Filed: December 16, 1996

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Nos. 95-2641(L)

(CA-94-312-2)

American Bankers Insurance Company of Florida,

Plaintiff - Appellant,

versus

Jack D. Maness, etc.,

Defendant - Appellee.

ORDER

The Court amends its opinion filed November 27, 1996, as

follows:

On page 17, third full paragraph, line 1 -- the phrase "grant

of summary judgment" is corrected to read "denial of summary

judgment."

For the Court - By Direction

/s/ Patricia S. Connor

Clerk
PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

AMERICAN BANKERS INSURANCE

COMPANY OF FLORIDA,

Plaintiff-Appellant,

and

UNITED STATES FIDELITY &

GUARANTY COMPANY,

Plaintiff,

v.

No. 95-2641

JACK D. MANESS, Trustee for the

Bankruptcy Estate of Joseph L.

Houska and Judy C. Houska,

Defendant-Appellee,

and

JOSEPH L. HOUSKA; JUDY C. HOUSKA;

CENIT BANK, F.S.B.,

Defendants.
UNITED STATES FIDELITY &

GUARANTY COMPANY,

Plaintiff-Appellant,

and

AMERICAN BANKERS INSURANCE

COMPANY OF FLORIDA,

Plaintiff,

v.

No. 95-2642

JACK D. MANESS, Trustee for the

Bankruptcy Estate of Joseph L.

Houska and Judy C. Houska,

Defendant-Appellee,

and

JOSEPH L. HOUSKA; JUDY C. HOUSKA;

CENIT BANK, F.S.B.,

Defendants.

 2
UNITED STATES FIDELITY &

GUARANTY COMPANY; AMERICAN

BANKERS INSURANCE COMPANY OF

FLORIDA,

Plaintiffs-Appellees,

v.

JACK D. MANESS, Trustee for the

No. 95-2643

Bankruptcy Estate of Joseph L.

Houska and Judy C. Houska,

Defendant-Appellant,

and

JOSEPH L. HOUSKA; JUDY C. HOUSKA;

CENIT BANK, F.S.B.,

Defendants.

Appeals from the United States District Court

for the Eastern District of Virginia, at Norfolk.

Robert G. Doumar, Senior District Judge.

(CA-94-312-2)

Argued: September 23, 1996

Decided: November 27, 1996

Before HALL, WILLIAMS, and MOTZ, Circuit Judges.

_________________________________________________________________

Nos. 95-2641 and 95-2643 affirmed and remanded, and No. 95-2642

reversed and remanded by published opinion. Judge Motz wrote the

opinion, in which Judge Hall and Judge Williams joined.

_________________________________________________________________

COUNSEL

ARGUED: W. Charles Waddell, III, WADDELL & BARNES, P.C.,

Newport News, Virginia, for Appellant USF&G; Clayton Henson

 3
Farnham, DREW, ECKL & FARNHAM, Atlanta, Georgia, for

Appellant American Bankers. Robert Vincent Roussos, ROUSSOS &

LANGHORNE, P.L.C., Norfolk, Virginia, for Appellee. ON BRIEF:

J. H. Revere, III, WADDELL & BARNES, P.C., Newport News, Virginia, for Appellant USF&G; Phillip C. Griffeth, DREW, ECKL &

FARNHAM, Atlanta, Georgia, for Appellant American Bankers.

_________________________________________________________________

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

In this diversity case, two insurers appeal the district court's holding that the trustee for a bankruptcy estate was entitled to an interest

in the payouts from one of two insurance policies covering the debtors' residence. The trustee cross appeals, asserting that the bankruptcy

estate was entitled to an interest in the payouts of both policies.

Because neither policy (nor the payouts from either of them) constituted property of the bankruptcy estate, the trustee had no right to

funds stemming from either policy. Accordingly, we affirm the district court's grant of summary judgment to one insurer, we reverse the

court's denial of summary judgment to the other insurer, and we

remand for further proceedings.

I.

