Jeffrey and Jeffrey v. Desmond

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                 ____________________



          No. 95-1261



                           JOHN JEFFREY AND MARSHA JEFFREY,



                                     Appellants,



                                          v.



                               JOHN O. DESMOND, ET AL.,



                                      Appellees.



                                 ____________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                       [Hon. Rya W. Zobel, U.S. District Judge]
                                           ___________________



                                 ____________________



                                        Before



                               Torruella, Chief Judge,
                                          ___________



                                Lynch, Circuit Judge,
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                            and Stearns,* District Judge.
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                                _____________________



               Donald C. Kupperstein for appellants.
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               Richard  D.  Wayne,  with whom  Paul  F.  O'Donnell III  and
               __________________              _______________________

          Hinckley, Allen & Snyder were on brief for appellees Brooks Drug,
          ________________________

          et al.

               John O. Desmond pro se.
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                                  November 22, 1995

                                 ____________________



                              
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          *  Of the District of Massachusetts, sitting by designation.



TORRUELLA, Chief  Judge.  John and  Marsha Jeffrey (the
                    TORRUELLA, Chief  Judge.
                               ____________



          "appellants")  appeal   the  decision  of  the   district  court,



          affirming the  bankruptcy court's decision to  compromise a claim



          belonging  to  the  appellants'  Chapter 7  estate.    Appellants



          contend that the bankruptcy court  abused its discretion when  it



          approved the  Chapter 7 Trustee's motion to compromise the claim.



          For the reasons stated below, we affirm.



                                      BACKGROUND
                                      BACKGROUND
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                    On February 14, 1992, appellants filed a petition under



          Chapter 7 of the Bankruptcy Act, 11 U.S.C.   701  et seq. (1988),
                                                            __ ___



          and John O. Desmond, an appellee in  this case, was appointed the



          Chapter  7 Trustee  (the "Trustee").   As  required by  11 U.S.C.



            521(1), appellants  filed a statement of  financial affairs and



          schedule  of  assets  and  liabilities.    Appellants  failed  to



          schedule  as an asset, however, a pending state court action they



          commenced  in 1990  against  Brooks Drug,  Inc., ("Brooks  Drug")



          (also  an appellee  in this  case),  seeking damages  for alleged



          discrimination against  John J. Jeffrey in  employment, under the



          Massachusetts  Civil Rights Act, Mass. Gen. L. ch. 12,    11H, I,



          and the Federal Civil Rights Act, 42 U.S.C   1983.1   


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          1   See 11 U.S.C.    521(a)(1) (property  of the  estate includes
              ___

          ". . . all legal or equitable interests of the debtor in property

          as  of the  commencement of  the case.");  see also  Oneida Motor
                                                     ________  ____________

          Freight, Inc. v. United  Jersey Bank, 848 F.2d 414, 416 (3d Cir.)
          _____________    ___________________

          (citing  In  re  Hannan,  127  F.2d  894,  897  (7th  Cir.  1942)
                   ______________

          ("[B]ankruptcy  law imposes  upon  one seeking  its benefits  the

          positive  duty to schedule for  the benefit of  creditors all his

          interest  and property  rights.")),  cert. denied,  488 U.S.  967
                                               ____________

          (1988).



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After the Trustee filed a Report of No Assets on May 1,



          1992, appellants received  a discharge under 11  U.S.C.   727(b),



          and  their  Chapter  7   case  was  closed  on  June   22,  1992.



          Appellants' counsel, who represented appellants in both the state



          court  action and the  Chapter 7 proceedings,  never informed the



          state  court  or  Brooks  Drug  that  appellants  had  filed  for



          bankruptcy or had received  a discharge without administration of



          the state court action in the Chapter 7 proceedings.  



                    On June  10, 1993, on the eve  of trial in state court,



          Brooks Drug  learned of appellants' bankruptcy  and their failure



          to schedule the  state court  action.  Brooks  Drug notified  the



          trial  judge of these facts  and moved to  dismiss with prejudice



          the  state  court action,  on  the grounds  that  appellants were



          judicially estopped  from asserting pre-petition claims that were



          not disclosed  during the bankruptcy case.  Subsequently, on July



          27,  1993,  the state  court stayed  the  state court  action and



          ordered Brooks Drug to  notify the Trustee about its  pendency in



          order to  give the Trustee the opportunity to bring the matter to



          the attention of the bankruptcy court.  



