Asset Must Be on Schedules to Satisfy 554(c) Abandonment Requirement

Posted by NCBRC - October 19, 2021

Finding that its “task is to interpret the Bankruptcy Code, ‘not to balance the equities,’” the Ninth Circuit held that section “554(c) requires property to be disclosed on a literal schedule, and thus that, absent Trustee or court action, property disclosed only on a statement (e.g., the Statement of Financial Affairs) cannot be abandoned under § 554(c).” Stevens v. Whitmore, No. 20-60044 (9th Cir. Oct. 19, 2021).

When the debtors filed for bankruptcy, they listed a pending state lawsuit against their mortgage servicing company in their Statement of Financial Affairs (SOFA), but failed to list it in their bankruptcy schedules. The debtors informed the Trustee of the lawsuit and provided documentation relating to it. The trustee reviewed the documents, determined that the estate contained “no property available for distribution,” and “that there were no scheduled assets which would benefit [the] estate.” The bankruptcy court discharged the trustee and closed the bankruptcy case. Years later, mortgage servicing company contacted the bankruptcy trustee with an offer of settlement of the lawsuit substantially lower than the debtors sought. The trustee had the bankruptcy case reopened, the state and bankruptcy courts approved the settlement, and the proceeds went to the bankruptcy estate. On appeal, the BAP affirmed. In re Stevens, 617 B.R. 328 (B.A.P. 9th Cir. 2020).

The debtors appealed to the Ninth Circuit, arguing that the asset had been abandoned under section 554(c) thereby removing it from the estate, and that the bankruptcy court erred in reopening the case to allow the trustee to administer the asset.

Section 554(c) provides: “Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.”

The Ninth Circuit found the question turned on whether the lawsuit had been properly scheduled under section 521(a)(1). That provision lists a number of required filings by debtors including, in paragraph (a)(1)(B)(i), “a schedule of assets and liabilities,” and, in paragraph (a)(1)(B)(iii), a “statement of the debtor’s financial affairs” (SOFA). The question before the court was whether section 554(c) demands that the asset be scheduled in the forms referred to in section 521(a)(1)(B)(i) or if listing the asset in the SOFA satisfies the requirement for abandonment. While lower courts have gone both ways on the issue, no circuit court had yet decided it.

The Ninth Circuit came down on the strict interpretation side of the question to find that “absent Trustee or court action, to be abandoned under § 554(c), property must be scheduled on a schedule, not just listed on the SOFA.”

Because the word “scheduled” is not defined in the Code, the court gave it the “ordinary meaning” it had at the time the provision was enacted. The court found that Webster’s New World Dictionary and the Oxford Compact Dictionary showed that to “schedule” something meant to include it on a literal schedule. The fact that section 554(c) refers to section 521’s “schedules,” indicating that the two words should have the same meaning in both provisions. The court concluded therefore, that “scheduled” within the meaning of section 554(c), meant put on a schedule as used in section 521. To allow “scheduled” to include a listing in the debtor’s SOFA would define the word in section 554(c) more broadly than it is used in section 521(a)(1)(B)(i).

The court noted that its interpretation harmonized with the Bankruptcy Rules which routinely distinguish between the petition itself, schedules, SOFA, and other documents.

The court rejected the debtor’s argument based on pre-section 554(c) common law, that it is enough that the trustee knows of the assets and elects not to administer it. The court found that once section 554(c) was enacted, common law was rendered irrelevant.

The court affirmed.

Stevens Decision (9th) Oct 2021

NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor.

Stevens 9th Cir Amicus Feb 2021


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