by NACBA/NCBRC filed an amicus brief in support of the debtors in a case where, two years after he elected not to administer a fully-disclosed cause of action against Ocwen, and the debtors’ bankruptcy case was closed, the chapter 7 trustee moved to reopen the case to obtain approval for a settlement agreement with Ocwen. Stevens v. Whitmore (In re Stevens), No. 20-60044 (9th Cir.) (filed Feb. 26, 2021).
In this case, the debtors, through bankruptcy counsel, listed a pending cause of action against Ocwen in their chapter 7 Statement of Financial Affairs (SOFA), but failed to list the lawsuit in their schedules. They discussed the cause of action with the chapter 7 trustee at the 341 creditor’s meeting and supplied the trustee with the pleadings in the case. Finding the costs likely to exceed the benefits, the trustee elected not to pursue the cause of action. He made a finding of no assets and deemed the case “fully administered.” The bankruptcy case was then closed and the debtors continued to pursue their pro se litigation against Ocwen. Two years later, Ocwen approached the bankruptcy trustee with an offer of settlement. At the trustee’s request, the bankruptcy court reopened the debtors’ chapter 7 case and approved the settlement. The debtors appealed pro se to the bankruptcy appellate panel which affirmed. Both the bankruptcy court and the BAP followed the “majority rule” that only an asset included in the debtor’s schedules can be deemed abandoned under section 554(c).
The debtors appealed to the Ninth Circuit, and the court appointed counsel to represent them.
The case turns on whether the trustee abandoned the asset under section 554(c) which provides: “Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.”
Focusing on statutory construction, the debtors’ brief argues that, although they did not list the asset in their schedules, section 521(a)(1) also includes property listed in the debtor’s SOFA. Therefore, the asset technically fell within the property abandoned by the trustee when he chose not to take on the litigation during their bankruptcy.
NACBA/NCBRC’s amicus brief broadens the scope of the argument to more fully discuss the broader implications of the bright line rule that only assets listed in the debtor’s schedules can be abandoned under section 544(c). The brief points out that the trustee has a statutory duty under section 704(a)(1) and (4) to fully investigate a debtor’s assets and make a determination as to their value to the bankruptcy estate. The decision by the lower courts here rewarded the trustee’s failure to take action during the case while allowing the debtors to undertake time, effort, and expense, to provide value to the asset. The brief further emphasizes the unfairness of allowing Ocwen to adopt the litigation strategy of obtaining a favorable settlement from the trustee rather than face the risk of continued litigation against the debtors.
The amicus brief notes that more recent cases out of the Ninth Circuit have been trending away from the bright line rule and leaning more toward a fairness approach under which courts look at whether the debtors fully disclosed the asset giving the trustee the information needed to determine its value to the estate. Nasseri v. Tadayon (In re Tadayon), 2019 WL 1923044 (B.A.P. 9th Cir. 2019) and Bird v. Hart (In re Hart), 616 B.R. 826 (D. Utah 2020).
Finally, while endorsing the debtors’ argument in the primary brief that an asset disclosed in SOFA is sufficient to fall within the abandonment provision of section 554(c), the amicus brief offers the alternative of “a discretionary test which would allow the bankruptcy court to consider all relevant means by which the debtors have disclosed an asset to determine whether such disclosure is sufficient to allow the trustee to perform his statutory duty to investigate assets.”