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The Limits of Targeted Abandonment “to” a Secured Creditor under § 554
Contributing Editor: Patrick A. Jackson Young Conaway Stargatt & Taylor LLP Wilmington, Del. firstname.lastname@example.org Also Written by: Elizabeth L. Gunn Durrette Bradshaw PLC; Richmond, Va. email@example.com
About the Authors
Patrick Jackson is an associate in the Bankruptcy and Corporate Restructuring Section at Young Conaway Stargatt & Taylor LLP in Wilmington, Del. Elizabeth Gunn is an associate in the Bankruptcy Department at Durrette Bradshaw PLC in Richmond, Va. ment under § 554 is to divest the bankruptcy estate of its interest in the property, which then reverts to the debtor as if no bankruptcy had been filed. 3 The abandonment power, therefore, appears to be a passive power, but is it possible to use abandonment affirmatively, to alter the status quo?
ection 554 of the Bankruptcy Code permits the abandonment of property of the estate that is “burdensome to the estate or that is of inconsequential value to the estate,” either on notice by the trustee or debtor in possession (DIP), or on motion by a party in interest. Bankruptcy Rule 6007 provides parties in interest 14 days to object to a notice of abandonment filed by the trustee pursuant to § 554(a). In the absence of an objection, the abandonment becomes effective without further order of the bankruptcy court.1 If there is an objection, the trustee’s decision to abandon will ordinarily be evaluated under a deferential “business-judgment” standard.2 A motion to compel abandonment under § 554(b), to the extent opposed, is a contested matter governed by Bankruptcy Rule 9014. Even if unopposed, abandonment pursuant to § 554(b) likely would require a court order granting the motion. Under § 541 of the Code, all interests of the debtor in property as of the commencement of the bankruptcy case become property of the debtor’s bankruptcy estate. The Patrick A. Jackson effect of abandon1 In re Trim-X Inc., 695 F.2d 296, 300 (7th Cir. 1982). 2 There are certain exceptions. For example, abandonment of property contaminated by hazardous waste, though perhaps understandable from a “business-judgment” perspective, may not be permitted. See generally Midlantic Nat’l Bank v. N.J. Dept. of Envt’l Protection (In re Quanta Resources), 474 U.S. 494 (1986).
Targeted Abandonment “to” a Secured Creditor
The Code does not specify to whom property may be abandoned under § 554.
to compel abandonment of a derivative RICO cause of action belonging to the bankruptcy estate, based on the creditor’s lack of standing to pursue such action. The Second Circuit declined to rule whether property could be abandoned only to the holder of a possessory interest therein, but concluded the lower court had not abused its discretion in denying the creditor’s motion on that basis.7 It is unclear from the case law whether targeted abandonment “to” a party not in possession will, or should, pass muster under § 554. Assuming that such a power exists, one Elizabeth L. Gunn practical limitation upon it is that the trustee or debtor in possession (DIP), as applicable, cannot rely on automatic
Practice & Procedure
The legislative history, however, states that property may be abandoned “to any party with a possessory interest in [it].”4 Several courts have reasoned that property should be abandoned only to a holder of a possessory interest therein.5 Other courts have reserved ruling whether possession is a necessary, rather than sufficient, condition for targeted abandonment. For example, in Miller v. Generale Bank Nederland NV (In re Interpictures Inc.),6 the Second Circuit affirmed the denial of a creditor’s motion
3 In re Dewsnup, 908 F.2d 588, 590 (10th Cir. 1990), aff’d, 502 U.S. 410 (1992). 4 S. Rep. No. 95-989, at 92 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5878. 5 See, e.g., In re Pilz Compact Disc Inc., 229 B.R. 630, 642 (Bankr. E.D. Pa. 1999); In re Popp, 166 B.R. 697, 700 (Bankr. D. Neb. 1993). 6 Miller v. Generale Bank Nederland NV (In re Interpictures Inc.), 217 F.3d 74 (2d Cir. 2000), cert. denied, 532 U.S. 906 (2001).