                    On September 17, 1993, the bankruptcy court granted the



          Trustee's motion to reopen appellants' Chapter 7 case in order to



          administer  the unscheduled  state court  action.   On  March 24,



          1994,  the  bankruptcy  court  granted the  Trustee's  motion  to



          compromise the state court action for $10,000.  The U.S. District



          Court for  the District of Massachusetts  affirmed the bankruptcy



          court's  decision   on  February  17,  1995,   finding  that  the


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bankruptcy court did  not abuse its  discretion in approving  the



          compromise.  



                                      DISCUSSION
                                      DISCUSSION
                                      __________



                    On an appeal from  the district court, we independently



          review  the bankruptcy  court's  decision, applying  the  clearly



          erroneous standard to its findings of fact and de  novo review to
                                                         ________



          its conclusions of  law.  In  re SPM Mfg.  Corp., 984 F.2d  1305,
                                    ______________________



          1311 (1st Cir. 1993); see also In re G.S.F. Corp., 938 F.2d 1467,
                                ________ __________________



          1474  (1st  Cir. 1991)  (collecting cases).    The approval  of a



          compromise  is  within the  sound  discretion  of the  bankruptcy



          judge,  however, and this court  will not overturn  a decision to



          approve  a compromise absent a clear  showing that the bankruptcy



          judge abused her discretion.  In re Anolik, 107 B.R. 426, 429 (D.
                                        ____________



          Mass.  1989)  (collecting  cases).   "The  cask  which  encases a



          judge's discretion,  though commodious,  can be shattered  when a



          reviewing tribunal is persuaded that the trial court misconceived



          or  misapplied the law, or misconstrued its own rules."  Aggarwal
                                                                   ________



          v. Ponce School of Medicine, 745 F.2d 723, 727 (1st Cir. 1984).  
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                    A  bankruptcy  judge has  the  authority  to approve  a



          compromise  of a claim pursuant to Bankruptcy Rule 9019(a).2  The



          ultimate  issue on appeal is whether  the bankruptcy court abused

                              
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          2  Bankruptcy Rule 9019(a) provides as follows:



                      On  motion  by the  trustee  and after  a

                      hearing  on  notice  to   creditors,  the

                      debtor and indenture trustees as provided

                      in  Rule  2002(a)   and  to  such   other

                      entities as the  court may designate, the

                      court   may   approve  a   compromise  or

                      settlement.



                                         -4-



its  discretion when  it  approved  the  compromise, which  is  a



          process requiring the bankruptcy court to "assess and balance the



          value of the claim that is being compromised against the value to



          the  estate of the acceptance of the compromise proposal."  In re
                                                                      _____



          GHR Cos.,  50 B.R. 925, 931 (Bankr. D. Mass. 1985) (quoting In re
          ________                                            _______ _____



          Boston & Providence R.R., 673 F.2d 11, 12 (1st Cir. 1982).  T h e
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          specific factors  which a bankruptcy court  considers when making



          this determination include: (i) the probability of success in the



          litigation being  compromised; (ii) the difficulties,  if any, to



          be encountered in the matter of collection; (iii) the  complexity



          of the  litigation involved,  and the expense,  inconvenience and



          delay  attending it;  and,  (iv) the  paramount  interest of  the



          creditors and a proper deference to their reasonable views in the



          premise.  In re Anolik, 107 B.R. 426, 429 (D. Mass. 1989).
                    ____________



                    After  a  careful  review   of  the  record,  and  upon



          consideration of the  briefs and  oral arguments  of counsel,  we



          find  no abuse  of  discretion by  the  bankruptcy court  in  its



          approval  of the  compromise.   As the  district court  held, the



          record  reveals that  before  the bankruptcy  court approved  the



          Trustee's   compromise  proposal,  it   spent  considerable  time



          evaluating three of  the four factors set  forth in In  re Anolik
                                                              _____________



          when  it assessed  the  value to  the  estate of  the  compromise



          proposal. 



