In re: Augustine Pena, III

Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 1 of 20
FILED
MAY 21 2019
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
ORDERED PUBLISHED
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. EC-18-1098-SLB
AUGUSTINE PENA, III, Bk. No. 1:12-bk-13170
Debtor.
AUGUSTINE PENA, III,
Appellant. OPINION
Argued and Submitted on January 24, 2019
at Sacramento, California
Filed – May 21, 2019
Appeal from the United States Bankruptcy Court
for the Eastern District of California
Honorable Fredrick E. Clement, Bankruptcy Judge, Presiding
Appearance: Sharlene Fay Roberts-Caudle argued for appellant.
Before: SPRAKER, LAFFERTY, and BRAND, Bankruptcy Judges.
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 2 of 20
SPRAKER, Bankruptcy Judge:
INTRODUCTION
Chapter 71 debtor Augustine Pena, III, appeals from an order denying
his application to recover $51,777.03 in unclaimed funds held in the
bankruptcy court’s registry. The unclaimed funds were rents his chapter 7
trustee collected from Pena’s rental properties before the trustee
abandoned those properties. The trustee initially tried to pay the rents to
the creditors holding security interests in the underlying rental properties,
but the secured creditors never cashed the trustee’s checks. The trustee
thereafter voided the checks and deposited the funds in the court’s registry
in accordance with § 347(a).
Pena claims that, because his former secured creditors are no longer
entitled to the unclaimed funds, the monies should be paid to him instead.
Pena argues that the trustee abandoned the rents when she abandoned the
underlying rental properties. He reasons that, as a result, the estate has no
interest in the funds the trustee deposited into the court’s registry. We
disagree. The chapter 7 trustee has administered these rents, and they
remain property of the estate. As a result, ownership of the funds has never
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532. All “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 3 of 20
reverted to the debtor. None of Pena’s other arguments on appeal have any
merit. Accordingly, we AFFIRM the bankruptcy court’s order denying
Pena’s application for unclaimed funds.
FACTS
Pena commenced his bankruptcy case by filing a voluntary chapter
11 petition in April 2012. At the time he filed his bankruptcy, Pena owned
30 parcels of real property, 29 of which were rental properties. In June 2012,
the bankruptcy court sua sponte converted the case from chapter 11 to
chapter 7 because of Pena’s unauthorized use of cash collateral. Trudi G.
Manfredo was appointed to serve as the chapter 7 trustee. Pena appealed
the conversion order first to the United States District Court for the Eastern
District of California and then to the Ninth Circuit Court of Appeals. He
lost both appeals.
After conversion, Manfredo sought to abandon the rental properties.
The bankruptcy court ruled, however, that during the pendency of the
debtor’s appeals, it lacked jurisdiction to order relief from stay or
abandonment with respect to any of Pena’s real property. Instead, the
bankruptcy court entered an order under § 721 authorizing Manfredo to
manage Pena’s rental properties, including their maintenance and the
collection of rents. Pursuant to that order, Manfredo managed the rental
properties until Pena lost both appeals. Manfredo collected the rents from
the rental properties, deposited them into the estate’s account, and
3
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 4 of 20
disbursed them in accordance with her duties as chapter 7 trustee. After the
Ninth Circuit affirmed conversion of the case to chapter 7, Manfredo
abandoned the rental properties and shortly thereafter ceased collection of
rents.2
The unclaimed funds at issue represent rents Manfredo collected
from rental properties throughout California. Two of the properties were
located in Compton, California. The other rental properties at issue were in
Visalia, Corcoran, and Tulare, California. Each property was encumbered
by a deed of trust, and the rents from the properties were treated as cash
collateral of the respective secured creditors while Manfredo administered
the properties. Manfredo abandoned the Tulare property in July 2014, and
abandoned the other properties in August 2014. During the second half of
2015, several months before the bankruptcy case was closed, Manfredo
sought to pay the secured creditors a combined total of $51,777.03
comprised of rents collected from the properties.3
Manfredo’s cash disbursement records reflect that she tried
2
Pena did not include in his excerpts of record copies of Manfredo’s 2014 filings
pursuant to which she formally abandoned the estate’s interest in the subject parcels of
real property. However, we can and do take judicial notice of these court filings and the
other papers filed in Pena’s bankruptcy case. O'Rourke v. Seaboard Sur. Co. (In re E.R.
