Opinion
Case No. 99-11118-SSM
January 13, 2000
William McCarron, Jr., Esquire, Gold Morrison Laughlin, P.C., Alexandria, VA, Counsel for H. Jason Gold, former chapter 7 trustee
Thomas P. Gorman, Esquire, Tyler, Bartl, Burke Albert, PLC, Alexandria, VA, for the Debtor
MEMORANDUM OPINION AND ORDER
A hearing was held in open court on January 4, 2000, on the motion of H. Jason Gold, the former chapter 7 trustee, to reopen this case for the purpose of administering the debtor's interest in a revocable trust that owns a one-half interest in the house in which the debtor resides. The former trustee and the debtor were present by counsel. After hearing argument from the parties the court ruled from the bench that the motion would be denied. The purpose of this memorandum opinion and order is to explain more fully the basis for the court's bench ruling, both for the benefit of the parties, and in the event an appeal is taken.
Background
Jon Roger Lackey ("the debtor") filed a voluntary chapter 7 petition in this court on March 5, 1999. On his schedules, he did not list any direct ownership interest in real estate, but did list an interest, which he valued at $17,400, in "James Jelasic Trust, Jon R. Lackey Trust," which was described as the owner of the debtor's residence at 6574 Flagmaker Court, Falls Church, VA." The schedules also listed James Jelasic as 50% owner with the debtor of all the household furnishings as well as two automobiles. H. Jason Gold was appointed as interim trustee and presided over the meeting of creditors held on April 5, 1999. The court has not been provided with a transcript or other evidence of what transpired at the meeting, but there appears to be no dispute that the trustee did not ask to see a copy of the trust instrument, nor did he ask any specific questions concerning the assets of the trust. The trustee filed a report of no distribution on April 22, 1999. The debtor was granted a discharge on June 16, 1999, and an order was entered on June 22, 1999, closing the case.
Approximately five and a half months later (December 8, 1999) the trustee filed the motion to reopen that is presently before the court. The motion recites that after the debtor's case was closed, James L. Jelasic, who also lives at the Flagmaker Court property, filed a chapter 7 petition. The Jelasic case is currently pending in this court as Case No. 99-13479-RGM, and Mr. Gold is the trustee. The meeting of creditors in the Jelasic case was held on August 9, 1999. Presumably, it was at that meeting or sometime thereafter that Mr. Gold was provided with copies of the written declarations of trust for the Jon Roger Lackey Trust and the James Lester Jelasic Trust, each of which is dated August 3, 1993. Each trust is the mirror of the other, except for the identity of the remainder beneficiaries upon termination. That is, the debtor is the life beneficiary of his own trust, with Mr. Jelasic the life beneficiary thereafter, and vice versa. Upon the death of both the debtor and Mr. Jelasic, the trusts terminate, with the assets then being separately distributed among various schools and relatives. Both trusts are revocable. Each trust was initially funded with $100 in cash. How and when the trusts came to own the Flagmaker Court residence is not disclosed on the present record. However, the trustee asserts that the house has a fair market value of $214,000 and is subject to two deeds of trust totaling $154,000. The trustee seeks to have the debtor's case reopened so that he can exercise the debtor's power to revoke the Jon Roger Lackey Trust, sell the debtor's half interest in the real estate, and pay the debtor's creditors.
Mr. Jelasic's petition was filed on July 2, 1999.
Discussion A.
The issues before the court have been previously addressed in In re Avis, No. 95-12007, 1996 WL 910911 (Bankr. E.D. Va., Mar. 12, 1996), but will be briefly summarized. Under § 350(b), Bankruptcy Code, "[A] case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause" (emphasis added). Under F.R.Bankr.P. 5010, a motion to reopen may be made by "the debtor or other party in interest." The former trustee of a closed case is a "party in interest" with standing to bring a motion under § 350(b). In re Winebrenner, 170 B.R. 878 (Bankr. E.D. Va. 1994) (Shelley, J.). The decision whether to permit a case to be reopened is discretionary with the court. Hawkins v. Landmark Finance Co., 727 F.2d 324 (4th Cir. 1984).
Here, the former chapter 7 trustee seeks to reopen this case to permit administration of the debtor's interest in the Jon R. Lackey Trust. Specifically, the trustee proposes to revoke the trust and then to sell the property for the benefit of creditors in this case and Mr. Jelasic's case. The debtor argues, however, that there is no asset for the trustee to administer, because the debtor's interest in the trust was listed on his schedules, was properly exempted, and has been irrevocably abandoned.