                    Although  nothing  more   need  be  said,  we   respond



          specifically to two of appellants' arguments.  Both arguments are



          based on their claim that they, and their attorney, discussed the


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state court action with the Trustee on March 23, 1992, during the



          creditors' meeting held pursuant to 11 U.S.C.   341, and that the



          Trustee determined the case had no value.



                    First,  appellants essentially  contend that  the state



          court action was "abandoned" to  appellants by operation of  law,



          within the meaning of 11 U.S.C.   554(c), because the Trustee had



          actual knowledge  of the state court action when the report of no



          assets was filed.  In support of finding abandonment by operation



          of law, appellants also point to their claimed oral disclosure as



          evidencing a lack of fraud and to the Trustee's zero-valuation. 



                    Despite  appellants' persistent  claims, we  agree with



          the district court that the alleged discussion with  the Trustee,



          even if true, has no bearing on  the outcome of this appeal.  The



          law is abundantly clear that the burden is on the debtors to list



          the asset and/or  amend their  schedules, and that  in order  for



          property  to  be abandoned  by operation  of  law pursuant  to 11



          U.S.C.   554(c),  the debtor must formally schedule  the property



          pursuant to  11 U.S.C.    521(1)  before the close  of the  case.



          See, e.g.,  In re Rothwell,  159 B.R.  374, 377 (Bankr.  D. Mass.
          ___  ____   ______________



          1993).3


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          3   Furthermore, by operation of 11  U.S.C.   554(c) and (d), any

          asset  not properly  scheduled remains  property of  the bankrupt

          estate, and  the debtor loses all rights to enforce it in his own

          name.   Vreugdenhill  v. Navistar  Int'l Transportation  Co., 950
                  ____________     ___________________________________

          F.2d 524, 526  (8th Cir. 1991)  (Chapter 7 debtor  who failed  to

          schedule  potential  claim  cannot  prosecute  the  claim   after

          emerging from bankruptcy).



                                         -6-



What matters  here is not what the  appellants or their



          counsel said,  it is  what they  did or,  rather, failed to  do.4



          The state court action was not  scheduled as an asset at any time



          during the bankruptcy proceedings.  There   is  simply   no  such



          concept  of  "assumed  abandonment,"  which  is  essentially what



          appellants ask us to find.  Id. (citing Vreugdenhill, 950 F.2d at
                                      __          ____________



          526 ("It  is not enough that  the trustee learns  of the property



          through other means;  the property must be scheduled  pursuant to



          [11 U.S.C.]    521(1).")); see also In re  Medley, 29 B.R. 84, 86
                                     ________ _____________



          (Bankr.  M.D. Tenn. 1983) (court does not have to address factual



          question of  trustee's knowledge because    554 makes  clear when



          abandonment  occurs).   Neither  the  bankruptcy  court, nor  the



          district  court,  abused  their  discretion  when  they  rejected



          appellants' abandonment claim.5 



                    Second, appellants  contend that because  their alleged



          oral  disclosure  disproves any  intent  to commit  fraud  on the



                              
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          4  We note, again,  that throughout the state court  action begun

          in 1990 and the  Chapter 7 proceedings begun in  1992, appellants

          were represented by the same attorney.  This fact alone amplifies

          "'the  silence'  in  [appellants'] bankruptcy  record  concerning

          [their  state  court   action],  [which]  as  they   say  in  the

          vernacular, 'is deafening'."   Payless, 989 F.2d at  571 (quoting
                                         _______                    _______

          Oneida Motor Freight, 848 F.2d at 417). 
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          5  In  a similar vein, appellants  also contend that their  state

          court action  would be exempt from  the Chapter 7 estate.   It is

          well settled in this Circuit  that "theories not raised  squarely

          in the  district court cannot be  surfaced for the  first time on

          appeal." McCoy v. Massachusetts Institute of Technology, 950 F.2d
                   _____    _____________________________________

          13, 22  (1st Cir.  1991).   We therefore  treat this  argument as

          unpreserved  for appellate  review.   Id. at  22 ("If  claims are
                                                __

          merely insinuated  rather than actually articulated  in the trial

          court, we  will  ordinarily refuse  to  deem them  preserved  for

          appellate review."). 



