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USCA1 Opinion

UNITED STATES COURT OF APPEALS


FOR THE FIRST CIRCUIT

____________________

No. 94-2233

INDIAN MOTOCYCLE ASSOCIATES III


LIMITED PARTNERSHIP,

Appellant,

v.

MASSACHUSETTS HOUSING FINANCE AGENCY,

Appellee,

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Frank H. Freedman, Senior U.S. District Judge]


__________________________

____________________

Torruella, Chief Judge,


___________

Cyr and Stahl, Circuit Judges.


______________

____________________

Paul R. Salvage, with


_________________

whom Susan Luttrell Burns and


______________________

Baco
____

Wilson, P.C. were on brief for appellant.


____________

Kevin C. Maynard, with whom Mark D. Cress and Bulkley, Richard


________________
_____________
________________
and Gelinas were on brief for appellee.
___________

____________________

October 2, 1995
____________________

CYR, Circuit Judge.


CYR, Circuit Judge.
______________

Indian Motocycle

Limited Partnership, a chapter 7

court

order

reversing

debtor, appeals from a district

bankruptcy

appellee Massachusetts Housing

Associates III

court

decision

denying

Finance Agency's ("MHFA")

motion

to compel the chapter 7 debtor to restore diverted cash collater-

al to the

chapter 7 estate.

We vacate

the district court order

and remand to the bankruptcy court for further proceedings.

I
I

BACKGROUND
BACKGROUND
__________

A.
A.

The Regulatory Agreement


The Regulatory Agreement
________________________

In

1987,

MHFA

loaned

Indian

Motocycle

Associates

Limited Partnership ("Indian Motocycle")

low-income

"the

housing

Project"].

Housing

Act

(1994);

24 C.F.R

Housing and

mortgage

Motocycle

in Springfield,

Under

("NHA"), 12

Massachusetts [hereinafter:

program authorized

U.S.C.

1701,

by

the National

1709, 1715k

et seq.
__ ____

250.1 (1994), the United States Department of

Urban Development ("HUD") coinsured the non-recourse

loan.1

signed

In order to qualify for HUD coinsurance, Indian

"Regulatory Agreement,"

comply with pertinent HUD

individual

$8.6 million to develop

obligating

it

to

regulations and conditions whereby the

Indian Motocycle partners

assumed personal liability

"for funds or property of the Project which come into their hands

and which they are

____________________

not entitled to retain;

and . . .

for their

1NHA coinsurance
note

permits the

private lender to

assign its

and mortgage to HUD if unable to collect from the borrower.

See 12 U.S.C.
___

1710.

own acts and

deeds or acts and deeds

that are in violation

of their authorized agents

of the provisions of this Agreement."

The

Regulatory Agreement is incorporated into the mortgage by express

reference.

In addition to conveying a

first mortgage on all

real

property belonging to the

its

Project, Indian Motocycle assigned all

Project leases, rents, profits

and income to

MHFA "for the

purpose of discharging the [note]."

See Mortgage
___

4; 12 U.S.C.

1715k(d)(2)(A).

MHFA in

turn authorized Indian

Motocycle to

collect and apply Project rents to enumerated purposes, including

loan repayments and "reasonable

tion and

maintenance of the

expenses necessary to the opera-

Project."

Regulatory Agreement

3(b). Indian Motocycle's right to collect Project rents terminat-

ed upon default.

See Mortgage
___

4.

In the event the debtor were

to breach the Regulatory Agreement, MHFA or HUD would be entitled

to seek specific performance,

injunctive relief, or the appoint-

ment of a receiver for the Project.

See
___

Regulatory Agreement

17-18. The

mortgage and Regulatory Agreement

were duly recorded

by MHFA.

In 1989,

interest

in

the

Indian

Project

Motocycle transferred

to Indian

Motocycle

its

ownership

Associates

III

Limited Partnership, which assumed the MHFA note and mortgage; in

August 1992,

default

it

defaulted.

MHFA promptly

tendered notice

of

but took no immediate steps to acquire possession of the

Project (as by foreclosure) or the rents (as

receiver).

Meanwhile, Indian Motocycle

by appointment of a

Associates III

Limited

Partnership had withdrawn

the

Project

retained

operating

counsel

in

$65,000 from the

rents on deposit

accounts,

with which,

contemplation

of the

inter
_____

alia,
____

commencement

of

in

it

voluntary chapter 11 proceeding ($35,000 retainer) and an accoun-

tant

(Coopers & Lybrand) to

Project

($20,000).2

On

prepare a prepetition

December 15,

disbursements, Indian Motocycle

ship (hereinafter:

continued

Pursuant to

compel the

to operate

1992,

following

Associates III Limited

"debtor") filed its chapter 11

the Project

the Regulatory

as a

Agreement,

debtor "to restore

audit of the

debtor in

MHFA filed

[the $65,000 in

these

Partner-

petition and

possession.3

a motion

to

cash collateral]

improperly diverted from the [chapter 11] estate in

violation of

Title II of the [NHA]."4

B.
B.

The Bankruptcy Court Decision


The Bankruptcy Court Decision
_____________________________

The

bankruptcy

court

ruled

that

the

unauthorized

prepetition transfer of MHFA cash collateral to retain chapter 11

____________________

2An additional $5,000 was used


and
ates

file a proof of claim in


__
III Limited

to retain counsel to prepare

behalf of Indian Motocycle Associ______

Partnership in

an unrelated

bankruptcy case.

Another $5,000 was transferred to a business owned by a principal


of

the debtor's

managing

general partner,

disclosed in the appellate record.

3The
chapter 7,

chapter

11 proceeding

see Bankruptcy Code


___

for

a purpose

not

See infra notes 18 & 20.


___ _____

has

since

been converted

1112, 11 U.S.C.

chapter 7 trustee has been appointed, id.


___

702.

to

1112, and a

4At the same time, MHFA sought to sequester all postpetition


rents.

Thereafter, on June 23, 1993,

motion to

compel, the bankruptcy

prior to denying the MHFA

court granted an

motion for relief from the automatic stay.


362(d), 11 U.S.C.
foreclosed

upon all

362(d).

interim MHFA

See Bankruptcy Code


___

MHFA represents that it

collateral except

the

monies at

has since

issue on

appeal.

counsel violated the

Regulatory Agreement.

cycle Assocs. III Ltd. Partnership,


__________________________________

In re Indian Moto___________________

161 B.R. 865, 867-68 (Bankr.

D.

