Bowie v. Rose Shanis Financial Services, LLC

CHARLES E. MOYLAN, Jr., Judge, retired, specially assigned. This appeal raises the question of what happens to the ownership of a law suit that once vests in the trustee of a bankruptcy estate after the estate subsequently closes with the law suit yet unpursued. Is ownership in limbo? How, if at all, may a trustee, through inaction, abandon such an asset, thus permitting it to revest in the original debtor?

Is there a difference between the fate of a law suit that has been formally scheduled as an asset of the estate and the fate of one that has not? ²³¹ The Present Case On March 25, 2003, the appellant, L.A. Bowie (“Bowie”), filed a five-count complaint against the appellee, Rose Shanis Financial Services, LLC (“Rose Shanis”), in the Circuit Court for Baltimore City. On December 2, 2003, Rose Shanis filed a Motion to Dismiss or, in the Alternative, a Motion for Summary Judgment. The second paragraph of that motion well states the dominant issue before us on this appeal. 2. Approximately one year after the alleged events giving rise to this lawsuit occurred, Plaintiff filed for bankruptcy protection on December 21, 2001.

As a result, the claims alleged against Rose Shanis da not belong to Plaintiff, but rather to his bankruptcy estate. Because the alleged claims were neither exempted from the estate nor abandoned by the bankruptcy trustee, Plaintiff is without standing to bring or pursue this action. Accordingly, Rose Shanis is entitled, to the dismissal of the Complaint for lack of subject matter jurisdiction. (Emphasis supplied).

Following a full hearing, including extensive argument by both parties, on January 12, 2004, Judge Kaye Allison granted summary judgment in favor of Rose Shanis on the ground that there was a “lack of subject-matter jurisdiction.” This appeal timely followed. In it, Bowie raises two issues. 1. Are the claims of Appellant property of his Bankruptcy Estate and does he have standing to file this action? 2. If the claims of Appellant are property of his Bankruptcy Estate, what procedure should be followed under the circumstances herein?

The Chronology The question of whether the Circuit Court for Baltimore City had subject matter jurisdiction over the underlying suit was essentially the question of whether the plaintiff, Bowie, had standing to bring the suit, to wit, 1) Did the cause of action belong to Bowie when he filed the suit on March 25, 2003? or, more significantly, 2) Did the cause of action belong ²³² to Bowie when Judge Allison granted summary judgment motion on January 12, 2004? The chronology of events is critically important. A. The Basis for the Underlying Suit: November 3, 2000 On June 12, 2000, Bowie obtained a loan of $30,024.88 from Rose Shanis. The loan was secured by two vehicles owned by Bowie, a 1998 Ford Expedition and a 2000 Ford Excursion.

When Bowie failed to make his August and September 2000 payments on the loan, Rose Shanis exercised its contractual right under the terms of the loan agreement and repossessed the two vehicles. Rose Shanis advised Bowie of its intent to sell both vehicles. On October 31, 2000, the 2000 Ford Excursion was sold at public auction. Rose Shanis did not sell the 1998 Ford Expedition.

It relinquished possession of that vehicle to Arcadia Financial, Ltd., upon learning that Arcadia was the senior lienholder. Shortly thereafter, Arcadia caused the 1998 Ford Expedition to be sold. Bowie filed its five-count complaint against Rose Shanis on March 25, 2003. The complaint alleged 1) fraud, 2) negligence, 3) breach of contract, 4) conversion, and 5) interference with a contract.

Our concern is not with the merits of that suit, but only with the dates of its underlying events. Every event alleged in the five-count complaint occurred between June 12, 2000, and November 3, 2000. B. The Bankruptcy: December 2001-April 2002 On December 21, 2001, a little more than a year after the last of the events that ultimately gave rise to the cause of action in this case, Bowie filed a Voluntary Petition for Chapter 7 Bankruptcy. Along with the bankruptcy petition, Bowie filed a Statement of Financial Affairs and Schedules of Assets and Liabilities.

Bowie did not list as an asset or otherwise identify any alleged cause of action against Rose Shanis. Bowie never thereafter amended any of his bankruptcy statements or schedules to include his potential claim against Rose Shanis. ²³³ In an affidavit filed by Bowie on December 18, 2003, moreover, Bowie acknowledged 1) that, at the time of filing for bankruptcy, he was fully aware of his potential claim against Rose Shanis; 2) that he discussed with his lawyer the pros and cons of listing the claim in his bankruptcy schedules and exemptions; and 3) that he refrained from listing the claim with “the intention that all matters relating to Rose Shanis Financial, LLC, claims would be dealt with outside of the Bankruptcy” and not by the bankruptcy trustee. Implicit in that decision was that any possible recovery on the claim would accrue to the benefit of Bowie personally and not to the benefit of the creditors of the bankrupt estate. I discussed, the possible claim against Rose Shanis Financial, LLC, the Defendant in this case with my Bankruptcy Attorney David L. Ruben, Esquire.

