In re Cambridge Land Co

If a case is dismissed, all assets revest in the debtor and nothing remains in the bankruptcy estate, not even undisclosed assets.

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Case Type:
Case Status:
OR-20-1110-BKT and OR-20-1111-BKT (9th Circuit, Apr 02,2021) Published
Defendants of malpractice claims of former Chapter 11 debtors did not have standing to object to a bankruptcy court's decision allowing the debtors to reopen their bankruptcy cases to file amended Schedules that include the malpractice claims. The malpractice defendants are not creditors, hold no claims against the bankruptcy estates, and were not directly and adversely affected by the decision allowing the debtors to reopen their cases. Further, because the cases had been dismissed and no creditor objected, the malpractice claims would not be administered in bankruptcy.
Procedural context:
Defendants in a state court lawsuit brought by former Chapter 11 debtors appealed the bankruptcy court's order that allowed the debtors to reopen their bankruptcy cases "for administrative purposes" to file amended Schedules that scheduled the malpractice claims.
This case arises from a malpractice claim against two lawyers and their firm, which are the appellants (the "Lawyers"). The debtors were two limited liability companies that are owned by the two individual appellees. The debtors each owned an apartment complex. In 2013, the lender began foreclosure proceedings against, and moved to appoint a receiver for, the apartment complexes. The debtors consulted with the Lawyers about filing Chapter 11 cases for the debtors. The Lawyers were not retained to file Chapter 11 cases for the debtors. The Lawyers advised the debtors that Chapter 11 was not viable and advised the debtors to file Chapter 7 petitions. The debtors hired a different lawyer, who filed Chapter 11 cases for the debtors. The petitions were filed after a state court had appointed receivers for the debtors' apartment complexes. The debtors' Schedules did not list malpractice claims against the Lawyers. The bankruptcy court approved the sale of the apartment complexes. The sale yielded no dividend for unsecured creditors and left the debtors' estates administratively insolvent. The debtors moved for dismissal under § 1112(b)(1), and the bankruptcy court closed the cases "for administrative purposes." In 2015, the debtors and the debtors' owners sued the Lawyers for malpractice. An issue arose in the malpractice litigation whether the bankruptcy estates owned the malpractice claims. The state court agreed to refer that issue to the bankruptcy court. The debtors then moved to reopen their Chapter 11 cases to amend their Schedules to include the malpractice claim. The Lawyers — but no one else — objected. The bankruptcy court ruled that it could not reopen the cases under 11 U.S.C. § 350(b) because the cases were not closed under § 350(a). The bankruptcy court, however, reopened the cases "for administrative purposes" and allowed the debtors to file amended Schedules.
BRAND, KLEIN, and TAYLOR, Bankruptcy Judges

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