In re Sas

• Decision Date: 19 February 2013
• Docket Number: No. BK–S–10–27221–MKN.,BK–S–10–27221–MKN.
• Citation: 488 B.R. 178
• Parties: In re Aharon Roni SAS and Orna Cohen, Debtors.
• Court: U.S. Bankruptcy Court — District of Nevada

488 B.R. 178

In re Aharon Roni SAS and Orna Cohen, Debtors.

No. BK–S–10–27221–MKN.

United States Bankruptcy Court, D. Nevada.

Feb. 19, 2013.

Arun Gupta, Las Vegas, NV, for Debtors.

Christine A. Roberts, Sullivan, Hill, Lewin, Rez, & Engel, Las Vegas, NV, for Trustee.

ORDER DENYING TRUSTEE'S MOTION FOR TURNOVER OF ARBITRATION FUNDS AND TO REVOKE ABANDONMENT ON ORDER SHORTENING TIME¹

MIKE K. NAKAGAWA, Bankruptcy Judge.

On October 10, 2012, the court heard the Motion for Turnover of Arbitration Funds and to Revoke Abandonment on Order Shortening Time (“Turnover Motion”). The appearances of counsel were noted on the record. At the conclusion of the hearing, the court took the matter under submission.

BACKGROUND

On or about April 14, 2004, Aharon Roni Sas (“Sas”) was injured in a car accident. About a year later, Sas pursued a personal injury claim for the accident, and hired attorney Imanuel B. Arin (“Attorney Arin”) of the law firm Arin & Associates, P.C.² (“Arin & Associates”). On June 10, 2005, Sas filed a complaint against Robert M. Castro and Air One Transport for the car accident (“Lawsuit”).³ In June 2009, the parties agreed to submit the matter to binding arbitration, subject to a cap on recovery of $200,000 from the named defendants.⁴

On September 11, 2010, Sas and his spouse, Orna Cohen (jointly “Debtors”) filed a voluntary Chapter 7 bankruptcy petition. When the Debtors filed their bankruptcy petition, they did not list the Lawsuit on their personal property Schedule “B,” but did identify its caption and case number in their Statement of Financial Affairs (“SOFA”).⁵ Trustee Yvette Weinstein (“Trustee”) questioned the Debtors about the Lawsuit during their 341 meeting on October 18, 2010, and afterwards she filed an Initial Asset Report for Debtors' case.

On October 19, 2010, Debtors filed an Amended Personal Property Schedule “B,” and an Amended Exemption Schedule “C.” For the category of personal property titled “Other contingent and unliquidated claims ...,” the Debtors listed “Personal Injury Claim (Case# : A505324) SAS VS CASTRO/AIR ONE TRANSPORT (ARIN & ASSOCIATES),” with a value of $16,150. Debtors listed an exemption of $16,150 for the personal injury claim on their Schedule “C” based on Nev.Rev.Stat. § 21.090(1)(u)⁶, which was the maximum allowed for that exemption. On October 20, 2010, Debtors' bankruptcy case was changed from “No Asset” to “Asset.” On October 22, 2010, the Debtors filed a further amendment to Schedules “B” and “C” that changed only the exemption of an automobile, but did not change the information for the personal injury claim.

On November 18, 2010, the Trustee filed notice of her intention to abandon any interest in the Debtors' residence.

On December 20, 2010, Debtors received their discharge.

On January 25, 2011, the Trustee filed a “Report of No Distribution,” indicating that she “made a diligent inquiry into the financial affairs of the debtor(s) and the location of the property belonging to the estate; and there is no property available for distribution from the estate over and above that exempted by law....” She also certified that the Debtors' estate had been fully administered.

On January 26, 2011, Debtors' case was changed from “Asset” to “No Asset.”

On August 24, 2011, the Lawsuit went to arbitration.

On October 26, 2011, the court entered an order discharging the Trustee and closing the bankruptcy case.⁷

On October 30, 2011, the arbitrators awarded $531,846.95 to Sas ⁸, which was limited to $200,000 (“Arbitration Funds”) under the agreed cap.

On August 7, 2012, the court reopened the bankruptcy case at the Debtors' request. Debtors' motion stated that they wanted to amend their schedules to include additional prepetition creditors, the arbitration award, and update the “outcome of lawsuits that were included in [sic] original statement of financial affairs.”

On August 24, 2012, Attorney Arin filed a motion seeking permission to remit the Arbitration Funds to the Trustee, less $80,000 representing the 40% contingency fee, plus costs of $25,050.69. The Trustee opposed Attorney Arin's Motion, and was joined in the opposition by secured creditor Roni Shaked (“Shaked”).⁹ Attorney Arin withdrew his motion before a hearing was held on the matter.

