City of Springfield v. Ostrander (In Re LAN Tamers, Inc.)

United States Court of Appeals
For the First Circuit

No. 02-2309

IN RE LAN TAMERS, INC.,
Debtor.

CITY OF SPRINGFIELD, MASSACHUSETTS,
Plaintiff, Appellee,

v.

DAVID W. OSTRANDER, Trustee in Bankruptcy,
Defendant, Appellant,

LAN TAMERS, INC.; BANK OF WESTERN MASSACHUSETTS;
EDUCATIONAL TECHNOLOGY, INC.; UNIVERSAL SERVICE
ADMINISTRATIVE COMPANY; OFFICIAL UNSECURED
CREDITORS' COMMITTEE OF LAN TAMERS, INC.,

Defendants.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Michael A. Ponsor, U.S. District Judge]

Before

Boudin, Chief Judge,

Lynch and Howard, Circuit Judges.

Eugene B. Berman, Kerry David Strayer, and Kamberg, Berman,
P.C. on brief for defendant-appellant.

Joseph B. Collins, George I. Roumeliotis, Hendel & Collins,
Harry P. Carroll, Deputy City Solicitor, Melissa M. Shea, Associate
City Solicitor, and Springfield Law Department on brief for
plaintiff-appellee.
 Joseph H. Baldiga and Mirick, O'Connell, DeMallie & Lougee,
LLP on brief for Universal Service Administrative Company, amicus
curiae.

May 19, 2003
 LYNCH, Circuit Judge. This case involves competing

claims of the Springfield, Massachusetts public schools and the

creditors of LAN Tamers, Inc., a bankrupt company, to a million-

plus dollars. The case arises from the intersection of the federal

Bankruptcy Code and the federal "E-Rate" program, created by the

Telecommunications Act of 1996 to encourage public schools to

connect to the internet. The E-Rate program subsidizes these

internet connections with funds extracted from the

telecommunications industry and administered by a private not-for-

profit corporation, the Universal Service Administrative Company

(USAC). The schools contract with service providers to do the

connection work. USAC, through the Universal Service Fund (USF),

either pays the subsidy to the service provider directly (if the

approved schools have not already paid in full) or reimburses the

schools for part of the cost (if the projects have been approved

and the schools have paid the service provider for the work). In

the latter case, USAC actually makes its payment to the service

provider, who in turn must pass the funds through to the school.

The issue here is whether reimbursement monies, presently

held by USAC, are part of the estate of LAN Tamers, the bankrupt

service provider. When LAN Tamers filed for bankruptcy,

Springfield had already paid it in full for installation and

maintenance of internet networks at various schools. USAC had

already approved E-Rate funding for the projects. The bankruptcy

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court and district court both held that these funds belong to

Springfield and are not the property of the estate. We affirm.

I.

The facts about the structure of the E-Rate program and

the events are undisputed.

One of the goals of the 1996 Telecommunications Act was

to encourage universal telecommunications service. Universal

service includes "advanced telecommunications and information

services," particularly high-speed internet access, for schools (as

well as for libraries and rural health care providers). See 47

U.S.C. § 254(b)(6), (h)(1) (2000). The internet highway for these

schools is paved with mandated contributions from the

telecommunications industries; the USF's coffers are filled by

interstate telecommunications providers who pay mandatory charges,

which they typically pass on to consumers in their bills. See id.

§ 254(d); 47 C.F.R. § 54.706 (2002). Federal regulations give USAC

the responsibility to administer the USF, collect the charges, and

disburse its funds, all under the direction of the Federal

Communications Commission (FCC). See 47 C.F.R. §§ 54.701, 54.702.

The USF monies are not appropriated federal funds; nonetheless,

they exist by reason of a federal mandate. The funds are not

distributed by a federal agency but by USAC, a private nonprofit

corporation, subject to regulation. See generally Tex. Office of

Pub. Util. Counsel v. FCC, 183 F.3d 393, 405-09 (5th Cir. 1999)

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(describing USF provisions of 1996 Telecom Act and subsequent

regulations); R.F. Frieden, Universal Service, 13 Harv. J.L. &

Tech. 395, 397-422 (2000) (same).

