1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-19-1999

Official Committe v. Westmorelandd Cty

Precedential or Non-Precedential:

Docket 98-3433

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Recommended Citation

"Official Committe v. Westmorelandd Cty" (1999). 1999 Decisions. Paper 206.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/206
Filed 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 Judges 

(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 Appellee 
OPINION OF THE COURT 

SLOVITER, Circuit Judge. 

In January 1997, Life Service Systems, Inc. ("LSS") filed 

a petition for voluntary bankruptcy under Chapter 11. LSS 

provided mental health services under contract with the 

Westmoreland County Mental Health and Mental 

Retardation Program (the "County"), a county-created 

agency fulfilling the state-imposed obligation to address the 

needs of the mentally ill population. 

Before us is the appeal of the Official Committee of 

Unsecured Creditors of Life Service Systems, Inc. (the 

"Creditors"), from the decision by the District Court 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 issue. 

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. Rather than 

paying LSS on a fee-for-service basis, the County agreed 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 reimbursed 

included the purchase of fixed assets, which the contract 

defined as items costing at least $500 and either having an 

expected useful life exceeding one year or being repeatedly 

usable without material impairment of their physical 

condition. 

The contract provided that "[t]itle to allfixed assets 

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 vest with 

County." App. at 118. In accordance with this title clause, 

LSS was prohibited during the term of the agreement or 

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within ninety days after its termination or cancellation from 

selling, leasing, donating, or otherwise disposing of fixed 

assets purchased with funds under the agreement without 

County approval. The contract further provided that, upon 

its expiration, the County could exercise one of three 

options regarding the assets: 

 A. Take possession of said fixed assets and

 reimburse any other funding sources according to their 

 percentage contribution based upon fair market value 

 as determined by an independent appraisal; 

 B. Direct that said fixed assets be sold pur suant to 

 an independent appraisal reflecting an acceptable 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 ionate 

 payment to the County of the share contributed by the 

 County as determined by the fair market value 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 title, 

Pennsylvania regulations governing the provision of mental 

health services state that, "[i]f the provider holds title to the 

asset, the provider may pledge the assets as collateral 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 fixed 

assets for collateral, as a result of which the Bank 

possesses an undisputed security interest in existing and 

future-acquired equipment. 

At the time LSS filed for bankruptcy in January 1997, it 

was in the middle of its contract with the County, which 

was due to expire June 30, 1997. LSS continued to provide 

services to the County under the contract as a debtor in 

possession. The County elected to end the contractual 

relationship with LSS at the conclusion of that term, 

terminated the agreement as of June 1997, and contracted 

with another company to provide the services LSS had 

provided. The County filed a Motion for Relief From Stay 

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later that same month, by which it sought a determination 

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 Courtfirst 

concluded that although LSS had title to the fixed assets at 

the time of filing, that title was divested after June 30, 

1997, when the contract terminated. It held that section 

541(a) of the Bankruptcy Code1 does not give the estate 

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 that the 

County did not have a "secured" interest in the fixed 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 that the 

fixed assets were available for use by any other provider 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 perfected 

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 28 U.S.C. 

S 158(a) for review of what the District Court termed a "final 

order." 

On the Creditors' appeal, the District Court distinguished 

between the status of the fixed assets listed in the Fixed 

Asset Ledger and the status of the motor vehicles listed 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) and (c)(2) of this 

section, 

 all legal or equitable interests of the debtor in property as of 

the 

 commencement of the case. 

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

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former, the court affirmed the Bankruptcy Court's 

determination that, at the termination of the contract, title 

in the property which had been purchased with contract 

funds vested in the County. As to the motor vehicles, the 

District Court concluded that there was a question of fact 

as to whether those motor vehicles were in fact purchased 

with funds received from the contract or with other funds. 

Therefore, the court remanded the case to the Bankruptcy 

Court for further proceedings, including an evidentiary 

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 Bank had 

an enforceable security interest. In conclusion, the District 

Court affirmed the Bankruptcy Court's decision for the 

most part and remanded for factual findings regarding 

whether the motor vehicles were purchased in whole or in 

part with the County's funds. 

The Creditors, but not the County, appeal. The Creditors 

argue that both the Bankruptcy Court and the District 

Court erred in "failing to consider the status of LSS as 

debtor and trustee as a hypothetical lien creditor under 11 

U.S.C. S 544(a)(1) and (2), with a judicial lien against all 

`fixed assets.' " Under 11 U.S.C. S 1107(a), the debtor in 

possession has almost all of the rights, powers, and duties 

of a trustee.2 The Creditors contend that it was error to 

hold that the debtor was divested of title in thefixed assets 

on termination of the contract. They also seek an 

evidentiary hearing on the County's interest in thefixed 

assets (in addition to the hearing ordered on the motor 

vehicles), i.e., whether the items listed were purchased 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 its affairs as debtor in 

possession. However, by an order of November 7, 1997, a Chapter 11 

trustee was approved in the case. 

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jurisdiction to hear this appeal, we have an independent 

obligation to ensure that appellate jurisdiction is present. 

See F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 103 (3d Cir. 

1988). 

Under 28 U.S.C. S 158(d), the courts of appeals have 

jurisdiction over appeals from "all final decisions, 

judgments, orders, and decrees entered" by a district 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 district 

court's order is also a final order." In re Porter, 961 F.2d 

1066, 1072 (3d Cir. 1992). However, where the district 

court does not merely affirm or reverse and instead

remands the case to the bankruptcy court, the finality of 

the order is less clear. 