Mass. 1994).5

compel the debtor

The

court nonetheless

to restore

denied the

the $65,000 to

MHFA, noting

Regulatory Agreement violations by the debtor were

given

that

"irrelevant,"

that the motion to compel purported to assert MHFA's legal

rights against the debtor

had

motion to

yet been

only and that no

commenced against

adversary proceeding

the debtor's

attorneys or accountants, the transferees

general partners,

in possession.

Id. at
___

868.

During

relied on case

prepetition

warrants

the

bankruptcy

law to

the effect that

disbursement of

postpetition relief

attorneys to restore the

court

proceedings,

a debtor's

rents securing an

compelling the

MHFA

had

unauthorized

NHA-insured loan

debtor

and/or its

encumbered funds to the debtor

estate.

Id.
___

The bankruptcy

court reasoned, however, that

the requested

relief would undermine the Bankruptcy Code distribution scheme by

entitling

$65,000 of

the HUD/MHFA

unsecured claim

against the

chapter 11 estate to "super priority" status.

On intermediate appeal, the district court reversed and

remanded to the bankruptcy court for entry of an order compelling

the

"[d]ebtor to

restore

the distributions

diverted from

the

____________________

5The

bankruptcy court

traced the

source of

the contested

monies directly to Project rents, as distinguished from individual partner advances as suggested by the debtor.
the

other hand,

the court

$65,000 distribution as a

Id.
___

mistakenly characterized

at 867.

the entire

retainer fee for legal services.

at 865; see infra note 6.


___ _____

On

Id.
___

estate."

Massachusetts Hous. Fin. Agency v.


_________________________________

Indian Motocycle
________________

Assocs. III Ltd. Partnership (In re Indian Motocycle Assocs. III


____________________________ ___________________________________

Ltd. Partnership), 174 B.R. 351, 357-58


_________________

(D. Mass. 1994) (citing

Bankruptcy

105(a)

Code

105(a), 11

U.S.C.

(empowering the

court to "issue any order, process, or judgment that is necessary

or appropriate to carry out the provisions of this title")).

II
II

DISCUSSION
DISCUSSION
__________

The debtor contends that the bankruptcy court correctly

determined

that

it lacked

authority

105(a) to order a chapter 11 debtor

it improperly

diverted a

under

even one who concedes that

secured creditor's

before filing its chapter 11 petition

al (or its

monetary equivalent) to

debtor argues

that it no

Bankruptcy Code

collateral shortly

to return the collater-

the chapter 11 estate.

longer retained a

The

property "interest"

in, or control over, the diverted collateral on the date it filed

its chapter

11 petition

and, accordingly, the

became property of the chapter 11 estate

tion.

See Bankruptcy Code

collateral never

amenable to administra-

541(a)(1), (6),

11 U.S.C.

541(a)-

___

(1), (6) (providing

that estate

is comprised of

"all legal

or

equitable interests of the debtor in property as of the commence__ __ ___ _________

ment of the case," including "rents . . . from [real] property of


____ __ ___ ____

the

estate") (emphasis

diversion of the

MHFA's

claim

added).

Further,

encumbered rents

against

balance outstanding

the

on the

the debtor

did not alter

debtor estate,

note at the

which

says, its

the amount
______

of

remained

the

date of the

chapter 11

petition.

correctly

chapter

diverted

Finally, the debtor argues that

declined to

NHA-encumbered rents, see


___

those courts

utilize

cite

underlying the

monies in

infra Section
_____

to legislative

ordered

II.A.2, since

Bankruptcy Code,

the debtor's

Injunctive Relief
Injunctive Relief
_________________

MHFA, nor

history indicating

that

policy override the debtor protection

retainers of chapter 11 counsel.

A.
A.

which have

involve a non-federal agency like

Congress intended that NHA

policy

those courts

11 debtors in possession to restore to the debtor estate

those cases did not

did

follow

the bankruptcy court

including the

possession to

right to

fund prepetition

We

court

review challenged

de novo and contested


__ ____

court for

clear error.

(1st Cir.

1992).6

See
___

rulings of

law by

findings of fact

by the bankruptcy

In re Laroche, 969
_____________

A bankruptcy

court's

the district

F.3d 1299, 1301

decision granting

denying injunctive relief pursuant to Bankruptcy Code

reviewed only for abuse

of discretion.

See, e.g.,
___ ____

or

105(a) is

Western Auto
____________

____________________

6On appeal,

neither party

challenges the

bankruptcy court

findings

that (1) the entire $65,000 was disbursed as a retainer

for legal

services, and (2) the entire disbursement breached the

Regulatory
accurate

Agreement.

Although this

reflection of the record

accompanying text; note 5,


sions
appeal.
these
_____

reached
Nor

by the
need we

evidence, cf. supra


___ _____

it does not infect the

bankruptcy

court,

nor

address the bankruptcy

disbursements, as

"reasonable expenses

first finding

matter of

law,

is not

note 2 &

legal conclu-

our decision
court ruling

did not

necessary to the operation

an

on

that

constitute

and maintenance

of the Project."

In re Indian Motocycle Assocs. III Ltd. Part_______________________________________________

nership, 161 B.R. at 868 (citing United States v. Frank, 587 F.2d
_______
_____________
_____
924 (8th Cir.
HUD regulatory

1978) (legal fees not


agreement)).

whether

the prepetition

violated

the Regulatory

"reasonable expenses" under

Similarly, we decline

disbursements
Agreement,

to consider

for accounting

since the

services

bankruptcy court

made no relevant findings.

Supply Co. v. Savage Arms, Inc. (In re Savage Arms, Inc.), 43


___________
__________________ _________________________

F.3d

714,

719 n.8

(1st Cir.

1994).

"Four

principal factors

govern the appropriateness

whether the plaintiff

the plaintiff

relief;

of permanent

injunctive relief:

has prevailed on

will suffer irreparable

the merits; (2)

injury absent

(1)

whether

injunctive

(3) whether the harm to the plaintiff outweighs any harm

threatened by the injunction; and (4) whether the public interest

will be adversely affected by the

injunction."

Id.
__

The present

appeal implicates only the first two factors.

