Westmoreland Human Opportunities, Inc. v. Walsh

Opinions of the United

2001 Decisions States Court of Appeals

for the Third Circuit

4-10-2001

Westmoreland Human v. Walsh

Precedential or Non-Precedential:

Docket 00-3070

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Filed April 10, 2001

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 00-3070

WESTMORELAND HUMAN OPPORTUNITIES, INC.,

Appellant

v.

JAMES R. WALSH, Trustee of the Bankruptcy Estate of

Life Service Systems, Inc.; LIFE SERVICE SYSTEMS, INC.

On Appeal From the United States District Court

For the Western District of Pennsylvania

(D.C. Civ. No. 99-cv-00110)

District Judge: Honorable D. Brooks Smith

Argued: October 25, 2000

Before: BECKER, Chief Judge, SCIRICA and

FUENTES, Circuit Judges.

(Filed April 10, 2001)

DANIEL B. PAGLIARI, ESQUIRE

(ARGUED)

Pagletta & Pagliari, LLP

2773 Leechburg Road

Lower Burrell, PA 15068-3138

Counsel for Appellant

JAMES R. WALSH, ESQUIRE

(ARGUED)

Spence, Custer, Sayler, Wolfe,

and Rose

400 U.S. Bank Building

P.O. Box 280

Johnstown, PA 15907

Counsel for Appellee

DAVID W. OGDEN, ESQUIRE

Assistant Attorney General

United States Department of Justice

P.O. Box 878

Ben Franklin Station

Washington, DC 20044

HARRY LITMAN, ESQUIRE

United States Attorney

633 U.S. Post Office & Courthouse

Pittsburgh, PA 15219

WILLIAM KANTER, ESQUIRE

H. TYOMAS BYRON, III, ESQUIRE

Attorneys, Appellate Staff

Civil Division, PHB Room 9102

Department of Justice

601 D Street, N.W.

Washington, DC 20530-0001

CAROLE W. WILSON, ESQUIRE

Associate General Counsel

ANGELO AIOSA, ESQUIRE

Assistant General Counsel

BATINA R. WILLS, ESQUIRE

Trial Attorney

Department of Housing and Urban

Development

451 7th Street, S.W., Room 10258

Washington, DC 20410

Counsel for United States of America

as Amicus Curiae

2

OPINION OF THE COURT

BECKER, Chief Judge.

This bankruptcy appeal requires us to define the

boundaries of the term "property of the estate," as used in

S 541 of Title 11 of the United States Code (Bankruptcy

Code), in the context of a federal grant relationship. The

appeal arises out of an adversary action instituted by the

trustee of debtor Life Service Systems, Inc. (LSS) against

defendant Westmoreland Human Opportunities, Inc. (WHO),

charging the latter with a breach of itsfiduciary duty to

LSS's Unsecured Creditors Committee (Committee). Both

LSS and WHO are non-profit organizations which provide

community services to residents of Westmoreland County in

western Pennsylvania.

In 1995, LSS was selected by the Department of Housing

and Urban Development (HUD) to receive grant moneys

under the federal Supportive Housing Program; LSS and

HUD executed a Supportive Housing Grant Agreement

(Grant Agreement) as part of this grantor/grantee

arrangement. Shortly thereafter, LSS experienced

significant financial difficulties, ultimatelyfiling a Chapter

11 bankruptcy petition. Because WHO was one of LSS's

largest creditors, it accepted an invitation to join the

Unsecured Creditors Committee.

During its tenure on the Committee, WHO, without

notifying either its fellow Committee members or the

Bankruptcy Court, assumed LSS's position as r ecipient of

Supportive Housing Program funds, executing a Supportive

Housing Grant Agreement Amendment (Grant Agr eement

Amendment) with HUD. In the adversary action at issue on

this appeal, LSS's trustee in bankruptcy alleged that WHO,

by assuming LSS's interest in the grant r elationship in this

manner, breached its fiduciary duty to Committee

constituents. WHO defended on the ground that LSS's

interest in the Supportive Housing Program grant

relationship was not property of LSS's bankruptcy estate

and thus did not trigger a fiduciary duty on WHO's part.

The Bankruptcy Court rejected WHO's defense, holding that

3

LSS's interest in the grant relationship constituted part of

LSS's bankruptcy estate and that WHO had ther efore

violated its fiduciary obligations. It enter ed judgment

against WHO in the sum of $135,653. On appeal, the

District Court affirmed.

Against this background, WHO's appeal pr esents the

question whether a debtor non-profit community service

organization's interest in a HUD-type federal grant

relationship constitutes property of the debtor's estate.

Disagreeing with the Bankruptcy and District Courts, we

hold that LSS's interest in the grant r elationship with HUD

is excluded from the definition of "pr operty of the estate"

set forth in S 541 of the Bankruptcy Code. Despite S 541's

considerable breadth, HUD's singular supervisory interest

in ensuring the effective administration of the Supportive

Housing Program, evidenced by the pervasive, strict, and

minute oversight over the grant relationship imposed by the

Program's relevant statutory and r egulatory provisions,

suffices to exclude LSS's interest in the Supportive Housing

Program grant relationship from S 541's property definition.

The District Court, in conducting its S 541 pr operty

analysis, failed to account for HUD's weighty inter est. The

court mistakenly viewed the provisions of the Grant

Agreement as the exclusive calipers for measuring the

rights yielded to LSS by virtue of the grant r elationship,

and therefore neglected to consider the substantial

limitations imposed on those rights by the other statutory

and regulatory components of the Supportive Housing

Program scheme. As a result, we conclude that the District

Court erred in deciding that LSS's inter est in the grant

relationship constituted property of its bankruptcy estate,

and we therefore set aside the court's judgment.

However, our conclusion that LSS's inter est does not

qualify as property for purposes of the Bankruptcy Code

does not dispose of this appeal. Left unanswer ed is a

question not considered by either the Bankruptcy or the

District Court: whether, despite the fact that LSS's interest

in the grant relationship with HUD was not pr operty of its

bankruptcy estate, WHO's assumption of LSS's inter est

without notice to Committee members or to the Bankruptcy

Court violated the fiduciary duty WHO owed to Committee

4

constituents. The Bankruptcy and District Courts, as well

as the parties themselves, all appear to have assumed that

resolution of the bankruptcy property question would also

dispose of the breach of fiduciary duty issue. Because

neither the District nor the Bankruptcy Court addr essed

the issue that our disposition of the case now raises,

relying instead on the erroneous conclusion that LSS's

interest qualified as property for purposes of the

Bankruptcy Code, and because the parties failed to

adequately brief and argue the question to us, we remand

the case to the District Court, which may in tur n refer it to

the Bankruptcy Court, for resolution of the issue.

I. Facts and Procedural History

A.

In 1995, LSS, a private non-profit community service

organization operating in western Pennsylvania, undertook

a project to provide supportive housing assistance to

homeless families in Westmoreland County. LSS planned to

purchase and refurbish two small apartment buildings,

which it would then use to provide those families with

transitional housing. As the name suggests, transitional

housing is not intended to furnish homeless families with

a permanent residence, but rather is designed to supply

recipients with temporary shelter while they seek

permanent housing and learn basic life skills necessary for

independent living.1 LSS's pr oject was to house some

twenty families with children, and would have provided

supportive services, including job training and placement,

day care, adult education, and instruction in daily life skills

such as nutrition and budgeting.

As its primary source of funding for the pr oject, LSS

turned to HUD, seeking moneys from HUD's Supportive

Housing Program. The purpose of this Pr ogram "is to

_________________________________________________________________

1. Section 11384(b) of the Stewart B. McKinney Homeless Assistance Act

defines "transitional housing" as "housing the purpose of which is to

facilitate the movement of homeless individuals and families to

permanent housing within 24 months." 42 U.S.C. S 11384(b).

5

promote the development of supportive housing and

supportive services, including innovative appr oaches to

assist homeless persons in the transition fr om

homelessness, and to promote the provision of supportive

housing to homeless persons to enable them to live as

independently as possible." 42 U.S.C. S 11381. The

Supportive Housing Program facilitates this public purpose

by furnishing federal moneys to qualified HUD-selected

applicants, who are to use the funds for several types of

housing-related activities, including acquisition and/or

rehabilitation of existing structures, construction of new

structures, leasing of existing structur es, and provision of

supportive services for transitional housing r esidents. See

generally 42 U.S.C. S 11383(a); 24 C.F .R. S 583.100(a)

(2000).

Recipients of Supportive Housing Program grants are

selected through a nationwide competitive pr ocess. See 42

U.S.C. S 11386(b). As part of this process, LSS was required

to submit to HUD a detailed application and pr oject

proposal, which furnished information about: (1) the

housing project itself, such as the project location, the

number of homeless families that LSS would accommodate

at that location, and the types of supportive services that

would be offered at the site; (2) LSS's past experience in

providing housing assistance, including pr evious housing

programs it had operated and prior HUD grants it had

received; and (3) the budget for the pr oposed project. In its

application, LSS requested $1,326,965 in Supportive

Housing Program funds to cover the cost of acquiring and

rehabilitating the two apartment buildings, the operating

expenses for those premises, the cost of the supportive

services that would be offered at those sites, and a five

percent administrative fee for the expenses LSS would incur

in administering the Supportive Housing Program grant.