I was advised that it would not be necessary to list the possible claims against Rose Shanis Financial, LLC, in my Bankruptcy Schedules or exemptions. Also, it was determined that we would not list any possible claim by Rose Shanis Financial, LLC, against me for the remaining balance of the Loan which is the subject matter of the pending litigation. This was done with the intention that all matters relating to Rose Shanis Financial, LLC, claims would, be dealt with outside of the Bankruptcy. (Emphasis supplied).

The trustee in bankruptcy reported to the Bankruptcy Court that I have neither received nor paid any money on account of this estate except exempt property; that I have made a diligent inquiry into the financial affairs of the Debtor(s) and the location of the property belonging to the estate; and that there is no property available for distribution from the estate over and above that exempted by law, and the Debtor’s 341 meeting has been held and concluded. (Emphasis supplied). The bankruptcy proceeding was closed on April 23, 2002, and Bowie was discharged from bankruptcy, ²³⁴ without there having been any distribution of assets to creditors whatsoever. C. The Present Claim: March 2003 The present claim was filed on March 25, 2003.

On December 2, 2003, six weeks before the hearing before Judge Alison on the motion for summary judgment, Rose Shanis filed its Motion for Summary Judgment. In the accompanying 13-page memorandum of law in support of that motion, Rose Shanis raised and argued in full detail, citing extensive case law and statutes, the fact that the cause of action no longer belonged to Bowie but to the bankrupt estate. That memorandum pointed out that Bowie had neither scheduled the potential claim as an asset nor attempted to have it exempted from the bankruptcy estate. The conclusion alleged in that Memorandum of Law could not have been more clear.

Because Plaintiff lacks standing to sue Rose Shanis as a result of his filing for bankruptcy, this Court does not have subject matter jurisdiction over this case. Accordingly, Rose Shanis is entitled to the dismissal of the Complaint with prejudice. (Emphasis supplied). Notwithstanding that “red alert,” Bowie, in the intervening two months before the granting of summary judgment, did nothing by way of seeking to amend his complaint or by way of making any reference to the bankrupt estate or to the former bankruptcy trustee as a possibly interested party.

It was during that period at the very latest, if not indeed as much as five months before the beginning of that period, that any three-year limitations period for the filing of the claim would have run. Indeed, it may already have been too late for Bowie to have taken any curative action and he is in no position to fault Judge Alison in this regard. Any possible limitations problem for a bankruptcy trustee was a fait accompli well before Judge Alison was called upon to make any sort of a ruling in this case. If a potential refiling of this claim by anyone represented a possible alternative remedy in this case, it was Bowie who allowed its viability ²³⁵ to lapse at some time before November 3, 2003.

Our concern, therefore, is with the legal entitlement of Bowie in his own right and not with the entitlement of a possibly resurrected bankruptcy estate. The Ownership of the Cause of Action During the Pendency of the Bankruptcy Bowie does not seriously dispute the fact that, with his filing for bankruptcy, the owner of this suit became the bankruptcy estate and was no longer Bowie himself. 11 United States Code, § 541 (a)(1) provides: (a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case. (Emphasis supplied).

In Pacific Mortgage and Investment Group, Ltd. v. Horn, 100 Md.App. 311, 319 , 641 A.2d 913 (1994), Judge Cathell held squarely: While the bankruptcy was open, the estate was the owner of the suit. 11 U.S.C. § 541 (a)(1) provides that, an “estate is comprised of ... all legal or equitable interests of the debtor in property....” The bankruptcy trustee is the proper party to bring an action for injury to a person’s property while a bankruptcy case is open; the debtor does not have standing to bring a claim. (Emphasis supplied). The definition of “legal and equitable property interests,” in turn, indisputably establishes that all causes of action belonging to a debtor at the time the bankruptcy petition is filed are included in that term. See Mitchell Excavators, Inc. v. Mitchell, 734 F.2d 129, 131 (2d Cir.1984) (“estate” under § 541 “ ‘includes all kinds of property, including ... causes of action’ ”); see also Matter of Yonikus, 996 F.2d 866, 869 (7th ²³⁶ Cir.1993) (Section 541 has been construed “most generously” to include “every conceivable interest of the debtor, future, nonpossessory, contingent, speculative and derivative”); In re Ozark Equip.

