Official Committe v. Westmorelandd Cty

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit

7-19-1999

Official Committe v. Westmorelandd Cty
Precedential or Non-Precedential:

Docket 98-3433

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Recommended Citation
"Official Committe v. Westmorelandd Cty" (1999). 1999 Decisions. Paper 206.
http://digitalcommons.law.villanova.edu/thirdcircuit_1999/206

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Filed July 19, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-3433

OFFICIAL COMMITTEE OF UNSECURED CREDITORS
OF LIFE SERVICE SYSTEMS, INC.,
Appellant

v.

WESTMORELAND COUNTY MH/MR

On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil No. 97-cv-01852)
District Judge: Honorable William L. Standish

Argued February 8, 1999

Before: SLOVITER, ROTH and STAPLETON, Circuit Judges

(Filed: July 19, 1999)

F. Scott Gray
Thomas M. Ferguson (Argued)
Sable, Makoroff & Gusky
Pittsburgh, PA 15219

Attorneys for Appellant

K. Lawrence Kemp (Argued)
Kemp & Kemp
New Kensington, PA 15068

Attorney for Appellee
OPINION OF THE COURT

SLOVITER, Circuit Judge.

In January 1997, Life Service Systems, Inc. ("LSS") filed
a petition for voluntary bankruptcy under Chapter 11. LSS
provided mental health services under contract with the
Westmoreland County Mental Health and Mental
Retardation Program (the "County"), a county-created
agency fulfilling the state-imposed obligation to address the
needs of the mentally ill population.

Before us is the appeal of the Official Committee of
Unsecured Creditors of Life Service Systems, Inc. (the
"Creditors"), from the decision by the District Court holding
that LSS's title to certain assets divested to the County
upon the termination of the contract between them.
Although the parties have briefed the merits of the appeal,
we determine that jurisdiction is the dispositive issue.

I.

Beginning in 1988, the County entered into a series of
identically worded, one-year contracts with LSS (or its
predecessor) to provide mental health services. Rather than
paying LSS on a fee-for-service basis, the County agreed to
reimburse LSS for its expenses and LSS could retain a
portion of its revenues up to a specified maximum.
Permissible expenditures for which it was reimbursed
included the purchase of fixed assets, which the contract
defined as items costing at least $500 and either having an
expected useful life exceeding one year or being repeatedly
usable without material impairment of their physical
condition.

The contract provided that "[t]itle to allfixed assets
purchased in whole or in part with funds from this
Agreement . . . shall vest during the term of this Agreement
in [LSS] and shall automatically divest upon the
termination or cancellation of the Agreement and vest with
County." App. at 118. In accordance with this title clause,
LSS was prohibited during the term of the agreement or

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within ninety days after its termination or cancellation from
selling, leasing, donating, or otherwise disposing of fixed
assets purchased with funds under the agreement without
County approval. The contract further provided that, upon
its expiration, the County could exercise one of three
options regarding the assets:

A. Take possession of said fixed assets and
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

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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
_________________________________________________________________

1. Section 541(a)(1) provides:

(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).

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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.

II.

Although none of the parties has questioned our
_________________________________________________________________

2. At the outset of the bankruptcy, LSS continued its affairs as debtor in
possession. However, by an order of November 7, 1997, a Chapter 11
trustee was approved in the case.

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jurisdiction to hear this appeal, we have an independent
obligation to ensure that appellate jurisdiction is present.
See F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 103 (3d Cir.
1988).

Under 28 U.S.C. S 158(d), the courts of appeals have
jurisdiction over appeals from "all final decisions,
judgments, orders, and decrees entered" by a district court
reviewing a bankruptcy court decision under 28 U.S.C.
S 158(a). Generally speaking, "when the bankruptcy court
issues what is indisputably a final order, and the district
court issues an order affirming or reversing, the district
court's order is also a final order." In re Porter, 961 F.2d
1066, 1072 (3d Cir. 1992). However, where the district
court does not merely affirm or reverse and instead
remands the case to the bankruptcy court, the finality of
the order is less clear.

Most courts of appeals analyze the jurisdictionalfinality
of a district court's remand by considering the bankruptcy
court's responsibility on remand. See In re Lopez, 116 F.3d
1191, 1192 (7th Cir. 1997) (citing cases from eight other
circuits). If the bankruptcy court's actions will be"purely
ministerial in character," such as computing prejudgment
interest according to an undisputed rate and time period,
then the remanded proceedings are unlikely to engender
further appeals and the order is final. Id.

This court has frequently noted that we have "taken a
flexible, practical approach to interpreting thefinality
requirement in bankruptcy cases." In re Blue Coal Corp.,
986 F.2d 687, 689 (3d Cir. 1993); accord F/S Airlease II,
844 F.2d at 103 (describing a "more pragmatic and less
technical way [of viewing finality] in bankruptcy cases than
in other situations" (internal quotation marks omitted)).
This entails balancing "a general reluctance to expand
traditional interpretations regarding finality and a desire to
effectuate a practical termination of the matter before us."
In re Meyertech Corp., 831 F.2d 410, 414 (3d Cir. 1987).

In In re Market Square Inn, Inc., 978 F.2d 116, 120 (3d
Cir. 1992), we applied this flexible approach tofind
appellate jurisdiction over the district court's order holding
that a lease between the debtor and its landlord survived

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after the filing of the bankruptcy. In so holding, we quoted
from our earlier opinion in Wheeling-Pittsburgh Steel Corp.
v. McCune, 836 F.2d 153, 158 (3d Cir. 1987), where we
noted that "bankruptcy cases `frequently involve protracted
proceedings with many parties participating,' " and
observed that, "[t]o avoid the waste of time and resources
that might result from viewing discrete portions of the
action only after a plan of reorganization is approved,
courts have permitted appellate review of orders that in
other contexts might be considered interlocutory." Id. at
158 (quoting In Re Amatex Corp., 755 F.2d 1034, 1039 (3d
Cir. 1985)) (internal quotation marks omitted).

