Opinion
Case No. 08-61473.
September 1, 2010
OPINION DENYING FORMER CHAPTER 7 TRUSTEE'S EX-PARTE MOTION TO REOPEN CASE, ETC.
INTRODUCTION
The matter came before the Court upon Former Chapter 7 Trustee's Ex-Parte Motion for Order to: (1) Reopen Bankruptcy Case, (2) Waive Filing Fee, (3) Withdraw No-Asset Report, (4) Appoint a Trustee, and (5) Revoke Abandonment of Real Property. For the reasons set forth below, the Former Chapter 7 Trustee's motion is denied.
BACKGROUND
Joseph Pioch ("Debtor") filed this Chapter 7 case on September 4, 2008. The Debtor's schedule A listed ownership of real property located at 9579 Garforth, White Lake, Michigan ("Property"), indicating a value of the Property at $97,380.00 and listing a secured claim against it of $106,496.00. Debtor's schedule D identified Lasalle Bank as the holder of the secured claim. On October 22, 2008, the first meeting of creditors was held. The Chapter 7 Trustee, Homer McClarty ("Trustee"), filed a no asset report on October 24, 2008, which states as follows:
Trustee of this estate reports and certifies that the trustee has performed the duties required of a trustee under 11 U.S.C. 704 and has concluded that there are no assets to administer for the benefit of creditors of this estate. I have received no funds or property of the estate, and paid no monies on account of the estate. Wherefore, the trustee prays that this report be approved and the trustee be discharged from office.
The Debtor received his discharge on December 24, 2008. This Chapter 7 case was closed on February 27, 2009.
On June 16, 2010, the Trustee filed an ex-parte motion for order to: (1) reopen bankruptcy case, (2) waive filing fee, (3) withdraw no-asset report, (4) appoint a trustee, and (5) revoke abandonment of real property. That motion alleged that, after the bankruptcy case was closed, on April 27, 2010 the Property was foreclosed, and by applicable state law, the redemption period would expire on October 27, 2010. The motion further alleged that "although the property has been foreclosed, [the Trustee] has been informed by a realtor that the bid price at the sheriff's sale was significantly below the fair-market value of the [Property]" and that "[a]s a result, and but for the bankruptcy case having closed, [the Property] could be sold for market value, the redemption amount paid to the foreclosure buyer, and the difference used to pay creditors." The motion asserted that the Court has the authority to revoke the "technical" abandonment that occurred when the case was closed under Fed.R.Civ.P. 60(b), as applied in LPP Mortgage, Ltd. v. Brinley, 547 F.3d 643 (6th Cir. 2008).
The Court held a hearing on the Trustee's motion. The only party objecting to the relief requested was the United States Trustee.
The Court also scheduled two other identical motions for hearing at the same time at the motion in this case: Suzanne M. Adelhouser, case no. 09-68818, and Dale R. McDowell, case no. 08-70986. The motion in the McDowell case has since been withdrawn. The Court also held a hearing on July 8, 2010 in yet another case involving an identical motion, Chistopher and Maria Stoecklein, case no. 09-78089.
The former case Trustee explained that lenders have unexpectedly been bidding amounts at the foreclosures sales that were significantly less than the outstanding mortgage debt, and that, since this phenomenon was quite unexpected, the trustees should now be allowed to reopen these bankruptcy cases and revoke the "technical" abandonment that occurred upon the closing of these cases. The Trustee asserted that this relief would allow the trustees to attempt to sell the properties for an amount in excess of (a) the amount necessary to redeem from the foreclosure sale and (b) any exemptions claimed by the debtors, and, if such can be achieved, provide a material distribution to the unsecured creditors who received no distribution and whose debts were discharged in these cases.
The Trustee also proposed that debtors who did not claim exemptions on schedule C with regard to the properties would have the opportunity to amend their schedules to allow for such exemptions.
The United States Trustee argued that such does not warrant revocation of abandonment under Fed.R.Civ.P. 60(b) and that the public policy of finality in judicial proceedings requires that the Trustee's motion be denied.
