Westmoreland Human Opportunities Inc. v. Walsh

• Decision Date: 25 October 2000
• Docket Number: No. 00-3070,00-3070
• Citation: 246 F.3d 233
• Parties: (3rd Cir. 2001) WESTMORELAND HUMAN OPPORTUNITIES, INC., APPELLANT v. JAMES R. WALSH, TRUSTEE OF THE BANKRUPTCY ESTATE OF LIFE SERVICE SYSTEMS, INC.; LIFE SERVICE SYSTEMS, INC. Argued:
• Court: U.S. Court of Appeals — Third Circuit

Page 233

246 F.3d 233 (3rd Cir. 2001)

WESTMORELAND HUMAN OPPORTUNITIES, INC., APPELLANT v. JAMES R. WALSH, TRUSTEE OF THE BANKRUPTCY ESTATE OF LIFE SERVICE SYSTEMS, INC.; LIFE SERVICE SYSTEMS, INC.

No. 00-3070

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued: October 25, 2000

April 10, 2001

On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Civ. No. 99-CV-00110) District Judge: Honorable D. Brooks Smith

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Daniel B. Pagliari, Esquire (argued) Pagletta & Pagliari, LLP 2773 Leechburg Road Lower Burrell, PA 15068-3138 Counsel for Appellant

James R. Walsh, Esquire (argued) Spence, Custer, Sayler, Wolfe, and Rose 400 U.S. Bank Building P.O. Box 280 Johnstown, PA 15907 Counsel for Appellee

David W. Ogden, Esquire Assistant Attorney General United States Department of Justice P.O. Box 878 Ben Franklin Station Washington, DC 20044 Harry Litman, Esquire United States Attorney 633 U.S. Post Office & Courthouse Pittsburgh, PA 15219 William Kanter, Esquire H. Tyomas Byron, III, Esquire Attorneys, Appellate Staff Civil Division, Phb Room 9102 Department of Justice 601 D Street, N.W. Washington, DC 20530-0001 Carole W. Wilson, Esquire Associate General Counsel Angelo Aiosa, Esquire Assistant General Counsel Batina R. Wills, Esquire Trial Attorney Department of Housing and Urban Development 451 7th Street, S.W., Room 10258 Washington, DC 20410 Counsel for United States of America as Amicus Curiae

Before: Becker, Chief Judge, Scirica and Fuentes, Circuit Judges.

OPINION OF THE COURT

Becker, Chief Judge.

This bankruptcy appeal requires us to define the boundaries of the term "property of the estate," as used in S 541 of Title 11 of the United States Code (Bankruptcy Code), in the context of a federal grant relationship. The appeal arises out of an adversary action instituted by the trustee of debtor Life Service Systems, Inc. (LSS) against defendant Westmoreland Human Opportunities, Inc. (WHO), charging the latter with a breach of its fiduciary duty to LSS's Unsecured Creditors Committee (Committee). Both LSS and WHO are non-profit organizations which provide community services to residents of Westmoreland County in western Pennsylvania.

In 1995, LSS was selected by the Department of Housing and Urban Development (HUD) to receive grant moneys under the federal Supportive Housing Program; LSS and HUD executed a Supportive Housing Grant Agreement (Grant Agreement) as part of this grantor/grantee arrangement. Shortly thereafter, LSS experienced significant financial difficulties, ultimately filing a Chapter 11 bankruptcy petition. Because WHO was one of LSS's largest creditors, it accepted an invitation to join the Unsecured Creditors Committee.

During its tenure on the Committee, WHO, without notifying either its fellow Committee members or the Bankruptcy Court, assumed LSS's position as recipient of supportive Housing Program funds, executing a Supportive Housing Grant Agreement Amendment (Grant Agreement Amendment) with HUD. In the adversary action at issue on this appeal, LSS's trustee in bankruptcy alleged that WHO, by assuming LSS's interest in the grant relationship in this manner, breached its fiduciary duty to Committee constituents. WHO defended on the ground that LSS's interest in the Supportive Housing Program grant relationship was not property of LSS's bankruptcy estate and thus did not trigger a fiduciary duty on WHO's part. The Bankruptcy Court rejected WHO's defense, holding that LSS's interest in the grant relationship constituted part of LSS's bankruptcy estate and that WHO had therefore violated its fiduciary obligations. It entered judgment against WHO in the sum of $135,653. On appeal, the District Court affirmed.

