Opinion
No. 7-03-10123 MA
August 1, 2003
Jennie Deden Behles, Albuquerque, NM., Attorney for BMSI.
William F. Davis, Albuquerque, NM., Attorney for Debtor.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Motion to Set Aside No Asset Report/Abandonment filed on March 14, 2003 by creditor Brake Masters Systems, Inc. ("BMSI") through its counsel Behles Law Firm, P.C. (Jennie Deden Behles) with the consent of the Trustee (the "Motion"). The Debtor filed an Objection to Motion to Set Aside No Asset Report/Abandonment on March 28, 2003 through his counsel Davis Pierce, P.C. (William F. Davis and Marisol Cintron Garcia). The Court held a hearing on June 17, 2003 at which time the Court partially granted the Motion and revoked the No Asset Report and took under advisement that portion of the Motion which sought to set aside the abandonment. After reviewing the pleadings, evidence and arguments of counsel, the Court will grant the Motion to set aside the abandonment and in that regard finds the following:
1. This bankruptcy was filed on January 8, 2003.
2. The Debtor owns all of the stock of Brake Masters of Santa Fe, Inc. ("BSF").
3. Brake Masters Systems, Inc. ("BMSI") is the franchiser and has a Franchise Agreement with BSF.
4. At the time the bankruptcy petition was filed, the Debtor, BSF and BMSI were involved in an arbitration proceeding before the American Arbitration Association relating to a lawsuit brought by BMSI. BMSI initiated the proceeding against the Debtor for liability on an individual guarantee of the Franchise Agreement and against BSF for breach of the Franchise Agreement. The Debtor individually and on behalf of BSF filed counterclaims in the arbitration proceeding against BMSI asking for $300,000.00 in damages plus punitive damages, attorneys' fees and costs. The Debtor and BSF were represented by Anthony B. Jeffries in the arbitration proceeding.
5. In his schedules, the Debtor listed the value of his interest in BSF as $1.00 and claimed an exemption of the interest in the same amount. The Debtor amended his schedules stating that his interest had a value of $1.00 yet claiming an exemption of the interest valued at $6,000.00. Later, he amended his schedules and stated that the value of his interest in BMSI was $6,000.00 and claimed the interest as exempt property.
6. The Debtor listed the value of the counterclaims against BMSI as $1.00 in his schedules and amended schedules.
7. The Debtor did not list BMSI as a creditor.
8. The Trustee convened the meeting of creditors on February 12, 2003 at which time he adjourned the meeting to investigate the counterclaim against BMSI and any potential value it might bring to the estate.
9. In his schedules and statements to the Trustee at the creditor's meeting, the Debtor did not inform the Trustee of his potential liability to BMSI nor did he inform the Trustee of any potential value of his individual counterclaim or BSF's counterclaim against BMSI.
10. The Trustee contacted the Debtor's counsel in the arbitration action, Anthony B. Jeffries, who informed him that the he thought the counterclaim was of nominal value.
11. The Debtor did not list his ownership of a parcel of property consisting of 13.94 acres in Mora County, New Mexico (the "Real Property"). At the creditor's meeting, the Debtor denied owning any real estate not listed on his schedules. Transcript of Meeting of Creditors held February 10, 2003, at p. 4 lines 7-10.
12. The Trustee reconvened the creditors' meeting on February 26, 2003 and based on the information from the Debtor's arbitration counsel, the Trustee filed a No Asset Report and a Report of Abandonment of Assets.
13. BMSI had no notice of the bankruptcy, did not appear at the creditors' meeting, and did not object to the No Asset Report or the Report of Abandonment.
14. On March 28, 2003 this Motion was filed.
15. On June 2, 2003 the Debtor filed an amendment to Schedules A and C listing the Real Property with a value of $28,000 and claiming it exempt.
16. On June 19, 2003 the Court entered an order setting aside the No Asset Report.
17. BMSI has offered to purchase the Debtor's counterclaim against BMSI for $20,000.00.
Discussion
The Motion asks this Court to set aside the abandonment under Rule 60, made applicable to bankruptcy cases by Bankruptcy Rule 9024. See In re Woods, 173 F.3d 770, 778 (10th Cir. 1999) (rejecting other courts' approaches and applying criteria of Rule 60(b) applied to motions to reopen allowing revocation of technical abandonment of assets by trustee), cert. denied, 528 U.S. 878 (1999). BMSI asks the Court to set aside the abandonment of two assets: 1) the Debtor's and BSF's counterclaims against BMSI; and 2) the Real Property.
Rule 60(b) allows the Court to set aside an order for these reasons pertinent to this case:
(1) mistake, inadvertence, surprise, or excusable neglect; . . . (3) fraud . . . misrepresentation, or other misconduct of an adverse party; . . . or (6) any other reason justifying relief from the operation of the judgment.