The E-Rate program implements the Telecom Act's mandate

of USF support for schools. See 47 U.S.C. § 254(b)(6). In the

past few years, USAC has disbursed between $1.4 billion and $1.7

billion annually in E-Rate funding for schools and libraries. To

receive funds, a school enters directly into a contract with a

service provider to supply eligible telecommunications services.

See 47 C.F.R. § 54.504(c). The service provider must be registered

with USAC. See USAC Service Provider Manual, ch. 4, available at

http://www.sl.universalservice.org/vendor/manual/ (last visited

May 15, 2003). A school must complete an application process with

multiple steps to have E-Rate support approved. The amount of

funding a school receives from the USF depends on the area's

poverty level, and ranges from 20% to 90% of the total cost of

eligible projects. See 47 C.F.R. § 54.505(b). Springfield, one of

the state's most economically disadvantaged school districts,

generally receives near the maximum percentage.

Most often, after approval, USAC and a school simply

disburse their respective shares of the cost directly to the

service provider. Sometimes, however, schools elect an alternative

payment method, referred to as "Billed Entity Applicant

Reimbursement" (BEAR), especially if they want a project completed

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quickly. Springfield chose the BEAR option for the two contracts

at issue here. Under the BEAR method, a school (the "Billed Entity

Applicant") pays the full cost to a service provider up front,

receives from USAC a funding commitment letter for the E-Rate

program's share of the cost, and then submits a form to USAC to

receive reimbursement.

USAC makes its payments from the USF in the form of

either a check or, if the service provider so chooses and owes

charges to the USF, a credit against those charges. See 47 U.S.C.

§ 254(h)(1)(B)(i)-(ii); 47 C.F.R. § 54.515. USAC says that it

lacks the authority to pay a school directly, because the Telecom

Act and its regulations allow payments from the USF only to service

providers. See 47 U.S.C. § 254(e) ("[O]nly an eligible

telecommunications carrier . . . shall be eligible to receive

specific Federal universal service support"); id. § 254(h)(1)(B)

(authorizing E-Rate payments for "telecommunications carriers").

Thus the service provider, who has already been paid, must receive

the funds under the BEAR method and pass them through to the

school. As part of the BEAR application, an authorized

representative of the service provider is required to sign an

"acknowledgment" that:

[T]he service provider must remit the discount amount
authorized by [USAC] to the Billed Entity Applicant who
prepared and submitted this [form] as soon as possible
after [USAC]'s notification to the service provider of
the amount of the approved discounts . . . but in no

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 event later than 10 calendar days after the receipt of
the reimbursement payment . . . .

The service provider must remit payment of the approved
discount amount to the Billed Entity Applicant prior to
tendering or making use of the payment issued by [USAC]
to the service provider . . . .

USAC's handbook for service providers is even more explicit: "The

service provider functions merely as a vehicle to deliver the

reimbursement back to the applicant. Failure to provide the

reimbursement in a timely fashion may result in the Service

Provider facing enforcement action." USAC Service Provider Manual,

supra, ch. 9.1 Springfield says it normally received

reimbursements within a few days after USAC paid them to the

service provider.

LAN Tamers completed a number of projects for

Springfield, two of which are pertinent. In 1999, LAN Tamers and

Springfield entered into a $1,096,180.28 contract for LAN Tamers to

install a high-speed data network at Central High School. In 2001,

they entered into a separate one-year contract for LAN Tamers to

provide network maintenance services at four Springfield schools

for $134,220. LAN Tamers completed both jobs satisfactorily.

1
We have found nothing further as to what "enforcement
action" means, and whether it encompasses, for example, a
prosecution for theft of the money. Cf. United States v. McKay,
274 F.3d 755, 759 (2d Cir. 2001) (affirming conviction under 18
U.S.C. § 641 (2000) for embezzling "money . . . of the United
States" where defendant improperly collected federally funded rent
subsidy from local housing authority).

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Springfield paid in full for the Central High School project by

January 2000, and for the maintenance contract by January 2002.

USAC initially found the Central High School project

ineligible for E-Rate funding, but Springfield appealed this

decision to the FCC and prevailed in March 2001. By early 2002,

the contracts were fully performed by both parties and Springfield

had received funding commitment letters from USAC stating that the

E-Rate program would reimburse 87% of each contract's cost. These

two reimbursements total $1,070,056.74. Springfield submitted the

required BEAR paperwork to USAC on April 17, 2002. On each form,

LAN Tamers signed the acknowledgment quoted above.

