds from such action cannot be distinguished from the proceeds attributable to the ADDCA action (which action Chrysler asserts the Cudas are not secured in). This argument must necessarily fail for the simple reason that the lawsuit has not yet been legally settled and, therefore, it has been neither liquidated nor reduced to proceeds. This Court's approval of the proposed settlement, which has not yet been granted, is much more than merely ministerial because, without it, said settlement has no legal effect whatsoever. In re Blehm Land and Cattle Co., 71 B.R. 818, 823 (D.Colo.1987); In re Masters, Inc., 149 B.R. 289, 291-93 (E.D.N.Y.1992) ("In general, debtors cannot bind their estates to compromises absent bankruptcy court approval"); Reynolds v. C.I.R., 861 F.2d 469, 473 (6th Cir.1988) ("In bankruptcy proceedings, as distinguished from ordinary civil cases, any compromise . . . must be approved by the court as fair and equitable.").

II. Whether Mellon possessed a security interest in the remaining claims in the debtor's lawsuit under Pennsylvania law?

Because the Cudas assert possession of a security interest in the lawsuit by way of subrogation to Mellon's rights, Mellon must have also possessed said security interest in the first instance. Thus, the Court shall next determine...