1.
1.

Injury
Injury
______

Although

prepetition

the bankruptcy court

transfer of

conversion, it concluded

MHFA's

cash collateral

that injunctive relief

since the amount owed MHFA by the chapter

same.

ruled that the debtor's

constituted

was unwarranted

11 estate remained the

To the extent this ruling suggests that MHFA sustained no

cognizable injury, we

that

disagree.

Since there

is no

indication

MHFA's claim was over-secured, the conversion by the debtor

of the

$65,000 cash collateral

that amount, leaving

See Bankruptcy
___

also id.
____ ___

Code

reduced MHFA's secured

MHFA with an

unsecured claim for

506(a), (b), 11

U.S.C.

$65,000.

506(a), (b); see


___

541(a)(6) ("Such estate is comprised of

ceeds, product, offspring,

claim by

. . . [p]ro-

rents, or profits of or from property


_____

of the estate [viz., the Project]") (emphasis added).

The advantage to holding a secured claim to these rents

in the chapter 11 proceeding is not to

the rents

be underestimated.

constituted "cash collateral" securing

Since

the MHFA note,

id.
___

363(a)

("cash collateral"

acquired in which the

have an interest and

includes "cash .

. .

whenever

estate and an entity other than the estate

includes . . . rents

. . . ."); cf.
___

id.
___

552(b) (governing enforceability of prepetition security interest

against

postpetition

rents),

the

rents could

not

have

been

expended or transferred without MHFA consent, id.


___

363(c)(2)(A),

and
___

on

bankruptcy

court

authorization

conditioned

"adequate

protection" for

361, 363(e).

to

MHFA's security

Thus, restoration

363(c)(2)(B),

of the converted cash collateral

the chapter 11 estate would have represented neither an empty

judicial exercise,

but

interest, id.
___

appropriate

nor a windfall

recognition

or "super priority"

of

the

valuable

to MHFA,

legal advantage

enjoyed by the holder of a secured claim in a bankruptcy proceed-

ing.

Nevertheless,

ruling

should

secured

NHA

cognizable

we do

not

be interpreted

lenders

injury nor

collateral, but

in

simply

these

have

think

as

the bankruptcy

court

a determination

that

circumstances

any recourse

rather as a determination

neither

for recovering

sustain

their

that MHFA prematurely


___________

sought extraordinary injunctive relief against the wrong party

_____ _____

the

chapter 11

debtor

without

first attempting

to exhaust

other available remedies against nondebtors.

2.
2.

"Irreparability" of Injury; Adequacy of Remedy at Law


"Irreparability" of Injury; Adequacy of Remedy at Law
____________________________________________________

Every

court

determined that the NHA

rights under

which

has

considered the

empowers HUD to enforce

a Regulatory Agreement

question

has

its prepetition

notwithstanding the initia-

tion of a

chapter 11 proceeding by or

against the NHA borrower.

See, e.g., In re EES Lambert Assocs., 43


___ ____ __________________________

N.D. Ill.

1984),

aff'd, 63
_____

B.R. 174

B.R. 689, 691

(N.D. Ill.

(Bankr.

1986); In re
______

Marion Carefree Ltd. Partnership, No. 93-33011, 1994 Bankr. LEXIS


________________________________

398, at

*8-9 (Bankr. N.D. Ohio

Briarwood Assocs., Ltd., 118


_______________________

Mar. 17, 1994); In re Tampa Bay


________________

B.R. 126, 128-29 (Bankr. M.D.

Fla.

1990); In re Garden Manor Assocs., 70 B.R. 477, 486 (Bankr. N.D.


___________________________

Cal. 1987);

In re TWO-KMF Dev. Assoc., 63 B.R. 149, 151 (Bankr.


_________________________

N.D. Ill. 1985);

(Bankr.

N.D.

In re Hil'Crest Apartments, 50 B.R.


___________________________

Ill. 1985).

Three principal

grounds

610, 613

appear to

support postpetition enforcement of the NHA

contract

remedies notwithstanding

lender's prepetition

the fact

that the

debtor no

longer has possession of, or access to, the precise collateral it

diverted prior to the petition.

First,

principally

collateral

the

debtor's

benefited by

thereby

the

safeguarding

expense

partners

the prepetition

most notably in

professional assistance

own

in

fending off

their personal

of low-income

the

parties

diversion of

the HUD

this case the

Project

any

are

fees for retaining

MHFA

financial

residents

foreclosure,

investments7 at

the

intended

____________________

7The NHA allows HUD to coinsure non-recourse mortgages under

which the partners are relieved from individual liability for the
partnership obligation

under the note.

But the

NHA conditions

that relief on the partners' agreement to assume personal liability "for funds or property
hands and which they

of the Project which come

are not entitled to retain;

into their

and . . .

for

their own

acts and deeds or

agents that are


ment."

acts and deeds of

in violation

their authorized

of the provisions

See In re Hil'crest Apartments, 50 B.R. at


___ __________________________

ners relieved of personal

of this

Agree-

612-13 (part-

liability on partnership obligation in

return for their agreement to restrictions on transfer of rents).

10

principal beneficiaries of

B.R. at

the NHA.

See In re Garden Manor, 70


___ ___________________

485; In re Hil'crest Apartments, 50 B.R. at


___________________________

EES Lambert, 43 B.R. at 690.


___________

612; In re
_____

But for the unauthorized diversion,

the

rents

normally would

have

toward Project maintenance.

483,

485 (regulatory

been

applied, as

appropriate,

See In re Garden Manor,


___ __________________

agreement is

not an

70 B.R. at

"executory contract"

subject to rejection by debtor) (citing Bankruptcy Code

Second,

Regulatory

the

Agreement

agreement, but a

assignment-of-rents

is not

merely a

U.S.C.

on

in a

in

the

private loan

to coinsurance

public interest.
______ ________

which

See 12
___

1709, 1715k, 1715v(c)(4) (listing numerous restrictions

NHA mortgagors).

individual

term

contractual precondition

Congress expected HUD to enforce in the


__ ___

provision

365).

Permitting

partners, to divert

partnership debtors,

public funds with

impunity threatens significant depletion

or their

any degree of

of the treasury, see In


___ __

re Garden Manor, 70 B.R. at 483, and ultimately undercuts public


________________

confidence

insurance

in

the efficacy

programs,

thereby

of

federal

subverting

housing, lending,

Congress's

and

announced

intention to promote private construction of low-income

housing.

