Opinion ID: 541385
Heading Depth: 1
Heading Rank: 2

Heading: the bankruptcy trustee's conveyance of the dock system

Text: 23 As an initial matter, the Court notes that the Bankruptcy Trustee's attempted abandonment of the Dock System is not an abandonment as contemplated by law, but is a purported sale of property of the estate. Abandonment of property by a bankruptcy trustee is treated in 11 U.S.C. Sec. 554. Section 554 provides that the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. 11 U.S.C. Sec. 554(a). In the instant case, the Dock System obviously was not burdensome or of inconsequential value to the estate, as the Bankruptcy Trustee received $255,000, which was placed in a segregated account, and a reduction in several proofs of claim filed against the estate in exchange for the Dock System. This bargained-for exchange is in the nature of a sale, not an abandonment. 24
25 The Bond Trustee contends that the debtor's lack of a property interest in the Dock System precluded the district court from exercising jurisdiction to approve the so called abandonment of the Dock System to Atlantic. Moreover, if the debtor had no interest in the Dock System, the Bankruptcy Trustee would have had nothing to abandon. 26 It is fundamental that the bankruptcy estate must have an interest in property as of the commencement of the case in order for the bankruptcy trustee to dispose of that interest. In re Continental Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir.1986) (Sec. 363(b) sale of assets outside the ordinary course of business is limited to assets of the estate). The bankruptcy estate consists only of the interests in property which the debtor had at the commencement of the case. Cross Electric, 664 F.2d 1218, 1220 (4th Cir.1981) (estate includes whatever property interests the debtor had at the commencement of the case); Jones, 768 F.2d 923, 927 (7th Cir.1985) (estate's rights in debtor's property limited to those rights had by debtor). Inherent in the concept of the bankruptcy estate is that the estate consists of the sum total of the debtor's property rights as of the commencement of the case, no more or no less. Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th Cir.1984). Consequently, in determining whether the bankruptcy trustee had the power to dispose of property, it is the Court's task to determine the nature and extent of the debtor's interest in property. 27 In examining the record, we are hard pressed to find that the Associates possessed a property interest in the Dock System which could have entitled the Bankruptcy Trustee to convey the Dock System to Atlantic. Section 3 of the Second Amendment to the Master Lease provides that: 28 The Authority shall acquire and construct a public marina (the Marina) to be operated at Patriot's Point and the Authority shall own the Marina as part of the Project.... The Marina ... shall remain the sole and exclusive property of the Authority, subject to the [Bondholders'] statutory lien and Trust Estate created to secure the Bonds. 29 Joint Appendix at 168 (emphasis added). This provision explicitly places ownership of the Marina, including the Dock System, in the hands of the Authority subject to a statutory lien in favor of the Bondholders. 30 The Bankruptcy Trustee argues that the Associates had an equitable interest arising by implication from its contractual assumption of the obligations, liabilities, and responsibilities of the Authority. Appellee's Brief at 23. It is significant that the Bankruptcy Trustee does not assert that the Associates' interest in the Dock System amounted to anything more than this equitable interest. As the Bankruptcy Trustee purportedly conveyed the entire Dock System to Atlantic, the Bankruptcy Trustee appears to argue that the Associates' equitable interest in the Dock System entitled him to convey the Dock System in its entirety. 31 However, this theory is wholly inconsistent with the concept of the bankruptcy estate and the Bankruptcy Trustee's rights with respect to estate property. Upon the commencement of the bankruptcy case, only the debtor's interest in property becomes property of the estate, and the estate's rights in the property are limited to the rights held by the debtor. Cross Electric, 664 F.2d at 1220; Jones, 768 F.2d at 927. The Bankruptcy Trustee may only dispose of the debtor's interest in property which the debtor had as of the commencement of the estate. Continental Air Lines, 780 F.2d at 1226. Yet, the Bankruptcy Trustee did not purport to abandon this equitable interest in the Dock System; rather, the Bankruptcy Trustee attempted to dispose of the Dock System in toto. It is axiomatic that the Bankruptcy Trustee may not convey an interest which is not part of the bankruptcy estate. To the extent that the Bankruptcy Trustee's abandonment of the Dock System was a disposition of an interest in property which was not part of the estate, it is void. 32 Accordingly, the Court reverses the district court's approval of the abandonment, and remands for a determination of the Bankruptcy Trustee's interest in the property, which he may properly convey as an asset of the estate.
