IN RE SOUTHWEST CITIZENS'ORG. FOR POVERTY ELIM.
| Decision Date | 12 August 1988 |
| Docket Number | Adv. No. 87-0346.,Bankruptcy No. 86-07727 |
| Citation | 91 BR 278 |
| Parties | In re SOUTHWEST CITIZENS' ORGANIZATION FOR POVERTY ELIMINATION, a/k/a S.C.O.P.E., Debtor. UNITED STATES of America For and on Behalf of the UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Plaintiff v. Joseph D. MARCHAND, Trustee and Southwest Citizens' Organization for Poverty Elimination, Defendants. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Marchand & Marchand by Joseph D. Marchand, Bridgeton, N.J., Trustee, pro se.
United States Atty.'s Office by Paul A. Blaine, Camden, N.J., Asst. U.S. Atty., for U.S.
This matter is before the court on cross-motions for summary judgment related to a Complaint for Declaratory Relief and Turnover of Property filed by the United States of America for and on behalf of the Department of Health and Human Services ("HHS") against Joseph D. Marchand, trustee of the debtor, Southwest Citizens' Organization for Poverty Elimination, Inc. ("SCOPE"), and the debtor, SCOPE.
On December 12, 1986, SCOPE filed a petition under Chapter 11 of the Bankruptcy Reform Act of 1978 as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984 (Bankruptcy Code). On January 16, 1987, SCOPE's Chapter 11 case was converted to a proceeding under Chapter 7 of the Bankruptcy Code. Joseph D. Marchand, Esquire was subsequently appointed Trustee of SCOPE's bankruptcy proceedings by the United States Trustee for this district.
SCOPE was a community service organization, incorporated under the laws of the State of New Jersey as a non-profit corporation. According to the Affidavit of Gilbert Amgott, Financial Operations Specialist of HHS, SCOPE has been a grantee under the federal Head Start Program, 42 U.S.C. § 9831 et seq., receiving Head Start grant funds on a yearly basis since at least February 1, 1978. SCOPE's last budget year under the Head Start Program was scheduled to expire on January 31, 1987. Under the Head Start Program, SCOPE operated approximately fourteen Head Start centers in Southern New Jersey providing primarily daycare services for the benefit of eligible children, youths and families. Total attendance at these centers averaged approximately 485 children. (See Affidavit of Gilbert Amgott filed on June 17, 1987).
Prior to the filing of its bankruptcy petition, SCOPE received grant funds under the Head Start Program from HHS. For each budget year beginning February 1, 1978, SCOPE applied for and received Head Start Program grant funds specifically for the acquisition of equipment which SCOPE later purchased. This equipment is, for the most part, comprised of 20 motor vehicles which SCOPE used for transporting children to and from its Head Start centers. Each yearly award of Head Start Program funds to SCOPE was made subject to the authorizing program legislation, HHS regulations and Office of Human Development Services regulations.
SCOPE's status as a Head Start grantee was terminated by HHS on January 25, 1987 following notification to the HHS in the form of a Resolution of SCOPE's board of directors dated December 9, 1986 which stated:
Since January 26, 1987, Test City Child Care Center, Inc. ("Test City"), as interim grantee, has been operating the Head Start programs previously operated by SCOPE. Pursuant to a consent order entered into by the parties and signed by this court on February 20, 1987, Test City has had the use of the 20 vehicles purchased by SCOPE under a lease which requires that Test City pay $900.00 per month to SCOPE for such use. By this court's February 20, 1987 order the trustee was authorized "effective as of January 28, 1987 to enter into a lease agreement with HHS, pursuant to which HHS may have and provide for the use of its interim Head Start program grantee of the 20 vehicles indentified in the annexed schedule, together with the equipment and supplies identified in the debtor's schedules of inventory filed herein on December 12, 1986 at the monthly rate of $900.00, which monthly rate may be revised downward following the receipt by the trustee of the anticipated appraisal of the foregoing equipment and supplies as the same may indicate is appropriate." According to the Affidavit of Gilbert Amgott, Financial Operations Specialist of HHS, HHS has $122,902.00 in its possession which had been authorized for use by SCOPE during its last year of operation but have never been released. (See Affidavit of Gilbert Amgott at para. 7). Pursuant to 45 C.F.R. § 74.115(c),1 this amount remains available for payment of any outstanding debts properly incurred by SCOPE for approved Head Start purposes, prior to the termination of its Head Start grant. (See Affidavit of Gilbert Amgott at para. 7).
On April 27, 1987, HHS filed a Complaint for Declaratory Relief and Turnover of Property. In the Complaint, HHS contends that SCOPE's legal and equitable title to equipment it acquired with grant funds was at all times expressly subject to HHS' right to require the transfer of the equipment, including title, to another interim grantee pursuant to 45 C.F.R. §§ 74.133 and 74.136(a). Accordingly, HHS requests that this court issue a declaratory judgment stating that the equipment in question, including title, is subject to HHS's right to require its transfer to the interim grantee, Test City, and that SCOPE and the Trustee have no further rights or interest in the equipment. HHS also requests an order directing the Trustee to turnover the equipment to Test City and to return all monies paid by Test City to the Trustee for the use of the equipment.
On May 12, 1987, the Trustee filed an Answer and Counterclaim to HHS's Complaint. The Trustee asserts 11 U.S.C. § 544 as a bar to the relief sought by HHS. In his counterclaim, the Trustee asserts that prior to the filing of its bankruptcy petition, SCOPE obtained funds through the federal Head Start Program to purchase various motor vehicles and that SCOPE also used grant funds to purchase equipment and office supplies presently located at various office sites. The Trustee also asserts that at all times title to the motor vehicles has been in the name of SCOPE and that no written security interest was obtained or filed by the United States of America and/or HHS. Accordingly, the Trustee's interests in the motor vehicles supercedes the United States of America and/or HHS's pursuant to 11 U.S.C. § 544. Thus, the Trustee requests that this court issue a declaratory judgment stating that the interest of the Trustee supercedes any interest of the United States of America and/or HHS in the motor vehicles, equipment and inventory.
On June 15, 1987, the Trustee filed a Motion for Declaratory Judgment seeking the same relief requested in his Counterclaim. This motion, however, has been treated as a Motion for Summary Judgment. On June 17, 1987, HHS filed a Cross-Motion for Summary Judgment and an Answer to the Trustee's Counterclaim. In HHS's Answer to the Trustee's Counterclaim, it raises two separate defenses. First, HHS contends that the Trustee succeeded to the same rights in SCOPE's estate as SCOPE possessed at the time of the filing of its bankruptcy petition. Consequently, the property acquired by SCOPE with grant funds remains subject to HHS's pre-existing right to require its transfer notwithstanding the fact that such property is currently under the legal possession and control of the Trustee. HHS by its motion for summary judgment seeks judgment ordering the turnover of the subject equipment and the return of previous rental payments funded by HHS for the use of that equipment.
Section 541(a) 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). Such a determination as to 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, 2313, 76 L.Ed.2d 515 (1983). Nevertheless, to the extent that a legal or equitable interest of the debtor in property is limited in the debtor's hands, it is equally limited in the hand of the Trustee. See e.g. In re Mortgage Funding, Inc., 48 B.R. 152, 155 (Bankr.D.Nev.1985); In re Collins, 5 B.R. 56 (Bankr.N.D.Fla.1980). In this regard the legislative history of § 541 is instructive to this end:
124 Cong.Rec.H. 11096 (daily ed., Sept. 28, 1978) (remarks of Congressman Edwards).
Section 541(d) also provides:
(d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a...
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