Court Opinion

ID: 3025089
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:33:01.682035+00
Date Added: 2024-06-11T12:46:34.782922
License: Public Domain

United States Bankruptcy Appellate Panel
                                 FOR THE EIGHTH CIRCUIT

                                        No. 00-6022 ND

In re:                                           *
                                                 *
Dean Nelson and Sharon Nelson,                   *
                                                 *
         Debtors.                                *
                                                 *
Kip M. Kaler,                                    *          Appeal from the United States
                                                 *          Bankruptcy Court for the
         Trustee-Appellant,                      *          District of North Dakota
                                                 *
                v.                               *
                                                 *
Dean Nelson and Sharon Nelson,                   *
                                                 *
         Debtors-Appellees.                      *

                                    Submitted: June 30, 2000
                                     Filed: August 17, 2000

Before KRESSEL, SCHERMER and FEDERMAN 1, Bankruptcy Judges

SCHERMER, Bankruptcy Judge

         1
        The Honorable Arthur Federman, United States Bankruptcy Judge for the Western District of
Missouri, sitting by designation.
         The trustee, Kip M. Kaler (“Trustee”), appeals the bankruptcy court2 order granting the motion
of debtors Dean Nelson and Sharon Nelson (“Debtors”) to compel the Trustee to abandon two parcels
of real estate and denying the Trustee’s motion for turnover of the two parcels. We have jurisdiction over
this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set
forth below, we affirm.

                                                 ISSUE

        The issue on appeal is whether the Trustee should be compelled to abandon two parcels of real
estate pursuant to 11 U.S.C. §554(b) as either burdensome or of inconsequential value to the bankruptcy
estate. We conclude that the bankruptcy court did not err when it ordered the Trustee to abandon the
property.

                                           BACKGROUND

        On June 21, 1999, the Debtors filed a voluntary petition for relief under Chapter 7 of the
Bankruptcy Code. In their schedule of real property filed with the bankruptcy court, the Debtors listed two
parcels of property. One tract consists of approximately 75 acres and includes tillable farmland as well as
a dwelling and various outbuildings. The Debtors reside on that tract, although they did not declare a
homestead exemption therein. The second tract consists of tillable farmland.

        The improved tract has a fair market value of $104,000 and is encumbered by outstanding debts
of $195,883. The unimproved tract has a fair market value of $77,000 and is encumbered by debts
totaling $263,000.

        Each tract is encumbered by mortgages in favor of the Red River State Bank and the Farm Service
Agency. Red River State Bank and the Farm Service Agency have assignment of rents clauses with
respect to each tract. As of the date of the hearing, the obligations to Red River State Bank were current,
the obligations to the Farm Service Agency were past due, and real estate taxes on each tract had not been

        2
          The Honorable William A. Hill, United States Bankruptcy Judge for the District of North
Dakota.

                                                    2
paid since 1997. Neither creditor had initiated a foreclosure proceeding with respect to either tract nor
had either exercised their assignment of rents clauses.

        In 1999, prior to filing their bankruptcy petition, the Debtors leased the tillable acreage on the
improved tract for $3,315 annually and the tillable acreage on the unimproved tract for $7,080 annually.
All rents received by the Debtors on account of the 1999 leases were used to make mortgage payments
to Red River Sate Bank. Neither property was leased in 2000.

        The Debtors spend approximately $230 per month to heat the dwelling on the improved tract,
$400 per month on electricity, and $1,690 annually on property and liability insurance for the tract.

        The Trustee filed his motion seeking a turnover of the two parcels of property from the Debtors
to the Trustee. In response, the Debtors filed their motion requesting the bankruptcy court to compel the
Trustee to abandon the parcels. After a hearing, the bankruptcy court concluded that the two parcels
would be of inconsequential value or benefit to the bankruptcy estate and, accordingly, ordered the Trustee
to abandon the property to the Debtors.