On February 5, 1996, LSS received final appr oval from

HUD for a transitional housing project to be located at 49

Division Street in Greensburg, W estmoreland County.

Several days later, LSS and HUD executed the Grant

Agreement, which obligated HUD to provide $1,326,965 to

the 49 Division Street project, and committed LSS to

administer those funds at that project site. The Grant

6

Agreement, which was subject to renewal, carried a three-

year term and was scheduled to expire in 1999. Shortly

after the execution of the Grant Agreement, LSS purchased

the Division Street property and began r enovations.

B.

Several months after entering into the Grant Agr eement

with HUD, LSS began experiencing significant financial and

administrative problems. LSS attempted to r esolve these

difficulties by seeking consulting relationships with other

non-profit entities. First, in September 1996, LSS entered

into a consulting agreement with WHO, pursuant to which

WHO was to furnish management assistance to LSS.

However, this affiliation ended after a month when WHO

elected to terminate the agreement upon discovering that

LSS's financial troubles were mor e serious than originally

anticipated. Subsequently, on November 9, 1996, LSS

retained Adelphoi, Inc., another non-pr ofit organization

operating in Westmoreland County. Pursuant to the

management agreement entered into with Adelphoi, all of

LSS's board members resigned and wer e replaced by new

directors selected by Adelphoi.

Two months after Adelphoi took over LSS's management,

LSS filed a voluntary Chapter 11 petition. At the time of the

petition, LSS had drawn down approximately $288,800 in

federal Supportive Housing Program moneys. LSS's interest

in the grant relationship with HUD was not itself listed on

the schedule of assets LSS submitted to the Bankruptcy

Court. An Unsecured Creditors Committee was formed, and

WHO, which had a claim against LSS for compensation

based on the brief period it spent providing consulting

services to LSS, accepted an invitation to sit on the

Committee. WHO resigned from the Unsecur ed Creditors

Committee in September 1997 due to accusations of a

conflict of interest. However, WHO's assumption of LSS's

Supportive Housing Program grant occurr ed prior to the

date of this resignation.

Less than two weeks after LSS filed its Chapter 11

petition, HUD declared LSS in default of the Supportive

Housing Program grant. By letter dated January 29, 1997,

7

HUD notified LSS that it could no longer r eceive Supportive

Housing Program disbursements. HUD also infor med LSS

that its grant would be reactivated should LSS develop a

"workable plan" acceptable to HUD. Further more, HUD

warned LSS that if a suitable plan was not forthcoming

within 30 days, HUD would exercise its power to either

cancel the remainder of the grant, or select a successor to

administer the program. Although LSS did not r espond

within the requested 30-day period, HUD did not in fact

terminate the grant or replace LSS as grantee; rather, on

March 4, 1997, HUD sent a follow-up communication to

LSS, once again requesting a "work-out plan for the

continued implementation of the [49 Division Str eet

transitional housing] project."

Ultimately, LSS responded by proposing to HUD that

Adelphoi acquire ownership of the Division Str eet property

and that WHO take over administration of the transitional

housing project located at that site. On May 28, 1997,

WHO was substituted as recipient of LSS's Supportive

Housing Program grant, and WHO and HUD executed the

Grant Agreement Amendment, which identified WHO as the

project sponsor and as the "Successor to Life Service

Systems, Inc." The Amendment listed both 49 Division

Street and a second site at 203 South Maple A venue as the

relevant project locations for the transitional housing

project. Apparently, WHO did not fur nish any consideration

to LSS's estate in exchange for assuming the Grant

Agreement, and neither WHO nor LSS provided notice of

the assumption to the Unsecured Creditors Committee or to

the Bankruptcy Court.

After assuming LSS's Supportive Housing Program grant,

WHO did not in fact continue the transitional housing

project at the Division Street location. Shortly after WHO

and HUD executed the Grant Agreement Amendment, LSS,

following its proposal that Adelphoi acquir e the transitional

housing project's real property, petitioned the Bankruptcy

Court to sell the Division Street property to Westmoreland

CHODO, a non-profit entity controlled by Adelphoi (and

apparently unaffiliated with WHO). With approval of the

Bankruptcy Court, the Division Street r eal estate was put

up for auction. However, Westmor eland CHODO was outbid

8

by a third party purchaser, and thus did not acquire the

Division Street real estate. WHO, appar ently uninterested

in dealing with the third party buyer, discontinued the

transitional housing project at the Division Street site and

elected to carry on the program at a dif ferent location.

C.

Following the property sale, the Bankruptcy Court

appointed James Walsh as LSS's Chapter 11 Bankruptcy

Trustee, at the request of the Unsecur ed Creditors

Committee. On February 16, 1998, the Trustee instituted

an adversary action against WHO in the Bankruptcy Court,

alleging that WHO, as a member of the Unsecur ed Creditors

Committee, owed a fiduciary duty to the other members of

the Committee which it breached by taking over LSS's

status as a recipient of federal Supportive Housing Program

moneys without furnishing notice to other unsecured

creditors or obtaining prior court appr oval.2 In its defense,

WHO argued that it breached no fiduciary duty because

LSS's interest in the Supportive Housing Pr ogram grant

relationship with HUD was never property of LSS's

bankruptcy estate within the meaning of S 541 of the

Bankruptcy Code.

The Bankruptcy Court held in the Trustee's favor,

concluding that LSS's interest in the grant r elationship with

HUD constituted property of LSS's bankruptcy estate.

Furthermore, the court determined that WHO did in fact

breach its fiduciary duty to fellow Committee members, and

awarded LSS's estate $135,653 in monetary r elief.3 WHO

(Text continued on page 11)

_________________________________________________________________

2. LSS's Bankruptcy Trustee also instituted adversary actions against

Adelphoi and LSS's board of directors (elected by Adelphoi), claiming,

inter alia, a breach of fiduciary duty in connection with WHO's

succession to the Supportive Housing Program grant. These actions were

settled before trial.

3. As the remedy for WHO's alleged br each of fiduciary duty, LSS's

Trustee did not seek to have the Bankruptcy Court void and set aside

WHO's assumption of the Supportive Housing Pr ogram grant; rather, the

Trustee only requested monetary damages. The record does not make

the basis for this monetary relief entir ely clear. The following is our

rendering.

9

The damage request consisted of three components. First, the Trustee

sought compensation for claims brought by five individuals relocated by

LSS as part of its acquisition and rehabilitation of the Division Street

property. The Supportive Housing Program r equires a grant recipient to

provide compensation to individuals displaced as a direct result of the

recipient's supportive housing project. See 24 C.F.R. S 583.310 (2000).

Although the record is silent on this issue, we can infer from the fact

that these five individuals were listed among LSS's general unsecured

creditors that LSS had failed to provide the full measure of assistance

required by the Supportive Housing Pr ogram.

Second, LSS's Trustee sought recovery for amounts owed to matching

fund grantors Westmoreland County Housing Authority, United Way, and

Richard K. Mellon Foundation, also listed among LSS's general

unsecured creditors. Before a grantee can receive federal funds under

the Supportive Housing Program for the acquisition or rehabilitation of

existing structures, or for new construction, it must obtain matching

funds from non-HUD sources equal to the amount of federal funds it is

requesting for those activities. See 42 U.S.C. S 11386(e); 24 C.F.R.

S 583.145 (2000). To satisfy this obligation, LSS contributed its own

moneys, and secured matching funds from the Westmoreland County

Housing Authority, the United Way, and the Mellon Foundation.

Although the record on appeal does not contain the terms of the

agreements entered into by LSS and the matching fund grantors, the

grantors apparently conditioned their pr ovision of matching funds on the

continued use of those funds for a transitional housing project at the 49

Division Street location. According to the Bankruptcy Court, when WHO,

after succeeding to LSS's interest in the Supportive Housing Program

grant relationship with HUD, decided not to continue the project at the

49 Division Street site, the matching fund grantors acquired a claim

against LSS's estate for a return of the balance of their donated moneys.

Finally, LSS's Trustee requested monetary relief in the amount of the

Supportive Housing grant moneys allocated to the grantee's

administrative expenses. According to the Bankruptcy Court, WHO

benefitted by receiving this amount as part of its succession to LSS's

Supportive Housing Program grant because WHO was able to use those

moneys to pay part of its employee salaries without having to

demonstrate that those employees worked exclusively on the

administration of the transitional housing pr ogram.

The Bankruptcy Court's $135,653 award cover ed only the latter two

components of the Trustee's monetary r elief claim. Because WHO

stipulated at trial that it had assumed LSS's obligation to provide

10

appealed to the District Court for the Wester n District of

Pennsylvania, contending that the Bankruptcy Court had

erroneously concluded that LSS's interest in the Supportive

Housing Program grant relationship with HUD qualified as

property of LSS's bankruptcy estate. The District Court,

however, affirmed the Bankruptcy Court's judgment, and

WHO timely appealed to this court.4 In addition to the

briefs of the parties, we requested (and r eceived) an amicus

curiae brief from the Bankruptcy Section and the

Commercial Litigation Department of the Civil Division of

the Department of Justice stating their position on the

central issues. We also gave the parties an opportunity to

reply to this amicus brief.

II. Property of the Estate

The filing of a voluntary petition in bankruptcy court

commences a bankruptcy case and creates a bankruptcy

estate comprised of the debtor's property as of the

commencement of the case. See 11 U.S.C.SS 301, 541.

