Opinion
Case No. 97-15515-SSM
April 16, 1998
Sunwoo Nam, Esquire, Silver Spring, MD, OF Counsel for the debtors
MEMORANDUM OPINION AND ORDER
This matter is before the court on the chapter 7 trustee's motion to reopen the case to administer assets. The dispositive question is whether the closing of the case irrevocably abandoned the estate's interest in an unexpected $24,758.30 surplus from a foreclosure sale.
FACTS
The debtors, Kap Sok Kim and Sun Sik Kim, then represented by attorney Suk Bin Im, filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on July 25, 1997. Gordon P. Peyton was appointed as the trustee. On their schedules, they listed a one-half undivided ownership interest in real estate located at 3218 Patrick Henry Drive, Falls Church, Virginia. The value of their interest in the property was listed as $107,850.00, and the property was shown as being subject to a deed of trust in favor of Chevy Chase Bank in the amount of $91,216.74, to a Federal tax lien in the amount of $26,145.69, and to secured claims in favor of the Commonwealth of Virginia and Fairfax County, Virginia, in the aggregate amount of $1,775.84. The debtors did not claim any interest in the property as exempt, and on their statement of intention with respect to secured property, they stated that they intended to surrender the property to Chevy Chase Bank.
Yong Ha Kim and In Kyoung Kim, the son and former daughter-in-law, respectively, of the debtors, are listed as owning the remaining one-half interest in the property.
Chevy Chase Bank, F.S.B., ("Chevy Chase") filed a motion for relief from the automatic stay in order to foreclose under its deed of trust against the property. The motion alleged that the current tax assessed value of the property was $215,700.00; that the total amount owed Chevy Chase was "in excess of $99,430.46; and that the property was further encumbered by federal tax liens and judgments totaling more than $185,617.46. The chapter 7 trustee filed a response stating that he had orally abandoned the property at the meeting of creditors on August 21, 1997, pursuant to Local Bankruptcy Rule 6007-1(A). On August 28, 1997, a consent order, endorsed by the chapter 7 trustee, was entered terminating the automatic stay with respect to the enforcement of Chevy Chase's rights against the property, and on September 4, 1997, the trustee filed a report of no distribution. The case was thereafter closed by order entered November 22, 1997.
This is consistent with the debtors' valuation of their one-half interest at $107,850.00.
For reasons that are unexplained, it appears that the foreclosure sale resulted in a surplus, and that on February 13, 1998, Chevy Chase's attorney sent the debtors' bankruptcy attorney a check, made payable to the debtors, in the amount of $24,758.38, as "the share from the surplus proceeds to which you are entitled." An associate attorney in the law firm advised the chapter 7 trustee of the payment but took the position that the funds belonged to the debtors rather than the bankruptcy estate. The debtors' bankruptcy attorney apparently convinced the debtors to endorse the check over to his escrow account pending resolution of the dispute with the trustee. That escrow account, however, apparently has been frozen. The court is advised that the debtors' attorney was arrested in early March on federal charges of immigration fraud, and that a receiver has been appointed for the law practice by the Circuit Court of Fairfax County, Virginia. On March 17, 1998, the chapter 7 trustee filed the Petition to Reopen Case that is currently before the court.
The debtors have obtained new counsel, who is representing them pro bono.
Discussion
Under § 350(b), Bankruptcy Code, "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" (emphasis added). The debtors argue, however, that there are no assets for the trustee to administer, as the trustee's interest in the real estate has been effectively abandoned, citing In re Sutton, 10 B.R. 737 (Bankr. E.D. Va. 1981) (Bostetter, J.).
Under F.R.Bankr.P. 5010, a motion to reopen may be made by "the debtor or other party in interest." The former trustee of a closed case is a "party in interest" with standing to bring a motion under § 350(b). In re Winebrenner, 170 B.R. 878, 881 (Bankr. E.D.Va. 1994)(Shelley, J.)
The commencement of a bankruptcy case creates an "estate" (the bankruptcy estate), which includes "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1), Bankruptcy Code. In a chapter 7 case, the trustee has a duty to "collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interest of parties in interest." § 704(1), Bankruptcy Code. The trustee is not, however, literally required to liquidate each and every non-exempt asset if doing so would provide no benefit to creditors. In particular, the trustee, after notice and a hearing, "may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." § 554(a), Bankruptcy Code. Local Bankruptcy Rule 6007-1 permits a trustee to give oral notice at the meeting of creditors of an intent to abandon property of the estate. Parties objecting to such abandonment have ten days in which to request a hearing on the issue of abandonment. While the local rule does not expressly say so, it would appear that, in the absence of such objection, abandonment is effective at the expiration of the ten day period. In any event, in addition to explicit abandonment under § 554(a), the Bankruptcy Code provides,
The term "notice and a hearing" does not literally require a hearing but only an opportunity to request a hearing. § 102(1), Bankruptcy Code.
