Lead Opinion
OPINION
Fоrmer debtor Yolanda Lopez (“Lopez”) appeals from the bankruptcy court’s order
We rule that adding a potentially valuable asset to the schedules is a valid ground to reopen a сhapter 7 case, that expiration of the time to revoke the discharge is not a sufficient basis to preclude reopening, and that a former debtor’s alleged bad faith is never a sufficient basis by itself to deny a motion to reopen to schedule an asset that has the potential to benefit creditors. Accordingly, because the Motion to Reopen should have been granted, the bankruptcy court’s order will be REVERSED with directions to order the appointment of a chapter 7 trustee. The appeal from that portion of the order granting the Motion to Intervene will be dismissed as MOOT.
I. FACTS
Before filing their joint, voluntary chapter 7 petition, Lopez and her husband Pro-eopio Lopez met with a non-attorney petition preparer, Abad Cabrera (“Cabrera”). On September 3, 1998, they signed a petition, schedules and statements. The schedules did not list any claim against Specialty as an asset, and Lopez and her husband did not claim any property as exempt. The bankruptcy petition was not filed at this time.
In or about December of 1998, Lopez spoke to Cabrera about a legal action for sexual harassment and Cabrera referred Lopez to an attorney. On December 31, 1998, Lopez signed a form provided by the California Department of Fair Employment and Housing (the “Department”) alleging sexual harassment by her еmployer, Specialty, and requesting authorization to file a lawsuit (the “Administrative Request”). The Administrative Request was filed with the Department on February 11, 1999, and on February 16, 1999, the Department authorized Lopez to bring a civil action under California Government Code Section 12965(b).
The Lopez’ bankruptcy petition was filed on March 3, 1999 (the “Petition Date”). The schedules and statements had not been revised to include anything about Lopez’ claims against Specialty. Lopez alleges that she was not aware of the Petition Date, and that she thought the bankruptcy papers had been filed around the time they had been prepared. She does not deny, however, that she never amended her schedules to include anything about her claims against Specialty.
Shortly after the Petition Date, oh March 22, 1999, Lopez and others filed an action against Specialty and other defendants in the Superior Court of the State of California, County of Los Angeles (Case No. BC 207443), seeking an unspecified amount of damages for sexual harassment, requiring plaintiffs to work over 40 hours per week without overtime pay, and other alleged wrongs (the “Action”). The Action was later consolidated with other cases (Case Nos. BC 215608 and BC 223482).
Meanwhile, on April 15, 1999, Lopez’ chapter 7 trustee (the “Trustee”) filed a “no asset” report, and on June 14, 1999,
On or about January 19, 2001, Specialty wrote to Lopez’ attorney in the Action stating its intention to file a motion for summary judgment on the basis that Lopez is judicially estopped from pursuing her claims because she intentionally failed to list any claim against Specialty in her bankruptcy schedules and statements. The parties stipulated to a stay of the Action pending determination in the bankruptcy court of Lopez’ authorization to prosecute the Action.
On May 3, 2001, the bankruptcy court entered an order (the “Order”) granting the Motion to Intervene and denying the Motion to Reopen. As to the Motion to Reopen, the bankruptcy court reasoned that creditors could not benefit from reopening because it was too late to revoke the discharge
Lopez filed a timely notice of appeal.
1. Did the bankruptcy court abuse its discretion by denying Lopez’ Motion to Reopen?
2. Is Specialty’s Motion to Intervene moot?
III.STANDARDS OF REVIEW
A decision regarding reopening of a case based upon allegations of additional assets “is committed to the sound discretion of the bankruptcy court, and will not be set aside absent an abuse of discretion.” Kozman v. Herzig (In re Herzig),
IV.DISCUSSION
We start with the Motion to Reopen. Section 350(b) provides that “[a] case may be reoрened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). Rule 5010 provides:
A case may be reopened on motion of the debtor or other party in interest pursuant to § 350(b) of the Code. In a chapter 7, 12, or 13 case a trustee shall not be appointed by the United States trustee unless the court determines that a trustee is necessary to protect the interests of creditors and the debtor or to insure efficient administration of the case.