Section 541(a)(1) of the Bankruptcy Code defines"property

of the estate" as including "all legal or equitable interests of

the debtor in property as of the commencement of the

case." Id. S 541(a)(1). As the Supr eme Court observed in

United States v. Whiting Pools, Inc., 462 U.S. 198 (1983),

S 541(a)'s legislative history demonstrates that the language

of this provision was intended to sweep br oadly to include

"all kinds of property, including tangible or intangible

property, causes of action . . . and all other forms of

property currently specified in section 70a of the

Bankruptcy Act." Id. at 205 n.9 (quoting H.R. Rep. No. 95-

595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5963);

see also In re O'Dowd, 233 F.3d 197, 202 (3d Cir. 2000).

In view of this definition, we must determine whether

LSS's interest in the grant relationship constituted a "legal

_________________________________________________________________

relocation assistance to the five displaced individuals (the first

component), the Bankruptcy Court held that LSS's bankruptcy estate

could not recover that amount.

4. The Bankruptcy Court exercised jurisdiction pursuant to 28 U.S.C.

S 157, the District Court had jurisdiction under 28 U.S.C. S 158(a)(1),

and we have jurisdiction pursuant to 28 U.S.C. S 158(d).

11

or equitable interest[ ]" that, under the terms of S 541(a)(1),

falls within S 541's property definition. Because a district

court's conclusion as to whether an item constitutes

"property of the estate" for purposes ofS 541 raises a

question of law, our review is plenary. See In re Blatstein,

192 F.3d 88, 94 (3d Cir. 1999). W e first identify the specific

interests regarded by the District Court as constituting

property of LSS's bankruptcy estate. We next examine the

ways in which a federal agency's supervisory inter est in a

grant relationship can alter the dynamics ofS 541's

property calculus. We then focus on the District Court's

principal error in this case, i.e., its failur e entirely to

account for HUD's weighty federal interest in the

Supportive Housing Program, and conclude that, had the

court given proper weight to HUD's strong interest, LSS's

interest in the grant relationship would have been excluded

from LSS's estate for bankruptcy purposes. Finally, we note

that considerations of bankruptcy policy militate in favor of

excluding LSS's interest from S 541's property definition. In

the course of this discussion, we distinguish LSS's

Trustee's attempts to rely on case law holding that

government-issued licenses, in general, qualify as property

of the estate under the Bankruptcy Code. Our last task will

then be to delineate the scope of our holding in the instant

case.

A.

Analysis under S 541's property definition must begin by

focusing directly on the specific inter ests claimed to

constitute the debtor's property. In the case before us, the

District Court characterized LSS's interest in the grant

relationship as a set of contractual rights arising out of the

Grant Agreement executed between LSS and HUD in 1995,

ultimately deciding that these contractual rights were

property of LSS's bankruptcy estate. In r eaching this

conclusion, the District Court began by turning to relevant

Pennsylvania state law and determining that, under that

case law, contractual rights are classified as property

interests. See, e.g., Klingner v. Pocono Int'l Raceway, Inc.,

433 A.2d 1357, 1361 (Pa. Super. Ct. 1981) (noting that

contractual rights are personal property under

Pennsylvania law).

12

In terms of our analysis, we do not question the District

Court's reading of Pennsylvania law, and assume that

ordinary contract rights would qualify as such property

interests under that state law; it is well-established that

federal courts typically must look to state law in

ascertaining the existence and scope of the debtor's"legal

or equitable interests" for purposes ofS 541(a)(1). See

Butner v. United States, 440 U.S. 48, 54 (1979) ("Congress

has generally left the determination of pr operty rights in the

assets of a bankrupt's estate to state law.") (footnote

omitted); O'Dowd, 233 F.3d at 202 ("While federal law

defines what types of property comprise the estate, state

law generally determines what interest, if any, a debtor has

in property."). It is also settled that the expansive nature of

S 541's property definition encompasses rights and interests

arising from ordinary contractual r elationships. See 5

Collier on Bankruptcy P 541.08[4], at 541-49 (15th ed. rev.,

King et al. eds., 1996); see also In re Minoco Group of Cos.,

Ltd., 799 F.2d 517, 519 (9th Cir. 1986) (holding that

insurance contracts constitute "property of the estate" for

purposes of S 541).

Attempting to delineate the scope of LSS's inter est in the

grant relationship, the District Court examined the

provisions of the Grant Agreement executed in 1995

between LSS and HUD, and identified three sets of

contractual rights that it believed arose out of the

relationship: (1) the debtor LSS's right to r eceive payment

from HUD for authorized expenditures that LSS incurred

while administering its Supportive Housing Pr ogram

project; (2) the debtor's right to compel HUD to make

payments in connection with LSS's administration of the

Supportive Housing Program; and (3) the debtor's right to

assign its interest in the Supportive Housing Grant, subject

to HUD's prior written approval. The court then held that

LSS's interest in the grant relationship, evidenced by these

three sets of rights, qualified as pr operty of LSS's

bankruptcy estate within the meaning of S 541. We

conclude that this decision was incorrect.

B.

At bottom, the problem with the District Court's S 541

property analysis lies in its failure to take into account

13

HUD's strong federal interest in supervising the efficient

and effective administration of Supportive Housing Program

grant funds by intermediaries such as LSS, designed to

ensure that the Program's ultimate beneficiaries (i.e.,

homeless individuals) receive the full measur e of federal

assistance afforded to them under the ter ms of the

Program. As will be seen in detail below, HUD's singular

interest in preserving such a supervisory role--evidenced by

the strict and pervasive oversight imposed by the

Supportive Housing Program scheme on the grant

relationship--can alter the dynamics of S 541's property

calculus, resulting in the exclusion of the grantee's interest

from its bankruptcy estate.

Our analysis proceeds in several steps. W e first explain

that a federal agency's supervisory interest over the

administration of a grant program can r esult in the

exclusion of a grantee's interest in the grant relationship

from S 541's property definition if the interest is sufficiently

weighty. We then present a method for assessing when an

agency's interest rises to such a level. Finally, we focus on

the facts of the case before us and on the specific

provisions of the Supportive Housing Pr ogram, explaining

the two related ways in which the District Court's failure to

account for HUD's supervisory interest manifested itself: (1)

the court neglected to consider the pervasive r estrictions

imposed on a Program grantee's rights by the substantive

provisions of two major components of the Supportive

Housing Program grant scheme; and (2) in light of these

limitations, the court construed the scope of the LSS's

rights under the grant arrangement too expansively.

1.

A federal agency like HUD clearly has a substantial

supervisory interest in preserving the coherence and

integrity of the federal grant scheme it is char ged with

administering, and in ensuring that federal grant moneys

disbursed pursuant to that scheme are dispensed by

intermediaries in an efficient and ef fective manner to the

ultimate beneficiaries of the grant. While the Bankruptcy

Code's property definition is certainly expansive, it is not

limitless, and, as we will demonstrate, a federal agency's

14

strong supervisory interest in the administration of a grant

program can play a significant role in determining whether

the interests created by a federal grant program fall within

S 541's definition of "property of the estate."

We recognize, of course, that each time a federal agency

executes a contractual agreement with a private party, or

enters into an arrangement with an entity in or der to

furnish assistance to the public, a federal interest is

arguably implicated. We therefor e must take care to

distinguish those situations in which a federal grantor

agency's supervisory interest is sufficiently weighty to

exclude the grantee's interest in the grant r elationship from

S 541's property definition from those situations in which it

is not. As we see it, the strength of an agency's supervisory

interest can best be gauged by examining the substantive

provisions of the grant scheme established by applicable

federal statutes and regulations. Cf. In r e Joliet-Will County

Cmty. Action Agency, 847 F.2d 430, 431-32 (7th Cir. 1988)

(analyzing the provisions of a federal "foster grandparents"

grant program administered by ACTION as part of the S 541

bankruptcy property inquiry).

To be sure, if a provision of a federal grant program

specifically authorizes federal grant moneys to be used to

pay a debtor grantee's creditors, it will be difficult for us to

conclude that the federal agency's interest is sufficiently

weighty to exclude the debtor's interest fr om S 541's

property definition. Cf. id. at 432. But the Supportive

Housing Program involved in the case befor e us contains no

such authorization, and thus our analysis of the nature of

HUD's supervisory interest, as manifested in the

substantive provisions of the Program, must be more

searching.

The strength of an agency's supervisory inter est can best

be measured by the level of agency oversight over the grant

relationship preserved in the provisions of the federal grant

program. A grant framework clearly evidences a desire to

sustain the federal agency's strong supervisory interest over

that relationship when it: (1) gives an agency extensive

control over the identity of the grant r ecipients with whom

it must deal by limiting the pool of applicants eligible to

receive funds, and by restricting the grantee's ability to

15

substitute a replacement entity in its stead; and (2) imposes

rigorous federal oversight of the grantee's per formance in

furtherance of the grant relationship.

As we see it, a federal agency's retention of pervasive

restrictions on a grantee's identity and manner of

performance under a HUD-type grant pr ogram is

inconsistent with the grantee's assertion of a pr operty

interest in the grant relationship. As we will discuss below

after examining the details of the Supportive Housing

Program, such limitations greatly constrict the scope of the

rights yielded to the grantee by the terms of the grant

arrangement, and substantially (if not completely) r estrict

their transferability and alienability, ther eby effectively

rendering the grantee's interest essentially valueless.

