Westmoreland Human Opportunities, Inc. v. Walsh , 260 F.3d 233 ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
4-10-2001
Westmoreland Human v. Walsh
Precedential or Non-Precedential:
Docket 00-3070
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Filed April 10, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-3070
WESTMORELAND HUMAN OPPORTUNITIES, INC.,
Appellant
v.
JAMES R. WALSH, Trustee of the Bankruptcy Estate of
Life Service Systems, Inc.; LIFE SERVICE SYSTEMS, INC.
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
Argued: October 25, 2000
Before: BECKER, Chief Judge, SCIRICA and
FUENTES, Circuit Judges.
(Filed April 10, 2001)
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
2
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 itsfiduciary 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, ultimatelyfiling 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 r ecipient of
Supportive Housing Program funds, executing a Supportive
Housing Grant Agreement Amendment (Grant Agr eement
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 r elationship 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
3
LSS's interest in the grant relationship constituted part of
LSS's bankruptcy estate and that WHO had ther efore
violated its fiduciary obligations. It enter ed judgment
against WHO in the sum of $135,653. On appeal, the
District Court affirmed.
Against this background, WHO's appeal pr esents 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 r elationship with HUD
is excluded from the definition of "pr operty 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 r egulatory 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 pr operty
analysis, failed to account for HUD's weighty inter est. 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 r elationship,
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 inter est 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 inter est does not
qualify as property for purposes of the Bankruptcy Code
does not dispose of this appeal. Left unanswer ed 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 pr operty of its
bankruptcy estate, WHO's assumption of LSS's inter est
without notice to Committee members or to the Bankruptcy
Court violated the fiduciary duty WHO owed to Committee
4
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 addr essed
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 tur n 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 pr oject 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 pr oject, LSS
turned to HUD, seeking moneys from HUD's Supportive
Housing Program. The purpose of this Pr ogram "is to
_________________________________________________________________
1. Section 11384(b) of the Stewart B. McKinney Homeless Assistance Act
defines "transitional housing" as "housing the purpose of which is to
facilitate the movement of homeless individuals and families to
permanent housing within 24 months." 42 U.S.C. S 11384(b).
5
promote the development of supportive housing and
supportive services, including innovative appr oaches to
assist homeless persons in the transition fr om
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 structur es, and provision of
supportive services for transitional housing r esidents. 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 pr ocess. See 42
U.S.C. S 11386(b). As part of this process, LSS was required
to submit to HUD a detailed application and pr oject
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 pr evious housing
programs it had operated and prior HUD grants it had
received; and (3) the budget for the pr oposed 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 appr oval from
HUD for a transitional housing project to be located at 49
Division Street in Greensburg, W estmoreland 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
6
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 purchased
the Division Street property and began r enovations.
B.
Several months after entering into the Grant Agr eement
with HUD, LSS began experiencing significant financial and
administrative problems. LSS attempted to r esolve these
difficulties by seeking consulting relationships with other
non-profit entities. First, in September 1996, LSS entered
into a consulting agreement with WHO, pursuant to which
WHO was to furnish management assistance to LSS.
However, this affiliation ended after a month when WHO
elected to terminate the agreement upon discovering that
LSS's financial troubles were mor e serious than originally
anticipated. Subsequently, on November 9, 1996, LSS
retained Adelphoi, Inc., another non-pr ofit organization
operating in Westmoreland County. Pursuant to the
management agreement entered into with Adelphoi, all of
LSS's board members resigned and wer e replaced by new
directors selected by Adelphoi.
Two months after Adelphoi took over LSS's management,
LSS filed a voluntary Chapter 11 petition. At the time of the
petition, LSS had drawn down approximately $288,800 in
federal Supportive Housing Program moneys. LSS's interest
in the grant relationship with HUD was not itself listed on
the schedule of assets LSS submitted to the Bankruptcy
Court. An Unsecured Creditors Committee was formed, and
WHO, which had a claim against LSS for compensation
based on the brief period it spent providing consulting
services to LSS, accepted an invitation to sit on the
Committee. WHO resigned from the Unsecur ed Creditors
Committee in September 1997 due to accusations of a
conflict of interest. However, WHO's assumption of LSS's
Supportive Housing Program grant occurr ed prior to the
date of this resignation.
Less than two weeks after LSS filed its Chapter 11
petition, HUD declared LSS in default of the Supportive
Housing Program grant. By letter dated January 29, 1997,
7
HUD notified LSS that it could no longer r eceive Supportive
Housing Program disbursements. HUD also infor med LSS
that its grant would be reactivated should LSS develop a
"workable plan" acceptable to HUD. Further more, HUD
warned LSS that if a suitable plan was not forthcoming
within 30 days, HUD would exercise its power to either
cancel the remainder of the grant, or select a successor to
administer the program. Although LSS did not r espond
within the requested 30-day period, HUD did not in fact
terminate the grant or replace LSS as grantee; rather, on
March 4, 1997, HUD sent a follow-up communication to
LSS, once again requesting a "work-out plan for the
continued implementation of the [49 Division Str eet
transitional housing] project."
Ultimately, LSS responded by proposing to HUD that
Adelphoi acquire ownership of the Division Str eet property
and that WHO take over administration of the transitional
housing project located at that site. On May 28, 1997,
WHO was substituted as recipient of LSS's Supportive
Housing Program grant, and WHO and HUD executed the
Grant Agreement Amendment, which identified WHO as the
project sponsor and as the "Successor to Life Service
Systems, Inc." The Amendment listed both 49 Division
Street and a second site at 203 South Maple A venue as the
relevant project locations for the transitional housing
project. Apparently, WHO did not fur nish any consideration
to LSS's estate in exchange for assuming the Grant
Agreement, and neither WHO nor LSS provided notice of
the assumption to the Unsecured Creditors Committee or to
the Bankruptcy Court.
After assuming LSS's Supportive Housing Program grant,
WHO did not in fact continue the transitional housing
project at the Division Street location. Shortly after WHO
and HUD executed the Grant Agreement Amendment, LSS,
following its proposal that Adelphoi acquir e the transitional
housing project's real property, petitioned the Bankruptcy
Court to sell the Division Street property to Westmoreland
CHODO, a non-profit entity controlled by Adelphoi (and
apparently unaffiliated with WHO). With approval of the
Bankruptcy Court, the Division Street r eal estate was put
up for auction. However, Westmor eland CHODO was outbid
8
by a third party purchaser, and thus did not acquire the
Division Street real estate. WHO, appar ently uninterested
in dealing with the third party buyer, discontinued the
transitional housing project at the Division Street site and
elected to carry on the program at a dif ferent location.
C.
Following the property sale, the Bankruptcy Court
appointed James Walsh as LSS's Chapter 11 Bankruptcy
Trustee, at the request of the Unsecur ed Creditors
Committee. On February 16, 1998, the Trustee instituted
an adversary action against WHO in the Bankruptcy Court,
alleging that WHO, as a member of the Unsecur ed Creditors
Committee, owed a fiduciary duty to the other members of
the Committee which it breached by taking over LSS's
status as a recipient of federal Supportive Housing Program
moneys without furnishing notice to other unsecured
creditors or obtaining prior court appr oval.2 In its defense,
WHO argued that it breached no fiduciary duty because
LSS's interest in the Supportive Housing Pr ogram grant
relationship with HUD was never property of LSS's
bankruptcy estate within the meaning of S 541 of the
Bankruptcy Code.
The Bankruptcy Court held in the Trustee's favor,
concluding that LSS's interest in the grant r elationship with
HUD constituted property of LSS's bankruptcy estate.
Furthermore, the court determined that WHO did in fact
breach its fiduciary duty to fellow Committee members, and
awarded LSS's estate $135,653 in monetary r elief.3 WHO
(Text continued on page 11)
_________________________________________________________________
2. LSS's Bankruptcy Trustee also instituted adversary actions against
Adelphoi and LSS's board of directors (elected by Adelphoi), claiming,
inter alia, a breach of fiduciary duty in connection with WHO's
succession to the Supportive Housing Program grant. These actions were
settled before trial.
3. As the remedy for WHO's alleged br each of fiduciary duty, LSS's
Trustee did not seek to have the Bankruptcy Court void and set aside
WHO's assumption of the Supportive Housing Pr ogram grant; rather, the
Trustee only requested monetary damages. The record does not make
the basis for this monetary relief entir ely clear. The following is our
rendering.