A month later, on May 20, 2002, LAN Tamers filed a

voluntary Chapter 11 bankruptcy petition. Upon learning of this

filing, USAC withheld payment of the reimbursements, which were to

have been made to LAN Tamers by check. At proceedings brought by

creditors, LAN Tamers mentioned the reimbursements and said the

monies were not its property and that it acted merely as a pass-

through. The creditors claimed the proceeds. The City of

Springfield appeared and asserted the reimbursements were its

property. The bankruptcy court opined that Springfield's claim was

really a claim to title and to recover an asset and so it should be

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asserted in an adversary proceeding. See Fed. R. Bankr. P.

7001(2).2

On June 4, 2002, Springfield filed an adversary

proceeding laying claim to the reimbursements. The suit named as

defendants LAN Tamers, its principal creditors, and USAC. One

creditor, the Bank of Western Massachusetts, counterclaimed,

arguing that its secured interest in all receivables of LAN Tamers

extended to the reimbursements. The Official Unsecured Creditors'

Committee also argued against Springfield's position and was deemed

a party to the proceeding. LAN Tamers supported Springfield's

claim. USAC also argued that the reimbursements belonged to

Springfield rather than LAN Tamers, but differed as to exactly what

power the bankruptcy court had over USAC to order it to take

action. Presumably, with the blessing of the bankruptcy court's

determination that the funds belong to Springfield, USAC intends to

make a check payable to LAN Tamers for the funds to be paid out to

Springfield.3 The bankruptcy court took testimony in the adversary

proceeding on June 13, 2002, and heard post-trial oral argument on

2
No party disagrees that this is the appropriate vehicle
to sort through the claim.
3
Springfield also asked the bankruptcy court to order USAC
to remit the reimbursements within a certain time. The court
concluded it had no jurisdiction to do so, City of Springfield v.
LAN Tamers, Inc. (In re LAN Tamers, Inc.), 281 B.R. 782, 797-98
(Bankr. D. Mass. 2002), and the issue is not before us. USAC has
filed an amicus brief in support of Springfield in this appeal.

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June 26. It also received pre-trial and post-trial briefing from

the parties.

The bankruptcy court issued a comprehensive written

decision in the adversary proceeding on August 16, 2002. City of

Springfield v. LAN Tamers, Inc. (In re LAN Tamers, Inc.), 281 B.R.

782 (Bankr. D. Mass. 2002). It determined that the reimbursements

were not the property of the estate, but were held by LAN Tamers in

either a resulting trust or a constructive trust for the benefit of

Springfield. Id. at 792, 796-97. The district court affirmed this

decision in a one-page order on September 26.

In October 2002, the bankruptcy court converted LAN

Tamers' petition from Chapter 11 to Chapter 7 and appointed David

W. Ostrander as trustee of the bankruptcy estate. The trustee

replaced the creditors' committee as the appellant before this

court. He appeals the exclusion of the reimbursements from the

property of the estate.

II.

The only issue here, whether the reimbursements are the

property of the estate, is purely one of law. Normally, such

issues are reviewed de novo. See Lentz v. Spadoni (In re Spadoni),

316 F.3d 56, 58 (1st Cir. 2003); Adams v. Coveney, 162 F.3d 23, 25

(1st Cir. 1998). Springfield argues for a more deferential

standard, citing a case concerning a bankruptcy court's award of

fees, Prebor v. Collins (In re I Don't Trust), 143 F.3d 1, 3 (1st

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Cir. 1998) (per curiam). That case is inapposite, because it

invoked discretionary and fact-based judgments made by the

bankruptcy judge. Id.; see Casco N. Bank, N.A. v. DN Assocs. (In

re DN Assocs.), 3 F.3d 512, 515 (1st Cir. 1993). Here, there is

plenary review of an unalloyed legal question. We have

jurisdiction over the appeal because the ruling is a final

disposition of Springfield's adversary action.

Section 541 of the Bankruptcy Code defines the property

of the estate. See 11 U.S.C. § 541 (2000). The statutory language

evinces congressional intent to include a broad range of property.

