7/29/2019 Practice Guide on Abandonment Motions

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JournalA M E R I C A N B A N K R U P T C Y I N S T I T U T E

The Essential Resource for Todays Busy Insolvency Professional

Contributing Editor:Patrick A. JacksonYoung Conaway Stargatt & Taylor LLPWilmington, Del.pjackson@ycst.com

Also Written by:Elizabeth L. Gunn

Durrette Bradshaw PLC; Richmond, Va.egunn@durrettebradshaw.com

Section 554 of the Bankruptcy Codepermits the abandonment of prop-erty of the estate that is burden-

some to the estate or that is of inconse-quential value to the estate, either onnotice by the trustee or debtor in posses-sion (DIP), or on motion by a party ininterest. Bankruptcy Rule 6007 providesparties in interest 14 days to object to anotice of abandonment led by the trust-ee pursuant to 554(a). In the absence of

an objection, the abandonment becomeseffective without further order of thebankruptcy court.1 If there is an objec-tion, the trustees decision to abandonwill ordinarily be evaluated under a def-erential business-judgment standard.2A motion to compel abandonment under 554(b), to the extent opposed, is a con-tested matter governed by BankruptcyRule 9014. Even if unopposed, abandon-ment pursuant to 554(b) likely wouldrequire a court order granting the motion.

Under 541 of theCode, all interestso f t h e d e b t o r i nproperty as of thecommencement ofthe bankruptcy casebecome property ofthe debtors bank-ruptcy estate. Theeffect of abandon-

ment under 554 is to divest the bank-ruptcy estate of its interest in the prop-erty, which then reverts to the debtor asif no bankruptcy had been filed.3 Theabandonment power, therefore, appearsto be a passive power, but is it possible touse abandonment afrmatively, to alterthe status quo?

Targeted Abandonmentto a Secured Creditor

The Code does not specify to whomproperty may be abandoned under 554.

The legislative history, however, statesthat property may be abandoned toany party with a possessory interest in[it].4 Several courts have reasoned thatproperty should be abandoned only toa holder of a possessory interest there-

in.5 Other courts have reserved rulingwhether possession is a necessary, ratherthan sufficient, condition for targetedabandonment. For example, inMillerv. Generale Bank Nederland NV (In re

Interpictures Inc.),6 the Second Circuitafrmed the denial of a creditors motion

to compel abandonment of a derivativeRICO cause of action belonging to thebankruptcy estate, based on the creditorslack of standing to pursue such actionThe Second Circuit declined to rulewhether property could be abandonedonly to the holder of a possessory inter-est therein, but concluded the lower court

had not abused its discretion in denyingthe creditors motion on that basis.7

It is unclear fromthe case law whethertargeted abandon-ment to a partynot in possessionwill, or should, passmuster under 554Assuming that sucha power exists, onepractical limitationupon it is that the

trustee or debtor in possession (DIP)as applicable, cannot rely on automatic

abandonment under 554(a) to alter thestatus quo ante. Where a trustee or DIPwishes to abandon property in its pos-session to a secured creditor, it will needto proceed by motion and seek an order

authorizing and/or effectuating the trans-fer of property to the secured creditor.Absent an objection by a party in inter-est, such a motion might be consideredroutine and granted without a hearingAt least one court, however, has revisit-ed a prior order conrming the abandon-ment of property (a cause of action) to asecured creditor, reversing its prior orderon reconsideration sua sponte and caus-ing the property to be abandoned solelyto the debtor.8

The Limits of Targeted Abandonmentto a Secured Creditor under 554

About the Authors

Patrick Jackson is an associate in theBankruptcy and Corporate RestructuringSection at Young Conaway Stargatt &Taylor LLP in Wilmington, Del. ElizabethGunn is an associate in the Bankruptcy

Department at Durrette Bradshaw PLCin Richmond, Va.

Practice & Procedure

Patrick A. Jackson

Elizabeth L. Gunn

1 In re Trim-X Inc.,695F.2d296,300(7thCir.1982).2 Therearecertainexceptions.Forexample,abandonmentofprop-

ertycontaminatedbyhazardouswaste,thoughperhapsunderstandable

fromabusiness-judgmentperspective,maynotbepermitted.See

generally Midlantic Natl Bank v. N.J. Dept. of Envtl Protection (In re

Quanta Resources),474U.S.494(1986).