Although the parties do not dispute the material facts, the facts

themselves are complicated. Furthermore, the timing of events is critical to our discussion. Accordingly, we set forth a chronology, which

includes only those facts necessary to understand our holding. The

opinion of the district court presents the facts in greater detail. See

United States Fidelity & Guar. Co. v. Houska, 184 B.R. 494 (E.D.

Va. 1995).

On August 27, 1991, Joseph and Judy Houska filed a bankruptcy

petition under Chapter 11. On October 25, 1991, their creditors held

a meeting pursuant to 11 U.S.C. § 341 (1988), at which Mr. Houska

confirmed that a policy issued by the Home Insurance Company

("Home") covered the real property at issue here, a residence in Vir-

 4
ginia Beach, Virginia. On April 30, 1992, the Houskas converted their

Chapter 11 case to one under Chapter 7. On May 20, the court

appointed Jack Maness as trustee of the estate, thereby removing control of the estate from the Houskas as debtors-in-possession. The conversion to Chapter 7 prompted another § 341 creditors' meeting, held

on June 22. No one mentioned insurance coverage at this meeting.

Prior to the June 22 creditors' meeting but subsequent to the May

20 appointment of the trustee, the Houskas decided to change their

homeowners insurance coverage. The Houskas decided to change

insurers because Home refused to continue to provide them automobile insurance, and the Houskas, at the suggestion of their insurance

agent, hoped to purchase a policy that would provide both car and

home insurance at a discounted premium.1 USF&G agreed to provide

this coverage, and the Houskas determined to switch to that insurer.

The USF&G policy that the Houskas chose became effective on June

19, 1992. On that date the Home policy expired, as the Houskas had

cancelled the plan's automatic renewal. The Home and USF&G policies provided identical limits of liability: $662,000 for the "dwelling,"

and $496,500 for personal property.

_________________________________________________________________

1 The record provides no clear information as to when the Houskas

decided to switch the policies. Home notified them of non-renewal of the

Home automobile policy in a letter dated May 1, 1992; this letter provided the Houskas with the initial incentive to change insurers. But the

record indicates that the Houskas took no action on this front until after

they were relieved of their duties as debtors in possession by the trustee's

appointment on May 20, 1992. Joseph Houska executed the cancellation

of the homeowners portion of the Home policy on June 15, 1992, effective June 19, 1992. USF&G issued its policy on June 28, 1992, with

retroactive coverage from June 19, 1992. These facts suggest that the

Houskas made the decision to purchase the USF&G insurance not only

after the May 20 appointment of Maness as the bankruptcy trustee but

also after the June 22 creditors' meeting. Thus the record cannot support

the argument that in arranging the USF&G policy, Mr. Houska was a

debtor in possession and, therefore, was the acting trustee, purchasing the

policy for the estate. The trustee at the time of the change of insurers was

Maness, and he was not involved in the decision to cancel the Home policy or purchase the USF&G policy, nor at any time did he attempt to

alter the USF&G policy to add the estate as an insured or a loss payee.

 5
On August 7, 1992, fire destroyed the Virginia Beach residence.

Local authorities determined that someone had intentionally set the

fire, but as of the time of the district court opinion, authorities had not

yet brought arson charges.

There were two deeds of trust on the property. Household Mortgage Corporation ("Household") held the first deed of trust. The

USF&G policy listed the Houskas as the insured and Household as

the named mortgagee. Household also had a contractual relationship

with American Bankers Insurance Company ("American Bankers")

compelling American Bankers to "force place" an insurance policy on

any property in which Household was the mortgagee if either party

determined that no other insurance covered it. In March 1993, after

the fire loss, American Bankers mistakenly issued a policy that retroactively covered the Houskas' residence at the time of the fire. The

American Bankers policy similarly lists the Houskas as the insured

and Household as the named mortgagee.2 

After the fire, the Houskas filed claims under both the USF&G and

American Bankers policies, claiming losses of $1,243,096.01 for the

dwelling and $647,350.05 for their personal property.3 In view of the

Houskas' claims that some of the real property and some of the personal property were exempt, the Houskas and trustee ultimately

agreed to divide their claims. The Houskas abandoned any claim to

insurance proceeds payable on the loss of real property, and agreed

to pursue insurance payouts for the loss of the personal property only.

