A transfer of proceeds from an involuntary Chapter 7 debtor's sale of livestock on another company's behalf could not be avoided because the debtor had no equitable interest in the property, the U.S. District Court for the Northern District of Illinois concluded Jan. 18 (Mississippi Valley Livestock Inc. v. J&R Farms, N.D. Ill., No. 3:12-cv-50341, 1/18/13).
Judge Frederick J. Kapala agreed with the bankruptcy court's ruling that the debtor was merely holding the cattle and the resulting proceeds from the sale of the cattle in bailment and therefore never acquired any legal or equitable interest in the property.
Pursuant to the arrangement, MVL would receive checks from the processing facility for all the livestock, with no differentiation between MVL's cattle and J&R's cattle, which it would then deposit in a general business fund. MVL would then write checks to J&R for J&R's share of the proceeds. MVL was sometimes slow in remitting the proceeds to J&R, but according to the bankruptcy court's factual findings, MVL never used the proceeds for any other purpose than returning them to J&R.
J&R moved for summary judgment and argued that the debtor never had equitable title to the proceeds and therefore they could not be included in the debtor's estate pursuant to Bankruptcy Code Section 541(d). The trustee argued that because the debtor had deposited the proceeds into its general business fund, the debtor had “complete control over what was done with the money” and therefore it should be included in the estate. The bankruptcy court granted J&R's motion for summary judgment, concluding that the debtor never had equitable title to the proceeds. The trustee appealed to the district court.
The district court noted that legal and equitable title are not defined in the Bankruptcy Code and thus those definitions must be derived from state law. In this case, the bankruptcy court found that based on the uncontested facts of the case, MVL was holding J&R's property in bailment. A bailment, the court said, is the “delivery of property for some purpose upon a contract, express or implied, that after the purpose has been fulfilled, the property shall be redelivered to the bailor, or otherwise dealt with according to his directions, or kept until he reclaims it.”
Pursuant to state law on bailments, the bailee, in this case MVL, acquires a possessory interest in the property but not a legal or equitable interest. Therefore, the court found that because MVL never had a legal or equitable interest in the property, the transfers could not be avoided. The court noted that even if MVL could prove some legal interest in the proceeds, Section 541(d) would still prevent the proceeds from being included in the estate because MVL lacked an equitable interest in the property. The court said that the purpose of Section 541(d) was to ensure the trustee would not be given greater rights to the property than a judgment creditor would have under state law.
Accordingly, the bankruptcy court's decision was affirmed.
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