Fegert, Inc.), 887 F.2d 955, 957–58 (9th Cir. 1989).
3
Pena did not present any evidence before the bankruptcy court, or argument on
appeal, to trace the origins of the unclaimed funds. Accordingly, we consider all the
unclaimed funds to have come from pre-abandonment rents, as the bankruptcy estate
would have no interest in post-abandonment rents.
4
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 5 of 20
unsuccessfully to pay these amounts to the secured creditors several times.
After those attempts failed, in February 2016, Manfredo paid the $51,777.03
in rent proceeds into the court registry. Manfredo’s actions concerning the
unclaimed funds were disclosed in her Final Account and Distribution
Report (“Final Account”).
Although Manfredo administered the rents on behalf of the secured
creditors, the case was administered as a no asset case, and the Final
Account proposed no distribution to Pena’s unsecured creditors. Manfredo
served the notice of the Final Account on all parties in interest, including
Pena. The notice advised that if no objections were filed, a final decree
would be entered and the case closed without further order. Neither Pena,
nor anyone else, objected to the Final Account. The bankruptcy court
entered a final decree and closed Pena’s bankruptcy case on December 27,
2016.
Well over a year after the case was closed, on March 1, 2018, Pena
filed an application seeking to recover the unclaimed funds without
reopening the bankruptcy case.4 According to Pena, none of the secured
4
Whereas the application requested recovery of the entire $51,777.03 in
unclaimed funds on deposit in the court’s registry, Pena’s legal brief in support of his
application only sought $45,685.12 of the unclaimed funds. The difference between
these two amounts – $6,091.91 – roughly equals the aggregate amount of rents collected
from the Tulare property that later became unclaimed funds ($6,091.89). Pena did not
submit with his application any evidence or law pertaining to Tulare property or the
$6,091.89. Furthermore, the certificate of service accompanying his application reflects
(continued...)
5
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 6 of 20
creditors could establish a present entitlement to the unclaimed funds
because the subject properties had been foreclosed upon or Pena was
current on his mortgage payments. Pena stated that he conveyed the
Compton properties to a third party in September 2014. He also advised
that the secured creditors of the Visalia and Corcoran properties foreclosed
on these properties in 2016. Nothing in the record demonstrates what
happened to the Tulare property.
Pena further argued that, as a result of Manfredo’s abandonment of
the rental properties in 2014, the rental properties – and the rents Manfredo
collected – should be treated “as if no bankruptcy case had been filed,” in
which case he would have been entitled to collect and use all rents absent
any event of default under his security agreements with his secured
creditors. Therefore, Pena concluded that he, and not his unsecured
creditors, was entitled to the unclaimed funds.
Pena served the application on the secured creditors, but received no
objections.5 Still, the bankruptcy court disagreed with Pena. According to
4
(...continued)
that Pena did not attempt to serve any parties who might have claimed an interest in
the Tulare property or the rents derived from that property. Pena does not mention the
Tulare property in his brief on appeal either, further suggesting that he seeks to recover
the unclaimed rents on the other properties but not those related to the Tulare property.
5
Pena also served his application on Manfredo, who did not file a response
either. However, the closing of the bankruptcy case discharged the trustee, and Pena
did not seek to have the bankruptcy case reopened. Accordingly, Manfredo was no
longer the trustee for the case when Pena filed his application.