In return, the bankruptcy trustee, Maness, agreed to drop all claims

to insurance payments due on the loss of personalty and seek payment

from the insurers solely for the damage to the real property.

_________________________________________________________________

2 Cenit Bank ("Cenit") holds a second deed of trust on the property in

the amount of $200,000 plus interest and attorney's fees. Neither the

USF&G nor the American Bankers policy lists Cenit as a named mortgagee, but under Virginia law, Cenit's security interest extends to insurance proceeds stemming from loss or damage to the collateral. See Va.

Code Ann. § 8.9-306 (Michie 1991).

3 In their bankruptcy petition, the Houskas valued their personal property at $13,190, claiming all of it as exempt. The government has

indicted the Houskas for bankruptcy fraud in connection with this valuation, but that proceeding has no bearing on the determination of the

issues in this case.

 6
Collectively, the insurers paid the named mortgagee, Household, at

least $571,633.91,4 and in return, Household assigned the mortgage

to them. Thereafter, on March 22, 1994, the insurers filed a complaint

for declaratory judgment against the Houskas. The insurers alleged

that the Houskas intentionally burned the house and falsely testified

under oath as to the value of the destroyed property. For these reasons, the insurers asked the court to declare the policies void and the

insurers not liable to the Houskas under the policies.

Both insurance policies have a provision which mandates that all

claims be brought within two years of the date of loss. Although the

record indicates that by March of 1993 the bankruptcy trustee,

Maness, knew of the likely refusal of the insurance claim, at no time

during the two years following the loss did he attempt to bring a claim

on behalf of the estate. In December 1994, after the two year period

had ended, the district court urged the trustee to intervene because the

attorney for the Houskas sought leave to withdraw and the court

feared that the Houskas would be proceeding pro se. Maness filed a

motion to intervene; the court granted that motion on January 27,

1995.

The insurers moved for summary judgment against Trustee Maness

on the grounds that he had failed to bring suit within the two year

period required by the policy and was barred from recovery by the

Houskas' arson and fraud. The insurers also argued that, in any event,

the trustee had no interest in the insurance policies because they were

issued post-petition. Maness filed a cross motion for summary judgment. He maintained that his claim was timely and moreover, that as

the bankruptcy trustee, under this court's holding in Kremen v. Harford Mut. Ins. Co. (In re J.T.R. Corp.), 958 F.2d 602 (4th Cir. 1992)

(per curiam), he was not subject to the insurers' defenses of fraud and

arson that were available against the Houskas.

In ruling on the summary judgment motions, the district court held

that "[u]nder Virginia law, payments pursuant to a contract of insur-

_________________________________________________________________

4 The record is unclear as to exactly how much the insurers paid to

Household. The checks in the record and the accompanying cover letter

indicate a total of $571,633.91; the lower court opinion states that the

total amount was $679,316.75.

 7
ance protecting against damage to property are not considered to be

proceeds derived from the property itself . . . ." 184 B.R. at 501. For

this reason the court determined that Trustee Maness had no interest

in the proceeds of the American Bankers insurance policy, which had

been issued post-petition, and so granted summary judgment to American Bankers with regard to the proceeds of that policy. Although the

USF&G policy had also been issued post-petition, the court refused

to apply the same rule to it. Instead the court concluded that the

trustee had an interest in the USF&G policy because it was a "replacement policy" for the Home policy that became part of the bankruptcy estate at the time of petitioning. For this reason, the court

denied summary judgment to USF&G.5

Upon the motion of the trustee, the district court certified its order

for interlocutory appeal to this court pursuant to 28 U.S.C. § 1292(b)

(1994). Both insurers and the trustee then noted appeals, and we

agreed to consider the case.

II.

