After a chapter 7 trustee moved to evict the debtors from their residence, the debtors moved to compel the trustee to abandon the property, arguing that the market value less the amount due on the mortgage left no equity for the bankruptcy estate. The bankruptcy court agreed that the net value was inconsequential and granted the debtors’ motion. The district court concurred, and the trustee appealed to the Sixth Circuit.
As background, the Sixth Circuit explained that the debtors “encountered financial distress during the ‘Great Recession’ that began in 2008. Unable to pay their debts, they moved for Chapter 7 bankruptcy seven years later.” The debtors listed their residence in their bankruptcy schedules with a value of $108,000 subject to a mortgage with an outstanding balance of ~$91,500.
The trustee sought to evict the debtors because he said it would make it easier to sell the property for the benefit of the creditors. He also asserted that the property was worth close to $200,000, which meant that a sale might provide around $90,000 for creditors. The debtors countered that the property was in fact worth only $108,000, so there was little or no value left for creditors after payment of the substantial mortgage loan.
Accordingly, the debtors moved to compel abandonment. In the alternative, they asked that the chapter 7 case be converted to a chapter 13 so that they could try to keep their home. The trustee offered a check for $7,500 (the value of the homestead exemption) which the debtors rejected.
The bankruptcy court framed the issue as a factual question of the value of the property and noted that the debtors had the burden of showing that the property was of inconsequential value to the bankruptcy estate. At the hearing on value:
- The debtors offered two appraisers: One concluded that the property would be worth $171,000 after repairs related to mold and the roof that would cost $63,000 – leaving a net value of $108,000. The second appraiser agreed that there were mold issues and identified other necessary repairs. He valued the home at $185,000 with repairs estimated at $60,000 – leaving a net value of $125,000.
- The trustee’s realtor offered an opinion that the property was worth $204,000 based on his tour the house. A home inspector also testified that there was no problem with the roof and the mold issue was overstated. The trustee himself testified that after repairs the home would be worth between $190,000 and $200,000.
The bankruptcy court was persuaded by the debtors’ first appraiser and granted the debtors’ motion to compel abandonment. The bankruptcy court was also influenced by the fact that (1) the case had been pending for six months by the time the court reached its decision and property is often sold while still occupied by the owner, and (2) the trustee could have been marketing the property during this time, particularly since he contended only minor repairs were needed.
On appeal the trustee’s primary argument was that the debtors did not have standing. The property was part of the bankruptcy estate, and to the extent that the debtors were parties in interest, he contended that tendering cash for their homestead exemption extinguished any standing that they might have had.
The Sixth Circuit rejected this argument as without merit. A chapter 7 trustee is responsible for liquidating the estate and using the proceeds to satisfy a debtor’s unsecured creditors. However, this power will not be exercised unless “there is a fair prospect of the property being sold for substantially more than enough to discharge the lien or liens upon it.”
In other words, a trustee is supposed to abandon property that does not have substantial equity. This was a common-law rule that became codified in section 554(b) of the Bankruptcy Code: Any “party in interest” – meaning someone who has a practical stake in the outcome – can ask the court to compel abandonment of property “that is burdensome to the estate or that is of inconsequential value and benefit to the estate.”
The court also rejected the trustee’s argument that tendering the amount of the homestead exemption extinguished any interest of the debtors. A homestead exemption is a statutory remedy to give debtors money to help with their “fresh start” after loss of their property. However, it is not an exclusive remedy. Allowing the trustee to extinguish the abandonment remedy by merely tendering the amount of the homestead exemption could effectively nullify section 554(b).
The court held that this case clearly came within the abandonment section since the residence was of inconsequential value to unsecured creditors but had real value for the debtors. The court rejected the trustee’s argument that he should have been allowed to evict the debtors on similar grounds and concluded that the evidentiary hearing on value was appropriate.
On the issue of standing, the court concluded that the debtors (1) would suffer an injury-in-fact (2) caused by the trustee that (3) could be redressed by a favorable ruling. Abandonment would give the debtors immediate material benefit and a sale would constitute an injury-in-fact.
In a final “Hail Mary” the trustee argued that the debtors’ alternative request to convert the case and retain the residence by paying $50,000 (using funds made available by a relative) was evidence that the value of the property was more than inconsequential. Aside from rejecting this as an entirely new argument that had been waived, the court noted the disconnect between the effect of an alternate offer and abandonment given that the bankruptcy court made a determination of value and granted abandonment.
Any party in interest can ask the court to compel a trustee to abandon property that is burdensome or of inconsequential value. The expectation is that this means the property is no longer part of the bankruptcy estate and revests in the debtor. However, it might be interesting to consider whether the property could end up somewhere else under appropriate circumstances.
For example: What if the property is seriously contaminated, the debtor is not at fault, and it has no ability to remedy the contamination – perhaps abandon to the party that caused the contamination or that is primarily responsible for the cleanup? Or what if the property is subject to a mortgage that far exceeds the value of the property – might it be possible to abandon the property to the mortgagee and cut out the foreclosure process?
Vicki R Harding, Esq.