Id.
___

Third, these cases point out that there is

inconsistency between the

Code,

in that the

ners, remain free to

no inherent

policies of the NHA and the Bankruptcy

partnership debtor, and

its individual part-

retain chapter 11 counsel provided

not fund their retainers

with the NHA lender's

11

they do

cash collateral.

Id.
___

at 482, 486; In re TWO-KMF,


_____________

63 B.R. at 151; In re Hil'crest


_______________

Apartments, 50 B.R. at 612.


__________

Notwithstanding the

strong judicial support

general policy considerations, however,

at

the prospect

absent

ments

of

for these

we are given great pause

fashioning extraordinary

injunctive relief

either demonstrated compliance with the explicit require______

of the enabling provision

in the Bankruptcy

Code, see 11
___

U.S.C.

105(a), or some clear


__

indication in the NHA

gress envisioned

such an accommodation

Bankruptcy Code.

Thus, we think it is not enough simply to point

to the importance of

between the NHA

that Con-

safeguarding the integrity of the

program, where neither the

and the

NHA loan

NHA, the Regulatory Agreement entered

into pursuant to the

NHA, nor the Bankruptcy Code itself so much

as

bankruptcy court

intimates that a

may fashion

the extraor-

dinary "reimbursement" relief sought by MHFA.

No matter how compelling

the public policy reasons for

formulating such extraordinary relief, it must be recognized that

the right and remedy

are judge-made.
__________

especially cautious about embarking

circumstances

where the

Bankruptcy courts

must be

upon a lawmaking exercise in

injured party has

neither demonstrated

that it has exhausted,

forms of

relief

finding that

the

which,

nor even pursued, efficacious alternative


_______

if available,

relief sought

either "necessary or appropriate

[the

Bankruptcy Code]."

105(a).

preclude

court

is

to carry out the provisions

of

from

Bankruptcy

See generally Lopez


___ _________ _____

might

the bankruptcy

Code

105(a),

v. Garriga, 917
_______

12

well

11 U.S.C.

F.2d 63, 68

(1st

Cir. 1990) (noting that injunction-seeker must first show that he

has

"no adequate

remedy

States, 27 F.2d 863,


______

into

effect constitute

bodies in usurpation of

omitted).8

see
___

also Baker
____ _____

875 (1st Cir. 1928) ("Where

their decree their opinions

they in

tion

at law");

We

v.

courts intrude

on questions of public policy,

the judicial tribunals

as law-making

the powers of the Legislature.")

therefore

United
______

decline to

endorse

(cita-

the MHFA's

request for extraordinary injunctive relief under Bankruptcy Code

105(a), absent

any showing

"necessary

or appropriate

Bankruptcy

Code.

See
___

105(a).

B.

Alternative Remedies

or appearance

to carry out

Bankruptcy Code

that it

is either

the provisions"

105(a), 11

of the

U.S.C.

B.

Alternative Remedies
____________________

MHFA

has not

demonstrated

that it

is without

other

viable remedies against the debtor's general partners, chapter 11

counsel, and/or

its accounting firm, for

restoring the diverted

collateral or its equivalent.


____________________

8Of course,
lawmaking
general
filled

where Congress
terms, but

by

statute.

See Conille
___ _______

courts may

be expected

"ambiguously

deliberately

the courts

F.2d 105, 110


utility

federal

addresses" an

leaves "an

in conformity

to engage

with

in

issue

in

interstice" to

be

the purposes

of the

v. Secretary of Hous. and Urban Dev., 840


__________________________________

n.6 (1st Cir. 1988).

This

principle is of little

in the instant case, however, for two principal reasons.

First, there is no apparent interstice in the NHA, which express-

ly prescribes severe criminal penalties for violating HUD Regulatory

Agreements, see 12
___

U.S.C.

years' imprisonment), thereby

1715z(19) ($250,000

providing a powerful

fine, 5-

deterrent to

unauthorized prepetition diversions of HUD collateral by debtors.


Second,

the "reimbursement"

necessitates

remedy requested

judicial assessment

of NHA

by MHFA
policy, but

not only

of any

conflicting Bankruptcy Code policy.

We do not regard this

as an

appropriate invitation to engage in judicial lawmaking, except as


a last resort.

13

1.
1.

The General Partners


The General Partners
____________________

Whether or not it perfected its lien in the prepetition

rents, see infra Section


___ _____

or's general partners

II.B.2, MHFA could have sued

for the value

of the diverted

the debt-

collateral

(or, at the

its

very least, for any deficiency between

collateral and any amount

unsecured

claim

Regulatory

partners

Agreement

chapter 11

provision

"for funds or property

their hands and

for their

rized

against the

recovered by MHFA

on its $65,000

estate), based

expressly

of the Project

on the

obligates

the

which come into

which they are not entitled to retain; and . . .

own acts and deeds

agents that

Agreement."

that

the value of

are in

See, e.g.,
___ ____

or acts and deeds

violation of

of their autho-

the provisions

Austin v. UNARCO Indus., Inc.,


______
___________________

of this

705 F.2d

1, 4 (1st Cir.) (automatic stay normally does not foreclose suits

against

general partners

of bankrupt

partnership), cert.
_____

missed,
______

463 U.S. 1247 (1983); see also supra


___ ____ _____

notes 4 & 7.

dis____

MHFA

has not alleged, nor does the appellate record disclose, that the

general partners are insolvent.

2.
2.

Chapter 11 Counsel
Chapter 11 Counsel
__________________

a)
a)

Perfection of MHFA Lien


Perfection of MHFA Lien
_______________________

In order

debtor

or the

to obtain

transferees of

course, MHFA would have

lien or

property

(6),

any meaningful relief

the $65,000

in other

to demonstrate that it held

security interest in

against the

the diverted rents;

venues, of

a perfected

otherwise, as

of the chapter 11 estate, see Bankruptcy Code


___

any unperfected

lien

on the

14

rents

would be

541(a)-

subject

to

avoidance

by the

arm" powers.

see generally
___ _________

See
___

debtor in possession

id.
___

pursuant to

544(a) ("strong arm

In re Ryan,
___________

851 F.2d

powers"), 1107(a);

502, 512

(trustee); In re Wabash Valley Power Ass'n, 114


_________________________________

(S.D. Ind. 1990) (debtor in possession).

ed lien was

have had

voided under

Bankruptcy Code

no right to control

the $65,000

in cash

its "strong

(1st Cir.

