Opinion
No. 1:02-cv-1214-LJM/WTL
July 1, 2003.
Howard E. Kochell BARNES THORNBURG, Indianapolis, IN, James M. Carr BAKER DANIELS, Indianapolis, IN, J. Michael Debbeler Graydon, Head Ritchey, LLP, Cincinnati, OH, Timothy P. Palmer, BUCHANAN INGERSOLL, P.C., Pittsburgh, PA, Joel M. Walker BUCHANAN INGERSOLL, P. C., Pittsburgh, PA, James Zoccola JENNINGS, TAYLOR WHEELER BOUWKAMP, P.C., Carmel, IN.
ORDER ON BASCON, INC.'S APPEAL FROM BANKRUPTCY RULING
This matter comes before the Court on the appeal of Bascon, Inc. ("Bascon") from the Bankruptcy Court's order that certain funds are part of the Heartland Steel bankruptcy estate ("Order"). Specifically, Bascon and Lewis Steel Company, Inc. ("Lewis") claim that the Bankruptcy Court erred when it ruled that Heartland Steel did not relinquish dominion and control over, and had a continuing interest in, the funds that Heartland Steel put in escrow through an agreement with Chicago Title Insurance Company ("Title Company"). PNC Bank, National Association and BT Deutsche Securities, Inc., as agents for Heartland Steel's senior secured lenders (the "Bank Group") have responded to Bascon's appeal and ask the Court to uphold the Bankruptcy Court's decision. For the reasons discussed herein, the Court AFFIRMS the Order.
Lewis has filed a substantially similar appeal, in Case No. 1:02-cv-1206-LJM/WTL, in which this Court has also entered an Order on this date.
I. BACKGROUND
In 1998, Heartland Steel secured a loan for the construction of a building on real property located in Terre Haute, Indiana (the "Construction Project"). Testimony of Joseph Scimia (Scimia Testimony") p. 77. The Construction Project was funded primarily through loans from the Bank Group to Heartland Steel. Id. p. 43. Bascon, as general contractor, and Lewis, as subcontractor, contracted for and provided substantial steel erection services in connection with the Construction Project. Brief of Appellant Bascon, Inc. ("Bascon's Brief") at 1.
Joseph Scimia was the lone witness at the hearing the Bankruptcy Court held on this matter below, and his testimony is the primary source of each party's statement of facts, as well as the Bankruptcy Court's findings of fact included in the Order.
In late 1998 or early 1999, Bascon and Lewis filed mechanic's liens (the "Mechanic's Liens") on the property. Scimia Testimony p. 43. In accordance with Indiana law, Bascon recorded its lien, in an amount exceeding $2,186,000, in Vigo County, Indiana, which is where the property is located. Bascon's Brief at 2. Lewis also recorded its lien, in an amount exceeding $632,000, in Vigo County. Response of Bank Group at 3. After the Mechanic's Liens were filed, the Bank Group ceased funding the Construction Project. Scimia Testimony p. 43.
In February, 1999, Heartland Steel and the Title Company entered into an Escrow Agreement, to allow the Title Company to continue to provide title insurance on the Construction Project and to allow for the Bank Group to continue financing the Construction Project. Id. pp. 54-55. Heartland Steel deposited with the Title Company the sum of $2.4 million (the "Escrow Funds"). According to the Escrow Agreement, the Title Company was to insure against loss or damage sustained by any of Heartland Steel's lenders by reason of the enforcement or attempted enforcement of liens against the Terre Haute property, including the Mechanic's Liens. Escrow Agreement; Scimia Testimony p. 48. The Escrow Funds were held as protection against claims filed against the Title Company by any of Heartland Steel's insured lenders. Scimia Testimony p. 51. The Title Company was granted the right to use the Escrow Funds if a judgment was obtained on the Mechanic's Liens, or if an insured lender made a formal claim on a policy issued by the Title Company. Escrow Agreement. Neither Bascon, Lewis, nor any member of the Bank Group was a party to the Escrow Agreement, or had the ability to demand or otherwise gain control of the Escrow Funds. Scimia Testimony pp. 50-52, 53, 65.
The Escrow Agreement did not provide the Title Company with the right to settle any disputes relative to title, the Escrow Funds, or the Mechanic's Liens. Id. p. 66. The Escrow Agreement required that the Escrow Funds be held in an interest-bearing account, separate from any other cash, and that all income derived from the Escrow Funds belonged to Heartland Steel. Escrow Agreement; Scimia Testimony p. 54. The Escrow Agreement also provided that Heartland Steel would receive any surplus from the Escrow Funds once the Escrow Funds were used as described, or any unused portion of the Escrow Funds if the Mechanic's Liens were removed from the title to the property. Escrow Agreement; Scimia Testimony p. 54.
Heartland Steel filed for Chapter 11 bankruptcy on January 24, 2001. The Bankruptcy Court ordered Heartland Steel to sell its assets, including its real estate and improvements, free and clear of all liens and encumbrances. Order Granting Motion of Heartland Steel, Inc., dated June 26, 2001, Docket No. 283 ("Sale Order") at 7. All liens and encumbrances were to attach to the proceeds of the sale of Heartland Steel's assets. Id. Thus, after the sale of assets, the property at issue here was free of any real or potential defects of title. Scimia Testimony p. 63. The Title Company no longer had any potential exposure relative to the Construction Project. Id. p. 68.