Our review of these summary judgment orders is de novo and we

view all evidence in the light most favorable to the non-moving party.

Pittman v. Nelms, 87 F.3d 116, 118 (4th Cir. 1996). The critical question in this case is whether the payouts of the USF&G and American

Bankers policies are the property of the bankruptcy estate. If the payouts are not the property of the bankruptcy estate, the trustee has no

interest in or right to those funds. On the other hand, if the payouts

are the property of the bankruptcy estate, the trustee does have an

interest in them and can make claim to them.

In determining what property is included in the bankruptcy estate,

we look initially at what property the debtors (the Houskas) possessed

at the time they filed their Chapter 11 petition (August 1991). "The

commencement of a case under [the Bankruptcy Code] creates an

estate. Such estate is comprised of . . . all legal or equitable interests

_________________________________________________________________

5 The court also ruled on various other arguments propounded by the

parties and the parties appeal those rulings. In view of our holding, we

need not reach those questions.

 8
of the debtor in property as of the commencement of the case." 11

U.S.C. § 541(a) (1994).

At the time the Houskas filed their Chapter 11 petition they

unquestionably owned the Home insurance policy. That policy thus

became an asset of their bankruptcy estate; debtors' insurance policies

clearly constitute "interests" under § 541(a) of the Bankruptcy Code.

A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.) (holding

that insurance policies existing at time of petition are property of

estate), cert. denied, 479 U.S. 876 (1986); Houston v. Edgeworth (In

re Edgeworth), 993 F.2d 51, 55 (5th Cir. 1993) (collecting cases); 2

Collier on Bankruptcy ¶ 362.04 [3] (Lawrence P. King, 15th ed.

1996) ("The prevailing view is that an insurance policy is property of

the estate . . . ."). However, the Home insurance policy was not in

effect at the time of the fire, and the policies that were in effect at the

time of the fire did not exist when the Houskas filed their Chapter 11

petition. Therefore we must determine whether insurance policies or

payouts from those policies that were not property of the bankruptcy

estate upon petitioning can later become estate property.

Generally, property not owned at the time of petition but only subsequently acquired by the debtor does not become property of the

bankruptcy estate. See Vogel v. Palmer (In re Palmer), 57 B.R. 332,

333-34 (Bankr. W.D. Va. 1986). There are limited exceptions to this

rule. Only two are arguably applicable here; both "[p]roceeds . . . of

or from property of the estate" and "[a]ny interest in property that the

estate acquires after the commencement of the case" can become part

of the estate post-petition. 11 U.S.C. §§ 541(a)(6), 541(a)(7). Thus to

prevail, the trustee must demonstrate that funds payable from the

insurance policies are either "proceeds" of the underlying property,

rather than just "proceeds" of the policies, or that the insurance policies themselves were property that the estate acquired after the commencement of the bankruptcy case.6

_________________________________________________________________

6 During oral argument, Maness suggested that § 541(a)(5) of the Bankruptcy Code provides a third avenue through which property acquired

post-petition could enter the estate. Under § 541(a)(5), "[a]ny interest in

property that would have been property of the estate if such interest had

been an interest of the debtor on the date of the filing of the petition, and

 9
Although the trustee claims that the estate became a co-insured on

the policies, he makes no claim that the estate, acting through its representative, acquired either policy. Nor does the trustee assert that

estate funds were used to purchase either policy. Therefore the only

way for Trustee Maness to claim an interest in the insurance payouts

is if those funds were "proceeds" of the destroyed house, which was

property of the estate, not merely proceeds of the USF&G and American Bankers insurance policies, which were not property of the estate.

The Supreme Court directed in Butner v. United States, 440 U.S.

48, 55 (1979), that:

Property interests are created and defined by state law.

Unless some federal interest requires a different result, there

is no reason why such interests should be analyzed differently simply because an interested party is involved in a

bankruptcy proceeding.