Moreover, as we explain infra in Part II.C., inclusion of such

interests in the grantee's bankruptcy estate would further

neither the equitable nor the rehabilitative purpose of the

Bankruptcy Code. As a result, we are satisfied that if these

controls are sufficiently extensive, i.e., if, under the terms

of the arrangement between the grantor federal agency and

the grantee, the agency retains strict, pervasive, and

minute oversight over the identity of the grant r ecipient and

the manner of that recipient's perfor mance, the existence of

such controls can demonstrate that the federal grantor

agency's interest in ensuring the effective administration of

that program is weighty enough to exclude the grantee's

interest from S 541's property definition.5

A number of federal courts have applied a similar

approach to resolve the related question whether

_________________________________________________________________

5. Our analysis of the supervisory controls and limitations over the grant

arrangement reserved to HUD is not meant to speak to the relationship

between federal grantees and grantor agencies in other contexts, such as

the government's liability for the acts of its grantees for purposes of

the

Federal Tort Claims Act. In that context, the Supreme Court has

distinguished between the pervasive conditions imposed by a grantor

agency to further federal supervision of the grant's administration, and

the control over day-to-day operations r etained by the grant recipient.

Because of this distinction, the Court has held that federal "regulations

do not convert the acts of entrepreneurs .. . into federal government

acts." United States v. Orleans, 425 U.S. 807, 816 (1976) (footnote

omitted).

16

unexpended federal funds themselves and property

purchased with those moneys once disbursed (as opposed

to contract rights like those at issue on this appeal)

constitute bankruptcy property of the debtor within the

meaning of S 541. For instance, the Seventh Circuit in

Joliet-Will considered the bankruptcy property status of

such funds and property in the case of a bankrupt

nonprofit community service organization. Although the

debtor's trustee claimed that those items repr esented

property of the debtor's estate, the Seventh Circuit

concluded that the federal moneys and personal pr operty

fell outside of S 541's property definition because the nature

of the federal grant program and the relationship between

the grantee community organization and grantor federal

agency rendered the debtor organization "a trustee,

custodian, or other intermediary, who lacks beneficial title

and is merely an agent for the disbursal of funds belonging

to another." Id. at 432 (citing to 11 U.S.C. S 541(d)).

In reaching this conclusion, the court r elied principally

on the fact that "[t]he grants impose minute controls on the

use of the funds, such that the recipient has very little

discretion." Id. (emphasis added). More specifically, the

court noted that each grant required the r ecipient to adhere

to a budget identifying particular project items and the

costs chargeable to the grant for each item; that the grantee

could not re-allocate unused moneys between items; that

the grantee was required to reconvey title to property

purchased with grant funds and costing mor e than $1,000

to the federal government, at the federal agency's direction;

and that the statutes and regulations cr eating the grant

scheme did not authorize the grantor federal agency to

permit grant moneys to be used to pay cr editors of the

private grantee. See id.

Federal district and bankruptcy courts have also used

the pervasiveness of government control over the

administration of a grant program as the touchstone for

assessing whether federal grant moneys and the pr operty

purchased with those moneys constitute pr operty of the

grantee's bankruptcy estate. See, e.g., In r e Community

Assocs., Inc., 173 B.R. 824, 828 (D. Conn. 1994) (holding

that three vans purchased with grant funds by the debtor,

17

a private community service organization, did not constitute

property of the debtor's estate for bankruptcy purposes, on

the ground that the agreement between the grantee

organization and grantor agency imposed " `minute controls'

on . . . [the] use of the grant funds and the use of the vans"

purchased with those grant funds); In r e Alpha Ctr., Inc.,

165 B.R. 881, 884 (Bankr. S.D. Ill. 1994) (holding that a

van and state grant moneys transferred by the debtor

community service organization to a successor grantee were

not property of the debtor's estate for bankruptcy purposes,

on the ground that extensive legislation and r egulatory

rules restricted the debtor community service organization's

discretion as to the use of grant moneys and vans

purchased with those grant moneys); cf. In re Southwest

Citizens' Org. for Poverty Elimination, 91 B.R. 278, 286-87

(Bankr. D.N.J. 1988) (noting that, although the federal

grantor agency conceded that twenty vehicles pur chased by

the debtor community service organization with federal

grant funds constituted property of the debtor's estate, the

federal agency, by virtue of the restrictions imposed by the

agency on the grantee's use of the funds, retained an

"equitable reversionary interest" in the vehicles superior to

the debtor's interest and the debtor's trustee's interest as a

hypothetical lien creditor under 11 U.S.C.S 544). We believe

that such a "minute control" analysis is equally appropriate

in assessing whether a debtor's interest in a grant

relationship with HUD qualifies as pr operty of the debtor's

estate under the terms of the Bankruptcy Code.

We hold then that a federal agency's inter est in ensuring

the efficient administration of program funds can result in

the exclusion of the debtor grantee's interest in the grant

relationship from S 541's pr operty definition if the agency's

supervisory controls over the identity of the grantee and the

manner of the grantee's performance ar e sufficiently

pervasive and rigorous. The District Court, however,

neglected entirely to take account of HUD's str ong interest

in the Supportive Housing Program. This omission

manifested itself in two related ways. First, the court

mistakenly viewed the provisions of the Grant Agreement

itself as the exclusive calipers for measuring the rights and

obligations that LSS and HUD incurred by virtue of their

grantor/grantee relationship, failing to consider the

18

restrictions placed on those rights by the other major

components of the Supportive Housing Program, both

statutory and regulatory. Second, the court construed the

scope of the contractual rights it identified as arising out of

the Grant Agreement too expansively, omitting

consideration of the limitations imposed on those rights by

the full Supportive Housing Program scheme. W e now turn

to the facts of the case sub judice and to the details of the

Supportive Housing Program, and explain why the District

Court's conclusion that LSS's interest in the Program

qualified as bankruptcy property was err oneous.

2.

The District Court conducted its "property of the estate"

inquiry by focusing solely on the Grant Agreement executed

between LSS and HUD in 1995, concluding that "LSS'

rights under the Grant Agreement became property of the

bankruptcy estate once the bankruptcy petition wasfiled."

By confining its examination to the Grant Agr eement,

however, the court failed to take into account the fact that

the Grant Agreement represents only one component of a

broader federal grant scheme. To be sur e, the grant

agreement into which the government and a grantee enter

is an important element of the Supportive Housing

Program's framework for the disbursement and

administration of federal housing assistance funds. See 24

C.F.R. S 583.400(a) (2000) ("The duty to provide supportive

housing or supportive services in accordance with the

requirements of this part will be incorporated in a grant

agreement executed by HUD and the recipient."). However,

the grant agreement is by no means the exclusive source of

those parties' rights and obligations under the federal

Supportive Housing Program. The rights and obligations of

grantor and grantee are also detailed in: (1) Subtitle C of

the Stewart B. McKinney Homeless Assistance Act

(Homeless Assistance Act or Act), 42 U.S.C. SS 11381-89;

and (2) a set of regulations codified at 24 C.F.R. S 583

(Supportive Housing Rule or Rule), see 42 U.S.C. S 11387

(authorizing the HUD Secretary to issue final regulations

implementing the Homeless Assistance Act). In fact, the

Grant Agreement itself recognizes that the provisions of the

19

Homeless Assistance Act and the Supportive Housing Rule

are integral elements of the grant relationship. For example,

the Grant Agreement states that "[t]his grant agreement will

be governed by the [Homeless Assistance] Act, [and] the

Supportive Housing rule (24 CFR 583), a copy of which is

attached hereto . . . and made a part her eof."

Considering all of the components of the Supportive

Housing Program as a coherent whole, it is evident that

HUD's strong federal interest in safeguar ding the effective

administration of Program funds, demonstrated by the

rigorous controls imposed on the grant r elationship by the

Act and the Rule, suffices to exclude LSS's inter est in the

grant relationship from LSS's bankruptcy estate. The

Supportive Housing Program scheme--embodied in the

Homeless Assistance Act, Supportive Housing Rule, and the

grant agreement executed between HUD and the grantee--

places important limitations on and provides HUD with

extensive oversight over both the identity of grant recipients

and the manner of those recipients' per formances under

the grant arrangement. Turning first to the restrictions

imposed on the identity of grantees, the provisions of the

Program limit eligibility for receipt of federal funding to

certain statutorily-enumerated entities: only "a State,

metropolitan city, urban county, governmental entity,

private nonprofit organization, or community mental health

association that is a public nonprofit or ganization" is

eligible to serve as a grant recipient. See 42 U.S.C.

S 11382(1).d

Further, in order to secure the right to administer

Program funds, even those entities within this limited pool

of eligible applicants must participate in a nationwide

competitive process, in which they are r equired to submit a

comprehensive project proposal. Recipients are selected by

HUD, and the Homeless Assistance Act expressly mandates

that HUD use the seven statutorily-enumerated criteria

listed in the margin in order to make its selection. See 42

U.S.C. S 11386(b).6 On their face, these seven criteria

_________________________________________________________________

6. Section 11386(b), titled "Selection criteria," states in full:

The Secretary [of Housing and Urban Development] shall select

applicants approved by the Secretary as tofinancial responsibility

to

20

demonstrate that HUD is to use these factors as a screen

for ensuring that the grant recipient will implement its

proposed project and administer Supportive Housing

Program funds in an efficient and effective manner.