Co., Inc., 816 F.2d 1222 , 1225 (8th Cir.1987) (“causes of action belonging to the debtor at the commencement of the case are included within the property of the estate”); Tignor v. Parkinson, 729 F.2d 977, 980 (4th Cir. 1984) (interpreting the scope of § 541 as “broad. It includes all kinds of property, including tangible or intangible property, causes of action.... ”). Upon the appointment of a trustee in bankruptcy, the trustee succeeds to all causes of action formerly held by the debtor and the debtor lacks standing to pursue those causes of action. 11 U.S.C. § 323 (a) (providing that a trustee in a Chapter 7 bankruptcy action is the sole representative of the estate); Detrick v. Panalpina Inc., 108 F.3d 529, 535 (4th Cir.1997); National American Ins. Co. v. Ruppert Landscaping Co., Inc., 187 F.3d 439, 441 (4th Cir.1999) (“If a cause of action is part of the estate of the bankrupt then the trustee alone has standing to bring that claim.”); Stanley v. Sherwin-Williams Co., 156 B.R. 25, 26 (W.D.Va.1993) (preventing Chapter 7 debtor from litigating a cause of action which belonged to the estate on the grounds that the debtor “lacks standing because the cause of action is [no longer] his to assert”). , Krank v. Utica Mutual Insurance Co., 109 B.R. 668, 669 (E.D.Pa.1990), is very clear that the ownership of a cause of action is in the bankruptcy estate and remains in the estate unless and until the cause of action is legally abandoned by the bankruptcy trustee, even after the debtor has been discharged from bankruptcy and the bankruptcy estate has been closed.

Upon the filing of a petition for bankruptcy, the estate is comprised of all property of the debtor including all legal and equitable interests of the debtor, unless the property is specifically excluded. 11 U.S.C. § 541 . The scope of § 511 is quite broad and it includes most claims the debtor may have against others. ²³⁷ Once a cause of action becomes the property of the estate, the debtor may not bring suit on that action unless the property has been abandoned by the trustee. (Emphasis supplied). It is beyond dispute 1) that Bowie’s claim against Rose Shanis, whatever its merits, had accrued as of the time Bowie filed for bankruptcy; and 2) that the ownership of the claim, therefore, passed to the trustee in bankruptcy as of that time.

The pertinent question then becomes: “How, if at all, the ownership of that claim and the consequential right or standing to bring this suit might ever revert to Bowie?” How May a Bankruptcy Estate Abandon Ownership of a Claim? In Pacific Mortgage v. Horn, 100 Md.App. at 319-20 , 641 A.2d 913 , Judge Cathell quoted from the Bankruptcy Code as it listed the exclusive three ways in which the property of a bankruptcy estate may be abandoned. Appellae contends, however, that the bankruptcy trustee abandoned this suit when the bankruptcy case closed, subsequent to the filing of this suit. 11 U.S.C. § 554 , “Abandonment of property of the estate,” provides in part: (a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. (b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estafe.

(c) Unless the court, orders otharwi.se, any property scheduled, under section 521(a)(1) of this title not otherwise administered, at the time of the closing of a case is abandoned to the debtor .... “Abandonment, requires either a court order after a notice and a hearing or a failure to administer scheduled assets ²³⁸ and a closing of the case.” Behrens v. Woodhaven Ass’n, 87 B.R. 971 , 973 n. 1 (Bankr.N.D.Ill.1988). (Emphasis supplied). Unless these formalities are satisfied, the property of the estate is not abandoned. It remains the property of the estate and there are no exceptions to this rule.

Section 554(d) continues: (d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate. In this case, the first two modalities of abandonment are not remotely involved. It is the third modality, pursuant to subsection (c), that Bowie invokes, as he argues that' the failure of the bankruptcy trustee to pursue a potential claim, of which the trustee was arguably aware, coupled with the subsequent closing of the bankruptcy estate constituted an abandonment of the potential claim back to him. Scheduled Assets Versus Unscheduled Assets The flaw in Bowie’s reasoning is his failure to acknowledge the diametrically different treatments accorded scheduled assets and unscheduled assets. 11 U.S.C. § 554 (c) expressly addresses “any property scheduled under section 521(a)(1) of this title.” (Emphasis supplied).