Although the Bankruptcy Code superseded the specific holding of

Butner, the Supreme Court has subsequently reiterated the Butner

approach. See Barnhill v. Johnson, 503 U.S. 393, 397-398 (1992)

("[T]ransfer" is a term governed by federal law, as defined in the

Bankruptcy Code, but "that definition in turn includes references to

parting with `property' and `interest in property.' In the absence of

any controlling federal law, `property' and `interests in property' are

creatures of state law.") See also Nobelman v. American Sav. Bank,

508 U.S. 324, 329 (1993) (referring to state law to determine the definition of a creditor's "rights" because the Bankruptcy Code does not

define the term) (specific holding superseded by statute); Ohio v.

Kovacs, 469 U.S. 274, 285-86 (1985) (O'Connor, J., concurring) (noting that whether state's interest in bankrupt's obligation to clean up

_________________________________________________________________

that the debtor acquires or becomes entitled to acquire within 180 days

after such date" will enter the estate post-petition. However this "180 day

rule" is strictly limited to property interests conveyed under particular

enumerated circumstances, such as inheritance, divorce, or payment

under a life insurance policy. Thus, § 541(a)(5) does not apply to this

case.

 10
hazardous waste is a lien on property, a perfected security interest, or

an unsecured claim depends on state law).

To summarize then, while federal law creates the bankruptcy

estate, Butner and the cases following it establish that state law,

absent a countervailing federal interest, determines whether a given

property falls within this federal framework. Thus, we must first

decide if a countervailing federal interest requires that we determine

property interests here in a way different from that mandated by state

law.

III.

Section 541(a)(6) of the Bankruptcy Code provides that the bankruptcy estate includes "proceeds" of estate property, without ever

defining "proceeds." The statute's legislative history indicates that the

term "[p]roceeds . . . is not used in a confining sense, as defined in

the Uniform Commercial Code . . . ." S. Rep. No. 989, 95th Cong.,

2d Sess. 83 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5869; H.R.

Rep. No. 595, 95th Cong., 1st Sess. 368 (1977), reprinted in 1978

U.S.C.C.A.N. 5963, 6324. Rather, "proceeds" "is intended to be a

broad term to encompass all proceeds of property of the estate. The

conversion in form of property of the estate does not change its character as property of the estate." Id.

Extrapolating from these pieces of legislative history, the Second

Circuit has concluded that § 541(a)(6) dictates that insurance payments be regarded as proceeds of the damaged property itself, not just

of the insurance policy. Bradt v. Woodlawn Auto Workers, F.C.U.,

757 F.2d 512, 515 (2d Cir. 1985) ("[T]he insurance payment for

repairs to an automobile that is property of the estate unquestionably

is also property of the estate."). Some courts, purportedly following

Bradt, have asserted that § 541 "supersedes state law." See In re Asay,

184 B.R. 265, 267 (Bankr. N.D. Tex. 1995). See also In re

Hoffmeister, 191 B.R. 875, 878-879 (D. Kan. 1996) (following Bradt

as alternative holding), aff'd, ___ F.3d ___ (10th Cir. 1996); Payne

v. Wood, 775 F.2d 202, 204 (7th Cir. 1985), cert. denied, 475 U.S.

1085 (1986).

It is not at all clear to us that the legislative history of § 541(a)(6)

supports this result. See Unsecured Creditors Comm. v. Marepcon

 11
Fin. Corp. (In re Bumper Sales, Inc.), 907 F.2d 1430, 1437 (4th Cir.

1990) (dismissing similar Congressional statement regarding interpretation of "proceeds" under 11 U.S.C. § 552 as "a vague and isolated

piece of legislative history"). We note that in another portion of the

legislative history, Congress stated that § 541 "is not intended to

expand the debtor's rights against others more than they exist at the

commencement of the case." S. Rep. No. 989, at 82, 1988

U.S.C.C.A.N. at 5868; H.R. Rep. No. 595, at 367, 1988 U.S.C.C.A.N.

at 6323.

