USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 95-1261
JOHN JEFFREY AND MARSHA JEFFREY,
Appellants,
v.
JOHN O. DESMOND, ET AL.,
Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
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Before
Torruella, Chief Judge,
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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
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Hinckley, Allen & Snyder were on brief for appellees Brooks Drug,
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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.
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"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),
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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
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". . . all legal or equitable interests of the debtor in property
as of the commencement of the case."); see also Oneida Motor
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Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 416 (3d Cir.)
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(citing In re Hannan, 127 F.2d 894, 897 (7th Cir. 1942)
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("[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
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(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
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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
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its conclusions of law. In re SPM Mfg. Corp., 984 F.2d 1305,
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1311 (1st Cir. 1993); see also In re G.S.F. Corp., 938 F.2d 1467,
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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.
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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
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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.
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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
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GHR Cos., 50 B.R. 925, 931 (Bankr. D. Mass. 1985) (quoting In re
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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).
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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
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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.
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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
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F.2d 524, 526 (8th Cir. 1991) (Chapter 7 debtor who failed to
schedule potential claim cannot prosecute the claim after
emerging from bankruptcy).
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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
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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
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(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
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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
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13, 22 (1st Cir. 1991). We therefore treat this argument as
unpreserved for appellate review. Id. at 22 ("If claims are
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merely insinuated rather than actually articulated in the trial
court, we will ordinarily refuse to deem them preserved for
appellate review.").
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bankruptcy proceedings, their state court action would not be
dismissed under our decision in Payless Wholesale Distribs., Inc.
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v. Alberto Culver, Inc., 989 F.2d 570 (1st Cir.), cert. denied,
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__ U.S. __, 114 S. Ct. 344, 126 L. Ed. 2d 309 (1993).6
Without ruling on the merits of whether Payless, by
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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
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the bankruptcy court when it took Payless into consideration as
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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;
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In re Giguere, 165 B.R. 531, 536 (D.R.I. 1994). Furthermore,
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whether or not appellants' initial failure to schedule the state
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6 In Payless we held that where a debtor obtains relief under
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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
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distinguishing Payless on the facts, see, e.g., In re Envirodyne
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Industries, Inc., 183 B.R. 812, 824 (N.D. Ill. 1995); In re Mai
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Systems Corporation, 178 B.R. 50, 54 (D. Del. 1995).
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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'
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argument would not affect the outcome of this appeal. Even
without considering the possibility of dismissal under Payless,
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the record nonetheless reveals a "serious question" regarding
appellants' likelihood of success. In re Anolik, 107 B.R. at
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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.
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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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