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

Heading: Jurisdiction of Bond Fund

Text: 9 The Bond Trustee argues that because the Bond Fund is not property of the estate according to Sec. 541 of the Bankruptcy Code, the district court lacked jurisdiction over the Fund. The Bankruptcy Trustee argues that because the debtor had a right to the earnings of the Bond Fund, the Bond Fund is part of the estate and the district court had jurisdiction to issue the injunction. 10 Section 541 of the Code defines property of the estate as all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. Sec. 541. It is well established that the bankruptcy estate includes whatever property interests the debtor had at the commencement of the case, and that whatever restrictions were placed upon such property rights prepetition continue to exist post-petition. Creasy v. Coleman Furniture Corp., 763 F.2d 656 (4th Cir.1985); Cross Electric Co., Inc. v. United States, 664 F.2d 1218 (4th Cir.1981). The bankruptcy estate's rights in a debtor's property are limited to those rights had by the debtor. Matter of Jones, 768 F.2d 923 (7th Cir.1985). If the debtor does not have an interest in property, that property is not property of the estate; consequently, the district court could not exercise jurisdiction over such property. See Matter of Xonics, Inc., 813 F.2d 127 (7th Cir.1987); In re Ace Industries, Inc., 65 B.R. 199 (Bankr.W.D.Mich.1986); In re Illinois-California Exp., Inc., 50 B.R. 232, 240 (Bankr.D.Colo.1985); Jordan v. Randolph Mills, Inc., 29 B.R. 398 (Bankr.M.D.N.C.1983), contempt citation vacated, 716 F.2d 1053 (4th Cir.1983). 11 By issuing the injunction, the district court sought to maintain the status quo while determining the parties' interests in the Bond Fund pursuant to the Bankruptcy Trustee's complaint. The use of an injunction to preserve the status quo while determining the merits of a controversy is a common practice. See Cordis Corp. v. Medtronic, Inc., 835 F.2d 859 (Fed.Cir.1987); F.T.C. v. H.N. Singer, Inc. 668 F.2d 1107 (9th Cir.1982). The district court issued the injunction because it determined that serious questions had been raised concerning the parties' interests in the Bond Fund. The rights of the respective parties to the Fund are defined by Sec. 5.03(a) of the Resolution, which provides that the Fund is to be used solely for the payment of principal, redemption premium and interest on the bonds. 1 Section 5.03(a) also delineates the rights of the parties to the earnings of the Bond Fund. After providing that the moneys in the Fund shall be kept invested to the extent practical, Sec. 5.03(a) provides that earnings become part of the Bond Fund unless an authorized officer of the debtor directs that the funds be transferred to the Construction Fund (used to pay subcontractors), and that the chairman of the Authority consents to the transfer. 2 12 While these provisions are unambiguous and appear to direct that the Bond Fund is to be used for payments of principal and interest to the Bondholders and that the earnings of the Bond Fund, at the debtor's direction, are to be transferred to the Construction Fund in certain circumstances, the Bankruptcy Trustee has raised a potential statutory conflict which raises serious questions about the status of the Bond Fund. According to South Carolina Code Sec. 6-21-310, interest and principal may be paid from the proceeds of the sale of the bonds. 3 The Bond Trustee intends to make an interest payment from the Bond Fund, which currently consists only of proceeds and the earnings therefrom resulting from the sale of bonds, as the uncompleted Project has yet to generate any revenue. On the other hand, Sec. 51-13-810 provides that interest and principal are to be payable from the revenues of the project. 4 The Bankruptcy Trustee argues that Sec. 51-13-810 precludes the Bond Trustee from making the interest payment from bond proceeds rather than revenues. 13 Confronted with this potential conflict, the district court issued the preliminary injunction for the purpose of preventing the disbursement of the interest payments to the bondholders in order to permit the court to resolve the statutory conflict and determine the ownership of the Fund pursuant to the Bankruptcy Trustee's complaint. The district court may of course properly preserve the status quo until the question of its jurisdiction can be resolved. Fernandez-Roque v. Smith, 671 F.2d 426, 431 (11th Cir.1982), on remand, 539 F.Supp. 925 (N.D.Ga.1982). See also Cordis Corp., 835 F.2d at 863; F.T.C., 668 F.2d at 1112. The Bond Trustee in his brief urges this Court to resolve this conflict according to principles of statutory construction. The Court declines to do so as the issue of ownership of the Bond Fund is at the heart of the Bankruptcy Trustee's complaint, which has yet to be decided by the district court. Because the purpose of the injunction was to preserve the status quo in order to permit the district court to determine the issue of ownership, the Court cannot find that the district court erred as a matter of law in exercising jurisdiction in issuing the injunction. 14