Fed.R.Bankr.P. 5010.
Under the above provisions, reopening a case is typically ministerial and “presents only a narrow range of issues: whether further administration appears to be warranted; whether a trustee should be appointed; and whether the circumstances of reopening necessitate payment of another filing fee.” Menk v. LaPaglia (In re Menk),
Therefore, although a motion to reopen is addressed to the sound discretion of the bankruptcy court, “the court has the duty to reopen an estate whenever prima facie proof is made that it has not been fully administered.” Herzig,
Specialty has argued before the bankruptcy court and on this appeal that further administration was not warranted because creditors could not benefit from reopening since the time to revoke Lopez’ discharge has expired under Sectiоn 727(e). Assuming the time to revoke the discharge has indeed run,
In other words, the Action belongs to the estate, not to Lopez. Lopez conceded this in her Motion to Reopen and at the hearing in the bankruptcy court, and specifically asked to reopen not just so she could amend her schedules but also so that a chapter 7 trustee could administer the Action.
Although we make no assumption about what actual value the Action might have, we note that it does not appear on its face be valueless or unworthy of consideration by a chapter 7 trustee. Unlike the situation in Herzig, it does not appear to be barred by a limitations period — it has survived in the state court since at least March of 1999 without having been dismissed — nor has a chapter 7 trustee or its counsel already “thoroughly” investigated and decided not to pursue it. See Herzig,
For all of these reasons, further administration is warranted. If the case is reopened a chapter 7 trustee can be аppointed, investigate whether the Action has value, and then prosecute it, settle it, abandon it, or arrange for Lopez to prosecute it in exchange for the estate receiving a share of the proceeds. The chapter 7 trustee can also notify creditors to file claims if it appears the estate may have any assets, and can make distributions on those claims out of any eventual recovery. See Dolliver, 255 B.R. at 258 (although § 727(e) prevented revocation of discharge, case could be reopened to recover and administer concealed assets); Fed.
The bankruptcy court appeared to be motivated in part by a desire to sanction Lopez for not previously disclosing the Action. At the hearing on March 7, 2001, the bankruptcy court commented, “the Court cannot accept the proffered testimony and argument of [Lopez] that somehow she simply ... forgot to put [the Action] down [on her schedules and statements].” Transcript (3/7/01) p. 8:1-4.
Assuming without deciding that Lopez intentionally omitted the Action from her schedules and statements, that is not a sufficient ground to deny the Motion to Reopen. That approach would risk harming creditors in an attempt to punish a former debtor.
The Koch decision, on whiсh the bankruptcy court relied, is distinguishable. As Lopez points out, in Koch the debtor avoided appointment of a chapter 7 trustee by converting to chapter 11 immediately after the case was reopened. The Koch court later vacated its reopening order on the ground that under chapter 11 the creditors would not benefit from reopening because only the former chapter 7 trustee could prosecute the omitted action. Koch,
There may be other circumstances in which creditors would no benefit from reopening, but again the facts on this appeal do not show any such circumstances. One court has held, for example, that where the former debtor admitted that his exemption would exceed the value of the omitted action, his lack of good faith and the prejudice to the defendant were sufficient to preclude reopening. In re Malay,
At least one court has held that where it appears creditors may benefit from re
We do not decide whether a former debtor’s alleged bad faith or lack of good faith is a factor at all when creditors’ interests are at stake. Assuming it is a factor, we hold that it is insufficient to preclude reopening if there is prima facie proof from which a chapter 7 trustee could reasonably determine that administering a previously undisclosed asset could benefit creditors. See Herzig,
We note that any legitimate concerns about a former debtor’s misconduct can be addressed by other methods, rather than refusing to reopen a bankruptcy case. In appropriate situations a debtor can be subject to prosecution and penalties. See, e.g., 18 U.S.C. §§ 152 and 3571. If a debtor shows bad faith, or if third parties are prejudiced by nondisclosure of an asset, then the bankruptcy court can exerсise its discretion to disallow any claimed exemption in the asset, in whole or in part. See Arnold v. Gill (In re Arnold),