Nor is it clear that Bradt and the cases following it really held that

§ 541(a)(6) required, as a matter of federal law even if state law provided to the contrary, that payments from insurance policies issued

post-petition be regarded as property of the bankruptcy estate just

because the property that those policies insured was property of the

estate. In Bradt itself the court concluded that state law required the

same result as that which the court believed to be mandated by § 541.

See Bradt, 757 F.2d at 514-15. Furthermore, nothing in Bradt or any

of the cases following it suggests that those cases involved insurance

policies issued post-petition. Rather, it appears that the insurance policies considered in Bradt (and its progeny) were issued pre-petition

and so the policies themselves constituted property of the bankruptcy

estate. Any payments from pre-petition policies are indisputably "proceeds" of estate property; these additional facts would make the holding of Bradt an unremarkable one.

Indeed, the only case squarely to have confronted policies issued

post-petition has held, under state law similar to that of Virginia, that

payouts from post-petition policies are merely proceeds of the policies, not proceeds of the underlying property, and therefore not property of the estate. See In re CS Associates, 161 B.R. 144, 147 (Bankr.

E.D. Pa. 1993) ("Under Pennsylvania law, an interest in the Debtor's

real property and an interest in the [hazard] insurance proceeds arising

from damages to that Property are two distinct things. Specifically,

Pennsylvania courts have consistently held that insurance contracts

are personal contracts of indemnity and that they protect the insured's

interest in the property, but that they are not an indemnity on the

property itself."), aff'd, 184 B.R. 458 (E.D. Pa. 1994).

In any event, we refuse to hold that § 541(a)(6) requires as a matter

of federal law, that payouts from insurance policies be regarded as

 12
proceeds of property of the bankruptcy estate merely because the

property insured is part of the bankruptcy estate. American common

law has long and firmly held that casualty payments from insurance

policies do not stand in the place of the damaged property. "It is well

established that . . . proceeds of a fire policy . .. [do] not arise from

property, but from a personal contract between insurer and insured."

4 Collier on Bankruptcy ¶ 541.12 (15th ed. 1996); Columbia Ins. Co.

v. Lawrence, 35 U.S. (10 Pet.) 507, 512 (1836) (citing "Lord Chancellor King, in Lynch v. Dalzell, (3 Bro.P.C. 497 s.c., 2 Marsh on Ins.

b. 4, ch. 4, p. 803) . . . [as] saying, `these policies are not insurances

of the specific things (goods) mentioned to be insured; nor do such

insurances attach to the realty, or in any manner go with the same, as

incident, . . . but they are only special agreements with the persons

insured against such loss or damage as they may sustain.'"); Hopkins

Ill. Elevator Co. v. Pentell (In re Pentell), 777 F.2d 1281, 1284 (7th

Cir. 1985) ("[T]he insurance proceeds are not considered to be

derived from the real property . . . ."). We think it unlikely that

§ 541(a)(6)'s mixed legislative history indicates a Congressional

intent to reject this extensive body of common law.

Thus we are left without any countervailing federal interest requiring that the term "proceeds" be defined differently than it would be

under state law.

IV.

Accordingly, we look to state law. See In re Estate of Medcare

HMO, 998 F.2d 436, 441 (7th Cir. 1993) ("[W]hen Congress has not

provided an explicit alternative to state law, we are mindful that the

Bankruptcy Code was written in the shadow of state law and conclude

that Congress intended state law to fill the interstices."). Specifically,

we examine Virginia law to determine if these insurance payouts are

proceeds of estate property or only proceeds of the policy. See, e.g.,

Fairfield v. United States (In re Ballard), 65 F.3d 367, 371 (4th Cir.

1995) (finding that Virginia property law determined whether creditors could reach proceeds of sale of jointly held estate property);

Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132, 136

(4th Cir. 1988) (holding that under Virginia law, corporation has equitable interest in assets of alter ego and therefore alter ego claim at

issue was "property of the estate" under § 541(a)(1)).

 13
Under Virginia law, payments made pursuant to insurance contracts protecting against damage to property are not proceeds derived

from the property itself. Thompson v. Gearheart, 119 S.E. 67, 69 (Va.

