How Does a Chapter 7 Trustee Prevent a Tort Claim from Being Abandoned under §554(c) Upon Closing a Case?
What must a chapter 7 trustee do to preserve a scheduled but unresolved personal injury claim as an estate asset when closing a case? Is reserving one’s right in a Report of No Distribution to reopen the case at a later date to administer the claim sufficient to prevent it being statutorily abandoned as a matter of law under Section 554 upon closure of the case? The Bankruptcy Appellate Panel for the Sixth Circuit Court of Appeal, in its recent decision of In re Wright, 2017 WL 1371293 (6th Cir. BAP Apr. 17, 2017), addressed this precise issue and held such a reservation of rights to be insufficient.
In Wright, the debtor filed for chapter 7 in 2010 and listed a personal injury claim against his employer on his Schedules in an unknown value and did not assert an exemption. In 2011, the bankruptcy court approved the trustee’s application to employ the debtor’s personal injury attorney as special counsel to prosecute the personal injury claim in state court. Special counsel filed a personal injury claim against the employer and a companion workers compensation claim against the Ohio Bureau of Worker’s Compensation (“BWC”).1 In 2013, the trustee filed a Report of No Distribution (the “NDR”), certifying that the estate had been fully administered “with the exception of a possible settlement in connection with a personal injury claim.” The NDR further stated: “The above-referenced settlement shall remain property of the bankruptcy estate upon the entry of a final decree; if money becomes available to creditors from this asset, the case will be re-opened and a trustee will be appointed to administer the asset.” The bankruptcy court entered the final decree closing the case but it did not contain any reservations regarding the personal injury claim.
In 2015, the trustee filed a motion to reopen the case, asserting that special counsel had recently informed her of an offer of settlement in connection with the personal injury case. The debtor objected on the basis that the trustee had abandoned any interest in the personal injury litigation. The bankruptcy court re-opened the case, with the trustee withdrawing the NDR and special counsel being reinstated for the limited purpose of presenting the settlement offer. The trustee filed a global motion to compromise the personal injury claim and the workers compensation claim for $180,000. The bankruptcy court approved the compromise over the debtor’s objection that the claims were no longer estate property.
The Sixth Circuit BAP affirmed in part and reversed in part. It affirmed the bankruptcy court’s ruling that the worker’s compensation claim remained property of the estate because unscheduled assets are not abandoned pursuant to Section 554(d). It reversed as to the personal injury claim because the plain language of Section 554(c) “unambiguously states that if an asset was properly scheduled and not administered by the trustee, upon closing the case, the asset is abandoned as a matter of law.” Id. at *4. Section 554(c) provides: “Unless the court orders otherwise, any property scheduled … not administered at the time of the closing of a case is abandoned to the debtor ….” The Sixth Circuit BAP held the trustee’s reservation rights in the NDR to be insufficient as only the bankruptcy court has the authority to “order otherwise” under Section 554(c) to prevent abandonment. As such, it reversed the order granting the global motion to compromise.
This decision demonstrates the potential danger in closing a bankruptcy case where there are scheduled, but unresolved tort claims. If a trustee closes a bankruptcy case where a tort claim has been scheduled, but is unresolved, based on this decision, the best practice would be to file a motion and obtain an order specifying that the claim is preserved as an estate asset prior to the closing of the case; otherwise, the claim could be deemed abandoned as a matter of law pursuant to Section 554(c).
1 The debtor never listed the workers compensation claim against BWC in his schedules.
Article Prepared By: Rhys Leonard