Page 5 - Corporate Restructuring And Bankruptcy

NYLJ.COM | Corporate Restructuring and Bankruptcy | MONDAY, DECEMBER 5, 2016 | S5
Uncertainty Continues
Over Debtor’s Right to Abandon Property
BY LORENZO MARINUZZI
The U.S. Bankruptcy Code (the Code) affords debtors and trustees many powerful tools intended to promote the key goals of bankruptcy—providing a debtor with a “fresh start” and recovering value for creditors. One of the tools is the power of a debtor or a trustee to abandon property of the estate under §554(a) of the Code. This section provides that “[a]fter 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 bene t to the estate.” This sensible power to effec- tively walk away from burdensome property is analogous to the power to reject economi- cally burdensome contracts. It is completely appropriate and consistent with the goals of the Code.
But what happens, according to §554, after a trustee or Chapter 11 debtor in possession abandons property is unclear. We as practi- tioners are left with an undeveloped body of case authority that fails to answer the obvious question: now what? Whether one represents a municipality wondering who will be responsible for maintaining land that was abandoned by a debtor, or a secured creditor with a secured interest in abandoned real estate, practitioners are often left struggling with how to address the post-abandonment rights and obligations of their clients.
This confusion arises from a combination of factors. First, like many of the powers found in Chapters 3 and 5 of the Bankruptcy Code, they are equally available to debtors in Chap- ters 7 and 11. Like many of these special pro- visions, §554 does not distinguish between abandonment by a Chapter 7 trustee and a Chapter 11 debtor in possession. It does, however, say that “[u]nless the court orders otherwise, 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 and adminis- tered for purposes of section 350 of this title.” In the context of a Chapter 7 case, it would make sense that a trustee can abandon an asset to the debtor. A trustee is appointed in every case under Chapter 7 to administer the estate of a Chapter 7 debtor and acts distinct from the debtor. In most Chapter 11 cases, however, the debtor continues to operate its business and maintain control over its assets as a debtor in possession.
This blanket granting of trustee powers to a Chapter 11 debtor in possession raises anoth- er source of the confusion. Many important provisions of the Bankruptcy Code reference a “trustee” as the entity that has the authority
LORENZO MARINUZZI is global co-chair of the rm- wide business restructuring and insolvency group at Morrison & Foerster.
But what happens, according to §554, after a trustee or Chapter 11 debtor in possession abandons property is unclear. We as practitio- ners are left with an undeveloped body of case authority that fails to answer the obvious question: now what?
confusing where the debtor in possession is doing the abandoning. Blanket application of the concept of abandonment to “the debtor” by courts does not quite work in Chapter 11 cases as it does in the case of an individual Chapter 7 debtor. Indeed, even in business Chapter 7 bankruptcy cases, where the debtor ceases to exist, practitioners are left to won- der about the ownership of the abandoned asset.
Some courts deem abandonment by a Chapter 11 debtor as surrendering property to the party with a “possessory interest” in the property. See In re Jandous Elec. Con- str., 96 B.R. 462, 466 (Bankr. S.D.N.Y. 1989)). See also In re First Magnus Fin., No. 4:07-BK- 01578-JMM, 2008 WL 5101347, at *5 (Bankr. D. Ariz. Nov. 25, 2008) (confirming power to abandon personal property to secured creditor or lessor because “the legislative history and weight of authority holds that abandonment to a third party with a posses- sory interest is entirely proper,” vacated in part on other grounds, No. 4:07-bk-01578-JMM, 2009 WL 248020 (Bankr. D. Ariz. Jan. 30, 2009)).
But other courts in Chapter 7 cases have expressly rejected interpreting §554 in this manner or balked at directing abandonment to a third party. In re Pilz Com- » Page S11
to perform certain acts. For example, §547(b) sets forth the trustee’s ability to recover pref- erential payments to the debtor’s creditors made within 90 days of the commencement of the debtor’s bankruptcy case—“[e]xcept as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property ...” The same is true of §365(a) which reads, “the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” The Bank- ruptcy Code contains many provisions that authorize acts by the “trustee”.
The drafters of the Bankruptcy Code clear- ly did not intend to make these broad trustee powers only available in a Chapter 7 case or in the rare instances where a trustee has been appointed in a Chapter 11 case under §1104.
Instead, the powers of a trustee are vested in the debtor in possession by virtue of §1107(a), which provides that “a debtor in possession shall have all the rights ... and powers, and shall perform all the functions and duties, except the duties speci ed in §1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.”
In most instances, vesting a Chapter 11 debtor in possession with the powers of a trustee works seamlessly. Abandonment, unfortunately, is a rare exception. That is principally because §554(a) references both a “trustee” and the “debtor”. It is the trustee—as the administrator of the debtor’s estate– that can determine that an asset is of little use to the estate and abandon the asset “to the debtor ...”
But abandoning property “to the debtor” is
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