The U.S. Court of Appeals for the Sixth Circuit recently affirmed a bankruptcy court’s order granting the debtors’ motion to compel the trustee to abandon their home as property of the estate because it had little equity and thus little value for unsecured creditors.

A copy of the opinion is available at: Link to Opinion.

Husband and wife debtors filed a petition under chapter 7 of the Bankruptcy Code, listing their home on their schedules as having an appraised value of $108,000 and a mortgage of $91,581.

The bankruptcy trustee moved to evict the debtors, arguing that the value of the property was closer to $200,000 and that it would be easier to sell the property unoccupied. 

The debtors responded by filing a motion to compel the trustee to abandon the property because the value was inconsequential and provided little or nothing of value to unsecured creditors. In the alternative, they asked that their case be converted to a chapter 13 reorganization in order that they could try to keep their home.

The bankruptcy trustee tendered to the debtors a check for $7,500, which was the value of the debtors’ statutory homestead exemption under Tennessee law, which the debtors rejected. 

The bankruptcy court held an evidentiary hearing in July 2015, at which the parties presented competing valuations of the property. The debtors called two appraisers. One testified that the property would be worth $171,000 after making needed repairs of $63,000, leaving a net value of $108,000. The other appraiser testified that the home’s property would be worth $185,000 after making $60,000 in needed repairs, leaving a net value of $125,000. 

The trustee’s witness, a realtor, testified that the property “was worth $204,000, which he based on his tour of the property.” The trustee also called a home inspector, who testified that the amount needed for repairs was exaggerated. Finally, the trustee “himself testified … that, after repairs, the home was worth between $190,000 and $200,000.” 

In August 2015, the bankruptcy court granted the debtors’ motion to abandon, holding that the home’s value was inconsequential to the estate. The trustee moved to alter or amend the judgment, which was denied. 

The trustee appealed to the trial court, which affirmed the bankruptcy court. The trustee then appealed to the Sixth Circuit.

On appeal, the Sixth Circuit first addressed the trustee’s argument that the debtors lacked standing to compel the trustee to abandon their home as property of the estate because they were not “parties in interest.” 

The Court rejected this argument, reasoning that a trustee’s statutory power to liquidate the estate and use the proceeds to pay unsecured creditors was limited by the requirement in section 554(b) of the Code that the trustee “must generally abandon property [“of inconsequential value and benefit to the estate”] that does not possess substantial equity.” 

The Sixth Circuit explained that since a “party in interest” means “anyone who has a practical stake in the outcome of a case[,] and the debtors would get to keep their home if the trustee was required to abandon it, they were “parties in interest” and “thus had standing to pursue a motion to compel abandonment.” 

The Court rejected the trustee’s argument that because he tendered their statutory homestead exemption, the debtors “lacked any ‘legal or possessory interest’ in their residence.” It reasoned that while the statutory homestead exemption was one remedy that debtors had available to them “to provide them with a ‘fresh start’ after the loss of their property[,]” it was not the exclusive remedy. “An alternative remedy is for the debtor to seek abandonment by the trustee under 11 U.S.C. § 554(b) if the property is ‘of inconsequential value and benefit to the estate.’ If [the trustee] could extinguish the abandonment remedy by simply tendering the homestead exemption, then he could effectively nullify 11 U.S.C. § 554(b).” 

The Sixth Circuit also rejected the trustee’s second argument that the debtors “lacked Article III standing to proceed on their motion to compel abandonment” because they met the three-pronged test. Specifically, they would suffer an injury-in-fact if they were evicted, caused by the trustee, which would be redressed by a favorable ruling on the motion to compel abandonment. 

The Sixth Circuit next rejected the trustee’s argument that there was insufficient evidence for the bankruptcy court to find that the debtors’ home was only worth $108,000, reasoning that “[t]he record here is replete with evidence on which the bankruptcy court could reasonably have concluded that the [debtors’] estimate of value was the more accurate one, especially because the [debtors] presented two appraisers who had thoroughly inspected the house, whereas [the trustee] presented no appraisers, instead relying on a realtor, a home inspector, and himself.”

Having concluded that the “bankruptcy court did not err in ordering the trustee to abandon the property[,]” the Court rejected the trustee’s “’Hail Mary’ attempt to avoid this result, … that, because the [debtors] offered to convert their Chapter 7 case to a case under Chapter 13 and pay the estate roughly $50,000 (albeit by utilizing funds made available by a relative), the bankruptcy court abused its discretion in concluding that the residence was of inconsequential benefit to the estate’s unsecured creditors.”

First, the Sixth Circuit held, the argument failed because it was waived, not having been raised in the trustee’s brief. “Second, there is a total disconnect between the debtors’ alternative offer and the issue of abandonment.” The Court found unpersuasive and inapposite the trustee’s cite to “a single unpublished out-of-circuit decision that reversed an abandonment order” because in that case the abandonment order was reversed because “abandonment is not available where the value of the property had not been established[,]” whereas in the case at bar, the bankruptcy court “ably discharged its responsibility in determining the value of the residence.” 

Accordingly, the judgment of the district court was affirmed.