Opinion
Case No. 00-10164-SSM, Chapter 7
February 9, 2001
Ann E. Schmitt, Esquire, Reed, Smith, Shaw McClay, Washington, DC., Chapter 7 trustee.
Richard G. Hall, Esquire, Annandale, Va., Counsel for the debtors.
Carmen A. Jacobs, Esquire, Alexandria, VA., Counsel for Treasury Department, Federal Credit Union.
MEMORANDUM OPINION
A hearing was held in open court on February 6, 2001, on the motion of Ann E. Schmitt, chapter 7 trustee, for an order authorizing her to abandon a cause of action belonging to the bankruptcy estate. The motion is opposed by the defendant in that cause of action, Treasury Department Federal Credit Union ("the credit union"), which argues essentially that the trustee should either settle the cause of action or dismiss it.
The credit union is also a general unsecured creditor with a claim of $5,437.48.
Background
Briefly, Mahlon Parker Moore and his wife, Valerie J. Moore, filed a voluntary chapter 7 bankruptcy petition in this court on January 14, 2000. At the time the bankruptcy was filed, Mr. Moore had two loan accounts with the credit union. One was a car loan, secured by a 1995 Honda Odyssey. The other was a Visa credit card, which Mr. Moore believed to be unsecured. The car loan was current, and after the bankruptcy petition was filed, Mr. Moore paid it off. The credit union, however, initially refused to release the title and asserted that the car was security also for the credit card. Mr. Moore promptly filed an adversary proceeding in this court, Moore v. Treasury Dept. Fed. Credit Union, No. 00-1054, in two counts. Count I sought a declaratory judgment that the lien against the car had been satisfied. Count II sought damages under the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., for failure to disclose that the credit card account was secured.
In the interim, the debtors received their discharge on May 10, 2000. The trustee had filed a report of no distribution, and the case was routinely closed on May 18, 2000. A trial was held in the adversary proceeding on November 2, 2000. The court concluded that the declaratory judgment count was moot because the credit union, shortly after the filing of the adversary proceeding, had released the title to the debtors without requiring them to pay any portion of the credit card account. The court also determined that the TILA count belonged to the bankruptcy estate and, because it had never been scheduled, had not been abandoned and could be asserted only by the bankruptcy trustee. The court then directed that the chapter 7 case be reopened, and an order was thereafter entered in the adversary proceeding substituting the chapter 7 trustee as plaintiff with respect to Count II. On November 16, 2000, the debtors filed, and served on the trustee (but not on creditors), amended schedules listing the TILA cause of action as an asset of the bankruptcy estate and claiming it exempt under the Virginia exemption for personal injury and wrongful death claims, Va. Code Ann. § 34-28.1. The trustee did not focus on the exemption of the TILA claim and filed no objection. In the meantime, the court, having determined that the TILA count was not a "core" proceeding, filed proposed findings of fact and conclusions of law for transmission to the United States District Court, recommending that the District Court enter judgment against the credit union on Count II in the amount of $4,071.78 plus $2,835.40 in attorneys' fees. The present motion by the trustee to abandon Count II was filed on January 24, 2001.
The value of the claim was listed as "unknown."
The value claimed exempt was $5,000.00. Additional claimed grounds for exemption were Va. Va. Ann. §§ 34-26 and 34-29. The court is frankly at a loss as to how either of the latter two exemption statutes could even remotely apply.
The trustee had previously given all creditors notice of her intent to abandon. The motion to approve abandonment was filed after the credit union filed an objection.
Discussion
Under § 554(a), Bankruptcy Code, a bankruptcy trustee, after notice and opportunity for a hearing, "may abandon any property of the estate that is burdensome to the estate or of inconsequential value and benefit for the estate." Here, the trustee seeks to abandon the TILA claim, first, because the debtors' exemption of it eliminates any benefit to the bankruptcy estate; and second, even absent the exemption, the costs of prosecuting the action and the existence of a significant priority tax claim would result in a minuscule dividend to general unsecured creditors.
To this, the credit union opposes on two grounds. First, it says that the debtors' attempted exemption of the TILA cause of action comes too late. Second, it says that the trustee has not seriously attempted to settle the cause of action, and that allowing the trustee to abandon it would be an improper attempt to confer retroactive standing on Mr. Moore. Each of these arguments will be addressed in turn.
A.
The TILA cause of action was neither listed nor exempted on the debtors' original schedules. This is not surprising, since the debtors did not learn until after the bankruptcy petition was filed that the credit union was taking the position that the credit card account was secured by the car. Until the credit union notified the debtors of its position, the debtors would not have had any reason to know or suspect that the credit union had improperly failed to disclose a security interest in violation of the TILA. The credit union nevertheless argues that once the case was closed, the debtors' right to amend their schedules ended. Fed.R.Bankr.P. 1009(a). The credit union, however, has not cited to any reported case that has, in the absence of bad faith, denied a debtor the right to amend the schedule of exemptions after a case has been reopened. Indeed, reported cases in this district and others have allowed the practice. In re Sherman, 191 B.R. 654 (Bankr.E.D.Va. 1995); In re Brooks, 227 B.R. 891 (Bankr.W.D.Mo. 1998).