Moreover, the court hearing the Action could impose any appropriate sanctions against Lopez (either as a current litigant, if the Action is abandoned to her, or perhaps as a former litigant, if it is not). That court could also rule that she is judicially estoppеd from asserting her claims. We express no opinion whether any such judicial estoppel would bar Lopez or her chapter 7 trustee from prosecuting the Action for the benefit of creditors, or from recovering anything from Specialty above some limit, such as what it would take to pay creditors in full. These are matters for that court to decide, and for a chapter 7 trustee to consider. See Hamilton,
V. CONCLUSION
The Action is a potentially valuable asset that should be administered for the benefit of creditors. Denial of the Motion to Reopen cannot be justified on the ground that § 727(e) might bar revocation of Lopez’ discharge. Nor can it be justified by any desire to punish Lopez for failing to disclose her claims against Specialty in her original schedules. The portion of the Order denying the Motion to Reopen is REVERSED, the appeal from the portion of the Order granting the Motion to Intervene is DISMISSED as MOOT, and the case is remanded for appointment of a chapter 7 trustee and further proceedings.
Notes
. Unless otherwise indicatеd, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330 and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
. The stipulation stays proceedings in the Action, but provides for the trial to be re-set "upon notification to this Court that the Trustee in Bankruptcy has resolved the issue of Plaintiff's authorization to sue and proceed in this action.”
. Lopez argues that the bankruptcy court erred by denying her request to continue the hearing on the Motion to Intervene and the Motion to Reopen. Lopez also raises eviden-tiary objections. Given our disposition of this appeal, we do not reach these issues.
. At the hearing on March 7, 2001, the bankruptcy court commented, "[I]t appears to the Court that the ability of the trustee or other interested parties to seek a revocation of the discharge pursuant to [Section 727(e)] has passed. So I wonder how the Debtor here expects that creditors will benefit from reopening the case.” Transcript (3/7/01) p. 5:17-21.
Lopez' counsel responded that, "First of all, under the 700 series and the case law that interprets it, there's always grounds to revoke a discharge on newly learned facts. Second, if a case is reopened, a new order of relief is granted. The trustee is then reappointed and has a clear right, if there is an asset potеntially to be distributed to creditors, to give a notice of potential distribution asking for claims. And in the event the estate garners any money, it can then distribute the same.” Id. pp. 5:23-6:6.
The bankruptcy court also asked Lopez' counsel, "Is the Debtor willing to voluntarily revoke her discharge to allow the value, if any, of this lawsuit to go to her creditors?” Lopez' counsel said he had not discussed it with Lopez, “so I really couldn't say yes or no.” Id. p. 6:7-11.
We express no opinion whether such a revocation of discharge would be appropriate or enforceable. Cf. Hayhoe v. Cole (In re Cole),
.The Order gives no indication that the interests of any persons other than Lopez and Specialty are at issue — except perhaps its reference to the Koch case,
. Lopez’ standing is not an issue in this case. On January 7, 2002, the Clerk of the Bankruptcy Appellate Panel ("BAP") issued a Clerk's Order requiring Lopez to file a written response demonstrating how she meets the "person aggrieved” test so as to have standing in this appeal. Lopez filed a response on January 22, 2002, in which she argued that her secured debt had been eliminated by surrender of her former house, her unsecured debt was less than $6,000, and the value of the Action is at least $70,000 to $125,000. Therefore, she alleged, she cоuld show "a reasonable possibility of a surplus after satisfying all debts, and accordingly has shown a pecuniary interest.” See Matter of Andreuccetti,
Lopez cites the evidence she submitted on this matter, regarding the potential value of the Action, in support of her arguments on this appeal for reopening her case, and she includes the evidence in her excerpts of record even though it does not appear to have been before the bankruptcy court. Specialty has nоt objected to our consideration of this evidence, and we make reference to it below to illustrate that the Action could have value. We do not rely on the evidence, however, in reaching our conclusion.
