Sheehan v. Scotchel

536 B.R. 166, 2015 U.S. Dist. LEXIS 106376, 2015 WL 4875333
CourtDistrict Court, N.D. West Virginia
DecidedAugust 13, 2015
DocketCivil Action No. 1:14CV197
StatusPublished

This text of 536 B.R. 166 (Sheehan v. Scotchel) is published on Counsel Stack Legal Research, covering District Court, N.D. West Virginia primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Sheehan v. Scotchel, 536 B.R. 166, 2015 U.S. Dist. LEXIS 106376, 2015 WL 4875333 (N.D.W. Va. 2015).

Opinion

MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT

IRENE M. KEELEY, District Judge.

As part of their Chapter 7 bankruptcy petition, the debtors, John Charles Scot-chel, Jr. (“Mr. Scotchel”) and Helen Holland Scotchel (“Mrs. Scotchel”) (collectively, the “Seotchels”), claimed as an asset the estate of Mr. Scotchel’s late uncle, Arthur P. Scotchel (“Arthur Scotchel”), who passed away in 2009. The asset was based on the Seotchels’ belief that Mr. Scotchel was a beneficiary to Arthur Scot-chel’s estate under the Fourth Will (the most recent in a series of four wills executed by Arthur Scotchel). In March 2014, a state court jury rendered a verdict invalidating the Fourth Will, and no appeal followed. Consequently, Arthur Scotchel’s Third Will, which disinherited Mr. Scot-chel, took effect. Significantly, Mr. Scot-chel is a beneficiary to the estate under Arthur Scotchel’s Second Will.

In April 2014, the Seotchels, pursuant to 11 U.S.C. § 554(b), moved the Bankruptcy Court to “enter an Order finding abandoned any portion of the debtor’s inheritance asset from the late Arthur P. Scot-chel [and] any causes of action formerly disclosed to the Trustee relating to the Estate of Arthur Scotchel not being pursued by the Trustee....” (Dkt. No. 1-10 at 3). Through an objection to the motion, Martin P. Sheehan as Trustee of the Scotched’ bankruptcy estate (the “Trustee”), argued that the potential claims to Arthur Scotchel’s estate carried value relative to both the Trustee and the Scotched. Therefore, he urged that the claims should be preserved for the bankruptcy estate.

On June 3, 2014, the Bankruptcy Court held a hearing on, inter alia, the motion for abandonment. The Scotched contended that the potential claims lacked any value in the hands of the bankruptcy estate, but would have some value if pursued by the Scotched individually. The Trustee disagreed with that contention, and represented his intent to market the claims either to the Scotched, to the executor of Arthur Scotchel’s estate under the Third Will, or to his law firm as a distribution-in-kind for legal services rendered to the bankruptcy estate.1

In August 2014, the Bankruptcy Court entered an Order granting the Scotched’ motion and ordering that “the bankruptcy [168]*168estate’s interest in the State Court litigation related to both the Fourth Will and the Third Will be and hereby [is] ABANDONED to Mr. Scotchel.” (Dkt. No. 1-13 at 5). It described two distinct claims at issue: (1) an appellate claim challenging the jury’s verdict invalidating the Fourth Will; and (2) a claim challenging the validity of the Third Will, which, if successful, would permit Mr. Scotchel to inherit under the Second Will. After thoroughly examining the viability and likelihood of success as to each of the two claims, the Bankruptcy Court concluded that, under § 554(b), both claims had “inconsequential value to the bankruptcy estate.” Id. at 3.

In the captioned proceeding, the Trustee appeals the Order of the Bankruptcy Court. The scope of his appeal, however, is limited. As to the first claim identified by the Bankruptcy Court, the Trustee concedes that “[t]he Bankruptcy Estate lost its derivative claim” relative to the Fourth Will by failing to appeal the jury verdict. (Dkt. No. 3 at 3). Thus, the appeal concerns only the second potential claim — a challenge to the validity of the Third Will (the “Third Will Claim”).

On appeal, the Court must determine whether the Bankruptcy Court abused its discretion in granting the Scotchels’ motion for abandonment. See In re Johnston, 49 F.3d 538, 540 (9th Cir.1995). “Under the abuse of discretion standard, the district court will not reverse the bankruptcy court unless its conclusion was ‘guided by erroneous legal principles,’ or ‘rests upon a clearly erroneous factual finding.’” In re Yankah, 514 B.R. 159, 163 (E.D.Va.2014) (quoting Westberry v. Gislaved Gummi AB, 178 F.3d 257, 261 (4th Cir.1999)).