9
The damage request consisted of three components. First, the Trustee
sought compensation for claims brought by five individuals relocated by
LSS as part of its acquisition and rehabilitation of the Division Street
property. The Supportive Housing Program r equires a grant recipient to
provide compensation to individuals displaced as a direct result of the
recipient's supportive housing project. See 24 C.F.R. S 583.310 (2000).
Although the record is silent on this issue, we can infer from the fact
that these five individuals were listed among LSS's general unsecured
creditors that LSS had failed to provide the full measure of assistance
required by the Supportive Housing Pr ogram.
Second, LSS's Trustee sought recovery for amounts owed to matching
fund grantors Westmoreland County Housing Authority, United Way, and
Richard K. Mellon Foundation, also listed among LSS's general
unsecured creditors. Before a grantee can receive federal funds under
the Supportive Housing Program for the acquisition or rehabilitation of
existing structures, or for new construction, it must obtain matching
funds from non-HUD sources equal to the amount of federal funds it is
requesting for those activities. See 42 U.S.C. S 11386(e); 24 C.F.R.
S 583.145 (2000). To satisfy this obligation, LSS contributed its own
moneys, and secured matching funds from the Westmoreland County
Housing Authority, the United Way, and the Mellon Foundation.
Although the record on appeal does not contain the terms of the
agreements entered into by LSS and the matching fund grantors, the
grantors apparently conditioned their pr ovision of matching funds on the
continued use of those funds for a transitional housing project at the 49
Division Street location. According to the Bankruptcy Court, when WHO,
after succeeding to LSS's interest in the Supportive Housing Program
grant relationship with HUD, decided not to continue the project at the
49 Division Street site, the matching fund grantors acquired a claim
against LSS's estate for a return of the balance of their donated moneys.
Finally, LSS's Trustee requested monetary relief in the amount of the
Supportive Housing grant moneys allocated to the grantee's
administrative expenses. According to the Bankruptcy Court, WHO
benefitted by receiving this amount as part of its succession to LSS's
Supportive Housing Program grant because WHO was able to use those
moneys to pay part of its employee salaries without having to
demonstrate that those employees worked exclusively on the
administration of the transitional housing pr ogram.
The Bankruptcy Court's $135,653 award cover ed only the latter two
components of the Trustee's monetary r elief claim. Because WHO
stipulated at trial that it had assumed LSS's obligation to provide
10
appealed to the District Court for the Wester n District of
Pennsylvania, contending that the Bankruptcy Court had
erroneously concluded that LSS's interest in the Supportive
Housing Program grant relationship with HUD qualified as
property of LSS's bankruptcy estate. The District Court,
however, affirmed the Bankruptcy Court's judgment, and
WHO timely appealed to this court.4 In addition to the
briefs of the parties, we requested (and r eceived) an amicus
curiae brief from the Bankruptcy Section and the
Commercial Litigation Department of the Civil Division of
the Department of Justice stating their position on the
central issues. We also gave the parties an opportunity to
reply to this amicus brief.
II. Property of the Estate
The filing of a voluntary petition in bankruptcy court
commences a bankruptcy case and creates a bankruptcy
estate comprised of the debtor's property as of the
commencement of the case. See 11 U.S.C.SS 301, 541.
Section 541(a)(1) of the Bankruptcy Code defines"property
of the estate" as including "all legal or equitable interests of
the debtor in property as of the commencement of the
case." Id. S 541(a)(1). As the Supr eme Court observed in
United States v. Whiting Pools, Inc., 462 U.S. 198 (1983),
S 541(a)'s legislative history demonstrates that the language
of this provision was intended to sweep br oadly to include
"all kinds of property, including tangible or intangible
property, causes of action . . . and all other forms of
property currently specified in section 70a of the
Bankruptcy Act." Id. at 205 n.9 (quoting H.R. Rep. No. 95-
595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5963);
see also In re O'Dowd, 233 F.3d 197, 202 (3d Cir. 2000).
In view of this definition, we must determine whether
LSS's interest in the grant relationship constituted a "legal
_________________________________________________________________
relocation assistance to the five displaced individuals (the first
component), the Bankruptcy Court held that LSS's bankruptcy estate
could not recover that amount.
4. The Bankruptcy Court exercised jurisdiction pursuant to 28 U.S.C.
S 157, the District Court had jurisdiction under 28 U.S.C. S 158(a)(1),
and we have jurisdiction pursuant to 28 U.S.C. S 158(d).
11
or equitable interest[ ]" that, under the terms of S 541(a)(1),
falls within S 541's property definition. Because a district
court's conclusion as to whether an item constitutes
"property of the estate" for purposes ofS 541 raises a
question of law, our review is plenary. See In re Blatstein,
192 F.3d 88, 94 (3d Cir. 1999). W e first identify the specific
interests regarded by the District Court as constituting
property of LSS's bankruptcy estate. We next examine the
ways in which a federal agency's supervisory inter est in a
grant relationship can alter the dynamics ofS 541's
property calculus. We then focus on the District Court's
principal error in this case, i.e., its failur e entirely to
account for HUD's weighty federal interest in the
Supportive Housing Program, and conclude that, had the
court given proper weight to HUD's strong interest, LSS's
interest in the grant relationship would have been excluded
from LSS's estate for bankruptcy purposes. Finally, we note
that considerations of bankruptcy policy militate in favor of
excluding LSS's interest from S 541's property definition. In
the course of this discussion, we distinguish LSS's
Trustee's attempts to rely on case law holding that
government-issued licenses, in general, qualify as property
of the estate under the Bankruptcy Code. Our last task will
then be to delineate the scope of our holding in the instant
case.
A.
Analysis under S 541's property definition must begin by
focusing directly on the specific inter ests claimed to
constitute the debtor's property. In the case before us, the
District Court characterized LSS's interest in the grant
relationship as a set of contractual rights arising out of the
Grant Agreement executed between LSS and HUD in 1995,
ultimately deciding that these contractual rights were
property of LSS's bankruptcy estate. In r eaching this
conclusion, the District Court began by turning to relevant
Pennsylvania state law and determining that, under that
case law, contractual rights are classified as property
interests. See, e.g., Klingner v. Pocono Int'l Raceway, Inc.,
433 A.2d 1357, 1361 (Pa. Super. Ct. 1981) (noting that
contractual rights are personal property under
Pennsylvania law).
12
In terms of our analysis, we do not question the District
Court's reading of Pennsylvania law, and assume that
ordinary contract rights would qualify as such property
interests under that state law; it is well-established that
federal courts typically must look to state law in
ascertaining the existence and scope of the debtor's"legal
or equitable interests" for purposes ofS 541(a)(1). See
Butner v. United States, 440 U.S. 48, 54 (1979) ("Congress
has generally left the determination of pr operty rights in the
assets of a bankrupt's estate to state law.") (footnote
omitted); O'Dowd, 233 F.3d at 202 ("While federal law
defines what types of property comprise the estate, state
law generally determines what interest, if any, a debtor has
in property."). It is also settled that the expansive nature of
S 541's property definition encompasses rights and interests
arising from ordinary contractual r elationships. See 5
Collier on Bankruptcy P 541.08[4], at 541-49 (15th ed. rev.,
King et al. eds., 1996); see also In re Minoco Group of Cos.,
Ltd., 799 F.2d 517, 519 (9th Cir. 1986) (holding that
insurance contracts constitute "property of the estate" for
purposes of S 541).
Attempting to delineate the scope of LSS's inter est in the
grant relationship, the District Court examined the
provisions of the Grant Agreement executed in 1995
between LSS and HUD, and identified three sets of
contractual rights that it believed arose out of the
relationship: (1) the debtor LSS's right to r eceive payment
from HUD for authorized expenditures that LSS incurred
while administering its Supportive Housing Pr ogram
project; (2) the debtor's right to compel HUD to make
payments in connection with LSS's administration of the
Supportive Housing Program; and (3) the debtor's right to
assign its interest in the Supportive Housing Grant, subject
to HUD's prior written approval. The court then held that
LSS's interest in the grant relationship, evidenced by these
three sets of rights, qualified as pr operty of LSS's
bankruptcy estate within the meaning of S 541. We
conclude that this decision was incorrect.
B.
At bottom, the problem with the District Court's S 541
property analysis lies in its failure to take into account
13
HUD's strong federal interest in supervising the efficient
and effective administration of Supportive Housing Program
grant funds by intermediaries such as LSS, designed to
ensure that the Program's ultimate beneficiaries (i.e.,
homeless individuals) receive the full measur e of federal
assistance afforded to them under the ter ms of the
Program. As will be seen in detail below, HUD's singular
interest in preserving such a supervisory role--evidenced by
the strict and pervasive oversight imposed by the
Supportive Housing Program scheme on the grant
relationship--can alter the dynamics of S 541's property
calculus, resulting in the exclusion of the grantee's interest
from its bankruptcy estate.
