KARLIN, Bankruptcy Judge.
Appellant, Gary E. Jubber, Trustee (the "Trustee"), appeals the bankruptcy court's decision denying his motion to require Appellees, Jose L. Ruiz and Carrie Ruiz ("Debtors"), to turn over estate assets. After oral argument and a review of the record, we reverse the order of the bankruptcy court.
During the one month period preceding the filing of their Chapter 7 bankruptcy petition, electronically filed on Saturday, April 24, 2010, Debtors wrote four checks on a checking account they held at Zions Bank (the "Zions account"). These four checks were in the following amounts and designated purposes: 1) $2,196.50 on March 29, 2010 to purchase hay used in Debtors' business; 2) $200.00 on April 1, 2010 for a charitable donation; 3) $240.00 on April 16, 2010 for a business purpose; and 4) $1,118.47 on April 23, 2010 to pay Debtors' monthly mortgage payment. None of these checks had been honored by Zions Bank on the date they filed their petition.
Debtors filed their Schedules of Assets and Liabilities, Statement of Financial Affairs, and Statement of Social Security Number (which contains only the last four digits of that number) with their petition. On the schedules, Debtors listed various checking and savings accounts, including the Zions account. Debtors indicated under penalty of perjury that the Zions account balance on the date of filing was $10.02. In reality, there was $3,764.99 in the account, because none of the four checks had been honored. All four checks then cleared within four days of the filing: one check cleared the account on Monday,
The Trustee was appointed as the panel Chapter 7 Trustee on the same date the petition was filed.
This Court has jurisdiction to hear timely filed appeals from final judgments and orders of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.
The Trustee filed his notice of appeal within fourteen days of the bankruptcy court's Memorandum Opinion denying the Motion for Turnover, and therefore the appeal was timely.
"For purposes of standard of review, decisions by judges are traditionally divided into three categories, denominated questions of law (reviewable de novo), questions of fact (reviewable for clear error), and matters of discretion (reviewable for `abuse of discretion')."
The bankruptcy court, while recognizing a split in authority on this issue, held that the Trustee could not recover from Debtors the amount that was in the checking account on the date of filing. Although the court recognized that the Debtors' interest in the account on the date of filing became property of the estate, it dismissed the Trustee's contention that the funds in the checking account constituted estate property.
Having determined that it was only the right to collect on a promise to pay from Zions Bank to the Debtors that constituted property of the estate, the bankruptcy court then turned to the issue of whether Debtors had any duty to collect on that promise to pay for the benefit of the estate. The bankruptcy court held that Debtors had constructively turned over this property by disclosing to the Trustee in their schedules the existence of the checking account. The court then held that the Debtors were under no duty to collect on debts owed to the bankruptcy estate, and that it was the Trustee's obligation to collect on that debt, either directly from Zions Bank if he sought turnover, or from the payees of the funds through avoidance proceedings. Based on these findings, the bankruptcy court denied the motion for turnover.
The starting point for analyzing the Trustee's motion for turnover is with the language of the pertinent statute, 11 U.S.C. § 542(a), which provides that "an entity ... in possession, custody, or control, during the case, of property [of the estate] ... shall deliver to the trustee ... such property or the value of such property[.]" According to the Trustee, because Debtors were in control of the funds contained in their checking account on the date they filed their petition, the Trustee may properly seek turnover of those funds directly from Debtors for ultimate distribution to their creditors. Debtors deny that they were in control of the funds in the checking account, and more importantly, that they have any duty to repay those funds.
The first question is what precisely constituted property of the bankruptcy estate on the date of filing. The bankruptcy court held that it was only Debtors' right to collect on a debt from the bank that constituted property of the estate, not the funds themselves. This Court disagrees.
The primary basis for Debtors' contention, as well as the bankruptcy court's holding, that the estate's interest in the checking account amounted to nothing more than a beneficial interest in Zions Bank's promise to pay the funds held in the account (as opposed to the money in the account), is derived from language contained in Citizens Bank of Maryland v. Strumpf.
The Supreme Court held that the bank's actions did not constitute a setoff, and thus it had not violated the automatic stay.
