Motion to Reopen Too Little Too Late

Posted by NCBRC - February 23, 2015

Equitable considerations weighed in favor of the debtors where, two years after their chapter 7 discharge, a creditor sought to reopen the bankruptcy in order to allow the trustee to administer a district court UCC claim that the debtors filed post-discharge. In re Pinks, No. 12-317 (Bankr. D. S.C. Jan. 21, 2015).

In their bankruptcy schedules the debtors listed the potential UCC claim against M&T Bank with value “unknown,” and at the creditor’s meeting debtors’ counsel informed the trustee of the claim and stated its expected value at under $5,000, noting that there was a $39,000 deficiency claim against which it would be set off. The trustee declared the case no-asset and abandoned the scheduled property. M&T did not participate in the bankruptcy and the debtors obtained their discharge. Ten months later the debtors filed the UCC complaint, with the potential of becoming a class action, against M&T in the district court seeking statutory damages in the amount of $70,144.20. Although M&T was aware of the bankruptcy it was not until two years after the debtors filed their complaint and M&T’s motion to dismiss was denied that M&T first argued that the debtors had improperly disclosed the UCC claim in their bankruptcy.

M&T argued that the bankruptcy should be reopened under section 350(b) for cause and to permit the trustee to administer the asset.

With respect to administration of the asset, the court found that a case should be reopened for that purpose only if reopening would benefit creditors and the asset was unknown, or its value concealed, at the time the bankruptcy was closed. The facts in this case did not support reopening for that purpose. The debtors disclosed the asset at a time when its value was speculative and the trustee had an opportunity to investigate further. There was no evidence that the debtors were less than honest about the claim.

Turning to the question of “cause” under section 350(b), the court noted two lines of reasoning. The first looks at prejudice to creditor and deceptive behavior on the part of the debtor in obscuring the asset. The second looks at benefit to the debtor, prejudice to the opposing party, and benefit to creditors. Under either mode of analysis, the court found that it must analyze equitable factors for the presence of “legal fraud.”

The passage of time between the closure of bankruptcy and M&T’s motion to reopen reflected unfavorably on M&T’s position. The UCC case had progressed, with its concomitant costs, in reliance on the closure of the bankruptcy, and M&T was aware of the bankruptcy at all times. In fact, M&T did not try to have the bankruptcy reopened until it suffered a defeat in the UCC case thereby making its motives suspect.

The court also did not discern a clear benefit to creditors if the case were reopened. The fees and costs already incurred in addition to those involved in the trustee taking over the case, would go to diminish any recovery the debtors could hope to make. Also, if the trustee were to take over prosecution of the UCC case she would not be able to serve as a class action plaintiff thereby possibly further reducing the value of the case.

The court found that M&T failed to meet its burden of proof that the debtors misled the court with respect to the UCC claim and failed to establish cause to reopen. It denied the motion to reopen.

M&T has appealed the decision to the South Carolina District Court, No. 15-544.

Pinks Bankr SC opinion


Post a Comment

You must be logged in to post a comment.