Court: United States Bankruptcy Court, D. Nevada; February 19, 2013; Us Bankruptcy; United States Bankruptcy Court
The court denied the Trustee's motion for turnover of arbitration funds and to revoke abandonment following a hearing on October 10, 2012. Background details reveal that Aharon Roni Sas was injured in a car accident on April 14, 2004, and subsequently filed a personal injury claim against Robert M. Castro and Air One Transport, leading to an arbitration agreement in June 2009 with a recovery cap of $200,000. On September 11, 2010, Sas and his spouse filed for Chapter 7 bankruptcy without initially listing the lawsuit as an asset but later identified it in their Statement of Financial Affairs. The Trustee, Yvette Weinstein, raised questions during the Section 341 meeting and the Debtors amended their schedules to include the personal injury claim valued at $16,150, for which they claimed an exemption under Nevada law.
The bankruptcy case transitioned from “No Asset” to “Asset” status, and the Trustee filed a report indicating no property was available for distribution beyond exempted amounts. After the lawsuit went to arbitration on August 24, 2011, the arbitrators awarded Sas $531,846.95, subject to the $200,000 cap. Following the closure of the bankruptcy case on October 26, 2011, the Debtors reopened it on August 7, 2012, intending to amend their schedules to include the arbitration award and other creditors. Attorney Imanuel B. Arin attempted to remit the arbitration funds to the Trustee, which led to opposition from the Trustee and creditor Roni Shaked. The Trustee's current motion argues that the lawsuit remained property of the estate, asserting that it was not affirmatively abandoned, and requested revocation of abandonment based on alleged false information provided about the lawsuit.
The Trustee claims insufficient funds to pay Attorney Arin, creditor Shaked, and the Debtors' exemption from the Arbitration Funds. Attorney Arin filed opposition, arguing that the case's closure led to technical abandonment under Section 554(c), asserting entitlement to rely on this abandonment, and stating that an adversary proceeding is necessary for asset turnover requests. In response, the Trustee accused the Debtors and their counsel of misleading her regarding the Lawsuit's value, asserting they had a duty to correct the Debtors’ schedules upon learning of the value increase. Additionally, a third creditor, Plaintiff Funding Holding, Inc., claims a security interest in the Arbitration Funds, leading to three parties asserting competing claims: Arin ($80,000 in fees plus $25,050.69 in costs), Shaked ($92,012.40), and Plaintiff Funding ($122,879.55), totaling $319,942.64 in claims against the $200,000 Arbitration Award.
On October 10, 2012, the Trustee initiated an adversary proceeding (No. 12-01235-MKN) against Arin, his firm, Shaked, Plaintiff Funding, and the Debtors, seeking declaratory relief, avoidance of postpetition transfers under Section 549, asset turnover under Section 542, and disgorgement of fees paid to Arin Associates. The motion for turnover of the Arbitration Funds requires revocation of the abandonment order since the funds are deemed abandoned post-case closure under Section 554. Abandonment is generally irrevocable unless specific circumstances exist, such as a debtor providing false information, failing to schedule an asset, or trustee mistake. The Debtors did disclose the Lawsuit in their schedules, negating the second circumstance. The court will assess the remaining circumstances, particularly whether the Debtors provided false or incomplete information. Although the Debtors’ valuation of the Lawsuit was inaccurate, it does not constitute false disclosure, as per Cusano, since the descriptions provided in their schedules were sufficient for the Trustee to investigate further.
Notice was adequately provided regarding the value of the Lawsuit, allowing the Trustee to investigate independently using available methods, including 2004 examinations, document requests, and state court records. The Trustee claimed Attorney Arin misled her about the Lawsuit's $20,000 valuation during a phone call before the bankruptcy case closed, but she did not specify the timing or the identity of the individual with whom she spoke. Attorney Arin countered by stating that his records showed no contact with the Trustee prior to the case closing, leading to the conclusion that the Trustee did not demonstrate she received false information.
