Abandonment May Not Be Revoked Upon Unexpected Increase in Value

Posted by NCBRC - November 2, 2017

A trustee’s abandonment of estate property may not be revoked upon a finding that the property had greater value than expected so long as the debtor properly revealed the asset in his schedules. In addition, the debtor had no duty to supplement his schedules to include the unexpected surplus from sale of the abandoned property. Hardesty v. Haber (In re Haber), No. 17-3323 (6th Cir. Oct. 30, 2017) (unpublished).

When George Haber filed for chapter 13 bankruptcy, his residential property was in foreclosure proceedings in state court. On his schedules, he listed the property’s value as $360,500 with claims against it in the amount of $617,628. He converted to chapter 7 and the trustee filed an abandonment of the property due to lack of equity. When the first mortgage holder failed to take part in the foreclosure proceeding, the state court extinguished its lien, and the property was sold at a sheriff’s sale for $80,000 more than the total remaining debt against it. The trustee intervened in the foreclosure proceeding and the state court ordered the sale proceeds to be turned over to him.

The trustee succeeded in reopening the bankruptcy case and moved to distribute the surplus funds to creditors. The bankruptcy court sustained Mr. Haber’s objection to distribution of the asset, concluding that the property was not part of the bankruptcy estate. The district court affirmed.

On appeal, the trustee made two arguments: 1) that he never abandoned the property, and 2) that the proceeds were personal property that Mr. Haber failed to schedule or disclose to the court.

The Sixth Circuit began with the general rules that when a trustee abandons estate property he loses the right to control its disposition, and that abandonment may be revoked only upon a finding that the debtor did not properly disclose the asset in his schedules as of the petition date. As to the debtor’s duty of disclosure, the court stated, “The trustee cites no authority for the proposition that a debtor, upon filing a bankruptcy petition, must schedule assets of which he has no knowledge, which are not in existence, and which may never come into existence.” Because Mr. Haber properly disclosed the asset in his petition papers, abandonment by the trustee caused the property to revert to Mr. Haber’s sole ownership. Sale proceeds of non-estate property do not belong to the estate.

The court turned to the trustee’s argument that, even if Mr. Haber properly listed the asset in his original petition, he had a duty to supplement his schedules to account for the surplus from its sale. The court found that the duty to supplement under 541(a)(5) arises in the limited circumstance of a debtor coming into property within 180 days of the petition date. That duty is further limited to disclosure of post-petition property that would be part of the bankruptcy estate. Here, because the trustee abandoned the real property, the surplus funds from its sale would not have become part of the estate and Mr. Haber, therefore, had no duty to supplement his schedules to include them. The trustee’s argument that the funds were “after-acquired property” under section 541(a)(7) failed for the same reason. Because the bankruptcy estate had no interest in the real property due to the trustee’s abandonment, Mr. Haber was sole owner of the proceeds from its sale.

Thanks to J. Erik Heath for authoring NACBA’s amicus brief in support of the debtor.

Haber 6th Cir opinion Oct 2017

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