Most courts of appeals analyze the jurisdictionalfinality 

of a district court's remand by considering the bankruptcy 

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 be"purely 

ministerial in character," such as computing prejudgment 

interest according to an undisputed rate and time period, 

then the remanded proceedings are unlikely to engender 

further appeals and the order is final. Id. 

This court has frequently noted that we have "taken a 

flexible, practical approach to interpreting thefinality 

requirement in bankruptcy cases." In re Blue Coal Corp., 

986 F.2d 687, 689 (3d Cir. 1993); accord F/S Airlease II, 

844 F.2d at 103 (describing a "more pragmatic and less 

technical way [of viewing finality] in bankruptcy cases than 

in other situations" (internal quotation marks omitted)). 

This entails balancing "a general reluctance to expand 

traditional interpretations regarding finality and a desire to 

effectuate a practical termination of the matter before us." 

In re Meyertech Corp., 831 F.2d 410, 414 (3d Cir. 1987). 

In In re Market Square Inn, Inc., 978 F.2d 116, 120 (3d 

Cir. 1992), we applied this flexible approach tofind 

appellate jurisdiction over the district court's order holding 

that a lease between the debtor and its landlord survived 

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

from our earlier opinion in Wheeling-Pittsburgh Steel Corp. 

v. McCune, 836 F.2d 153, 158 (3d Cir. 1987), where we 

noted that "bankruptcy cases `frequently involve protracted 

proceedings with many parties participating,' " and

observed that, "[t]o avoid the waste of time and resources 

that might result from viewing discrete portions of the 

action only after a plan of reorganization is approved, 

courts have permitted appellate review of orders that in 

other contexts might be considered interlocutory." Id. at 

158 (quoting In Re Amatex Corp., 755 F.2d 1034, 1039 (3d 

Cir. 1985)) (internal quotation marks omitted). 

We consider four factors to determine whether a district 

court's order is final and reviewable: "the impact upon the 

assets of the bankrupt estate, the necessity for further factfinding on remand, the preclusive effects of our decision on 

the merits of further litigation, and whether the interest of 

judicial economy would be furthered." In re Blue Coal 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 airplane 

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 held a 

hearing and approved a lease of the airplane that had been 

negotiated by a broker. Seven months after that approval, 

the broker filed a motion for a nunc pro tunc appointment 

as broker, with an attendant claim for administrative 

expenses. The bankruptcy court approved the requests, but 

the district court affirmed only the appointment and 

remanded for substantiation of the requested expenses. The 

creditor appealed the appointment. Id. at 102-03. 

We considered, and upheld, our appellate jurisdiction. 

We noted that "the order has a significant impact on 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 final 

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resolution of the matter could have an adverse impact on 

the debtor's successful reorganization." Id. at 104. Although 

the district court had remanded for further fact-finding, we 

held that did not affect our jurisdiction over the portion of 

its order approving the nunc pro tunc employment. The 

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 determination 

that, at the termination of the County's contract with LSS, 

title in property which had been purchased with contract 

funds vested in the County. The issue that the District 

Court remanded to the Bankruptcy Court is whether the 

motor vehicles were also purchased with contract funds. At 

oral argument, we inquired of counsel for the Creditors 

regarding the potential impact on the estate, and counsel, 

rather than asserting that the impact on the estate would 

be substantial, candidly replied that the appeal was 

precautionary. Based on our review of this case, we cannot 

conclude that the impact on the estate will be substantial 

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 differs from 

cases such as In re Market Square Inn, Inc. in which we 

took jurisdiction. In that case, the debtor's business 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 health 

services contract to another entity and presumablyfiled its 

motion for relief from the stay so that the new contractor 

could employ those assets. Inasmuch as LSS no longer 

requires the assets in order to continue in its former 

business with the County, this case does not fall into the 

category of cases where an immediate appeal is necessary 

because of the impact of the District Court's ruling on the 

possibility of a viable reorganization. 

 8 
Admittedly, were we to adopt the Creditors' argument, 

based on the scope of the power of a hypothetical judicial 

lien creditor under section 544, we would obviate the need 

for further fact-finding by the Bankruptcy Court. Yet the 

fact-finding that is the subject of the District Court's 

remand to the bankruptcy court requires more than a

"purely ministerial" function. See, e.g., United States 

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, were we to 

decide the merits issue in favor of the County, we would 

not necessarily obviate further appeals following the 

bankruptcy court's determination of the County's share of 

the motor vehicle purchases, and the litigation could be 

protracted. 

Finally, it appears likely that our failure to decide 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 upheld our 

jurisdiction. For example, in In re Market Square Inn, Inc. 

we observed that reversing the bankruptcy court's decision 

would foreclose any possible reorganization because the 

lease had a substantial impact on the estate and the debtor 

would be unable to obtain new financing for its business 

without the lease. 978 F.2d at 120-21. Similarly, in F/S 

Airlease we opined that the effect of failing to take 

jurisdiction at that stage could be to transform the Chapter 

11 reorganization into a Chapter 7 involuntary bankruptcy. 

F/S Airlease, 844 F.2d at 104. 

Here, the furniture remains subject to National City 

Bank's perfected security interest and will not be 

distributed to another creditor. Moreover, according to the 

County, only two parties have an interest in the motor 

vehicles. There is, therefore, a lesser danger of wasting the 

court's or the parties' time and resources if they move 

forward in the Bankruptcy Court to resolve the issue of the 

source of the funds used to purchase the motor vehicles. 

On balance, we conclude that the District Court order 

appealed from is not final under section 158(d). 

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III. 

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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