Unless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for the purposes of section 350 of this title.
§ 554(c), Bankruptcy Code (emphasis added).
Conversely, property that is not listed on a debtor's schedules — or, if scheduled, is not sufficiently described so as to put the trustee on fair notice of the debtor's interest — is not abandoned simply because the case is closed, but rather remains property of the estate. See, In re Avis, 1996 WL 910911 at *7 (Bankr. E.D. Va. 1996) (Mitchell, J.) (allowing reopening of case on trustee's motion to administer lump sum trust distribution of principal where schedules listed only income distribution rights).
It is well-settled that abandonment, if it does occur, "is irrevocable, regardless of any subsequent discovery that the property had greater value than previously believed." 4 Collier on Bankruptcy, supra, p. 554.02, p. 554-8. In re Sutton, 10 B.R. 737, 739-740 (Bankr. E.D. Va. 1981) (Bostetter, C.J.); In re Hood, 92 B.R. 648, 655-56 (Bankr. E.D. Va. 1988) (Tice, J.), affd, 92 B.R. 656 (E.D.Va. 1988) ("Property abandoned pursuant to Section 554 generally cannot be recovered by the debtor's estate notwithstanding a later determination of value which might have benefitted the estate.") But see Indian Head Nat'l Bank v. Dominic (In re Dominic), 29 B.R. 482 (Bankr. M.D. Fla. 1983).
In Sutton, the trustee had abandoned the debtor's residence, which had been listed on the schedules, because an appraisal indicated little or no equity for the benefit of the estate. The second deed of trust holder then foreclosed, and, to the surprise of both the debtor and the trustee, the sale resulted in excess proceeds of approximately $6,800. The trustee filed a motion for turnover, and the debtor amended his schedule of exempt property to include the excess proceeds. The trustee then moved the court under Fed.R.Civ.P. 60(b), for relief from the order permitting him to abandon the residence. The court, after an extensive review of authorities under both the predecessor Bankruptcy Act of 1898 and the Bankruptcy Code, concluded, "It is a principal of uniform application that once an asset of the estate has been abandoned by the trustee, it is no longer part of the estate and is effectively beyond the reach and control of the trustee." Sutton, 10 B.R. at 739. The only exceptions involved situations where property was actually concealed from the trustee, where the trustee's knowledge of the existence of the property "was one of mere suspicion, which engendered only a cursory investigation," and where the property was unscheduled by the debtor, "thus preventing the trustee from having `knowledge, or sufficient means of knowledge, of its existence.'" Id. at 740. Since the debtor's residence in Sutton had been duly scheduled and the trustee had a reasonable opportunity to consider its value to the bankruptcy estate before abandoning it, the court found that the abandonment was "irrevocable as not falling within any of the . . . exceptions to the general rule." Id. at 741.
In Dominic, the chapter 7 trustee had "disclaimed" an interest in two parcels of real estate on the mistaken understanding that the property was held as tenants by the entirety. After the case was closed, a foreclosure sale was held that resulted in excess proceeds of $46,033. The trustee moved to reopen the case to assert a claim against the funds, and the bankruptcy court granted the motion. The court, while acknowledging Sutton, distinguished it on the ground that the trustee in the case before it had "disclaimed" rather than "abandoned" the property. The decision does not discuss the effect of § 554(c), Bankruptcy Code.
The trustee does not dispute these general principles. He distinguishes Sutton, however, on the basis that the trustee there had formally abandoned the property by filing a notice of abandonment with the court. However, under Local Bankruptcy Rule 6007-1, oral notice of intent to abandon given at the meeting of creditors is legally effective and, where not objected to, results in the abandonment of the estate's interest as effectively as does the filing of a written notice of intent to abandon. In any event, even in the absence of an express abandonment, the closing of a case statutorily operates as an abandonment of all scheduled assets. § 554(c), Bankruptcy Code. Consequently, the closing of this case on November 22, 1997, resulted in the abandonment of the real estate, and any equity therein, to the debtors. While this unquestionably represents a windfall to the debtors, it is one that follows from the plain language of the statute.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion to reopen is denied.
2. The clerk will mail a copy of this memorandum opinion and order to the chapter 7 trustee, counsel for the debtors, and the United States Trustee.