Against this background, WHO's appeal presents the question whether a debtor non-profit community service organization's interest in a HUD-type federal grant relationship constitutes property of the debtor's estate. Disagreeing with the Bankruptcy and District Courts, we hold that LSS's interest in the grant relationship with HUD is excluded from the definition of "property of the estate" set forth in S 541 of the Bankruptcy Code. Despite S 541's considerable breadth, HUD's singular supervisory interest in ensuring the effective administration of the Supportive Housing Program, evidenced by the pervasive, strict, and minute oversight over the grant relationship imposed by the Program's relevant statutory and regulatory provisions, suffices to exclude LSS's interest in the Supportive Housing Program grant relationship from S 541's property definition. The District Court, in conducting its S 541 property analysis, failed to account for HUD's weighty interest. The court mistakenly viewed the provisions of the Grant Agreement as the exclusive calipers for measuring the rights yielded to LSS by virtue of the grant relationship, and therefore neglected to consider the substantial limitations imposed on those rights by the other statutory and regulatory components of the Supportive Housing Program scheme. As a result, we conclude that the District Court erred in deciding that LSS's interest in the grant relationship constituted property of its bankruptcy estate, and we therefore set aside the court's judgment.

However, our conclusion that LSS's interest does not qualify as property for purposes of the Bankruptcy Code does not dispose of this appeal. Left unanswered is a question not considered by either the Bankruptcy or the District Court: whether, despite the fact that LSS's interest in the grant relationship with HUD was not property of its bankruptcy estate, WHO's assumption of LSS's interest without notice to Committee members or to the Bankruptcy Court violated the fiduciary duty WHO owed to Committee constituents. The Bankruptcy and District Courts, as well as the parties themselves, all appear to have assumed that resolution of the bankruptcy property question would also dispose of the breach of fiduciary duty issue. Because neither the District nor the Bankruptcy Court addressed the issue that our disposition of the case now raises, relying instead on the erroneous conclusion that LSS's interest qualified as property for purposes of the Bankruptcy Code, and because the parties failed to adequately brief and argue the question to us, we remand the case to the District Court, which may in turn refer it to the Bankruptcy Court, for resolution of the issue.

I. Facts and Procedural History

A.

In 1995, LSS, a private non-profit community service organization operating in western Pennsylvania, undertook a project to provide supportive housing assistance to homeless families in Westmoreland County. LSS planned to purchase and refurbish two small apartment buildings, which it would then use to provide those families with transitional housing. As the name suggests, transitional housing is not intended to furnish homeless families with a permanent residence, but rather is designed to supply recipients with temporary shelter while they seek permanent housing and learn basic life skills necessary for independent living.¹ LSS's project was to house some twenty families with children, and would have provided supportive services, including job training and placement, day care, adult education, and instruction in daily life skills such as nutrition and budgeting.

As its primary source of funding for the project, LSS turned to HUD, seeking moneys from HUD's Supportive Housing Program. The purpose of this Program "is to promote the development of supportive housing and supportive services, including innovative approaches to assist homeless persons in the transition from homelessness, and to promote the provision of supportive housing to homeless persons to enable them to live as independently as possible." 42 U.S.C. S 11381. The Supportive Housing Program facilitates this public purpose by furnishing federal moneys to qualified HUD-selected applicants, who are to use the funds for several types of housing-related activities, including acquisition and/or rehabilitation of existing structures, construction of new structures, leasing of existing structures, and provision of supportive services for transitional housing residents. See generally 42 U.S.C. S 11383(a); 24 C.F .R. S 583.100(a) (2000).

Recipients of supportive Housing Program grants are selected through a nationwide competitive process. See 42 U.S.C. S 11386(b). As part of this process, LSS was required to submit to HUD a detailed application and project proposal, which furnished information about: (1) the housing project itself, such as the project location, the number of homeless families that LSS would accommodate at that location, and the types of supportive services that would be offered at the site; (2) LSS's past experience in providing housing assistance, including previous housing programs it had operated and prior HUD grants it had received; and (3) the budget for the proposed project. In its application, LSS requested $1,326,965 in Supportive Housing Program funds to cover the cost of acquiring and rehabilitating the two apartment buildings, the operating expenses for those premises, the cost of the supportive services that would be offered at those sites, and a five percent administrative fee for the expenses LSS would incur in administering the Supportive Housing Program grant.

On February 5, 1996, LSS received final approval from HUD for a transitional housing project to be located at 49 Division Street in Greensburg, Westmoreland County. Several days later, LSS and HUD executed the Grant Agreement, which obligated HUD to provide $1,326,965 to the 49 Division Street project, and committed LSS to administer those funds at that project site. The Grant Agreement, which was subject to renewal, carried a three-year term and was scheduled to expire in 1999. Shortly after the execution of the Grant Agreement, LSS...