1923). See also Lynch v. Johnson, 84 S.E.2d 419, 422-23 (Va. 1954).

This holding accords with the body of common law referred to above,

defining the insurance contract as a personal contract between the

insurer and insured, totally separate from the insured property. See,

e.g., Columbia Ins. Co., 35 U.S. (10 Pet.) at 512; In re Pentell, 777

F.2d at 1284.

The district court recognized this well established Virginia law. On

the basis of it, the court correctly held that payouts from the American

Bankers policy on the Houskas' house were not proceeds derived

from the house itself, but only proceeds of a policy issued postpetition that never became part of the bankruptcy estate. Accordingly,

the court properly granted summary judgment to American Bankers.

Although the USF&G policy, like the American Bankers policy,

was not issued until long after the Houskas filed their bankruptcy

petition and a significant amount of time after the Houskas ceased

being debtors in possession, the district court found that the bankruptcy estate did have an interest in payouts from the USF&G policy.

The court reasoned that the Houskas' creditors could have reasonably

assumed that some insurance policy on the house continued in force,

similar in terms to the Home policy, which had been disclosed at the

first § 341 meeting in October of 1991. The court concluded that

because the USF&G policy covered the same property, to the same

extent, and was purchased through the same insurance agent as the

Home policy, it was a "replacement policy" and so the court should

treat it as if it were in fact the Home policy. According to the district

court, the Houskas bought the USF&G policy in order to benefit the

estate, feeling an obligation to maintain insurance protection at the

same level as it had been at the time of petitioning. 184 B.R. at 502.

Following this line of reasoning, the court held that the estate was, by

implication, a third party beneficiary of the USF&G policy.

Under Virginia law, if someone purchases an insurance policy with

the intent to benefit someone else, that third person does have a claim

on the policy's proceeds. See Va. Code Ann.§ 55-22 (Michie 1995);

Lynch, 84 S.E.2d at 423. However, this third party beneficiary doc-

 14
trine only applies when "parties to [the contract to benefit the third

party] `clearly and definitely intended' to confer a benefit upon him."

Copenhaver v. Rogers, 384 S.E.2d 593, 596 (Va. 1989) (citations

omitted) (holding that third party must be intended beneficiary of the

contract, not just beneficiary of the estate and that "[t]he essence of

a third-party beneficiary's claim is that others have agreed between

themselves to bestow a benefit upon the third party"). Thus, Virginia

law requires that both parties to the contract intend to benefit the third

person. Richmond Shopping Ctr., Inc. v. Wiley N. Jackson Co., 255

S.E.2d 518, 523 (Va. 1979) ("[T]he third party must clearly show that

the contracting parties definitely intended the contract to confer a benefit upon him; incidental beneficiaries may not sue thereon.") (citations omitted); Levine v. Selective Ins. Co. of America, 462 S.E.2d 81,

82-83 (Va. 1995) (finding Levines may be third party beneficiaries of

insurance contract, noting that even though contract made no mention

of the Levines, "all parties expressly understood that the beneficiaries

of such Policy were the Levines").

Here, nothing evidences the requisite intent by both parties to the

USF&G insurance contract. Even if the Houskas intended to benefit

the bankruptcy estate, USF&G did not. USF&G may not have even

known the Houskas were bankrupt. No mention of the estate appeared

on the policy as an insured or a loss payee, although the Houskas certainly could have asked USF&G to write the policy that way, given

that they were already Chapter 7 petitioners when they purchased the

policy. No extrinsic evidence suggests that the parties to the contract

agreed that anyone other than the Houskas and Household, the named

loss payee, would benefit. Therefore, under Virginia law, the trustee

had no more interest in the USF&G policy than in the American

Bankers policy. Accordingly, the district court erred in refusing to

grant summary judgment to USF&G.

V.

Although the trustee concedes that the district court erred in holding that the estate was a third-party beneficiary of the USF&G insurance policy, Appellee's Opening Brief at 23, the trustee nonetheless

claims the estate has an interest in both policies for two reasons.