abandonment under § 554(a) to alter the status quo ante. Where a trustee or DIP wishes to abandon property in its possession to a secured creditor, it will need to proceed by motion and seek an order authorizing and/or effectuating the transfer of property to the secured creditor. Absent an objection by a party in interest, such a motion might be considered routine and granted without a hearing. At least one court, however, has revisited a prior order confirming the abandonment of property (a cause of action) to a secured creditor, reversing its prior order on reconsideration sua sponte and causing the property to be abandoned solely to the debtor.8
7 Id. at 76-77. 8 In re Renaissance Stone Works LLC, 373 B.R. 817 (Bankr. E.D. Mich. 2007).
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. at 270 (finding abandonment of real property to mortgagee discharged “secured portion” of debt). 108 (Bankr. at 270-71 (finding abandonment to constitute taxable “sale”). Lane & Co. the answer may depend upon whether the collateral is personal property governed by Article 9.12 The commentary to the UCC explains that this limitation was put in place “[t]o ensure that the debtor cannot unilaterally cause an acceptance of collateral” and to prevent the secured party’s “mere delay in collection or disposition of the collateral” from being treated as a “‘constructive’ strict foreclosure. 16 See In re Sandy Ridge Dev. 1991). the UCC specifically precludes a debtor from “putting” collateral to a secured party in full or partial satisfaction of the underlying debt unless the secured party “consents to the acceptance [of the collateral] in an authenticated record or sends a proposal to the debtor” regarding the same. where the collateral is illiquid or § 506(c) rights are waived as a condition to cash collateral usage). But see A. • take possession of the collateral. • sell. aff’d. having the ability to avoid taxes on the sale of the property could be a major benefit to the estate. with respect to secured credit relationships governed by Article 9 of the Uniform Commercial Code (UCC). under § 9-610. such abandonment may not be treated as a full satisfaction of the debt. A critical feature of secured parties’ default rights under the UCC is that they are cumulative rather than elective. relief from automatic stay entitles a creditor to exercise its rights in property. to
14 See In re A. conversely. upon default by the debtor.. If a secured creditor has obtained relief from the automatic stay and is willing to accept its collateral in satisfaction of its debt. a secured creditor’s rights vis-à-vis personal property in which it has a security interest would be governed by Article 9 of UCC. however. 121 B.. Rights afforded a secured party by the UCC include. Abandonment constitutes the elimination of the bankruptcy estate’s interest in the property. but does not eliminate the estate’s interest in the property.14 However. then abandonment may provide an avenue for the elimination of an estate liability without the creation of a taxable event to the estate..
• reduce its claim to judgment and enforce such judgment against collateral or non-collateral property of the debtor via ordinary judicial procedure (UCC § 9-601(a)(1)). mortgage or deed of trust). 133 B. there does not appear to be any ability. Summers. 930 F. aff’d. Mass. the answer seems to be no. to conduct any disposition of collateral in a commercially reasonable manner). VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www. Iowa 1988). Suite 400 • Alexandria. Corp.
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While the effect of abandonment of personal property to a secured party is governed by Article 9. Absent cooperation. 881 F. Iowa 1990).g.g. while the UCC imposes certain duties on secured parties when exercising particular remedies (e. as enacted in the particular jurisdiction at issue.abiworld. 2000) (noting that secured creditor “can ignore its security interest and proceed by execution and levy” under non-UCC law).R.2d 6. Samore v. N. Under these circumstances. 1991). Under either scenario. outside a chapter 11 plan. with or without resort to judicial process (UCC § 9-609).10 and permissive rather than compulsory. 5. the rights to:
9 UCC § 9-207(a). and • accept the collateral in full or partial satisfaction of the underlying indebtedness (or “strict foreclosure”) (UCC § 9-620).org
. 269 (Bankr.15 The ability to abandon property unilaterally in full satisfaction of a debt (“dirt for debt”) can only be accomplished through a chapter 11 plan if the abandoned property is the “indubitable equivalent” of the secured claim.g. as noted. e. there is no general duty under the UCC to exercise one remedy over another. Iowa 1989). White and Robert S.D. (2) the carrying cost of the property (and/ or the administrative hassle associated with it) is substantial. 95 B. 100 B.17 When considering the value of real property (even in today’s market). For instance. Inc. 348 (N. abandonment to a secured party may still benefit the estate by shifting to the secured party the cost and responsibility of maintaining and disposing of the collateral.R.9
Abandonment in Satisfaction of Debt?
