Adam I. Adler, Navigating the Morass: a Proposed Uniform Standard to Determine the Revocability of Technical Abandonments

• Publication year: 2011

NAVIGATING THE MORASS:

A PROPOSED UNIFORM STANDARD TO DETERMINE THE REVOCABILITY OF TECHNICAL ABANDONMENTS

INTRODUCTION

Bankruptcy law balances the constant struggle between parties with competing interests: the creditors to whom the debtor owes money and the debtor, who wishes to achieve a “fresh start.”1 Generally, the debtor’s assets are the source of the creditors’ repayment. In many cases, a trustee is appointed

to administer the debtor’s assets. The trustee’s duties include maximizing the value of the bankruptcy estate2 and investigating the debtor’s financial affairs.3 The conflict between these duties, especially in chapter 7 cases, puts the trustee in a precarious position.4 The trustee investigates the debtor’s financial affairs, decides which assets will benefit the estate, and, in turn, determines how best to administer those assets and pay off the creditors.5 If the trustee does not administer an asset, the asset is generally “abandoned” to the debtor. With the benefit of hindsight, the trustee or creditors may later contest the abandonment

1 S. REP. NO. 95-989, at 14 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5800.

1. With some limited exceptions, the bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1) (2006). Conceptually, “[t]he

   most direct analogy [to a bankruptcy estate] is . . . the estate created by law upon someone’s death.” ELIZABETH WARREN & JAY LAWRENCE WESTBROOK, THE LAW OF DEBTORS AND CREDITORS 116 (6th ed. 2009).

2. Mele v. First Colony Life Ins. Co., 127 B.R. 82, 85 (D.D.C. 1991) (comparing the bankruptcy trustee’s

   position to “that of a fiduciary to both the debtor and creditors”); see also Steven Rhodes, The Fiduciary and Institutional Obligations of a Chapter 7 Bankruptcy Trustee, 80 AM. BANKR. L.J. 147, 147–48 (2006). The trustee’s duties to the court include “objecting to the debtor’s discharge” where appropriate and “protect[ing] the integrity of the bankruptcy process.” Id. at 149.

3. See In re Melenyzer, 140 B.R. 143, 155 (Bankr. W.D. Tex. 1992). The court in Melenyzer

summarized the trustee’s conflicting duties as follows:

On the one hand, the trustee has a duty to close the estate as expeditiously as is compatible with the best interests of parties in interest. On the other hand, the trustee must also collect the assets of the estate; investigate the financial affairs of the debtor; and appropriately object to the debtor’s discharge, to proofs of claim, or to exemptions. . . .

Balancing these apparently competing duties is all the more difficult because the trustee must make decisions prospectively, without the benefit of hindsight, and it is always much harder to guess than to second-guess.

Id.; see also Rhodes, supra note 3, at 148–49(“[A] trustee’s obligation to close a case expeditiously directly conflicts with the obligation to administer all estate assets . . . .”).

5 See 11 U.S.C. § 704.

of an asset initially thought to be valueless by moving to reopen the debtor’s case.6 This Comment examines when a court should reopen a case and revoke abandoned assets for the benefit of the debtor’s creditors or another party in interest.

When a debtor files a bankruptcy petition, nearly all of the debtor’s property immediately enters the bankruptcy estate.7 Once the estate is created, the debtor no longer has control over or a right to the estate’s assets,8 unless the court or trustee decides to abandon a particular asset.9 The competing interests between the debtor and the creditors culminate when the trustee must choose whether an asset has potential value to the estate. If the trustee determines that the asset is not worth administering—either because the asset has no value or because the cost of administering the it exceeds its value—the trustee may choose to abandon the asset.10 Once an asset is abandoned, “the trustee is . . . divested of control of the property because it is no longer part of the estate.”11 A party in interest, such as the debtor or a creditor, may request that the bankruptcy court order the trustee to abandon an asset that is burdensome or “of inconsequential value and benefit to the estate.”12 Additionally, if any of the estate’s assets remains unadministered when the court closes the debtor’s case, those assets are abandoned to the debtor.13 This is known as “technical abandonment” or “abandonment by operation of law.”14 Sometimes a trustee inadvertently abandons an asset by operation of law.15

6 See id. § 350(b) (“A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.”).

7 Id. § 541(a).

1. See id.; In re Burgess, 234 B.R. 793, 795 (Bankr. D. Nev. 1999) (“When a bankruptcy petition is filed, an ‘estate’ is created, consisting of all of the debtor’s interests, both legal and equitable, in all property, both tangible and intangible.”).