B.R. 613,

1988)

617

And once its unperfect-

544(a), MHFA

the disposition of

collateral which remained

would

any portion of

property of

the

chapter 7

estate, cf.
___

Bankruptcy Code

363(a),

(c)(2), (e),9

nor any right of recourse to lien foreclosure proceedings outside

the bankruptcy court against third party transferees who acquired

title to the

cf.,
___

rents prior

e.g., In re McBee,
____ ____________

(perfected

security

collateral is

trict

to the debtor's

714 F.2d

interest

conveyed).

court that the MHFA

in

chapter 11

1316, 1326

collateral

Nevertheless,

(5th

petition,

Cir. 1983)

continues

we agree with

security interest in

after

the dis-

these rents had

been perfected before the chapter 11 petition was filed.

See In
___ __

re Indian Motocycle Assocs. III Ltd. Partnership, 174


___________________________________________________

B.R. at

356.

____________________

9Following appointment
note 3, all avoidance powers
not in

the debtor.

1107(a).

We

See
___

of the chapter 7

resided exclusively in the trustee,

Bankruptcy Code

assume arguendo
________

trustee, see supra


___ _____

1107(a),

that the chapter

11 U.S.C.

7 trustee

would

attempt to avoid MHFA's lien in order that the net proceeds could
be

applied to

claim.

claims

against the

estate,

including any

MHFA

For present purposes, however, we confine ourselves to an

assessment

of the debtor's avoidance

bankruptcy

court ruling; that is, during the chapter 11 proceed-

ing.

15

powers at the

time of the

Although

interest

reference

the

in property

prepetition

of the

perfection

estate normally

to applicable state law, see


_____ ___ ___

for perfecting

property

securing

addressed by

federal agency's

federally-insured

the NHA

that the require-

security interest

loans

55 (noting that state law

subject

in

not

726 (1979);

governing perfec-

applies "unless some federal interest

different result");10 United States


_____________

& Assocs., 795 F.2d


_________

in

is controlled by federal common law, see


___

tion of security interests

requires a

security

is determined

United States v. Kimbell Foods, Inc., 440 U.S. 715,


_____________
____________________

Butner, 440 U.S. at


______

Butner v. United States,


______
_____________

440 U.S. 48, 55 (1979), it is now well settled

ments

of

683, 685-86 (8th Cir. 1986)

v. Landmark Park
_____________

(rents); United
______

States v. Floral Park Dev. Co., 619 F.


______
_____________________

Ohio

(S.D.

1985) (rents); United States v. Borden Fin. Corp., 164 B.R.


_____________
_________________

260, 264 (E.D. La.

Loan,
____

Supp. 144, 147-48

1994) (rents); cf. Graham v.


___ ______

Security Sav. &


_______________

125 F.R.D. 687, 692 (N.D. Ind. 1989) (federal law controls

government's rights in litigation involving

federally guaranteed

student loans), aff'd sub nom.


_____ ___ ____

Veal v. First Am. Sav. Bank, 914


____
____________________

F.2d 909 (7th Cir. 1990); cf.


___

also Conille v. Secretary of Hous.


____ _______
__________________

and Urban Dev., 840


________________

F.2d 105,

109

(1st Cir.

1988) (applying

federal common law to litigation involving scope of HUD's obliga-

____________________

10Butner,
______

a Bankruptcy Act

under the Bankruptcy Code.

case, remains

viable precedent

See Wolters Village Ltd.


___ ____________________

v. Village
_______

Properties, Ltd. (In re Village Properties, Ltd.), 723 F.2d 441,


_________________ ______________________________
443 (5th Cir.), cert. denied, 466 U.S. 974 (1984).
_____ ______

16

tions as NHA landlord, after finding NHA left this issue for

courts).11

Under established federal common

the

law, HUD's securi-

ty

interest

in post-default

simply by recording
_________

NHA

a HUD mortgage

rents

normally is

perfected

containing an assignment

rents, which places third parties on notice of the HUD lien.

Landmark Park & Assocs., 795


_________________________

uniform federal rule in

to perfection

F.2d at

685-86 (noting

face of discordant state

of security

interests in rents);

of

See
___

need for

rules relating

In re Westwood
_______________

Plaza Apartments, Ltd., 154 B.R. 916, 920 (Bankr. E.D. Tex. 1993)
______________________

(same);

cf. In re Executive House Assocs., 99


___ ______________________________

B.R. 266, 275-76

(Bankr. E.D. Pa. 1989) (adopting Landmark Park "perfection" rule,


_____________

but

noting that other required

scribed in

security agreement;

default).

Of course,

means of perfection

e.g., an express

in our case the

may be pre-

declaration of

debtor concedes that the

HUD mortgage and Regulatory

appropriate

Agreement were duly recorded in

the

registry of deeds, and that it had received a notice

of default under the note before disbursing the $65,000.12


____________________

11Like

the

distinguishing

district

court,

the instant

case

we see

no

policy

simply because

basis for

MHFA, a

state

agency, rather than HUD, is the party presently seeking return of


the

collateral.

Under the

assign the note to


deficiency.

our

regime, MHFA

HUD in return for payment

See 12 U.S.C.
___

events, given

NHA coinsurance

of any unrecovered

1710; see also supra note 1.


___ ____ _____

determination, infra,
_____

interest was perfected under

will

that

MHFA's

In all

security

both federal and Massachusetts law,


____
___

the distinction is inconsequential.

See Conille, 840 F.2d at 110


___ _______

(no need to adopt federal common law where there is "no 'signifi-

cant conflict between some federal policy or interest and the use
of state law'") (citation omitted).

12We note that the debtor's opening


challenge

the

district

interest in rents had


first

time in

a reply

court

appellate brief did not

ruling that

been perfected.
brief normally

the

MHFA

Issues presented

security

for the

are deemed waived.

