In re Pace, BAP No. AK-91-2105-AsJV

• Decision Date: 10 September 1992
• Docket Number: Adv. No. 3-86-00572-001.,BAP No. AK-91-2105-AsJV,Bankruptcy No. 3-86-00572-HAR
• Citation: 146 BR 562
• Parties: In re H. Russell PACE, dba Seward's Folly, Debtor. H. Russell PACE, John E. Havelock and John R. Strachan, Appellants, v. Kenneth W. BATTLEY, Trustee, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

146 B.R. 562 (1992)

In re H. Russell PACE, dba Seward's Folly, Debtor H. Russell PACE, John E. Havelock and John R. Strachan, Appellants, v. Kenneth W. BATTLEY, Trustee, Appellee.

BAP No. AK-91-2105-AsJV, Bankruptcy No. 3-86-00572-HAR, Adv. No. 3-86-00572-001.

United States Bankruptcy Appellate Panel, Ninth Circuit.

Argued and Submitted June 23, 1992.

Decided September 10, 1992.

Thomas J. Yerbich, Anchorage, Alaska, for H. Russell Pace.

William D. Artus, Anchorage, Alaska, for Kenneth W. Battley, Trustee.

Before ASHLAND, JONES and VOLINN, Bankruptcy Judges.

OPINION

ASHLAND, Bankruptcy Judge:

H. Russell Pace, John E. Havelock, and John Strachan appeal an order of the bankruptcy court awarding Kenneth W. Battley, trustee of the bankruptcy estate, $150,000 constituting one half the settlement proceeds from a malpractice action between the debtor H. Russell Pace and debtor's former attorneys, 132 B.R. 644 (Bankr.D.Alaska 1991). We affirm.

STATEMENT OF THE FACTS

In September of 1984, H. Russell Pace and his former wife sold their interest in a night club to New Pines Corp., Wayne Bond and Fred McCorriston (collectively referred to as New Pines). Pace employed Boyko & Davis as their attorneys for the sale. The promissory note executed in connection with the sale was secured by two liquor licenses with a combined value of $360,000. Although the liquor licenses served as collateral for the note, no UCC-1 financing statement was filed.

On September 24, 1986, Pace filed a Chapter 11 petition that was converted to a Chapter 7 in December 1986. Pace filed schedules of assets and liabilities in his bankruptcy reflecting the New Pines promissory note as an asset of the estate and listing the liquor licenses as exempt assets.

On March 19, 1986, New Pines filed a Chapter 11 bankruptcy petition, which was later converted to a Chapter 7 bankruptcy. In May of 1987, the liquor licenses were sold in the New Pines bankruptcy. Pace's interest in the licenses was deemed worthless because of the failure to perfect his security interest in the same and Pace received no money for the licenses.

In October of 1987, Pace brought a malpractice action against his former attorneys for failure to file a UCC-1 financing statement to perfect Pace's interest in the liquor licenses. Upon learning of the malpractice claim, the trustee in Pace's bankruptcy included in the trustee's interim report filed on October 30, 1987, the "suit against attorney" as an asset to be liquidated. The debtor's bankruptcy schedules were not amended to reflect the malpractice law suit.

In February of 1989, the trustee in the Pace bankruptcy closed the estate and filed a general motion for abandonment seeking to abandon all property of the estate to Pace, which was not sold, abandoned, or allowed as exempt. The court granted the motion and entered the order in September of 1989. The original abandonment order provided for the abandonment of "property of the estate," and was later amended, pursuant to a motion to amend, to include only "scheduled property of the estate."

In January of 1991, the trustee filed a motion to reopen Pace's bankruptcy case to administer the malpractice claim which was an unscheduled asset. The case was reopened and Kenneth Battley was appointed the successor trustee.

In February of 1991, the malpractice claim was settled for $300,000. Battley, as successor trustee in the Pace bankruptcy, agreed with the trustee for the bankruptcy estate of Pace's former wife to divide the settlement proceeds evenly, $150,000 to Battley and $150,000 to the estate of Pace's former wife.

