IN RE KIM (Bankr.E.D.Va. 1998)

Case No. 97-15515-SSMUnited States Bankruptcy Court, E.D. Virginia
April 16, 1998

Sunwoo Nam, Esquire, Silver Spring, MD, OF Counsel for the debtors

MEMORANDUM OPINION AND ORDER
STEPHEN MITCHELL, Bankruptcy Judge

This matter is before the court on the chapter 7 trustee’s motion to reopen the case to administer assets. The dispositive question is whether the closing of the case irrevocably abandoned the estate’s interest in an unexpected $24,758.30 surplus from a foreclosure sale.

FACTS
The debtors, Kap Sok Kim and Sun Sik Kim, then represented by attorney Suk Bin Im, filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on July 25, 1997. Gordon P. Peyton was appointed as the trustee. On their schedules, they listed a one-half undivided ownership interest in real estate located at 3218 Patrick Henry Drive, Falls Church, Virginia.[1] The value of their interest in the property was listed as $107,850.00, and the property was shown as being subject to a deed of trust in favor of Chevy Chase Bank in the amount of $91,216.74, to a Federal tax lien in the amount of $26,145.69, and to secured claims in favor of the Commonwealth of Virginia and Fairfax County, Virginia, in the aggregate amount of $1,775.84. The debtors did not claim any interest in the property as exempt, and on their

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statement of intention with respect to secured property, they stated that they intended to surrender the property to Chevy Chase Bank.

Chevy Chase Bank, F.S.B., (“Chevy Chase”) filed a motion for relief from the automatic stay in order to foreclose under its deed of trust against the property. The motion alleged that the current tax assessed value of the property was $215,700.00;[2] that the total amount owed Chevy Chase was “in excess of $99,430.46; and that the property was further encumbered by federal tax liens and judgments totaling more than $185,617.46. The chapter 7 trustee filed a response stating that he had orally abandoned the property at the meeting of creditors on August 21, 1997, pursuant to Local Bankruptcy Rule 6007-1(A). On August 28, 1997, a consent order, endorsed by the chapter 7 trustee, was entered terminating the automatic stay with respect to the enforcement of Chevy Chase’s rights against the property, and on September 4, 1997, the trustee filed a report of no distribution. The case was thereafter closed by order entered November 22, 1997.

For reasons that are unexplained, it appears that the foreclosure sale resulted in a surplus, and that on February 13, 1998, Chevy Chase’s attorney sent the debtors’ bankruptcy attorney a check, made payable to the debtors, in the amount of $24,758.38, as “the share from the surplus proceeds to which you are entitled.” An associate attorney in the law firm advised the chapter 7 trustee of the payment but took the position that the funds belonged to the debtors rather than the bankruptcy estate. The debtors’ bankruptcy attorney apparently convinced the debtors to endorse the check over to his escrow account pending resolution of the dispute with the trustee. That escrow account, however, apparently has been frozen. The court is advised that the debtors’

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attorney was arrested in early March on federal charges of immigration fraud,[3] and that a receiver has been appointed for the law practice by the Circuit Court of Fairfax County, Virginia. On March 17, 1998, the chapter 7 trustee filed the Petition to Reopen Case that is currently before the court.

Discussion
Under § 350(b), Bankruptcy Code, “A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause” (emphasis added).[4]
The debtors argue, however, that there are no assets for the trustee to administer, as the trustee’s interest in the real estate has been effectively abandoned, citing In re Sutton, 10 B.R. 737 (Bankr. E.D. Va. 1981) (Bostetter, J.).

The commencement of a bankruptcy case creates an “estate” (the bankruptcy estate), which includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” §541(a)(1), Bankruptcy Code. In a chapter 7 case, the trustee has a duty to “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interest of parties in interest.” § 704(1), Bankruptcy Code. The trustee is not, however, literally required to liquidate each and every non-exempt asset if doing so would provide no benefit to creditors. In particular, the

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trustee, after notice and a hearing,[5] “may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.” § 554(a), Bankruptcy Code. Local Bankruptcy Rule 6007-1 permits a trustee to give oral notice at the meeting of creditors of an intent to abandon property of the estate. Parties objecting to such abandonment have ten days in which to request a hearing on the issue of abandonment. While the local rule does not expressly say so, it would appear that, in the absence of such objection, abandonment is effective at the expiration of the ten day period. In any event, in addition to explicit abandonment under § 554(a), the Bankruptcy Code provides,

Unless 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 the purposes of section 350 of this title.

§ 554(c), Bankruptcy Code (emphasis added).[6]

It is well-settled that abandonment, if it does occur, “is irrevocable, regardless of any subsequent discovery that the property had greater value than previously believed.” 4 Collier on Bankruptcy, supra, p. 554.02, p. 554-8. In re Sutton, 10 B.R. 737, 739-740 (Bankr. E.D. Va. 1981) (Bostetter, C.J.);[7] In re Hood, 92 B.R. 648, 655-56 (Bankr. E.D. Va. 1988) (Tice, J.),

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affd, 92 B.R. 656 (E.D.Va. 1988) (“Property abandoned pursuant to Section 554 generally cannot be recovered by the debtor’s estate notwithstanding a later determination of value which might have benefitted the estate.”) But see Indian Head Nat’l Bank v. Dominic (In re Dominic), 29 B.R. 482 (Bankr. M.D. Fla. 1983).[8]

The trustee does not dispute these general principles. He distinguishe Sutton, however, on the basis that the trustee there had formally abandoned the property by filing a notice of abandonment with the court. However, under Local Bankruptcy Rule 6007-1, oral notice of intent to abandon given at the meeting of creditors is legally effective and, where not objected to,

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results in the abandonment of the estate’s interest as effectively as does the filing of a written notice of intent to abandon. In any event, even in the absence of an express abandonment, the closing of a case statutorily operates as an abandonment of all scheduled assets. § 554(c), Bankruptcy Code. Consequently, the closing of this case on November 22, 1997, resulted in the abandonment of the real estate, and any equity therein, to the debtors. While this unquestionably represents a windfall to the debtors, it is one that follows from the plain language of the statute.

ORDER
For the foregoing reasons, it is

ORDERED:

1. The motion to reopen is denied.

2. The clerk will mail a copy of this memorandum opinion and order to the chapter 7 trustee, counsel for the debtors, and the United States Trustee.