Its Never Too Late to Deal with Unscheduled Assets

By: Krystiana L. Gembressi

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, in In re Dunning Brothers Co.,[1] the United States Bankruptcy Court for the Eastern District of California affirmed the longstanding tenet that unscheduled assets remain property of the bankruptcy estate indefinitely. The court held that a bankruptcy case that was closed more than seventy years ago could be reopened following the later discovery of certain unscheduled assets.

 

The case was originally commenced in 1936 under the Bankruptcy Act of 1898, when Dunning Brothers Company filed a petition in bankruptcy.[2] Seven decades later it was discovered that the company did not list three parcels of land as assets in its bankruptcy petition.[3] A railroad, which possessed a right of way over the company’s unscheduled parcels of land, had been buying the land under the length of the railroad. In an effort to acquire the fee under the right of way, the railroad pursued a reopening of the case to clear title on the land.[4]

 

The court examined whether the case qualified for reopening under the Bankruptcy Act. As the court discussed, whether there is sufficient cause to reopen a case is a matter within the discretion of the bankruptcy court.[5] The court found that the case qualified for reopening since there existed assets of the estate that were not yet administered.[6] It further reasoned that because the property right to the three unscheduled parcels vested in the trustee in 1936, the case was presumptively appropriate to reopen.[7] Relying on the Supreme Court’s decision in First National Bank v. Lasater,[8] the court stated that a debtor does not have a legal right to unscheduled property that the debtor failed to list as an asset.[9] It further held that the question of reopening should be limited to the question of whether there was bankruptcy work to be done, and thus refused to consider possible equitable defenses against the trustee in its opinion.[10] Furthermore, the court noted that an extensive lapse in time will not prevent a case from being reopened, as long as “cause” to re-open exists.[11] It stated: “[t]here is no time limit for seeking to reopen.”[12]

 

Although this case was decided under the Bankruptcy Act of 1898, the court applied a rule that is currently found in section 554(d) of the current Bankruptcy Code, which states: “property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.”[13] This law has remained unchanged for more than a century and demonstrates the magnitude of the equity interests that the bankruptcy courts are trying to defend. Debtors cannot retain title to property that they failed to include as a scheduled asset. Thus, because unscheduled assets were discovered, the In re Dunning court exercised its discretion to reopen the case in order to manage equitably the rights of creditors. The court warned that “the integrity of the bankruptcy system depends in large part on full, candid, and complete scheduling of assets by debtors.” [14] In order to guard this doctrine and ensure an equitable outcome, the In re Dunning court was willing to reopen a bankruptcy case that was presumed to be closed decades ago.

 

In using its discretion to reopen the case, the In re Dunning court found it significant that there was no outside sale of the property since it first became part of the bankruptcy estate. Because there was no sale, it reasoned that reopening the case would not present a risk of unfairness.[15] Of great importance was that the In re Dunning court, in applying the Bankruptcy Act, did not have to contend with section 362, which extends the protection of the automatic stay to unscheduled property of the estate.[16] Since the automatic stay does not attach to assets under the Bankruptcy Act, courts such as In re Dunning possess more discretion to weigh the equity interests and rights that have accrued when considering whether to reopen a case. Because of the balance between sections 554(d) and 362, debtors today have more incentive to prepare a full and inclusive schedule than they did under the Bankruptcy Act.[17]

 

Although section 362 allows certain equitable exceptions to be made to the automatic stay,[18] most courts under the Code find that acts in violation of the automatic stay are “void ab initio.”[19] Thus, the application of the automatic stay to unscheduled property that has passed between the hands of buyers can have disastrous repercussions. As the court warns: “the protection afforded by section 362(c)(1) to property of the estate remaining after the case is closed spells trouble for anyone dealing with unscheduled property that is property of the estate.”[20] Although the unscheduled property in In re Dunning did not present a series of equitable considerations, the case stands for the notion that in the broadest application of section 554(d), unscheduled assets remain affixed to the bankruptcy estate and present a justifiable cause for reopening a previously settled case.[21]

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