DISCUSSION
Another Judge of this Court has issued an opinion that deals with the same substantive and factual issues as those in this case. In re Reiman, Case No. 09-70776 (Bankr. E.D. Mich. July 16, 2010). Having reviewed the Reiman opinion, this Court can say it essentially agrees with the law, reasoning, and result articulated in that opinion, but also needs to articulate its reasoning and rationale, which might differ somewhat in emphasis or content from what is stated in that opinion.
Abandonment of Property of the Estate
Section 554 of the Bankruptcy Code, which governs abandonment of property of the estate, states:
(a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.
(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value to the estate.
(c) 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 purposes of section 350 of this title.
(d) 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.
Section 554(c), which is the subsection at issue in this case, provides, by operation of law, that all property not otherwise administered at the time of the closing of the case is abandoned to the debtor. See Stark v. Moran (In re Moran), 566 F.3d 676, 679 (6th Cir. 2009) (noting that "bankruptcy law contemplates the return of leftover assets to the debtor at the close of the case").
In his motion, the Trustee refers to revocation of the abandonment that occurred at the closing of this case under § 554(c) as a "mere technical abandonment." The term "technical" has been used by some courts, including the Court of Appeals in Brinley, to describe an abandonment effected under § 554(c). See LPP Mortgage, Ltd. v. Brinley, 547 F.3d 643, 648 n. 3 (6th Cir. 2008); Stoebner v. Wick (In re Wick), 276 F.3d 412, 414 (8th Cir. 2002); Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001); Woods v. Kenan (In re Woods), 173 F.3d 770, 776-77 (10th Cir. 1999). Apparently, the Trustee is attempting to distinguish an abandonment under § 554(c) from the abandonments that occur by court order under § 554(a) and (b). The implication apparently drawn from the use of the adjective "technical" is that a revocation of an abandonment under § 554(c) should be easier to accomplish than a revocation of an abandonment that occurred under § 554(a) or (b). Not so. Under § 554(a) and (b), the abandonment occurs by way of some affirmative act of an interested party resulting in a court order of abandonment before the case is fully administered and closed. An abandonment under § 554(c), in conjunction with the mandate of § 350(a), essentially arises statutorily, by operation of law, incident to the closing of the estate and without any need for a specific court order. In either case, the resulting abandonment is, for all purposes, an abandonment with the same legal effects and characteristics. The Court does not see any justifiable reason to differentiate between the two in terms of the requirements applicable to an attempted revocation of such, nor does any clear reading of § 350(a) afford any reasonable basis for doing so.
In any event, the pertinent question is whether the abandonment that occurred at the closing of this case under § 554(c) can be revoked. Courts have applied Fed.R.Civ.P. 60(b) to determine whether to grant a revocation of abandonment under § 554(c). See Morlan v. Universal Guaranty Life Ins. Co., 298 F.3d 609, 618 (7th Cir. 2002) (commenting that, under Rule 60(b), a § 554(c) "abandonment is revocable only in very limited circumstances, such as where the trustee is given incomplete or false information of the asset by the debtor, thereby foregoing a proper investigation of the asset") (quoting Catalano v. Commissioner, 279 F.3d 682, 686 (9th Cir. 2002)); Woods v Kenan (In re Woods), 173 F.3d 770, 779-80 (10th Cir. 1999) (commenting that "the granting of Rule 60(b) relief may be challenged on equitable grounds" such as where revocation of abandonment "would unfairly prejudice the purported owner of the property"). The Sixth Circuit has agreed with the use of Rule 60(b) to determine when abandonment is revocable, stating that "[t]he application of [Rule 60(b)] strikes the appropriate balance between promoting finality and allowing courts to grant relief in limited circumstances." LPP Mortgage, Ltd. V. Brinley, 547 F.3d at 649.
