Ninth Circuit Rules Automatic Stay Protects Abandoned Property

A recent decision by the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals holds that foreclosure on property after the bankruptcy trustee has abandoned it will violate the automatic stay provisions of the bankruptcy code. In previous posts, we have discussed how automatic stays under Chapter 13 Bankruptcy can help stave off an imminent home foreclosure or protect a car from being repossessed.

Chapter 7 Bankruptcy Trustees and Property Abandonment

In section 7 bankruptcy, an impartial trustee is appointed to liquidate any of the creditor’s non-exempt assets. Non-exempt assets might be real property or other assets that a debtor has over a certain amount. The trustee’s job is to liquidate these assets and distribute the property to the creditors of the bankruptcy estate. Sometimes, a trustee may decide to abandon property from the trust if it holds little value or is difficult to sell. Even if a trustee has abandoned property, it is still protected by the automatic stay protections of the bankruptcy code. Section 362 of the bankruptcy code provides that a petition for bankruptcy will act as an automatic stay against property of the bankruptcy estate and the debtor.

The Ninth Circuit’s decision in Gaspron, Inc. v. Fateh

In Gaspron, a debtor who filed for Chapter 7 bankruptcy owned a gas station that was not currently operational. Additionally, the gas station was contaminated hazardous waste and the underground storage tanks were not in compliance with regulations. Without selling the gas station, there was no feasible way to distribute the asset to the creditors. The bankruptcy trustee abandoned the gas station because she did not have enough funds to make it operational in order to sell, and, as such, it had no value to the bankruptcy estate.

After the trustee abandoned the gas station, a creditor who held a lien against the gas station seized the asset and had a foreclosure sale in order to recoup some of their losses. The debtor protested and moved to set aside the foreclosure sale, arguing that after a trustee abandons property, it reverts to the debtor and is protected from foreclosure by the automatic stay provision. The bankruptcy court held that the automatic stay did not protect property that had been abandoned by the trustee. The debtor appealed to the Ninth Circuit, which held that upon abandonment, property reverts to the debtor. The automatic stay provision under section 362(a)(5) protects the property of the debtor. As such, the gas station should have been protected and the foreclosure sale was improper.

This decision by the Ninth Circuit may help some bankruptcy filers, particularly those who have an asset that is not easily sold or auctioned by the bankruptcy trustee.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code