When is an asset abandoned in the bankruptcy?
Stevens v. Whitmore, No. 20-60044 (9th Cir. Oct. 19, 2021). Finding that its “task is to interpret the Bankruptcy Code, ‘not to balance the equities,'” the Ninth Circuit held that section “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).” The court determined that even though the debtor discussed the lawsuit with the trustee, that is not complying with the Code, and therefore the closing of the case does not abandon the “undisclosed” asset. 521(a)(1).
When the debtors filed for bankruptcy, they listed a pending state lawsuit against their mortgage servicing company in their Statement of Financial Affairs (SOFA), but failed to list it in their bankruptcy schedules. The debtors informed the Trustee of the lawsuit and provided documentation relating to it. The trustee reviewed the documents, determined that the estate contained “no property available for distribution,” and “that there were no scheduled assets which would benefit [the] estate.” The bankruptcy court discharged the trustee and closed the bankruptcy case. Years later, mortgage servicing company contacted the bankruptcy trustee with an offer of settlement of the lawsuit substantially lower than the debtors sought. The trustee had the bankruptcy case reopened, the state and bankruptcy courts approved the settlement, and the proceeds went to the bankruptcy estate. On appeal, the BAP affirmed. In re Stevens, 617 B.R. 328 (B.A.P. 9th Cir. 2020).
Note – the law was different under the pre-BAPCPA Act.
Posted by NCBRC – October 19th, 2021