In a case of first impression in the circuit, the Sixth Circuit Court of Appeals has applied Federal Rule of Civil Procedure 60(b) to revoke a bankruptcy trustee's "technical" abandonment of property. LPP Mortgage Ltd. v. Brinley, 547 F.3d 643 (6th Cir. 2008). If a bankruptcy trustee files a notice of abandonment of property under §554(a) of the Bankruptcy Code, the property is irrevocably abandoned, at least when the property is scheduled or the trustee is otherwise aware that it exists. See, e.g., In re Bryson, 53 B.R. 3 (Bankr. M.D. Tenn. 1985). But property may also be abandoned without action by the trustee. Section 554(c) provides that all property scheduled under §521(1) and not otherwise administered at the time the case is closed is abandoned.
Is such an abandonment irrevocable? Not in the Sixth Circuit.
In LPP Mortgage, the Sixth Circuit decided two cases with similar facts. In each case, the debtor's real property was scheduled pursuant to §521(1). The debtors filed motions under §522(f) to avoid judgment liens held by LPP Mortgage. The bankruptcy court reduced the lien amounts, but did not eliminate them. The debtors appealed to the district court, and while the appeals were pending, the cases were closed. The appeals ultimately went to the Sixth Circuit, which held that one of the liens should be further reduced and the other lien entirely eliminated.
LPP Mortgage filed motions to reopen the bankruptcy cases and motions to preserve the avoided liens for the benefit of the bankruptcy estates under §551. The trustee (who served in both cases) joined in the motions. The debtors opposed the motions, arguing that the trustee had irrevocably abandoned his interest in the property. In each case, the bankruptcy court held that the abandonment was revocable under Fed. R. Civ. P. 60(b), and that equity required that the abandonment be revoked. In each case, the bankruptcy court held that the avoided lien was preserved for the benefit of the estate. On appeal in both cases, the district court and the Sixth Circuit Court affirmed.
As the Sixth Circuit Court noted, there undoubtedly had been a "technical" abandonment of the property under §554(c). The question was whether a technical abandonment is revocable, an issue of first impression in the circuit. 547 F.3d at 649. The bankruptcy court had followed the approach adopted in Woods v. Kenan (In re Woods), 173 F.3d 770 (10th Cir. 1999), cert. denied, 528 U.S. 878 (1999). In Woods, the Tenth Circuit held that a technical abandonment may be revoked under the guidelines of Rule 60(b), made applicable in bankruptcy cases by Federal Rule of Bankruptcy Procedure 9024. Woods, 173 F.3d at 776. The Woods court rejected several alternative approaches to the problem, including cases holding that a technical abandonment may be set aside because §554(d) states that a property is abandoned unless "the court orders otherwise" cases holding that reopening a case under §350(b) automatically revives the original case and voids any technical abandonment; and cases holding that technical abandonments are irrevocable. The Woods court held that Rule 9024, which incorporates Rule 60, requires that Rule 60(b) be applied in determining whether to grant relief from an order closing a bankruptcy case. Woods, 173 F.3d at 776-778.
As the Sixth Circuit court observed, in following Woods the bankruptcy court had rejected the bright-line rules for revoking an abandonment. The bankruptcy court concluded that imposing absolute irrevocability would encourage the trustee to be diligent, but would not allow for equitable considerations such as inadvertence and excusable neglect. On the other hand, automatically revoking abandonment when cases are reopened would create uncertainty and allow the trustee a "second bite of the apple." 547 F.3d at 649. The Sixth Circuit adopted the bankruptcy court''s reasoning. "The application of Fed. R. Civ. P. 60(b) strikes the appropriate balance between promoting finality and allowing courts to grant relief in limited circumstances." Id.
Applying Rule 60(b) to the facts, the bankruptcy court had held that the abandonments should be revoked on several grounds: Under Rule 60(b)(1), for "mistake, inadvertence, surprise or excusable neglect;" under Rule 60(b)(5), because "the judgment has been satisfied, released or discharged or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application;" and under Rule 60(b)(6), for "any other reason justifying relief from the operation of the judgment." On appeal, the debtors argued that the trustee''s neglect in abandoning the properties was not excusable under Rule 60(b)(1). However, the Sixth Circuit Court held that the trustee was entitled to relief under Rule 60(b)(5) and (6) whether or not any neglect was excusable. Like the bankruptcy court, the Sixth Circuit court based its decision on "principles of equity" and the desire to avoid a windfall to the debtors and to junior lienholders. 547 F.3d at 650.
In the wake of LLP Mortgage, those in the Sixth Circuit who rely on a technical abandonment of property face uncertainty as to whether the abandonment might be revoked-and when-but Rule 60 does have its limits. Rule 60(c)(1) provides that a motion under rule Rule 60(b) must be made "within a reasonable time," and that motions based on the grounds set forth in Rule 60(b)(1) (mistake, inadvertence, surprise or excusable neglect), 60(b)(2) (newly discovered evidence) and 60(b)(3) (fraud) must be made within a year after entry of the judgment or order, or the date of the proceeding. However, a "reasonable time" for bringing motions on other grounds set forth in Rule 60, including the catchall provision in Rule 60(b)(6), could be much longer than a year, depending on the facts of the case. See, e.g., United States v. Holtzman, 762 F.2d 720, 725 (9th Cir. 1985), and cases cited therein.
How likely is it that a trustee will abandon a property that is scheduled and is worth enough to fight over? I''m sure you can come up with some scenarios. Here''s one: A bankruptcy debtor owns real property apparently encumbered by a deed of trust in favor of a lender, leaving no equity in the property. However, the deed of trust contains an erroneous legal description, and the property is actually unencumbered. The trustee doesn''t notice the error in the deed of trust. He does not file a notice of abandonment, but does nothing to administer the property. After the bankruptcy case is closed, the lender discovers the error in the legal description and files suit against the debtor to reform the deed of trust. What if the trustee gets wind of the suit? The Sixth Circuit has made life a little better for bankruptcy trustees, but a little less certain for the rest of us.