33 Even assuming that the Bankruptcy Trustee was empowered to convey the Dock System by virtue of the Associates' interest in the property, the conveyance did not comply with the statutory requirements governing sales outside of the ordinary course of business. As alluded to supra, the Bankruptcy Trustee's abandonment of the Dock System amounted to a sale of the property outside the ordinary course of business. As such, the sale must comport with the requirements of 11 U.S.C. Sec. 363. According to Sec. 363(e), on request of an entity that has an interest in property to be sold by the trustee, the court shall condition such sale as is necessary to provide adequate protection of such interest. Section 363(o) places the burden of proof on the issue of adequate protection on the trustee and the burden of proving the validity, priority, or extent of its interest in the Dock System by means of an adversary proceeding as is contemplated by Sec. 363(o) and Bankruptcy Rule 7001(2). For this reason alone, the Court must reverse the district court's approval of the abandonment and remand the case to allow the parties adequate opportunity to conduct a sale pursuant to 11 U.S.C. Sec. 363. 34 The Court notes the presence of Sec. 363(m), which provides that the reversal or modification on appeal of an authorization under subsection (b) or (c) of Sec. 363 does not affect the validity of a sale to an entity that purchased that property in good faith, unless the authorization and sale were stayed pending appeal. This provision does not affect the Court's decision, because Sec. 363(m) applies to sales under Sec. 363(b), which requires authorization to sell property of the estate. As it has been established that the Trustee attempted to convey the entire Dock System when the debtor only had a limited interest in it, the attempted conveyance was not a sale of property of the estate as contemplated by Sec. 363(b), and, consequently, Sec. 363(m) does not apply in this instance.
35 The Bond Trustee asserts that even if the Bankruptcy Trustee was empowered to convey the Dock System to Atlantic, the Bond Trustee was not afforded adequate notice of the hearing on abandonment. In light of our holding regarding the purported abandonment the issue would appear moot, yet in the interest of completeness we would point out that it is a fact that the district court held a hearing on the abandonment on October 16, 1989, on 10 days' notice to general creditors. The Bond Trustee was represented by counsel at the hearing and raised an objection to the Bankruptcy Trustee's conveyance of the Dock System. 36 Bankruptcy Rule 2002(2) requires 20 days' notice of a sale outside the ordinary course of business, unless the court for cause shown shortens the time. As it appears from the record that the potential purchasers of the Dock System would not wait long, this Court does not find that the district court abused its discretion in conducting an expedited hearing. Even if we were to find that the district court abused its discretion in shortening the time, a rule requiring notice and opportunity to object is adequately complied with if an objecting party receives actual notice and is afforded an opportunity to raise its objection. In re Glinz, 66 B.R. 88, 91 (D.N.D.1986). Here, the Bond Trustee received actual notice of the hearing and was heard on his objection. Furthermore, the harmless error provisions of F.R.C.P. 61 are applicable to bankruptcy cases pursuant to Bankruptcy Rule 9005. See In re Mandalay Shores Co-Op. Housing Ass'n, Inc., 63 B.R. 842, 852 (N.D.Ill.1986). As the Bond Trustee received actual notice of the hearing and objected to the abandonment, any noncompliance with notice requirements was harmless error.
37 The district court's order approving the abandonment of the Dock System also provided that any insurance proceeds recovered as a result of the partial destruction of the Dock System by Hurricane Hugo were to be paid into a segregated account subject to the control of the district court. Apparently, the district court believed that this disposition of the insurance proceeds would maintain the status quo by preventing the transfer of the proceeds to the Fund pursuant to the terms of the Supplemental Resolution. 38 The Bond Trustee argues that this order contravenes the Supplemental Resolution which provides in pertinent part: 39 [a] If prior to full payment of the Series 1987-A Bonds, the Project is damaged by fire or other casualties.... 40 [a]ll net proceeds of insurance resulting from such claims for losses shall be paid to and held by the [Bond] Trustee in a separate trust account in the Project Revenue Fund.... The Developer is authorized to direct the Trustee, provided there is no Default ... to disburse so much as may be necessary of the net proceeds of such insurance to payment of the cost of such repair, rebuilding, or restoration.... 41 [c] ... all remaining net proceeds if there is a Default ... shall be deposited in the Bond Fund and applied to the repayment of the [Series 1987] Bonds. 42 The Bond Trustee argues that according to Section 9.01(a) of the Supplemental Resolution default has occurred and that the insurance proceeds should have been deposited in the Bond Fund pursuant to the Resolution. 43 The record before the Court contains neither findings of fact nor conclusions of law supporting the district court's order directing the insurance proceeds to be placed in a segregated account subject to the control of the district court. The diversion was effected by means of the abandonment order, yet the order sets forth no rationale justifying this action. Where a trial court fails to make findings of fact and set forth conclusions of law, the record on appeal is insufficient for the appellate court to adequately review the decision. In the absence of a complete record, remand to the district court is the proper remedy to enable the appellate court to review the decision properly. In re Thompson, 788 F.2d 560 (9th Cir.1986); Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030 (5th Cir.1987). Accordingly, the Court remands this issue to the district court to make further findings of fact and set forth conclusions of law. 44 In sum, the Bankruptcy Trustee did not have the power to convey the Dock System, and therefore the provision of the district court's order approving the abandonment is vacated and the case is remanded for further consideration in conformity with this opinion. Furthermore, the provision of the district court's order directing insurance proceeds to be deposited in a segregated account is unsupported by the record. This provision is vacated and the case remanded to permit the district court to make adequate findings of fact and set forth conclusions of law. 45 Accordingly, for the reasons stated above, the judgment of the trial court is affirmed in part, reversed in part, and remanded. 46 AFFIRMED IN PART, REVERSED IN PART, AND REMANDED. 47