6
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 7 of 20
the court, Manfredo’s disbursement of the rents into the court’s registry as
unclaimed funds when the secured creditors failed to cash their
disbursement checks was consistent with her statutory obligations under
§ 347.6 Furthermore, the bankruptcy court held that, pursuant to 28 U.S.C.
§ 2042, the secured creditors had five years to claim the funds. The court
noted that this time period was not close to running. If the five-year time
period elapsed without the secured creditors successfully claiming the
funds, the bankruptcy court opined that the funds should escheat to the
United States. 28 U.S.C. § 2042.
More importantly, the bankruptcy court ruled that, as between Pena
and his bankruptcy estate, the bankruptcy estate was entitled to the rents.
The bankruptcy court rejected Pena’s assertion that the unclaimed rents
collected from the properties had been abandoned along with the
properties in 2014, noting that rents were separate property of the estate
under § 541(a)(6). The court explained that, under the distribution scheme
imposed by § 726(a), it was the estate’s unsecured creditors, not Pena, that
were entitled to unclaimed rents if the secured creditors no longer had any
6
§ 347(a) provides:
Ninety days after the final distribution under section 726, 1226, or 1326 of
this title in a case under chapter 7, 12, or 13 of this title, as the case may be,
the trustee shall stop payment on any check remaining unpaid, and any
remaining property of the estate shall be paid into the court and disposed
of under chapter 129 of title 28.
7
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 8 of 20
entitlement to those funds. The court noted that Pena had disclosed
$411,000 in unsecured debt that remained unpaid.
On March 29, 2018, the bankruptcy court entered an order denying
Pena’s application. Pena timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err when it denied Pena’s application to
recover the unclaimed funds?
STANDARD OF REVIEW
The issues raised by this appeal require us to construe the
Bankruptcy Code and the federal statutes governing unclaimed funds.
Issues of statutory construction are legal questions, which we review de
novo. Greenpoint Mortg. Funding, Inc. v. Herrera (In re Herrera), 422 B.R. 698,
709 (9th Cir. BAP 2010), aff'd sub nom. and adopted, Home Funds Direct v.
Monroy (In re Monroy), 650 F.3d 1300 (9th Cir. 2011).
DISCUSSION
I. The Trustee Properly Administered The Rents As Property of the
Estate.
Generally speaking, a chapter 7 trustee administers property of the
estate by liquidating the assets to cash and then distributing them to the
8
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 9 of 20
estate’s creditors. See §§ 704(a)(1), 726; see also Harris v. Viegelahn, 135 S. Ct.
1829, 1835 (2015); 2 Collier Bankruptcy Practice Guide ¶ 26.03 (2018)
(“Collier”); Handbook For Chapter 7 Trustees (U.S. Dep’t Of Justice) (Oct.
1, 2012) at pp. 4-1, 4-33, (“Trustee Handbook”). 7 Here, the trustee did not
liquidate the rental properties but instead managed them for a time under
court authorization pursuant to § 721. As part of her management of the
rental properties, Manfredo transmitted the collected rents to Pena’s
secured creditors. After she abandoned the rental properties, Manfredo
transmitted the remaining collected rents in the same manner. Pena never
objected to any of Manfredo’s transmittals to the secured creditors. In fact,
he repeatedly has conceded in his appeal brief that the rents Manfredo
collected and successfully distributed to the secured creditors were estate
property. This is consistent with § 541(a)(6), which defines property of the
estate to include: “[p]roceeds, product, offspring, rents, or profits of or
from property of the estate, except such as are earnings from services
performed by an individual debtor after the commencement of the case.”
(Emphasis added.)8
After the secured creditors failed to cash the unclaimed funds checks
7
Available at https://www.justice.gov/ust/file/handbook_for_chapter_7_
trustees.pdf/download (last viewed April 17, 2019).
8
Except for his abandonment nunc pro tunc argument discussed below, Pena
also has conceded that the rental properties were property of the bankruptcy estate
until they were abandoned.