We consider four factors to determine whether a district
court's order is final and reviewable: "the impact upon the
assets of the bankrupt estate, the necessity for further fact-
finding on remand, the preclusive effects of our decision on
the merits of further litigation, and whether the interest of
judicial economy would be furthered." In re Blue Coal Corp.,
986 F.2d at 689 (internal quotation marks omitted). Of
these, the "most important" factor is the impact on the
assets of the estate. In re Market Square Inn, Inc., 978 F.2d
at 120 (internal quotation marks omitted).

Our decision in F/S Airlease II is illustrative. In that
case, a company that had leased back a Boeing airplane
that it had previously sold to the lessor filed for bankruptcy
under Chapter 11 of the Bankruptcy Code. See 844 F.2d at
101. Some time thereafter, the bankruptcy court held a
hearing and approved a lease of the airplane that had been
negotiated by a broker. Seven months after that approval,
the broker filed a motion for a nunc pro tunc appointment
as broker, with an attendant claim for administrative
expenses. The bankruptcy court approved the requests, but
the district court affirmed only the appointment and
remanded for substantiation of the requested expenses. The
creditor appealed the appointment. Id. at 102-03.

We considered, and upheld, our appellate jurisdiction.
We noted that "the order has a significant impact on the
assets of the estate" because the amount the broker sought
constituted a "substantial portion" of the estate's assets,
approval of the award to the broker would "severely affect
the rights of other creditors," and "delay of the final

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resolution of the matter could have an adverse impact on
the debtor's successful reorganization." Id. at 104. Although
the district court had remanded for further fact-finding, we
held that did not affect our jurisdiction over the portion of
its order approving the nunc pro tunc employment. The
remand was only for the matter of the amount of the
broker's compensation, and did not "relate[ ] to a central
issue on appeal," the propriety of the retroactive
appointment. Id. at 104 n.4 (quoting In re Stanton, 766
F.2d 1283, 1287 (9th Cir. 1985)).

Our primary inquiry, therefore, must be directed to the
impact of the order at issue on the estate. In this case, the
Creditors are appealing the District Court's determination
that, at the termination of the County's contract with LSS,
title in property which had been purchased with contract
funds vested in the County. The issue that the District
Court remanded to the Bankruptcy Court is whether the
motor vehicles were also purchased with contract funds. At
oral argument, we inquired of counsel for the Creditors
regarding the potential impact on the estate, and counsel,
rather than asserting that the impact on the estate would
be substantial, candidly replied that the appeal was
precautionary. Based on our review of this case, we cannot
conclude that the impact on the estate will be substantial
if the remand is completed before the issue of the County's
title in the property is reviewed.

Moreover, even if the furniture were not subject to the
Bank's perfected security interest, this case differs from
cases such as In re Market Square Inn, Inc. in which we
took jurisdiction. In that case, the debtor's business had a
chance of continuing in the reorganization only if the debtor
retained the lease in question. 978 F.2d at 120-21. By
contrast, here the County has awarded the mental health
services contract to another entity and presumablyfiled its
motion for relief from the stay so that the new contractor
could employ those assets. Inasmuch as LSS no longer
requires the assets in order to continue in its former
business with the County, this case does not fall into the
category of cases where an immediate appeal is necessary
because of the impact of the District Court's ruling on the
possibility of a viable reorganization.

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Admittedly, were we to adopt the Creditors' argument,
based on the scope of the power of a hypothetical judicial
lien creditor under section 544, we would obviate the need
for further fact-finding by the Bankruptcy Court. Yet the
fact-finding that is the subject of the District Court's
remand to the bankruptcy court requires more than a
"purely ministerial" function. See, e.g., United States
Trustee v. Gryphon at the Stone Mansion, Inc., 166 F.3d
552, 556-57 (3d Cir. 1999) (citing In re Lopez, 116 F.3d
1191, 1192 (7th Cir. 1997)). On the other hand, were we to
decide the merits issue in favor of the County, we would
not necessarily obviate further appeals following the
bankruptcy court's determination of the County's share of
the motor vehicle purchases, and the litigation could be
protracted.

Finally, it appears likely that our failure to decide the
Creditors' appeal at this time will not prevent the
reorganization from proceeding, if that is possible. Nor will
it result in a waste of judicial time and resources. This is
in sharp contrast to the decisions in which we upheld our
jurisdiction. For example, in In re Market Square Inn, Inc.
we observed that reversing the bankruptcy court's decision
would foreclose any possible reorganization because the
lease had a substantial impact on the estate and the debtor
would be unable to obtain new financing for its business
without the lease. 978 F.2d at 120-21. Similarly, in F/S
Airlease we opined that the effect of failing to take
jurisdiction at that stage could be to transform the Chapter
11 reorganization into a Chapter 7 involuntary bankruptcy.
F/S Airlease, 844 F.2d at 104.

Here, the furniture remains subject to National City
Bank's perfected security interest and will not be
distributed to another creditor. Moreover, according to the
County, only two parties have an interest in the motor
vehicles. There is, therefore, a lesser danger of wasting the
court's or the parties' time and resources if they move
forward in the Bankruptcy Court to resolve the issue of the
source of the funds used to purchase the motor vehicles.
On balance, we conclude that the District Court order
appealed from is not final under section 158(d).

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III.

Accordingly, we will dismiss the appeal for lack of
jurisdiction.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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