See United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05

(1983). It begins, in § 541(a), by including "all legal or

equitable interests of the debtor in property." 11 U.S.C. §

541(a)(1). The remainder of § 541, however, enumerates statutory

exclusions from this broad definition. Property covered by these

provisions is "excluded" from the estate, rather than being

"exempted" under other portions of the Code. This is an important

distinction. See Traina v. Sewell (In re Sewell), 180 F.3d 707,

710 (5th Cir. 1999) (differentiating "exclusions" from

"exemptions"); Ostrander v. Lalchandani (In re Lalchandani), 279

B.R. 880, 882 n.3 (B.A.P. 1st Cir. 2002) ("[P]roperty must first be

property of the estate before it can be exempted.").

Two exclusions are arguably relevant here. One such

exclusion, § 541(c)(2), removes inalienable interests in trusts,

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typically spendthrift trusts or pension plans, from the estate.

The bankruptcy court rested its holding on another basis for

exclusion, which states:

Property in which the debtor holds, as of the
commencement of the case, only legal title and not an
equitable interest . . . becomes property of the estate
. . . only to the extent of the debtor's legal title to
such property, but not to the extent of any equitable
interest in such property that the debtor does not hold.

11 U.S.C. § 541(d).

The trustee argues that the reimbursements are accounts

receivable of LAN Tamers, covered by the broad definition of the

property of the estate, and that Springfield is an ordinary

unsecured creditor of LAN Tamers, entitled only to a pro rata

distribution for its claim on an unpaid contractual debt.

Springfield, pointing to the bankruptcy court decision and the

language of the § 541(d) exclusion, responds that LAN Tamers never

had any equitable interest in the reimbursements and was simply a

conduit for them. There is no claim that Springfield did not meet

all the requirements to get the funding; USAC, in whose coffers the

funds now reside, argues that the money should go to Springfield.

Cf. Buchanan v. Alexander, 45 U.S. (4 How.) 20 (1846) (navy purser

argues that seamen's wages cannot be attached by their creditors).

The plain text of § 541(d) excludes property from the

estate where the bankrupt entity is only a delivery vehicle and

lacks any equitable interest in the property it delivers.

Identical language found in both the House and Senate reports that

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accompanied passage of the Bankruptcy Code strongly reinforces this

plain reading. See United States v. Yellin (In re Weinstein), 272

F.3d 39, 43, 45-46 (1st Cir. 2001) (further supporting plain-text

interpretation of Bankruptcy Code through legislative history).

While noting that the overall scope of § 541 is broad, the reports

continue:

Situations occasionally arise where property ostensibly
belonging to the debtor will actually not be property of
the debtor, but will be held in trust for another. For
example, if the debtor has incurred medical bills that
were covered by insurance, and the insurance company had
sent payment of the bills to the debtor before the debtor
had paid the bill for which the payment was
reimbursement, the payment would actually be held in a
constructive trust for the person to whom the bill was
owed.

S. Rep. No. 95-989 (1978), at 82, reprinted in 1978 U.S.C.C.A.N.

5787, 5868; H.R. Rep. No. 95-595 (1978), at 368, reprinted in 1978

U.S.C.C.A.N. 5963, 6324. In this congressional hypothetical,

property is excluded from the estate where the debtor merely

receives property in order to deliver it to its intended recipient

without any control or ownership over it.

The task, then, is to characterize the reimbursements

properly. To determine the nature of LAN Tamers' interest, we look

to the nature of the federal program from which that interest

arises. At least two circuits have faced analogous problems under

§ 541(d). In one of these cases, the Seventh Circuit aptly framed

the issue:

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 The answer depends on the terms under which the grants
were made. Did they constitute [the debtor] a trustee,
custodian, or other intermediary, who lacks beneficial
title and is merely an agent for the disbursal of funds
belonging to another? If so, the funds . . . were not
assets of the bankruptcy estate. Or were the grants more
like payment under a contract . . . ?

In re Joliet-Will County Cmty. Action Agency, 847 F.2d 430, 432

(7th Cir. 1988) (Posner, J.) (citations omitted). Joliet-Will

involved efforts by a federal agency to claim the unexpended

balance of federal grant funds and property bought with grant funds

from the estate of a bankrupt private nonprofit community service

agency, and thus to prevent distribution of this property to

creditors. The court looked at the nature of the federal

government's interest in the property, expressed through the

regulations and the nature of the grantor-grantee relationship.