9
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 10 of 20
identified above, Manfredo took action consistent with § 347(a) and Rule
3011.9 When a creditor fails to cash a chapter 7 trustee disbursement check
within 90 days of the final distribution, the trustee must stop payment on
the check and pay the funds into the court registry as unclaimed funds.
§ 347(a); Rule 3011; see also 2 Collier, at 26.18[4]; Trustee’s Handbook, at p.
4-33. Thereafter, the “rightful owners” of the funds may claim them from
the court registry. 28 U.S.C. § 2041.10 The federal statutory scheme further
provides:
In every case in which the right to withdraw money deposited
in court under section 2041 has been adjudicated or is not in
dispute and such money has remained so deposited for at least
five years unclaimed by the person entitled thereto, such court
shall cause such money to be deposited in the Treasury in the
name and to the credit of the United States. Any claimant
9
Rule 3011 provides:
The trustee shall file a list of all known names and addresses of the entities
and the amounts which they are entitled to be paid from remaining property
of the estate that is paid into court pursuant to § 347(a) of the Code.
10
28 U.S.C. § 2041 provides:
All moneys paid into any court of the United States, or received by the
officers thereof, in any case pending or adjudicated in such court, shall be
forthwith deposited with the Treasurer of the United States or a
designated depositary, in the name and to the credit of such court.
This section shall not prevent the delivery of any such money to the
rightful owners upon security, according to agreement of parties, under
the direction of the court.
10
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 11 of 20
entitled to any such money may, on petition to the court and
upon notice to the United States attorney and full proof of the
right thereto, obtain an order directing payment to him.
28 U.S.C. § 2042 (emphasis added).
Here, the secured creditors’ rights to the rents Manfredo
administered were undisputed at the time the bankruptcy court entered its
final decree. Among other things, the final decree approved Manfredo’s
disbursement of the unclaimed funds into the court registry (pursuant to
§ 347 and Rule 3011) in the name of the secured creditors to whom
Manfredo had determined the funds were owed. Under 28 U.S.C. §§ 2041and 2042, the funds must remain in the court registry until their “rightful
owner” with “full proof” of entitlement comes to claim them. If, after five
years, the funds still remain unclaimed in the court registry, then they must
be turned over to the United States Treasury. 28 U.S.C. § 2042.
In short, the bankruptcy court did not err in finding that the trustee
properly administered the unclaimed rents.
II. The Secured Creditors’ Entitlement To The Rents.
Pena does not seriously dispute that Manfredo properly
administered the unclaimed rents. Citing 28 U.S.C. §§ 2041 and 2042, he
contends that the unclaimed rents now belong to him because the secured
creditors no longer are the rightful owners of the unclaimed rents. Pena
argues that, after the bankruptcy estate abandoned the real properties, the
Compton properties were conveyed to a third party, and the Visalia and
11
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 12 of 20
Corcoran properties were foreclosed. He argues that the secured creditors
cannot prove a present entitlement to the funds, and this is why they never
cashed the payments and never objected to his application for the funds.
As a general proposition of law Pena is correct that, if the secured
creditors sought to collect the unclaimed funds deposited into the registry,
they must prove they have “a ‘present entitlement to the unclaimed funds
sought.’” In re Scott, 346 B.R. 557, 559 (Bankr. N.D. Ga. 2006)(quoting In re
Acker, 275 B.R. 143, 145 (Bankr. D.D.C. 2002)). A “claimant does not have a
‘present entitlement’ to unclaimed funds if the original secured claim has
been brought current or satisfied, either through payment or foreclosure.”
In re Pena, 456 B.R. 451, 454 (Bankr. E.D. Cal. 2011) (unrelated to
debtor)(quoting In re Scott, 275 B.R. at 559). Here, however, the secured
creditors are not seeking to recover the unclaimed rents. Rather, Pena
asserts that he is entitled to the unclaimed rents. Pena reasons that, since
the secured creditors can no longer establish a present entitlement to these
funds, state law governs and requires that the monies must be distributed
to him. We need not determine what rights the secured creditors may
currently have to the unclaimed rents because they remain property of the
bankruptcy estate over which Pena has no interest.
