ORDER ON MOTION TO COMPEL DEBTOR TO TURN OVER VALUE OF SCHEDULED NONEXEMPT PROPERTY OF THE ESTATE1

MIKE K. NAKAGAWA, Bankrupcty Judge.

There is one bad actor in this case and he does not work for Bank of America.2

BACKGROUND

On May 19, 2016, a voluntary Chapter 7 petition was filed by Fred Charles Rosen ("Debtor"). (ECF No. 1). Debtor was represented by attorney Robert C. Graham ("Attorney Graham"), doing business as Robert Graham & Associates and as Lawyers West. The case was assigned to Brian D. Shapiro, as a panel Chapter 7 trustee for this judicial district ("Trustee").

On August 19, 2016, the Trustee filed a motion to compel the Debtor to turn over various 1 non-exempt assets valued at $10,052.00, as well as $16,153.71 in funds from a bank account that allegedly were used to make prepayments on various living expenses ("Turnover Motion"). (ECF No. 82). On September 2, 2016, Attorney Graham filed a partial opposition to the Turnover Motion on behalf of the Debtor. (ECF No. 93). On September 13, 2016, the Trustee filed a reply. (ECF No. 95).

On October 13, 2016, the Trustee filed a motion to approve a settlement ("Settlement Motion") that he had reached with the Debtor with respect to the Turnover Motion. (ECF No. 108).

On November 17, 2016, an order was entered approving the Settlement Motion ("Settlement Order"). (ECF No. 118).3 The Settlement Agreement attached to the Settlement Order required the Debtor to pay $21,000 to the bankruptcy estate instead of the $26,205.71 sought in the Turnover Motion.4

On December 1, 2016, Debtor received his discharge. (ECF No. 134).

On January 17, 2017, the Trustee filed a motion to enforce the Settlement Agreement ("Enforcement Motion"). (ECF No. 146). Attorney Thomas H. Fell of the law firm of Fennemore Craig, P.C., appeared in the proceeding on behalf of the Debtor. (ECF No. 154). Attorney Fell filed opposition (ECF No. 165) and the Trustee filed a reply (ECF No. 167).

On March 22, 2017, an order was entered denying enforcement of the Settlement Agreement, but vacating the Settlement Order. (ECF No. 168).

On April 20, 2017, the Trustee filed the instant Motion to Compel Debtor to Turn Over Value of Scheduled Nonexempt Property of the Estate ("Motion"), renewing his original request, but limited to turn over of non-exempt assets, i.e., the value of $10,052.00. (ECF No. 171). Debtor filed opposition (ECF No. 175) along with his supporting declaration (ECF No. 176). The Trustee filed a reply. (ECF No. 178).

On May 23, 2017, the court heard the Motion. The appearances of counsel for the Trustee and the Debtor, as well as counsel for the Debtor's former spouse, were noted on the record. After arguments were presented, the matter was taken under submission.

DISCUSSION

There is no dispute that the Debtor deposited the full amount of the settlement funds with Attorney Graham payable to the Lawyers West Trust Account. See Proof of Claim 1-1, filed December 27, 2016, in In re Robert C. Graham, Ltd., dba, Rob Graham & Associates, and dba Lawyers West, Case No. 16-16655-BTB ("Graham Bankruptcy"). There is no dispute that the Debtor's check was dated October 6, 2016, and was deposited by Attorney Graham on October 11, 2016. Id. at Part 3. There is no dispute that the Graham Bankruptcy was commenced by the filing of an involuntary Chapter 11 proceeding on December 15, 2016. (Graham ECF No. 1). There is no dispute that on December 22, 2016, an order for relief was entered and that the Graham Bankruptcy estate is now liquidating in Chapter 7. (Graham ECF No. 21).

There is no dispute that Attorney Graham shuttered the operations of the law firm on or about December 5, 2016. See Exhibit "6" to Declaration of Joseph S. Kistler attached as Exhibit "A" to Emergency Ex Parte Application to Expand the Relief of the Temporary Restraining Order Granted on December 5, 2016, attached as Exhibit "D" to Motion to Appoint Interim Trustee in Involuntary Case. (Graham ECF No. 3). There is no dispute that the funds deposited into client trust accounts and other financial accounts maintained by the law firm are missing. See Schedule A/B: Assets — Real and Personal Property, Part 1, No. 3, and Statement of Financial Affairs, Part 11, No. 21. (Graham ECF No. 175). There is no dispute that Attorney Graham is currently incarcerated pending state criminal prosecution, and that his law license has been suspended by the State Bar of Nevada. See Exhibits "1" and "2" to Motion of Markel Insurance Company for Relief from Stay Pursuant to 11 U.S.C. 362 to Proceed in Non-Bankruptcy Forum. (Graham ECF No. 169). There is no dispute that Attorney Graham's spouse has moved to Colorado and has filed a personal Chapter 7 proceeding. See In re Linda Marie Graham, Case No. 16-22532-CDP (Bankr. D. Colo. December 31, 2016).5 There is no dispute that the Debtor filed a proof of claim in the Graham Bankruptcy proceeding in the amount of $21,000, representing the funds that had been paid to satisfy the Settlement Agreement.