If it is possible to abandon collateral “to” a secured creditor as a cost-shifting mechanism.2d 1346 (5th Cir. license or otherwise dispose of the collateral using any commercially reasonable means (UCC § 9-610).R. its ability to exercise any interest in the property is necessarily prohibited by § 362. a secured party has the rights provided in the UCC as well as any rights provided in its security agreement with the debtor (subject to certain limitations set forth in UCC § 9-602).J. 11 Thus. is it possible to force the secured creditor to accept the collateral in full or partial satisfaction of its secured claim? As a threshold matter.. Lane & Co. Uniform Commercial Code § 25-4 (5th ed. In re McGowan. Taxes are one major factor in trustees and DIPs seeking to abandon property in favor of a third party because the abandonment of property. However. abandonment “to” a secured creditor under § 554 may be possible where that creditor has obtained relief from the automatic stay but not yet foreclosed upon the property. among other things. 264.”13 In light of the foregoing. Notably. 17 See. and (5) the trustee or DIP wants to ensure some recovery on the property to minimize deficiency claims.Under what circumstances might a trustee or DIP seek to abandon “to” a secured creditor? Suppose the following: (1) the property is over-encumbered.
Because abandonment causes a reversion of property rights to their state prior to the commencement of the bankruptcy case. This use of abandonment is only possible when there is a cooperative secured creditor. If the creditor has not obtained relief from the stay. In limited cases where the controlling documents and state law provide the secured creditor the right to obtain a superior possessory interest in the real property upon default by the debtor. abandonment “to” the secured creditor would rid the estate of an administrative burden and possibly shift to the secured creditor the responsibility and costs of maintaining and disposing of the collateral.D. Olson (In re Olson). Section 9-601(a) provides that.R. absent an agreement by the secured creditor. is generally held to not be a “sale or exchange” resulting in a tax liability to the estate. or to exercise any remedy at all. 458. 8 (8th Cir. it appears that abandonment “to” a secured party under § 554 could not effectuate a satisfaction of the secured indebtedness. 12 UCC § 9-620(b)(1). 11 James J. a secured party in possession (or coming into possession) of collateral has a duty of reasonable care in the custody and preservation of the collateral. 133 B. abandonment of real property turns on other law and
10 UCC § 9-601(c). as opposed to a § 363 sale. (4) the secured creditor has no interest or incentive to obtaining stay relief with respect to the property. 346.16 The ability to abandon real property to a secured creditor under § 554 then seems to necessarily hinge on whether the creditor has already obtained relief from the automatic stay of § 362.
governing security documents (e.g.. N..R. 104.J. or real property governed by other state law. (3) the prospect of recouping these costs via a § 506(c) surcharge is dubious (e. 15 See id. 1989). lease. 13 UCC § 9-620 cmt. 462-63 (Bankr. Inc. D.
For more information.org
. No. The American Bankruptcy Institute is a multi-disciplinary. there does not appear to be any basis in the Bankruptcy Code or applicable law to “put” collateral to a secured creditor in satisfaction of its debt outside the context of a chapter 11 plan. representing all facets of the insolvency field.500 members. n Reprinted with permission from the ABI Journal. VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www. November 2010.abandon property unilaterally in satisfaction of a debt. abandonment under § 554 may.
Though generally a passive power.org.
44 Canal Center Plaza. Vol. in some circumstances. visit ABI World at www. 9. ABI has more than 12.abiworld.” However. Suite 400 • Alexandria. abiworld. nonpartisan organization devoted to bankruptcy issues. be used affirmatively (if unconventionally) to foist the burden of preserving and maintaining personal property upon a secured party or to effectuate a tax-free disposition of real property in a “friendly foreclosure. XXIX.