The bankruptcy estate generally includes, "all legal or equitable interests of the debtor in property as of the commencement of the case" wherever the property is located and by whomever held. In re Rowland, 140 B.R. 206, 207 (Bankr. S.D. Ohio 1992) (citing 11 U.S.C. §541(a) and (a)(1)). Section 541(d) further clarifies what constitutes property of the bankruptcy estate:
. . . The mere failure to pay a debt does not belong in that category."); Marwin Prod. Sys., Inc. v. Pratt & Whitney Co. (In re Pratt & Whitney Co.), 140 B.R. 327, 332 (Bankr.D.Conn.1992) (court refused to impose constructive trust where debtor failed to pay after repeated demands by the creditor finding that "the debtor has committed no wrongdoing outside of not paying."); In re Rowland, 140 B.R. 206, 209 (Bankr.S.D.Ohio 1992) (noting that "generally, a mere breach of contract is insufficient to raise a constructive trust."). The Agreements are governed by New Mexico law. (Agreements at § 6.)
Two bankruptcy courts that have examined the nature of insurance benefits under 11 U.S.C. § 541 have reached a similar conclusion. In In re Rowland, 140 B.R. 206 (Bankr. S.D. Ohio 1992), a contractor who repaired fire damage to the debtors' residence moved for relief from stay to recover the insurance proceeds. Id. at 207.
Even so, the requirement to bring an action via an adversary proceeding may be waived by the party that the requirement seeks to protect. In re Rowland, 140 B.R. 206, 208 n. 1 (Bankr.S.D.Ohio 1992); see also Wilkinson, 196 B.R. at 315; In re Jablonski, 70 B.R. 381, 385 (Bankr.E.D.Pa. 1987); In re Shorts, 63 B.R. at 3-4. In this case, as National City has responded to the Debtor's motion on its merits, it is the court's conclusion that "no purpose would be served by insisting on the technically correct procedure at this late date."
Jarvis Cannon, supra, at 3. The Debtors argue to the contrary, relying on In re Rowland, 140 B.R. 206 (Bankr. S.D. Ohio 1992). But Rowland is inapposite: it involved a home owners' fire insurance policy, not a liability insurance policy.
At filing, Debtors had a combination of household goods, including items purchased with a portion of the insurance proceeds, and the remainder of the insurance proceeds, and the entirety became property of the estate. 11 U.S.C. § 541(a); In re Rowland, 140 B.R. 206 (Bankr. S.D. Ohio 1992). Debtors have not cited any persuasive case law or authority to support their claim they are entitled to any amount in excess of the statutory amount. Debtors may only remove from the estate an amount determined by the applicable exemption statute.
The Court notes that, although the Parties did not cite to any cases involving the specific question of whether a constructive trust could be imposed over property insurance proceeds in favor of a contractor who had done repair work on the property, its own research disclosed several such cases, though none applying Pennsylvania law. See, e.g., In re Rowland, 140 B.R. 206 (S.D. Ohio 1992) (applying Ohio law and finding proceeds not held in constructive trust), In re Stafford, 2011 WL 10894608 (Bankr. W.D. N.C. 2011) (applying North Carolina law and imposing a constructive trust). Additionally, the Court is mindful that extreme caution is in order before an "after-the-fact" constructive trust is imposed by a bankruptcy court because the result of doing so runs counter to one of the overarching principles of bankruptcy law, namely, the ratable distribution of the bankruptcy estate to creditors.
"[T]he court must look to state law to determine whether to impose a constructive trust on property within the debtor['s] possession." In re Rowland, 140 B.R. 206, 208 (Bkrtcy. S.D. Ohio 1992). In Michigan:
In this case, as the respondent has responded to the Debtor's motion on its merits, it is the court's conclusion that no purpose would be served by insisting on an adversary proceeding." (citations and internal quotation marks omitted)); In re Rowland, 140 B.R. 206, 207 n. 1 (Bankr. S.D.Ohio 1992) ("Generally, a relief from stay proceeding is not the proper forum in which to determine whether property is property of the bankruptcy estate or property of another. Instead, Bankr.R. 7001(2) requires the filing of an adversary proceeding `to determine the validity, priority, or extent of a lien or other interest in property....' However, where parties deliberately argue the merits of their positions, and appear to have waived any technical defects in procedure, no purpose would be served by insisting on the technically correct procedure at this late date.
A dispute with third parties over property of the estate requires an adversary proceeding pursuant to Fed.R.Bankr.P. 7001(2) and cannot be decided in a motion for relief from the automatic stay. In re Rowland, 140 B.R. 206, 207 n. 1 (Bankr. S.D. Ohio 1992) (citing In re Colrud, 45 B.R. 169, 172 n. 2. (Bankr. Alaska 1984)). Similarly, this court cannot validate or invalidate the foreclosure on any grounds without an adversary proceeding.