It does not address unscheduled property. Pacific Mortgage v. Horn, 100 Md.App. at 320 , 641 A.2d 913 , in turn speaks only to “a failure to administer scheduled assets” as a modality of abandonment. (Emphasis supplied). The obligation is on the debtor to list all assets. 11 U.S.C. § 521 (1) is an absolute, as it directs: The debtor shall— (1) file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor’s financial affairs.

(Emphasis supplied). The requirement that a debtor, seeking the protection of the bankruptcy law, schedule a full list of all assets and ²³⁹ property rights is no mere trivial formality with which he may claim substantial compliance. Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 416-17 (3rd Cir.1988), well articulates the paramount importance of a rigorous scheduling requirement. A long-standing tenet of bankruptcy law requires one seeking benefits under its terms to satisfy a companion duty to schedule, for the benefit of creditors, all his interests and property rights.

In Re Hannan, 127 F.2d 894 (7th Cir. 1942). Section 521 of the current Bankruptcy Code outlines a non-exhaustive list of the debtor’s duties in a bankruptcy case. Foremost for our purposes, the debtor is required to “file a, ... schedule of assets and liabilities ... and a statement of the debtor’s financial affairs....” 11 U.S.C. § 521 (1) (1978). (Emphasis supplied).

Bowie’s statement in his affidavit 1) that he discussed with his lawyer whether to schedule the claim, 2) that he followed his lawyer’s advice that it would not be necessary to do so, and 3) that the deliberate omission “was done with the intention that all matters relating to Rose Shanis Financial, LLC, claims would be dealt with outside of the Bankruptcy,” far from excusing Bowie’s failure to comply with § 521(a), accentuates the deliberate nature of the omission. The consequences of that omission control the outcome of this appeal. Pacific Mortgage v. Horn, supra, illustrates the stark difference in consequences of a bankruptcy trustee’s 1) failure to administer a scheduled cause of action and 2) his failure to administer an unscheduled cause of action. The first will, pursuant to § 554(c), result in an abandonment of that asset by operation of law; the second will never do so.

In Pacific Mortgage , a potential law suit, temporarily in control of a trustee in bankruptcy, was held by this Court to have been abandoned by the trustee, through inaction, and to have revested in the debtor after his discharge from bankruptcy. Absolutely critical to our decision, however, was the fact that the cause of action had been “properly scheduled.” ²⁴⁰ Upon review of appellee’s description and listing of this case in her bankruptcy schedule, we find that it was properly scheduled. Indeed, appellants do not argue to the contrary. When property is “scheduled as an asset of the estate for the benefit of creditors,” the trustee, creditors and representatives of the estate [are] put on notice of its existence and the fact it [is] a claim in favor of the estate. “[W]here the trustee has knowledge that is sufficient to put him upon diligent inquiry as to the subject asset, the abandonment is held to have been knowingly made and hence is irrevocable.” Starrett v. Starrett, 225 N.J.Super. 150 , 541 A.2d 1119, 1123 (A.D.1988). 100 Md.App. at 320 , 641 A.2d 913 (emphasis supplied).

Of secondary significance in Pacific Mortgage was the fact that “appellee paid her creditors in full” and that no purpose, therefore, would have been served by preventing the revesting of ownership of the law suit in the former debtor. Also, it is of no small significance that appellee paid her creditors in full. The trustee has a duty to protect the creditors. Since the creditors were paid in full, there would be no purpose for the trustee to assert and maintain control over this suit.

We thus hold that the bankruptcy trustee did abandon this suit when the bankruptcy was closed. 100 Md.App. at 320-21 , 641 A.2d 913 (emphasis supplied). In this case, by dramatic contrast, Bowie’s creditors received nothing. There may not, on the other hand, be an abandonment of a cause of action by a bankruptcy trustee in a case where the debtor failed to list the cause of action as an asset. In Adams v. Manown, 328 Md. 463, 479 , 615 A.2d 611 (1992), Judge Rodowsky quoted with approval from Krank v. Utica Mutual Ins.

Co., 109 B.R. 668 (E.D.Pa.), affd without opinion, 908 F.2d 962 (3d Cir.1990). “If a trustee chooses to abandon a claim or is ordered to do so, the debtor may assert title to the cause of action and bring suit upon it. If however, the debtor fails to list a ²⁴¹ claim as an asset, the trustee cannot abandon the claim because he or she will have had no opportunity to determine whether it will benefit the estate. In such circumstances, the debtor may not claim abandonment and seek to enforce the claim after discharge^]” (Emphasis supplied). The Allocation of the Burden of Proof As to Abandonment of an Asset It is clear, moreover, that when a debtor, following his discharge from bankruptcy, claims that because the bankruptcy trustee failed to pursue a cause of action he thereby abandoned it, the burden of proving such an abandonment is allocated to the debtor.

