Opinion ID: 769339
Heading Depth: 3
Heading Rank: 1

Heading: Property Interest Extinguished After Judgment

Text: 24 The district court concluded that the registry funds were never property of the bankruptcy estate, because the Pettits'property interest in the funds was extinguished once the jury found in favor of the Trust Funds and the district court entered judgment against the Pettits. 25 Although the question whether an interest claimed by the debtor is property of the estate is a federal question to be decided by federal law, bankruptcy courts must look to state law to determine whether and to what extent the debtor has any legal or equitable interests in property as of the commencement of the case. See Butner v. United States, 440 U.S. 48, 54-55 (1979). Under California law, property is defined as the thing of which there may be ownership. Cal. Civ. Code. S 654. The ownership of a thing is the right of one or more persons to possess and use it to the exclusion of others. Id. 26 By agreement of the parties, the registry funds at issue in this case were being held by the district court as judgment security in the event the jury ruled against the Pettits at trial. Before trial and entry of the adverse judgment by the district court, the Pettits had a contingent property interest in the registry funds. See, e.g., Tolz v. Lockwood (In re Mount Claire, Inc.), 131 B.R. 231, 233 (S.D. Fla. 1991) (concluding that when state court determined registry funds to be the sole property of the creditor and ordered their release, debtor's interest in the funds was extinguished); Carlson v. Farmers Home Admin. (In re Newcomb), 744 F.2d 621, 625-27 (8th Cir. 1984) (holding that debtor lost all interest in funds held in escrow for judgment security pending appeal when lower court judgment was affirmed). The contingency was that the jury would find in their favor. If the jury had indeed found in favor of the Pettits, the registry funds would not have been needed to satisfy an adverse judgment and, in all likelihood, legal and equitable title over the funds would have reverted to the Pettits. 27 Unfortunately for the Pettits, however, this contingency never came to pass. The jury ruled against them. Thus, when judgment was entered in favor of the Trust Funds, the Pettits' contingent interest was extinguished. See, e.g., Mount Claire, 131 B.R. at 233. Once this interest was extinguished, it is clear that under California's definition of property, as well as under any general theory of ownership, the registry funds no longer belonged to the Pettits. 28 The Pettits and the Trust Funds agreed to leave approximately $523,000 in the court's registry to secure payment to the Trust Funds if they prevailed at trial. The Trust Funds did prevail and, after judgment was entered against the Pettits, the Pettits had none of the rights we associate with legal or equitable ownership: they could not possess the funds, use the funds, sell the funds, loan the funds, give away the funds, encumber the funds, or exclude others from using the funds. See, e.g., Moore v. Regents of the Univ. of Cal., 51 Cal. 3d 120, 165 (1990) (noting that the concept of property is often said to refer to a bundle of rights that may be exercised with respect to that object--principally the rights to possess the property, to use the property, to exclude others from the property, and to dispose of the property by sale or by gift.) (internal quotations and citations omitted). After judgment was entered, the funds rightfully belonged to the Trust Funds as the prevailing party at trial. 29 Because the Pettits retained no legal or equitable ownership interest over the funds once judgment was entered, the funds never became property of the estate and were never subject to the automatic stay under section 362. Accordingly, the Trust Funds acted perfectly appropriately in obtaining the check from the clerk of the court on May 22, 1996. 30 In contrast to our holding and that of the district court, the bankruptcy court concluded that the funds were indeed property of the bankruptcy estate and noted that:The salient fact about the deposit's status as property of the estate is that if the Pettits and North Bay ultimately were to prevail in the district court litigation, the funds that were on deposit in the registry of the court would have to be paid to the Pettits and/or North Bay. That constitutes an interest in property within the meaning of 11 U.S.C. S 541. 31 The bankruptcy court also stated that the funds were property of the Pettits' estate when the bankruptcy petitions were filed on the evening of May 21, 1996, because it is settled that the actual transfer of funds from the registry of the court did not occur until after the drawee bank honored the district court clerk's check. This reasoning assumes that the registry funds were property of the estate when the clerk issued the check on May 22, 1996. 32 The bankruptcy court's reasoning was incomplete. While the court correctly stated that the Pettits had an interest in the funds before the pending trial, it failed to take the next step and analyze the property interests after judgment was entered against them. The time period relevant to assessing what interest, if any, the Pettits had in the registry funds was at the time the bankruptcy petitions were filed. The Pettits did not file their bankruptcy petitions until May 21, 1996, over a month after judgment was entered. By this date, as discussed above, the Pettits had lost at trial and their contingent interest in the funds had been extinguished. The funds never became property of the bankruptcy estate. The contrary determination by the bankruptcy court was incorrect, and the district court properly reversed. 33 The Pettits advance four arguments as to why the funds remained their property despite entry of the adverse judgment. All are unpersuasive. First, the Pettits argue that the entry of judgment against them following the jury's verdict did not extinguish their property interest in the registry funds because the parties never agreed that the Pettits' interest in the funds would be extinguished in this instance. We reject this argument because, although the parties may not have agreed specifically that the Pettits' interest would be extinguished, they did agree that the funds would serve as security for an adverse judgment. It was not necessary for the Pettits and the Trust Funds to agree to any further details regarding ownership or use of the funds. 34 Second, the Pettits argue that their property interest could not have been extinguished after entry of judgment, because they could have used the funds as a portion of a new supersedeas bond for the appeal of the Northern District judgment. While this argument has some initial appeal, it is ultimately not persuasive. The funds could have been used as a supersedeas bond only if the district court granted the Pettits' request for a stay pending appeal and allowed the funds to be so used. See Fed. R. Civ. P. 62 (providing that [t]he stay is effective when the supersedeas bond is approved by the court.). If this had occurred, the district court would have created a new contingent property interest in favor of the Pettits. This did not happen. Counsel for the Pettits withdrew the request for a stay of execution, and the district court never considered whether the funds could or would be used as a bond. There was no contingent interest created. 35 Third, the Pettits argue that, because the district court allowed them to withdraw approximately $200,000 from the original $700,000 deposited in the court's registry to help with legal fees, the Pettits must have had some property interest in the funds. This argument is not helpful to the Pettits because the district court allowed them to withdraw these funds before trial and before judgment was entered against them. 36 Finally, the Pettits appear to argue that the funds were not actually judgment security. This argument is without merit. Judge Illston, the Trust Funds, and the Pettits all referred to the funds, at one point or another, as security,  and thereis no doubt that this was what the funds were to be used for. 37 In sum, the Pettits' interest in the registry funds was extinguished upon entry of judgment against them and, thus, when they filed for bankruptcy under Chapter 11, the funds were no longer property of their estate. The Trust Funds, therefore, did not violate the automatic stay under section 362 by obtaining and retaining the funds, and the district court properly reversed the order of the bankruptcy court. 38