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Purchaser at Auction Lacks Standing To Reopen Debtor's Case; Sale of Assets Void

Wednesday, November 27, 2013
By Diane Davis

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.

Case Filed, Then Closed
Debtor Alexandria Surveys International LLC is a local surveying company formed by John Hoofnagle in 2000. The company filed for Chapter 11 protection March 3, 2010. Subsequently, the Chapter 11 proceeding was converted to Chapter 7 and Robert O. Tyler was appointed Chapter 7 trustee. Tyler filed a trustee's report of no distribution and closed the case May 18, 2012.

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.

Motion to Reopen Case
Subsequently, another surveying firm, appellee Alexandria Consulting Group LLC, filed a motion to reopen to administer assets under Section 350(b), arguing that it was interested in purchasing personal property remaining in the bankruptcy estate that was not scheduled such as customer lists, files, web page, and phone and facsimile numbers. The debtor opposed the motion.

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.

Turnover of Assets
The trustee then moved for an order requiring the appellant to turn over the purchased assets to the appellee, to which the appellant objected. The bankruptcy court issued an order granting the trustee's motion to require turnover of some of the purchased assets. With respect to the debtor's physical files and computers, the court held that they were listed in the debtor's schedules and were therefore abandoned when the case closed and were no longer part of the debtor's estate.

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.

Arguments on Appeal
Alexandria Surveys LLC appealed, arguing that: (1) the appellee was not an “interested party” and therefore had no standing to move to reopen the debtor's estate; (2) the web addresses and phone numbers sold to the appellee at auction were not the debtor's property and therefore could not be property sold as part of the bankruptcy estate; and (3) the servers were listed on Schedule B and included under “computers.”
No Standing to Reopen Case
Under Section 350(b), the court explained, the bankruptcy court may reopen a case “to administer assets, to accord relief to the debtor, or for other cause.” Federal Rule of Bankruptcy Procedure 5010, however, permits a case to be reopened “on motion of the debtor or other party in interest,” the court said. Under Section 1109(b), “party in interest” is defined by reference to “the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee.”

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.”

Sale of Web Addresses, Phone Numbers
Property of the bankruptcy estate, the court said, is defined under Section 541(a)(1) as “all legal and equitable interests of the debtor in property as of the commencement of the estate.” The court noted that there is a split of authority among the circuits with respect to the status of phone numbers. According to the court, the Second and Ninth Circuits have held that a trustee lacks the right to distribute a telephone number as property of the estate, while the First and Fifth Circuits have taken the opposite position.

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.

Servers Included Among 'Computers.'
The court determined that the servers were included among the “computers” listed in Schedule B, and therefore were abandoned and no longer property of the debtor's estate at the time the case was reopened. The servers were desktop computers used in that capacity, the court said. Based on the undisputed description, the court found no basis for distinguishing between computers used as traditional desktops and computers used as servers when Schedule B listed “computers” broadly.

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.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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