Court Opinion

ID: 2998541
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:44:52.005742+00
Date Added: 2024-06-11T18:01:39.320019
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 05-1779
IN THE MATTER OF:
  RESOURCE TECHNOLOGY CORPORATION
  (BY GREGG E. SZILAGYI, TRUSTEE),
                                                Debtor-Appellee.
APPEAL OF:
  LEON GREENBLATT; BANCO PANAMERICANO, INC.;
  AND CHIPLEASE, INC.
                      ____________
       Appeal from the United States District Court for the
         Northern District of Illinois, Eastern Division.
         No. 05 C 1508—Matthew F. Kennelly, Judge.
                         ____________
  ARGUED NOVEMBER 7, 2005—DECIDED DECEMBER 9, 2005
                    ____________

  Before POSNER, EASTERBROOK, and WOOD, Circuit Judges.
  EASTERBROOK, Circuit Judge. Resource Technology
Corporation turns garbage into money by collecting meth-
ane from landfills, reducing the emission of a greenhouse
gas in the process. It either sells the methane or burns the
gas to make electricity. Installing methane-collection
systems is tricky, however, and Resource Technology landed
in bankruptcy because its outlays exceed its revenues from
harvested methane. This appeal concerns one of its money-
losing ventures.
2                                               No. 05-1779

  In 1996 Resource Technology agreed with Chastang
Landfill, Inc., in Mount Vernon, Alabama, to build a gas-
collection system. Consortium Service Management Group
contracted to buy the scavenged gas, which it planned to
purify and resell to a local utility. By 1999 the collection
system had not been completed, and Chastang terminated
the contract. Litigation ensued and was settled: Resource
Technology promised to finish the system by September
2002 and gave Chastang a promissory note to cover costs it
had incurred. When that deadline passed with the system
still not operable, Chastang again terminated the agree-
ment and Resource Technology, by then in bankruptcy, filed
an adversary proceeding. A second settlement was reached
and a final deadline for completion set: March 31, 2003.
That deadline, too, passed with the system unfinished, and
another adversary proceeding followed. A third settlement
was reached, this time with the Trustee in bankruptcy.
Chastang and Consortium Service Management agreed to
release Resource Technology from its obligation to finish the
system, to forgive the promissory note, to abandon any
claim to damages, and to pay $75,000; in exchange the
Trustee agreed to give up Resource Technology’s right to the
methane.
  Before the bankruptcy court approved this settlement,
Resource Technology’s principal creditors (holding about
$40 million in debt claims, secured by a floating lien on
the firm’s assets) made the Trustee a better offer. In ex-
change for a right to complete the system and collect the
methane, the lenders offered to pay the estate $200,000 and
release $2 million of their debt claims; they promised to
indemnify the estate for any sums it should be required to
pay on account of delay in completing the system. The
Trustee preferred this offer to Chastang’s but could not see
how to implement the proposal, for the contract between
Resource Technology and Chastang has an anti-assignment
No. 05-1779                                                  3

clause, and at all events had been terminated because of
Resource Technology’s enduring delinquency.
  The lenders proposed that the right to collect the gas
could be transferred to them if the Trustee were to abandon
the executory portion of the contract between Resource
Technology and Chastang. The lenders then could use their
security interest to step into Resource Technology’s position.
Bankruptcy Judge Wedoff concluded, however, that an
executory contract cannot be abandoned under 11 U.S.C.
§554; the debtor’s choices are limited to assumption or
rejection under 11 U.S.C. §365—and, once a contract has
been assumed (as this one was), to performance or breach.
Abandonment would just break the debtor’s promise and
support a claim for damages; it could not transfer Resource
Technology’s rights to the lenders. Judge Wedoff therefore
approved the settlement with Chastang, and District Judge
Kennelly affirmed. 2005 U.S. Dist. LEXIS 4101 (N.D. Ill.
March 18, 2005).
  The lenders’ appeal has been met at the outset with a
contention that the litigation is moot. All requests for a stay
were denied, and the settlement between Chastang and the
Trustee has been consummated. The $75,000 has been paid;
Chastang’s claims have been released; someone else has
taken over completion of the system and the collection of
gas. Yet why should this end the controversy? A case is
moot when no further judicial relief is possible. See Church
of Scientology v. United States, 506 U.S. 9 (1992). By that
standard, this dispute is live. A court could order the
Trustee to return Chastang’s money, reinstate its claims for
damages and payment on the note, and direct Chastang to
deliver the gas to the lenders. Unscrambling a transaction
may be difficult, but it can be done. No one (to our knowl-
edge) thinks that an antitrust or corporate-law challenge to
a merger becomes moot as soon as the deal is consummated.
Courts can and do order divestiture or damages in such
4                                               No. 05-1779

