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Bankruptcy Court Rejects Chapter 7 Trustee's Efforts to Revoke Abandonment of Property

In re Reiman, Bankr. E.D. Mich., July 16, 2010 (Case No. 09-70776, Hon. Phillip J. Shefferly).

Because of the high volume of foreclosures in Michigan, some lenders are bidding less than fair market value at foreclosure sales, particularly on the east side of the state. This has created a conundrum for Chapter 7 trustees who close cases as "no asset" cases, only to discover after the foreclosure sale that they could have sold the property at market value, paid the redemption amount, and still had money remaining to distribute to unsecured creditors.

The trustee in In re Reiman faced this exact situation. The mortgage debt on the debtors' home exceeded the scheduled value, and so the trustee filed a no asset report soon after the first meeting of creditors. This resulted in an abandonment of the estate's interest in the debtors' property under § 554(c). Later, the trustee learned that the lender's bid at the foreclosure sale was far less than the property's fair market value – which meant that if the redemption amount were paid, there would be funds leftover. The trustee reopened the case and filed a motion to revoke the abandonment of the estate's interest in the home, arguing that he had no way of knowing that the lender would make such a low bid.

The bankruptcy court denied the trustee's motion. Although the court recognized that abandonment can be revoked under limited circumstances based on Fed. R. Civ. P. 60(b), the court held that such "atypical" facts were not present here. Rather, the court reasoned that this case "simply presents an instance where there may now be more value in a property interest that was previously property of the estate than the Trustee believed to be the case while the Trustee was administering the case." Opinion at 17. The court also emphasized the importance of finality, and it noted that the trustee did not face a change in the law or other unexpected turn of events that would warrant relief.

The court concluded that if a Chapter 7 trustee believes that there might be value in certain property in the future, then the trustee should ask the court under § 554(c) to order that the property not be abandoned despite the closing of the case. Chapter 7 trustees and their counsel may wish to consider making this request more frequently in light of the apparent trend of low bidding at foreclosure sales. 

Categories: Chapter 7, Eastern District of Michigan

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practice focuses on bankruptcy, municipal law, collections, and trial-level and appeals litigation. In the bankruptcy arena, she represents primarily Chapter 7 trustees. Laura has handled a wide range of trial and appellate matters for individual and business clients and has appeared before the U.S. Sixth Circuit Court of Appeals, the Michigan Court of Appeals, and the United States Bankruptcy Court for the Western District of Michigan, as well as Michigan circuit and district courts across the state.

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