Court Opinion

ID: 9705815
Source: CourtListenerOpinion
Date Created: 2023-08-26 01:22:16.875897+00
Date Added: 2024-06-11T18:22:16.186882
License: Public Domain

KLEIN, Bankruptcy Judge,
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 become 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.13 11 U.S.C. § 554(d); cf. Hel-bling & Klein, The Emerging Harmless Innocent Omission Defense to Nondis-chargeability under Bankruptcy Code § 523(a)(3)(A): Making Sense of the Confusion over Reopening Cases and Amending Schedules to Add Omitted Debts, 69 Am.BaNKR.L.J. 33, 37-47 (1995).
*32Thus, in the case of an omitted cause of action, the trustee is the real party in interest and the more correct defenses are that the action is not being prosecuted by the real party in interest and that the debtor lacks standing. Haley v. Dow Lewis Motors, Inc., 72 Cal.App.4th 497, 511, 85 Cal.Rptr.2d 352 (1999).
The purpose of reopening the bankruptcy case in this context is to 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), 954 F.2d 569, 574-75 (9th Cir.1992).
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 automatic 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;14 it ought to be in the interest of defendant to be in a position to have a definitive resolution of the matter.
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. The trustee has authority to act for the benefit of the estate and may sell the cause of action, prosecute it in nonbank-ruptcy court,15 settle it, or abandon it to *33the debtor as of inconsequential value to the estate.16
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 have 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.