situations. Perhaps Chastang has in mind not mootness but
judicial reluctance to upset legitimate reliance interests.
See 11 U.S.C. §363(m); In re UNR Industries, Inc., 20 F.3d
766 (7th Cir. 1994). Appellees do not contend, however, that
anyone who has relied on the settlement would be left in
the lurch; the lenders could be ordered to compensate
the firm that completed the system and collects the gas.
So we must resolve the merits.
  The lenders want us to decide whether §365 (which
addresses the assumption or rejection of executory con-
tracts) supersedes §554 (which authorizes debtors to
abandon assets). They contend that these sections of
the Bankruptcy Code may be reconciled. Maybe so, see
Precision Industries, Inc. v. Qualitech Steel SBQ, LLC,
327 F.3d 537, 544 (7th Cir. 2003), but that’s not the real
issue. Suppose that §554 were the only part of the Code
with any relevance. Still, the creditors would face two
problems: first, a debtor may abandon assets but not
contractual duties; second, abandonment would end the
business deal rather than pass any rights through to the
lenders.
  Section 554(a) provides: “After notice and a hearing, 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.” The phrase “property of the
estate” is not defined in the Code; courts look to state law
to determine what kind of “property” an estate possesses.
See Butner v. United States, 440 U.S. 48 (1979). The normal
use of §554 is to give up an interest in real estate that is
burdened by a debt so large that the equity value is negligi-
ble or negative. That is not its sole use, however. A contract
right—say, a right to purchase a parcel of land—usefully
may be understood as “property” for this purpose. States
generally deem options and equivalent entitlements to be
varieties of property. But does either Illinois or Alabama
(the two states involved in the contract between Resource
No. 05-1779                                                 5

Technology and Chastang) treat a duty of performance
under a contract as a property right?
  Normally a duty is the opposite of a right. And that’s
the lenders’ main problem. Resource Technology had a duty
to complete the gas-collection system; it had a right to
collect the gas only after fulfilling that duty. When the
lenders asked the Trustee to “abandon” the contract,
Resource Technology had not finished the collection system.
Abandonment then would have been nothing but breach;
and if Resource Technology repudiated its promise (already
broken by delay), it would have lost any right to the gas.
There was no property interest the Trustee could abandon.
   If one were to treat a package of rights and duties as
a single property interest, in the way a contract as a
whole might be sold (in the absence of an anti-assign-
ment clause), how would abandonment of that package give
the lenders any entitlement to the gas? A right that
is abandoned is gone. Once Resource Technology’s right
to harvest gas disappears, the entitlement reverts to the
landfill’s owner—Chastang. The lenders seem to think
that their security interest would direct the gas to them,
free from the anti-assignment clause, but their security is in
the contract rather than in the gas. If the contract
is abandoned, the security disappears. A contract right
in this respect differs from real estate or chattels, which
continue to exist even if a given party’s stake is abandoned.
When a contract terminates, the asset covered by the
floating lien vanishes in a puff of smoke. So the bankruptcy
judge was right to hold that the lenders’ proposal is legally
impossible.
  Finally we must consider §363(f)(3), which says that
a trustee cannot dispose of a secured party’s collateral
over objection unless the price realized exceeds the value of
the lien. Appellants maintain that this provision forbids the
settlement between the Trustee and Chastang. Yet why
6                                                No. 05-1779

should we treat the settlement as the disposition of collat-
eral? Section 363(f)(3) deals with liens on specific assets. A
floating lien does not attach to particular assets; a borrower
remains free to transact in the course of its business, and if
it sells gas—or settles a lawsuit—the proceeds become
subject to the lien. Out of bankruptcy Resource Technology
and Chastang could have settled their dispute without any
hindrance from the lenders; a Trustee has the same power
in bankruptcy. Creditors that hold floating liens are
protected by the requirement that the Trustee’s decisions be
beneficial to the estate. Judge Wedoff concluded, after a
hearing, that this settlement is beneficial. This means that
the lenders are better off than they would be if Resource
Technology, having failed to complete the system, were
exposed to liability on the note and damages for breach,
while losing the right to harvest and sell the gas. Section
363(f)(3) does not block transactions that make creditors
better off. These lenders are not as well off as they would be
if they could harvest the methane, but as we have ex-
plained that is not an available option.
                                                   AFFIRMED

A true Copy:
       Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit

                   USCA-02-C-0072—12-9-05