Although this Court recognizes that the language contained in the concluding paragraph of Strumpf does facially support Debtors' position, the context of that case is entirely different from the case currently before this Court. Strumpf solely involved the automatic stay and the relationship between the bank and the debtor in that context. The issue of what constituted property of the estate under § 541 was neither argued nor decided. For that reason, this language in Strumpf is not dispositive under the facts, or the issue presented, in this case.
The relationship between Zions Bank and Debtors was considerably different than the typical debtor-creditor relationship that existed in Strumpf. Debtors maintained the right to withdraw the funds in their account at any time, to direct Zions Bank to deliver the funds to any third party, or to leave the funds on deposit. Although Zions Bank did make a promise to pay the funds in the account to Debtors, the checking account constituted much more than that promise and Debtors' rights to those funds exceeded those of a typical creditor.
Well established Tenth Circuit precedent directs that "the scope of section 541 is broad and should be generously construed[.]"
The Court next turns to the question of whether Debtors had "possession, custody, or control" of the property "during the case," such that they can be required to turnover the property, or its value, to the Trustee pursuant to § 542(a). There is no question Debtors had neither actual "possession" nor "custody" of the funds in the checking account "during the case." Undoubtedly Zions Bank, and later the entities that received the funds from the account post-petition, are the only entities that would satisfy those requirements. However, Debtors most certainly had "control" over the funds "during the case," as § 542(a) requires.
At any time prior to the filing of the petition, and up to the time the funds were withdrawn by the third parties to whom Debtors had written pre-petition checks, Debtors had the ability to withdraw all funds in their account, to close the account, to stop payment on any outstanding checks, and to transfer the funds from the account to another account. There can really be no question that these Debtors had nearly total control over these funds on the date they filed the petition, and this control extended through the following Monday for one check, Tuesday for two checks, and Wednesday for the last of those checks.
This leaves the final question of whether that control, which lasted for at least two days after the case was filed, constitutes control "during the case," which is required by § 542(a). Although a handful of courts have held that an entity must have current possession of the actual funds at the time the trustee makes the demand for turnover,
In In re Majors,
In fact, if the statute is read to require current possession of the property, the language allowing a trustee to alternatively recover "the value of the property" would become superfluous, as the trustee could only recover the property itself. It is an elementary canon of statutory construction that "a statute should be interpreted so as not to render one part inoperative."
We do wish to address one argument in support of requiring current possession of property in a turnover action under § 542(a), which was raised by the Eighth Circuit Court of Appeals in In re Pyatt,
The Eighth Circuit noted that § 550(d) specifically limits a trustee to a single recovery in actions under §§ 544, 545, 547-549, 553(b) and 724(a), but makes no mention of such a limitation for actions under § 542(a). The court inferred from that language that "[t]he absence of such a prohibition suggests that the drafters did not intend to authorize a trustee to proceed under § 542(a) against everyone who may have had control over property of the estate at some point after the petition was filed."
Although at first glance this appears to be a strong argument in favor of Debtors' position that current possession or control is required, a closer examination shows at least two flaws in this argument. First, it would be extremely unusual for § 542(a) to be referenced in § 550(d), as a matter of statutory construction. Every other statutory provision that is limited by § 550(d) relates to the Trustee's powers to avoid transfers for the benefit of the estate. Unlike §§ 544, 545, 547-549, 553(b) and 724(a), § 542(a) is not an avoidance provision. It requires turnover of estate property
Secondly, the Eighth Circuit's concerns about the potential for a double recovery by the trustee are not entirely remedied by the holding that an entity must have current possession, custody, or control over estate property to be subject to a turnover action by a trustee. For example, in a case where funds remain in a checking account on the date a trustee seeks turnover, both the bank (which would currently be in possession of the funds) and the debtor (who would currently be in control of the funds) could be the subject of the trustee's turnover demand. So the double recovery the In re Pyatt court feared could still occur under its interpretation.