Our analysis proceeds in several steps. W e first explain
that a federal agency's supervisory interest over the
administration of a grant program can r esult in the
exclusion of a grantee's interest in the grant relationship
from S 541's property definition if the interest is sufficiently
weighty. We then present a method for assessing when an
agency's interest rises to such a level. Finally, we focus on
the facts of the case before us and on the specific
provisions of the Supportive Housing Pr ogram, explaining
the two related ways in which the District Court's failure to
account for HUD's supervisory interest manifested itself: (1)
the court neglected to consider the pervasive r estrictions
imposed on a Program grantee's rights by the substantive
provisions of two major components of the Supportive
Housing Program grant scheme; and (2) in light of these
limitations, the court construed the scope of the LSS's
rights under the grant arrangement too expansively.
1.
A federal agency like HUD clearly has a substantial
supervisory interest in preserving the coherence and
integrity of the federal grant scheme it is char ged with
administering, and in ensuring that federal grant moneys
disbursed pursuant to that scheme are dispensed by
intermediaries in an efficient and ef fective manner to the
ultimate beneficiaries of the grant. While the Bankruptcy
Code's property definition is certainly expansive, it is not
limitless, and, as we will demonstrate, a federal agency's
14
strong supervisory interest in the administration of a grant
program can play a significant role in determining whether
the interests created by a federal grant program fall within
S 541's definition of "property of the estate."
We recognize, of course, that each time a federal agency
executes a contractual agreement with a private party, or
enters into an arrangement with an entity in or der to
furnish assistance to the public, a federal interest is
arguably implicated. We therefor e must take care to
distinguish those situations in which a federal grantor
agency's supervisory interest is sufficiently weighty to
exclude the grantee's interest in the grant r elationship from
S 541's property definition from those situations in which it
is not. As we see it, the strength of an agency's supervisory
interest can best be gauged by examining the substantive
provisions of the grant scheme established by applicable
federal statutes and regulations. Cf. In r e Joliet-Will County
Cmty. Action Agency, 847 F.2d 430, 431-32 (7th Cir. 1988)
(analyzing the provisions of a federal "foster grandparents"
grant program administered by ACTION as part of the S 541
bankruptcy property inquiry).
To be sure, if a provision of a federal grant program
specifically authorizes federal grant moneys to be used to
pay a debtor grantee's creditors, it will be difficult for us to
conclude that the federal agency's interest is sufficiently
weighty to exclude the debtor's interest fr om S 541's
property definition. Cf. id. at 432. But the Supportive
Housing Program involved in the case befor e us contains no
such authorization, and thus our analysis of the nature of
HUD's supervisory interest, as manifested in the
substantive provisions of the Program, must be more
searching.
The strength of an agency's supervisory inter est can best
be measured by the level of agency oversight over the grant
relationship preserved in the provisions of the federal grant
program. A grant framework clearly evidences a desire to
sustain the federal agency's strong supervisory interest over
that relationship when it: (1) gives an agency extensive
control over the identity of the grant r ecipients with whom
it must deal by limiting the pool of applicants eligible to
receive funds, and by restricting the grantee's ability to
15
substitute a replacement entity in its stead; and (2) imposes
rigorous federal oversight of the grantee's per formance in
furtherance of the grant relationship.
As we see it, a federal agency's retention of pervasive
restrictions on a grantee's identity and manner of
performance under a HUD-type grant pr ogram is
inconsistent with the grantee's assertion of a pr operty
interest in the grant relationship. As we will discuss below
after examining the details of the Supportive Housing
Program, such limitations greatly constrict the scope of the
rights yielded to the grantee by the terms of the grant
arrangement, and substantially (if not completely) r estrict
their transferability and alienability, ther eby effectively
rendering the grantee's interest essentially valueless.
Moreover, as we explain infra in Part II.C., inclusion of such
interests in the grantee's bankruptcy estate would further
neither the equitable nor the rehabilitative purpose of the
Bankruptcy Code. As a result, we are satisfied that if these
controls are sufficiently extensive, i.e., if, under the terms
of the arrangement between the grantor federal agency and
the grantee, the agency retains strict, pervasive, and
minute oversight over the identity of the grant r ecipient and
the manner of that recipient's perfor mance, the existence of
such controls can demonstrate that the federal grantor
agency's interest in ensuring the effective administration of
that program is weighty enough to exclude the grantee's
interest from S 541's property definition.5
A number of federal courts have applied a similar
approach to resolve the related question whether
_________________________________________________________________
5. Our analysis of the supervisory controls and limitations over the grant
arrangement reserved to HUD is not meant to speak to the relationship
between federal grantees and grantor agencies in other contexts, such as
the government's liability for the acts of its grantees for purposes of
the
Federal Tort Claims Act. In that context, the Supreme Court has
distinguished between the pervasive conditions imposed by a grantor
agency to further federal supervision of the grant's administration, and
the control over day-to-day operations r etained by the grant recipient.
Because of this distinction, the Court has held that federal "regulations
do not convert the acts of entrepreneurs .. . into federal government
acts." United States v. Orleans, 425 U.S. 807, 816 (1976) (footnote
omitted).
16
unexpended federal funds themselves and property
purchased with those moneys once disbursed (as opposed
to contract rights like those at issue on this appeal)
constitute bankruptcy property of the debtor within the
meaning of S 541. For instance, the Seventh Circuit in
Joliet-Will considered the bankruptcy property status of
such funds and property in the case of a bankrupt
nonprofit community service organization. Although the
debtor's trustee claimed that those items repr esented
property of the debtor's estate, the Seventh Circuit
concluded that the federal moneys and personal pr operty
fell outside of S 541's property definition because the nature
of the federal grant program and the relationship between
the grantee community organization and grantor federal
agency rendered the debtor organization "a trustee,
custodian, or other intermediary, who lacks beneficial title
and is merely an agent for the disbursal of funds belonging
to another." Id. at 432 (citing to 11 U.S.C. S 541(d)).
In reaching this conclusion, the court r elied principally
on the fact that "[t]he grants impose minute controls on the
use of the funds, such that the recipient has very little
discretion." Id. (emphasis added). More specifically, the
court noted that each grant required the r ecipient to adhere
to a budget identifying particular project items and the
costs chargeable to the grant for each item; that the grantee
could not re-allocate unused moneys between items; that
the grantee was required to reconvey title to property
purchased with grant funds and costing mor e than $1,000
to the federal government, at the federal agency's direction;
and that the statutes and regulations cr eating the grant
scheme did not authorize the grantor federal agency to
permit grant moneys to be used to pay cr editors of the
private grantee. See id.
Federal district and bankruptcy courts have also used
the pervasiveness of government control over the
administration of a grant program as the touchstone for
assessing whether federal grant moneys and the pr operty
purchased with those moneys constitute pr operty of the
grantee's bankruptcy estate. See, e.g., In r e Community
Assocs., Inc., 173 B.R. 824, 828 (D. Conn. 1994) (holding
that three vans purchased with grant funds by the debtor,
17
a private community service organization, did not constitute
property of the debtor's estate for bankruptcy purposes, on
the ground that the agreement between the grantee
organization and grantor agency imposed " ``minute controls'
on . . . [the] use of the grant funds and the use of the vans"
purchased with those grant funds); In r e Alpha Ctr., Inc.,
165 B.R. 881, 884 (Bankr. S.D. Ill. 1994) (holding that a
van and state grant moneys transferred by the debtor
community service organization to a successor grantee were
not property of the debtor's estate for bankruptcy purposes,
on the ground that extensive legislation and r egulatory
rules restricted the debtor community service organization's
discretion as to the use of grant moneys and vans
purchased with those grant moneys); cf. In re Southwest
Citizens' Org. for Poverty Elimination, 91 B.R. 278, 286-87
(Bankr. D.N.J. 1988) (noting that, although the federal
grantor agency conceded that twenty vehicles pur chased by
the debtor community service organization with federal
grant funds constituted property of the debtor's estate, the
federal agency, by virtue of the restrictions imposed by the
agency on the grantee's use of the funds, retained an
"equitable reversionary interest" in the vehicles superior to
the debtor's interest and the debtor's trustee's interest as a
hypothetical lien creditor under 11 U.S.C.S 544). We believe
that such a "minute control" analysis is equally appropriate
in assessing whether a debtor's interest in a grant
relationship with HUD qualifies as pr operty of the debtor's
estate under the terms of the Bankruptcy Code.
