582 B.R. 407
Bankr. W.D. Va.2018Background
- Townside Construction, Inc. and Landmark Properties, Inc. filed Chapter 11 in May 2016; both cases converted to Chapter 7 in May 2017 and William E. Callahan Jr. was appointed Chapter 7 Trustee.
- Pinnacle Bank (successor to BNC and Valley Bank) held multiple promissory notes and deeds of trust securing substantial real estate collateral (Cherokee Hills tracts, 5th Street building); substantial unpaid balances existed as of the petition dates.
- Pinnacle conducted foreclosure sales in February and May 2017; Pinnacle and related buyers were high bidders on multiple tracts; Lot 49 remained unsold and was the subject of litigation.
- Debtors (without Trustee participation) filed two state-court suits challenging the foreclosures and alleging collusion, breach of fiduciary duty, invasion of privacy, and conspiracy relating to the foreclosure sales and pre- and post-petition conduct.
- Trustee, Pinnacle, and the Foreclosure Trustee moved to approve a settlement (including a general release and conveyance of Lot 49 to Pinnacle for $29,500); the Court requested briefing on whether the asserted causes of action were property of the estates and whether the Trustee could release them.
- The Bankruptcy Court found the asserted claims were "sufficiently rooted" in the pre-petition relationship and thus are property of the Townside and Landmark estates under 11 U.S.C. § 541(a) and Segal v. Rochelle; accordingly the Trustee, not the Debtors, has authority over these claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the claims asserted in the two state-court suits are property of the bankruptcy estates | Debtors: post-petition foreclosure-related claims are not "sufficiently rooted" in the pre-petition past and therefore are not estate property | Movants (Trustee & Pinnacle): claims arise from pre-petition relationship and foreclosures of estate property, so they belong to the estates | Held: Claims are property of the estates under §541(a) and the Segal test (sufficiently rooted in pre-petition past) |
| Whether the Trustee may investigate and settle/compromise these claims | Debtors: Trustee lacks standing to settle post-petition claims that are not estate property | Trustee: has duty/right to investigate and administer estate causes of action and may settle if in estate's interest | Held: Trustee has duty to evaluate and administer these claims; settlement appropriateness to be addressed after Trustee's investigation |
| Effect of debtors not scheduling claims and case closure (Landmark) | Debtors: contend remaining claims are debtor property and they may prosecute | Movants: unscheduled claims were not administered or abandoned and thus remain estate property; Trustee may reopen Landmark case | Held: Because claims were not scheduled, not administered, and the Landmark case was reopened, the claims remain estate property (not abandoned) |
| Applicability of Segal v. Rochelle and related precedent | Debtors: foreclosure-sale conduct is post-petition and disconnected from pre-petition past | Trustee: Segal governs when post-petition interests are "sufficiently rooted" in pre-petition past; here, long pre-petition loan relationship ties claims to estate | Held: Segal and Fourth Circuit interpretations apply; asserted claims meet the Segal standard and are estate property |
Key Cases Cited
- Segal v. Rochelle, 382 U.S. 375 (Sup. Ct.) (post-petition gains rooted in pre-petition activity may be estate property)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (Sup. Ct.) (§541 broadly defines property of the estate)
- In re Chesnut, 422 F.3d 298 (5th Cir.) (determination of estate property can involve complex analysis)
- In re Bogdan (Logan v. JKV Real Estate Servs.), 414 F.3d 507 (4th Cir.) (causes of action are generally property of the estate)
- TMT Procurement Corp., 764 F.3d 512 (5th Cir.) (§541(a)(7) confined to post-petition property traceable to estate property)
- In re Andrews, 80 F.3d 906 (4th Cir.) (Segal applied to post-petition payments traceable to pre-petition agreement)
- In re Shearin, 224 F.3d 346 (4th Cir.) (pre-petition earnings that pay out post-petition are estate property)