As the Trustee in this case noted at oral argument, no trustee seeks to recover the same asset twice, but they most assuredly want to collect it once. In addition, if a trustee sought a double recovery, the party from whom the second recovery was sought could raise as an equitable defense to turnover that the bank account constituted effectively a single asset, and the trustee should not be able to recover the same asset twice.
This Court reaffirms the holding of In re Majors by recognizing that current possession of estate property is not a required element for turnover pursuant to § 542(a). The fact that § 542(a) specifically allows a trustee to recover either the property itself, or the value of such property, clearly establishes that a party need not be in actual possession of the property at the time of the turnover demand to fall within the scope of § 542(a).
The Trustee has satisfied all of the elements required under § 542(a) to establish a claim against Debtors for turnover of the funds that remained in the Zions account on the date they filed their bankruptcy petition. The Court will, however, briefly address some of the policy concerns that have been raised in this and similar cases where a debtor had written pre-petition checks that cleared the debtor's checking account post-petition, and where the trustee sought to collect those funds directly from the debtor, rather than by using other remedies provided in the Code.
The Court recognizes that the result of this decision places Debtors in a difficult position. The funds that were in their checking account on the date they filed their case are admittedly no longer available to them, as Zions Bank honored those checks, and debited those amounts from their account, within four days after they filed the case. This will therefore require Debtors to pay the funds twice—once to the creditors
The Court also notes that Debtors could have prevented this result. Debtors could have merely waited until all outstanding checks had cleared the bank before filing their petition. However, if immediate filing was required, because of a financial emergency such as a pending foreclosure, Debtors could have stopped payment on the outstanding checks, or simply closed the bank account. In addition, Debtors could have provided notice directly to the bank that they had filed a bankruptcy petition, which would have created a duty on the part of the institution to not honor the checks.
The Court understands Debtor's argument that the latter of the three options could theoretically have subjected them to criminal charges,
This case provides a good example why this is not practical. This bankruptcy was filed on a Saturday. It would be a rare situation for a panel trustee to 1) be sitting in his or her office on a weekend, with staff, in the off-chance a bankruptcy would be filed; 2) that he would necessarily be the one appointed as the panel trustee on that new case; 3) that the schedules would show the existence of enough money in a checking account worth immediately acting on;
These facts show that even if the Trustee had immediately complied with the requirements of Rule 2015(a)(4), it is not only possible, but likely, that most or all of the checks written pre-petition would have cleared the account by the time the bank received the notice. Accordingly, compliance with Rule 2015(a)(4) is not the solution to the issue presented under the facts of this case.
Secondly, if debtors are not properly counseled, they may inadvertently indicate in their schedules the balance they show in their check register, rather than the accurate amount actually still within their account. That is what appears to have happened here; Debtors listed the account with a $10.02 balance instead of the actual amount of $3,764.99. Since panel trustees stand to only receive $60 in a no-asset case, the system is not set up to require those same trustees to spend their personal assets to seize a $10 bank account.
In addition, the first time panel trustees typically receive a debtor's full social security number is usually a minimum of four to five days after the bankruptcy filing, when the § 341 notice is received from the Bankruptcy Noticing Center. Accordingly, especially in cases where the debtor has a common last name, notice to a bank without a full social security number could well be ineffective to provide actual notice of the bankruptcy. Had the Trustee in this case waited the typical amount of time to receive the full social security number before sending a notice to Zion Bank, all checks would have cleared.
Finally, the Trustee could admittedly seek to recover the funds directly from the payees of the checks by pursuing separate avoidance actions under § 549. As the Trustee argues, however, that approach would oftentimes be extremely uneconomical when there are numerous checks in relatively small amounts. Instead, the Trustee argues that the bankruptcy estate was better served by following the path he chose to follow—seeking reimbursement through a single entity without the need to file four separate adversary proceedings, with the estate paying a separate filing fee for each one. His approach is both allowed by the Code, and satisfies his "duty to collect the property of the estate `as
For the foregoing reasons, the decision of the bankruptcy court should be, and hereby is, reversed. The Trustee has shown that he is entitled to an order compelling Debtors to turnover $3,524.99, the amount he sought in his turnover motion under § 542(a).
Accordingly, we REVERSE the bankruptcy court.
