“I Told the Trustee About the Unscheduled Asset” – That Doesn’t Do It

The 9th Circuit Court of Appeals In re: Stevens, addressed a fairly common issue in the Chapter 7 context. Often times schedules prepared by debtors are not complete or thorough. In Stevens, the Debtors filed Chapter 13. Among their assets was a lawsuit pending against their mortgage holder. The lawsuit was not listed on their list of personal property (Schedule B) on their schedules. It undisputed that the Debtors did not intend to hide the existence of the lawsuit or that they thought it was an asset. The lawsuit appeared on the Debtors’ Statement of Financial Affairs and was timely revealed orally on the record at the First Meeting of Creditors. The Debtors cooperated with the Trustee regarding the cause of action, providing the Trustee with copies of the lawsuit papers and related documents. After review, the Trustee later filed a so called “no asset” report.

Later, it became clear that the lawsuit was more valuable than all originally thought. The question became – “Was the lawsuit “abandoned” under 11 U.S.C § 554(c) (and thereby giving the Debtors control of it) or was it still property of the Estate and subject to marshalling by the Trustee?”

In Stevens, the court followed the strict interpretation, ruling that if the asset was not “scheduled”, i.e., if the property was not listed on the Debtors’ Schedule B (Personal Property), it could not be deemed abandoned. The mention of the lawsuit in the Statement of Financial Affairs did not cut it. The debtors had a duty to “schedule” the asset on their “B” Schedule, not simply make reference to it somewhere else in their bankruptcy papers. The Trustee would be entitled to administer the lawsuit.

In re: Stevens follows a strict interpretation regarding the abandonment of property. Other cases are not so strict – a Debtor’s listing of property elsewhere in his/her bankruptcy papers has been held by some courts to be sufficient. Both Debtors and their counsel ought be aware of this ruling, however, as strict compliance may be required to preserve the debtors’ property.

Categories: Bankruptcy