III. The Estate’s Abandonment Of The Rental Properties Did Not
Abandon Its Interest In The Collected Rents.
Pena acknowledges that the bankruptcy estate had an interest in the
12
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 13 of 20
rents prior to abandonment of the rental properties. He contends, however,
that Manfredo abandoned any interest in the rents when she abandoned
the real property. Since the secured creditors can no longer prove a present
entitlement to the proceeds, and the bankruptcy estate abandoned any
interest it had in the unclaimed rents, Pena reasons that the funds belong to
him.
Abandonment is the “formal relinquishment of the property at issue
from the bankruptcy estate.” Catalano v. C.I.R., 279 F.3d 682, 685 (9th Cir.
2002). Abandonment of an estate asset is governed by § 554, and can occur
in one of three ways: (1) the bankruptcy trustee can obtain bankruptcy
court authority to abandon the asset (see § 554(a)); (2) another party in
interest can seek to compel the trustee to abandon the asset (see § 554(b)); or
(3) abandonment may occur by operation of law – also known as a
“technical abandonment” (see § 554(c)). No other party has sought
abandonment of the rents under § 554(b). While Pena does refer to the
abandonment of the unclaimed rents upon the closing of the case, he has
not asserted any argument that the estate technically abandoned the
unclaimed rents under § 554(c). Nor does the record provide any support
for technical abandonment, as Manfredo administered the rents by paying
the secured creditors she understood had rights in the cash collateral at the
time she closed the bankruptcy case. This leaves abandonment under
§ 554(a) as the basis for Pena’s interest in the unclaimed rents.
13
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 14 of 20
Pena contends that Manfredo’s abandonment of the underlying
rental properties must be given nunc pro tunc effect to the petition date. He
argues that, if the rental properties are deemed to have been abandoned
retroactively to the bankruptcy filing, this divests the bankruptcy estate of
any interest in not only the rental properties themselves, but also the rents
derived from those properties.
As a general rule Pena is correct that “[u]pon abandonment, the
debtor’s interest in the property is restored nunc pro tunc as of the filing of
the bankruptcy petition.”11 Catalano, 279 F.3d at 685. “The purposes of
11
Though retroactive application of abandonment is the general rule, it “is not a
categorical imperative, to be blindly followed to a result that is unjust.” Wallace v.
Lawrence Warehouse Co., 338 F.2d 392, 394 n.1 (9th Cir. 1964). The bankruptcy court
concluded that, as between Pena and his unsecured creditors, the creditors, who were
owed more than $411,000, had a superior right to the unclaimed funds. We agree.
Pena’s reliance on Van Curen v. Great Am. Ins. Co. (In re Hat), 363 B.R. 123 (Bankr. E.D.
Cal. 2007), is not persuasive. There, the chapter 11 trustee abandoned several farms, and
permitted the debtor to farm the properties even prior to abandonment. Id. at 129, 132.
When the crops failed, the estate claimed the insurance proceeds as property of the
estate. Id. at 133-34. The debtor argued that the estate had no interest in the insurance
proceeds based upon the prior abandonment of the farms, which included the crops. Id.
at 141-42. The court held that, while abandonment did not deprive the estate of its
insurance policy, retroactive application of the abandonment negated the estate’s
insurable interest in the crops and thus deprived the estate of any interest in the
insurance proceeds. Id. Considering the equities before applying abandonment
retroactively, the Hat court found that the estate’s loss of its interest in the proceeds was
not unjust given its realization that the estate would not be able to farm the properties
and its decision to allow Hat to resume farming the properties prior to abandonment.
