618 B.R. 424
Bankr. E.D. Pa.2020Background
- Wilton Armetale (the Debtor) filed chapter 7; AHR obtained a large pre‑petition judgment, acquired control of the company, and is the Debtor’s largest secured creditor/owner.
- The chapter 7 Trustee retained Saltz Mongeluzzi Barrett & Bendesky as Special Counsel on a one‑third contingency to prosecute malpractice/professional‑liability and breach‑of‑contract claims against the Debtor’s former counsel (Leisawitz Heller and two lawyers).
- The litigation (removed from state court to Adv. No. 17‑372) has been pending ~3 years; Special Counsel has incurred about $39,000 and projected additional expert/costs exceeding $100,000.
- The Trustee moved to abandon the claims under 11 U.S.C. §554(a), reasoning that expected recovery (after fees/expenses) would be inconsequential to the estate given >$3.7M in claims.
- Leisawitz (the Firm) and creditor Gordon Brothers opposed, arguing abandonment is improper if it effectively benefits a single creditor and relying on a District Court opinion later vacated by the Third Circuit.
- The Bankruptcy Court held the Trustee met the §554 standard (business judgment, good faith, reasonable basis, within authority) and granted the Motion to abandon; the court did not finally decide post‑abandonment consequences or substitution by other plaintiffs.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Firm / Gordon Brothers) | Held |
|---|---|---|---|
| Whether the trustee may abandon the malpractice/breach claims under §554 | §554(a) governs; trustee may abandon if property is burdensome or of inconsequential value and he exercised business judgment in good faith on a reasonable basis | Abandonment cannot be allowed if it effectively relinquishes claims for the benefit of a single creditor; relies on District Court decision | Trustee may abandon under §554; District Court opinion relied on by objectors is not controlling (it was vacated) and did not set §554 standards here |
| Whether the Trustee met the §554 abandonment test (business judgment, good faith, reasonable basis, authority) | Continued prosecution would require substantial expert and litigation costs; estimated net benefit to estate likely trivial given contingency fee and trustee commissions | Litigation is not “toxic,” Special Counsel’s contingency arrangement means little downside; possible recovery could reduce AHR’s claim | Trustee satisfied the standard — his cost/benefit analysis and risk assessment were reasonable; objectors failed to show likely meaningful benefit to the estate |
| Whether abandonment would impermissibly direct benefit to a single creditor (AHR) or otherwise limit court control | Abandonment reverts the claims out of the estate per §554; where property goes post‑abandonment is not the §554 inquiry | If abandonment results in only AHR benefitting, trustee may not abandon for that purpose | Court rejected the single‑creditor prohibition as applied here; once properly abandoned, property reverts to non‑estate status and the court generally loses control (post‑abandonment effects not adjudicated now) |
| Standing to object to abandonment | Trustee did not contest objectors’ status at hearing but argued law supports abandonment | Firm and Gordon Brothers argued they are parties in interest and can object | Court held Firm and Gordon Brothers are parties in interest with standing to object, but they did not meet their burden to defeat abandonment |
Key Cases Cited
- First Nat’l Bank v. Lasater, 196 U.S. 115 (1905) (trustee’s abandonment power is discretionary)
- In re Dewnsup, 908 F.2d 588 (10th Cir. 1990) (abandoned property is not administered by the estate)
- Dewnsup v. (affirming opinion), 502 U.S. 410 (1992) (Supreme Court affirming treatment of abandoned property)
- In re Xonics, Inc., 813 F.2d 127 (7th Cir. 1987) (bankruptcy court lacked jurisdiction over claims concerning abandoned property)
- In re Bray, 288 B.R. 305 (Bankr. S.D. Ga. 2001) (abandoned causes of action revert to pre‑bankruptcy status)