Rule 60(b)
Rule 60(b), incorporated by Fed.R.Bankr.P. 9024, provides that, "[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding" based on these limited reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released, or discharged; it was based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
(6) any other reason that justifies relief.
"As a prerequisite to relief under Rule 60(b), a party must establish that the facts of its case are within one of the enumerated reasons contained in Rule 60(b) that warrant relief." Lewis v. Alexander, 987 F.2d 392, 396 (6th Cir. 1993) (citations omitted).
The Trustee cites Brinley to support his argument that Rule 60(b)(5) and (6) provide grounds for revoking the abandonment that occurred by operation of law at the close of this case under § 554(c). In Brinley, the Sixth Circuit Court of Appeals addressed appeals in two cases with similar facts. In both cases, the Chapter 7 Trustee had closed the cases while the debtors' § 522(f) actions to avoid judgment liens on real property, which were held by the same creditor, were still pending. LPP Mortgage v. Brinley, 547 F.3d 643, 645-47. An appeal of the bankruptcy court's lien avoidance ruling resulted in a partial reversal and remand, with a finding that the judgment creditor's liens were significantly avoided, which created unencumbered equity in the real property. See In re Brinley, 403 F.3d 415 (6th Cir. 2005). The creditor sought to reopen the cases, revoke the abandonments occurred by operation of law at the close of the cases, and have the Chapter 7 Trustee administer that equity for the benefit of unsecured creditors. The bankruptcy court granted the relief requested and the Sixth Circuit Court of Appeals affirmed. Brinley, 547 F.3d at 646-47. The Sixth Circuit Court of Appeals held that "[r]egardless of the applicability of 60(b)(1), the Trustee was entitled to relief pursuant to the equitable considerations of subsections (5) and (6) of [Rule 60(b)]." Brinley, 547 F.3d at 650.
The Sixth Circuit Court of Appeals did not explain how the facts in that case warranted relief under subsections (5) and (6) of Rule 60(b). The Court simply stated that "the Trustee was entitled to relief under [Rule 60(b)(5) and (6)] `based on principles of equity, and the windfall to the debtors and the junior lienholders [if abandonment were not revoked]." Brinley, 547 F.3d at 650.
"The applicable language of [Rule 60(b)(5)] deals with amending or giving relief from a final order if `it is no longer equitable that the judgment should have prospective application.'" Olle v. The Henry Wright Corp., 910 F.2d 357, 364 (6th Cir. 1990). In its use, Rule 60(b)(5) requires "caution, substantial change, unforeseenness, oppressive hardship, and a clear showing." Olle, 910 F.2d at 364 (citation omitted). In Brinley, Rule 60(b)(5) was arguably applicable because the Trustee's decision to close those cases while the § 522(f) lien avoidance actions were still pending was based on his understanding of priorities and lien avoidance law at the time the motions to avoid the liens were filed. The Sixth Circuit had a different interpretation of § 522(f), which resulted in a complete avoidance of the creditor's liens on the properties, which in turn ultimately changed the amount of equity in the properties.
Rule 60(b)(6) allows relief for "any other reason justifying relief from the operation of the judgment." Rule 60(b) should be applied "only in exceptional or extraordinary circumstances which are not addressed by the first five numbered clauses of the Rule." Hopper v. Euclid Manor Nursing Home, Inc., 867 F.2d 291, 294 (6th Cir. 1989) (citations omitted). "This is because almost every conceivable ground for relief is covered under the other subsections of Rule 60(b)." Rogan v. Countrywide Home Loans, Inc. (In re Brown), 413 B.R. 700, 705 (B.A.P. 6th Cir. 2009) (citing Olle v. The Henry Wright Corp., 910 F.2d 357, 365 (6th Cir. 1990)). The moving party must show "something more" than the circumstances covered in the first five subsections, such as "extreme and undue hardship" in an "unusual" situation "where the principles of equity mandate relief." Ollie, 910 F.2d at 365.