Id. at 432. Joliet-Will expressly noted that this federal interest

does not preempt the Code -- a recipient of federal money can

declare bankruptcy -- but it may affect the issue of who owns the

property. Id. at 433.

The Third Circuit, in deciding In re Columbia Gas

Systems, Inc., 997 F.2d 1039 (3d Cir. 1993), held that refunds

created and mandated pursuant to federal law by a federal agency,

the Federal Energy Regulatory Commission (FERC), and held by a

bankrupt natural gas pipeline company, were not the property of the

estate under § 541(d). Id. at 1061 (debtor "acts as a receiving

and transmitting agent, or a conduit, for money upstream suppliers

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owe to overcharged consumers") (quotation omitted). As such, the

funds could not be reached by creditors of the bankrupt entity.

Analyzing the problem as one of federal law, Columbia Gas held that

the bankruptcy court should give permission to the debtor to pay

refunds that it had collected from upstream suppliers to the

appropriate customers. Id. at 1064. Using trust and beneficiary

concepts as a matter of federal common law, the court considered

the facts that the refunds were created by order of a federal

agency, private parties could not alter the refund orders, the

refunds implemented a central objective of the federal legislation,

and the refunds should not be subject to the inconsistent results

that the vagaries of state law would impose. Id. at 1055.

Columbia Gas likewise excluded surcharges the debtor had collected

from customers to fund industry research under FERC's direction.

Id. at 1062; see also Westmoreland Human Opportunities, Inc. v.

Walsh, 246 F.3d 233, 243-46 (3d Cir. 2001) (rights to debtor

grantee's continuing contract relationship with government are not

property of the estate); In re United Milk Prods. Co., 261 F. Supp.

766 (N.D. Ill. 1966) (funds collected by debtor under federal milk

marketing orders, and owed to milk producers, are not property of

the estate in pre-Code case); cf. Yonkers Bd. of Educ. v. Richmond

Children's Ctr., 58 B.R. 980, 981-82 (S.D.N.Y. 1986) (funds from

state education department paid to debtor but designated as "pass-

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through" payment for school district are not property of the

estate).

These cases share several common modes of analysis which

we apply here. First, we look to the role that the debtor was

intended to play. In the words of USAC's guidance to service

providers, LAN Tamers "function[ed] merely as a vehicle to deliver

the reimbursement back to the applicant." Courts have classified

debtors as mere delivery vehicles even when the nature of the

"pass-through" under a government program is less obvious than it

is here.4 See Joliet-Will, 847 F.2d at 432; Connecticut v. Novak

(In re Cmty. Assocs., Inc.), 173 B.R. 824, 830 (D. Conn. 1994)

(vans purchased with state-administered federal grant for transport

of elderly and disabled are not property of the estate). Joliet-

Will emphasized that the terms of the grant rendered the grantee

"in effect an agent to carry out specified tasks rather than a

4
Some courts have excluded property from the estate on the
basis that the debtor was a mere delivery vehicle without any
government interest directly at stake. See, e.g., T & B Scottdale
Contractors, Inc. v. United States, 866 F.2d 1372, 1376 (11th Cir.
1989) (bank account maintained by primary contractor contained
funds from subcontractor to pay its materialmen; funds not part of
subcontractor's bankruptcy estate because held solely for benefit
of materialmen); Branch v. Hill, Holliday, Connors, Cosmopolous,
Inc. (In re Bank of New Engl. Corp.), 165 B.R. 972, 978 (Bankr. D.
Mass. 1994) (debtor transmitted payments from its subsidiaries to
an advertising agency; this was "straight pass-through" with "no
profit element" for debtor and therefore not property of its
estate); Shipley Co. v. Darr (In re Tap, Inc.), 52 B.R. 271, 276
(Bankr. D. Mass. 1985) (debtor payroll company's "only function was
to transmit the funds entrusted to it promptly" so that funds are
not property of its estate). We need not consider such non-
governmental situations in this appeal.

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borrower, or an entrepreneur using invested funds." 847 F.2d at

432. The restrictive rules and intensive oversight rendered the

grantee's ownership "nominal." Id.; see also Cmty. Assocs., 173

B.R. at 828-29 (applying similar analysis to restrictive grant

agreement). There is little doubt in this case that the regulatory

structure of the E-Rate program reduced LAN Tamers to the status of

a mere delivery vehicle. LAN Tamers signed an acknowledgment

stating as much and foregoing any beneficial interest in the funds.