We hold then that a federal agency's inter est in ensuring
the efficient administration of program funds can result in
the exclusion of the debtor grantee's interest in the grant
relationship from S 541's pr operty definition if the agency's
supervisory controls over the identity of the grantee and the
manner of the grantee's performance ar e sufficiently
pervasive and rigorous. The District Court, however,
neglected entirely to take account of HUD's str ong interest
in the Supportive Housing Program. This omission
manifested itself in two related ways. First, the court
mistakenly viewed the provisions of the Grant Agreement
itself as the exclusive calipers for measuring the rights and
obligations that LSS and HUD incurred by virtue of their
grantor/grantee relationship, failing to consider the
18
restrictions placed on those rights by the other major
components of the Supportive Housing Program, both
statutory and regulatory. Second, the court construed the
scope of the contractual rights it identified as arising out of
the Grant Agreement too expansively, omitting
consideration of the limitations imposed on those rights by
the full Supportive Housing Program scheme. W e now turn
to the facts of the case sub judice and to the details of the
Supportive Housing Program, and explain why the District
Court's conclusion that LSS's interest in the Program
qualified as bankruptcy property was err oneous.
2.
The District Court conducted its "property of the estate"
inquiry by focusing solely on the Grant Agreement executed
between LSS and HUD in 1995, concluding that "LSS'
rights under the Grant Agreement became property of the
bankruptcy estate once the bankruptcy petition wasfiled."
By confining its examination to the Grant Agr eement,
however, the court failed to take into account the fact that
the Grant Agreement represents only one component of a
broader federal grant scheme. To be sur e, the grant
agreement into which the government and a grantee enter
is an important element of the Supportive Housing
Program's framework for the disbursement and
administration of federal housing assistance funds. See 24
C.F.R. S 583.400(a) (2000) ("The duty to provide supportive
housing or supportive services in accordance with the
requirements of this part will be incorporated in a grant
agreement executed by HUD and the recipient."). However,
the grant agreement is by no means the exclusive source of
those parties' rights and obligations under the federal
Supportive Housing Program. The rights and obligations of
grantor and grantee are also detailed in: (1) Subtitle C of
the Stewart B. McKinney Homeless Assistance Act
(Homeless Assistance Act or Act), 42 U.S.C. SS 11381-89;
and (2) a set of regulations codified at 24 C.F.R. S 583
(Supportive Housing Rule or Rule), see 42 U.S.C. S 11387
(authorizing the HUD Secretary to issue final regulations
implementing the Homeless Assistance Act). In fact, the
Grant Agreement itself recognizes that the provisions of the
19
Homeless Assistance Act and the Supportive Housing Rule
are integral elements of the grant relationship. For example,
the Grant Agreement states that "[t]his grant agreement will
be governed by the [Homeless Assistance] Act, [and] the
Supportive Housing rule (24 CFR 583), a copy of which is
attached hereto . . . and made a part her eof."
Considering all of the components of the Supportive
Housing Program as a coherent whole, it is evident that
HUD's strong federal interest in safeguar ding the effective
administration of Program funds, demonstrated by the
rigorous controls imposed on the grant r elationship by the
Act and the Rule, suffices to exclude LSS's inter est in the
grant relationship from LSS's bankruptcy estate. The
Supportive Housing Program scheme--embodied in the
Homeless Assistance Act, Supportive Housing Rule, and the
grant agreement executed between HUD and the grantee--
places important limitations on and provides HUD with
extensive oversight over both the identity of grant recipients
and the manner of those recipients' per formances under
the grant arrangement. Turning first to the restrictions
imposed on the identity of grantees, the provisions of the
Program limit eligibility for receipt of federal funding to
certain statutorily-enumerated entities: only "a State,
metropolitan city, urban county, governmental entity,
private nonprofit organization, or community mental health
association that is a public nonprofit or ganization" is
eligible to serve as a grant recipient. See 42 U.S.C.
S 11382(1).d
Further, in order to secure the right to administer
Program funds, even those entities within this limited pool
of eligible applicants must participate in a nationwide
competitive process, in which they are r equired to submit a
comprehensive project proposal. Recipients are selected by
HUD, and the Homeless Assistance Act expressly mandates
that HUD use the seven statutorily-enumerated criteria
listed in the margin in order to make its selection. See 42
U.S.C. S 11386(b).6 On their face, these seven criteria
_________________________________________________________________
6. Section 11386(b), titled "Selection criteria," states in full:
The Secretary [of Housing and Urban Development] shall select
applicants approved by the Secretary as tofinancial responsibility
to
20
demonstrate that HUD is to use these factors as a screen
for ensuring that the grant recipient will implement its
proposed project and administer Supportive Housing
Program funds in an efficient and effective manner.
In addition, and most importantly, the Supportive
Housing Program preserves HUD's contr ol over the identity
of the grant recipient by prohibiting changes in the grantee
absent HUD's prior written approval. The Supportive
Housing Rule states that "[a] recipient may not make any
significant changes to an approved pr ogram without prior
HUD approval," and expressly defines"significant changes"
to include "a change in the recipient." 24 C.F.R.
S 583.405(a)(1) (2000). This general r estraint on a grantee's
ability to alienate or assign its interest in the grant
arrangement with HUD is also reflected in a provision of the
Grant Agreement executed between LSS and HUD:"No
change may be made to the project nor any right, benefit,
or advantage of the Recipient hereunder be assigned
without prior written approval of HUD."
_________________________________________________________________
receive assistance under this part by a national competition based
on criteria established by the Secretary, which shall include--
(1) the ability of the applicant to develop an d operate a
project;
(2) the innovative quality of the proposa l in providing a
project;
(3) the need for the type of project pr oposed by the applicant in
the area to be served;
(4) the extent to which the amount of assistan ce to be provided
under this part will be supplemented with resources from other
public and private sources;
(5) the cost-effectiveness of the pr oposed project;
(6) the extent to which the applicant has demo nstrated
coordination with other Federal, State, local, private and other
entities serving homeless persons in the planning and operation of
the project, to the extent practicable; and
(7) such other factors as the Secretary d etermines to be
appropriate to carry out this part in an ef fective and efficient
manner.
42 U.S.C. S 11386(b).
21
The Supportive Housing Program's limitations on the
uses to which grantees can put federal funds ar e just as
strict, if not more so, than the Program's controls over the
identity of grant recipients. In general, a Supportive
Housing Program grant is tied to a particular project
location, detailed in the recipient's funding proposal and
application. A recipient may not change the location of the
project site without prior written HUD appr oval. See 24
C.F.R. S 583.405(a)(1) (2000). Further more, the Supportive
Housing Rule requires each recipient's project to comply
with all applicable state and local housing codes, see id.
S 583.300(a), and to meet various habitability standards
with respect to such matters as structur e and materials,
interior air quality, and water supply, see id. S 583.300(b).
Most importantly, if the grant recipient r eceives Supportive
Housing Program moneys for acquisition, r ehabilitation, or
new construction purposes, the Supportive Housing
Program requires that the recipient continue to use the
property at that project site for the particular purposes
specified in the funding application for at least 20 years.
See 42 U.S.C. S 11383(b)(1); 24 C.F .R. S 583.305(a) (2000).
Finally, the Supportive Housing Program fur nishes HUD
with a series of remedial options exercisable in the event of
a default on the part of the grant recipient. For example,
should the grantee cease to use the project site for the
agreed-upon project purposes befor e the expiration of the
20-year period, the Supportive Housing Program mandates
that the recipient be required to r epay to HUD some or all
of the federal grant moneys it has received. If the property
ceases to be used for listed project purposes within 10
years of the project's start date, the Pr ogram requires that
the recipient repay to HUD 100 per cent of the acquisition,
rehabilitation, or new construction assistance received. And
if the property ceases being used in the r equired manner
some time after 10 years have passed, the repayment
obligation is reduced by 10 percentage points for each year
in excess of the 10 years that the property was used as
supportive housing. See 42 U.S.C. S 11383(c)(1); 24 C.F.R.
S 583.305(b) (2000). In addition, the Grant Agreement
executed between LSS and HUD lists other remedial
options available to HUD upon due notice to the grantee,
including the issuance of a letter of warning requesting
22
corrective action, the reduction of grant amounts, and the
substitution of an alternate recipient of HUD's choosing.
