In the case of Bostanian v. Liberty Savings Bank (1997) 52 Cal.App.4th 1075, 61 Cal.Rptr.2d 68, the California Court of Appeal, Second District, has held that only a bankruptcy trustee can prosecute an action that is an asset of the bankruptcy estate, such as an action to establish that a foreclosure violated the automatic stay.

The issue presented to the court was whether a Chapter 7 debtor could pursue an action which was an asset of the bankruptcy estate.

Under bankruptcy law, the Chapter 7 bankruptcy trustee is the representative of the bankruptcy estate, and has sole authority to pursue actions on behalf of the estate. The Chapter 7 debtor may not on his own prosecute an action belonging to the bankruptcy estate unless the claim has been abandoned by the Chapter 7 trustee. (Griffin v. Allstate Insurance (C.D. Cal. 1996) 920 F.Supp. 127, 130; Reichert v. General Ins. Co. (1968) 68 Cal.2d 822, 829-830.)

In this case, the cause of action arose after the filing of the original Chapter 11 proceeding. In the Chapter 11 proceeding, the debtor was the debtor-in-possession, acting as the trustee in the Chapter 11. However, the cause of action for improper foreclosure belonged to the bankruptcy estate, not the debtor-in-possession.

The court held that the cause of action was property of the bankruptcy estate under 11 U.S.C. ß 541(a)(1) [all legal or equitable interests of the debtor] or ß 541(a)(6) [proceeds or product arising from property of the estate] or ß 541(a)(7) [a legal interest in property].

Mr. Bostanian argued that the conversion of the case from Chapter 11 to Chapter 7 effected a change in the property of the bankruptcy estate. Upon conversion of a Chapter 11 to a Chapter 7 proceeding, the Chapter 7 relates back to the filing of the Chapter 11. Thus, the cause of action, which arose after the filing of the Chapter 11 but before the conversion to Chapter 7, was part of the Chapter 7 estate.

The Bostanians argued that, following the foreclosure, the property was no longer property of the estate, and that they were free to pursue their action. The appellate court rejected this argument. The Bostanians had missed the point. The issue in this case was not whether the property was still an asset of the estate --- it was not, due to the foreclosure. The issue in this case was whether the cause of action for improper foreclosure was still an asset of the estate. In this case, the Chapter 7 trustee had not abandoned the cause of action. Abandonment, in bankruptcy, is a formal procedure governed by 11 U.S.C. ß 554. The cause of action remained an asset of the estate until it had been abandoned by the trustee. Granting relief from the automatic stay for purposes of foreclosure is not the equivalent of an abandonment of the property. In this case, there was no evidence of an abandonment under ß 554. The fact that the trustee was aware of the case, and took no steps to pursue it was not an abandonment under the terms of the statute.

This case provides a good analysis of the nature of bankruptcy estate assets, and the broad scope of the authority of the bankruptcy trustee. The case is also significant due to the fact that the decision is by a California appellate court, and reflects a growing sophistication on the part of the state appellate courts in bankruptcy related issues.