See
___

17

Moreover, even if

common

law does

not govern

interest, see supra note


___ _____

Massachusetts law.13

Harbor Marina Co.,


_________________

it were to

be assumed that

the perfection

of MHFA's

11, the same result would

616 (D. Mass.

security

obtain under

In Prudential Ins. Co. of Am. v.


____________________________

159 B.R.

federal

1993), the

Boston
______

district

court

held that

Massachusetts mortgagee

which recorded

its

assignment of rents in the registry of deeds as an adjunct to its

mortgage, "perfected" its lien

the rents "cash

in the rents so as

to constitute

collateral" under Bankruptcy Code

363(a), and

that there was no need for the creditor to take possession of the

real property (e.g., as by foreclosure) or the rents (e.g., as by

____________________

Clarke v. Kentucky Fried Chicken, 57 F.3d 21, 27 (1st Cir. 1995).


______
______________________
There is
Even

no basis for

in its reply

relief from

brief, the

implications of Kimbell or
_______
instead

simply stating

should be applied.
Cir.

1993) (issues

waiver in the

debtor chose

instant case.

not to

discuss the

Butner on the choice-of-law question;


______

its

conclusion

that Massachusetts

law

See Williams v. Poulos, 11 F.3d 271, 285 (1st


___ ________
______
adverted to

in perfunctory

manner, without

adequate argumentation, deemed waived).

13Although MHFA concedes


statement,

the

law

in

most

that it did

not file a

states, including

financing

Massachusetts,

classifies
ty.
__

an assignment of rents as an interest in real proper____ _______

Thus,

parties

generated from

with

security

interests in

future

rents

encumbered real property need not comply with the

Uniform Commercial

Code.

See Mass.
___

Gen. L. Ann. ch.

106,

9-

104(j) (excluding assignments of rent from Massachusetts U.C.C.);


see
___

also, e.g., Commerce Bank


____ ____ _____________

34, 39 (3d Cir.

v. Mountain View Village, 5 F.3d


______________________

1993); J.H. Streiker & Co. v. SeSide Co. (In re


___________________
___________ _____

SeSide Co.), 152 B.R. 878, 882 (E.D.


__________

Pa. 1993); First Nat'l Bank


________________

v. United States (In re Dorsey), 155 B.R. 263, 267 (Bankr. D. Me.
_____________ ____________
1993);

see generally
___ _________

Laurence D.

Cherkis, Collier Real Estate


____________________

Transactions and the Bankruptcy Code


_____________________________________
Instead,

the

mortgage

recorded

in the appropriate registry

Laws Ann. ch. 183,


rents

2.03[1],

and assignment

of

rents

of deeds.

4 (providing that unrecorded

is invalid against third parties,

actual knowledge); see also


___ ____

at 2-65 (1992).
need

only be

See Mass. Gen.


___

assignment of

except for persons with

In re Cadwell's Corners Partnership,


___________________________________

174 B.R. 744, 754 (Bankr. N.D. Ill. 1994) (same).

18

appointment

petition.

of a receiver) prior to the filing of the bankruptcy

Id. at 620-22 (recognizing


___

fection," which governs

parties,

secured creditor's rights against

and "enforcement" of

rights against its debtor;

or

Code

unenforced security

distinction between "per-

liens, which

third

controls creditor's

rejecting theory that such "inchoate"

interests are voidable

544(a)); see also H.R.


___ ____

Rep. No. 95-595,

Sess. 312 (1978) ("[T]he definition of

under Bankruptcy

95th Cong., 1st

'lien' is new and is very

broad

. .

'inchoate lien[s]'").14

The

Prudential court noted also that the "recordation" rule was


__________

fast

becoming

. [and]

the

[i]t includes

majority rule

further

support

adopted

in

for

the

Landmark.15
________

among

the

states, thus

"uniform" federal

See Conille,
___ _______

840

rule

providing

of

F.2d at

decision

112-13 (in

fashioning appropriate federal rule of decision, court should not


____________________

14The "possession" theory rejected in Prudential, supra, had


__________ _____
essentially
rents

sounded the

knell

in the bankruptcy context,

claim is precluded

by the

steps required to reduce


ruptcy Code

15See
___
(Bankr.

for most

security interests

since the holder

automatic stay from


rents to possession.

in

of a secured

taking the
See,
___

very

e.g., Bank____

362(a)(1), (a)(3), (a)(4).

In re Park at Dash Point L.P., 121


________________________________

B.R. 850,

855

W.D. Wash. 1990), aff'd, 152 B.R. 300 (W.D. Wash. 1991),
_____

aff'd, 985
_____

F.2d 1008 (9th Cir. 1993);

In re Vienna Park Proper_________________________

ties, 976 F.2d 106,


____
SeSide Co., 152
__________

law); In re
_____

B.R. at 884; In re Wiston XXIV Ltd. Partnership,


__________________________________

147 B.R. 575, 580-81


1012

112-13 (2d Cir. 1992) (Virginia

(D. Kan. 1992), appeal dismissed,


______ _________

988 F.2d

(10th Cir. 1993); Midlantic Nat'l Bank v. Sourlis, 141 B.R.


____________________
_______

826, 832 (D.N.J. 1992); Creekstone Apartments Assocs. v. RTC (In


______________________________
___ __

re Creekstone Apartments Assocs.), 165 B.R. 845, 851 (Bankr. M.D.


________________________________
Tenn. 1993); SLC Ltd. V. v. Bradford Group West, Inc.
__________
_________________________
Ltd. V),
______

152 B.R. 755, 760-62

Roswell Ltd. Partnership, 126


_________________________

(In re SLC
_________

(Bankr. D. Utah 1993);

In re KNM
_________

B.R. 548,

N.D. Ill.

554 (Bankr.

1991); In re Rancourt, 123 B.R. 143, 147-48 (Bankr. D.N.H. 1991);


______________
In re Foxhill Place Assoc., 119
___________________________

B.R. 708, 711 (Bankr.

W.D. Mo.

1990); cf. Commerce Bank, 5 F.3d at 39 (recordation, coupled with


___ _____________
notice to tenants).

19

adopt forum state's law if it would frustrate NHA's purposes, but

may consult

other states'

federal common

715

(1979)).16

law as

law rule) (citing

a "source"
_

for the more

Kimbell Foods, Inc.,


___________________

Accordingly, we

conclude that the

apt

440 U.S.

MHFA lien on

rents was fully perfected prior to the chapter 11 petition, hence

not voidable under Bankruptcy Code

b)
b)

544(a).

