Court Denies Trustees Attempt to Revoke Section 554(c) Abandonment

By: Justin Zaroovabeli
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re Reiman,[1] a Michigan bankruptcy court held that a trustee could not revoke abandonment of property that he later discovered to have additional value.[2] The Reimans, the debtors, listed both their house’s value and a secured claim above their house’s value on their chapter 7 schedules.[3] After the trustee filed his no-asset report, the bankruptcy case closed and the debtors received a discharge.[4] The property eventually foreclosed at a bid price below the house’s fair market value and the trustee moved to re-open the case to recover any additional value in the house.[5] Although the court re-opened the case,[6] the court denied the trustee’s motion to revoke abandonment because the trustee’s no asset-report was not influenced by an unforeseeable change or mistake of law.[7] The court also noted that policy considerations typically favored finality in bankruptcy cases.[8]

Most circuits have clarified that a trustee may revoke abandonment through Rule 9024 once a case is re-opened.[9] But, most courts will not revoke abandonment automatically.[10] Courts have uniformly held that revocation is permitted under “very limited circumstances.”[11] Situations in which a court has permitted revocation include inadvertently abandoning assets,[12] incompletely disclosing assets,[13] ambiguously describing schedules,[14] inconsistently disclosing debtor corporation’s information,[15] and indirectly hindering investigation of assets.[16] For example, in LPP Mortgage., Ltd. v. Brinley,[17]the Sixth Circuit allowed a trustee to revoke abandonment through Rule 9024.[18] Soon after abandonment, the Sixth Circuit unforeseeably ruled in a way that changed lien avoidance law and created substantial equity in the abandoned property.[19] The Brinley court held that “equities weighed in favor of revoking the abandonment”[20] because when the trustee in Brinley abandoned the property, the trustee made the decision “based on his knowledge of existing [lien avoidance] law.”[21] While agreeing that Rule 9024 is the proper way for a trustee to revoke abandonment,[22] the Reiman court rejected the Reiman trustee’s argument that “equities” also weighed in favor of revocation.

The trustee in Brinley re-opened the case because of a mistake of law,[23] while the trustee in Reiman “made an assumption [about the foreclosure sale] that later turned out to be incorrect.”[24] In the court’s eyes, the trustee in Reiman made a mistake of fact, as opposed to the trustee in Brinley whoacted in response to an unforeseeable change in law.[25] This trustee in Reiman simultaneously sought revocation in identical cases[26] in what the court described as “standardized motions to revoke abandonment.”[27] These identical revocations sought by the trustee in Reiman fell outside the “limited circumstances” set out in Brinley. Reiman recognized that the trustee in Brinley acted on an “extraordinary set of circumstances.”[28] Finally, the Reiman court implied that section 554(c) was intended to provide finality and stressed the trustee’s duty to thoroughly investigate estate assets before closing a case.[29]

The Reiman decision is important to future trustees seeking to revoke abandonment after closing a case. Reiman is a wake up call for these trustees to abandon property only when they are certain that the property has no value. A trustee must administer the estate as quickly as possible while maximizing the estate’s value. A dilemma may arise when a trustee wants to close the bankruptcy case, but anticipates future value in an asset.   The trustee has the option to ask the Court under section 554(c) to “order otherwise,”[30] and wait to see if there is any value to be realized by the estate. In these circumstances, the trustee may find additional value for creditors and avoid losing out of potential value recognition.