By: Donald L Swanson
“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” (11 U.S.C. § 554(c), emphasis added).
Question: What does “scheduled under section 521(a)(1)” mean in § 554(c):
- Is inclusion on the “schedule of assets and liabilities” required?; or
- Is inclusion on any one of the other statutory filings identified in § 521(a)(1) sufficient? [Fn. 1]
The Ninth Circuit Court of Appeals has now ruled on the interconnection between the abandonment provision of § 554(c) and § 521(a)(1). Specifically, the Ninth Circuit addresses the following question in Stevens v. Whitmore [fn. 2]:
- When a debtor lists a lawsuit asset only on its statement of financial affaires (and not on its schedule of assets), is that asset automatically abandoned under § 554(c) at the closing of the case ?
What follows is a summary of the Stevens v. Whitmore opinion.
Chapter 7 Debtors list their state court lawsuit on their statement of financial affairs—but not in their schedule of assets:
- Where their schedule of assets asks about claims against third parties, Debtors say they have none—even though their lawsuit is pending; and
- Where their schedule of assets asks about other contingent or unliquidated claims, Debtors also say they have none.
However, the Debtors do discuss the state court lawsuit with the bankruptcy Trustee, who requests litigation documents that the Debtors send to him. After reviewing those documents, the Trustee:
- certifies that the estate “has been fully administered” and contains “no property available for distribution”;
- determines that there are “no scheduled assets which would benefit [the] estate”; and
- confirms that he “made a diligent inquiry into the financial affairs of the debtor(s).”
The Bankruptcy Court then discharges the Trustee and closes the case.
Then, Debtors continue litigating their state court lawsuit for a couple years. Finally, the Defendant in that lawsuit contacts the bankruptcy Trustee directly and:
- offers to settle the Debtors’ claims for ten times less money than Debtors are seeking; and
- asks the Trustee to reopen the bankruptcy case, become reappointed as Trustee, take over the state court lawsuit, and settle that lawsuit quickly.
The Trustee responds by:
- reopening the bankruptcy case;
- being reappointed as Trustee by the Bankruptcy Court;
- taking over the state court lawsuit;
- settling that lawsuit; and
- obtaining settlement approval from both the state court and the Bankruptcy Court.
Debtors appeal the Bankruptcy Court’s approval of the settlement. The Ninth Circuit Bankruptcy Appellate Panel affirms.
The Ninth Circuit Question & Answer
Debtors appeal to the Ninth Circuit Court of Appeals. Here’s a summary of the question before the Ninth Circuit of Appeals and its answer.
–The Background and the Question.
The background is this: at the end of a bankruptcy case, property that has not been administered is automatically abandoned to the debtor, if it has been “scheduled” (§ 554(c)). A neighboring provision (§ 521(a)(1)) requires the debtor to file several schedules, as well as other statements.
The question is whether “scheduled” requires that property be listed on one of the literal schedules, or if listing it on one of the other statements identified in § 521(a)(1) can suffice.
The Ninth Circuit holds that:
- § 554(c) requires property to be disclosed on a literal schedule identified in § 521(a)(1);
- property disclosed only on the “statement of financial affairs” identified in § 521(a)(1) cannot be automatically abandoned under § 554(c); but
- An exception exists under § 554(c) when the trustee or the court administers that property.
“Abandonment” in bankruptcy is “a term of art with special meaning.” It is the formal relinquishment of a property from the bankruptcy estate. Operative statutes in this case are:
- Sec. 554(d) provides that, unless property is properly abandoned, it continues as property of the bankruptcy estate and does not revert to the debtor;
- Sec. 544(c) provides for automatic abandonment of property of the estate at closing of the estate—if the property is “scheduled under section 521(a)(1)”; and
- Sec. 521(a)(1) requires that several documents be filed by each debtor, including schedules and a statement of financial affairs.
Based on the language and context of the statutes, property listed only on a statement of financial affairs is not “scheduled”; thus, absent Trustee or court action, such property is not automatically abandoned under § 554(c).
Actual knowledge of property by the trustee is not sufficient to achieve automatic abandonment under § 554(c). The only exception is when the trustee acts on that knowledge, based on the “otherwise administered” language in § 554(c).
The same insufficiency is true for disclosures in other contexts, such as in ad hoc oral disclosures or discussions at the § 341 meeting.
Put another way:
- “The law is abundantly clear that the burden is on the debtors to list the asset and/or amend their schedules, and that in order for property to be abandoned . . . the debtor must formally schedule” it.
The preparation of schedules and statements of financial affairs is always a tricky thing.
Such documents are commonly prepared under intense time pressures and, despite best efforts of counsel, with less than a full and complete set of supporting paperwork.
What the Stevens v. Whitmore opinion from the Ninth Circuit demonstrates is the importance of efforts to get schedules right.
Footnote 1. 11 U.S.C. § 521(a)(1) provides (emphasis added):
(iii) a statement of the debtor’s financial affairs and, if section 342(b) applies, a certificate—(I) of an attorney whose name is indicated on the petition as the attorney for the debtor, or a bankruptcy petition preparer signing the petition under section 110(b)(1), indicating that such attorney or the bankruptcy petition preparer delivered to the debtor the notice required by section 342(b); or (II) if no attorney is so indicated, and no bankruptcy petition preparer signed the petition, of the debtor that such notice was received and read by the debtor;
Footnote 2. The recent Ninth Circuit opinion is Stevens v. Whitmore, Case No. 20-60044 (issued October 19, 2021).