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Bierbower v. McCarthy

December 16, 2005

WILLIAM J. BIERBOWER, ET AL., APPELLANTS,
v.
KEVIN R. MCCARTHY, APPELLEE.



The opinion of the court was delivered by: John D. Bates United States District Judge

MEMORANDUM OPINION

This case comes on appeal from the United States Bankruptcy Court for the District of Columbia. Appellants are trustees of the Alexander and Margaret Stewart Trust ("Stewart Trust"), a charitable trust that supports pediatric health care for low-income families in the District of Columbia. Appellee is the bankruptcy trustee of Crossroad Health Ministry ("Crossroad"), a nonprofit provider of pediatric care that Stewart Trust had supported for many years.*fn1 This appeal challenges the Bankruptcy Court's decision that Stewart Trust did not retain an ownership interest in a $60,000 grant given to Crossroad prior its bankruptcy filing. For the reasons discussed below, the Court affirms the decision of the Bankruptcy Court.

BACKGROUND

In December 2003, Stewart Trust approved a $60,000 grant to support a Crossroad program that offered health-care services for infants and toddlers in the District's Ward 5 neighborhood. See Compl. at ¶¶ 6- 7, Ex. A.*fn2 A letter accompanying the grant check stated that "these funds must be used in 2004 for the purposes stated in your proposal unless changed with our written permission." Id. at ¶ 8. Crossroad's proposal had indicated that the "purpose of the funding request" was a "Pediatric: Early Intervention Program." Id. at Ex. A. The letter from Stewart Trust to Crossroad imposed no further limitations on the grant. Id. at ¶ 8. Crossroad deposited the funds in its general operating fund, which was used for routine operating expenses. Id. at ¶8.

On February 27, 2004, Crossroad filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Id. at ¶ 5. Crossroad had neglected to pay federal withholding taxes for the two years prior and owed a substantial amount of money to additional creditors. Id. at 13. Stewart Trust wrote to Crossroad requesting return of the funds so that they could be distributed to another charitable organization. Id. at ¶¶ 11, 14.

Crossroad declined to return the funds and filed a complaint in the United States Bankruptcy Court for the District of Columbia to determine ownership of the $60,000 grant. The Bankruptcy Court ruled that Stewart Trust was not entitled to any return or transfer of the funds because the grant was an asset of the bankruptcy estate and therefore must be utilized for the payment of debts. The Bankruptcy Court held that the provisions of D.C. Code § 29-301.56, which governs the liquidation of assets of a nonprofit organization, can be applied in a bankruptcy proceeding to determine the priority in which assets are allocated in a dissolution or liquidation. The Bankruptcy Court interpreted the statute as requiring that the grant funds first be used for payment of Crossroad's debts and administrative expenses of the bankruptcy before they could be returned or transferred to another charity.*fn3 The Bankruptcy Court also found that a resulting trust did not arise from the charitable-use limitation that accompanied the grant, and it declined to impose a constructive trust despite Stewart Trust's assertion that Crossroad intentionally concealed its perilous financial condition during the grant-solicitation process.

Stewart Trust appeals the ruling of the Bankruptcy Court, arguing that the provisions of D.C. Code § 29-301.56 may be interpreted to permit a return or transfer of the funds. Appellants also contend that a resulting trust arose from the charitable-use limitation that accompanied the grant or, in the alternative, that the Bankruptcy Court should have imposed a constructive trust.

The Court reviews de novo the bankruptcy court's conclusions of law. See Solins v. 1391 Conn. Ave. Assocs., 1996 U.S. Dist. LEXIS 1315 at *6. Findings of fact must be clearly erroneous to be overturned. Bankr. R. 8013.

ANALYSIS

I. Applicability and Proper Interpretation of D.C. Code § 29-301.56

The Bankruptcy Court properly applied and interpreted D.C. Code § 29-301.56 in determining the nature of Crossroad's property interest in the grant. Although federal bankruptcy law ultimately determines the distributionof estate assets, "[w]hether and to what extent the debtor has an interest in property is a matter of state law." Rodriguez v. Inmobiliaria Naihomy, 2005 Bankr. LEXIS 2304 at *5 (citing Butner v. United States, 440 U.S. 48, 54 (1979)). In this case, the debtor, Crossroad, is incorporated in the District of Columbia, and therefore D.C. law determines its property rights. Section 29-301.56(c) governs the dissolution of nonprofit corporations in the District of Columbia and states, in pertinent part:

The assets of the corporation or the proceeds resulting from a sale, conveyance, or other disposition thereof shall be applied and distributed as follows:

(1) All costs and expenses of the court proceedings and all liabilitiesand obligations of the corporation shall be paid, satisfied, and discharged, or adequate provision shall be made therefor;

(2) Assets held by the corporation upon condition requiring return, transfer or conveyance, which condition occurs by reason of the dissolution or liquidation, shall be returned, transferred, ...


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