The Trustee's reliance on the Debtors' lower valuation of $16,150 compared to the $200,000 settlement to support revoking abandonment was deemed excessive. A precedent case, Adair, illustrated that a debtor listing a low value for an asset did not obligate them to keep the Trustee updated, as the burden was on the Trustee to seek further information. The Trustee's assertion that the Debtors and their counsel misrepresented the Lawsuit's value lacked persuasive weight; the Trustee may have underestimated the Lawsuit's value, a misjudgment not uncommon in bankruptcy proceedings.
Regarding the potential revocation of technical abandonment due to the Trustee's mistake or inadvertence, courts consider factors outlined in FRCP 60(b)(1), including the risk of prejudice to the non-moving party, the length of delay, the reason for the delay, and whether the movant acted in good faith. The principle of irrevocable abandonment aims to prevent prejudice by allowing parties to rely on the abandonment's finality. However, requiring a party to litigate does not inherently create significant prejudice unless it materially impairs their ability to pursue their claims.
The Trustee's request to revoke abandonment of the Arbitration Funds is supported by the fact that the funds have not been distributed, which minimizes the risk of undue prejudice from reversing prior transfers. However, Attorney Arin's reliance on abandonment and continued pursuit of the Lawsuit is unconvincing since Sas prevailed before the case concluded, leaving only the collection of the Arbitration Funds as the necessary action. Given existing competing claims, Arin and Arin Associates would likely need to litigate their priority irrespective of the revocation, and such litigation occurring in bankruptcy does not constitute undue prejudice.
The length of delay in seeking revocation weighs heavily against the Trustee, as nearly a year passed after the Debtors’ case closure before action was taken, indicating a lack of diligence. Granting the revocation could lead to litigation that likely would not benefit the estate, as the Trustee noted that competing secured claims would consume the Arbitration Funds entirely. This suggests that pursuing the case would waste judicial resources with no real gain.
The Trustee had the ability to investigate the Lawsuit effectively and should have recognized the significance of Sas’s medical bills, which indicated that the Lawsuit's value was underestimated. This factor strongly disfavored the Trustee, as there is no evidence that she was misled by the Debtors or their counsel.
Although the Trustee did not act in bad faith, her inadequate investigation is insufficient to meet the necessary conditions for revoking abandonment. Consequently, the Turnover Motion for the Arbitration Funds is denied, as these funds are not considered property of the estate. The court orders the denial of the Motion for Turnover of Arbitration Funds and to Revoke Abandonment. All references to "Section" pertain to the Bankruptcy Code, while "FRCP" and "FRE" refer to the Federal Rules of Civil Procedure and Federal Rules of Evidence, respectively.
Sas was originally represented by the dissolved law firm Parker, Nelson, Arin, Chtd., but his personal injury claim representation continued with Attorney Arin at Arin Associates on a 40% contingency fee basis, with costs reimbursed. The court acknowledged records from the Eighth Judicial District Court in Nevada regarding Sas v. Castro, Case No. 05A505324, noting a stipulation for binding arbitration attached as Exhibit 'C' to Attorney Arin's declaration. In the Debtor’s Statement of Financial Affairs (SOFA), the lawsuit was identified, and Nevada law exempts personal injury compensation payments up to $16,150 from claims, excluding pain and suffering. The Trustee contacted Attorney Arin regarding the lawsuit, who claimed it had not settled, estimating its value at $20,000; however, Arin disputed this conversation based on his records.
Two claims were filed in Sas’s bankruptcy case: Shaked filed a secured claim for $95,012.40 based on a judgment against Sas, and Plaintiff Funding claimed $122,879.55 based on funds advanced to Sas related to the lawsuit. Both claims were allowed under Section 502(a) due to the absence of objections. The Trustee must demonstrate how to utilize the Arbitration Proceeds, as the liens exceed the Arbitration Award. The Trustee has several options for obtaining additional asset information from the debtor, including requests for information, seeking court orders for examinations, or adjourning creditor meetings.
The Trustee sought to reopen the bankruptcy case to recover the asset abandoned after the case closure on October 26, 2011. The motion for relief was timely filed on September 14, 2012. During the Turnover Motion hearing, it was noted that the Arbitration Funds are held by Arin Associates, with Sas awarded $200,000 while facing $319,942.64 in claims against these funds. The court concluded that once the property was abandoned, the Trustee and estate had no further interest in it, citing relevant case law.