USAC's guidance reiterates the point forcefully.

Second, we look to the degree and intensity of regulatory

control over the property in question. See, e.g., Westmoreland,

246 F.3d at 244-46 (looking to agency's "pervasive and rigorous"

administration of grant); Joliet-Will, 847 F.2d at 432 (noting that

federal agency placed "minute controls on the use of the funds" by

debtor grantee). As stringent as the supervision was in cases such

as Joliet-Will, the debtor there enjoyed at least some autonomy in

the use of the property at issue. Not so here. Under the BEAR

payment method, LAN Tamers has absolutely no freedom to do anything

with the reimbursements except forward them to Springfield within

ten days. LAN Tamers was explicitly barred from "tendering or

making use of" the payment from USAC before Springfield was

reimbursed. In addition, other aspects of the E-Rate program,

including the registration of service providers and the multi-

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layered approval process for projects, display a comparable or

greater degree of regulatory control.

Next, we focus on the extent to which recognizing a

greater ownership interest -- and thereby diverting the property in

question to the creditors -- would thwart the overall purpose of

the regulatory scheme. See, e.g., Columbia Gas, 997 F.2d at 1055

("[T]he refunds arise directly from federal law and implement the

central objective of the [Natural Gas Act]."); Yonkers, 58 B.R. at

983 (purpose of reimbursement structure was to provide free public

education to mentally disabled children). In part, the amount of

oversight is a proxy for this consideration. See Westmoreland, 246

F.3d at 244. But even without reference to the detailed BEAR

procedures, it is clear that Congress intended money from the USF

to pay only for certain very specific activities. See 47 U.S.C. §

254(e) (USF funds shall be used "only for the provision,

maintenance, and upgrading of facilities and services for which the

support is intended"). LAN Tamers has already been paid for the

eligible services it provided; allowing USF funds to pay its other

debts would violate this congressional mandate. See Buchanan, 45

U.S. at 20-21 ("The funds of the government are specifically

appropriated to certain national objects, and if such

appropriations may be diverted and defeated by state process or

otherwise, the functions of the government may be suspended.");

Joliet-Will, 847 F.2d at 432 ("Congress is traditionally chary" of

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allowing funds of government programs to be diverted from their

stated purposes).

Finally, we note that this conclusion also prevents the

creditors from receiving a windfall of double payment for the work

LAN Tamers completed in Springfield's schools. If LAN Tamers had

not filed for bankruptcy, it could hardly sue USAC in its own right

to be paid again, having received full payment for its services

from Springfield long before. Once USAC issued the check to LAN

Tamers, the company could not have diverted the funds to its

creditors or to other purposes without "facing enforcement action."

At most, LAN Tamers arguably would hold bare legal title to the

reimbursements for a short time.5 It is a fundamental principle of

bankruptcy law "that the estate can only succeed to the same

property interest that the debtor possesses, and cannot achieve a

greater interest." 5 L.P. King et al., Collier on Bankruptcy ¶

541.01, at p. 541-8 (15th ed. 2003) (discussing § 541(d)). A

conclusion that the reimbursements should be distributed to the

creditors would flout this basic premise. It would provide a

windfall to the creditors at the expense of Springfield's public

schools and its students, contrary to the dictates of the statutory

and regulatory text underlying the E-Rate program.

5
For purposes of this opinion, we need not consider
whether the bankruptcy court was correct in determining that LAN
Tamers did hold legal title to the reimbursements, despite the fact
that USAC has never sent the check. See LAN Tamers, 281 B.R. at
792.

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 III.

The trustee seeks to undermine this conclusion in a

variety of ways. He advances different characterizations of many

of the cases cited above, but the factual distinctions he makes are

immaterial to the legal conclusions we draw from the cases.

The trustee devotes most of his energy to supporting a

very narrow interpretation of § 541(d). He argues that it applies

solely to trusts that would be recognized under state law, in this

case Massachusetts law. He further argues that the conditions of

Massachusetts trust law are not satisfied here. We need not

determine if the second contention is correct, because we reject

the first. There is no basis for a per se rule limiting § 541(d)

to state law trusts under all circumstances.