Bascon and Lewis filed a joint motion asking the Bankruptcy Court to determine that the Escrow Funds are not part of the Estate. Lewis Steel Company's Motion for Order Providing that Certain Assets or Funds are not the Property of the Bankruptcy Estate, Docket No. 392 ("541 Motion"). The Plan of Liquidation ("Plan"), confirmed by the Bankruptcy Court, provides that the Escrow Funds become part of the bankruptcy estate ("Estate") and that the Bank Group will receive payment of the Escrow Funds. Plan of Liquidation. The Plan also establishes a Mechanic's Lien Reserve Fund of approximately $4,193,450 for payment of any valid mechanic's liens, including those of Bascon and Lewis, on a pro rata basis, to the extent each mechanic's lien is deemed valid. Id. Bascon and Lewis filed an objection to the proposed payment of the Escrow Funds to the Bank Group.
The Order overruled that objection. The Bankruptcy Court concluded as follows: (1) Heartland Steel never relinquished dominion or control over the Escrow Funds; (2) Heartland Steel held a continuing legal and equitable interest in the Escrow Funds, as required by Section 541 of the Bankruptcy Code for an asset to be property of the Estate; and (3) after the property was sold, pursuant to the Sale Order, all legal and equitable title in the Escrow Funds vested in Heartland Steel. Order at 8.
II. STANDARD
When it reviews a decision of the Bankruptcy Court, the District Court acts as an appellate tribunal. Therefore, its review is governed by traditional standards of appellate review. Specifically, the Court "is constrained to accept the bankruptcy court's findings of facts unless they are clearly erroneous." In re Excalibur Auto Corp., 859 F.2d 454, 457 n. 3 (7th Cir. 1988). See also In re Fedpak Sys., Inc., 80 F.3d 207, 211 (7th Cir. 1996); In re Longardner Assocs., Inc., 855 F.2d 455, 459 (7th Cir. 1988). However, conclusions of law made by the Bankruptcy Court must be reviewed de novo. See Excalibur Auto Corp., 859 F.2d at 457 n. 3; Longardner Assocs., Inc., 855 F.2d at 459. And, where the challenged finding is a mixture of law and fact, the clearly erroneous standard is also applicable. See Graham v. Lennington, 74 B.R. 963, 965 (S.D.Ind. 1987). Keeping in mind that Bascon has challenged only the Bankruptcy Court's legal conclusion, the Court will address the issues raised in the instant appeal.
III. DISCUSSION
Pursuant to Section 541(a)(1) of the Bankruptcy Code, the Escrow Funds are property of the Estate. Section 541(a)(1) defines the "estate" as being: "comprised of all the following property, wherever located and by whomever held: (1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The scope of property of the estate is broad. United States v. Whiting Pools, Inc., 462 U.S. 198, 205 (1983); In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993). Property within the estate "`has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.'" In re Yonikus, 996 F.2d at 869 (quoting Segal v. Rochelle, 382 U.S. 375, 379 (1996)). "In fact, every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541." Id.
Although this Court applies federal bankruptcy law to determine whether the Escrow Funds are property of the Estate, it must first determine the extent of Heartland Steel's interest in the Escrow Funds at the time Heartland Steel filed for bankruptcy. See id. That determination is made according to Indiana law. See id. (citing Butner v. United States, 440 U.S. 48, 55 (1979)). Under Indiana law, sparse and dated as it may be, property put in escrow is not delivered to the grantee or obligee until the performance of a certain event. See Yost v. Miller, 129 N.E. 487, 488 (Ind.App. 1921). "A deed in escrow conveys no title until final delivery." Id. See also Moslander v. Beldon, 164 N.E. 277, 279 (Ind.App. 1928) (surveying case law that holds, essentially, that a deed in escrow is delivered and effective when certain conditions are performed). Thus, Heartland Steel did not relinquish title or control over the Escrow Funds merely by depositing them in escrow. Until the performance of a condition — here, the Title Company becoming liable to members of the Bank Group — the Escrow Funds would not be delivered to the Title Company.
As the Bankruptcy Court found below, the language of the Escrow Agreement and the clear intent of the parties also support the conclusion that Heartland Steel maintained a legal and equitable interest in the Escrow Funds. Heartland Steel had an interest in the income the Escrow Funds generated and, more importantly, Heartland Steel had an interest in any unused portion of the Escrow Funds. Moreover, if Heartland Steel had decided it no longer needed title insurance relative to the Mechanic's Liens, the Title Company would have returned the Escrow Funds to Heartland Steel's possession. Bascon and Lewis were not parties to the Escrow Agreement, and under no scenario did they have an interest in the Escrow Funds.
At the time Heartland Steel filed for bankruptcy, it had every right to recover possession of the Escrow Funds. The contingency upon which the Title Company would receive the Escrow Funds had not occurred. Moreover, at the time the Sale Order was entered, the contingency was extinguished, and could not occur. That is, once the property was sold without any liens or encumbrances, the Title Company no longer had any potential exposure.
The broad scope of property within the Estate, as defined in Section 541, includes the nonpossessory and contingent interest Heartland Steel had in the Escrow Funds here. This Court agrees with the Bankruptcy Court that the Escrow Funds should be paid to the Bank Group in accordance with the Plan.
IV. CONCLUSION
Based on the foregoing, the Order of the Bankruptcy Court is AFFIRMED.
IT IS SO ORDERED this 1st day of July, 2003.