Nov. 21 -- The appellee surveying company was not an “interested party” within the meaning of Bankruptcy Code Section 350(b), and therefore had no standing to reopen the debtor's bankruptcy case, and as a result, any sale of the debtor's assets to the appellee at a subsequent auction is void, the U.S. District Court for the Eastern District of Virginia held Nov. 7 (Alexandria Surveys, LLC v. Alexandria Consulting Grp. (Alexandria Surveys Int'l LLC), 2013 BL 309478, E.D. Va., No. 1:13-cv-00891-LO-TCB, 11/7/13).
Reversing the judgment of the bankruptcy court and ruling in favor of the appellant, Judge Liam O'Grady concluded that the appellee lacked standing to reopen the debtor's case, and thus, the sale of its assets to the appellee at auction was void.
In the absence of controlling Fourth Circuit precedent on the issue of defining a debtor's property interest in its web address and telephone numbers, the court followed the Virginia Supreme Court's ruling in Network Solutions Inc. v. Umbro Int'l Inc., 529 S.E.2d 80 (Va. 2000), and determined that Virginia does not recognize an ownership interest in telephone numbers and web addresses. Thus, neither were property of the debtor's estate and neither were subject to sale by the trustee.
The court also found no basis for distinguishing between computers used as traditional desktops and computers used as servers when the debtor's Schedule B listed “computers” broadly. Based on the lack of evidence in the record, the court could find no distinction between computers and servers. Because the debtor's servers were listed among “computers” on Schedule B, they were abandoned and not subject to sale upon the reopening of the debtor's estate.
Shortly after the debtor ceased business in October 2010, Sharon Hoofnagle and Michael Flynn formed the appellant Alexandria Surveys LLC and began doing business out of the debtor's old location. The company acquired the former telephone numbers and web addresses of the debtor from Cox Communications, as well as other property formerly owned by the debtor, including computer equipment and hard drives.
The bankruptcy court issued an order reopening the case on Dec. 31, 2012. The appellant was not a party to that proceeding.
The Chapter 7 trustee then provided notice of the upcoming sale of assets in the bankruptcy estate. The appellant objected on the basis that the assets in question became abandoned when the case was closed in May 2012. The trustee conducted an auction to sell the assets, and the appellee and appellant were the sole bidders. The appellee, however, successfully outbid the appellant and purchased the assets for $28,100.
The survey and title files, the server and its digital files, the phone numbers, and the website, according to the bankruptcy court were not listed in the debtor's schedules and therefore were not abandoned and could be sold as part of the bankruptcy estate.
The Fourth Circuit has held in the Chapter 7 context that a “party in interest” includes “all persons whose pecuniary interests are directly affected by the bankruptcy proceedings,” the court said, citing In re Hutchinson, 5 F.3d 750 (4th Cir. 1993). Citing the Fourth Circuit case, the Tenth Circuit has also specifically held that the only “parties in interest” for purposes of a Section 350(b) motion are debtors, trustees, and creditors, the court said, citing In re Alpex Computer Corp., 71 F.3d 353 (10th Cir. 1995).
The court found that because the appellee was not the debtor, a trustee, or a creditor of the debtor, it was not an “interested party” within the meaning of Section 350(b). Thus, the appellee was without standing to reopen the debtor's bankruptcy case, and as a result, any sale of the debtor's assets to the appellee at the subsequent auction is void, the court said.
The appellee was simply a competitor, the court said. The court also noted that the appellant raised the standing argument at the appropriate time since it stated in its objection to the turnover motion that the appellee was not a creditor or party in interest and “thus perhaps without standing.”
Although the Fourth Circuit has not specifically addressed the issue, it is well settled that the contours of the property interests assumed by the trustee are determined by state law, the court said. Looking to Network Solutions, the Virginia Supreme Court held that a web address and telephone number could not be garnished by a judgment creditor because the debtor lacked a property interest in them.
In the absence of controlling Fourth Circuit precedent, the court followed Network Solutions and concluded that Virginia does not recognize an ownership interest in telephone numbers and web addresses. Since neither were property of the debtor's bankruptcy estate, neither were subject to sale by the trustee, the court said.
Based on the lack of evidence in the record, the court found that a distinction between computers and servers cannot be sustained. Therefore, because the debtor's servers were among the “computers” listed in Schedule B, they were abandoned and not subject to sale upon the reopening of the debtor's estate, the court concluded.
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