The Supreme Court unanimously rejected such a "state law

only" interpretation in Patterson v. Shumate, 504 U.S. 753 (1992).

That case concerned the exclusion in § 541(c)(2): "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 [the Bankruptcy Code]." A beneficiary

of a pension plan that was covered by the antialienation provision

of the Employee Retirement Income Security Act (ERISA), 29 U.S.C.

§ 1056(d)(1) (1988), claimed that his interest in the plan was

excluded from his bankruptcy estate because ERISA served as

"applicable nonbankruptcy law" restricting its transfer. The

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Patterson Court rejected an argument that the phrase applies only

to state law, and not ERISA, finding that interpretation contrary

to a "natural reading of the provision." 504 U.S. at 758; see

Lalchandani, 279 B.R. at 885-86 (applying ERISA to § 541(c)(2) case

concerning dependents of beneficiaries).

The Court also noted that, when Congress intended for

bankruptcy questions to be answered only by reference to state law,

it so specified. Patterson, 504 U.S. at 758 (citing examples).

For example, the Code explicitly incorporates applicable state law

in defining certain exemptions. See 11 U.S.C. § 522(b); Howe v.

Richardson, 193 F.3d 60, 61 (1st Cir. 1999) (applying Rhode Island

law to exemption under § 522(b)(2)(A)). In the absence of any

language specifically incorporating state law in the exclusions,

the "natural reading" of § 541(d), like the Patterson Court's

reading of § 541(c)(2), cuts against the trustee's proposed

construction that it incorporates and is restricted by state law in

all situations.

It is true that state law often provides the applicable

rules for bankruptcy determinations in the absence of other

imperatives. As the Supreme Court has summarized it, "Property

interests are created and defined by state law. Unless some

federal interest requires a different result, there is no reason

why such interests should be analyzed differently [in bankruptcy

law]." Butner v. United States, 440 U.S. 48, 55 (1979) (emphasis

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added); see Barnhill v. Johnson, 503 U.S. 393, 398 (1992) (citing

Butner). Likewise, a recent bankruptcy decision in this court

noted that a federal court "will often simply incorporate the law

of the appropriate state if there is no relevant federal interest

to justify a distinct federal rule." United States v. Fleet Bank

of Mass. (In re Calore Express Co.), 288 F.3d 22, 44 (1st Cir.

2002) (emphasis added); see also Conn. Gen. Life Ins. Co. v.

Universal Ins. Co., 838 F.2d 612, 618 (1st Cir. 1988) (state law

"usually" the determinant of property interests). In short,

"Section 541 eliminates exclusive reliance on state law in

determining what constitutes property of the estate but recognizes

the traditional role of the states in creating and defining the

underlying property interests and commercial arrangements to which

bankruptcy law applies." Branch v. Hill, Holliday, Connors,

Cosmopolous, Inc. (In re Bank of New Engl. Corp.), 165 B.R. 972,

977 (Bankr. D. Mass. 1994) (quotation omitted).

The qualifying clauses in these decisions cannot be

ignored. Where there are significant federal interests involved,

the default rule of applying state standards to bankruptcy

determinations may yield.6 Here, the statutory and regulatory

framework for the E-Rate program, established under the Telecom

Act, provides a federal definition of the property interests

6
We need not decide precisely when state law would or
would not apply. We simply conclude that this situation involves
sufficiently significant federal interests.

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involved in this case. That definition takes account of the

federal government's aspiration, expressed in the Telecom Act and

promoted by the activities of the FCC and USAC, that "[e]lementary

and secondary schools and classrooms . . . should have access to

advanced telecommunications services." 47 U.S.C. § 254(b)(6). As

such, it is the definition that we apply. See Calore Express, 288

F.3d at 43-44 (choice of standard guided by protection of strong

federal interests).

Just as the language of § 541(d) does not invariably

incorporate state law, it is not always limited to trusts either.

To be sure, since the separation of legal and equitable interests

is characteristic of a trust, there will be overlap. In some of

the cases discussed above, courts classified the excluded property

as the corpus of a trust of some kind. E.g., Columbia Gas, 997

F.2d at 1059-60; Yonkers, 58 B.R. at 983. The bankruptcy court

here did so as well. LAN Tamers, 281 B.R. at 792. And Congress

referred to a "constructive trust" in the insurance hypothetical

quoted earlier.