Battley subsequently brought an action against Pace and his attorneys to recover the proceeds of the malpractice settlement. Pace defended the suit by arguing that the abandonment of the New Pines promissory note constituted abandonment of the attorney malpractice claim. The bankruptcy court found for the trustee and awarded Battley $150,000 of the settlement proceeds which were placed in an escrow account pending the bankruptcy court's decision. Pace timely appealed the court's order.

STATEMENT OF THE ISSUE

Whether the bankruptcy court erred in finding that abandonment of the New Pines promissory note by the trustee did not constitute abandonment of the attorney malpractice claim against debtor's former attorneys.

STANDARD OF REVIEW

Findings of fact are reviewed for clear error; conclusions of law are reviewed de novo. In re Taylor, 884 F.2d 478, 480 (9th Cir.1989); In re Probasco, 839 F.2d 1352, 1353-54 (9th Cir.1988).

DISCUSSION

Section 554 of the Bankruptcy Code provides for abandonment of property of the estate during the case through court order directing abandonment, see, 11 U.S.C. § 554(a) and (b), or abandonment by operation of law once the case is closed, see, 11 U.S.C. § 554(c), In re Lange, 120 B.R. 132, 135 n. 3 (9th Cir.BAP 1990).

Abandonment pursuant to § 554(a) or (b), according to Federal Rule of Bankruptcy Procedure 6007, requires notice, a hearing, and an order of the court authorizing the abandonment. In re Reed, 940 F.2d 1317, 1321 (9th Cir.1991); In re Hyman, 123 B.R. 342, 348 (9th Cir.BAP 1991).

Abandonment pursuant to § 554(c) requires that the property to be abandoned is properly scheduled under § 521(l). Vreugdenhill v. Navistar Int'l Transp. Corp., 950 F.2d 524, 526 (8th Cir.1991) (unless formally scheduled, property is not abandoned at the close of the estate, even if the trustee knew of the existence of the property when the case was closed); In re Harris, 32 B.R. 125, 127 (Bankr.S.D.Fla. 1983) (property not scheduled was not deemed abandoned and remained property of the estate); In re Medley, 29 B.R. 84, 86-87 (Bankr.M.D.Tenn.1983) (an unscheduled asset was not deemed abandoned and trustee could reopen case to administer the asset to creditors).

Here, the malpractice claim against the debtor's former attorneys was not abandoned pursuant to § 554(a) or (b) because there was no notice, hearing, or order of the court directing abandonment. Furthermore, the malpractice claim was not listed in the debtor's schedules of assets and liabilities, as required by § 554(c). However, appellants contend that the malpractice claim was "so inextricably intertwined" with the promissory note executed in connection with the sale of the two liquor licenses that abandonment of the note constituted abandonment of the malpractice claim. They argue that to have a cause of action for professional negligence one has to own the interest that was lost or damaged. In other words, the estate did not have a malpractice claim once the trustee abandoned the interest in the promissory note.

The appellants cite no cases in which two assets were "so inextricably intertwined" that abandonment of one constituted abandonment of the other. However, the bankruptcy court below relied on a case in which a similar argument was raised by the appellant and failed. See, In re Woodson, 839 F.2d 610 (9th Cir.1988). The appellants are correct that Woodson is factually distinguishable from this case. However, the rationale espoused in Woodson is applicable here.

Woodson concerned exemption of life insurance proceeds pursuant to § 522 of the Bankruptcy Code. Appellant therein exempted his life insurance policy and argued that the proceeds therefrom were also exempt, both constituting one asset. The Woodson court drew a distinction between the policy and the proceeds; the former being an ownership interest exempt under § 522(d)(7), the latter being a beneficial interest of the debtor under § 541(a)(5).

The court stated:

The right to maintain the policy is of value to the debtor only; it is not capable of sale or transfer and is therefore of little use to the estate. Policy proceeds, on the other hand, are fully liquidated and therefore readily usable by the estate to pay creditors. It seems perfectly logical for the bankruptcy laws to protect an unmatured policy while subjecting the proceeds of a matured policy to the reach of creditors. The two assets

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