. We do not decide this issue. The bankruptcy court stated that "it appears” the ability to seek revocation of the discharge "has passed” pursuant to Section 727(e). We note that most courts appear to reject any extension of the time limits in Section 727(e), although a minority view would either extend the overall time or hold that closing of a case interrupts the running of that time period. See generally Rosemary Williams, Creditor’s Right to Have Bankruptcy Discharge of Individual Debtor Revoked, Vacated, and Set Aside, 138 A.L.R.Fed. 253, text accompanying nn. 47-94,
. We do not decide whether Specialty had standing and a sufficient interest to intervene on this issue and argue against reopening. Although we doubt it, we assume so for purposes of this discussion.
On the one hand, an argument in favor of Specialty’s standing might be that it could lose a judicial estоppel defense if a chapter 7 trustee prosecutes the Action instead of Lopez. See Haley v. Dow Lewis Motors, Inc.,
On the other hand, any judicial estoppel defense would seem to arise not because Lopez misled Specialty by failing to list the Action in her bankruptcy papers — Specialty was not a party to the bаnkruptcy case — but because Lopez allegedly "played fast and loose” and otherwise misled the courts. Hamilton v. State Farm Fire & Cas. Co.,
. On this appeal Lopez argues that the Action is worth at least $70,000 to $125,000, based on an offer under California Code of Civil Procedure Section 998 and the opinion of her counsel in the Action, respectively. In contrast, she claims that unsatisfied creditors’ claims amounted to less than $6,000 when her bankruptcy case was pending. In other words, according to Lopez, creditors could be paid in full.
Lopеz’ evidence and arguments as to value were not before the bankruptcy court and we do not rely on them. We mention them only to illustrate that there is potential for the Action to have value for the benefit of creditors.
. We question whether, in circumstances such as those in Koch, a chapter 11 debtor in possession would lack standing to prosecute an action that has been added to the schedules and statements. We also note that there may be practical benefits from proceeding in chapter 11 instead of chapter 7.
For example, in chapter 7 there might be no way to fund the litigation costs of an omitted action other’than engaging counsel on a contingency basis who would advance the costs, whereas in chapter 11a plan of reorganization might let some creditors fund the legal fees and costs in exchange for a greater share of any proceeds. If no such advantages were apparent in the Koch case, there were alternatives other than vacating the order reopening the case. In appropriate circumstances the case could have been converted back to chapter 7 or a chapter 11 trustee could have been appointed. These and perhaps other alternatives could have preserved a potentially valuable asset for the benefit of creditors. The Koch court did not address these considerations, and seems to have been motivated by annoyance with the debtor and perhaps doubt about the actual value of the omitted action, rather than by the interests of creditors. Koch,
. We have recognized in footnote 9, above, that Specialty’s asserted judicial estoppel defense arguably would be lost or diminished by reopening. See generally Haley,
Concurrence Opinion
concurring.
I join the majority decision and write separately to emphasize salient practice points about the problem of unscheduled causes of action that is increasingly a headache for nonbankruptcy courts and litigants so that they may have more sophisticated insights about how to deal with the problem.
It has beсome increasingly popular to interpose judicial estoppel as a defense to a lawsuit by a former debtor who did not schedule the cause of action in the bankruptcy case. The theory is one of inconsistent positions: the debtor, by not schedul-
ing the cause of action in the bankruptcy case, impliedly contended that it did not exist or was valueless, which position was accepted by the bankruptcy court when the case was closed without the unscheduled asset being administered. Then, inconsistently, the debtor sues on the cause of action. Defendants rightly smell something rotten. Nonbankruptcy courts are rightly reluctant to tolerate such “fast and loose” litigation tactics.