On September 14, 2012, Trustee filed the instant Turnover Motion.¹⁰ The Trustee argues that she did not affirmatively abandon the Lawsuit pursuant to Sections 554(a) or (b), and thus it remained property of the estate and subject to turnover under Section 542. In the alternative, if technical abandonment is found under Section 554(c), the Trustee suggests that revocation of the abandonment should be granted because she was given false information about the Lawsuit. Moreover, the Trustee asserts that there are insufficient funds to pay Attorney Arin and creditor Shaked, as well as the Debtors' exemption, from the Arbitration Funds.

On October 8, 2012, Attorney Arin filed opposition, arguing that technical abandonment under Section 554(c) occurred when the Debtors' case was closed, that he was entitled to rely on the abandonment, and the facts do not warrant an exception to the general irrevocability of abandonment. He also noted that a request for turnover of assets requires the filing of an adversary proceeding.

On October 9, 2012, the Trustee filed a reply asserting that the Debtors and their counsel deliberately misled her about the Lawsuit's value, and had an ongoing duty to correct Debtors' schedules when they learned of the increase in value. She also noted that a third creditor, Plaintiff Funding Holding, Inc. (“Plaintiff Funding”), is claiming a security interest in the Arbitration Funds ¹¹. As a result, the Trustee claims that there are at least three parties asserting competing security interests in the Arbitration Funds: Attorney Arin—$80,000 in fees, plus $25,050.69 in costs; Shaked—$92,012.40 ¹²; Plaintiff Funding—$122,879.55 ¹³. The total of the claims against the $200,000 Arbitration Award therefore is $319,942.64. ¹⁴

On October 10, 2012, the Trustee filed a separate adversary proceeding, Adversary No. 12–01235–MKN, naming Attorney Arin, Arin & Associates, Shaked, Plaintiff Funding and Debtors as defendants. In her complaint, the Trustee seeks declaratory relief, avoidance of postpetition transfers pursuant to Section 549, turnover of estate property pursuant to Section 542, and disgorgement of any fees paid to Arin & Associates.

DISCUSSION

The instant motion seeks turnover of the Arbitration Funds. In order to do so, the order closing the case must be revoked so that the Arbitration Funds are no longer abandoned to the Debtors by operation of Section 554(c).

I. Revocation of Abandonment.

Section 554 provides that an unadministered, scheduled asset is deemed abandoned at the close of a bankruptcy case, unless the bankruptcy court orders otherwise. 11 U.S.C. § 554(c). This technical abandonment is generally irrevocable unless appropriate circumstances exist. See DeVore v. Marshack (In re DeVore), 223 B.R. 193, 197 (9th Cir. BAP 1998). Appropriate circumstances include where (1) a debtor provided a trustee with false or incomplete information about an asset; (2) the debtor did not schedule the asset at all; or (3) the trustee abandoned the asset based on mistake or inadvertence and revocation will not cause undue prejudice. Id. at 198.

Here, the Debtors disclosed the Lawsuit on their SOFA, and twice on their Amended Schedules “B” and “C,” and therefore, the second basis for revoking abandonment (complete failure to disclose an asset) is not applicable in this case. Accordingly, the court will evaluate the two remaining potential appropriate circumstances that may support revocation.

A. False or Incomplete Information Provided by Debtors to Trustee.

A debtor must prepare his schedules accurately and completely. See Cusano v. Klein, 264 F.3d 936, 946 (9th Cir.2001). However, a debtor's imprecise description of an asset in his schedules that is “not so defective [as to] forestall a proper investigation of the asset,” does not provide a basis for revocation of abandonment. Id. In Cusano, the Ninth Circuit found that the debtor's listing of “songrights” worth an unknown value was sufficient to provide a party with “inquiry notice ... to seek further detail if [the party] required it” even though the description could have been more detailed. Id. at 946–47. Furthermore, “mistakes in valuation will not enable a trustee to recover an abandoned asset, ... not even upon subsequentdiscovery that the property had a greater value than previously believed.” Id. at 946.

In this case, although the Debtors' estimation of the Lawsuit's value was not accurate in hindsight, this mistaken valuation is not enough by itself to establish that the Debtors provided the Trustee with false or incomplete information and, allow her to recover the abandoned Lawsuit. As established in Cusano, an incorrect description as to value does not necessarily establish that the disclosure was false for purposes of revocation of abandonment. Debtors' description of the Lawsuit “was not so defective [as to] forestall [Trustee's] proper investigation of the asset” as their SOFA and Amended Schedules “B” and “C” provided sufficient information to the Trustee to put her on inquiry notice if she desired more detailed information on the Lawsuit. Debtors disclosed the nature of the Lawsuit, the names of the parties, the case number, an estimation of the Lawsuit's value, and the identity of Debtors' counsel for the Lawsuit. These facts were sufficient to provide a party with notice that the Lawsuit had some value, and the Debtors included enough facts so that the Trustee could independently investigate the action. She had several tools available to do so, such as requesting 2004 examinations of the Debtors and their counsel, compelling production of documents regarding the Lawsuit, and reviewing relevant state court records. ¹⁵

The Trustee asserts...