04 Feb California Lawyers’ Association – Cases of Interest
South Bay Law Firm is proud to profile select “Cases of Interest,” prepared by members and colleagues of the Califoria Lawyers Association Business Law Section’s Insolvency Law Committee, and posted here by kind permission of the California Lawyers Association:
In an unpublished memorandum decision, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit in In re Miller, BAP No. CC 18-1267-SFL, filed March 11, 2019, reversed the bankruptcy court’s award of Rule 9011 sanctions in the amount of $50,875 because the claimant lacked standing to seek a recovery of his attorney’s fees. A copy of the decision is available here.
After more than ten years of litigation between two parties, including several bankruptcy filings by each of them, creditor Edward Gilliam obtained a dismissal of Minon Miller’s sixth bankruptcy petition on the grounds of bad faith. Gilliam then sought recovery of his attorney’s fees under Section 105 and Federal Rule of Bankruptcy Procedure 9011. The bankruptcy court agreed that Miller’s latest bankruptcy petition violated Rule 9011 because Miller filed it in bad faith and for an improper purpose — to impede Gilliam’s collection efforts — and awarded fees in the amount of $50,875.
The BAP reversed on the grounds that Gilliam lacked standing to file the claim for fees because the claim became property of Gilliam’s bankruptcy estate after he filed for bankruptcy. Gilliam had filed a chapter 7 bankruptcy case in 2017, in which he had received a discharge, but he had not listed his claim for fees in his schedules. Thus, the fee claim had not been administered by the chapter 7 trustee and remained property of the bankruptcy estate. Accordingly, only Gilliam’s chapter 7 trustee had the right to prosecute the Rule 9011 sanctions motion to recover the fees. The bankruptcy court’s sanctions order was reversed.
The BAP first held that standing is a jurisdictional issue, to be reviewed by the appellate court de novo.
Because all of Gilliam’s attorney’s fees were incurred prior to filing his 2017 bankruptcy case, his claim for fees constituted a pre-petition asset that became property of the bankruptcy estate upon filing his bankruptcy petition. Generally, a debtor’s scheduled assets are deemed abandoned to the debtor upon the closing of the chapter 7 bankruptcy case if not otherwise administered by the chapter 7 trustee. See 11 U.S.C. § 554(c); Diamond Z Trailer, Inc. v. JZ L.L.C. (In re JZ L.L.C.), 371 B.R. 412, 418 (9th Cir. BAP 2007). However, when estate property is not scheduled and not administered by the chapter 7 trustee, it is not deemed abandoned. Rather, the omitted property remains property of the estate even after the bankruptcy case is closed. See 11 U.S.C. § 554(d); JZ L.L.C., 371 B.R. at 418.
In this case, the BAP held that Gilliam’s claim against Miller for fees remained property of his bankruptcy estate even after the case was closed because Gilliam failed to list the claim in his bankruptcy schedules. And, Gilliam’s mere mentioning of Miller’s bankruptcy filing as an impediment to his collection actions in his schedules did not constitute proper or adequate scheduling of the fee claim. See Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001). The BAP finally noted that there was nothing in the record to support the bankruptcy court’s conclusion that Gilliam’s lack of standing was irrelevant, as it would be Gilliam’s attorney who would ultimately receive the attorney’s fees. Only Gilliam, and not his attorney, ever had standing to recover attorney’s fees from Miller. Thus, Gilliam’s bankruptcy, and the failure to disclose his attorney’s fee claim, divested him of standing to pursue that claim.
This case is a reminder that absent a full and adequate disclosure of all litigation claims and causes of action that exist as of the petition date, a debtor will be precluded from pursuing those claims after the case is closed. This rule prohibits a lack of candor that interferes with the proper functioning and integrity of the bankruptcy system.
Addressing this issue as a question of proper standing seems to be an analytically preferable alternative approach to ruling that the debtor was judicially estopped from asserting a contrary position to that previously asserted; that is, asserting a litigation claim that the debtor had omitted, under oath, in the previous bankruptcy proceeding. See Hamilton v. State Farm Fire and Cas. Co., 270 F.3d 778 (9th Cir. 2001); Elston v. Westport Ins. Co., 253 Fed. Appx 697, 699 (9th Cir. 2007).
These materials were prepared by ILC member Gregory M. Salvato of Salvato Law Offices in Los Angeles (gsalvato@salvatolawoffices.