Opinion ID: 3011010
Heading Depth: 2
Heading Rank: 1

Heading: Take possession of said fixed assets and

Text: 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 3 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 _________________________________________________________________
(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). 4 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.