In the aggregate, these provisions demonstrate that the
Supportive Housing Program contemplates a str ong
supervisory role for HUD, the agency char ged with
implementing the Program and ensuring its efficient and
effective administration. As we see it, HUD's interest was
strong enough to materially affect theS 541 "property of the
estate" calculus, excluding LSS's interest in the grant
relationship with HUD from LSS's bankruptcy estate. In
contrast, in its opinion, the District Court never mentioned
either the Homeless Assistance Act or the Supportive
Housing Rule, instead focusing exclusively on the Grant
Agreement. The court's failure to account for HUD's strong
supervisory interest in the administration of the Supportive
Housing Program led to its incorrect conclusion that LSS's
interest qualified as property of its bankruptcy estate.
Furthermore, by omitting consideration of HUD's strong
supervisory interest in the grant relationship, the District
Court also appeared to give too much weight to LSS's
contractual rights, because it failed to consider the
limitations imposed on those rights by the substantive
provisions of the Supportive Housing Pr ogram scheme. For
example, in identifying the contractual rights yielded to LSS
by virtue of its grant relationship with HUD, the District
Court pointed to the fact that LSS had the power to assign
its interest in the Supportive Housing Grant arrangement
to another party. Although it recognized that this power of
assignment was subject to HUD's prior written appr oval,
the District Court did not take sufficient note of the extent
of the restrictions that the other components of the
Supportive Housing Program, i.e., the Homeless Assistance
Act and the Supportive Housing Rule, placed on the
grantee's power to assign.
For instance, as discussed above, S 11382(1) of the
Homeless Assistance Act restricts eligibility for Supportive
Housing Program funding to a prescribed list of entities--
essentially state and local government units and non-profit
organizations--and S 11386(b) of the Act directs that
grantees be selected by HUD according to expr ess
statutorily-enumerated criteria. Under the ter ms of the
23
Supportive Housing Program, LSS would not have had the
power to assign its interest to a party that fell outside of
S 11382(1)'s list of eligible entities--e.g., a private for-profit
corporation--or to a party that failed to meet the criteria set
forth in S 11386(b). The District Court's analysis, however,
implied that LSS's right to assign was limited solely by the
necessity of HUD's formal approval, and not by the
substantial restrictions on the grant r elationship imposed
by the other components of the Supportive Housing
Program. In short, by omitting consideration of HUD's
strong supervisory interest, the court construed the scope
of the grantee's power of assignment too broadly.7
_________________________________________________________________
7. Although not necessary to our conclusion that LSS's interest in the
grant relationship fails to constitute part of the property of its
bankruptcy estate, we note another way in which the District Court's
assessment of the scope of LSS's interest was too expansive. As noted at
the outset of Section II, the District Court, in concluding that LSS had
a cognizable property interest for bankruptcy purposes, also pointed to
two other contractual rights that it believed LSS possessed as a
consequence of its grant relationship with HUD: (1) LSS's right to receive
payment from HUD for authorized expenditur es incurred while
administering its Supportive Housing Program pr oject; and (2) LSS's
right to compel HUD to make payments in connection with LSS's
administration of the Supportive Housing Program. In essence, these
rights represent two sides of the same coin: both are concerned with
LSS's ability to require HUD to pay moneys for expenses that LSS
incurred in implementing and running its Supportive Housing Program
project, and hence our discussion treats these two rights together.
The Department of Justice (DOJ), as amicus curiae, argues that, just
as the District Court construed LSS's power of assignment too robustly,
so too it treated these contractual rights to compel payment as having
too broad a scope. Specifically, DOJ contends that LSS did not have a
general right to receive moneys for HUD. Rather , DOJ asserts, LSS's
right to receive payment from HUD was cir cumscribed by the provisions
of the Tucker Act, which authorizes actions seeking money damages
against the federal government for breach of contract. See 28 U.S.C.
S 1346(a)(2) ("Little Tucker Act" granting concurrent jurisdiction to the
district courts and the United States Court of Federal Claims over
claims, not in excess of $10,000, founded "upon any express or implied
contract with the United States, or for liquidated or unliquidated
damages in cases not sounding in tort"); id. S 1491(a)(1) ("Big Tucker
Act"
granting exclusive jurisdiction to the United States Court of Federal
Claims over identical claims in excess of $10,000); Dia Navigation Co. v.
Pomeroy, 34 F.3d 1255, 1267 (3d Cir. 1994).
24
C.
Considerations of bankruptcy policy also militate in favor
of the conclusion detailed in the previous section. Cf.
_________________________________________________________________
According to DOJ, a claim against the federal government under the
Tucker Act will lie only if the government, in administering the grant
program, incurs a contractual obligation to the grantee, breaches that
obligation (thereby injuring the grantee), and the grantee then uses the
Tucker Act as a vehicle for obtaining "monetary compensation for [this]
past injury." Cole County Reg'l Sewer Dist. v. United States, 22 Cl. Ct.
551, 556 (1991), aff 'd without opinion, 949 F.2d 402, 404 (Fed. Cir.
1991); see also City of Wheeling v. United States, 20 Cl. Ct. 659, 664
(1990) (holding that the Claims Court, the pr edecessor to the Court of
Federal Claims, has jurisdiction under the Tucker Act to hear a city's
challenge to the Environmental Protection Agency's refusal to disburse
grant funds to cover the increased engineering fee the city was obligated
to pay as a result of its renegotiation of an engineering contract, on the
ground that the city's claim "seeks a r emedy which is retroactive in
nature (monetary compensation for an injury to property)").
With respect to the Supportive Housing Program, DOJ contends that
a contractual obligation on the part of HUD would have been triggered
only if LSS had expended its own moneys for authorized Program
expenses, and then HUD had refused to r eimburse LSS out of the grant
funds allocated to LSS's supportive housing pr oject. Thus, according to
DOJ, LSS did not have the broad, generalized right to compel HUD to
disburse Program moneys that the District Court appeared to assume
that LSS possessed; rather, the argument continues, LSS had the much
narrower right to receive grant funds fr om HUD to cover expenses
incurred in furtherance of authorized grant purposes.
DOJ's analysis of LSS's ability to compel payment of Program moneys
glosses over significant unresolved issues, e.g., whether federal
assistance agreements, such as the Grant Agr eement at issue on this
appeal, constitute "express or implied contract[s]" within the meaning of
the Tucker Act. The jurisprudence on this issue is inconclusive. Compare
Trauma Serv. Group, Ltd. v. United States, 33 Fed. Cl. 426, 429-30
(1995) (holding that a cooperative agreement, a species of federal
assistance agreement identified in the Federal Grant and Cooperative
Agreement Act, did not qualify as a contract within the coverage of the
Tucker Act), aff 'd on other grounds, 104 F.3d 1321 (Fed. Cir. 1997) with
Thermalon Indus., Ltd. v. United States, 34 Fed. Cl. 411, 413, 414 (1995)
(holding that a grant agreement "satisfies the criteria for an express or
implied contract with the United States and, thus, falls within the scope
25
Kokoszka v. Belford, 417 U.S. 642, 645 (1974) (noting that
because "it is impossible to give any categorical definition to
the word ``property' " as used inS 70a(5) of the Bankruptcy
Act, the predecessor to the current definition of property
contained in 11 U.S.C. S 541, "[i]n determining the term's
scope--and its limitations--the purposes of the Bankruptcy
Act must ultimately govern") (inter nal quotation marks and
citations omitted). It is well-settled that two overarching
purposes, one equitable and the other rehabilitative,
undergird the Bankruptcy Code in general and the
definition of property contained in S 541 in particular. See,
e.g., In re Andrews, 80 F.3d 906, 909 (4th Cir. 1996). First,
the Bankruptcy Code attempts to provide for the efficient
and equitable distribution of an insolvent debtor's
remaining assets to its creditors. See, e.g., City of New York
v. Quanta Resources Corp., 739 F.2d 912, 915 (3d Cir.
1984). Second, the Code seeks to provide debtors with a
_________________________________________________________________
of . . . Tucker Act jurisdiction" so long as it meets the general black
letter
requirements for a binding contract, i.e.,"a mutual intent to contract
including an offer, an acceptance, and consideration passing between the
parties"). See also Jeffrey C. Walker, Note, Enforcing Grants and
Cooperative Agreements as Contracts Under the Tucker Act, 26 Pub.