Id. at 142. But whereas the equities in Hat supported retroactive abandonment of the
farms and crops to prevent the estate from receiving a windfall from the debtor’s
efforts, in this case the windfall would result if Pena was to recover the rents while his
unsecured creditors receive nothing. In any event, as we hold infra, abandonment of the
rental properties did not alter the separate status of the rents as property of the estate.
14
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 15 of 20
retroactive vesting include to protect against the running of the statute of
limitations, and to compensate the trustee for any cost he may have
incurred in maintaining the property during his custody of it.” Morlan v.
Universal Guar. Life Ins. Co., 298 F.3d 609, 617 (7th Cir. 2002) (internal
citations omitted); 4 Norton Bankr. L. & Prac. 3d § 74:1 (2019).
As often noted, abandonment of an asset is not to be taken lightly as
it removes the asset from the estate and returns it to the debtor. Pham v.
United States Trustee (In re Pham), 2019 WL 77505, *4 (C.D. Cal. Jan. 2,
2019)(citing Catalano, 279 F.3d at 686). Before a trustee abandons property
of the estate, she must give notice of the property to be abandoned.
§ 554(a); Quarre v. Saylor (In re Saylor), 108 F.3d 219, 221 n.3 (9th Cir. 1997).
Moreover, the “intent to abandon an asset must be clear and unequivocal.”
Reisinger v. Seneca Specialty Ins. Co., No. CV 3:07-1221, 2011 WL 13220212, at
*7 (M.D. Pa. Mar. 21, 2011), report and recommendation adopted, No.
3:07CV1221, 2011 WL 2433681 (M.D. Pa. June 14, 2011) (citing Catalano, 279
F.3d at 686). Accordingly, “there is no abandonment without notice to
creditors.” Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705,
709 (9th Cir. 1986). For these very reasons, “there is no informal
abandonment of property of the estate.” In re Hat, 363 B.R. at 138.
Manfredo moved to abandon the rental properties, identifying the
properties to be abandoned by street address. The required notice of
abandonment stated only that the estate “intends to and will abandon the
15
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 16 of 20
following described real properties as burdensome and inconsequential
value to the estate . . . .” The subsequent notices filed by Manfredo to
effectuate the abandonments similarly were limited to abandonments of
the rental properties. None of the notices ever mentioned the rents the
estate had collected. Manfredo never sought, or gave notice of any intent,
to abandon the remaining rents the estate had collected. Her actions speak
loudly to a contrary intent as she was attempting to distribute the collected
rents.
Pena does not distinguish between the unclaimed rents and the
abandoned rental properties from which they were derived. He contends
that abandonment of the rental properties resulted in abandonment of the
rents. However, they are not the same. Section 541(a)(6) independently
categorizes proceeds from property of the estate. As distinct property of the
estate, a trustee must clearly state her intent to abandon such rents under
§ 554(a).
In an unpublished decision, the District Court for the Central District
of California recently considered whether the abandonment of rental
properties precluded the chapter 7 trustee from denying the debtors their
discharge under § 727(a)(2) for improperly transferring post-petition rents.
In re Pham, 2019 WL 77505, *3-5. In Pham, the debtors argued that the
trustee could not prove they had transferred property of the estate because
the trustee had abandoned the rental properties that generated the rents.
16
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 17 of 20
The bankruptcy court rejected the debtors’ argument, noting that the notice
of abandonment referred only to the rental properties and not the rents. Id.
at *2. Moreover, the bankruptcy court found it telling that the trustee had
made demand on the debtors for the turnover of the missing rents, further
evincing an intent not to abandon the rents. Id.On appeal, the district court affirmed the denial of the discharge
under § 727(a)(2) based on the debtor’s transfer of property of the estate. Id.
at *5. The court found that the rental proceeds were separate interests
distinct from the real property, and agreed that the record failed to
establish any intent to abandon the rental proceeds. Explaining its
reasoning, the district court noted that “numerous courts have held that the
abandonment of real property does not also abandon personal property
that is related to, but separable from the real property, such as rental
proceeds or insurance policies.” Pham, 2019 WL 77505, * 5 (citing Pierson v.