Rule 1009(a) provides in relevant part:
General Right to Amend. A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed. The debtor shall give notice of the amendment to the trustee and to any entity affected thereby.
As to the trustee, there can be little doubt that the failure to object to the exemption within 30 days after the amended Schedule C was served on her bars her from now attacking it. Fed.R.Bankr.P. 4003(b); Taylor v. Freeland Kronz, 503 U.S. 638, 112 S.Ct. 1644 (1992) (trustee's failure to object within 30 days of meeting of creditors to debtor's exemption of cause of action precluded later attempt to administer asset, even though no colorable basis for exemption existed). However, it would appear that the period in which the credit union could object has not yet expired, since the credit union was not served with a copy of the amended claim of exemptions. Rule 4003(b) allows a creditor to file an objection to an amended claim of exemption within 30 days after the amended schedule asserting it is "filed." Rule 1009(a) requires that an amended schedule be served on the trustee and "any entity affected thereby." Since creditors are clearly "affected" by exemption claims and have the right to object, it seems plain that amended schedules of exemptions must be served on creditors. See 4 Lawrence P. King, ed., Collier on Bankruptcy ¶ 522.05 at 522-32 (15th ed. rev., 2000) ("In the case of an amended Schedule C listing a debtor's exemption claim, all creditors arguably should be served with a copy of the amendment."). Accordingly, the court would hold that, as to creditors, the 30-day period to object to an amended exemption claim does not begin to run until they are served with the amended schedules.
Rule 4003(b) provides in relevant part:
Objections to Claim of Exemptions. The trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a), or the filing of any amendment to the list or supplemental schedules unless, within such period, further time is granted by the court.
In the present case, it is far from clear that a TILA violation would constitute a "personal injury" within the meaning of Va. Code Ann. § 34-28.1. But see In re Webb, 214 B.R. 553 (E.D.Va. 1997) (holding that gender discrimination claim against employer under Title VII of the Civil Rights Act of 1964 was a "personal injury" within the meaning of the Virginia exemption statute). However, for the purpose of the present motion, it is not necessary to decide whether the debtors' claim of exemption can be overcome; it is sufficient that the trustee is not in a position to do so, and that the outcome of any objection that the credit union or other creditors might file is uncertain. This uncertainty, coupled with the relatively small amount of the potential recovery under Count II (assuming the District Court adopts this court's proposed findings of fact and conclusions of law), and the costs of pursuing the cause of action, certainly justify the trustee's determination that there would be no meaningful benefit to creditors from her continued prosecution of the TILA cause of action.
There have apparently been brief discussions between the credit union and the trustee as to a possible settlement amount. The trustee advised the court at oral argument that the amounts suggested by the credit union have been only in the several hundreds of dollars. Since some fees would likely have to be paid to debtors' counsel out of any recovery, see In re Taylor, 250 B.R. 869 (E.D.Va. 2000) (debtor's attorney may be awarded compensation under § 330 in chapter 7 case for work that benefits bankruptcy estate), and since the trustee herself is entitled to a commission on distributions and has also independently incurred attorneys fees, a settlement of anything less than $2,500.00 would barely cover administrative expenses, let alone pay the priority tax claim.
B.
The remaining objection raised by the credit union goes to the asserted impropriety of allowing abandonment to confer retroactive standing on Mr. Moore to prosecute Count II. At least one reported case has held that a TILA cause of action filed by a bankruptcy debtor before her claimed exemption of the cause of action had been allowed had to be dismissed without prejudice, since standing had to exist at the time the suit was filed. Ball v. Nationscredit Fin. Svcs. Corp., 207 B.R. 869, 871 (N.D.Ill. 1997). Whether Ball is consistent with the Fourth Circuit's analysis in Detrick v. Panalpina, Inc., 108 F.3d 529 (4th Cir. 1997), cert. denied 522 U.S. 810, 118 S.Ct. 52, 139 L.Ed.2d 17 (1997), is an issue the court need not reach in the context of the present motion. The test for approving abandonment under § 554(a), Bankruptcy Code, focuses solely on the economic impact on the bankruptcy estate of having to administer the asset. Abandonment of a debtor's cause of action simply revests that cause of action in the debtor. Whether the existing suit must be dismissed without prejudice and Mr. Moore made to refile it in an appropriate forum, or whether the analysis in Detrick, carried to its logical conclusion, allows Mr. Moore now to be substituted for the trustee as plaintiff, is an issue to be determined within the context of the adversary proceeding. (Indeed, since Count II is non-core and the credit union has not consented to the entry of dispositive orders by a bankruptcy judge, any final ruling on standing will be made by the District Court, not this court.) Assuming, however, that abandonment would entitle Mr. Moore to pursue the claim within the context of the existing litigation, the court can perceive no unfairness to the plaintiff. At this point, there has been a full and fair trial on the merits, and the combined attorneys fees by this time surely equal or exceed the amount of the likely judgment. Why dismissal of Count II and relitigation of the claim in this or some other forum would be in the interest of judicial economy or justice is a mystery, to say the least.
C.
For the reasons stated, a separate order will be entered granting the trustee's motion to abandon the TILA cause of action.