Cont. L.J. 683 (1997) (analyzing the disagreement between the Court of
Federal Claim's decisions in Trauma Services and Thermalon, and
reasoning that federal assistance agreements should constitute
"contracts" for purposes of the Tucker Act).
The case before us does not directly pr esent a claim by LSS seeking to
compel HUD to pay over Supportive Housing Pr ogram funds, however,
and we will therefore refrain fr om resolving such open issues.
Nonetheless, we believe that DOJ's argument in regard to the scope of
LSS's right to compel payment is not without for ce. If grant agreements
do qualify as contracts for Tucker Act purposes, it appears that the
District Court overemphasized the scope of LSS's right to receive
Program moneys from HUD insofar as the court characterized it as a
general right to compel payment from HUD. T o the contrary, under the
Tucker Act regime advanced by the gover nment, LSS's right is much
narrower, in that a claim against the federal government for money owed
would lie only if LSS incurred expenses authorized by the terms of the
Supportive Housing Program, and HUD refused to disburse federal
moneys to cover such expenses. While the for egoing analysis does not
inform our decision, it does inveigh against facile, expansive
construction of LSS's rights under the Grant Agr eement.
26
"fresh start" by relieving them of the weight of their
outstanding debts and permitting them to r eorganize their
affairs. See, e.g., United States v. Whiting Pools, Inc., 462
U.S. 198, 203 (1983); Insurance Co. of North America v.
Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995). We do not believe
that inclusion of intangible contractual rightsflowing from
a HUD-type federal grant arrangement will further either of
the dual purposes of the Bankruptcy Code.
Under the scheme contemplated by the Bankruptcy
Code, a debtor's creditors are typically compensated to the
extent possible and in as equitable a fashion as possible
pursuant to a court-approved plan, generally after the
trustee marshals the debtor's bankruptcy property and
liquidates it at a bankruptcy sale. As a practical matter, in
order for such a procedure to generate a pool of funds from
which creditors can be compensated, the items constituting
the bankrupt's property must be readily alienable and
assignable--i.e., they must be capable of being sold to a
third party and of fetching some value as a consequence of
that sale. Unlike a federal license, which fur nishes clear,
quantifiable benefits to the licensee, it is difficult to see how
LSS's tenuous interest in the Supportive Housing Program
grant relationship with HUD would yield that value, given
the fact that, as discussed supra in Part II.B.2, any
potential purchaser would surely have to fall within the list
of eligible applicants contained in S 11382(1) of the
Homeless Assistance Act, and would be requir ed to meet
the criteria set forth in S 11386(b). Mor eover, it is unclear
why an entity that qualifies as an eligible applicant under
S 11382(1) would elect to bid on and pur chase the
opportunity to administer Program funds fr om a previous
grantee, rather than simply engaging in the or dinary
grantee selection process. Put another way, even were LSS's
Trustee to place the right to succeed to LSS's interest in the
Grant Agreement with HUD up for auction, we ar e dubious,
as a practical matter, that any potential buyers would
actually bid for that right.
Inclusion of a grantee's intangible contractual rights as
part of the bankruptcy estate in furtherance of the
Bankruptcy Code's rehabilitative goal seems equally
problematic. It is true that a debtor's "r eorganization effort
27
would have small chance of success . . . if pr operty
essential to running the business were excluded from the
estate," Whiting Pools, 462 U.S. at 203; cf. Stewart v.
Gurley, 745 F.2d 1194, 1196 (9th Cir . 1984) (per curiam)
("Unless the debtor can demonstrate that the pr operty is
necessary to an effective reorganization, the property is of
no value to him.").8 However , given the pervasive
supervisory controls over the grant reserved to HUD under
the terms of the Supportive Housing Pr ogram scheme, see
supra Part II.B.2., it is difficult to see how LSS's interest in
the Supportive Housing Program grant could be considered
essential to the continued operation of its community
service operations.
The Supportive Housing Program makes available to HUD
an array of remedial options in the event of a default on the
part of a grantee, such as the filing of a bankruptcy
petition. For instance, under the terms of the Grant
Agreement executed between LSS and HUD, once the
grantee defaults, HUD can seek to preserve the integrity of
the Supportive Housing Program grant by or dering the
recipient to stop incurring costs chargeable to the grant
program, by reducing the amount of grant moneys
available, or by substituting another recipient of HUD's
choosing. In fact, after LSS filed its Chapter 11 bankruptcy
petition on January 14, 1997, HUD exercised one such
remedial option by freezing LSS's ability to draw down
grant moneys. Neither of the parties disputes that HUD's
actions were authorized by the Supportive Housing
Program. In light of this freeze on the disbursement of
funds to LSS, it is difficult to see how LSS's contractual
interest in the grant relationship would be of any
assistance to its business reorganization.
In short, we think, as a practical matter, that LSS's
tenuous interest in the Supportive Housing grant
_________________________________________________________________
8. In fact, if an item of property in the hands of a third party is
essential
to the debtor's continuing business operations, the debtor's trustee,
provided that the appropriate statutory conditions are met, will typically
seek to have the property turned over the debtor's estate, see 11 U.S.C.
SS 542-43, or to have the transfer set aside, see id. S 544.
Interestingly,
in the instant case, LSS's Trustee never sought to have WHO's
assumption of the Supportive Housing Grant voided.
28
arrangement, subject to HUD's pervasive supervisory
controls, would yield no value even if put up for auction by
LSS's Trustee. Given the apparent worthlessness of LSS's
interest, we do not believe that inclusion of that interest
within S 541's definition of property would serve either the
Bankruptcy Code's equitable goal of protecting creditors by
ensuring that they are fairly compensated fr om a tangible
pool of funds, or the Code's rehabilitative goal of permitting
the debtor to make a fresh start.
D.
In response to this S 541 property analysis, LSS's Trustee
counters that even highly regulated items of pr operty, such
as stock exchange seats and government-issued licenses,
can constitute "property of the estate" for bankruptcy
purposes, and argues, therefore, that the fact that federal
law imposes significant restrictions on grantees such as
LSS should not preclude the grantee's inter est from falling
within the Bankruptcy Code's property definition. In
support of this position, the Trustee points us to such
decisions as In re Page, 107 F . 89 (3d Cir. 1901), involving
the bankruptcy status of a member's seat on the
Philadelphia Stock Exchange, see id. at 89, and In re
Central Arkansas Broadcasting Company, 68 F.3d 213 (8th
Cir. 1995) (per curiam), concerning the bankruptcy status
of a radio station broadcasting license issued by the Federal
Communications Commission (FCC), see id. at 214. The
Trustee is certainly correct in contending that the fact of
significant regulatory control, by itself, will not keep a piece
of property outside of S 541's expansive scope, and we do
not mean to suggest that regulation qua regulation directs
the outcome of the S 541 property inquiry. Rather, we
conclude only that, under the appropriate set of
circumstances, the supervisory controls imposed on a grant
relationship by the substantive provisions of the grant
program can be sufficiently pervasive, strict, and minute so
as to make manifest the federal agency's str ong interest in
overseeing the administration of that grant pr ogram. It is
that weighty federal interest, and not the bar e fact of
regulation itself, that can keep the debtor's interest in the
grant relationship outside of S 541's pr operty definition.
29
Furthermore, the Trustee's r eliance on cases such as
Page and Central Arkansas Broadcasting is unavailing. In
Page, a decision that is now a century old, we held that a
debtor's seat on the Philadelphia Stock Exchange qualified
as property of the bankruptcy estate under the Bankruptcy
Act of 1898, notwithstanding the fact that the Stock
Exchange's constitution required any sale or transfer of the
seat to be approved by the Exchange. See Page, 107 F. at
92. We noted that this limitation "possibly affected the
value of the seat for the purposes of sale, but, while
restricting, did not destroy its transferability." Id. However,
our decision in Page has little bearing on our analysis in
the instant case. Unlike Page, which examined the effect of
a transfer restriction alone on the bankruptcy status of the
subject property, our S 541 property analysis takes into
account the full panoply of supervisory conditions and
controls imposed by the Supportive Housing Pr ogram
scheme on the grant relationship between LSS and HUD.
More importantly, because the case befor e us involves a
federal agency with a substantial interest in overseeing the
grant program it is charged with administering, we must
accord greater weight to that gover nmental interest than we
ordinarily would provide, as in Page , to a private entity's
supervisory interest over its relationship with its
constituent members.
