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. e du/thir dc ir c uit_1999/206Filed July 19, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 98-3433

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF LIFE SERVICE SYSTEMS, INC., Appellant

v.

WESTMORELAND COUNTY MH/MR

On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil No. 97-cv-01852) District Judge: Honorable William L. Standish

Argued February 8, 1999

Before: SLOVITER, ROTH and STAPLETON, Circuit Judge s

(Filed: July 19, 1999)

F. Scott Gray Thomas M. Ferguson (Argued) Sable, Makoroff & Gusky Pittsburgh, PA 15219

Attorneys for Appellant

K. Lawrence Kemp (Argued) Kemp & Kemp New Kensington, PA 15068

Attorney for AppelleeOPINION OF THE COURT

SLOVITER, Circuit Judge.

In January 1997, Life Service Systems, Inc. ("LSS") filed a petition for voluntary bankruptcy under Chapter 1 1. LSS provided mental health services under contract with the Westmoreland County Mental Health and Mental Retardation Program (the "County"), a county-create d agency fulfilling the state-imposed obligation to a ddress the needs of the mentally ill population.

Before us is the appeal of the Official Committee o f Unsecured Creditors of Life Service Systems, Inc. ( the "Creditors"), from the decision by the District Cou rt holding
that LSS's title to certain assets divested to the County upon the termination of the contract between them. Although the parties have briefed the merits of the appeal, we determine that jurisdiction is the dispositive i ssue.

I.

Beginning in 1988, the County entered into a series of identically worded, one-year contracts with LSS (or its predecessor) to provide mental health services. Rat her than paying LSS on a fee-for-service basis, the County a greed to reimburse LSS for its expenses and LSS could retain a portion of its revenues up to a specified maximum. Permissible expenditures for which it was reimburse d included the purchase of fixed assets, which the co ntract defined as items costing at least $500 and either h aving an expected useful life exceeding one year or being re peatedly usable without material impairment of their physica l
condition.

The contract provided that "[t]itle to allfixed ass ets purchased in whole or in part with funds from this Agreement . . . shall vest during the term of this Agreement in [LSS] and shall automatically divest upon the termination or cancellation of the Agreement and ve st with County." App. at 118. In accordance with this title clause, LSS was prohibited during the term of the agreement or

2within ninety days after its termination or cancell ation from

selling, leasing, donating, or otherwise disposing of fixed assets purchased with funds under the agreement wit hout County approval. The contract further provided that , upon its expiration, the County could exercise one of th ree options regarding the assets:

A. Take possession of said fixed assets and reimburse any other funding sources accordin g to their percentage contribution based upon fair mark et value as determined by an independent appraisal;

B. Direct that said fixed assets be sold pu r suant to an independent appraisal reflecting an accep table fair market value in accordance with [State law] with the proceeds of the sale retained by the County;

C. Allow retention by [LSS] upon proport io nate payment to the County of the share contribut ed by the County as determined by the fair market valu e in accordance with an independent appraiser. .

. .

App. at 118-19; see 55 Pa. Code S 4300.106(c).

Despite the contract's procedure for divesting titl e, Pennsylvania regulations governing the provision of mental health services state that, "[i]f the provider hold s title to the asset, the provider may pledge the assets as collat eral for loans necessary to the agency." 55 Pa. Code S 4300. 106(d). Consequently, LSS obtained three loans for building renovations in 1995 from National City Bank of Pennsylvania (the "Bank"), and used some of the fix ed assets for collateral, as a result of which the Ban k possesses an undisputed security interest in existi ng and future-acquired equipment.

At the time LSS filed for bankruptcy in January 199 7, it was in the middle of its contract with the County, which was due to expire June 30, 1997. LSS continued to p rovide services to the County under the contract as a debt or in possession. The County elected to end the contractu al relationship with LSS at the conclusion of that ter m, terminated the agreement as of June 1997, and contr acted with another company to provide the services LSS ha d provided. The County filed a Motion for Relief From Stay

3later that same month, by which it sought a determi nation

that title to certain fixed assets is now vested in the County and sought their possession. Both the Bank and the Creditors objected.

