Abandonment: Divesting Property From the Bankruptcy Estate

Lara Glaesman of Stinson Leonard Street

By Lara Glaesman

The filing of a bankruptcy case creates a bankruptcy estate, which is comprised of all of the debtor’s property, including, among other things, all legal and equitable interests of the debtor in property as of the date of the bankruptcy filing – the petition date – and any interest in property that the estate acquires after the petition date. 11 U.S.C. § 541. During a bankruptcy case, one of the few ways to divest property from the estate is through abandonment pursuant to 11 U.S.C. § 554.

Who May Seek Abandonment and How?
Estate property may be abandoned if the property is burdensome to the estate or the property is of inconsequential value and benefit to the estate. 11 U.S.C. § 554. Typically, a trustee or debtor in possession will abandon property of the estate after a determination that the property does not yield any value to the estate or its administration will reduce the available assets of the estate. Usually, an abandonment determination is made in the following circumstances: (i) the debtor has no equity in the property because the creditors claim in the property exceeds the value of the property, (ii) the cost to maintain the property during the case is too costly, (iii) there are tax consequences to the estate following any sale of the property, or (iv) the property is subject to environmental liabilities.

The trustee or debtor in possession may abandon any estate property after notice and a hearing. 11 U.S.C. § 554(a); Fed. R. Bankr. P. 6007. Additionally, in a Chapter 7 case, the trustee, after notice and a hearing, may seek abandonment of estate property where a lien creditor’s secured claim is greater than the value of the collateral. 11 U.S.C. § 725. By filing a motion, any party in interest may seek a court order requiring the trustee or debtor in possession to abandon property. 11 U.S.C. § 554(b); Fed. R. Bankr. P. 6007(b). In the event an objection is filed to the notice of abandonment or the motion requesting abandonment, the court will schedule a hearing. Regardless of who seeks abandonment, the party must prove that abandonment is appropriate because either the estate property is burdensome or it is of inconsequential value and benefit to the estate. Although the party seeking abandonment is required only to meet one of the grounds for abandonment, often both grounds are met and in making a determination for abandonment, “the court need not consider speculative factors….” Kaler v. Nelson (In re Nelson), 251 B.R. 857 at 860 (8th Cir. BAP 2000).

Can Estate Property Be Abandoned Without Seeking Abandonment?
Pursuant to 11 U.S.C. § 554(c), any scheduled estate property that has not been administered or dealt with by an order of the bankruptcy court is abandoned to the debtor at the time the bankruptcy case is closed. Sometimes, in an effort to avoid the time and expense of noticing the abandonment of nominal, nonexempt property of the estate, a trustee will wait for the technical abandonment of the property at the close of the case.

Any estate property that is not abandoned and that is not administered in the case remains property of the estate. 11 U.S.C. § 554(d). Additionally, any unscheduled assets that are not abandoned at the time of the closing of the case remain property of the estate.

What is the Effect of an Abandonment?
The entry of an order for abandonment or the completion of a technical abandonment removes the property from the estate and returns it to the debtor or any party with a possessory interest in the property. In re Franklin Signal Corp., 65 B.R. 268, 271 (Bankr. D. Minn. 1986). Upon abandonment, “ownership and control of the asset is reinstated with all rights and obligations as before filing a petition in bankruptcy.” Id. at 274. Although abandoned property is no longer estate property and not usually subject to the jurisdiction of the bankruptcy court, a creditor must still take steps under non-bankruptcy law to pursue its remedies. For example, once the trustee abandons the estate property in which a secured creditor holds a lien, the secured creditor can then pursue its remedies under state law, such as commencing a foreclosure by action or advertisement. Some practitioners erroneously believe that an order modifying or lifting the automatic stay under 11 U.S.C. § 362 releases the estate’s interest in the property as it does in an abandonment. In that instance, the estate still maintains an interest in the property for any amounts that exceed the creditor’s claim.

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