On January 5, 2015, the United States Court of Appeals for the Sixth Circuit affirmed the Bankruptcy and District Courts for the Western District of Kentucky in favor of the Commonwealth of Kentucky, Transportation Cabinet, represented by Morgan & Pottinger’s John Majors and Brad Salyer. The Chapter 7 trustee of Shelbyville Road Shoppes, LLC sued the Cabinet, seeking return of a nearly $1 million deposit paid to the Cabinet in connection with a purchase agreement for a tract of land in eastern Jefferson County.
The Sixth Circuit determined that the Trustee’s demand for turnover of the deposit failed because the deposit was not part of the bankruptcy estate under section 541 of the Bankruptcy Code, finding that at the time of the filing of the bankruptcy case, the debtor had no “present right to possess the deposit, and thus no legal or equitable interest in it.” Rather, the bankruptcy estate had an interest in the purchase agreement as an executory contract, which would have permitted the debtor to complete the payment of the purchase price and obtain title to the subject property. When the Trustee chose not to assume the contract and complete the purchase, he lost the limited right to a credit-the amount of the deposit-towards the purchase price. In so holding, the Sixth Circuit noted that a trustee may not reject part of an executory contract while accepting another part that is beneficial to the estate; it’s all or nothing.
Finally, the Sixth Circuit noted that no equitable interest in the deposit existed at the commencement of the bankruptcy that would entitle the Trustee to a turnover request. The opinion is to be published.
The opinion also is noteworthy because it is a rare situation in which a bankruptcy trustee loses a turnover effort; and, in this case, three times.