3 In re Dewsnup,908F.2d588,590(10thCir.1990),affd,502U.S.

410(1992).4 S.Rep.No.95-989,at92(1978),reprinted in 1978U.S.C.C.A.N.

5787,5878.5 See, e.g., In re Pilz Compact Disc Inc. ,229B.R.630,642(Bankr.E.D.

Pa.1999); In re Popp,166B.R.697,700(Bankr.D.Neb.1993).6 Miller v. Generale Bank Nederland NV (In re Interpictures Inc.),217F.3d

74(2dCir.2000),cert. denied,532U.S.906(2001).7 Id.at76-77.8 In re Renaissance Stone Works LLC,373B.R.817(Bankr.E.D.Mich.2007

7/29/2019 Practice Guide on Abandonment Motions

2/344 Canal Center Plaza, Suite 400 Alexandria, VA 22314 (703) 739-0800 Fax (703) 739-1060 www.abiworld.org

Under what circumstances might atrustee or DIP seek to abandon to asecured creditor? Suppose the follow-ing: (1) the property is over-encumbered;(2) the carrying cost of the property (and/or the administrative hassle associatedwith it) is substantial; (3) the prospectof recouping these costs via a 506(c)surcharge is dubious (e.g., where thecollateral is illiquid or 506(c) rights

are waived as a condition to cash col-lateral usage); (4) the secured creditorhas no interest or incentive to obtain-ing stay relief with respect to the prop-erty; and (5) the trustee or DIP wants toensure some recovery on the propertyto minimize deficiency claims. Underthese circumstances, abandonment tothe secured creditor would rid the estateof an administrative burden and pos-sibly shift to the secured creditor theresponsibility and costs of maintain-ing and disposing of the collateral. Forinstance, with respect to secured creditrelationships governed by Article 9 ofthe Uniform Commercial Code (UCC),a secured party in possession (or cominginto possession) of collateral has a dutyof reasonable care in the custody andpreservation of the collateral.9

Abandonment in Satisfactionof Debt?

If it is possible to abandon collateralto a secured creditor as a cost-shiftingmechanism, is it possible to force thesecured creditor to acceptthe collat-

eral in full or partial satisfaction of itssecured claim? As a threshold matter, theanswer may depend upon whether thecollateral is personal property governedby Article 9, or real property governedby other state law. Under either scenario,however, the answer seems to be no.

Personal PropertyBecause abandonment causes a rever-

sion of property rights to their state priorto the commencement of the bankruptcycase, a secured creditors rights vis--vispersonal property in which it has a secu-

rity interest would be governed by Article9 of UCC, as enacted in the particular

jurisdiction at issue. Section 9-601(a)provides that, upon default by the debtor,a secured party has the rights provided inthe UCC as well as any rights providedin its security agreement with the debtor(subject to certain limitations set forth inUCC 9-602). Rights afforded a securedparty by the UCC include, among otherthings, the rights to:

reduce its claim to judgment andenforce such judgment against col-lateral or non-collateral property ofthe debtor via ordinary judicial pro-cedure (UCC 9-601(a)(1)); take possession of the collateral,with or without resort to judicial pro-cess (UCC 9-609); sell, lease, license or otherwise dis-pose of the collateral using any com-

mercially reasonable means (UCC 9-610); and accept the collateral in full or par-tial satisfaction of the underlyingindebtedness (or strict foreclosure)(UCC 9-620).A critical feature of secured parties

default rights under the UCC is that theyare cumulative rather than elective,10 and

permissive rather than compulsory.11Thus, while the UCC imposes certainduties on secured parties when exercisingparticular remedies (e.g., under 9-610,to conduct any disposition of collateralin a commercially reasonable manner),there is no general duty under the UCCto exercise one remedy over another, orto exercise any remedy at all.