The commencement of a bankruptcy case creates an "estate" which comprises, among other things, "all legal or equitable interests of the debtor in property as of the commencement of the case." This includes the debtor's beneficial interest in a trust unless "applicable nonbankruptcy law" would prevent creditors from reaching that interest. § 541(c)(2), Bankruptcy Code; see In re Hersch, 57 B.R. 667 (Bankr. E.D. Va. 1986) (testamentary trust under which debtor was beneficiary and which did not qualify as spendthrift trust under state law was included in bankruptcy estate). It is the debtor's duty to file "a schedule of assets." § 521(1), Bankruptcy Code; F.R.Bankr.P. 1007(b). In a chapter 7 case, the trustee has a duty to "collect and reduce to money the property of the estate for which such trustee serves, and [to] close such estate as expeditiously as is compatible with the best interest of parties in interest." § 704(1), Bankruptcy Code. The trustee is not, however, literally required to liquidate each and every non-exempt asset if doing so would provide no benefit to creditors. In particular, the trustee, after notice and a hearing, "may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." § 554(a), Bankruptcy Code. In this district, the trustee may give oral notice at the meeting of creditors of an intent to abandon property. Local Bankruptcy Rule 6007-1. In addition to explicit abandonment under § 554(a), the Bankruptcy Code provides,
Unless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for the purposes of section 350 of this title.
§ 554(c), Bankruptcy Code (emphasis added). Conversely,
Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.
§ 554(d), Bankruptcy Code. A leading treatise explains the purpose of § 544(d) as follows:
Abandonment presupposes knowledge. There can, as a rule, therefore, be no abandonment by mere operation of law of property that was not listed in the debtor's schedules or otherwise disclosed to creditors . . .[U]nless the court orders otherwise, property that is neither abandoned nor administered in the case remains property of the estate. *** If the property is later discovered and is valuable, the court may reopen the case. . . .
5, Lawrence P. King, Collier on Bankruptcy, ¶ 554.03, p. 554-11 (1999) (emphasis added).
It appears well-settled that abandonment, if it does occur, "is irrevocable, regardless of any subsequent discovery that the property had greater value than previously believed." 5, Collier on Bankruptcy, supra, ¶ 554.02, p. 554-6. In re Sutton, 10 B.R. 737 (Bankr. E.D. Va. 1981) (Bostetter, J.); In re Hood, 92 B.R. 648, 655-6 (Bankr. E.D. Va. 1988) (Tice, J.), aff'd 92 B.R. 656 (E.D. Va. 1988) ("Property abandoned pursuant to Section 554 generally cannot be recovered by the debtor's estate notwithstanding a later determination of value which might have benefitted the estate."); but see, Indian Head Nat'l Bank v. Dominic (In re Dominic), 29 B.R. 482 (Bankr. M.D. Fla. 1983) (distinguishing Sutton because the trustee in Dominic "disclaimed" rather than "abandoned" two parcels of real estate).
The trustee, however, urges that abandonment is not necessarily irrevocable, citing in particular In re Shelton, 201 B.R. 147 (Bankr. E.D. Va. 1996) (Shelley, J.). Indeed, even Sutton recognized that there were some exceptions to the rule of finality. In Sutton, the trustee had abandoned the debtor's residence, which had been listed on his schedules, because an appraisal indicated little or no equity for the benefit of the estate. The second deed of trust holder then foreclosed, and, to the surprise of both the debtor and the trustee, the sale resulted in excess proceeds of approximately $6,800. The trustee filed a motion for turnover, and the debtor amended his schedule of exempt property to include the excess proceeds. The trustee then moved the court under Fed.R.Civ.P. 60(b), for relief from the order permitting him to abandon the residence. The court, after an extensive review of authorities under both the predecessor Bankruptcy Act of 1898 and the Bankruptcy Code, concluded, "It is a principal of uniform application that once an asset of the estate has been abandoned by the trustee, it is no longer part of the estate and is effectively beyond the reach and control of the trustee." 10 B.R. at 739. The only exceptions involved situations where property was actually concealed from the trustee, where the trustee's knowledge of the existence of the property "was one of mere suspicion, which engendered only a cursory investigation," and where the property was unscheduled by the debtor, "thus preventing the trustee from having `knowledge, or sufficient means of knowledge, of its existence.'" 10 B.R. at 740. Since the debtor's residence in Sutton had been duly scheduled and the trustee had a reasonable opportunity to consider its value to the bankruptcy estate before abandoning it, the court found that the abandonment was "irrevocable as not falling within any of the . . . exceptions to the general rule." 10 B.R. at 741.
In Shelton, a husband and wife who owned real estate together as tenants by the entireties having equity of approximately $57,300, filed separate chapter 7 petitions approximately 18 months apart. The schedules in the husband's case, which was filed first, reflected only a minimal amount of joint unsecured debt. The trustee in the husband's case did not attempt to administer the tenancy by the entireties property (which the husband had claimed exempt) for the benefit of their joint creditors and filed a report of no distribution. The husband received a discharge two weeks later, and the case was then closed. When the wife later filed, her schedules reflected certain joint liabilities that had not been described as joint on the husband's schedules. The trustee in the wife's case (a different trustee than the one who had been appointed in the husband's case) then moved to reopen the husband's case to permit joint administration of the tenancy by the entireties real estate. Judge Shelley of this court, relying on a line of Fourth Circuit cases that "permitting debtors to harbor and protect tenancy by the entireties property from their joint creditors by filing serial individual bankruptcies may represent a legal fraud upon . . . joint creditors," 201 B.R. at 151-52, held that the husband's case could be reopened to permit the real estate to be administered for the benefit of joint creditors. In reaching this conclusion, the court rejected the debtor-husband's argument that his interest in the real estate was effectively abandoned when his case was closed and held that it was "within the Court's discretionary powers to reopen [the] case and by doing so, to permit the appointed trustee to administer assets that, absent the reopening, may otherwise have been considered abandoned." Id. at 154. In reaching this conclusion, the court relied on the language in § 554(c) that unadministered property was abandoned upon the closing of the case "[u]nless the court orders otherwise[.]" In the court's view, this power to preserve unadministered property for the bankruptcy estate did not have to be exercised at or before the time the case was closed, but enabled the court to "to modify or limit the extent of property that is technically abandoned under § 554(c), even after a debtor's case is closed." Id. at 155.