This usage may prove confusing, however, because these

supposed trusts might lack characteristics of trusts recognized for

other purposes under state law. We think it better to avoid the

language of trusts and rest our holding more simply on the fact

that LAN Tamers, as a mere delivery vehicle, lacked an equitable

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interest in the reimbursements under the federal program.7 See

R.J. Keach, The Continued Unsettled State of Constructive Trusts in

Bankruptcy, 103 Com. L.J. 411, 446, 449 n.172 (1998)

(distinguishing "true conduit" cases from constructive trust

cases); cf. Joliet-Will, 847 F.2d at 433 (criticizing

characterization of government's interest in debtor's grant funds

as "equitable lien" for similar reasons).

The trustee also argues that the Supreme Court's recent

decision in FCC v. NextWave Personal Communications, Inc., 123 S.

Ct. 832 (2003), requires a different outcome. In NextWave, the

debtor had purchased broadband spectrum licenses in an FCC auction,

and arranged to pay for them in installments. When the debtor fell

behind in its payments and filed for bankruptcy, the FCC tried to

revoke the licenses, but the Court held that it could not. The

licenses remained property of the estate.

There are two enormous differences between NextWave and

this case. First, FCC licenses have many qualities of property in

which the licensee holds beneficial interest, sweeping them out of

the § 541(d) exclusion and into the broad overall definition of

property of the estate. See Ramsay v. Dowden, (In re Cent. Ark.

7
In addition, the use of constructive trusts as the basis
for exclusions under § 541 has been criticized for reasons
unrelated to the situation of the true delivery vehicle. See
generally XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.),
16 F.3d 1443 (6th Cir. 1994); E.L. Sherwin, Constructive Trusts in
Bankruptcy, 1989 U. Ill. L. Rev. 297.

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Broad. Co.), 68 F.3d 213, 214-15 (8th Cir. 1995) (per curiam). The

licensee secures the right to engage in communications activities

and keep the resulting profit for itself -- rather than serving

solely as a vehicle delivering benefits to another -- and does so

under less pervasive regulatory supervision. See Westmoreland, 246

F.3d at 253-54 (distinguishing broadcast licenses from contract

rights under a grant).

A second distinction between this case and NextWave is

that NextWave relied heavily on specific language in the Bankruptcy

Code barring the government from revoking a license on the basis of

a debtor's nonpayment. See 11 U.S.C. § 525(a). The Court rejected

the FCC's argument that its regulatory authority trumped this

prohibition. NextWave, 123 S. Ct. at 838-40. As such, it

invalidated the purported revocation as "not in accordance with

law" under the Administrative Procedure Act, 5 U.S.C. § 706(2)(A)

(2000). See NextWave, 123 S. Ct. at 838. Here, in contrast, the

trustee points to no similar provision of the Code that applies to

the reimbursements and stands in opposition to the federal rules

derived from the E-Rate program's regulatory scheme.

Finally, throughout his briefs the trustee emphasizes the

importance in bankruptcy law of equal footing for similarly placed

creditors. The argument assumes that Springfield is indeed a

creditor similar to the others. This bankruptcy policy is not

implicated, however, when the property in question is not

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legitimately available to creditors in the first place. See Begier

v. IRS, 496 U.S. 53, 58 (1990) (policy behind avoidance irrelevant

when property is not part of the estate); United Milk, 261 F. Supp.

at 768 ("[U]nsecured creditors should not be permitted to share in

monies . . . which [the debtor] would not be permitted to retain

for its own use."). The true harm to creditors is minimal here

anyway, because the legal and regulatory impediment to using the

reimbursements for other purposes makes bare legal title to them an

asset of almost no value. See Westmoreland, 246 F.3d at 244

(restrictions on housing grants so limit their transferability that

grantee's interest is "essentially valueless"). LAN Tamers served

only as a delivery vehicle for federally regulated reimbursements

derived from the USF, not as an owner of those funds (or of the

right to receive them). The reimbursements were never part of the

bankruptcy estate, so creditors never had a claim to them.

IV.

For the reasons stated in this opinion, the ruling of the

district court is affirmed.

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