Stein v. United Artists Corp., 691 F.2d 885, 890-91 (9th Cir.1982), was unequivocal in this regard: Unless property is abandoned or intentionally revested, title generally remains in the trustee. Abandonment requires affirmative action or some other evidence of intent by the trustee. A bankrupt alleging abandonment has the burden of proving at least the trustee’s intention to abandon the asset. (Emphasis supplied).

See also United States v. Ivers, 512 F.2d 121, 124 (8th Cir.1975); Gochenour v. Cleveland Terminals Bldg. Co., 118 F.2d 89, 94 (6th Cir.1941). In Stein v. United Artists the Ninth Circuit also pointed out, that, with respect to an unscheduled cause of action, it is virtually impossible for a debtor to satisfy that burden of proving abandonment. Courts generally have not permitted parties asserting title to unlisted causes of action to enforce the claim, because they cannot demonstrate abandonment by the trustee. 691 F.2d at 891 (emphasis supplied).

Talking to a Trustee in Bankruptcy Is Not Tantamount to Scheduling an Asset Bowie freely acknowledges, as he must, that his petition for bankruptcy never scheduled as an asset of his estate his ²⁴² potential suit against Rose Shanis. In a dazzling display of fancy footwork, however, he nonetheless maintains that the bankruptcy trustee, albeit once in lawful possession of such a potential claim, abandoned the claim by operation of law. Bowie’s verbal alchemy transmutes an unscheduled asset into something that bears every characteristic of a scheduled asset, as he asserts in his brief: A. The Trustee abandoned alleged asset. The potential claims against Rose Shanis LLC were not listed in the Petition for Bankruptcy.

However Appellant and his attorney David L. Ruben, Esquire appeared at the First meeting of Creditors with David E. Rice, the Trustee appointed in the Bankruptcy Case. The Appellant was asked if he had any pending legal actions and he truthfully stated that he did not at that time. When he was asked about oumership of Motor Vehicles, he explained the situation that is outlined in the Complaint. The Trustee after being informed of the possible claim against Rose Shanis did not request further information or an Amendment of any of the schedules.

The Trustee took no action to pursue any possible claims or to allege that the Bankruptcy Estate owned the claims at any time. (Emphasis supplied). Once having hopefully turned the base metal of an unscheduled asset into the pure gold of a scheduled asset, Bowie glibly invokes the automatic abandonment provision of 11 U.S.C. § 554 (c): A Trustee may pursue a claim of the Bankruptcy Estate or he may abandon the claim. Under 11 U.S.C. [554] a Trustee may abandon a claim of operation of law if it has not been administered by the time the Bankruptcy Case is closed.

It is clear in this case although the Trustee was informed of the possibility of a claim against Rose Shanis he chose not to pursue the matter as part of his administration of the Bankruptcy Estate. (Emphasis supplied). Although it is not critical, or even material, to the legal resolution of this issue, we cannot help but note the flimsy, if ²⁴³ not indeed non-existent, nature of Bowie’s factual predicate in this regard. After conceding in his brief that when asked “if he had any pending legal actions, he truthfully stated that he did not at that time,” he relies on an affidavit to establish otherwise.

Referring to his first meeting with the bankruptcy trustee and his creditors, Bowie’s sole substantive statement in that affidavit is: As a result of questioning relating to Motor Vehicles, I stated to the Trustee the facts relating to my possible claim against Rose Shanis Financial, LLC. That unilluminating statement may mean nothing more than, “When asked if I had any automobiles, I said that my automobiles had been repossessed by the finance company.” Reading into that answer about the repossession of motor vehicles the existence or the details of a possible legal action against the finance company is an exercise in pure speculation. Our observation in this regard, however, is, in any event, unnecessary to the legal resolution of this issue. Even assuming, arguendo, that Bowie had advised the bankruptcy trustee in late 2001 or early 2002 of everything that was later alleged in his formal complaint against Rose Shanis of March 25, 2003, such a furnishing of information to the trustee would not, as a matter of law, transform an unscheduled asset into a scheduled asset or the legal equivalent of a scheduled asset.

Neither would it shift