As loath as I am to disagree with a brother judge of this court, a more straight-forward reading of § 554(c) would require that the order preserving scheduled but unadministered property for the bankruptcy estate be entered at or before the closing of the case. Otherwise, for example, a good-faith purchaser who acquired, or a secured creditor who enforced a security interest against, such property in reliance on the deemed abandonment arising from the closing of the case could never be certain of having acquired good title. But assuming that Shelton is correct that the power exists under § 554(c) to "undo" an abandonment, even Shelton did not hold that such relief was to be granted as a matter of course, but only when the equities justified it.
Rather than give § 554(c) a strained reading that almost renders it a nullity, it would seem more appropriate when presented with compelling facts to decree relief under F.R.Bankr.P. 9024, which, with some limitations, incorporates Rule 60, Fed.R.Civ.P.
Having considered the circumstances of the present case, I cannot find that the facts would justify the relief requested, even assuming that the former trustee's construction of § 554(c) is correct. Shelton was a response to a particular potential for "legal fraud" on creditors arising when husband and wife file separate, successive cases in an effort to prevent joint creditors from reaching tenancy by the entireties real estate. Here, the separate filing by the debtor and Mr. Jelasic did not in any legal sense prevent the trustee from administering the half-interest in the Flagmaker Court property held by the debtor's trust. That property is held by the two trusts as tenants in common, not as tenants by the entirety. There was nothing to prevent the trustee from revoking the debtor's trust and either selling the undivided half-interest in the real estate or bringing an action under § 363(h), Bankruptcy Code, to sell the entire property. It may indeed be more convenient, now that Mr. Jelasic has filed, to sell the property as a whole without having to resort to the somewhat cumbersome mechanism of § 363(h), but the mere inconvenience involved in selling the property when only the debtor had filed is a very different issue from the potential for "legal fraud" on joint creditors that was present in Shelton.
To sell the interest of both the debtor and a non-debtor co-owner under § 363(h), the trustee must bring an adversary proceeding. F.R.Bankr.P. 7001. The trustee has the burden of showing that the benefit from selling the entire property outweighs the detriment to the co-owner, and the co-owner has a right of first refusal. § 363(h)(3) and (i).
Nor, in the court's view, do the schedules materially misrepresent the nature of the debtor's interest in the property so as to bring this case within one of the three exceptions to technical abandonment articulated in Sutton. The existence of the two trusts (under one of which the debtor was primary life beneficiary, and under the other the secondary life beneficiary) was fully disclosed, as was the fact that the trust owned the debtor's residence, which was identified by street address. The trustee does not dispute that legal title to the property is in fact held by the two trusts. The debtor therefore does not own one-half of the real estate, but only a beneficial interest in the trust. Since the trust is revocable, that value of that interest is equal to the value of property minus any encumbrances. Although it is true that, if the debtor had a direct ownership interest in the real estate, the schedules would have required him to list the "market value" of his half-interest without deduction for encumbrances, there is no requirement that the debtor list the market value of assets held by a separate entity, such as a trust, corporation, or partnership, in which a debtor has an interest. To repeat, the debtor's "interest" was not the real estate proper but the net value of the distributions to which he was entitled. The trustee, of course, was free to inquire as to how the debtor's interest was valued, in which event the debtor was required to provide complete and truthful information. But there is no evidence here that the trustee inquired. No evidence was offered as to how the debtor arrived at the value of $17,400 for an equity interest that the trustee contends is actually $30,000. But given that real estate appraisal is an art and not a science and that — as the court can attest from having sat through many hours of such testimony — two experienced appraisers all too frequently arrive at quite different values for the same property, a mere difference of opinion between what a debtor believes his property is worth and what a trustee's appraiser or broker now thinks it is worth is not a sufficiently compelling basis upon which to reverse the effect of the order closing the case. The schedules contained ample information to have put the trustee on inquiry notice, and a simple call to the real estate assessor's office would have provided at least a rough measure of the property's value.
Were the trust irrevocable, on the other hand, the calculation of the debtor's life interest would be considerably more complex. See § 55-274, Code of Virginia (interest of joint or successive tenants for life valued as an annuity of 8% on the probable lives of the tenants).
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion to reopen the debtor's case is denied.
2. The clerk will mail a copy of this order to counsel for the debtor, counsel for the former trustee, and the United States Trustee.