On an issue where the lower courts are split, the Ninth Circuit affirmed the Bankruptcy Appellate Panel by holding that an asset is not automatically abandoned if it was disclosed only in the statement of financial affairs and not on the schedule of assets.

No matter what the practice might have been before adoption of the Bankruptcy Code, disclosure to the trustee does not satisfy the requirements of Section 554(c), according to the October 19 opinion by Circuit Judge Ryan D. Nelson.

Lawsuit Not Scheduled but Listed on the SOFA

A couple had begun a lawsuit against their mortgage servicer before filing in chapter 7. They disclosed the suit in the statement of financial affairs but did not list the claim or its value in the schedule of assets. The couple also discussed the claim with the trustee and gave him copies of the pleadings.

Although not mentioned in Judge Nelson’s opinion, the bankruptcy court docket reveals that the trustee decided not to pursue the lawsuit given the cost of prosecution and the uncertainty of a favorable result.

The trustee issued a no-asset report and certified that he had fully administered the estate. The court discharged the trustee and closed the case.

The debtors continued prosecuting the suit after discharge. With a hearing on summary judgment approaching, the defendant servicer approached the trustee and made a settlement proposal. After the trustee reopened the case, the bankruptcy court approved the settlement. Concluding that the lawsuit had not been abandoned, the bankruptcy court gave the proceeds to the trustee for distribution to creditors.

The debtors appealed and lost in a July 2, 2020, opinion for the Ninth Circuit Bankruptcy Appellate Panel by Bankruptcy Judge Laura S. Taylor. See Stevens v. Whitmore (In re Stevens), 617 B.R. 328 (B.A.P. 9th Cir. July 2, 2020). To read ABI’s report, click here.

The debtors argued in the BAP that the lawsuit had been abandoned automatically under Section 554(c). Although not mentioned by the BAP or the circuit, the bankruptcy court’s docket shows that the defendant offered $50,000 to settle. Judge Nelson said that the debtors were looking for 10 times more if they had maintained control of the lawsuit.

‘Plain Language’ Dictates the Outcome

The outcome in the circuit turned on the interactions between Sections 554(c) and 521(a)(1). The former provides that an asset not administered is “abandoned to the debtor” if it was “scheduled under section 521(a)(1).”

For Judge Nelson, the analysis was largely a linguistic exercise. No circuit court has addressed the issue. The lower courts are split. Some believe that an asset is abandoned only if it was scheduled as an asset under Section 521(a)(1)(B)(i). Others believe that an asset will have been abandoned if it was included in the statement of affairs under Section 521(a)(1)(B)(iii).

Among the circuits, only the Second Circuit mentioned the issue but left the question undecided. See Ashmore v. CGI Grp. Inc., 923 F.3d 260 (2d Cir. 2019). To read ABI’s report on Ashmore, click here.

Judge Nelson said that the dictionary meaning of the word “scheduled” as used in Section 554(c) means “to include something on a literal schedule.” The court, he said, “must give ‘schedule’ and ‘scheduled’ similar meanings: scheduled means included on a schedule.” Listing on the statement of affairs won’t suffice.

Judge Nelson found support in the Bankruptcy Rules, which, he said, “routinely distinguish between the bankruptcy petition itself, bankruptcy schedules, the SOFA, and other documents.”

The debtors urged the Ninth Circuit to follow pre-Code law and the understanding that property was abandoned if the trustee knew about it. Now that Congress has enacted the Bankruptcy Code, Judge Nelson said, “we cannot disregard its plain language.”

Judge Nelson conceded that the omission from the schedules may have been “an inadvertent oversight.” Given the statute’s “plain text, . . . we cannot consider equitable arguments,” he said.

Judge Nelson affirmed, holding that “§ 554(c) requires property to be disclosed on a literal schedule, and thus that, absent Trustee or court action, property disclosed only on a statement (e.g., the Statement of Financial Affairs) cannot be abandoned under § 554(c).”

Judge Nelson did not explain what he meant by “Trustee or court action.” Evidently, a trustee’s analysis of an unscheduled claim does not measure up if we can credit facts not mentioned in the circuit opinion.

Observations

In representing corporate and individual debtors before turning to journalism, this writer would confront circumstances where it was unclear whether something should be scheduled as a debt or asset or disclosed in the statement of financial affairs. In those situations, it was our practice to both schedule and list.

Was it malpractice for the debtors’ lawyer not to schedule the lawsuit against the servicer?

Kudos

The debtors paid the filing fee but could not afford the counsel. Recognizing the importance of the issue, the circuit appointed Kellam M. Conover from Gibson, Dunn & Crutcher LLP in Washington, D.C., as pro bono counsel for the debtors. With him on the brief were Mark A. Perry and Suria M. Bahadue. Mr. Conover argued. He had clerked on the Ninth Circuit.

Tara Twomey submitted an amicus brief for the debtors on behalf of the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys.