Trustee's Options Where Lawsuit Pending Prior to Bankruptcy Proceeding
Under section 541 of the United States Bankruptcy Code, filing a petition in bankruptcy creates a bankruptcy estate. 11 U.S.C. 541(a); Louisiana World Exposition v. Federal Ins. Co., 858 F.2d 233, 245 (5th Cir. 1988); Douglas v. Delp, 987 S.W.2d 879, 882 (Tex. 1999).
All legal or equitable interests held by the debtor as of the commencement of the case become part of that estate, including any legal claims that belonged to the debtor before the petition was filed. See 11 U.S.C. 541(a)(1); In the Matter of Swift, 129 F.3d 792, 795 (5th Cir. 1997); Douglas, 987 S.W.2d at 882.
The bankruptcy trustee is the representative of the estate, and once a claim belongs to the estate, the trustee has exclusive standing to assert the claim. See 11 U.S.C. 323(a); In the Matter of Educators Group Health Trust, 25 F.3d 1281, 1284 (5th Cir. 1994); Douglas, 987 S.W.2d at 882.
Federal Rule of Bankruptcy Procedure 6009 gives the trustee two options with regard to dealing with a legal claim once a petition in bankruptcy has been filed.
Where an action is already pending, the trustee "may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor." FED. R. BANKR. P. 6009.
Therefore, where an action is pending prior to the commencement of a bankruptcy proceeding a trustee has three options:
(1) to assume prosecution of the pending action;
(2) to consent to the debtor's continued prosecution of the action for the trustee's benefit; or:
(3) to decline to prosecute the pending actions if it appears the prosecution would be fruitless. See Munters Corp., 936 S.W.2d at 497.
However, for those claims that have not been brought, the trustee may "commence or prosecute any action or proceeding in behalf of the estate before any tribunal." FED. R. BANKR. P. 6009.
Thus, only the bankruptcy trustee may file an original petition for a potential claim that arose prior to the commencement of the bankruptcy proceeding.
If a bankruptcy trustee determines that a claim is burdensome or is of inconsequential value and benefit to the estate he or she may abandon that claim. See 11 U.S.C. 554(a); In re Heil, 141 B.R. 112, 113-14 (Bankr. N.D. Tex. 1992).
However, the trustee's right to abandon a claim may only be asserted upon proper notice and a hearing. See 11 U.S.C. 554(a); In re Heil, 141 B.R. at 114.
The hearing requirement may be circumvented provided proper notice is given and no party requests a hearing. See 11 U.S.C. 102(1); In re Heil, 141 B.R. at 114.
To properly provide notice for the purposes of abandoning a claim, the trustee must notify all creditors, indenture trustees and appointed or elected committees of the proposed abandonment, unless otherwise instructed by the court. See FED. R. BANKR. P. 6007(a).