In addition, and most importantly, the Supportive

Housing Program preserves HUD's contr ol over the identity

of the grant recipient by prohibiting changes in the grantee

absent HUD's prior written approval. The Supportive

Housing Rule states that "[a] recipient may not make any

significant changes to an approved pr ogram without prior

HUD approval," and expressly defines"significant changes"

to include "a change in the recipient." 24 C.F.R.

S 583.405(a)(1) (2000). This general r estraint on a grantee's

ability to alienate or assign its interest in the grant

arrangement with HUD is also reflected in a provision of the

Grant Agreement executed between LSS and HUD:"No

change may be made to the project nor any right, benefit,

or advantage of the Recipient hereunder be assigned

without prior written approval of HUD."

_________________________________________________________________

receive assistance under this part by a national competition based

on criteria established by the Secretary, which shall include--

(1) the ability of the applicant to develop an d operate a

project;

(2) the innovative quality of the proposa l in providing a

project;

(3) the need for the type of project pr oposed by the applicant in

the area to be served;

(4) the extent to which the amount of assistan ce to be provided

under this part will be supplemented with resources from other

public and private sources;

(5) the cost-effectiveness of the pr oposed project;

(6) the extent to which the applicant has demo nstrated

coordination with other Federal, State, local, private and other

entities serving homeless persons in the planning and operation of

the project, to the extent practicable; and

(7) such other factors as the Secretary d etermines to be

appropriate to carry out this part in an ef fective and efficient

manner.

42 U.S.C. S 11386(b).

21

The Supportive Housing Program's limitations on the

uses to which grantees can put federal funds ar e just as

strict, if not more so, than the Program's controls over the

identity of grant recipients. In general, a Supportive

Housing Program grant is tied to a particular project

location, detailed in the recipient's funding proposal and

application. A recipient may not change the location of the

project site without prior written HUD appr oval. See 24

C.F.R. S 583.405(a)(1) (2000). Further more, the Supportive

Housing Rule requires each recipient's project to comply

with all applicable state and local housing codes, see id.

S 583.300(a), and to meet various habitability standards

with respect to such matters as structur e and materials,

interior air quality, and water supply, see id. S 583.300(b).

Most importantly, if the grant recipient r eceives Supportive

Housing Program moneys for acquisition, r ehabilitation, or

new construction purposes, the Supportive Housing

Program requires that the recipient continue to use the

property at that project site for the particular purposes

specified in the funding application for at least 20 years.

See 42 U.S.C. S 11383(b)(1); 24 C.F .R. S 583.305(a) (2000).

Finally, the Supportive Housing Program fur nishes HUD

with a series of remedial options exercisable in the event of

a default on the part of the grant recipient. For example,

should the grantee cease to use the project site for the

agreed-upon project purposes befor e the expiration of the

20-year period, the Supportive Housing Program mandates

that the recipient be required to r epay to HUD some or all

of the federal grant moneys it has received. If the property

ceases to be used for listed project purposes within 10

years of the project's start date, the Pr ogram requires that

the recipient repay to HUD 100 per cent of the acquisition,

rehabilitation, or new construction assistance received. And

if the property ceases being used in the r equired manner

some time after 10 years have passed, the repayment

obligation is reduced by 10 percentage points for each year

in excess of the 10 years that the property was used as

supportive housing. See 42 U.S.C. S 11383(c)(1); 24 C.F.R.

S 583.305(b) (2000). In addition, the Grant Agreement

executed between LSS and HUD lists other remedial

options available to HUD upon due notice to the grantee,

including the issuance of a letter of warning requesting

22

corrective action, the reduction of grant amounts, and the

substitution of an alternate recipient of HUD's choosing.

In the aggregate, these provisions demonstrate that the

Supportive Housing Program contemplates a str ong

supervisory role for HUD, the agency char ged with

implementing the Program and ensuring its efficient and

effective administration. As we see it, HUD's interest was

strong enough to materially affect theS 541 "property of the

estate" calculus, excluding LSS's interest in the grant

relationship with HUD from LSS's bankruptcy estate. In

contrast, in its opinion, the District Court never mentioned

either the Homeless Assistance Act or the Supportive

Housing Rule, instead focusing exclusively on the Grant

Agreement. The court's failure to account for HUD's strong

supervisory interest in the administration of the Supportive

Housing Program led to its incorrect conclusion that LSS's

interest qualified as property of its bankruptcy estate.

Furthermore, by omitting consideration of HUD's strong

supervisory interest in the grant relationship, the District

Court also appeared to give too much weight to LSS's

contractual rights, because it failed to consider the

limitations imposed on those rights by the substantive

provisions of the Supportive Housing Pr ogram scheme. For

example, in identifying the contractual rights yielded to LSS

by virtue of its grant relationship with HUD, the District

Court pointed to the fact that LSS had the power to assign

its interest in the Supportive Housing Grant arrangement

to another party. Although it recognized that this power of

assignment was subject to HUD's prior written appr oval,

the District Court did not take sufficient note of the extent

of the restrictions that the other components of the

Supportive Housing Program, i.e., the Homeless Assistance

Act and the Supportive Housing Rule, placed on the

grantee's power to assign.

For instance, as discussed above, S 11382(1) of the

Homeless Assistance Act restricts eligibility for Supportive

Housing Program funding to a prescribed list of entities--

essentially state and local government units and non-profit

organizations--and S 11386(b) of the Act directs that

grantees be selected by HUD according to expr ess

statutorily-enumerated criteria. Under the ter ms of the

23

Supportive Housing Program, LSS would not have had the

power to assign its interest to a party that fell outside of

S 11382(1)'s list of eligible entities--e.g., a private for-profit

corporation--or to a party that failed to meet the criteria set

forth in S 11386(b). The District Court's analysis, however,

implied that LSS's right to assign was limited solely by the

necessity of HUD's formal approval, and not by the

substantial restrictions on the grant r elationship imposed

by the other components of the Supportive Housing

Program. In short, by omitting consideration of HUD's

strong supervisory interest, the court construed the scope

of the grantee's power of assignment too broadly.7

_________________________________________________________________

7. Although not necessary to our conclusion that LSS's interest in the

grant relationship fails to constitute part of the property of its

bankruptcy estate, we note another way in which the District Court's

assessment of the scope of LSS's interest was too expansive. As noted at

the outset of Section II, the District Court, in concluding that LSS had

a cognizable property interest for bankruptcy purposes, also pointed to

two other contractual rights that it believed LSS possessed as a

consequence of its grant relationship with HUD: (1) LSS's right to receive

payment from HUD for authorized expenditur es incurred while

administering its Supportive Housing Program pr oject; and (2) LSS's

right to compel HUD to make payments in connection with LSS's

administration of the Supportive Housing Program. In essence, these

rights represent two sides of the same coin: both are concerned with

LSS's ability to require HUD to pay moneys for expenses that LSS

incurred in implementing and running its Supportive Housing Program

project, and hence our discussion treats these two rights together.

The Department of Justice (DOJ), as amicus curiae, argues that, just

as the District Court construed LSS's power of assignment too robustly,

so too it treated these contractual rights to compel payment as having

too broad a scope. Specifically, DOJ contends that LSS did not have a

general right to receive moneys for HUD. Rather , DOJ asserts, LSS's

right to receive payment from HUD was cir cumscribed by the provisions

of the Tucker Act, which authorizes actions seeking money damages

against the federal government for breach of contract. See 28 U.S.C.

S 1346(a)(2) ("Little Tucker Act" granting concurrent jurisdiction to the

district courts and the United States Court of Federal Claims over

claims, not in excess of $10,000, founded "upon any express or implied

contract with the United States, or for liquidated or unliquidated

damages in cases not sounding in tort"); id. S 1491(a)(1) ("Big Tucker

Act"

granting exclusive jurisdiction to the United States Court of Federal

Claims over identical claims in excess of $10,000); Dia Navigation Co. v.

Pomeroy, 34 F.3d 1255, 1267 (3d Cir. 1994).

24

C.

Considerations of bankruptcy policy also militate in favor

of the conclusion detailed in the previous section. Cf.

_________________________________________________________________

According to DOJ, a claim against the federal government under the

Tucker Act will lie only if the government, in administering the grant

program, incurs a contractual obligation to the grantee, breaches that

obligation (thereby injuring the grantee), and the grantee then uses the

Tucker Act as a vehicle for obtaining "monetary compensation for [this]

past injury." Cole County Reg'l Sewer Dist. v. United States, 22 Cl. Ct.

551, 556 (1991), aff 'd without opinion, 949 F.2d 402, 404 (Fed. Cir.

1991); see also City of Wheeling v. United States, 20 Cl. Ct. 659, 664

(1990) (holding that the Claims Court, the pr edecessor to the Court of

Federal Claims, has jurisdiction under the Tucker Act to hear a city's

challenge to the Environmental Protection Agency's refusal to disburse

grant funds to cover the increased engineering fee the city was obligated

to pay as a result of its renegotiation of an engineering contract, on the

ground that the city's claim "seeks a r emedy which is retroactive in

nature (monetary compensation for an injury to property)").