In this regard, the Trustee contests the Bankruptcy Court’s conclusion that the Third Will Claim had inconsequential value to the bankruptcy estate. Notably, the Trustee frames the issue on appeal as whether “the Bankruptcy Court impermis-sibly substituted its business judgment for the business judgment of the Trustee.” Id. at 4. In response, the Scotchels urge the Court to adopt the reasoning of the Bankruptcy Court because “the Trustee was unable to articulate a sound business justification for effectively doing nothing since the conclusion of the jury trial [relating to the Fourth Will] other than espousing a variety of options that he might undertake.” (Dkt. No. 5 at 6) (emphasis in original).

The Scotchels’ concern regarding inaction by the Trustee to pursue or sell the claim is warranted in light of his statutory obligation to “collect and reduce to money the property of the estate” as expeditiously as possible. 11 U.S.C. § 704(a)(1); In re Hutchinson, 5 F.3d 750, 754 (4th Cir.1993). Although “the Code does not explicitly make trustees liable for breach of [this duty],” Hutchinson, 5 F.3d at 752, remedies can include the reduction of the trustee’s commission, see In re Melenyzer, 140 B.R. 143, 157 (Bankr.W.D.Tex.1992), and removal of the trustee. See Matter of Island Amusement, Inc., 74 B.R. 18, 20 (Bankr.D.P.R.1987). Moreover, where a trustee acts outside his authority, a breach of duty “can result in personal liability.” In re AB & C Grp., Inc., 411 B.R. 284, 295 (Bankr.N.D.W.Va.2009) (citing Mosser v. Darrow, 341 U.S. 267, 71 S.Ct. 680, 95 L.Ed. 927 (1951); Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d 74, 76 (4th Cir.1987)).

Typically, in evaluating whether a violation of § 704(a) has occurred, courts apply the so-called “business judgment rule,” which affords trustees great discretion in carrying out their statutory- duties. See, e.g., In re CHN Const., LLC, 531 B.R. 126, 132-33 (Bankr.E.D.Va.2015) (“The chapter 7 trustee needs to be provided a substan[169]*169tial degree of discretion in determining how to most effectively administer the bankruptcy estate. The court should review the trustee’s actions utilizing a business judgment standard.”) (citations omitted); In re Consol. Indus. Corp., 330 B.R. 712, 715-16 (Bankr.N.D.Ind.2005) . (“To carry this burden [of showing cause for removal of the trustee] it will not be sufficient for it to prove that the trustee has failed to .prosecute a cause of action belonging to the bankruptcy estate. Instead, it will be required to prove that the trustee’s failure to do so is unjustifiable or somehow outside the proper scope of the trustee’s business judgment.”) (italics in original).

To be sure, the Scotchels have not asserted a violation of the Trustee’s § 704(a) or fiduciary duties.

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Related

Mosser v. Darrow
341 U.S. 267 (Supreme Court, 1951)
In Re Lehosit
344 B.R. 782 (N.D. West Virginia, 2006)
In Re Melenyzer
140 B.R. 143 (W.D. Texas, 1992)
Matter of Island Amusement, Inc.
74 B.R. 18 (D. Puerto Rico, 1987)
In Re AB & C Group, Inc.
411 B.R. 284 (N.D. West Virginia, 2009)
In Re Wilson
94 B.R. 886 (E.D. Virginia, 1989)
In Re Consolidated Industries Corp.
330 B.R. 712 (N.D. Indiana, 2005)
Yadkin Valley Bank & Trust Co. v. McGee
819 F.2d 74 (Fourth Circuit, 1987)
Westberry v. Gislaved Gummi AB
178 F.3d 257 (Fourth Circuit, 1999)
Mack v. Yankah (In re Yankah)
514 B.R. 159 (E.D. Virginia, 2014)

Cite This Page — Counsel Stack

Bluebook (online)
536 B.R. 166, 2015 U.S. Dist. LEXIS 106376, 2015 WL 4875333, Counsel Stack Legal Research, https://law.counselstack.com/opinion/sheehan-v-scotchel-wvnd-2015.