Trustee Can’t Revoke Abandonment Merely to Recover Unexpected Value

Recently, in In re Reiman, 431 B.R. 901 (Bankr. E.D. Mich. 2010), a Michigan bankruptcy court held that a trustee could not revoke abandonment of property that he later discovered to have additional value. The Reimans, the debtors, listed both their house’s value and a secured claim above their house’s value on their chapter 7 schedules. After the trustee filed his no-asset report, the bankruptcy case closed and the debtors received a discharge. The property eventually foreclosed at a bid price below the house’s fair market value and the trustee moved to re-open the case to recover any additional value in the house. Although the court re-opened the case, the court denied the trustee’s motion to revoke abandonment because the trustee’s no asset-report was not influenced by an unforeseeable change or mistake of law.

Most circuits have clarified that a trustee may revoke abandonment through Fed. R. Bankr. P. 9024 once a case is re-opened. But, most courts will not revoke abandonment automatically. Courts have uniformly held that revocation is permitted under “very limited circumstances.” Catalano v. Comm'r of Internal Revenue, 279 F.3d 682, 686 (9th Cir. 2002). For example, in LPP Mortgage., Ltd. v. Brinley, 547 F.3d 643 (6th Cir. 2008), the Sixth Circuit allowed a trustee to revoke abandonment through Rule 9024. Soon after abandonment, the Sixth Circuit unforeseeably ruled in a way that changed lien avoidance law and created substantial equity in the abandoned property. While agreeing that Rule 9024 is the proper way for a trustee to revoke abandonment, the Reiman court rejected the Reiman trustee’s argument that “equities” also weighed in favor of revocation.

The trustee in Brinley re-opened the case because of a mistake of law, while the trustee in Reiman “made an assumption [about the foreclosure sale] that later turned out to be incorrect.” In the court’s eyes, the trustee in Reiman made a mistake of fact, as opposed to the trustee in Brinley who acted in response to an unforeseeable change in law. The trustee in Reiman simultaneously sought revocation in identical cases in what the court described as “standardized motions to revoke abandonment.” These identical revocations sought by the trustee in Reiman fell outside the “limited circumstances” set out in Brinley. Reiman recognized that the trustee in Brinley acted on an “extraordinary set of circumstances.”

The Reiman decision is important to future trustees seeking to revoke abandonment after closing a case. Reiman is a wake up call for these trustees to abandon property only when they are certain that the property has no value. If the trustee is uncertain about abandonment, the trustee has the option to ask the Court under § 554(c) to “order otherwise,” and wait to see if there is any value to be realized by the estate. In these circumstances, the trustee may find additional value for creditors and avoid losing out of potential value recognition.

By Justin Zaroovabeli
St. John’s Law Student
American Bankruptcy Institute Law Review Staff