Law Firm
Law Firm
________

MHFA concedes that it

counsel in the bankruptcy

can proceed against the debtor's

court only if the $35,000

in diverted

cash collateral, intended

as a

prepetition "retainer,"

property of the estate, presumably as a

the debtor.

ment"

MHFA

decisions,

fund held "in trust" for

cites several so-called "collateral reimburse-

see
___

supra
_____

Section II.A.2,

counsel have been directed to surrender to


_______

monies

Westwood Plaza Apartments,


_________________________

trustee to

at oral

argument that

recoup the

Bankruptcy Code

154 B.R.

it may

which

debtor
______

See, e.g., In re
___ ____ _____

at 923 n.11.

putative trust

542, 11 U.S.C.

in

the bankruptcy estate

diverted to fund prepetition retainers.

intimated

remains

MHFA

request the

monies from

542, see also


___ ____

itself

chapter 7

counsel, see
___

In re Sinder,
____________

____________________

16Though not

retroactively applicable to this

case, see In
___ __

re Barkley 3A Investors, 175 B.R. 755, 758 (Bankr. D. Kan. 1994),

_______________________
the

Bankruptcy Reform

1994),

Act of

1994, Pub.

further supports the trend.

tion dealing

L. 103-394

(Oct. 22,

Congress added a new subsec-

separately with the question

whether a prepetition

security interest in rents extends to postpetition

rents.

Under

prior law, the bankruptcy court was required to look to "applicable nonbankruptcy
552(b); the

law," usually state law, see Bankruptcy Code


___

amendment now

refers the

court exclusively

terms of the parties' "security agreement."

See id.
___ ___

to the

552(b)(2);

In re Barkley, 175 B.R. at 758 (noting that, henceforth, "courts


______________
will

not look to state

law" to determine

rents).

20

security interests in

102 B.R. 978, 982-83 (Bankr. S.D. Ohio 1989) (questioning whether

parties other than trustee and debtor in possession have standing

to

bring

542

action), or may

application submitted

330, 11 U.S.C.

The

to

may

by debtor

interpose objection

to any fee

counsel, see Bankruptcy


___

Code

330.17

question whether the $35,000 "retainer" is subject

turnover cannot be resolved

ultimately

agreement between

turn on

the

on the present

precise

terms

record, since it

of any

the debtor and its counsel.

McDonald Bros. Constr., Inc., 114 B.R.


______________________________

"retainer"

See, e.g., In re
___ ____ _____

989, 1002

(Bankr. N.D.

Ill. 1990) (type of retainer is question of fact); see also In re


___ ____ _____

DLIC, Inc., 120


__________

B.R. 348,

351 (Bankr. S.D.N.Y.

1990) (type

of

retainer

simply

depends on

ensure

(whether

or

intent

counsel's

not

availability to

any legal

constitute prepayment for

formed (e.g.,

services

flat fee).

are

In these

Certain

represent

all future legal

acquires full title to the

regardless

of parties).18

ever

the client

performed), or

services to be

circumstances,

retainer fee on the date


__ ___ ____

at 997-98,

999-1000; see also


___ ____

per-

counsel

of payment,
__ _______

whether legal services are ever performed.

McDonald, 114 B.R.


________

retainers

See In re
___ _____

In re Mondie
_____________

____________________

17For present purposes, we


7

trustee would be amenable

prosecute a
the

to MHFA's request

542 turnover action against

commensurate

increase

assume arguendo that the chapter


________

reduction

the recoveries

See supra note 9.

in

of other

MHFA's

that the trustee

the transferees, since


unsecured

holders of

claim

could

unsecured claims.

___ _____

18The
$5,000

same rationale would apply to

MHFA's recovery of the

which the debtor advanced to retain bankruptcy counsel in

an unrelated bankruptcy case.

See supra note 2.


___ _____

21

Forge Co., 154


_________

B.R. 232, 235

(Bankr. N.D. Ohio

1993).

Such

retainer is precisely the same as the retainer fee paid Coopers &

Lybrand;

it

never became

part of

the

property of

the debtor

estate,

and is

reasonable

329(b);

subject

to turnover

value of services

rendered."

In re McDonald, 114 B.R.


______________

Bankruptcy Code

prepetition

only

See
___

"exceeds

the

Bankruptcy Code

at 995-96, 1003 n.18; cf. also


__ ____

548(a)(2), 11 U.S.C.

"fraudulent"

if it

transfers

548(a)(2) (avoidance of

where

"insolvent"

debtor

"received less than a reasonably equivalent value in exchange for

transfer").19

On the

other hand,

a "security"

retainer is

held by

counsel to secure payment of anticipated legal services yet to be

rendered.

Under the ethical

rules applicable in most jurisdic-

tions, these monies remain property

by

of the client until

applied

counsel in payment of legal services actually performed.

In re McDonald,
______________

114 B.R. at

999; see also


___ ____

In re Saturley,
______________

See
___

131

B.R. 509,

119, 120

not

515 (Bankr. D.

(Bankr. D. Md.

earned prior

to

Me. 1991); In re Lilliston,


________________

1991) (portion of

petition is

127 B.R.

prepetition retainer

property

of estate);

In re
______

Fitzsimmons Trucking, Inc., 124 B.R. 556, 558-59 (Bankr. D. Minn.


__________________________

1991) (same).

"interest"

In

in any

the

instant case,

unearned portion

the

of the

debtor's

equitable

retainer, impressed

____________________

19Some courts have


two

types of

retainers without

under Bankruptcy Code


at

1002.

In

held that debtor

330.

all events,

first filing a

payments received

these

fee application

See, e.g., In re McDonald, 114 B.R.


___ ____ ______________
these

scrutiny under Bankruptcy Code


all

counsel may use

retainers remain

329 (debtor counsel

for legal

Bankr. P. 2017.

22

services).

subject

to

must report

See also
___ ____

Fed. R.

with

estate

MHFA's perfected

lien, would have

on the date the chapter 11

ruptcy Code

of the

petition was filed, see Bank___

541(a)(6), and presumably would remain subject to a

turnover order in a

possession.

become property

section 542 action brought by

the debtor in

See In re McDonald, 114 B.R. at 1000 n.13 (citing In


___ ______________
__

re Gerwer, 898 F.2d 730, 734 (9th Cir. 1990)).