With respect to the Supportive Housing Program, DOJ contends that

a contractual obligation on the part of HUD would have been triggered

only if LSS had expended its own moneys for authorized Program

expenses, and then HUD had refused to r eimburse LSS out of the grant

funds allocated to LSS's supportive housing pr oject. Thus, according to

DOJ, LSS did not have the broad, generalized right to compel HUD to

disburse Program moneys that the District Court appeared to assume

that LSS possessed; rather, the argument continues, LSS had the much

narrower right to receive grant funds fr om HUD to cover expenses

incurred in furtherance of authorized grant purposes.

DOJ's analysis of LSS's ability to compel payment of Program moneys

glosses over significant unresolved issues, e.g., whether federal

assistance agreements, such as the Grant Agr eement at issue on this

appeal, constitute "express or implied contract[s]" within the meaning of

the Tucker Act. The jurisprudence on this issue is inconclusive. Compare

Trauma Serv. Group, Ltd. v. United States, 33 Fed. Cl. 426, 429-30

(1995) (holding that a cooperative agreement, a species of federal

assistance agreement identified in the Federal Grant and Cooperative

Agreement Act, did not qualify as a contract within the coverage of the

Tucker Act), aff 'd on other grounds, 104 F.3d 1321 (Fed. Cir. 1997) with

Thermalon Indus., Ltd. v. United States, 34 Fed. Cl. 411, 413, 414 (1995)

(holding that a grant agreement "satisfies the criteria for an express or

implied contract with the United States and, thus, falls within the scope

25

Kokoszka v. Belford, 417 U.S. 642, 645 (1974) (noting that

because "it is impossible to give any categorical definition to

the word `property' " as used inS 70a(5) of the Bankruptcy

Act, the predecessor to the current definition of property

contained in 11 U.S.C. S 541, "[i]n determining the term's

scope--and its limitations--the purposes of the Bankruptcy

Act must ultimately govern") (inter nal quotation marks and

citations omitted). It is well-settled that two overarching

purposes, one equitable and the other rehabilitative,

undergird the Bankruptcy Code in general and the

definition of property contained in S 541 in particular. See,

e.g., In re Andrews, 80 F.3d 906, 909 (4th Cir. 1996). First,

the Bankruptcy Code attempts to provide for the efficient

and equitable distribution of an insolvent debtor's

remaining assets to its creditors. See, e.g., City of New York

v. Quanta Resources Corp., 739 F.2d 912, 915 (3d Cir.

1984). Second, the Code seeks to provide debtors with a

_________________________________________________________________

of . . . Tucker Act jurisdiction" so long as it meets the general black

letter

requirements for a binding contract, i.e.,"a mutual intent to contract

including an offer, an acceptance, and consideration passing between the

parties"). See also Jeffrey C. Walker, Note, Enforcing Grants and

Cooperative Agreements as Contracts Under the Tucker Act, 26 Pub.

Cont. L.J. 683 (1997) (analyzing the disagreement between the Court of

Federal Claim's decisions in Trauma Services and Thermalon, and

reasoning that federal assistance agreements should constitute

"contracts" for purposes of the Tucker Act).

The case before us does not directly pr esent a claim by LSS seeking to

compel HUD to pay over Supportive Housing Pr ogram funds, however,

and we will therefore refrain fr om resolving such open issues.

Nonetheless, we believe that DOJ's argument in regard to the scope of

LSS's right to compel payment is not without for ce. If grant agreements

do qualify as contracts for Tucker Act purposes, it appears that the

District Court overemphasized the scope of LSS's right to receive

Program moneys from HUD insofar as the court characterized it as a

general right to compel payment from HUD. T o the contrary, under the

Tucker Act regime advanced by the gover nment, LSS's right is much

narrower, in that a claim against the federal government for money owed

would lie only if LSS incurred expenses authorized by the terms of the

Supportive Housing Program, and HUD refused to disburse federal

moneys to cover such expenses. While the for egoing analysis does not

inform our decision, it does inveigh against facile, expansive

construction of LSS's rights under the Grant Agr eement.

26

"fresh start" by relieving them of the weight of their

outstanding debts and permitting them to r eorganize their

affairs. See, e.g., United States v. Whiting Pools, Inc., 462

U.S. 198, 203 (1983); Insurance Co. of North America v.

Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995). We do not believe

that inclusion of intangible contractual rightsflowing from

a HUD-type federal grant arrangement will further either of

the dual purposes of the Bankruptcy Code.

Under the scheme contemplated by the Bankruptcy

Code, a debtor's creditors are typically compensated to the

extent possible and in as equitable a fashion as possible

pursuant to a court-approved plan, generally after the

trustee marshals the debtor's bankruptcy property and

liquidates it at a bankruptcy sale. As a practical matter, in

order for such a procedure to generate a pool of funds from

which creditors can be compensated, the items constituting

the bankrupt's property must be readily alienable and

assignable--i.e., they must be capable of being sold to a

third party and of fetching some value as a consequence of

that sale. Unlike a federal license, which fur nishes clear,

quantifiable benefits to the licensee, it is difficult to see how

LSS's tenuous interest in the Supportive Housing Program

grant relationship with HUD would yield that value, given

the fact that, as discussed supra in Part II.B.2, any

potential purchaser would surely have to fall within the list

of eligible applicants contained in S 11382(1) of the

Homeless Assistance Act, and would be requir ed to meet

the criteria set forth in S 11386(b). Mor eover, it is unclear

why an entity that qualifies as an eligible applicant under

S 11382(1) would elect to bid on and pur chase the

opportunity to administer Program funds fr om a previous

grantee, rather than simply engaging in the or dinary

grantee selection process. Put another way, even were LSS's

Trustee to place the right to succeed to LSS's interest in the

Grant Agreement with HUD up for auction, we ar e dubious,

as a practical matter, that any potential buyers would

actually bid for that right.

Inclusion of a grantee's intangible contractual rights as

part of the bankruptcy estate in furtherance of the

Bankruptcy Code's rehabilitative goal seems equally

problematic. It is true that a debtor's "r eorganization effort

27

would have small chance of success . . . if pr operty

essential to running the business were excluded from the

estate," Whiting Pools, 462 U.S. at 203; cf. Stewart v.

Gurley, 745 F.2d 1194, 1196 (9th Cir . 1984) (per curiam)

("Unless the debtor can demonstrate that the pr operty is

necessary to an effective reorganization, the property is of

no value to him.").8 However , given the pervasive

supervisory controls over the grant reserved to HUD under

the terms of the Supportive Housing Pr ogram scheme, see

supra Part II.B.2., it is difficult to see how LSS's interest in

the Supportive Housing Program grant could be considered

essential to the continued operation of its community

service operations.

The Supportive Housing Program makes available to HUD

an array of remedial options in the event of a default on the

part of a grantee, such as the filing of a bankruptcy

petition. For instance, under the terms of the Grant

Agreement executed between LSS and HUD, once the

grantee defaults, HUD can seek to preserve the integrity of

the Supportive Housing Program grant by or dering the

recipient to stop incurring costs chargeable to the grant

program, by reducing the amount of grant moneys

available, or by substituting another recipient of HUD's

choosing. In fact, after LSS filed its Chapter 11 bankruptcy

petition on January 14, 1997, HUD exercised one such

remedial option by freezing LSS's ability to draw down

grant moneys. Neither of the parties disputes that HUD's

actions were authorized by the Supportive Housing

Program. In light of this freeze on the disbursement of

funds to LSS, it is difficult to see how LSS's contractual

interest in the grant relationship would be of any

assistance to its business reorganization.

In short, we think, as a practical matter, that LSS's

tenuous interest in the Supportive Housing grant

_________________________________________________________________

8. In fact, if an item of property in the hands of a third party is

essential

to the debtor's continuing business operations, the debtor's trustee,

provided that the appropriate statutory conditions are met, will typically

seek to have the property turned over the debtor's estate, see 11 U.S.C.

SS 542-43, or to have the transfer set aside, see id. S 544.

Interestingly,

in the instant case, LSS's Trustee never sought to have WHO's

assumption of the Supportive Housing Grant voided.

28

arrangement, subject to HUD's pervasive supervisory

controls, would yield no value even if put up for auction by

LSS's Trustee. Given the apparent worthlessness of LSS's

interest, we do not believe that inclusion of that interest

within S 541's definition of property would serve either the

Bankruptcy Code's equitable goal of protecting creditors by

ensuring that they are fairly compensated fr om a tangible

pool of funds, or the Code's rehabilitative goal of permitting

the debtor to make a fresh start.

D.

In response to this S 541 property analysis, LSS's Trustee

counters that even highly regulated items of pr operty, such

as stock exchange seats and government-issued licenses,

can constitute "property of the estate" for bankruptcy

purposes, and argues, therefore, that the fact that federal

law imposes significant restrictions on grantees such as

LSS should not preclude the grantee's inter est from falling

within the Bankruptcy Code's property definition. In

support of this position, the Trustee points us to such

decisions as In re Page, 107 F . 89 (3d Cir. 1901), involving

the bankruptcy status of a member's seat on the

Philadelphia Stock Exchange, see id. at 89, and In re

Central Arkansas Broadcasting Company, 68 F.3d 213 (8th

Cir. 1995) (per curiam), concerning the bankruptcy status

of a radio station broadcasting license issued by the Federal

Communications Commission (FCC), see id. at 214. The

Trustee is certainly correct in contending that the fact of

significant regulatory control, by itself, will not keep a piece

of property outside of S 541's expansive scope, and we do

not mean to suggest that regulation qua regulation directs

the outcome of the S 541 property inquiry. Rather, we

conclude only that, under the appropriate set of

circumstances, the supervisory controls imposed on a grant

relationship by the substantive provisions of the grant

program can be sufficiently pervasive, strict, and minute so

as to make manifest the federal agency's str ong interest in

overseeing the administration of that grant pr ogram. It is

that weighty federal interest, and not the bar e fact of

regulation itself, that can keep the debtor's interest in the

grant relationship outside of S 541's pr operty definition.