                                      STANDARD OF REVIEW

         We review the bankruptcy court’s factual findings for clear error and its conclusions of law de
novo. Fed. R. Bankr. P. 8013; Jensen v. Dietz, (In re Sholdan), 2000 WL 822112, at *2 (8th Cir. 2000).
Where the bankruptcy court has determined that the factual predicates for abandonment are present, we
review the court’s decision and reverse only in the case of an abuse of discretion. Johnston v. Webster
(In re Johnston), 49 F.3d 538, 540 (9th Cir. 1995). See also Miller v. Generale Bank Nederland, N.V.
(In re Interpictures, Inc.), 217 F.3d 74 (2nd Cir. 2000)(order resolving motion to compel abandonment is
reviewed under abuse of discretion standard). An abuse of discretion may only be found if the lower
court’s judgment was based upon clearly erroneous factual findings or erroneous legal conclusions.
Innovative Home Health Care, Inc. v. P.T.-O.T. Associates of the Black Hills, 141 F.3d 1284, 1286 (8th
Cir. 1998); Mathenia v. Delo, 99 F.3d 1476, 1480 (8th Cir. 1996), cert denied 521 U.S. 1123 (1997);
Hopper v. Hopper (In re Hopper), 228 B.R. 216, 218 (B.A.P. 8th Cir. 1999); Barger v,. Hayes County
Non-stock Co-op (In re Barger), 219 B.R. 238 (B.A.P. 8th Cir. 1998). Under an abuse of discretion
standard, this court will not reverse without a definite and firm conviction that the bankruptcy court
committed a clear error of judgment in weighing the relevant factors and in reaching its conclusion. Hopper

                                                    3
v. Hopper (In re Hopper), 228 B.R. 216, 218 (B.A.P. 8th Cir. 1999); Nelson v. Siouxland Federal Credit
Union (In re Nelson), 223 B.R. 349, 352 (B.A.P. 8th Cir. 1998).

                                             DISCUSSION

         Pursuant to Section 554(b) of the Bankruptcy Code, on request of a party in interest and after
notice and a hearing, the court may order the trustee to abandon property of the estate that is burdensome
to the estate or that is of inconsequential value and benefit to the estate. The bankruptcy court determined
that the two parcels of real estate were of inconsequential value or benefit to the estate. The bankruptcy
court’s determination is supported by the record and therefore will not be reversed.3

        The Trustee argues that the two parcels have more than inconsequential value. The Trustee admits
that the Debtors have no equity in the parcels and that a sale will not generate any benefit for the
bankruptcy estate. However, the Trustee argues that the parcels have value as rental property.
Additionally, he argues that the equity of redemption in the property provides another source of value for
the estate.

         The Trustee argues that the parcels can be rented and generate annual rental income for the estate
of $13,000. Such rental value is more than “inconsequential” and therefore precludes a compelled
abandonment of the parcels. The Trustee’s argument is speculative at best. The Trustee did not
demonstrate any effort to rent the parcels. Furthermore, Red River State Bank and the Farm Service
Agency each have an assignment of rents clause with respect to each parcel which can be activated if a
rental income stream is created. Therefore any benefit generated by a lease of the property will
undoubtedly be swiftly captured by the secured creditors.4 The court need not consider speculative factors

        3
          Court ordered abandonment has been reversed only upon the demonstration of a clear benefit
to the estate from the administration of the property. See, for example, Morgan v. K.C. Machine &
Tool Co. (In re K.C. Machine & Tool Co.), 816 F.2d 238, 243 (6th Cir. 1987), where the Sixth
Circuit Court of Appeals affirmed the district court opinion which reversed a bankruptcy court’s order
compelling a trustee to abandon property. The court found a demonstrated benefit to the estate in
excess of $156,000 from the administration of the asset and, accordingly, determined that the
abandonment order was in entered in error.
        4
         Although neither secured creditor had activated its assignment of rents clause as of the date of
the hearing before the bankruptcy court, Red River State Bank has since exercised its rights under its

                                                     4
when determining whether abandonment is appropriate under Section 554(b) of the Bankruptcy Code.
Vu v. Kendall (In re Vu), 245 B.R. 644, 649 (B.A.P. 9th Cir. 2000).