2. See 11 U.S.C. § 554(a)–(c) (allowing the trustee to abandon property that is “burdensome” or “of inconsequential value and benefit to the estate”).

10 Id. § 554(a).

11 5 COLLIER ON BANKRUPTCY ¶ 554.02[3] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010); see also Dewsnup v. Timm (In re Dewsnup), 908 F.2d 588, 590 (10th Cir. 1990) (“Property abandoned under this section ceases to be part of the estate. . . . It reverts to the debtor and stands as if no bankruptcy petition

was filed.” (citation omitted)), aff’d, 502 U.S. 410 (1992); H.R. REP. NO. 95-595, at 343 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6299 (noting that the automatic stay does not apply “when the property ceases to be property of the estate, such as by sale, abandonment, or exemption” (emphasis added)).

12 11 U.S.C. § 554(b).

13 Id. § 554(c).

1. Woods v. Kenan (In re Woods), 173 F.3d 770, 776 (10th Cir. 1999).

2. See Neville v. Harris, 192 B.R. 825, 830 (D.N.J. 1996) (“The facts of the instant case indicate the failure of the [t]rustee to administer the [l]awsuit resulted from inadvertence. In these circumstances, the [b]ankruptcy [c]ourt did not abuse its discretion by reopening the [c]ase.”)

   Other times, a trustee abandons an asset by operation of law because it possesses little value to the estate, only to discover that the asset’s value increased dramatically after the case was closed.16 To remedy the problem of inadvertently abandoning a valuable asset or deliberately abandoning an asset

   whose value later increases, a trustee will sometimes file a motion to reopen a case in order to revoke the abandonment and administer the asset.17

   
   

   Courts have taken widely divergent approaches when confronted with the revocability of technical abandonments.18 Although many courts that have

   
   

3. This situation sometimes occurs with respect to causes of action, in which the defendant holds to low settlement offers throughout negotiations and increases the offer dramatically some time after the debtor’s case is closed. See, e.g., In re Balonze, 336 B.R. 160 (Bankr. D. Conn. 2006). In In re Balonze, the debtor had a cause of action against a law firm, Zeldes, Needle & Cooper (“ZNC”). Id. at 166. Once the debtor declared bankruptcy, the cause of action became property of the estate and the trustee took over settlement negotiations. Id. During these negotiations, ZNC “held firmly” to a very low settlement offer. Id. After further negotiation and consultation with an attorney, the trustee determined that the cause of action was not worth the cost of administering the asset, closed the case, and abandoned the cause of action to the debtor. Id. A few days later, ZNC called the trustee and increased their settlement offer considerably. Id. The bankruptcy court reopened the case to allow the proceeds from the settlement to be administered. Id. at 170.

4. In fact, in virtually every case involving the revocability of a technical abandonment, the trustee or

   some other party in interest, such as a creditor, claims that the asset in dispute was abandoned inadvertently— for instance, due to a clerical or other error—because the asset’s value increased after it was abandoned, or because the asset turned out to be worth more than the trustee believed when she abandoned it. In In re Woods, for instance, at the behest of the bankruptcy court, the trustee filed his final report of the debtor’s case while a motion to approve the sale of certain pieces of real property was pending before the court. In re Woods, 173 F.3d at 779–80. This resulted in the bankruptcy court closing the case before it decided the motion to approve the sale of the real property. Id. at 773–74. Thus, when the court closed the debtor’s case, the real property had not yet been sold and, pursuant to § 554(c), reverted back to the debtor. Id. at 776. The trustee then needed to file a motion to reopen the debtor’s case to be able to sell the real property at issue. Id. at 779–80.

   In re Brinley involves complicated facts but illustrates that a trustee and creditors sometimes move to reopen a case and revoke a technical abandonment because a change in circumstances makes an asset more valuable to the bankruptcy estate. LPP Mortg., Ltd. v. Brinley (In re Brinley), 547 F.3d 643, 645–46 (6th Cir. 2008). The debtor moved to avoid a creditor’s lien on a piece of real property. Id. The bankruptcy court avoided only a small portion of the lien, meaning that the estate had only minimal equity in the encumbered property. Id. The debtor appealed the bankruptcy court’s decision, and while the appeal was pending, the trustee closed the debtor’s case and adandoned the real estate to the debtor. Id. On appeal, the district court reversed the bankruptcy court’s decision to avoid only a small portion of the lien and ruled that the lien should be avoided almost in its entirety. Id. This gave the debtor much more equity in the real estate at issue. The creditor whose lien was wiped out then moved to reopen the debtor’s bankruptcy case so that the trustee could administer the property. Id.; see also In re Balonze,

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