29

Furthermore, the Trustee's r eliance on cases such as

Page and Central Arkansas Broadcasting is unavailing. In

Page, a decision that is now a century old, we held that a

debtor's seat on the Philadelphia Stock Exchange qualified

as property of the bankruptcy estate under the Bankruptcy

Act of 1898, notwithstanding the fact that the Stock

Exchange's constitution required any sale or transfer of the

seat to be approved by the Exchange. See Page, 107 F. at

92. We noted that this limitation "possibly affected the

value of the seat for the purposes of sale, but, while

restricting, did not destroy its transferability." Id. However,

our decision in Page has little bearing on our analysis in

the instant case. Unlike Page, which examined the effect of

a transfer restriction alone on the bankruptcy status of the

subject property, our S 541 property analysis takes into

account the full panoply of supervisory conditions and

controls imposed by the Supportive Housing Pr ogram

scheme on the grant relationship between LSS and HUD.

More importantly, because the case befor e us involves a

federal agency with a substantial interest in overseeing the

grant program it is charged with administering, we must

accord greater weight to that gover nmental interest than we

ordinarily would provide, as in Page , to a private entity's

supervisory interest over its relationship with its

constituent members.

The Trustee's reliance on Central Arkansas Broadcasting,

in which the Court of Appeals for the Eighth Cir cuit held

that a FCC-issued radio operating license fell within the

ambit of the Bankruptcy Code's property definition, see 68

F.3d at 214-15, does more to advance his case. After all,

the fact that the FCC, a federal agency, designates a

particular radio operator as licensee and retains the power

to approve the transfer of an issued license does implicate

a federal concern. Moreover, the Eighth Circuit's decision is

consistent with a line of cases holding that state-issued

licenses, commonly liquor licenses, are encompassed within

S 541's property definition. See, e.g., In re Nejberger, 934

F.2d 1300, 1300-01 (3d Cir. 1991) (holding that a debtor

licensee's interest in a license issued by the Pennsylvania

Liquor Control Board constituted pr operty of the debtor's

estate within the meaning of S 541). Nonetheless, we

conclude that there are fundamental dif ferences in the

30

nature of a HUD-type grant relationship as compared to

that of a licensing arrangement that excludes the former

from S 541's property definition.

First, an entity selected as a licensee plays a dif ferent

role and faces a different set of incentives than does an

entity chosen as a HUD-type grantee. Ordinarily, an entity's

receipt of a license permits the entity to engage in federally

regulated activities for its own profit. In other words, the

benefits of the license accrue primarily to the licensee itself.

In contrast, an entity chosen as a HUD-type grant r ecipient

is not itself the beneficiary, but acts as an intermediary

administering those moneys for the benefit of the ultimate

recipients of the federal assistance. Put another way, unlike

the licensee, the grantee's position is more akin to that of

"a trustee, custodian, or other intermediary, who lacks

beneficial title and is merely an agent for the disbursal of

funds belonging to another." In r e Joliet-Will County Cmty.

Action Agency, 847 F.2d 430, 432 (7th Cir . 1988). In this

latter situation, as compared to a typical licensing

arrangement, the federal government will likely possess a

weightier supervisory interest in ensuring that the grantee

administers the moneys it receives in an ef fective and

efficient manner so that the ultimate beneficiaries receive

the full measure of the federal assistance intended for

them.

Furthermore, as a practical matter , we do not believe that

a grantee's interest in a HUD-type grant arrangement is as

easily bought and sold--and thus as readily capable of

serving as a source of funds from which the debtor's

creditors can be paid--as is a debtor's inter est in a

government-issued license. For example, in Central

Arkansas Broadcasting, the FCC-issued radio license found

to constitute property of the debtor's estate had been sold

and transferred as part of a bankruptcy auction conducted

by the trustee. See 68 F.3d at 214. In fact, courts have

generally acknowledged that the value of a gover nment-

issued license can typically be realized thr ough sale,

notwithstanding conditions requiring gover nment approval

prior to transfer. See, e.g., Nejber ger, 934 F.2d at 1302

(noting that "in practice, a liquor license can be bought and

sold in the market place"); In re T erwilliger's Catering Plus,

31

Inc., 911 F.2d 1168, 1171 (6th Cir . 1990) ("It is undeniable

that a liquor license has pecuniary value to its holder since

the license enables the holder to sell alcoholic beverages

and can be sold for value."). In sharp contrast, our

discussion supra at Part II.C. demonstrates the

unlikelihood that a grantee's interest in a HUD-type grant

relationship would be able to yield any type of value at a

bankruptcy auction, especially given the strict r estrictions

imposed by federal law over the identity of any potential

grantee.

E.

In light of the numerous and varied scenarios under

which federal agencies enter into contractual arrangements

with private entities, we must be careful to delineate the

scope of our holding. As we earlier observed, each time a

federal agency executes a contractual agreement with a

private party, a federal interest is ar guably implicated, and

we certainly do not mean to suggest in our discussion that

every right arising out of any such contractual arrangement

should be automatically excluded from S 541's property

definition. For example, as discussed supra in Part II.D., a

licensee's interest in a government-issued license is

generally likely to fall within the ambit of the Bankruptcy

Code's property definition, given the fact that licenses,

unlike grants, typically inure to the dir ect benefit of the

recipient (as opposed to other, ultimate beneficiaries), and

are generally capable of being bought and sold in the public

market.

Moreover, we recognize that agencies of the federal

government can and do routinely enter into contracts with

private entities that share the features of ordinary

commercial agreements. Federal procur ement contracts,

typically entered into between government agency

purchasers and private suppliers, are one such example.9

_________________________________________________________________

9. In fact, in our prior case law, we appear to have assumed that the

Bankruptcy Code's definition of "property of the estate" would cover

federal procurement contracts. For instance, in Matter of West

Electronics, Inc., 852 F.2d 79 (3d Cir. 1988), we considered a

32

Our holding is not meant to imply that the rights and

interests yielded to private entities by those contracts

automatically fall outside the scope of S 541's property

definition. Although we need not decide today the question

whether a contractual interest arising out of a federal

procurement relationship qualifies as property of the

debtor's estate within the meaning of 11 U.S.C.S 541, we

observe that, in contrast to a grantor/grantee r elationship

such as the one entered into between HUD and LSS in this

case, a garden-variety federal procur ement contract (for

goods or services) generally does not directly further a

public-oriented purpose (such as the provision of

transitional housing to homeless individuals). Thus, federal

procurement contracts appear significantly less likely to

implicate a federal concern akin to the weighty federal

interests operating in the instant case--i.e., HUD's

supervisory interest in ensuring the efficient administration

of federal grant moneys by qualified inter mediaries to the

ultimate beneficiaries of the grant.

The absence of a significant, direct public-oriented

objective undergirding a procur ement contract relationship

is evident from the language of the Federal Grant and

Cooperative Agreement Act of 1977 (FGCAA), curr ently

codified at 31 U.S.C. SS 6301-08.10 The FGCAA's distinction

_________________________________________________________________

procurement contract executed between the United States and West

Electronics, Inc., under which West obligated itself to furnish the Air

Force with missile launcher power supply units. See id. at 80. After

suffering financial difficulties, W est filed for Chapter 11 bankruptcy

relief, triggering an automatic stay under 11 U.S.C. S 362, and the

United States petitioned the bankruptcy court to lift the stay to allow

the

government to terminate the contract. See id. at 80-81. Although we

reserved a final determination of the issue, we assumed that the

automatic stay provision--which under S 362(a) of the Bankruptcy Code

extends to "any act to obtain possession of property of the [debtor's]

estate," 11 U.S.C. S 362(a)(3) (emphasis added)--would cover the

procurement contract at issue in West. See West Elecs., 852 F.2d at 82.

10. Congress enacted the FGCAA in response to agencies' inconsistent

and often interchangeable use of assistance instruments such as

procurement contracts and grant agr eements. One of the FGCAA's

principal stated goals is to

33

between procurement contracts and grant agreements is, in

large part, based on the extent to which each contractual

arrangement directly furthers a public purpose. The statute

characterizes a procurement contract as"the legal

instrument reflecting a relationship between the United

States Government and . . . [an]other r ecipient when . . .

the principal purpose of the instrument is to acquir e (by

purchase, lease, or barter) property or services for the direct

benefit or use of the United States Government." 31 U.S.C.

S 6303 (emphasis added). In contrast, the FGCAA describes

a grant agreement as

the legal instrument reflecting a relationship between

the United States Government and . . . [an]other

recipient when--

(1) the principal purpose of the relationship is to

transfer a thing of value to . . . [the] other recipient to

carry out a public purpose of support or stimulation

authorized by a law of the United States instead of

acquiring (by purchase, lease, or barter) pr operty or

services for the direct benefit or use of the United

States Government; . . . .