The Trustee's reliance on Central Arkansas Broadcasting,
in which the Court of Appeals for the Eighth Cir cuit held
that a FCC-issued radio operating license fell within the
ambit of the Bankruptcy Code's property definition, see 68
F.3d at 214-15, does more to advance his case. After all,
the fact that the FCC, a federal agency, designates a
particular radio operator as licensee and retains the power
to approve the transfer of an issued license does implicate
a federal concern. Moreover, the Eighth Circuit's decision is
consistent with a line of cases holding that state-issued
licenses, commonly liquor licenses, are encompassed within
S 541's property definition. See, e.g., In re Nejberger, 934
F.2d 1300, 1300-01 (3d Cir. 1991) (holding that a debtor
licensee's interest in a license issued by the Pennsylvania
Liquor Control Board constituted pr operty of the debtor's
estate within the meaning of S 541). Nonetheless, we
conclude that there are fundamental dif ferences in the
30
nature of a HUD-type grant relationship as compared to
that of a licensing arrangement that excludes the former
from S 541's property definition.
First, an entity selected as a licensee plays a dif ferent
role and faces a different set of incentives than does an
entity chosen as a HUD-type grantee. Ordinarily, an entity's
receipt of a license permits the entity to engage in federally
regulated activities for its own profit. In other words, the
benefits of the license accrue primarily to the licensee itself.
In contrast, an entity chosen as a HUD-type grant r ecipient
is not itself the beneficiary, but acts as an intermediary
administering those moneys for the benefit of the ultimate
recipients of the federal assistance. Put another way, unlike
the licensee, the grantee's position is more akin to that of
"a trustee, custodian, or other intermediary, who lacks
beneficial title and is merely an agent for the disbursal of
funds belonging to another." In r e Joliet-Will County Cmty.
Action Agency, 847 F.2d 430, 432 (7th Cir . 1988). In this
latter situation, as compared to a typical licensing
arrangement, the federal government will likely possess a
weightier supervisory interest in ensuring that the grantee
administers the moneys it receives in an ef fective and
efficient manner so that the ultimate beneficiaries receive
the full measure of the federal assistance intended for
them.
Furthermore, as a practical matter , we do not believe that
a grantee's interest in a HUD-type grant arrangement is as
easily bought and sold--and thus as readily capable of
serving as a source of funds from which the debtor's
creditors can be paid--as is a debtor's inter est in a
government-issued license. For example, in Central
Arkansas Broadcasting, the FCC-issued radio license found
to constitute property of the debtor's estate had been sold
and transferred as part of a bankruptcy auction conducted
by the trustee. See 68 F.3d at 214. In fact, courts have
generally acknowledged that the value of a gover nment-
issued license can typically be realized thr ough sale,
notwithstanding conditions requiring gover nment approval
prior to transfer. See, e.g., Nejber ger, 934 F.2d at 1302
(noting that "in practice, a liquor license can be bought and
sold in the market place"); In re T erwilliger's Catering Plus,
31
Inc., 911 F.2d 1168, 1171 (6th Cir . 1990) ("It is undeniable
that a liquor license has pecuniary value to its holder since
the license enables the holder to sell alcoholic beverages
and can be sold for value."). In sharp contrast, our
discussion supra at Part II.C. demonstrates the
unlikelihood that a grantee's interest in a HUD-type grant
relationship would be able to yield any type of value at a
bankruptcy auction, especially given the strict r estrictions
imposed by federal law over the identity of any potential
grantee.
E.
In light of the numerous and varied scenarios under
which federal agencies enter into contractual arrangements
with private entities, we must be careful to delineate the
scope of our holding. As we earlier observed, each time a
federal agency executes a contractual agreement with a
private party, a federal interest is ar guably implicated, and
we certainly do not mean to suggest in our discussion that
every right arising out of any such contractual arrangement
should be automatically excluded from S 541's property
definition. For example, as discussed supra in Part II.D., a
licensee's interest in a government-issued license is
generally likely to fall within the ambit of the Bankruptcy
Code's property definition, given the fact that licenses,
unlike grants, typically inure to the dir ect benefit of the
recipient (as opposed to other, ultimate beneficiaries), and
are generally capable of being bought and sold in the public
market.
Moreover, we recognize that agencies of the federal
government can and do routinely enter into contracts with
private entities that share the features of ordinary
commercial agreements. Federal procur ement contracts,
typically entered into between government agency
purchasers and private suppliers, are one such example.9
_________________________________________________________________
9. In fact, in our prior case law, we appear to have assumed that the
Bankruptcy Code's definition of "property of the estate" would cover
federal procurement contracts. For instance, in Matter of West
Electronics, Inc., 852 F.2d 79 (3d Cir. 1988), we considered a
32
Our holding is not meant to imply that the rights and
interests yielded to private entities by those contracts
automatically fall outside the scope of S 541's property
definition. Although we need not decide today the question
whether a contractual interest arising out of a federal
procurement relationship qualifies as property of the
debtor's estate within the meaning of 11 U.S.C.S 541, we
observe that, in contrast to a grantor/grantee r elationship
such as the one entered into between HUD and LSS in this
case, a garden-variety federal procur ement contract (for
goods or services) generally does not directly further a
public-oriented purpose (such as the provision of
transitional housing to homeless individuals). Thus, federal
procurement contracts appear significantly less likely to
implicate a federal concern akin to the weighty federal
interests operating in the instant case--i.e., HUD's
supervisory interest in ensuring the efficient administration
of federal grant moneys by qualified inter mediaries to the
ultimate beneficiaries of the grant.
The absence of a significant, direct public-oriented
objective undergirding a procur ement contract relationship
is evident from the language of the Federal Grant and
Cooperative Agreement Act of 1977 (FGCAA), curr ently
codified at 31 U.S.C. SS 6301-08.10 The FGCAA's distinction
_________________________________________________________________
procurement contract executed between the United States and West
Electronics, Inc., under which West obligated itself to furnish the Air
Force with missile launcher power supply units. See id. at 80. After
suffering financial difficulties, W est filed for Chapter 11 bankruptcy
relief, triggering an automatic stay under 11 U.S.C. S 362, and the
United States petitioned the bankruptcy court to lift the stay to allow
the
government to terminate the contract. See id. at 80-81. Although we
reserved a final determination of the issue, we assumed that the
automatic stay provision--which under S 362(a) of the Bankruptcy Code
extends to "any act to obtain possession of property of the [debtor's]
estate," 11 U.S.C. S 362(a)(3) (emphasis added)--would cover the
procurement contract at issue in West. See West Elecs., 852 F.2d at 82.
10. Congress enacted the FGCAA in response to agencies' inconsistent
and often interchangeable use of assistance instruments such as
procurement contracts and grant agr eements. One of the FGCAA's
principal stated goals is to
33
between procurement contracts and grant agreements is, in
large part, based on the extent to which each contractual
arrangement directly furthers a public purpose. The statute
characterizes a procurement contract as"the legal
instrument reflecting a relationship between the United
States Government and . . . [an]other r ecipient when . . .
the principal purpose of the instrument is to acquir e (by
purchase, lease, or barter) property or services for the direct
benefit or use of the United States Government." 31 U.S.C.
S 6303 (emphasis added). In contrast, the FGCAA describes
a grant agreement as
the legal instrument reflecting a relationship between
the United States Government and . . . [an]other
recipient when--
(1) the principal purpose of the relationship is to
transfer a thing of value to . . . [the] other recipient to
carry out a public purpose of support or stimulation
authorized by a law of the United States instead of
acquiring (by purchase, lease, or barter) pr operty or
services for the direct benefit or use of the United
States Government; . . . .
Id. S 6304 (emphasis added). As the FGCAA's provisions
recognize, a private party's interest in a federal
procurement contract is much less likely to serve a public-
oriented purpose, such as the provision of federal
assistance to third-party beneficiaries, and thus the federal
_________________________________________________________________
prescribe criteria for executive agencies in selecting appropriate
legal
instruments to achieve--
(A) uniformity in their use by executive age ncies;
(B) a clear definition of the relationships they reflect; and
(C) a better understanding of the responsibil ities of the parties
to
them . . . .
31 U.S.C. S 6301(2). For an overview of the r elationship between the
various federal assistance instruments, and an examination of the legal
issues they raise, see generally Jeffrey C. Walker, Note, Enforcing Grants
and Cooperative Agreements as Contracts Under the Tucker Act, 26 Pub.
Cont. L.J. 683 (1997).
34
government's interest in the contractual arrangement
appears substantially less likely to lead to the exclusion of
LSS's interest from S 541's pr operty definition.
F.
