15+ Years For A Chapter 7 Case: How Can That Happen? (Phillips v. Goldman, Part 1)

Time is ticking away (photo by Marilyn Swanson)

Can you say, “litigious”? And how about, “abusing the bankruptcy system”?

Get this. A Chapter 7 case is pending in the Central California Bankruptcy Court (Case No. 11-bk-11603) that:

began on February 7, 2011, with limited assets and a report of no distribution after the § 341 meeting; and
is still in progress today (15+ years later)—with the latest docket entry north of number 920 and still counting!

In this Chapter 7 case, there are twelve years of litigation and appeals over an objection to Debtor’s homestead exemption.

And there is a dischargeability action in the same bankruptcy (No. 11-ap-01389) filed on May 13, 2011, with a “Judgment Denying Debtor Discharge in Bankruptcy” dated November 23, 2016 (Doc. 671), and with the last entry closing the case dated a decade after the adversary began (March 16, 2021; Doc. 813).

That’s more than 1,730 docket entries in a Chapter 7 case with limited assets.

And not only that, another adversary proceeding is pending in the same case (No. 22-ap-1014), where the same litigious creditor is suing the Chapter 7 Trustee for negligence. This adversary, filed on February 17, 2022, and dismissed on June 9, 2022, is back in the Bankruptcy Court on remand from the Ninth Circuit Court of Appeals

Unbelievable!! Who let this happen? Where is the oversight? Where are the controls on preventing abuse of the bankruptcy system?

The Ninth Circuit’s en banc opinion is Phillips v. Goldman (In re Gilman), 176 F.4th 1152 (9th Cir., May 7, 2026). What follows is a summary of the time lines in that case.

Facts

On February 7, 2011, Debtor files a voluntary Chapter 7 petition, and Trustee is appointed for the Chapter 7 case.

Debtor and spouse own two Los Angeles properties: (i) their homestead, and (ii) a commercial property.

Judgment Creditor files proofs of claim that assert judgment liens on both of Debtor’s properties.

On June 21, 2011, Trustee files a no distribution report and requests to be discharged from service as trustee. No action is taken by the Court thereon.

Objection to Homestead Exemption

About two weeks later (on June 25, 2011), Judgment Creditor files an objection to Debtor’s homestead exemption (Doc. 28).

Over the next twelve years:

the Bankruptcy Court overrules Judgment Creditor’s objection on August 8, 2012 (Doc. 84) and again on January 6, 2015 (Doc. 315);
the Ninth Circuit vacates in part the Bankruptcy Court’s ruling and remands for further findings on April 13, 2018;
after a two day trial on homestead issues (on January 28 & 29, 2019), the Bankruptcy Court overrules the objection, again, on September 25, 2019; and
after further machinations, the Bankruptcy Court’s order overruling the homestead objection is affirmed on appeal by the U.S. Ninth Circuit Court of Appeals on January 27, 2023.

Dissatisfaction with Trustee

On November 26, 2020, (nearly a decade after Debtor’s bankruptcy filing) Judgment Creditor asks the Bankruptcy Court to direct Trustee to administer the estate or, alternatively, remove Trustee from that position. Judgment Creditor argues:

Debtor’s two properties have a value “well beyond” the amount of Debtor’s secured debt; and
Trustee “did not adequately explore” malpractice claims against Debtor’s bankruptcy counsel (Doc. 761).

So, Trustee:

hires an attorney (with Bankruptcy Court approval) to assess the value of the properties and to defend against Judgment Creditor’s charge of improper investigation; and
withdraws the no distribution report and notifies the Bankruptcy Court that assets will be administered (see Doc. 780 dated January 25, 2021, and Doc. 783 dated January 28, 2021).

Debtor dies in May 2021. But Debtor’s bankruptcy remains pending, as required by Fed.R.Bankr.P. 1016(a).

Then, Trustee files notices of intent to abandon the real properties and the malpractice claim, based on investigations revealing that such assets have inconsequential value and are burdensome to the bankruptcy estate (see Doc. 794 & 795 dated May 13, 2021).

Secured Creditor objects. After a hearing, the bankruptcy court overrules the objection and approves the proposed abandonments on July 20, 2021 (Doc. 819).

Trustee files a second no distribution report and again asks to be discharged from trustee duties. Secured Creditor objects.

But then, Trustee withdraws the second report and successfully demands turnover of funds from Debtor’s ex-wife.

Suing Trustee, Ruling & Appeals

In February 2022, Judgment Creditor sues Trustee in Bankruptcy Court, alleging gross negligence and breach of fiduciary duties in allowing waste and failing to collect rent.

Specifically, Judgment Creditor alleges that Trustee:

knew about and failed to safeguard against physical deteriorating of the two properties from from Debtor’s neglect, resulting in a loss of value over time totaling $200,000 to $300,000; and
allowed Debtor and spouse to collect rent from the properties, without paying real estate taxes or homeowners association dues, and made no attempt to obtain turnover of rent payments to use in maintaining the properties.

Trustee moves to dismiss the Complaint on several grounds, and the Bankruptcy Court grants the motion, with prejudice, on two grounds.

First is quasi-judicial immunity: Trustee has immunity if discretionary decisions to act or refrain from acting amount only to negligence—as opposed to gross negligence. And since the Complaint alleges only ordinary negligence, the Bankruptcy Court rules that the Complaint must be dismissed.

Second is the four-years statute of limitations. The Bankruptcy Court finds that Judgment Creditor:

had notice in 2011 that Trustee was not actively managing the two properties by the first no distribution report; and
complains to Trustee, in a 2016 letter, about rent payments not being turned over to the bankruptcy estate, yet Judgment Creditor waits more than the four years limitations period to file suit.

Judgment Creditor appeals to the District Court, which:

affirms that Trustee is entitled to quasi-judicial immunity based on the current pleading;
agrees that immunity extends to a trustee’s acts of ordinary negligence if they are closely related to the judicial process and involve the exercise of judgment—but not to gross negligence or intentional wrongdoing, which the Complaint fails to allege; and
remands to determine whether an amendment to the Complaint would be futile.

Ninth Circuit Action

Judgment Creditor appeals to the Ninth Circuit Court of Appeals, where judges vote to hear the case en banc.

And the Ninth Circuit reverses and remands for further proceedings!

Yeah. That’s what this case needs.

Conclusion

I’m sure there are rational explanations for everything that has happened over the 15+ years in this Chapter 7 case.

But how can anyone spend 15+ years on a simple Chapter 7 case with limited assets and standard issues of homestead exemption and dischargeability? And the case is still going on.

How can that be?

Peering in from the outside, it looks and smells like an abuse of the bankruptcy system that should not be allowed to happen.

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