Paris (In re Humeston), 83 F.2d 187, 189 (2d Cir. 1936);12 see also In re Hat, 363
B.R. at 141-42 (abandonment of farms did not result in abandonment of
insurance policies covering crops grown on the farms).
Pena’s situation mirrors that of the debtor in Pham. In both cases, the
trustees sought to abandon real property while attempting to administer
12
In Humeston, Judge Learned Hand considered the effect of abandonment of real
property on the bankruptcy estate’s interest in encumbered rents and wrote: “even if
the trustee did abandon the equity, he did not include the rents; the two were not
inseparably linked.” In re Humeston, 83 F.2d at 189.
17
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 18 of 20
rents from those properties. In Pham, the trustee was seeking turnover of
the rents from the debtor. Here, Manfredo actually had collected the rents
and was attempting to distribute them based on the interests as they
existed at the time she closed the case. In neither situation did the trustee
mention the rents within the notices of abandonment. Manfredo, like the
trustee in Pham, did not abandon the rents she was attempting to
administer.
Pena focuses upon the secured creditors’ present entitlement to the
unclaimed rents, but the bankruptcy court did not rule on this issue.
Rather, it found that Pena was not entitled to the funds. Because the
unclaimed rents remain property of the bankruptcy estate, the bankruptcy
court did not err in denying Pena’s application to recover those funds.
IV. The Designation Of The Bankruptcy As A No Asset Case Is
Irrelevant To The Determination Of The Property Of The Estate.
Pena also makes much of Manfredo’s designation of his case as a no
asset chapter 7 bankruptcy.13 The designation of the case as a no asset case
was based on the trustee’s understanding that the secured creditors held
continuing security interests against the rental properties and all rents she
13
Pena attempts to argue on appeal that the unclaimed funds actually were
surplus funds because some of the secured creditors to whom Manfredo mailed the
checks affirmatively refused the rent payments in light of the pending foreclosure of the
underlying rental properties. Pena’s argument makes no sense and ignores the nature of
the rents as property of the estate subject to the distribution requirements of § 726(a) if
administered by the trustee.
18
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 19 of 20
collected that were generated by those encumbered properties. This
assumption was manifested in the trustee’s Final Account. No one,
including Pena, objected to the trustee’s proposed distribution to the
secured creditors. If these lenders no longer have secured claims against
the remaining rents, and those funds actually are now unencumbered, they
nonetheless remain property of the estate available for distribution
pursuant to the statutory scheme Congress enacted for chapter 7 cases, as
set forth in § 726(a). Viegelahn, 135 S. Ct. at 1835; see also Elliot v. Four Seasons
Props. (In re Frontier Props., Inc.), 979 F.2d 1358, 1366-67 (9th Cir. 1992).
The designation of the bankruptcy as a no asset case is irrelevant to
the question presented in this appeal and provides the debtor with no
interest in the remaining rents. The fact that some additional action is
required to properly administer these rents in light of Manfredo’s prior
Final Account does not alter the nature of the unclaimed funds as property
of the estate. Rather, a party in interest such as an unsecured creditor or the
United States Trustee should be afforded the opportunity to reopen the
bankruptcy case, establish that the unclaimed rents are not encumbered,
and modify the Final Account to permit distribution of the unclaimed rents
to the unpaid creditors pursuant to § 726(a). That distribution scheme
contemplates payment in full of all creditors, including interest, before the
debtor can receive any distribution from the estate’s assets. Viegelahn, 135 S.
Ct. at 1835.
19
Case: 18-1098, Document: 20, Filed: 05/21/2019 Page 20 of 20
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
order denying Pena’s application seeking to recover the unclaimed funds.
20