In re Jarrett, Case No. 12-11453
Decision Date | 08 April 2014 |
Docket Number | Case No. 12-11453 |
Court | U.S. Bankruptcy Court — Middle District of North Carolina |
Parties | IN RE: Robert A. Jarrett and Patricia C. Jarrett, Debtors. |
SO ORDERED.
__________
BENJAMIN A. KAHN
UNITED STATES BANKRUPTCY JUDGE
MEMORANDUM OPINION REGARDING MOTION TOThis matter came before the Court on March 4, 2014, in Greensboro, North Carolina, after notice to all parties in interest, upon the Trustee's Motion to Except Asset from Abandonment Upon Closing of Case and for Authority to Reopen Case Without Payment of Filing Fee, dated December 11, 2013 [Doc. # 18] (the "Motion"), and the Bankruptcy Administrator's Response, dated March 3, 2014 [Doc. # 23] (the "Response"). Charles M. Ivey, III appeared as the Chapter 7 Trustee, Lynn E. Coleman appeared as attorney for the Debtors, and Robert E. Price appeared on behalf of the Bankruptcy Administrator. After considering the Motion, the Response, arguments of counsel, and the record, the Court has determined that the Motion should be denied. Pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure, the Court makes the following findings of fact and conclusions of law:
Jurisdiction
This Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157, and 1334 and Local Rule 83.11 entered by the United States District Court for the Middle District of North Carolina. This is a core proceeding under 28 U.S.C. § 157(b)(2), which this Court may constitutionally hear and determine.
On September 28, 2012, the Debtors filed a voluntary petition under Chapter 7 of the Bankruptcy Code. The sole asset of the estate in this case is a one-half remainder interest in certain real estate located at 637 Robinhood Road, Bassett, Virginia (the "Real Property") owned by Robert A. Jarrett (the "Male Debtor"). The other one-half remainder interest is held by the Male Debtor's sister. The Real Property is subject to a life estate in favor of the Male Debtor's mother.
The tax value of the Real Property has been assessed at $118,500. The Debtors' scheduled the value of the Male Debtor's fractional interest at $7,110. The Male Debtor also has claimed a $4,568.28 exemption in his interest in the Real Property. The Debtors' schedules indicate a lien on the property in favor of Martinsville Dupont Credit Union in the amount of $42,362.
On December 11, 2013, the Trustee filed a motion seeking an order excepting the property from abandonment upon the closing of the case pursuant to 11 U.S.C. § 554(c) [Doc. # 18] (the "Motion"). The Trustee indicates that he personally has inspected the Real Property, and he believes that the tax value is an accurate representation of its marketable value. The Debtors did not contest this value. Nevertheless, even if the Trustee could meet the requirements of 11 U.S.C. § 363(h) to sell both the bankruptcy estate's and the co-tenant's remainder interestsin the Real Property,1 the Trustee currently cannot sell the Real Property free of the interest of the life tenant.2 Moreover, the Trustee asserts that he has no funds to employ an auctioneer, and has unsuccessfully attempted to solicit offers for the estate's interest in the property from the other one-half future interest holder, members of the Male Debtor's family, and those specializing in the purchase of illiquid or unusual assets, among others. The Trustee did not indicate whether he has investigated the marketability of the remainder interests of both the Male Debtor and the co-tenant if sold jointly. Having come to the conclusion that there is no way for him to currently realize the value of the estate's interest in the Real Property, the Trustee argues that abandonment of the asset would result in an unwarranted benefit to the Male Debtor and inappropriate harm to the creditors.3
The Debtors argue that indefinitely excepting the asset from abandonment is inequitable to both the Male Debtor and his sister, as the Trustee has not disputed that the current value of the Male Debtor's interest in the Real Property is minimal, and the Male Debtor has claimed most of that value as exempt without objection. The Male Debtor further points out that it is unknown when the remainder interests will vest. The Male Debtor's mother, who holds the life estate interest in the property, is eighty years old and in good health, and the attorney for the Debtors stated at the hearing on this matter that women in the Male Debtor's family tend to have long life expectancies.
In light of concerns as to finality and monitoring, the Bankruptcy Administrator filed its Response, contending that motions to except property from abandonment under 11 U.S.C. § 554 (c) should be not be favored, but taking no position on the current Motion.
Section 554(c) of the Bankruptcy Code provides that "[u]nless 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." 11 U.S.C. § 554(c). By stating "[u]nless the court orders otherwise," this section provides authority for courts to except previously disclosed assets from abandonment during the pendency of a Chapter 7 proceeding. See In re Prospero, 107 B.R. 732, 734-35 (Bankr. C.D. Cal. 1989) ( ). If a court chooses not to except a scheduled but unadministered asset from abandonment, it will be deemed automatically abandoned at the closing of the case by operation of law under 11 U.S.C. § 554(c). In re Caslin, 97 B.R. 366, 370 (Bankr. S.D. Ohio 1989); Behrens v. Woodhaven Association, 87 B.R. 971, 973 (Bankr. N.D. Ill. 1988); In re McGowan, 95 B.R. 104, 106 (Bankr. N.D. Iowa 1988).
There is little case law addressing the circumstances under which a bankruptcy court should order that an asset be excepted from abandonment pursuant to section 554(c). Cases providing guidance on this issue likely are rare due to practical considerations. Prospero, 107 B.R. at 734 ( ).
As noted by the Bankruptcy Administrator in this case, excepting assets from abandonment also causes administrative problems and conflicts with the policy in favor of finality of the administration of estates. See 11 U.S.C. § 350 () (emphasis added); 11 U.S.C. § 704 ( ).
In In re Hart, 76 B.R. 774 (Bankr. C.D. Cal. 1987), the court considered the circumstances under which an order excepting an asset from abandonment should be entered. In that case, the property of the estate included a fractional interest in a note secured by a first deed of trust on certain real property which was subject to a pending state court receivership. Id. at 775. The state court receiver informed the bankruptcy trustee that the real property securing the note was not then marketable, but that he expected to sell the property at some date in the future for an amount that would satisfy the note in full. Id. at 775-76. The trustee believed that any sale of the real property (and the resulting payment of the fractional interest in the note) would result in unsecured creditors receiving a substantial percentage of their claims, and therefore requested that the court except the fractional interest in the note from abandonment. Id.
In considering the trustee's request, the court in Hart recognized the concerns of finality, noting that, "if claims or assets of the debtor do not have to be liquidated before closing, cases may be closed prematurely, thereby eroding the concept of the finality of the closing." Id. at 777. In addition, the court noted that monitoring an unabandoned asset usually will be problematic "in the absence of a Chapter 7 Trustee charged with the responsibility foradministering the estate." Id. For these reasons, the court in Hart correctly noted that exceptions to abandonment under section 554(c) should be rare.
In light of the overriding concerns of finality and monitoring, the court first specifically observed that Id. at 776. Having satisfied itself that there were no monitoring concerns in its case due to the presence of the state court receiver, the court set forth three factors, which a bankruptcy court should consider when asked to except an asset from abandonment. The court found that an exception to abandonment may be justified when: (1) there is "reasonable possibility" that "an asset valuable enough to pay substantial dividends to the creditors may be recovered in the future[;]" (2) the event triggering the reopening of the case is clearly defined and will not require further action by the trustee; and (3) the triggering event is not likely to occur so soon that the case should just remain open. Id. The court went on to hold that "if the asset was expected to be liquidated within say, a year, the case should probably be kept open until then." Id.
Applying these factors, the court in Hart granted the trustee's motion to except the fractional interest in the note from abandonment. Id. at 775, 777. Specifically, the court found that the asset could not be liquidated for any substantial...
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