         The Trustee next argues that even if the assignment of rents clauses in favor of Red River State
Bank and the Farm Service Agency are activated, the Trustee can still recover one year’s worth of rent
if a foreclosure sale occurs. North Dakota law provides for a one-year redemption period after a
foreclosure sale. N.D. Cent. Code §28-24-02 (1999). During the redemption period, the owner of the
property is entitled to the possession, rents, use, and benefit of the property sold from the date of sale until
the expiration of the redemption period. N.D. Cent. Code §28-24-11 (1999). Therefore, according to
the Trustee, in the event Red River State Bank forecloses on the parcels, the Trustee will have the
opportunity to rent the parcels for the redemption period and recover for the bankruptcy estate the yearly
rental value for the two parcels of $13,000.5 Again, the Trustee’s argument is tenuous, at best. While the
above-described scenario may be possible, the Trustee presented no evidence that Red River State Bank
has taken any steps to foreclose its interests in the parcels, nor that it has any intention of doing so in the
future. Furthermore, the Trustee fails to consider the fact that the Farm Service Agency is not subject to
the North Dakota redemption statute and, therefore, if it forecloses its interests in the property, the benefit
of the redemption period will not be available.6 This scenario is more likely to occur given the fact that the
indebtedness to the Red River State Bank was current as of the hearing date while the indebtedness to the
Farm Service Agency was in arrears.

assignment of rents clause. Therefore any rental stream generated at this time will inure to Red River
State Bank’s benefit and not to that of the bankruptcy estate. Furthermore, if the Trustee were to rent
the parcels, the estate will incur, at a minimum, obligations for taxes on the property for which no funds
will be available. Thus the property would not only provide no benefit to the estate, it would be
burdensome.
        5
           The Trustee’s argument assumes that he can rent the property. The majority of the property is
tillable farmland and therefore only has rental value if the Trustee can rent it for the entire growing
season. If a foreclosure sale occurs during the growing season, it is extremely unlikely that the Trustee
will be able to rent the property without the ability to assure a prospective tenant of the continued use
and possession of the property until after harvest.
        6
        As a courtesy, the North Dakota U.S. Attorney’s Office provides a sixty-day redemption
period. However, the North Dakota U.S. Attorney’s Office is not bound to provide any redemption
period. Furthermore, the rental value of tillable farmland for a sixty-day period is inconsequential at
best.

                                                       5
         The bankruptcy court’s determination that the parcels are of inconsequential value to the estate is
not clearly erroneous. The bankruptcy court cannot be expected to deny the Debtors’ request to compel
abandonment on the basis of a speculative scenario which may or may not occur in the future. Vu v.
Kendall (In re Vu), 245 B.R. 644, 649 (B.A.P. 9th Cir. 2000). Otherwise, trustees could certainly invent
a scenario under which virtually all property could become valuable in the future and thereby defeat any
motion to compel abandonment. The bankruptcy court cannot gaze into a crystal ball and see the future.
It can only consider the evidence before it. In this instance, no concrete evidence of value to the estate was
presented and, therefore, the bankruptcy court did not abuse its discretion in compelling the Trustee to
abandon the parcels.

                                             CONCLUSION

        The bankruptcy court properly determined that the Debtor’s two parcels of real estate were of
inconsequential value or benefit to the estate. Furthermore, the bankruptcy court did not abuse its
discretion in ordering the trustee to abandon such property. Consequently, the court’s order directing the
Trustee to abandon the parcels of real property pursuant to Section 554(b) of the Bankruptcy Code is
affirmed.

        A true copy.

                Attest:

                          CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
                          EIGHTH CIRCUIT

                                                      6