In re Pena

          Argued and Submitted on January 24, 2019 at Sacramento, California

          Appeal from the United States Bankruptcy Court for the Eastern District of California Honorable Fredrick E. Clement, Bankruptcy Judge, Presiding.

          Sharlene Fay Roberts-Caudle argued for appellant.

          Before: SPRAKER, LAFFERTY, and BRAND, Bankruptcy Judges. SPRAKER, Bankruptcy Judge.

          OPINION

          SPRAKER, Bankruptcy Judge.

         INTRODUCTION

         Chapter 7^[1] debtor Augustine Pena, III, appeals from an order denying his application to recover $51, 777.03 in unclaimed funds held in the bankruptcy court's registry. The unclaimed funds were rents his chapter 7 trustee collected from Pena's rental properties before the trustee abandoned those properties. The trustee initially tried to pay the rents to the creditors holding security interests in the underlying rental properties, but the secured creditors never cashed the trustee's checks. The trustee thereafter voided the checks and deposited the funds in the court's registry in accordance with § 347(a).

         Pena claims that, because his former secured creditors are no longer entitled to the unclaimed funds, the monies should be paid to him instead. Pena argues that the trustee abandoned the rents when she abandoned the underlying rental properties. He reasons that, as a result, the estate has no interest in the funds the trustee deposited into the court's registry. We disagree. The chapter 7 trustee has administered these rents, and they remain property of the estate. As a result, ownership of the funds has never reverted to the debtor. None of Pena's other arguments on appeal have any merit. Accordingly, we AFFIRM the bankruptcy court's order denying Pena's application for unclaimed funds.

         FACTS

         Pena commenced his bankruptcy case by filing a voluntary chapter 11 petition in April 2012. At the time he filed his bankruptcy, Pena owned 30 parcels of real property, 29 of which were rental properties. In June 2012, the bankruptcy court sua sponte converted the case from chapter 11 to chapter 7 because of Pena's unauthorized use of cash collateral. Trudi G. Manfredo was appointed to serve as the chapter 7 trustee. Pena appealed the conversion order first to the United States District Court for the Eastern District of California and then to the Ninth Circuit Court of Appeals. He lost both appeals.

         After conversion, Manfredo sought to abandon the rental properties. The bankruptcy court ruled, however, that during the pendency of the debtor's appeals, it lacked jurisdiction to order relief from stay or abandonment with respect to any of Pena's real property. Instead, the bankruptcy court entered an order under § 721 authorizing Manfredo to manage Pena's rental properties, including their maintenance and the collection of rents. Pursuant to that order, Manfredo managed the rental properties until Pena lost both appeals. Manfredo collected the rents from the rental properties, deposited them into the estate's account, and disbursed them in accordance with her duties as chapter 7 trustee. After the Ninth Circuit affirmed conversion of the case to chapter 7, Manfredo abandoned the rental properties and shortly thereafter ceased collection of rents.^[2]

         The unclaimed funds at issue represent rents Manfredo collected from rental properties throughout California. Two of the properties were located in Compton, California. The other rental properties at issue were in Visalia, Corcoran, and Tulare, California. Each property was encumbered by a deed of trust, and the rents from the properties were treated as cash collateral of the respective secured creditors while Manfredo administered the properties. Manfredo abandoned the Tulare property in July 2014, and abandoned the other properties in August 2014. During the second half of 2015, several months before the bankruptcy case was closed, Manfredo sought to pay the secured creditors a combined total of $51, 777.03 comprised of rents collected from the properties.^[3]

         Manfredo's cash disbursement records reflect that she tried unsuccessfully to pay these amounts to the secured creditors several times. After those attempts failed, in February 2016, Manfredo paid the $51, 777.03 in rent proceeds into the court registry. Manfredo's actions concerning the unclaimed funds were disclosed in her Final Account and Distribution Report ("Final Account").

         Although Manfredo administered the rents on behalf of the secured creditors, the case was administered as a no asset case, and the Final Account proposed no distribution to Pena's unsecured creditors. Manfredo served the notice of the Final Account on all parties in interest, including Pena. The notice advised that if no objections were filed, a final decree would be entered and the case closed without further order. Neither Pena, nor anyone else, objected to the Final Account. The bankruptcy court entered a final decree and closed Pena's bankruptcy case on December 27, 2016.

         Well over a year after the case was closed, on March 1, 2018, Pena filed an application seeking to recover the unclaimed funds without reopening the bankruptcy case.^[4] According to Pena, none of the secured creditors could establish a present entitlement to the unclaimed funds because the subject properties had been foreclosed upon or Pena was current on his mortgage payments. Pena stated that he conveyed the Compton properties to a third party in September 2014. He also advised that the secured creditors of the Visalia and Corcoran properties foreclosed on these properties in 2016. Nothing in the record demonstrates what happened to the Tulare property.

         Pena further argued that, as a result of Manfredo's abandonment of the rental properties in 2014, the rental properties - and the rents Manfredo collected - should be treated "as if no bankruptcy case had been filed," in which case he would have been entitled to collect and use all rents absent any event of default under his security agreements with his secured creditors. Therefore, Pena concluded that he, and not his unsecured creditors, was entitled to the unclaimed funds.

         Pena served the application on the secured creditors, but received no objections.^[5] Still, the bankruptcy court disagreed with Pena. According to the court, Manfredo's disbursement of the rents into the court's registry as unclaimed funds when the secured creditors failed to cash their disbursement checks was consistent with her statutory obligations under § 347.^[6] Furthermore, the bankruptcy court held that, pursuant to 28 U.S.C. § 2042, the secured creditors had five years to claim the funds. The court noted that this time period was not close to running. If the five-year time period elapsed without the secured creditors successfully claiming the funds, the bankruptcy court opined that the funds should escheat to the United States. 28 U.S.C. § 2042.

         More importantly, the bankruptcy court ruled that, as between Pena and his bankruptcy estate, the bankruptcy estate was entitled to the rents. The bankruptcy court rejected Pena's assertion that the unclaimed rents collected from the properties had been abandoned along with the properties in 2014, noting that rents were separate property of the estate under § 541(a)(6). The court explained that, under the distribution scheme imposed by § 726(a), it was the estate's unsecured creditors, not Pena, that were entitled to unclaimed rents if the secured creditors no longer had any entitlement to those funds. The court noted that Pena had disclosed $411, 000 in unsecured debt that remained unpaid.

         On March 29, 2018, the bankruptcy court entered an order denying Pena's application. Pena timely appealed.

         JURISDICTION

         The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have ...