Fifth Circuit Finds Defensive Appellate Rights Property of Estate

Posted by NCBRC - December 18, 2013

In a case of first impression, the Fifth Circuit Court of Appeals found that a chapter 7 debtor’s right to appeal a state court judgment against him was property of the estate that could be sold by the trustee. Croft v. Lowry (In re Croft), No. 13-50020 (Dec. 10, 2013). In that case, the debtor had a two Texas state court sanction judgments against him for which he had pending appeals. When the debtor filed for chapter 7 bankruptcy, the state court abated both appeals and the debtor moved in the bankruptcy court for relief from stay to pursue his appeals in the state court. The bankruptcy court granted the motion. The district court reversed. Lowry v. Croft (In re Croft), No. 12-535 (W.D. Tex. Dec. 10, 2012).

On appeal, the Fifth Circuit cited Womack v. Womack, 141 Tex. 299, 301 (1943), for a broad definition of “property” encompassing “every species of valuable right and interest,” including causes of action. The court framed the issue in the case before it as “whether an appellate right that is not based on a cause of action—i.e., an appeal of a judgment against the debtor—is property under Texas law.”

The court identified only two cases on point, neither of which involved Texas law: Mozer v. Goldman (In re Mozer), 302 B.R. 892 (C.D. Cal.2003) (defensive appellate rights property of bankruptcy estate); In re Morales, 403 B.R. 629 (Bankr. N.D. Iowa 2009) (defensive appellate rights not property of estate).

In Morales, the court found that defensive appellate rights were fundamentally different from other causes of action because a defensive appeal is inextricably tied to the underlying judgment. The court distinguished between a “debt,” which was a liability of the debtor, and a “chose in action,” which was property of the creditor. That court concluded that “property” for bankruptcy purposes, consists of choses in action, but not debts, and the defensive appeal does not change the nature of the debtor’s interest from a debt to a chose in action.

The Morales court further found that even if defensive appellate rights did constitute “property” under Texas law, they would not be property of the bankruptcy estate. The court reasoned that “[i]f the trustee, by compromise or sale, can dispose of her appeal of the judgment against her by treating it as a claim against the appellee, it would effectively destroy [the debtor’s] right to object to the claim.”

The court in Mozer v. Goldman (In re Mozer), 302 B.R. 892 (C.D.Cal.2003), began with the same premise as Morales—that debts are not property of the estate while choses in action are—but from there the two opinions diverged. The Mozer court found that while the underlying liability from which the debtors appealed in state court was not property of the estate, the right to appeal constituted a separate concept which, under California law defining “property” to include “rights created by statute,” fit within that definition.

The Fifth Circuit in Croft agreed with the analysis set forth in Mozer and rejected that of the court in Morales. Quoting the district court below, it found that defensive appellate rights constitute both (1) a right, because it “grants a party the prerogative to unilaterally invoke the court system,” and (2) a “valuable interest,” as a “judgment against property directly affects the property’s value and character, and because a judgment can be modified or vacated on appeal, the right to appeal a judgment constitutes an interest in the underlying property.” The court reasoned that “while the debtor may not have a legal interest in the cause of action underlying the judgment against him, he certainly retains a legal interest in the assets that will be used to satisfy that judgment and in ensuring that the damage to these interests is minimized.”

Croft opinion


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