Sixth Circuit holds that tendering homestead exemption does not deprive debtors of standing to compel abandonment

The Sixth Circuit held in In re Burke, 863 F.3d 521 (6th Cir. July 14, 2017), that a Trustee cannot deprive Chapter 7 debtors of standing to compel the Trustee to abandon the property by tendering their homestead exemption.

The Chapter 7 Trustee moved to evict Debtors from their home, which was listed as an asset of the bankruptcy estate. In so doing, the Trustee asserted that the property should be sold for the benefit of the creditors and evicting the Debtors would make the property easier to sell. The Trustee tendered Debtors a check for the value of their statutory homestead exemption, which Debtors rejected. In response, Debtors moved to compel the Trustee to abandon the property under 11 U.S.C. §554(b) contending that there was no net equity in the property.

After an evidentiary hearing, the bankruptcy court found that the property was of inconsequential value to the estate, based on the Debtor’s valuation, and granted the motion to compel abandonment. The Trustee subsequently appealed to the District Court, which affirmed and then appealed to the Court of Appeals, which also affirmed the decision of the bankruptcy court.

On appeal the Trustee argued that the Debtors lacked standing and were not “parties in interest” because the property was property of the Bankruptcy estate, and that, to the extent they were “parties in interest” at all, the tendering of cash for the Debtor’s homestead exemption extinguished any standing that they might have had. The tender of the homestead exemption therefore entitled him to evict the Debtors.

The Appellate Court rejected these arguments. It held that when a court compels a Trustee to abandon property the debtors are the beneficiaries of such abandonment because they will get to keep the property. This constitutes a practical stake in the outcome of an abandonment motion. The fact that the Trustee attempted to tender the amount of the homestead did not deprive Debtors of a legal or possessory interest in their home. The homestead exemption is not the exclusive remedy for a debtor facing the loss of his or her residence. The Bankruptcy Code recognizes the alternative remedy of abandonment by the trustee if the property is “of inconsequential value and benefit to the estate.” “If the [Trustee] could extinguish the abandonment remedy by simply tendering the homestead exemption, then he could effectively nullify 11 U.S.C. § 554(b).”

Thus, the Trustee could not evict the Debtors after tendering the homestead exemption. The authority the Trustee cited concerned debtors who remained in their property after filing Bankruptcy and had been ordered to pay rent. But the key issue in this case was whether the property should be in the estate at all, especially where the Debtors were not requesting the homestead exemption. As to the substantive issue of whether the property should be subject to abandonment, the Appellate Court held the bankruptcy court’s finding that there was no net equity in the property was not clearly erroneous.

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