When a Bankruptcy trustee abandons California real estate – Who it Belongs to, And When the Automatic Stay is lifted

Property ceases to be property of the estate if it is sold or abandoned. The trustee may abandon property if it is burdensome or of inconsequential value. (§554) Unless the judge orders otherwise, the property is abandoned back to the debtor. Often, the debtor is behind on their mortgage and the lender, wanting to foreclose, consults a real estate attorney. A recent decision in the 9th Circuit BAP points out just what that means- as property of the debtor, it is still protected by an automatic stay, and a foreclosure is void. The lender should have made sure that the abandonment order included lifting the stay so it could proceed with the sale, or otherwise sought relief from stay..

In re Gasprom, Inc. involved abandonment of a gas station in Oxnard, the principal asset of the debtor. The gas station was subject to a deed of trust securing a debt of over $1 million dollars. The trustee brought a motion to abandon the property. Gasprom objected (to prevent its creditors from exercising their state law rights and remedies, bu the court approved the abandonment. The Abandonment order was silent as to the automatic stay, and the secured creditor held a trustee’s sale later that day. Sixteen days later the case was closed. The trustee’s sale was in violation of the automatic stay -if they waited another 16 days, they would have been in the clear.

The Court found that, when the abandonment order was entered, the property was abandoned back to the debtor. However, the debtor was still protected by the automatic stay.

Some of the confusion may arise in how the automatic stay statute was constructed by the Legislature. Section 362(a) language quoted below protects different things, as pointed out in italics:

DEBTOR & ESTATE (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
ESTATE (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
ESTATE (4) any act to create, perfect, or enforce any lien against property of the estate;
DEBTOR (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
DEBTOR (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.