_________

Of

course,

if

the

$35,000

transfer

constituted

"security"

retainer, counsel would be required to file a section

330 fee application

Steel Foundry Co.,


_________________

MHFA

could then

to withdraw

the retainer.

In re Burnside
_______________

90 B.R. 942, 945 n.1 (Bankr. N.D. Ill. 1988).

object

portion of the retainer

to debtor

counsel's

retention of

not yet devoted to legal

any

services which

were "actual [and] necessary," see Bankruptcy Code


___

330, and the

bankruptcy court presumably could order debtor counsel to surren-

der the unearned portion as "property of the estate."

105(a); 363(e); see


___

See id.
___ ___

also In re Westwood Plaza Apartments,


____ _________________________________

154

B.R. at 923 n.11.

We need not resolve the

tial

bankruptcy court

remedies

precise contours of the poten-

available to

MHFA against

the

debtor's law firm.

the unavailability
______________

collateral.

retainer

subject

is

to

Rather, it was MHFA's burden

of any alternative remedy


__ ___

See supra
___ _____

Section II.A.2.

not property

chapter

of the

diverted

collateral

for recovering its

Even if

in

has

that it cannot trace

nonbankruptcy

23

the $35,000

7 estate,

administration, MHFA

plausible basis for concluding

the

chapter

to demonstrate

hence not

suggested

no

and recover

lawsuit directed

against the

by

debtor's chapter 11 counsel (which

the automatic stay, see


___

upon

its prior
_____

retainer

pursue

lien on the
____

remains

its

Bankruptcy Code

property of

bankruptcy

court

rents.

the

is not protected

362) to foreclose

On the other

chapter 7

remedies

hand, if the

estate,

against

the

MHFA may

nondebtor
_________

chapter 11 counsel.

3.
3.

Accounting Firm
Accounting Firm
_______________

At oral

its $25,000

prepetition payment to

services which

See
___

argument, MHFA

conceded that the

Coopers & Lybrand

were completed prior to the


_____ __

supra Section
_____

I.A.

Consequently, the

debtor made

for audit

chapter 11 petition.

debtor retained

no

legal or equitable

the

"interest" in these monies as

chapter 11 petition; and no right

monies

ever became

Bankruptcy

Code

basis upon which

could

541(a)(6).

&

to the

542 (third

may be compelled

of the

to, or interest in, these

chapter

11 estate.

court, at this

Lybrand to

chapter 7

turn over

estate.

point in

time,

any part

of its

id.
___

542, 11

See
___

party, in possession of property

to turn it

See
___

MHFA could point to no conceivable

the bankruptcy

direct Coopers

$25,000 retainer

U.S.C.

property

of the date of

of estate,

over to trustee); United States v.


______________

Whiting Pools, Inc., 462 U.S. 198 (1983) (even a secured party in
___________________

possession of collateral constituting "property of the estate" is

subject to

542

turnover order).

Moreover, MHFA

has suggested

no other basis upon

which either the debtor in possession or the

chapter 7 trustee could have avoided

Coopers

& Lybrand.

See,
___

the prepetition transfer to

e.g., id.
____ ___

544 (avoidance of unper-

24

fected liens), 545 (avoidance of statutory liens), 547 (avoidance

of

preferences),

Moreover, the

548

(avoidance

limitations period

of

fraudulent

for any such

transfers).

avoidance action

would

appear to

have lapsed.

See id.
___ ___

546(a)(1)

(two years

after order for relief); compare also In re Ollada, 114 B.R. 654,
____________ ____________

655 (Bankr. E.D. Mo.

period) with
____

1986)

1990) (

In re De Berry,
_____ ________

542

turnover motion

542 has no

comparable limitations

59 B.R. 891,

must

be made

898 (Bankr. E.D.N.Y.

within "reasonable

time").20

In all events, MHFA

against Coopers & Lybrand

may have a direct cause

of action

outside the bankruptcy court.


_______ ___ __________ _____

Cf. In
___ __

re Indian Motocycle Assocs. III Ltd. Partnership, 161 B.R. at 868


________________________________________________

("[S]uch action

in

a case

. . . would involve only rights among nondebtors

having no

prospects of

previously granted MHFA relief

reorganization [and]

I have

from [the automatic] stay."); see


___

generally
_________

security

In re McBee, 714
___________

interest

survives

automatic stay afforded

Bankruptcy Code

lien directly.

F.2d at 1326

conveyance

(noting that perfected

of

collateral).

no protection to Coopers

The

& Lybrand, see


___

362, and MHFA may seek to execute its perfected

At least this procedure would allay a troublesome

aspect of the present case, in

received either notice

that Coopers & Lybrand has

never

or a hearing on MHFA's allegedly superior

claim to the $25,000.


____________________

20The
compelling

same

rationale would

to

preclude an

order

turnover of the $5,000 payment the debtor made to the

principal of its managing


have

appear

been voidable as

See Bankruptcy Code


___

general partner, which might otherwise

a preferential transfer
547; see also supra note 2.
___ ____ _____

25

to an "insider."

III
III

CONCLUSION
CONCLUSION
__________

For the foregoing reasons, we decline MHFA's invitation

to fashion extraordinary judicial

relief under Bankruptcy Code

105(a), absent a showing that the judicial

lawmaking it inevita-

bly entails is either "necessary or appropriate to carry out" any

provision of the Bankruptcy

Code in the circumstances presented.

Accordingly, we vacate the district court decision entitling MHFA

to an

order directing the debtor

to turn over to

the chapter 7

trustee the diverted MHFA cash collateral or its monetary equiva-

lent.

chapter

MHFA

shall not

be entitled

to further

7 proceedings, except on order

relief in

these

of the bankruptcy court,

after appropriate notice and hearing.

The
The
___

district court order


district court order
________ _____ _____

remanded to the bankruptcy


remanded to the bankruptcy
________ __ ___ __________

is vacated
is vacated
__ _______

and the
and the
___ ___

case is
case is
____ __

court for further proceedings consiscourt for further proceedings consis_____ ___ _______ ___________ _______

tent with this opinion; costs to appellant.


tent with this opinion; costs to appellant.
____ ____ ____ _______ _____ __ _________

26