Creditors Plan To Snatch Assets From Bankruptcy Trustees

25 Sep Creditors Plan To Snatch Assets From Bankruptcy Trustees

http://www.flickr.com/photos/psykotrooper/

Creditors are starting to talk up how to snatch assets away from bankruptcy trustees who don’t even know they’re coming.

The case that’s causing the excitement is the Ninth Circuit’s In re Blixseth where the circuit court concluded that a bankruptcy trustee lost an asset that was not even properly listed on the debtor’s schedule of assets. Normally, that’s not possible – a bankruptcy estate doesn’t lose something it owns but doesn’t know about. But in this case, the debtor had pledged stock as collateral for a loan with a bank (so it was a “secured” debt) and the debtor did not file a Statement of Intentions regarding this secured debt in the case. Under revised Sec. 362(h), the asset in such a situation is removed from the estate and the automatic stay is dissolved — 30-days after the case was filed. In another article, I nicknamed this as a “statutory abandonment.”

Creditors and their attorneys are becoming aware of this decision and its implications. In particular, in complex business-related cases where some assets might not get properly disclosed during a business meltdown, they’re looking forward to surprising the trustee by snatching up those unlisted items of personal property.

Indeed, in one blog, one law firm implied that the dissolution of the stay means “a creditor can attach and foreclose upon a debtor’s other personal property to satisfy the claim” although they can’t go after real estate. Only in the final sentence does this blog make clear this is limited to personal property securing the debt, not just any property the creditor can get its hands on.

The irony here is that while the trustee is working for creditors as a whole, the creditors are hoping the debtor doesn’t get the asset list correct or doesn’t file a Statement of Intention to reaffirm, redeem, or surrender secured assets — and that the trustee doesn’t catch the error. In such situations, they are hoping to snatch potentially valuable collateral away with the trustee having no recourse.

Of course, it seems unlikely that a trustee who has no inkling a truck or piece of machinery is an asset until after a creditor grabs it away from him, will have no recourse at all if she relied on apparently-complete asset schedules filed under oath. And already Judge Boroff in Massachusetts has found a somewhat unique remedy to protect the estate from the unexpected. But only time will tell how many ways the counterattack will come.

Photo Credit: Flickr/Psykotrooper

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively. I have represented bankruptcy trustees as well as creditors. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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