Id. S 6304 (emphasis added). As the FGCAA's provisions

recognize, a private party's interest in a federal

procurement contract is much less likely to serve a public-

oriented purpose, such as the provision of federal

assistance to third-party beneficiaries, and thus the federal

_________________________________________________________________

prescribe criteria for executive agencies in selecting appropriate

legal

instruments to achieve--

(A) uniformity in their use by executive age ncies;

(B) a clear definition of the relationships they reflect; and

(C) a better understanding of the responsibil ities of the parties

to

them . . . .

31 U.S.C. S 6301(2). For an overview of the r elationship between the

various federal assistance instruments, and an examination of the legal

issues they raise, see generally Jeffrey C. Walker, Note, Enforcing Grants

and Cooperative Agreements as Contracts Under the Tucker Act, 26 Pub.

Cont. L.J. 683 (1997).

34

government's interest in the contractual arrangement

appears substantially less likely to lead to the exclusion of

LSS's interest from S 541's pr operty definition.

F.

In sum, we do not mean to suggest that every grantee's

interest in a grant relationship with a federal agency will

fall outside the scope of S 541's property definition, for we

must be mindful of the fact that Congress intended the

Bankruptcy Code's definition of property to sweep broadly.

But the Code's property definition is not without

limitations, and under certain concededly narr ow

circumstances, a federal agency's weighty inter est in

overseeing the administration of its grant pr ograms can

suffice to keep a grantee's interest outside of the Code's

property definition. In this regar d, the touchstone of our

analysis is the strength of the federal agency's supervisory

interest over the grant program, best measured by the level

of agency oversight over the grant relationship preserved in

the provisions of the federal grant program.

Controls that are sufficiently extensive, i.e., federal

agency retention of strict, pervasive and minute oversight

over the identity of the grant recipient and the manner of

that recipient's performance, can demonstrate the strength

of an agency's federal interest in the ef fective

administration of grant moneys, and can lead to the

exclusion of the grantee's interest in the grant relationship

from its bankruptcy estate. In the case befor e us, HUD's

weighty interest, manifested in the extensive supervisory

controls imposed by HUD through the pr ovisions of the

Homeless Assistance Act, Supportive Housing Rule, and

Grant Agreement itself, sufficed to keep LSS's interest in

the grant relationship outside of S 541's property definition.

III. Breach of Fiduciary Duty

Our conclusion that LSS's interest in the Supportive

Housing Grant relationship with HUD does not constitute

property of LSS's bankruptcy estate does not fully dispose

of the merits. There is an issue in this case that was not

directly considered by either the Bankruptcy or the District

35

Court, and that remains open even in light of our holding

that LSS's interest falls outside of S 541's property

definition: whether WHO, by assuming LSS's inter est

without notifying constituents of the Unsecur ed Creditors

Committee of which WHO was a member at the time of the

assumption, breached a fiduciary duty to its fellow

Committee members.

The Bankruptcy Code authorizes the appointment of a

committee of creditors, see 11 U.S.C.S 1102, and grants to

such committees the power to investigate debtors, to

negotiate a bankruptcy reorganization plan, and to

"perform such other services as ar e in the interest of those

represented," 11 U.S.C. S 1103(c). We have construed

S 1103(c) as implying a fiduciary duty on the part of

members of a creditor's committee, such as the present

Unsecured Creditors Committee, towar d their constituent

members. See In re PWS Holding Corp., 228 F.3d 224, 246

(3d Cir. 2000). A committee member violates its fiduciary

duty by pursuing a course of action that furthers its self-

interest to the potential detriment of fellow committee

members.

On May 28, 1997, about four months after LSS's January

14, 1997 bankruptcy petition, WHO executed a Grant

Agreement Amendment with HUD, pursuant to which WHO

assumed LSS's interest in the Supportive Housing Program

grant relationship. The Grant Agreement Amendment in

fact identified WHO as "Successor to Life Service Systems,

Inc." LSS had not identified the original Grant Agreement

on its Schedule of Assets. At the time it assumed LSS's

interest, WHO was serving on LSS's Unsecur ed Creditors

Committee. WHO, however, did not disclose the fact that it

had assumed LSS's interest in the Supportive Housing

Program grant relationship to its fellow Committee

members or to the Bankruptcy Court.

By accepting an invitation to sit on the LSS's Unsecured

Creditors Committee, WHO clearly incurr ed a fiduciary

obligation to its fellow Committee members. The question

remaining before us, therefor e, is whether WHO's actions in

assuming LSS's interest violated such a duty. The

Bankruptcy Court summarily concluded that WHO

"breached the fiduciary duty it owed to general unsecured

36

creditors as a result of its membership on the committee of

unsecured creditors in that its conduct was blatantly self-

aggrandizing." The conduct to which the Bankruptcy Court

referred was WHO's assumption of LSS's interest in the

Grant Agreement with HUD, without notice to either fellow

Committee members or to the Bankruptcy Court. The

District Court never reviewed the Bankruptcy Court's

fiduciary duty analysis, stating that WHO had not claimed

"that the bankruptcy court erred in concluding that WHO

breached its fiduciary duty by assuming the LSS' rights

under the agreement."

In light of our conclusion above, we are constrained to

conclude that both the District and Bankruptcy Courts'

analysis of the breach of fiduciary duty issue was

incomplete, as neither court considered the important

question whether a fiduciary obligation to Committee

members can arise in connection with a transaction

involving property that falls outside of the debtor's

bankruptcy estate. This omission is of course explained by

the fact that both the Bankruptcy and District Courts

appeared to predicate their breach offiduciary duty

analyses on the assumption that LSS's interest in the

Grant Agreement with HUD constituted pr operty of the

debtor's estate within the meaning of 11 U.S.C.S 541. As

discussed extensively in Section II, this assumption was

erroneous. Thus, neither court had occasion to consider

whether this error would alter its analysis of the fiduciary

duty issue.

Moreover, in the initial briefing and at oral argument, the

parties to this appeal never addressed this important

question, framing the issue before us solely as whether

LSS's interest in the Supportive Housing Grant Agreement

constituted property within the meaning ofS 541. Both

LSS's Trustee and WHO appear to have assumed that the

Trustee's action for breach of fiduciary duty would not lie

if LSS's interest fell outside of S 541's property definition. In

its amicus curiae brief, the Department of Justice (DOJ)

challenges this assumption. While arguing at length that

LSS's interest in the grant relationship with HUD does not

constitute property of its bankruptcy estate, DOJ also

contends that WHO violated its fiduciary obligation to fellow

37

Committee members by not disclosing the existence of that

interest. In response, WHO asserts that a breach of a

fiduciary duty can never occur--in fact, that afiduciary

duty can never arise--in connection with the transfer of an

item that is not "property of the estate" within the meaning

of S 541.

We have problems with both DOJ's and WHO's positions

in regard to the breach of fiduciary duty issue. DOJ's

argument that a fiduciary obligation was violated

notwithstanding the fact that LSS's interest did not

constitute property of the estate is less than pellucid.

Under the DOJ's theory, WHO's failure to disclose the

existence of LSS's interest in the grant r elationship to either

the Bankruptcy Court or LSS's creditors materially

undermined the ability of the Bankruptcy Court to take the

Supportive Housing Program grant into account in

formulating a comprehensive Chapter 11 plan for LSS's

reorganization. What the DOJ fails to explain, however, is

why property that falls outside of S 541's definition, such as

LSS's interest in the grant relationship with HUD, has any

role in a debtor's reorganization.

At the same time, we are unwilling at this stage, given

the scanty briefing and argument on this issue, to adopt

WHO's suggested bright-line rule, which would have us

declare that a fiduciary obligation can never arise with

respect to an item of property not included in S 541's

definition. Perhaps situations (which we cannot anticipate

here) could exist in which a creditor's active concealment of

an item of property that does not qualify as pr operty of the

estate for bankruptcy purposes would threaten to

undermine the ability of other creditors to receive an

equitable distribution of the debtor's remaining assets or

the efforts of the bankruptcy trustee to r eorganize the

debtor's affairs. In such a circumstance, imposition of a

fiduciary obligation may very well further the purposes of

the Bankruptcy Code and the general fiduciary pr ohibition

against self-dealing.

In light of the fact that both the Bankruptcy and District

Courts did not consider these issues, and given the parties'

failure to fairly present and addr ess these issues to us, we

decline at this stage of the proceedings to r esolve the

38

question whether WHO breached a fiduciary duty it owed to

fellow Committee members by failing to disclose the

existence of an item of property--LSS's inter est in the

Supportive Housing Grant program--that does not

constitute property of the debtor's estate within the

meaning of 11 U.S.C. S 541. Rather, we believe the proper

course of action lies in remand for further pr oceedings

designed to resolve this issue in the first instance. On

remand, the court should consider whether afiduciary

obligation to fellow unsecured creditors can arise out of a

transaction involving an item of property that does not

qualify as property of the estate for Bankruptcy Code

purposes and, if so, whether, based on the specific facts of

WHO's case, WHO breached such a fiduciary duty.

IV. Conclusion

For the foregoing reasons, the judgment of the District

Court will be reversed, and the case remanded to the

District Court for a determination as to whether WHO

breached its fiduciary duty to fellow members of the

Unsecured Creditors Committee, in light of the fact that

LSS's interest in the Grant Agreement with HUD does not

constitute property of LSS's bankruptcy estate. The District

Court may of course remand the matter to the Bankruptcy

Court for this determination. Parties to bear their own

costs.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

39