There is no dispute in the Debtor's bankruptcy proceeding that the Trustee took appropriate steps to seek recovery of assets of the estate, see Turnover Motion at ¶¶ 10 to 12, and further took appropriate steps to reach a settlement once doubts were raised as to the probability of success on the merits of certain aspects of the initial Turnover Motion. See Declaration of Brian D. Shapiro in Support of Motion to Approve Settlement Agreement at ¶¶ 7 to 10. (ECF No. 109). There is no dispute that the Debtor took appropriate steps to satisfy the terms of the court-approved Settlement Agreement. See Declaration of Fred Charles Rosen in Support of Debtor's Opposition to Trustee's Motion to Compel Debtor to Turn Over Value of Scheduled Nonexempt Property of the Estate at ¶ 6. (ECF No. 176). There is no dispute that neither the Trustee nor the Debtor had any reason to suspect or believe that the settlement funds would be misappropriated from the Lawyers West Trust Account by Attorney Graham.6

In his renewed Motion, the Trustee relies on the language of Section 542(a), which requires an entity in possession of property of the estate to deliver such property or its value to the trustee, unless the property is of inconsequential value or benefit to the estate. There is no question that the Debtor is in possession of nonexempt property of the bankruptcy estate consisting of funds held in various financial accounts. While the Debtor requests a finding that those accounts are now of inconsequential value or benefit under the circumstances, that request is wishful thinking at best since the subject nonexempt assets are in liquid form.

In this case, the previous Settlement Agreement reflected a combined settlement value of both the non-exempt assets and the Trustee's claim to recover the alleged prepayments of living expenses. The Debtor already delivered that settlement value to Attorney Graham and the Trustee now seeks to compel the Debtor to turn over half of that settlement value again. There is, however, only one intervening bad actor in this proceeding: Attorney Graham.7

Having considered the entire record as well as the arguments and representations of counsel, in addition to the equities in the case, the court will require the Debtor to turn over to the Trustee the cash amount of $10,052.00, representing the value of the nonexempt property that is the subject of this Motion. Alternatively, the Debtor will be permitted to assign the proof of claim he filed in the Graham Bankruptcy proceeding in the amount of $21,000, as well as any and all other claims against Attorney Graham and his business entities, in full satisfaction of the $10,052.00 amount requested in the present Motion. Debtor will be required to deliver the cash payment, or, the foregoing assignments to the Trustee's counsel no later than June 9, 2017. Upon the Debtor's compliance with either of these alternatives, the Trustee shall file a statement of such compliance with the court. In the event Debtor fails to timely deliver the cash payment and also fails to timely deliver the assignments, the Trustee may submit an ex parte application for entry of a judgment against the Debtor in the amount of $10,052.00.

IT IS THEREFORE ORDERED that the Motion to Compel Debtor to Turn Over Value of Scheduled Nonexempt Property of the Estate ("Motion"), Docket No. 171, be, and the same hereby is, GRANTED AS PROVIDED HEREIN.

IT IS FURTHER ORDERED that no later than June 9, 2017, Fred Charles Rosen ("Debtor"), shall tender payment of the amount of $10,052.00 to the Chapter 7 trustee, Brian D. Shapiro ("Trustee"), representing the value of the non-exempt assets that are subject of the instant Motion. In the alternative, Debtor may assign Proof of Claim No. 1-1, that was filed by the Debtor on December 27, 2016, in the matter of Robert C. Graham, Ltd., Case No. 16-16655-BTB, in addition to any and all other claims against attorney Robert C. Graham and his business entities, in full satisfaction of the amount requested by the instant Motion. The payment or assignments must be delivered in care of the Trustee's counsel of record. Upon the Debtor's compliance with either of these alternatives, the Trustee shall file a statement of such compliance with the court.

IT IS FURTHER ORDERED that in the event the Debtor fails to timely deliver the cash payment and fails to timely deliver the assignments set forth in the preceding paragraph of this Order, the Trustee may submit an ex parte application for entry of a judgment against the Debtor in the amount of $10,052.00.