In a recent decision, the Bankruptcy Appellate Panel of the Sixth Circuit (the “Court”) considered the issue of asset “abandonment” in a Chapter 7 case. The Court reversed the bankruptcy court’s decision to allow the Chapter 7 trustee to compromise a claim that the debtor argued the trustee had abandoned.
In a Chapter 7 bankruptcy case, a debtor’s assets are administered by a Chapter 7 trustee for the benefit of creditors, subject to valid exemptions claimed by the debtor. When a case is closed, the bankruptcy court enters an order and any assets being preserved by the trustee for later distribution are to be listed in the order. Assets not listed are abandoned to the debtor pursuant to 11 U.S.C. § 554(c).
In this case, the debtor listed a personal injury claim against his former employer, James Simms (“Simms”), on his schedule of assets. Subsequently, a personal injury lawsuit was filed against the former employer, as well as another party, Bureau of Workers' Compensation ("BWC"). The claim against BWC was not included in the debtor’s schedules. The debtor claimed no exemption related to the value of the personal injury claim.
The trustee filed a Report of No Distribution (“NDR”), certifying that the estate had been fully administered “with the exception of a possible settlement in connection with a personal injury claim against Simms." The bankruptcy court order closing the case contained no reservation of rights related to the personal injury claim.
Two years later the trustee filed a motion requesting the bankruptcy court to reopen the case in order to present a settlement resolving the personal injury claim for the court’s approval. The debtor objected on the basis that the trustee had abandoned any interest in the personal injury litigation.
The bankruptcy court ruled against the debtor, finding that the personal injury claim was not abandoned and granted the trustee's motion to reopen and motion for authority to compromise. The debtor appealed the decision.
The Court first considered whether the trustee did, in fact, abandon the personal injury claim pursuant to Section 554(c). The Court explained that, unless a court “orders otherwise,” abandonment under Section 554(c) occurs statutorily. Ruling in favor of the debtor on this issue, the Court explained that “[t]he plain language of the statute unambiguously states that if an asset was properly scheduled and not administered by the trustee, upon closing the case, the asset is abandoned as a matter of law.” Simply mentioning the asset in the NDR, as the trustee did in this case, “did not suffice to preserve the trustee’s right to pursue the claim on the bankruptcy estate’s behalf.”
The Court next turned to whether the personal injury claim against BWC - which was not listed on the debtor’s schedules - was also abandoned by the trustee. According to Section 554(d), if a debtor fails to schedule property, it is not abandoned upon closure of the case. The Court explained, however, that a bankruptcy court has discretion to determine whether to order abandonment under appropriate circumstances. The Court ruled that such circumstances did not exist in this case. Despite the fact that the trustee may have had prior knowledge of the claim, that alone was not enough to overturn the bankruptcy court’s decision that the BWC claim was not abandoned.
Finally, the Court considered whether the bankruptcy court erred in approving the trustee’s request to settle or compromise the personal injury claim. The Court ruled that the bankruptcy court erred in approving the compromise because the trustee had no right to settle the abandoned personal injury claim. The fact that there was nothing in the record indicating that the bankruptcy court considered or determined whether the settlement was fair and equitable also buttressed the Court’s ruling.