First and foremost, the Trustee is under a duty to investigate the financial affairs of the Debtor. 11 U.S.C. § 704. It important to note that there is a strong public interest in the full and proper administration of a bankruptcy case by a trustee, including a full investigation of the debtor's assets. In re Barman, 252 B.R. 403, 417 ((Bankr.E.D.Mich. 2000) (citations omitted). Full and proper administration of a bankruptcy estate depends upon the Debtor's full disclosure of financial information as well as the trustee's diligence in examining the debtor's affairs. Id.; See also In re Bogert, 104 B.R. 547, 548 (Bankr.M.D.Ga. 1989) (setting aside a no asset report finding that Trustee unable to make informed decision regarding the asset due to the wording in schedules).
Once an investigation has been completed, the trustee may abandon estate property if it is burdensome to the estate or is of inconsequential value or benefit to the estate. 11 U.S.C. § 554. Generally, abandonment is irrevocable, even if it is subsequently discovered that the abandoned property had greater value than previously believed. In re Adair, 253 B.R. 85, 88 (9th Cir. BAP 2000) (citations omitted) (affirming denial of trustee's motion to reopen to administer a personal injury claim scheduled with an estimated but speculative value even though settled post-petition for higher value). See also, In re Atkinson, 62 B.R. 678, 680 (Bankr.D.Nev. 1986) (denying reopening to administer abandoned litigation claim because debtor described claim in detail and stated its value as "unknown"). However, courts have discretion to revoke an abandonment in appropriate circumstances, including when the trustee is misled by false or incomplete information. Adair, 253 B.R. at 89. As stated in Buckner 224 B.R. 760 (Bankr.E.D.Mo. 1998), the court may revoke an abandonment when (1) the trustee is given incomplete or false information about the asset by the debtor; (2) the debtor has failed to list the asset on the schedules and petition; or (3) the trustee's abandonment was the result of a mistake or inadvertence. Buckner, 224 B.R. at 762. In this case both the Trustee and the Debtor carried out their duties in a less than satisfactory manner.
First, the Debtor failed to list the Real Property in his schedules or amended schedules and answered "no" under oath in response to the Trustee's question about whether he owned real property not listed on the schedules. A diligent investigation by the Trustee would not have revealed this asset owned by the Debtor through an unrecorded deed. Similarly, the court in Buckner allowed the Chapter 7 trustee to vacate an abandonment of estate's interest in an options contract on real estate which debtor had failed to include in her description of the real estate to which the option pertained. The debtor had scheduled the real estate with a lower value even though the option holder had exercised the option for a greater amount during the bankruptcy case. Id. 224 B.R. at 762. Because the Debtor failed to schedule the Real Property, the abandonment is hereby set aside as to the Real Property and the Trustee may evaluate and administer this asset as part of the bankruptcy estate.
As for the counterclaims, the Debtor disclosed their existence but did not disclose enough information about their potential value. The Debtor not only failed to state the amount of damages claimed, he failed to disclose a settlement offer made to BMSI by his attorney in the amount of $450,000.00. Ex. CR-3 Deposition of Demetrio E. Lucero dated May 21, 2003 at p. 37, lines 13-18. Additionally, the Debtor's arbitration attorney represented to the Trustee that the counterclaim was not worth much despite the recent settlement offer. However, the Trustee made only a cursory investigation of the potential value of the counterclaim. Trustee questioned the arbitration attorney only, he did not ask for documentation regarding the arbitration and did not seek further information as to whether the attorney was pursuing the counterclaims or seeking to settle with BMSI.
In addition to failing to disclose the counterclaims. The Debtor failed to fully disclose the value of his interest in BSF. First he valued it at $1.00, and claimed an exemption in the same amount. Still later, the Debtor amended his schedules stating that his interest had a value of $1.00 yet claiming an exemption of the interest valued at $6,000.00. Later, he scheduled the value of his interest at $6,000.00 and claimed an exemption of the same amount. The Debtor did not explain how he arrived at the figures stated in the schedules. It appears that the Debtor used the amount of $6,000.00 because $6,000.00 was the residual amount of exemption available after all other exemptions accounted for. Apart from this discrepancy in value, if BSF recovers from BMSI on its counterclaims, value may be added to the Debtor's interest. This possibility was not fully explained in the schedules. See, In re Suplinskas, 252 B.R. 293, 296 (Bankr.D.Conn. 2000) (debtor's claim against third parties for damages based on fraud in the purchase of a partnership interest is a separate asset from the debtor's ownership of his partnership interest, and non-disclosure of claim provided basis to set aside abandonment.).
In light of these omissions and misstatements, the Court finds that the trustee abandoned the Debtor's interest in BSF along with the Debtor's counterclaims based on a cursory examination of information which was incomplete, inaccurate and possibly misleading. Cause exists under Rule 60(b)(3) to set aside the abandonment for misrepresentations by the Debtor in his schedules, his testimony at the creditor's meeting, and the representation by the Debtor's arbitration counsel, the consequence of which, the Trustee was not able to make an informed decision as to the value of the Debtor's interest in BSF or as to the value of the Debtor's counterclaim against BMSI. Further, cause exists to set aside the abandonment under Rule 60(b)(1) for mistake or inadvertence by the Trustee.
The Court hereby grants the Motion and sets aside the abandonment of the Real Property, the Debtor's interest in BSF, and the Debtor's individual counterclaim against BMSI. An appropriate order will be entered in accordance with these findings of fact and conclusions of law. F.R.Bankr.P. 7052.