                                         -7-



bankruptcy  proceedings, their state  court action  would not  be



          dismissed under our decision in Payless Wholesale Distribs., Inc.
                                          _________________________________



          v. Alberto Culver, Inc.,  989 F.2d 570 (1st Cir.),  cert. denied,
             ____________________                             ____________



          __ U.S. __, 114 S. Ct. 344, 126 L.Ed.2d 309 (1993).6  



                    Without  ruling on  the merits  of whether  Payless, by
                                                                _______



          itself, would justify dismissal,  we find no abuse of  discretion



          by  the bankruptcy  court  when it  found  that there  was  "some



          likelihood" Brooks Drug would  prevail in state court based  on a



          Payless defense.  In addition, we find no abuse of  discretion by
          _______



          the bankruptcy  court when it took Payless  into consideration as
                                             _______



          one of the factors it weighed when  it assessed the likelihood of



          appellants'  success were  appellants to  proceed with  the state



          court action.



                    We  merely add  that  appellants'  argument  that  they



          brought  the  state  court  action  to  the  Trustee's  attention



          completely overlooks both the importance of the Bankruptcy Code's



          disclosure requirements  and the fact that  appellants signed the



          schedules under penalties of  perjury.  Oneida, 848 F.2d  at 416;
                                                  ______



          In re Giguere,  165 B.R.  531, 536 (D.R.I.  1994).   Furthermore,
          _____________



          whether or not appellants' initial  failure to schedule the state



                              
          ____________________



          6   In Payless we held  that where a debtor  obtains relief under
                 _______

          Chapter 11  of the Bankruptcy  Code based on  his representations

          under penalty of  perjury that he had no  assets other than those

          scheduled, that debtor is judicially estopped from asserting pre-

          petition claims  not disclosed  during the bankruptcy  case, even

          though  the judicial estoppel might  result in a  windfall to the

          defendant.    Id.   For  cases recognizing  this  proposition but
                        __

          distinguishing Payless on the facts, see, e.g., In  re Envirodyne
                         _______               ___  ____  _________________

          Industries, Inc., 183 B.R.  812, 824 (N.D. Ill. 1995);  In re Mai
          ________________                                        _________

          Systems Corporation, 178 B.R. 50, 54 (D. Del. 1995).  
          ___________________



                                         -8-



court asset  was intentional, the glaring fact  remains that, but



          for  the   investigation  made   by  counsel  for   Brooks  Drug,



          appellants'  failure to  list  on the  schedule  the state  court



          action at any  time during the bankruptcy proceedings would never



          have come to  the attention  of the state  court, the  bankruptcy



          court, or the  Trustee.   As we have  already noted,  appellants'



          "silence" here is thoroughly "deafening." 



                    Moreover,  assuming  arguendo  that  appellants'  state



          court  action  was  not   precluded  under  Payless,  appellants'
                                                      _______



          argument  would  not affect  the outcome  of  this appeal.   Even



          without  considering the possibility  of dismissal under Payless,
                                                                   _______



          the  record nonetheless  reveals  a "serious  question" regarding



          appellants' likelihood of  success.   In re Anolik,  107 B.R.  at
                                                ____________



          430.   This, coupled  with the  bankruptcy court's  inquiries and



          findings regarding the inconvenience and expense to the estate in



          attending  the  state  court  action,  and   the  fact  that  the



          compromise would provide creditors  with an immediate and certain



          payment  of   a  large   percentage  of  the   outstanding  debt,



          illustrates  that   the  bankruptcy  court  did   not  abuse  its



          discretion in approving the compromise.  Id.
                                                   __



                    For the foregoing reasons, and having found no merit to



          appellants'  other  arguments,  we affirm  the  district  court's



          decision, finding no abuse of discretion by  the bankruptcy court



          in its approval of the compromise.  Finally, because we view this



          appeal  to  have  been  frivolous,  we  impose  double  costs  on



          appellants.  The judgment of the district court is affirmed.


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Affirmed.
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