After a hearing on the motion, the Bankruptcy Court first concluded that although LSS had title to the fixed assets at the time of filing, that title was divested after J une 30, 1997, when the contract terminated. It held that se ction 541(a) of the Bankruptcy Code1 does not give the es tate more than the debtor had at the time of the filing, which, in this case, was title that would divest upon the termination of the agreement. The court next held t hat the County did not have a "secured" interest in the fix ed assets within the contemplation of the Uniform Commercial Code, because the purpose of vesting "title" in thefixed assets in the County was not to secure payment or performance of any obligation owed to the County but to ensure tha t the fixed assets were available for use by any other pr ovider of the necessary mental health services with whom the County might contract in the future. The Bankruptcy Court finally concluded that the Bank could enforce its p erfected security interest against the County, so the County would receive the fixed assets subject to that interest.

Both the Creditors and the County appealed to the District Court, invoking jurisdiction pursuant to 2 8 U.S.C. S 158(a) for review of what the District Court term ed a "final

order."

On the Creditors' appeal, the District Court distin guished
between the status of the fixed assets listed in th e Fixed Asset Ledger and the status of the motor vehicles l isted in
the Motor Vehicle chart of the same exhibit. As to the

___________________________________________________ ______________

1. Section 541(a)(1) provides:

(a) The commencement of a case under section 3 01, 302, or 303 of
this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) an d (c)(2) of this section, all legal or equitable interests of the debt or in property as of

the

commencement of the case.

11 U.S.C. S 541(a)(1).

4former, the court affirmed the Bankruptcy Court's

determination that, at the termination of the contr act, title in the property which had been purchased with contr act funds vested in the County. As to the motor vehicle s, the District Court concluded that there was a question of fact as to whether those motor vehicles were in fact pur chased
with funds received from the contract or with other funds. Therefore, the court remanded the case to the Bankr uptcy Court for further proceedings, including an evident iary hearing on that issue.

On the County's appeal with respect to the order regarding the Bank's rights as to the fixed assets, the District Court rejected the County's arguments and agreed with the Bankruptcy Court's disposition that the Ba nk had an enforceable security interest. In conclusion, th e District Court affirmed the Bankruptcy Court's decision for the most part and remanded for factual findings regardi ng whether the motor vehicles were purchased in whole or in part with the County's funds.

The Creditors, but not the County, appeal. The Cred itors argue that both the Bankruptcy Court and the Distri ct Court erred in "failing to consider the status of L SS as debtor and trustee as a hypothetical lien creditor under 11 U.S.C. S 544(a)(1) and (2), with a judicial lien ag ainst all `fixed assets.' " Under 11 U.S.C. S 1107(a), the de btor in possession has almost all of the rights, powers, an d duties
of a trustee.2 The Creditors contend that it was er ror to
hold that the debtor was divested of title in thefi xed assets on termination of the contract. They also seek an evidentiary hearing on the County's interest in the fixed assets (in addition to the hearing ordered on the m otor vehicles), i.e., whether the items listed were purc hased in whole or in part with the County's funds.

II.

Although none of the parties has questioned our

___________________________________________________ ______________

2. At the outset of the bankruptcy, LSS continued i ts affairs as debtor in possession. However, by an order of November 7, 199 7, a Chapter 11 trustee was approved in the case.

5jurisdiction to hear this appeal, we have an indepe ndent

obligation to ensure that appellate jurisdiction is present. See F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 10 3 (3d Cir. 1988).