In this case, the Trustee relies on Rule 60(b)(5) and (6). The Trustee argues that the facts in this case are even more compelling than those in the Brinley case. The Court does not agree. The Brinley case involved a very specific set of circumstances that can and should be distinguished from those in this case, for a number of reasons.
First, the Chapter 7 cases in Brinley were closed while the § 522(f) lien avoidance actions brought by the debtors were pending. The Sixth Circuit Court of Appeals described the closing of the Chapter 7 cases under those circumstances as "premature." Brinley, 547 F.3d at 648. There is no evidence that this case was closed "prematurely." The evidence shows that this case was closed after the Trustee performed his statutory duties under § 704 of the Bankruptcy Code by investigating the debtor's financial affairs and concluding that there were no assets to administer for the benefit of creditors. The Trustee properly made an informed decision to file a no-asset report and close the case based on the facts as they existed at that time.
Second, in the Brinley case, the Trustee closed those bankruptcy cases based on the Trustee's understanding of priorities and lien avoidance law as it existed at that time. The Sixth Circuit Court of Appeals took a different approach than the Trustee had expected, ruling in favor of the debtors and applying § 522(f) in a way that created substantial equity in the properties. Based on the Trustee's knowledge of existing law, this interpretation was an unforeseeable surprise. The Trustee in this case does not cite any change in the law that resembles what occurred in Brinley.
Although the Trustee does not cite any unexpected change in the law, he does argue that the lender bidding significantly less than the perceived then market value at the foreclosure sale was unforeseeable. The Trustee made a factual assumption (not a legal one) during the administration of the estate about the amount the lender might bid at the later foreclosure sale, and that assumption turned out to be incorrect. The lender bidding a lesser amount than anticipated at the foreclosure sale should not have come as a surprise to the Trustee. In this Court's view, in light of the kind of soft and deteriorating real estate market that was evident at the time this property was abandoned, the possibility of what later occurred reasonably could have been foreseen. For example, what is so unreasonable or unpredictable about the possibility that a foreclosing mortgagee, in a most common situation where the property is clearly worth materially less than the balance due, might bid in at a figure that is closer to the value of the property, in hopes that some third party (or even the debtor) might see an opportunity to buy the property at a figure what would enable that party to possibly resell the property at some later time, and thus permit the foreclosing mortgagee to at least quickly realize the present value of the property and to avoid the costs of holding that property and the risks of further market deterioration. The fact that there may now be some additional value in the debtor's interest in the Property, which was occasioned essentially by events or market/business driven occurrences subsequent to the abandonment, does not provide sufficient grounds under Rule 60(b)(5) or (6) to revoke the abandonment that occurred by operation of law and the end of this case. "The trustee . . . may not reassert control over the property in light of subsequent events-for example, if it later becomes clear that a piece of property has a greater value than was previously believed." Kloian v. Kelley, 115 Fed. Appx. 768, 769 (6th Cir. Sept. 10, 2004) (citations omitted); see also Gencorp, Inc. v. Olin Corp., 477 F.3d 368, 373 (6th Cir. 2007) (concluding that intervening changes in the law "by themselves rarely constitute the extraordinary circumstances required for relief" and "[i]nstead, courts have relied on an applicable change in decisional law, coupled with some other special circumstance, in order to grant Rule 60(b)(6) relief").
In this case, the Trustee did his the perceived duty and exercised his best judgment, which included taking into account and deciding what might or could happen in the future that might affect the administration of the estate. After the case was closed, a broker approached the Trustee to inform him that the lender had bid less for the Property at the foreclosure sale than either the broker or the Trustee anticipated. In this case, the foreclosure sale took place on April 27, 2010, two months after the case was closed. Also relevant to the Court's conclusion is the fact that when, or even if, the foreclosure sale might occur is completely under the control of the mortgagee, its assignee, or their servicing agents. The decision to foreclose is likely governed by considerations that are not under anybody's control or are even fairly predictable, i.e.: the real estate market and financial conditions. There is no rule or requirement as to when a foreclosure proceeding must take place and it is well known that, today at least, mortgagees whose security value is less than their debt are delaying commencing pending foreclosures for a variety of selfish and perfectly understandable business reasons. There is nothing to say that a foreclosure sale could not be postponed for months, or even years. As a matter of equity and policy, the essentially uncontrolled and unpredictable possibility of reopening otherwise completed bankruptcy cases in such circumstances is at odds with (1) the policy of finality and certainty attendant to the closing of a bankruptcy case and the consequent ability of the debtor and all other interested parties to move on, and (2) an important policy of freedom to sell and otherwise dispose of property without the possibility of it becoming later involved in what the Trustee proposes here.
