Bankruptcy

11th Cir: Trustee's Abdndonment Of Cause Of Action Already Ruled Upon By Bankruptcy Court Did Not "Re-Vest" Plaintiffs With Ability To Re-Litigate Claims

By Scott Riddle

By:Scott B. Riddle, Esq.

Matthews, Wilson & Matthews, Inc. v. Capital City Bank, 2008 WL 901919, 07-15615 (April 4, 2008).

MWM [Debtor] had trouble making loan payments, and ultimately filed for Chapter 7 bankruptcy. The bankruptcy trustee sought approval from the bankruptcy court to sell the Conyers property [owned by Debtor] and use the sale proceeds to satisfy the [Capital City Bank's] lien. On behalf of MWM, Watkins filed an objection to the sale in which she argued that the bank had engaged in fraud, misappropriated funds and failed to give an accounting. The factual allegations in Watkins’s bankruptcy objection are also included in plaintiffs’ claims in this case. After a hearing, the bankruptcy court overruled Watkins’s objection and approved the sale of the Conyers property and the use of  the sale proceeds to apply to the bank’s lien. Thus, the bankruptcy court  effectively decided plaintiffs’ claims adversely to the plaintiffs.

Debtor then amended its schedules to include a cause of action against the Bank, based upon the same allegations made in the objection to the sale. The Trustee abandoned the claims under §544 and the plaintiffs filed suit in District Court.  The District Court granted summary judgment in favor of the Bank based on res judicata and the prior decision of the Bankruptcy Court.  Plaintiffs appealed, essentially arguing that the abandonment essentially gives them a "do over," as if the Bankruptcy Court never ruled on the allegations.

Plaintiffs contend that “the abandoned tort action would be treated as if it were never a part of the estate, leaving the bankruptcy court without jurisdiction to issue orders which have a preclusive effect.” Thus, according to plaintiffs, the bankruptcy trustee’s formal
abandonment of their state law claims retroactively divested the bankruptcy court
of jurisdiction over those claims and restored the claims to them in their prepetition
status.

The Eleventh Circuit disagreed (after the jump) -

This argument is foreclosed by In re Martin, 490 F.3d 1272 (11th Cir. 2007).  In In re Martin, the appellant argued that a bankruptcy trustee’s abandonment of an interest in a state court action “divested the bankruptcy court of jurisdiction and restored his ability [to] proceed in that litigation.” 490 F.3d at 1276. This Court concluded that a bankruptcy trustee’s “abandonment [is] a ministerial act pursuant to the Bankruptcy Code which divested the Trustee, and [the debtor’s] estate, of any remaining interest . . . . and does not re-vest [the debtor] with the ability to relitigate” issues already decided. Id. ...

As in Martin, the bankruptcy trustee’s abandonment of plaintiffs’ claims was a ministerial act performed only after the claims had already been rejected by the bankruptcy court and were of inconsequential value. Under Martin, what reverted back to MWM after the trustee’s abandonment was “any remaining interest” in the claims after the bankruptcy court had approved the Conyers property sale. The trustee’s abandonment did not “re-vest” the plaintiffs with the ability to relitigatet he claims overruled by the bankruptcy court.

Full post as published by Georgia Bankruptcy Blog on April 14, 2008 (boomark / email).