Under 28 U.S.C. S 158(d), the courts of appeals hav e jurisdiction over appeals from "all final decisions
, judgments, orders, and decrees entered" by a distri ct court reviewing a bankruptcy court decision under 28 U.S. C. S 158(a). Generally speaking, "when the bankruptcy court issues what is indisputably a final order, and the district court issues an order affirming or reversing, the d istrict court's order is also a final order." In re Porter, 961 F.2d 1066, 1072 (3d Cir. 1992). However, where the distr ict court does not merely affirm or reverse and instead remands the case to the bankruptcy court, the final ity of
the order is less clear.

Most courts of appeals analyze the jurisdictionalfi nality of a district court's remand by considering the ban kruptcy court's responsibility on remand. See In re Lopez, 116 F.3d 1191, 1192 (7th Cir. 1997) (citing cases from eight other circuits). If the bankruptcy court's actions will b e"purely ministerial in character," such as computing prejud gment interest according to an undisputed rate and time p eriod, then the remanded proceedings are unlikely to engen der further appeals and the order is final. Id.

This court has frequently noted that we have "taken a flexible, practical approach to interpreting thefin ality requirement in bankruptcy cases." In re Blue Coal C orp., 986 F.2d 687, 689 (3d Cir. 1993); accord F/S Airlea se II, 844 F.2d at 103 (describing a "more pragmatic and l ess technical way [of viewing finality] in bankruptcy c ases than in other situations" (internal quotation marks omit ted)). This entails balancing "a general reluctance to exp and traditional interpretations regarding finality and a desire to effectuate a practical termination of the matter be fore us." In re Meyertech Corp., 831 F.2d 410, 414 (3d Cir. 1 987).

In In re Market Square Inn, Inc., 978 F.2d 116, 120 (3d Cir. 1992), we applied this flexible approach tofin d appellate jurisdiction over the district court's or der holding
that a lease between the debtor and its landlord su rvived

6after the filing of the bankruptcy. In so holding, we quoted

from our earlier opinion in Wheeling-Pittsburgh Ste el Corp. v. McCune, 836 F.2d 153, 158 (3d Cir. 1987), where we noted that "bankruptcy cases `frequently involve pr otracted proceedings with many parties participating,' " and observed that, "[t]o avoid the waste of time and re sources that might result from viewing discrete portions of the action only after a plan of reorganization is appro ved, courts have permitted appellate review of orders th at in other contexts might be considered interlocutory." Id. at 158 (quoting In Re Amatex Corp., 755 F.2d 1034, 103 9 (3d Cir. 1985)) (internal quotation marks omitted).

We consider four factors to determine whether a dis trict court's order is final and reviewable: "the impact upon the assets of the bankrupt estate, the necessity for fu rther factfinding on remand, the preclusive effects of our de cision on the merits of further litigation, and whether the i nterest of judicial economy would be furthered." In re Blue Co al Corp., 986 F.2d at 689 (internal quotation marks omitted). Of these, the "most important" factor is the impact on the assets of the estate. In re Market Square Inn, Inc. , 978 F.2d at 120 (internal quotation marks omitted).

Our decision in F/S Airlease II is illustrative. In that case, a company that had leased back a Boeing airpl ane that it had previously sold to the lessor filed for bankruptcy under Chapter 11 of the Bankruptcy Code. See 844 F. 2d at 101. Some time thereafter, the bankruptcy court hel d a hearing and approved a lease of the airplane that h ad been negotiated by a broker. Seven months after that app roval, the broker filed a motion for a nunc pro tunc appoi ntment as broker, with an attendant claim for administrati ve expenses. The bankruptcy court approved the request s, but the district court affirmed only the appointment an d remanded for substantiation of the requested expens es. The creditor appealed the appointment. Id. at 102-03.

