On an issue where the lower courts are split, the Ninth Circuit Bankruptcy Appellate Panel took sides with the majority by holding that an asset is not automatically abandoned if it was disclosed only in the statement of financial affairs.
A couple had begun a lawsuit 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.
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 made a settlement proposal to the trustee, who reopened the case.
The Settlement
The settlement was not chump change. Although not mentioned in the BAP opinion, the bankruptcy court’s docket shows that the defendant was offering $50,000 to settle.
The trustee filed a motion for approval of the settlement. The bankruptcy court docket also reveals how the trustee told the bankruptcy court that he did not pursue the lawsuit given the cost of prosecution and the uncertainty of a favorable result. With a settlement in hand, the trustee said he decided to administer the asset because there was no uncertainty and little cost.
The debtors opposed approval of the settlement, contending that the claim had been automatically abandoned under Section 554(c).
The bankruptcy court overruled the objection, decided that the claim had not been abandoned and approved the settlement. The debtors appealed but lost in a July 2 opinion for the BAP by Bankruptcy Judge Laura S. Taylor.
The Outcome Turned on ‘Plain Language’
For Judge Taylor, the outcome turned on the meaning of the word “scheduled” in Section 554(c). The provision provides that “any property scheduled under Section 521(a)(1) . . . and not otherwise administered at the time of the closing of a case is abandoned to the debtor.”
In turn, Section 521(a)(1)(B) requires the debtor to file “(i) a schedule of assets and liabilities; . . . [and] (iii) a statement of the debtor’s financial affairs.”
Naturally, the debtors interpreted Section 554(c) to mean that an asset is automatically abandoned if it was disclosed in the schedules or in the statement of financial affairs. Judge Taylor disagreed.
The Ninth Circuit has not tackled the issue, but the majority of lower courts around the country follow the plain language of the statute and require that an asset must have been listed the schedule of assets to be abandoned automatically.
In Section 523(a)(3), Judge Taylor pointed out how the Bankruptcy Code refers to debts that were “neither listed nor scheduled under Section 521(a)(1).” She therefore inferred that the omission of “scheduled” in Section 544(c) was fraught with meaning and demonstrated that Congress made a distinction between “scheduled” and “listed.”
Requiring debtors to list their assets in the schedules, Judge Taylor said, “encourages” debtors “to carefully, completely, and accurately disclose all their property.” Furthermore, the schedules require debtors to place values on their assets, where the statement of financial affairs does not. Therefore, accurate schedules “apprise all parties . . . of the debtor’s financial situation, including the value of assets.”
Discussing the claim with the trustee was no salvation for the debtors. Judge Taylor said that the trustee’s acquisition of information “is not a sufficient substitute for inclusion on the Schedules because the bankruptcy court and creditors remain in the dark.”
Judge Taylor upheld the bankruptcy court’s decision that the lawsuit was not abandoned and concluded that the bankruptcy judge had not abused his discretion in approving the settlement.
Observations
The BAP’s decision was based on a technicality. The trustee originally made a business decision when he decided not to pursue the lawsuit. After receiving the settlement offer, the trustee realized that his decision had been incorrect.
The failure to list the lawsuit as an asset was a costly mistake, but who made the mistake? Was it the debtors or the debtors’ counsel?
Assuming the debtors disclosed the lawsuit in response to counsel’s inquiry about pending litigation, the lawyer should have known to schedule the lawsuit as a claim. Was counsel guilty of malpractice?
And if there was malpractice, does the malpractice claim belong to the debtors or to the estate? (If you think there’s an easy answer, there isn’t.)
On an issue where the lower courts are split, the Ninth Circuit Bankruptcy Appellate Panel took sides with the majority by holding that an asset is not automatically abandoned if it was disclosed only in the statement of financial affairs.
A couple had begun a lawsuit 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.
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 made a settlement proposal to the trustee, who reopened the case.
The Settlement
The settlement was not chump change. Although not mentioned in the BAP opinion, the bankruptcy court’s docket shows that the defendant was offering $50,000 to settle.
The trustee filed a motion for approval of the settlement. The bankruptcy court docket also reveals how the trustee told the bankruptcy court that he did not pursue the lawsuit given the cost of prosecution and the uncertainty of a favorable result. With a settlement in hand, the trustee said he decided to administer the asset because there was no uncertainty and little cost.