In sum, we do not mean to suggest that every grantee's
interest in a grant relationship with a federal agency will
fall outside the scope of S 541's property definition, for we
must be mindful of the fact that Congress intended the
Bankruptcy Code's definition of property to sweep broadly.
But the Code's property definition is not without
limitations, and under certain concededly narr ow
circumstances, a federal agency's weighty inter est in
overseeing the administration of its grant pr ograms can
suffice to keep a grantee's interest outside of the Code's
property definition. In this regar d, the touchstone of our
analysis is the strength of the federal agency's supervisory
interest over the grant program, best measured by the level
of agency oversight over the grant relationship preserved in
the provisions of the federal grant program.
Controls that are sufficiently extensive, i.e., federal
agency retention of strict, pervasive and minute oversight
over the identity of the grant recipient and the manner of
that recipient's performance, can demonstrate the strength
of an agency's federal interest in the ef fective
administration of grant moneys, and can lead to the
exclusion of the grantee's interest in the grant relationship
from its bankruptcy estate. In the case befor e us, HUD's
weighty interest, manifested in the extensive supervisory
controls imposed by HUD through the pr ovisions of the
Homeless Assistance Act, Supportive Housing Rule, and
Grant Agreement itself, sufficed to keep LSS's interest in
the grant relationship outside of S 541's property definition.
III. Breach of Fiduciary Duty
Our conclusion that LSS's interest in the Supportive
Housing Grant relationship with HUD does not constitute
property of LSS's bankruptcy estate does not fully dispose
of the merits. There is an issue in this case that was not
directly considered by either the Bankruptcy or the District
35
Court, and that remains open even in light of our holding
that LSS's interest falls outside of S 541's property
definition: whether WHO, by assuming LSS's inter est
without notifying constituents of the Unsecur ed Creditors
Committee of which WHO was a member at the time of the
assumption, breached a fiduciary duty to its fellow
Committee members.
The Bankruptcy Code authorizes the appointment of a
committee of creditors, see 11 U.S.C.S 1102, and grants to
such committees the power to investigate debtors, to
negotiate a bankruptcy reorganization plan, and to
"perform such other services as ar e in the interest of those
represented," 11 U.S.C. S 1103(c). We have construed
S 1103(c) as implying a fiduciary duty on the part of
members of a creditor's committee, such as the present
Unsecured Creditors Committee, towar d their constituent
members. See In re PWS Holding Corp., 228 F.3d 224, 246
(3d Cir. 2000). A committee member violates its fiduciary
duty by pursuing a course of action that furthers its self-
interest to the potential detriment of fellow committee
members.
On May 28, 1997, about four months after LSS's January
14, 1997 bankruptcy petition, WHO executed a Grant
Agreement Amendment with HUD, pursuant to which WHO
assumed LSS's interest in the Supportive Housing Program
grant relationship. The Grant Agreement Amendment in
fact identified WHO as "Successor to Life Service Systems,
Inc." LSS had not identified the original Grant Agreement
on its Schedule of Assets. At the time it assumed LSS's
interest, WHO was serving on LSS's Unsecur ed Creditors
Committee. WHO, however, did not disclose the fact that it
had assumed LSS's interest in the Supportive Housing
Program grant relationship to its fellow Committee
members or to the Bankruptcy Court.
By accepting an invitation to sit on the LSS's Unsecured
Creditors Committee, WHO clearly incurr ed a fiduciary
obligation to its fellow Committee members. The question
remaining before us, therefor e, is whether WHO's actions in
assuming LSS's interest violated such a duty. The
Bankruptcy Court summarily concluded that WHO
"breached the fiduciary duty it owed to general unsecured
36
creditors as a result of its membership on the committee of
unsecured creditors in that its conduct was blatantly self-
aggrandizing." The conduct to which the Bankruptcy Court
referred was WHO's assumption of LSS's interest in the
Grant Agreement with HUD, without notice to either fellow
Committee members or to the Bankruptcy Court. The
District Court never reviewed the Bankruptcy Court's
fiduciary duty analysis, stating that WHO had not claimed
"that the bankruptcy court erred in concluding that WHO
breached its fiduciary duty by assuming the LSS' rights
under the agreement."
In light of our conclusion above, we are constrained to
conclude that both the District and Bankruptcy Courts'
analysis of the breach of fiduciary duty issue was
incomplete, as neither court considered the important
question whether a fiduciary obligation to Committee
members can arise in connection with a transaction
involving property that falls outside of the debtor's
bankruptcy estate. This omission is of course explained by
the fact that both the Bankruptcy and District Courts
appeared to predicate their breach offiduciary duty
analyses on the assumption that LSS's interest in the
Grant Agreement with HUD constituted pr operty of the
debtor's estate within the meaning of 11 U.S.C.S 541. As
discussed extensively in Section II, this assumption was
erroneous. Thus, neither court had occasion to consider
whether this error would alter its analysis of the fiduciary
duty issue.
Moreover, in the initial briefing and at oral argument, the
parties to this appeal never addressed this important
question, framing the issue before us solely as whether
LSS's interest in the Supportive Housing Grant Agreement
constituted property within the meaning ofS 541. Both
LSS's Trustee and WHO appear to have assumed that the
Trustee's action for breach of fiduciary duty would not lie
if LSS's interest fell outside of S 541's property definition. In
its amicus curiae brief, the Department of Justice (DOJ)
challenges this assumption. While arguing at length that
LSS's interest in the grant relationship with HUD does not
constitute property of its bankruptcy estate, DOJ also
contends that WHO violated its fiduciary obligation to fellow
37
Committee members by not disclosing the existence of that
interest. In response, WHO asserts that a breach of a
fiduciary duty can never occur--in fact, that afiduciary
duty can never arise--in connection with the transfer of an
item that is not "property of the estate" within the meaning
of S 541.
We have problems with both DOJ's and WHO's positions
in regard to the breach of fiduciary duty issue. DOJ's
argument that a fiduciary obligation was violated
notwithstanding the fact that LSS's interest did not
constitute property of the estate is less than pellucid.
Under the DOJ's theory, WHO's failure to disclose the
existence of LSS's interest in the grant r elationship to either
the Bankruptcy Court or LSS's creditors materially
undermined the ability of the Bankruptcy Court to take the
Supportive Housing Program grant into account in
formulating a comprehensive Chapter 11 plan for LSS's
reorganization. What the DOJ fails to explain, however, is
why property that falls outside of S 541's definition, such as
LSS's interest in the grant relationship with HUD, has any
role in a debtor's reorganization.
At the same time, we are unwilling at this stage, given
the scanty briefing and argument on this issue, to adopt
WHO's suggested bright-line rule, which would have us
declare that a fiduciary obligation can never arise with
respect to an item of property not included in S 541's
definition. Perhaps situations (which we cannot anticipate
here) could exist in which a creditor's active concealment of
an item of property that does not qualify as pr operty of the
estate for bankruptcy purposes would threaten to
undermine the ability of other creditors to receive an
equitable distribution of the debtor's remaining assets or
the efforts of the bankruptcy trustee to r eorganize the
debtor's affairs. In such a circumstance, imposition of a
fiduciary obligation may very well further the purposes of
the Bankruptcy Code and the general fiduciary pr ohibition
against self-dealing.
In light of the fact that both the Bankruptcy and District
Courts did not consider these issues, and given the parties'
failure to fairly present and addr ess these issues to us, we
decline at this stage of the proceedings to r esolve the
38
question whether WHO breached a fiduciary duty it owed to
fellow Committee members by failing to disclose the
existence of an item of property--LSS's inter est in the
Supportive Housing Grant program--that does not
constitute property of the debtor's estate within the
meaning of 11 U.S.C. S 541. Rather, we believe the proper
course of action lies in remand for further pr oceedings
designed to resolve this issue in the first instance. On
remand, the court should consider whether afiduciary
obligation to fellow unsecured creditors can arise out of a
transaction involving an item of property that does not
qualify as property of the estate for Bankruptcy Code
purposes and, if so, whether, based on the specific facts of
WHO's case, WHO breached such a fiduciary duty.
IV. Conclusion
For the foregoing reasons, the judgment of the District
Court will be reversed, and the case remanded to the
District Court for a determination as to whether WHO
breached its fiduciary duty to fellow members of the
Unsecured Creditors Committee, in light of the fact that
LSS's interest in the Grant Agreement with HUD does not
constitute property of LSS's bankruptcy estate. The District
Court may of course remand the matter to the Bankruptcy
Court for this determination. Parties to bear their own
costs.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
39