 15
A.

First, the trustee relies on Kremen v. Harford Mut. Ins. Co. (In re

J.T.R. Corp.), 958 F.2d 602 (4th Cir. 1992) (per curiam). In J.T.R.,

Kenny, a principal of the bankrupt debtor, J.T.R., intentionally burned

J.T.R. property after the filing of J.T.R.'s Chapter 11 bankruptcy petition, but prior to the appointment of the bankruptcy trustee. When

Kenny committed the arson, J.T.R. was a debtor in possession and as

such the corporation became a fiduciary of its bankruptcy estate. The

filing of the corporation's bankruptcy petition had made Kenny "a

third party to the transaction." Id. at 605. Accordingly, the fraud

defenses that barred Kenny from recovery were not effective against

J.T.R.'s bankruptcy trustee.

J.T.R. is inapposite here because the insurance policy at issue in

J.T.R. had been issued on November 3, 1978, seven months before the

June 1979 filing of the Chapter 11 petition. Kremen v. Harford

Mutual Ins. Co. (In re J.T.R. Corp.), Bankr. No. 79-00999-L, Civ. No.

M 82-1159, at 1-2 (D. Md. Dec. 5, 1986). Thus, in J.T.R., unlike the

case at hand, the policy clearly constituted an asset of the estate.

J.T.R. does not suggest, let alone hold, that insurance policies purchased post-petition are somehow, because of the insured's arson,

converted into estate property. All that J.T.R. holds is that arson by

the debtor's principal after a bankruptcy petition has been filed does

not bar the bankruptcy estate from recovering under an insurance policy that is itself a part of the bankruptcy estate, even if the principal

would be barred from recovery under the policy.

Contrary to Trustee Maness' suggestion, our holding in this case

does not mean a bankruptcy trustee could never recover under a postpetition insurance policy that does not designate the estate as the

insured. A trustee could recover under such a policy, but the trustee

would have to do so through an equitable lien on the proceeds. When

pursuing an equitable lien, the trustee could, of course, only recover

if the named insured (the bankrupt) could recover. Thus, in the case

at hand, Trustee Maness' pursuit of an equitable lien would not enable

him to circumvent the arson and fraud defenses available against the

Houskas.

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B.

In addition to his J.T.R. argument, Trustee Maness claims that a

holding that payouts from post-petition insurance policies are not

assets of the bankruptcy estate would place on the bankruptcy trustee

the "impossible burden of policing whether the debtor has named the

bankruptcy trustee on an insurance policy [and] whether [the policy]

is [a] new one or a replacement one." Appellee's Opening Brief at 26.

Our holding does require a trustee to pay attention to the safety of

the bankruptcy estate and preservation of its assets. We do not

believe, however, that requiring the trustee to determine whether

estate property is insured by policies owned by the estate or those in

which the estate or trustee are named insureds imposes an extraordinary burden. See, e.g., Yadkin Valley Bank & Trust Co. v. Northwestern Bank (In re Hutchinson), 132 B.R. 827, 832 (Bankr. M.D.N.C.

1991) ("A trustee . . . has a duty to exercise reasonable diligence to

preserve and protect [estate] property."), aff'd and remanded, 5 F.3d

750, 758 (4th Cir. 1993). If the burden imposed is so onerous as to

defeat the intent and purpose of the Bankruptcy Code, then Congress

must act. But until Congress provides a federal definition of "proceeds" which clearly includes payouts of insurance policies issued

post-petition and purchased without using estate assets, a court must

look to state law. State law will determine if such payouts constitute

proceeds of estate property. See Butner, 440 U.S. at 35.

VI.

We therefore affirm the district court's denial of summary judgment

to American Bankers and reverse its grant of summary judgment to

USF&G. We remand the case for further proceedings consistent with

this opinion.

Nos. 95-2641 and 95-2643 - AFFIRMED AND REMANDED

No. 95-2642 - REVERSED AND REMANDED

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