It is not bothersome to this Court if the result in this case is that for instance a debtor could redeem from a foreclosure at a price which would produce, over and above what his exemptions would be in a bankruptcy situation, which would net him a profit which the debtor could keep for himself. It is likewise not bothersome in respect to any bankruptcy case where a debtor receives back what was property of the estate (whether by abandonment at the close of a case or by virtue of exemptions, or in some other manner) which increases in value by virtue of the passage of time or changes in the market after the case is over. That is simply the way of the bankruptcy and commercial worlds. The administration of a bankruptcy estate, not unlike the disposition of a non-bankruptcy lawsuit or otherwise litigated controversy, is a finite process with a beginning and an end — this is importantly so if personal affairs and commercial affected relationships are to be able to move forward. The trustees do their duties and exercise their best judgment to complete the administration of the case as timely as possible, thus allowing the interested parties, debtors and creditors alike, to go forward with their lives. It should be importantly noted that, a trustee could seek to specifically except specific property from abandonment at the end of the case or simply not then close the case. This clearly can be, and has been done in various cases, and could have been done here. To be sure, in the bankruptcy arena, given the potential for material distributions to creditors the movant has pointed out (and indeed in other cases has apparently actually been achieved) it is tempting to grant these motions. The Court has concluded however, that the proper answer in cases like this where, as noted, such potential predictably exists, is for the case trustee to delay the closing of the estate or refrain from abandoning the specific property rights affected in the first place. On balance, that is the point at which those responsible for the operation of the system and the administration of bankruptcy estates should decide whether any delays attendant to closing cases or finality are worth the potential gains.
It should also be borne in mind that what precipitates the potential "asset" that forms the basis for the motions to reopen these cases under § 350(b) is a bid at a foreclosure sale, which could only eventually produce funds for distribution to creditors if, and only if, that bid was ascertainably less than what a trustee might be able to net from the proceeds of a later sale of that property. In order to produce a sum sufficiently material to provide such a distribution to unsecured creditors and to have made the entire exercise worthwhile in the first place, the net proceeds of the later sale would need to exceed the total of the following: (1) the amount bid at the foreclosure sale, (2) the amount of the debtor's exemptions with respect to the property, (3) the amount that would approximate all of the costs and direct expenses of the sale, and (4) the trustee's fee and any applicable attorney fees. There is no justification for reopening the case if that cannot be seen as a reasonably possible result. Achieving such a sum might be possible in any given case. However, as the Court considers whether or not to reopen a case to even let that process proceed, a good case can be made for requiring the movant to make a reasonable showing that the foregoing might be the result, i.e.: produce expert testimony as to the value of the property if sold soon; show the likely costs and expenses of such a sale; show that the fulfilment of all of the normal conditions to consummation of a sale of real estate can be accomplished prior to the expiration of the ever shrinking redemption period? Should the reopening threshold be so low that mere unsupported allegations of such are a sufficient basis to reopen the case? Even if the Trustee could get past the Rule 60(b) analysis somehow, this Court might conclude that the reopening threshold is not that low and that reasonable proofs of a likely outcome favorable to the realization of a material distribution to creditors should be a condition precedent to even reopening the case. Given the Court's overriding rationale, however, this need not be decided in this case.
CONCLUSION
Accordingly, the Trustee's motion is denied. The Court will enter an order consistent with this opinion.