Trustee Failed To State A Claim For Turnover Under 11 U.S.C. § 542 Where Genuine Dispute Existed As To Whether Security Deposit Was Property Of The Estate
Giuliano v. Fairfield Group Health Care Centers Ltd. P'ship (In Re Lexington Healthcare Group, Inc.), 363 B.R. 713 (Bankr. D. Del. 2007) (Judge Mary F. Walrath)
The Chapter 7 Trustee filed a complaint against a nursing home landlord under Section 542 of the bankruptcy code seeking turnover of a $2.2 million security deposit posted by the Debtor’s predecessor. The landlord filed a motion to dismiss under FRBP 12(b)(6) claiming that a turnover action under Section 542 may only be used to obtain property which is undisputedly property of the bankruptcy estate. Noting that the Trustee had not pled an absolute right to the security deposit, and that a genuine dispute existed over rights to it, the Court agreed and dismissed the turnover action.
In 1995, Lexington Healthcare Group, LLC entered into a nursing home lease with Fairfield Group Health Care Centers Limited Partnership. Pursuant to the lease, Lexington (the Debtor’s predecessor) paid a $2.28 million “Security Deposit.” The lease was assigned to the Debtor in May 1997.After the Debtor filed bankruptcy, the Trustee commenced an action against Fairfield and others under Section 542 of the bankruptcy code seeking turnover of the $2.28 million to the estate. Fairfield and the other defendants moved to dismiss the complaint pursuant to FRBP 12(b)(6).
The Court first noted that FRBP 12(b)(6) required the Court to accept all well pled allegations in the complaint as true and view them in the light most favorable to the Trustee. However, the Court also observed that previous Delaware bankruptcy court decisions had held that a trustee may only use Section 542 to compel a turnover of property that is not in dispute.
In this case, Fairfield argued that the Debtor’s predecessor intended the security deposit to be rent and additional consideration paid under the lease. In addition, there was no provision in the lease for return of the security deposit. The Court agreed with Fairfield that there was a material dispute over title to the security deposit. An examination of the lease revealed that the security deposit was to be applied by the landlord toward damages or defaults, or alternatively to the last months of the initial term of the lease. Because the Debtor had rejected the lease, and there was no “plain and unambiguous . . . clear, objective basis for concluding that the security deposit is property of the estate,” a turnover action pursuant to Section 542 was not appropriate, and the Court dismissed that count of the complaint.
The Court declined to dismiss entirely the complaint, finding that Count 2 of the complaint stated a claim that the security deposit was debt owed to the estate. The Court also declined to dismiss two individual defendants on the asserted basis that they were “disassociated partners” of Fairfield. To the contrary, at the time of entering the lease, the two individuals were general partners of Fairfield. Whether they were disassociated partners (and therefore not liable) was an issue of fact that was not ripe for disposition on the motion to dismiss.