Notably, the UCC specifically pre-cludes a debtor from putting collateralto a secured party in full or partial sat-isfaction of the underlying debt unlessthe secured party consents to the accep-tance [of the collateral] in an authenti-cated record or sends a proposal to thedebtor regarding the same.12 The com-mentary to the UCC explains that this

limitation was put in place [t]o ensurethat the debtor cannot unilaterally causean acceptance of collateral and to pre-vent the secured partys mere delay incollection or disposition of the collat-eral from being treated as a construc-tive strict foreclosure.13

In light of the foregoing, it appearsthat abandonment to a secured partyunder 554 could not effectuate a sat-isfaction of the secured indebtedness.However, as noted, abandonment to asecured party may still benet the estate

by shifting to the secured party the costand responsibility of maintaining anddisposing of the collateral.

Real PropertyWhile the effect of abandonment

of personal property to a secured partyis governed by Article 9, abandonmentof real property turns on other law and

governing security documents (e.g.mortgage or deed of trust). In limitedcases where the controlling documentsand state law provide the secured credi-tor the right to obtain a superior posses-sory interest in the real property upondefault by the debtor, abandonment toa secured creditor under 554 may bepossible where that creditor has obtainedrelief from the automatic stay but not yet

foreclosed upon the property.14

Howeversuch abandonment may not be treated asa full satisfaction of the debt, absent anagreement by the secured creditor.15 Theability to abandon property unilaterallyin full satisfaction of a debt (dirt fordebt) can only be accomplished througha chapter 11 plan if the abandoned prop-erty is the indubitable equivalent of thesecured claim.16

The ability to abandon real propertyto a secured creditor under 554 thenseems to necessarily hinge on wheth-er the creditor has already obtainedrelief from the automatic stay of 362.Abandonment constitutes the elimina-tion of the bankruptcy estates interestin the property; conversely, relief fromautomatic stay entitles a creditor toexercise its rights in property, but doesnot eliminate the estates interest in theproperty. If the creditor has not obtainedrelief from the stay, its ability to exerciseany interest in the property is necessarilyprohibited by 362.

Taxes are one major factor in trust-ees and DIPs seeking to abandon prop-

erty in favor of a third party because theabandonment of property, as opposed toa 363 sale, is generally held to not bea sale or exchange resulting in a taxliability to the estate.17 When consider-ing the value of real property (even intodays market), having the ability toavoid taxes on the sale of the propertycould be a major benefit to the estateIf a secured creditor has obtained relieffrom the automatic stay and is willing toaccept its collateral in satisfaction of itsdebt, then abandonment may provide an

avenue for the elimination of an estateliability without the creation of a taxableevent to the estate. This use of aban-donment is only possible when there isa cooperative secured creditor. Absentcooperation, there does not appear to beany ability, outside a chapter 11 plan, to

9 UCC9-207(a).

10 UCC9-601(c).11JamesJ.WhiteandRobertS.Summers,UniformCommercialCode

25-4(5thed.2000)(notingthatsecuredcreditorcanignoreitssecu-

rityinterestandproceedbyexecutionandlevyundernon-UCClaw).12 UCC9-620(b)(1).13 UCC9-620cmt.5.

14 See In re A.J. Lane & Co. Inc.,133B.R.264,269(Bankr.D.Mass.1991).15 See id. at270(ndingabandonmentofreal propertytomortgage

dischargedsecuredportionofdebt).16 See In re Sandy Ridge Dev. Corp.,881F.2d1346(5thCir.1989).17 See, e.g., Samore v. Olson (In re Olson),100B.R.458,462-63(Bankr

N.D.Iowa1989),affd,121B.R.346,348(N.D.Iowa1990),affd,930

F.2d6,8(8thCir.1991);In re McGowan,95B.R.104,108(Bankr.N.D

Iowa1988).But see A.J. Lane & Co. Inc. ,133B.R.at270-71(nding

abandonmenttoconstitutetaxablesale).

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abandon property unilaterally in satisfac-tion of a debt.

ConclusionThough generally a passive power,

abandonment under 554 may, in somecircumstances, be used affirmatively(if unconventionally) to foist the bur-den of preserving and maintaining per-sonal property upon a secured party orto effectuate a tax-free disposition ofreal property in a friendly foreclosure.However, there does not appear to be anybasis in the Bankruptcy Code or appli-cable law to put collateral to a securedcreditor in satisfaction of its debt outsidethe context of a chapter 11 plan. n

Reprinted with permission from the ABIJournal, Vol. XXIX, No. 9, November 2010.

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