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
-3-
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)
-4-
(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
-5-
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
-6-
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).
-7-
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
-8-
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.
-9-
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
-10-
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,
-11-
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
-12-
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:
-13-
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
-14-
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-
-15-
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.
-16-
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-
-17-
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
-18-
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.
-19-
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
-20-
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
-21-
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.
-22-
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
-23-
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.
-24-
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
-25-
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.
-26-