Bankruptcy

ND Ga - Chapter 7 Trustee Could Neither Assign Tort Claim Nor "Conditionally Abandon" Valuable Cause Of Action

By Scott Riddle

In re Allen, Ch. 7 Case No. 01-82408-MHM, 2008 Bankr LEXIS 366 (Bankr. N.D. Ga. February 14, 2008).

Debtor’s pre-petition state law cause of action was property of the Chapter 7 Estate, with a value that likely exceeded the liabilities of the Estate. The Trustee sought to conditionally abandon the cause of action as follows:

Trustee proposes to abandon the Claim on the following conditions: Debtor will pay to the estate $ 10,000, non refundable; Debtor will be substituted as Plaintiff in the lawsuit…the proceeds of any recovery on the Claim will be disbursed 40% plus litigation expenses to' Debtor's attorney; $ 25,000 to Trustee; the remainder divided equally between Debtor and Trustee up to the amount of accrued administrative expenses and filed claims; Debtor offers to waive his discharge if Debtor's share of the recovery is more than the aggregate amount of unsecured debt for which no proof of claim is filed, thereby implying that such creditors may seek and obtain payment from Debtor.

The Court denied the motion. Section 544 allows abandonment only when the trustee or the court concludes that the asset is burdensome to the estate or of inconsequential value and benefit. No such finding was possible in the case.

Abandonment" is not defined in the Bankruptcy Code. Black's Law Dictionary defines "abandonment":

The relinquishing of a right or interest with the intention of never again claiming it.
BLACK'S LAW DICTIONARY, Seventh Edition, West Publishing Co. (1999). Abandonment is an absolute term. One cannot slightly abandon, partially abandon, or conditionally abandon an asset of the estate.

No case law has been found or cited by the parties to support a proposal to "conditionally abandon" an asset, i.e., abandon the asset while retaining an interest in its proceeds. Just as Trustee could not abandon the estate's interest in a tangible asset of the estate while retaining the right to share in the proceeds from a sale, Trustee cannot abandon the Claim while retaining the right to share in the proceeds of the recovery. …

Any proposed settlement of Claim would require approval by the bankruptcy court, which, recognizing Debtor's interest in maximizing the claim, would protect Debtor from any proposal that failed to sufficiently acknowledge Debtor's interests. Therefore, the only disposition of Trustee's Motion for Conditional Abandonment is denial and direction that Trustee be substituted as Plaintiff in the state court proceeding. In that proceeding, the Trustee may consult with Debtor as respects Debtor's interest in the outcome.

The Court also noted that a Motion to Sell the cause of action previously filed by the Trustee was inappropriate -

At the hearing on the Second Motion to Sell, the court concluded that it contravened Georgia law and could not be approved. In the case of United Technologies Corp. v. Gaines, 225 Ga. App. 191, 483 S.E. 2d 357 (1997), the Georgia court concluded that when, under the Bankruptcy Code, a Chapter 7 Trustee acquires a debtor's tort claim, the Trustee becomes the real party in interest and alone possesses the right to pursue the claim. Assignment by the Trustee of the claim to the debtor would violate O.C.G.A. §44-12-24, which prohibits the assignment of such tort claims. Another Georgia case concluded that although the assignment of such claim by the Trustee to a debtor violates O.C.G.A. §44-12-24, the Trustee's abandonment of the claim, even following payment by the debtor to the estate, does not violate O.C.G.A. §44-12-24. Denis v. Delta Air Lines, Inc., 248 Ga. App. 377, 546 S.E. 2d 805 (2001).

Full post as published by Georgia Bankruptcy Blog on May 03, 2008 (boomark / email).