Summary:
Mr. Jarrett held a one-half remainder interest in real property, with the other one-half remainder interest held by his sister and the life estate in favor of his mother. The tax value of the property is $118,500, with a $42,362 mortgage. Mr. Jarrett valued his fractional interest at $7,110 and exempted $4,568.28. The Court held that Chapter 7 Trustee could not sell an entire interest in the property free and clear of the interest of the life tenant. See In re Sargent, 337 B.R. 661 (Bankr. N.D. Ohio 2006) and the Trustee did not seek to sell the remainder interests jointly under 11 U.S.C. § 363(h). After unsuccessfully soliciting bids from, among others, both Mr. Jarrett's family and "those specializing in the purchase of illiquid or unusual assets", the Trustee argued that abandonment of the property would be an "unwarranted benefit" to Mr. Jarrett and wanted to hold the estate open indefinitely.
11 U.S.C. § 554(c) provides that "[u]nless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title." The court began by recognizing that excepting assets from abandonment causes administrative problems and conflicts with the policy in favor of finality of the administration of estates. Noting the dearth of case law on this issue, the bankruptcy court, building on the factors from In re Hart, 76 B.R. 774 (Bankr. C.D. Cal. 1987), held that an exception to abandonment may be justified when:
(1) there is "reasonable possibility" that "an asset valuable enough to pay substantial dividends to the creditors may be recovered in the future[;]"
(2) the event triggering the reopening of the case is clearly defined and will not require further action by the trustee;
(3) the triggering event is not likely to occur so soon that the case should just remain open or will occur within a reasonable period of time for reopening;
(4) the existence of a co-owner in the property at issue and the equities with respect to the rights of the co-owner;
(5) the possibility that it will be economically impractical to reopen the estate to administer the asset; and
(6) if the estate is not reopened, whether the retention of the asset in the estate could result in a perpetually unmarketable asset.
This requires a case-by-case basis and no factor in this analysis is dispositive. Applying the factors in the present case, the bankruptcy court held that based on the agreed tax value, the amount of the lien, and real estate commissions (but without any known additional costs of sale, which the court felt was "uncertain to the point of being overly optimistic" as the co-owner would almost certainly object to a § 363(h) sale), Mr. Jarrett's eventual 50% interest in the property could be up to $30,000 and pay a 71% dividend. The bankruptcy court, however, felt that this calculation was extremely tenuous and did not consider the time-value of money, which would decrease the present value of any dividend substantially. That the triggering event, viz. the death of Mr. Jarrett's mother, was certain, as in Hart, this case differed as there was no receiver appointed to monitor when that occurred. Further, the threat of an eventual sale by the Trustee, would be s severe disincentive to Mr. Jarrett, his sister and mother to maintain the property. And the death of the mother, by itself would be insufficient, as that would only trigger the Trustee's later review of whether administration of the asset at that time was economically feasible for the estate. That Mr. Jarrett's sister was the co-owner of the remainder interest, further weighed against exception from abandonment, particularly as someone will need to continue to pay the outstanding mortgage, with it being an inequitable result that the bankruptcy estate recover the increase in equity from such payments. Lastly, the court held that retention of the real property in the estate would leave no one to either monitor or administer Mr. Jarrett's interest, making both his interest and the entire fee interest unsalable. This limitation on the Mr. Jarrett's sister and mother, as well as the indefinite effect on the alienability of the real property would be unfair and violates public policy. Accordingly, this was not the "the rare case" where exception from abandonment was warranted.
Commentary:
It would appear that the initial valuation by Mr. Jarrett may have been based on In re Cain, 235 B.R. 812 (Bankr. M.D.N.C. 1998).
For a copy of the opinion, please see:
Jarrett- Exception from Abandonment of Assets on Conclusion of Case; Fractional Interest in Assets
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