We considered, and upheld, our appellate jurisdicti on. We noted that "the order has a significant impact o n the

assets of the estate" because the amount the broker sought constituted a "substantial portion" of the estate's assets, approval of the award to the broker would "severely affect the rights of other creditors," and "delay of the f inal

7resolution of the matter could have an adverse impa ct on

the debtor's successful reorganization." Id. at 104 . Although
the district court had remanded for further fact-fi nding, we held that did not affect our jurisdiction over the portion of its order approving the nunc pro tunc employment. T he remand was only for the matter of the amount of the broker's compensation, and did not "relate[ ] to a central issue on appeal," the propriety of the retroactive appointment. Id. at 104 n.4 (quoting In re Stanton, 766 F.2d 1283, 1287 (9th Cir. 1985)).

Our primary inquiry, therefore, must be directed to the impact of the order at issue on the estate. In this case, the Creditors are appealing the District Court's determ ination that, at the termination of the County's contract w ith LSS, title in property which had been purchased with con tract funds vested in the County. The issue that the Dist rict Court remanded to the Bankruptcy Court is whether t he motor vehicles were also purchased with contract fu nds. At oral argument, we inquired of counsel for the Credi tors regarding the potential impact on the estate, and c ounsel, rather than asserting that the impact on the estate would be substantial, candidly replied that the appeal wa s precautionary. Based on our review of this case, we cannot conclude that the impact on the estate will be subs tantial if the remand is completed before the issue of the County's title in the property is reviewed.

Moreover, even if the furniture were not subject to the Bank's perfected security interest, this case diffe rs from cases such as In re Market Square Inn, Inc. in whic h we took jurisdiction. In that case, the debtor's busin ess had a chance of continuing in the reorganization only if the debtor retained the lease in question. 978 F.2d at 120-21. By contrast, here the County has awarded the mental he alth services contract to another entity and presumablyf iled its motion for relief from the stay so that the new con tractor could employ those assets. Inasmuch as LSS no longe r requires the assets in order to continue in its for mer business with the County, this case does not fall i nto the category of cases where an immediate appeal is nece ssary because of the impact of the District Court's rulin g on the possibility of a viable reorganization.

8Admittedly, were we to adopt the Creditors' argumen t,

based on the scope of the power of a hypothetical j udicial lien creditor under section 544, we would obviate t he need for further fact-finding by the Bankruptcy Court. Y et the fact-finding that is the subject of the District Co urt's remand to the bankruptcy court requires more than a "purely ministerial" function. See, e.g., United St ates Trustee v. Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556-57 (3d Cir. 1999) (citing In re Lopez, 116 F.3d 1191, 1192 (7th Cir. 1997)). On the other hand, wer e we to decide the merits issue in favor of the County, we would not necessarily obviate further appeals following t he bankruptcy court's determination of the County's sh are of the motor vehicle purchases, and the litigation cou ld be protracted.

Finally, it appears likely that our failure to deci de the Creditors' appeal at this time will not prevent the reorganization from proceeding, if that is possible . Nor will it result in a waste of judicial time and resources . This is in sharp contrast to the decisions in which we uphe ld our jurisdiction. For example, in In re Market Square I nn, Inc. we observed that reversing the bankruptcy court's d ecision would foreclose any possible reorganization because the lease had a substantial impact on the estate and th e debtor would be unable to obtain new financing for its bus iness without the lease. 978 F.2d at 120-21. Similarly, i n F/S Airlease we opined that the effect of failing to ta ke jurisdiction at that stage could be to transform th e Chapter 11 reorganization into a Chapter 7 involuntary bank ruptcy. F/S Airlease, 844 F.2d at 104.

Here, the furniture remains subject to National Cit y Bank's perfected security interest and will not be distributed to another creditor. Moreover, accordin g to the County, only two parties have an interest in the mo tor vehicles. There is, therefore, a lesser danger of w asting the court's or the parties' time and resources if they move forward in the Bankruptcy Court to resolve the issu e of the source of the funds used to purchase the motor vehi cles. On balance, we conclude that the District Court ord er appealed from is not final under section 158(d).

9III.

Accordingly, we will dismiss the appeal for lack of jurisdiction.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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