Court Opinion

ID: 2686312
Source: CourtListenerOpinion
Date Created: 2014-07-30 05:00:35.496228+00
Date Added: 2024-06-11T09:46:23.534304
License: Public Domain

Case: 13-11076          Document: 00512715032   Page: 1   Date Filed: 07/29/2014

            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT
                                                                         United States Court of Appeals
                                                                                  Fifth Circuit
                                         No. 13-11076                           FILED
                                       Summary Calendar                     July 29, 2014
                                                                           Lyle W. Cayce
                                                                                Clerk
In the Matter of: HEARTHWOOD NORTH I ASSOCIATION,

                                                   Debtor

------------------------------

BDA DESIGN GROUP, INCORPORATED,

                                                   Appellant
v.

THE OFFICIAL UNSECURED CREDITORS’ COMMITTEE; JAMES W.
CUNNINGHAM,

                                                   Appellees

                      Appeal from the United States District Court
                           for the Northern District of Texas
                                USDC No. 3:13-CV-1568

Before JOLLY, SMITH, and CLEMENT, Circuit Judges.
PER CURIAM:*

     Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be
     *

published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
    Case: 13-11076    Document: 00512715032      Page: 2   Date Filed: 07/29/2014

                                  No. 13-11076
      BDA Design Group, Inc., (“BDA”) appeals the district court’s affirmance
of the bankruptcy court’s decision that casualty loss insurance proceeds that
Debtor Hearthwood I North Association (“Hearthwood”) received after a fire at
its condominium were correctly a part of the bankruptcy estate and its
subsequent refusal to lift the automatic stay to permit BDA to pursue state
court actions against the Debtor. For the following reasons, we AFFIRM the
judgment of the district court.
                       FACTS AND PROCEEDINGS
      In July 2009, a fire burned through several units in a building at the
Hearthwood I North condominiums managed by Debtor Hearthwood.
Hearthwood was insured through a casualty loss insurance policy that paid out
$1,500,000 to Hearthwood for the damage.          Hearthwood’s Condominium
Declaration states,
      The following provisions shall apply with respect to damage by fire
      or other causes:
      (a) If any one of the Buildings is damaged by fire or other casualty
          and said damage is limited to a single Unit, all insurance
          proceeds shall be paid to the Unit Owner or one or more
          Mortgagees of such Unit, as their respective interests may
          appear, and such Unit Owner or Mortgagees shall use the same
          to rebuild or repair such Unit substantially in accordance with
          the original plans and specifications therefor. If such damage
          extends to two or more Units, or extends to any part of the
          Common Elements, such insurance proceeds shall be paid to the
          Board, as trustee, or to such bank or trust company as may be
          designated by amendment hereof, to be held in trust for the
          benefit of the Unit Owners and their Mortgagees as their
          respective interests may appear. The Board shall thereupon
          contract to repair or rebuild the damaged portions of all Units,
          the Building, and the Common Elements substantially in
          accordance with the original plans and specifications therefore
          and the funds held in the insurance trust fund shall be used for
          this purpose.

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    Case: 13-11076    Document: 00512715032     Page: 3   Date Filed: 07/29/2014

                                 No. 13-11076
Importantly, Hearthwood owned several of the condominium units in the
building and had an interest in the common areas.
      Hearthwood contracted with BDA to provide architectural services for
the damaged building. BDA alleged that Hearthwood “continually failed and
refused to timely tender payment” to the firm, and filed a suit in state court to
recover the amount owed. On August 20, 2012, Hearthwood filed a voluntary
petition for Chapter 11 bankruptcy relief in the United States Bankruptcy
Court for the Northern District of Texas.
      BDA unsuccessfully sought relief from the automatic stay in the
bankruptcy court so it could proceed with its state court action. BDA argued
that, based on the language in the Condominium Declaration, the casualty loss
insurance proceeds were trust funds, not property of the bankruptcy estate.
The bankruptcy court denied BDA’s request and held that the proceeds were
part of the bankruptcy estate because Hearthwood had a property interest in
the proceeds under 11 U.S.C. § 541.
      BDA appealed the Bankruptcy Court’s denial of relief to the United
States District Court for the Northern District of Texas. The district court
affirmed the bankruptcy court’s decisions. The court determined that the
estate had an interest in the proceeds, and that the bankruptcy court did not
err in declining to lift the automatic stay to allow BDA to continue its state
court litigation and pursue enforcement against the proceeds. BDA appeals.
                          STANDARD OF REVIEW
      “When reviewing a bankruptcy court’s decision in a core proceeding, a
district court functions as a appellate court and applies the standard of review
generally applied in federal court appeals.” In re Renaissance Hosp. Grand
Prairie Inc., 713 F.3d 285, 293 (5th Cir. 2013) (internal quotation marks
omitted). “Generally, a bankruptcy court’s findings of fact are reviewed for
clear error and conclusions of law are reviewed de novo.” Id. at 294. “This
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    Case: 13-11076     Document: 00512715032     Page: 4     Date Filed: 07/29/2014

