Abandonment of Claim Permitted by Bankruptcy Court in New Mexico

The United States Bankruptcy Court in Albuquerque decided to permit abandonment of property upon an unopposed motion by the Debtor itself. In the case of In Re College of Christian Brothers, Case No. 12-11195 j7 (Bankr Ct. N.M. 2014), the Court entered a default order granting a motion to abandon a pending claim held by the Debtor. Neither the Trustee in the case nor any other party to the bankruptcy case objected to the abandonment of a claim for indemnification against an insurance company which the debtor college maintains in a separate legal action wherein it was sued. The decision by the bankruptcy court in this Chapter 7 action does not mean that the Debtor must abandon its indemnification claim it is pursuing in that other case. Rather it means that the Trustee cannot or would not be able to use the proceeds from that claim – were it eventually successful – to pay off any debts owed by the Debtor.

When a Chapter 7 debtor files for bankruptcy protection the property of that debtor becomes part of the bankruptcy estate which itself is then administered by the trustee. Until certain claims on property are officially discharged and the case reaches its conclusion, the trustee exercises controls of the property. But a trustee, as well as other parties, can request the court order, pursuant to 11 U.S. Code § 554 of the Bankruptcy Code, specific property be abandoned where:

1. that property is of “inconsequential value and benefit” to the estate;

2. if the property is “burdensome” to the estate; or

3. where there is some other good reason why property of the estate should not be used to pay creditors.

In reaching its decision on the motion, the Court focused on two important factors. First, the trustee did not participate or ask to play a role in the separate legal action which is a state court case pending in Santa Fe. Second, the trustee did not object to the motion for abandonment. This particular Chapter 7 bankruptcy case appears to be a surplus case suggesting that the trustee believes that there is adequate value in the other property which is part of the bankruptcy estate to pay off pending claims.

As a result if the debtor in that other separate legal case does prevail in securing a recovery from the insurance company against which it asserted its indemnification claim, it would be allowed to use the proceeds in any fashion it so decides – absent any order in that other case commanding the college to use the funds for some other purpose.

This case also demonstrates how the term “property” in the bankruptcy context does not merely refer to tangible items such as homes or cars but also includes contingent interests such as legal claims which may or may not have any value depending on whether the Debtor succeeds in winning their argument for indemnification against the insurance company. 

In Albuquerque, Giddens & Gatton Law, PC has bankruptcy attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases and can specifically provide advice as to disposition of property in Chapter 7, Chapter 11 and Chapter 13 cases.. The New Mexico firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, PC at (505) 633-6298 to set up an appointment or visit the firm’s website at giddenslaw.com. Giddens & Gatton Law, PC is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.