Yet, the judicial estoppel defense to the basic unscheduled cause of action is meretricious and potentially inexpedient in two respects.
First, the unscheduled cause of action is still property of the bankruptcy estate after a chapter 7 bankruptcy case is closed, not property of the debtor, regardless of whether the case is reopened and regardless of whether schedules are amended after reopening.
Upon closing a case, correctly scheduled property not otherwise administered by the trustee is abandoned to the debtor. 11 U.S.C. § 554(c).
Property that was not correctly scheduled remains property of the estate forever (until administered or formally abandoned by the trustee), regardless of whether it is scheduled after the case is reopened.
The purpose of reopening the bankruptcy case in this context is tо permit the appointment of a trustee to deal with the property of the estate. At the time of reopening, the court must determine whether a trustee should be appointed because the original trustee is ordinarily relieved at the time the case is closed. Fed. R.Bankr.P. 5010. If the purpose of the reopening is to deal with unscheduled assets as property of the estate, then it is per se an abuse of discretion not to order appointment of a trustee.
The second difficulty with the judicial estoppel defense is that the automatic stay remains in effect to protect property of the estate so long as it is property of the estate, even after the bankruptcy case is closed. 11 U.S.C. § 362(c)(1). Thus, dismissing the action probably violates the automatic stay. The practical consequence is futility because acts in violation of the automatic stay are void ab initio. Schwartz v. United States (In re Schwartz),
If one is determined to impose judicial estoppel, the better course is to use it as a device to require that the action be prosecuted by the real party in interest — a bankruptcy trustee.
Reopening does not bring property back into the estate nor does it cause the automatic stay to be revived. The unscheduled asset never lost its character as property of the estate and the automаtic stay, which otherwise terminated on closing the case, never ceased to remain applicable to protect (and render void any act against) the property of the estate. It is for this reason that it is often difficult to perceive non-obfuscatory merit in a defendant’s opposition to reopening;
The expedient solution to this dilemma is to require the parties to return to bankruptcy court for reopening so that a trustee can be appointed to deal with the cause of action that is property of the estate. Thе trustee has authority to act for the benefit of the estate and may sell the cause of action, prosecute it in nonbank-ruptcy court,
The worst thing the parties can do is to ignore the property of the estate problem. The worst thing a bankruptcy court can do is to frustrate the process by refusing to reopen and order the appointment of a trustee who can definitively deal with property of the estate.
. For this reason, the debtor's desire to "schedule” the cause of action in this case was misconceived.
. Speciality’s argument in opposition to reopening that creditors would have no interest because their claims havе been discharged is even more misconceived than the former debtor’s assumption that scheduling the asset would improve her rights in the cause of action.
Under black-letter bankruptcy law, the fact that the debtor is discharged from personal’ liability on claims has no effect on the rights of the claimants to be paid on their allowed claims from the bankruptcy estate. 11 U.S.C. § 726. In fact, the creditors holding discharged claims have an intense interest in a reopening that may lead to funds coming into the estate and being available for distribution to creditors because that is the only way they will be paid on their discharged claims.
Likewise, Speciality’s further assertion that because it is too late to revoke the discharge "all of the money obtained from Lopez's claim against Specialty will ultimately go to Lopez, not her creditors” misstates the law.
Under the bankruptcy distribution scheme (absent either a specific compromise approved by the court or a successful claim of exemption), the debtor would receive nothing until after all administrative expenses and all claims are paid in full with interest at the legal rate from the date of the filing of the petition. 11 U.S.C. § 726(a)(6).
. The trustee is authorized to employ the debtor’s trial counsel with court approval. 11 U.S.C. § 327(e).
. If it is abandoned to the debtor, the debtor thenceforth owns the cause of action and must be prepared to deal with all defenses, including estoppel.