Bostanian v. Liberty Savings Bank – Case Brief Summary (California)

In Bostanian v. Liberty Savings Bank (1997) 52 Cal.App.4th 1075, a married couple owned a residence as community property. After the husband filed a voluntary petition for bankruptcy, the bank obtained relief from the automatic stay provisions of Title 11 United States Code section 362(a), foreclosed on its deed of trust, and the property was sold at an auction. The couple then brought a civil action against the bank, contending that the foreclosure sale was improper. The trial court dismissed their action and the couple appealed. The Court of Appeal held that the couple lacked standing to pursue the appeal. The court stated: "We conclude plaintiffs' cause of action is property of the bankruptcy estate. Further, there is no evidence the chapter 7 trustee has abandoned the interest in this claim. Absent abandonment, plaintiffs have no standing to pursue this appeal; the chapter 7 trustee is the real party in interest with standing to sue." (Bostanian, at p. 1087.)

In Bostanian v. Liberty Savings Bank, debtors appealed the dismissal of their lawsuit seeking to set aside a foreclosure sale following the conversion of their bankruptcy from chapter 11 to chapter 7. (Id. at pp. 1077-1078.) The appeal was dismissed because standing to maintain the lawsuit became vested in the trus-tee by operation of law when the matter was converted to chapter 7. (Id. at p. 1079.)

Disagreeing with cases holding a "debtor may continue to prosecute the cause of action unless the trustee takes affirmative steps to intervene" (see, e.g., Kaley v. Catalina Yachts (1986) 187 Cal.App.3d 1187, 1193-1196), the Court of Appeal concluded "that the debtor must take affirmative steps to comply with sec-tion 554 of the Bankruptcy Code concerning abandonment" and that, "until the debtor secures the trustee's abandonment of the claim, the debtor lacks standing to pursue it." (Bostanian v. Liberty Savings Bank, supra, 52 Cal.App.4th at p. 1083.)

Section 554 of title 11 of the United States Code provides:

"(a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to aban-don any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(c) Unless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.

(d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate."

The court explained: "Code of Civil Procedure section 368.5 does not confer standing on a party who has no right to assert the claim. . . . A chapter 7 trustee may be able to continue to prosecute an action in the name of the debtor pursuant to Code of Civil Procedure section 368.5; however, . . . the debtor may not pur-sue the cause of action on his or her own unless the cause of action has been abandoned by the trustee pursuant to section 554 of the Bankruptcy Code. Stated differently, a bankruptcy trustee could continue an action in the name of the debtor under Code of Civil Procedure section 368.5. However, it is the trustee who must prosecute the action, not the debtor." (Ibid.)

Accordingly, the moment the action becomes property of the bankruptcy estate, the trustee possesses ex-clusive standing to pursue it and need not file a complaint in intervention in order to assert such standing.

The Court of Appeal concluded that a cause of action for improper foreclosure upon a bankruptcy estate asset that arose postpetition constituted property of the estate that could be pursued only by the chapter 7 bankruptcy trustee, unless the trustee abandoned the action. The court held that the bankruptcy estate in-cludes not just property but also any cause of action arising from that property. (Bostanian, supra, 52 Cal.App.4th at p. 1083.)

Specifically, a cause of action for improper foreclosure of estate property is also the property of the bank-ruptcy estate. (Id. at p. 1084.)

Since the cause of action is property of the bankruptcy estate, only the bankruptcy trustee has standing to assert the cause of action. The bankruptcy debtor may obtain standing only if the bankruptcy trustee formally abandons the cause of action. (Id. at pp. 1085-1087.)

In Bostanian, the court determined that "fairness dictates plaintiffs should be given an opportunity to secure an abandonment by the trustee in the bankruptcy court. They shall have 30 days to do so." (Bostanian, su-pra, 52 Cal.App.4th at p. 1087.)