                                  No. 13-11076
Court reviews the decision of a district court, sitting as an appellate court, by
applying the same standards of review to the bankruptcy court’s findings of
fact and conclusions of law as applied by the district court.” Id. (internal
quotation marks and modifications omitted). A determination of whether the
proceeds of an insurance policy are property of the bankruptcy estate is a legal
conclusion reviewed de novo, see In re Edgeworth, 993 F.2d 51, 53 (5th Cir.
1993), while a denial of a motion for modification of the automatic stay is
reviewed for abuse of discretion, see In re Chunn, 106 F.3d 1239, 1242 (5th Cir.
1997).
                                 DISCUSSION
      Property of a bankruptcy estate consists of “all legal or equitable
interests of the debtor in property as of the commencement of the case.” 11
U.S.C. § 541(a)(1). It does not include “any power that the debtor may exercise
solely for the benefit of an entity other than the debtor.” 11 U.S.C. § 541(b)(1).
“A restriction on the transfer of a beneficial interest of the debtor in a trust
that is enforceable under applicable nonbankruptcy law is enforceable in a case
under this title.” 11 U.S.C. § 541(c)(2).
      Neither the bankruptcy court nor the district court erred in holding that
the insurance proceeds are property of the estate. All sides concede that Debtor
is a trustee of the trust, described in the Condominium Declaration and the
Texas Property Code Section 82.111(f), and all sides also concede that Debtor
is a beneficiary of that trust as an owner of some of the damaged units and the
common areas of the burned building. Because of this, the debtor does not
exercise its power “solely for the benefit of an entity other than the debtor” but
for itself as well, making Section 541(b)(1) inapplicable.

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     Case: 13-11076        Document: 00512715032           Page: 5     Date Filed: 07/29/2014

                                        No. 13-11076
       BDA argues that the Texas Condominium Act, V.T.C.A., Property Code
§ 82.111(f) 1 created a statutory trust for the casualty loss insurance proceeds
that operated as a “restriction on the transfer of any beneficial interest in the
trust created in the [proceeds],” and that this is enforceable nonbankruptcy
law under 11 U.S.C. § 541(c)(2).
       While Section 82.111(f) states that “proceeds paid under a policy must
be disbursed first for the repair or restoration of the damaged common
elements and units,” there is no claim that this statute creates a spendthrift
trust under Texas law, nor is Hearthwood’s own beneficial interest subject to
the types of restraint on alienation that Section 541(c)(2) contemplates. 2 Nor
does the language of the Condominium Declaration alter this analysis. The
cases cited by BDA concern situations in which the Debtor held only a legal
interest in the proceeds, not one, as here, where the Debtor also was a
beneficiary. See In the Matter of Maple Mortg., Inc., 81 F.3d 592 (1996).
Section 541(c)(2) is inapplicable in this situation.                   We agree with the
bankruptcy and district courts that the casualty loss insurance proceeds are
part of the bankruptcy estate. In light of that conclusion, the bankruptcy court
did not abuse its discretion in refusing to lift the automatic stay.

       1  Section 82.111(f) states:
        The insurance trustee or the association shall hold insurance proceeds in trust
        for unit owners and lienholders as their interests may appear. Subject to
        Subsection (i), the proceeds paid under a policy must be disbursed first for the
        repair or restoration of the damaged common elements and units, and unit
        owners or lienholders are not entitled to receive payment of any portion of the
        proceeds unless there is a surplus of proceeds after the property has been
        completely repaired or restored, or the condominium is terminated.
        2 The interests that are excluded “[t]ypically . . . are those associated with spendthrift

trusts or ERISA plans.” In re Walt Robbins, Inc., 129 B.R. 452, 455 (Bankr. E.D. Va. 1991)
(citing In re Moore, 907 F.2d 1476 (4th Cir. 1990). See also Patterson v. Shumate, 504 U.S.
753, 760 (1992) (antialienation provision required for ERISA qualification of pension plan
constituted enforceable transfer restriction for purposes of Bankruptcy Code).

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    Case: 13-11076      Document: 00512715032    Page: 6   Date Filed: 07/29/2014

                                  No. 13-11076
                                 CONCLUSION
         For the foregoing reasons, we AFFIRM the judgment of the district
court.

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