Tracy A. Brown v. Gary W. Pyatt , 486 F.3d 423 ( 2007 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 06-3404
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In re: Gary Wayne Pyatt, *
*
Debtor. *
__________________ *
*
Tracy Brown, *
*
Appellant, *
*
v. *
*
Gary Wayne Pyatt, * Appeal from the United States
* Bankruptcy Appellate Panel
Appellee. * for the Eighth Circuit.
__________________ *
*
Robert J. Blackwell, Chapter 7 Trustee; *
Rice Pete Burns, Chapter 7 Trustee; *
James Cole, Chapter 7 Trustee; *
Fredrich J. Cruse, Chapter 7 Trustee; *
Rebert E. Eggmann, Chapter 7 Trustee; *
Janice A. Harder, Chapter 7 Trustee; *
Charles W. Riske, Chapter 7 Trustee; *
Leslie A. Davis, Chapter 7 Trustee; *
National Association of Bankruptcy *
Trustees, *
*
Amici on Behalf *
of Appellant, *
*
National Association of Consumer *
Bankruptcy Attorneys, *
*
Amicus on Behalf *
of Appellee. *
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Submitted: April 13, 2007
Filed: May 23, 2007
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Before MURPHY, BENTON, and SHEPHERD, Circuit Judges.
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MURPHY, Circuit Judge.
Gary Wayne Pyatt filed a voluntary petition for chapter 7 bankruptcy relief. His
petition did not list several checks which had been written prior to his filing but not
yet honored. The trustee moved to compel Pyatt to turn over to the estate the value
of these checks which amounted to $1938.76. The bankruptcy court granted the
motion, and Pyatt appealed to the bankruptcy appellate panel1 which reversed. Pyatt
v. Brown (In re Pyatt), 348 B.R. 783 (B.A.P. 8th Cir. 2006). The trustee appeals, and
we affirm.
On October 4, 2004 Pyatt filed his petition for bankruptcy. He stated that he
had 15 or fewer creditors and debts in an amount between $0 and $50,000, reported
his yearly income as about $15,000, and claimed two unmarried dependents. On his
schedule of personal property Pyatt indicated that the value of what he owned was
$7,470. His personal property consisted mainly of two cars: a Ford E-150 worth $750
1
The Honorable Robert J. Kressel, United States Bankruptcy Judge for the
District of Minnesota; the Honorable Timothy J. Mahoney, Chief Judge, United States
Bankruptcy Court for the District of Nebraska; and the Honorable Jerry W. Venters,
Chief Judge, United States Bankruptcy Court for the Western District of Missouri.
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and a Dodge minivan valued at $6,000. Pyatt also reported that he had $300 in a
checking account at Southern Commercial Bank.
At the first meeting of Pyatt's creditors on November 8, trustee Tracy Brown
discovered that Pyatt actually had $1,938.76 in the bank account on the date he filed
for bankruptcy. Several checks written to creditors before he filed his petition had not
been processed as of that date; they were honored after filing. Since Pyatt reported
he had $300 in the account, he had apparently subtracted the amount of the
outstanding checks in order to value his account on the date of filing. No one has
suggested that he fraudulently or intentionally misrepresented the balance in his
checking account.
In November 2004 Brown wrote to Pyatt, asking him to turn over $1,938.76 to
the estate. When he did not comply with the trustee’s demand, Brown invoked the
turnover provision of the bankruptcy code, 11 U.S.C. § 542(a), and filed a motion to
compel turnover on March 30, 2005. The bankruptcy court concluded that because
the assets represented by the checks were still in Pyatt's account as of the date of his
bankruptcy filing, the trustee was allowed to compel turnover under § 542(a).
Pyatt appealed to the bankruptcy appellate panel which reversed. The panel
majority concluded that the bankruptcy trustee was in a better position to recover
funds paid out by a bank to third parties after the debtor's filing. That is because only
the trustee is authorized by the bankruptcy code to avoid postpetition transfers.
See 11 U.S.C. § 549 (trustee may avoid unauthorized transfer occurring after
commencement of case). If the trustee were to recover the transferred funds, the
claims paid by the checks could be reinstated and the recovered funds could be
distributed equally among all creditors. The concurring opinion disagreed that the
trustee is in a better position to collect property of the estate, for the debtor is able to
prevent loss to the estate, but it pointed out that § 542(a) does not authorize the
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procedure used by Brown because the debtor no longer had control over the funds at
the time she demanded them.
Trustee Brown appeals. She argues that because the funds in question were still
in Pyatt's bank account on the date he filed bankruptcy, he was obligated to produce
them for the estate. When he failed to do so, she had the right under § 542(a) to
compel him to turn them over even though the checks had been honored and the funds
disbursed. The trustee contends that failure to affirm the bankruptcy court would limit
a trustee's ability to recover funds for the bankruptcy estate and impede its efficient
administration. Trustee's amici2 point out that her motion to compel turnover sought
the value of the property, not the property itself. Pyatt was therefore required to turn
over the amount of money in his bank account on the filing date.
Pyatt responds that § 542(a) codifies the turnover rules in effect before the
Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2595. Under those
rules a trustee could only seek the turnover of funds which were currently in the
possession of a debtor. He argues that he cannot be compelled to turn over money he
no longer possesses. Debtor's amicus emphasizes that an account holder is the
creditor of the bank and that nothing in the bankruptcy code requires debtors to collect
all debts owed to them at the time they file for bankruptcy. Amicus further contends
that Brown has other more appropriate statutory tools at her disposal in order to
recover the funds transferred by the checks.
The facts here are undisputed and we face only questions of law. Like the
bankruptcy appellate panel, we review the bankruptcy court's interpretation of the
bankruptcy code de novo. In re Farmland Indus., Inc., 397 F.3d 647, 650 (8th Cir.
2005).
2
The trustee's amici are the National Association of Bankruptcy Trustees and
seven individual bankruptcy trustees. The National Association of Consumer
Bankruptcy Attorneys filed an amicus brief supporting Pyatt.
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The turnover provision of the code reads in pertinent part:
[A]n entity, other than a custodian, in possession, custody or control,
during the case, of property that the trustee may use, sell, or lease under
section 363 of this title . . . shall deliver to the trustee, and account for,
such property or the value of such property, unless such property is of
inconsequential value or benefit to the estate.
11 U.S.C. § 542(a). By referring to § 363, a section which authorizes the trustee to
"use, sell, or lease . . . property of the estate," the drafters of § 542(a) made it clear that
the turnover obligation applies to property of the estate. Property of the estate is
defined by 11 U.S.C. § 541(a)(1) as "all legal and equitable interests of the debtor in
property as of the commencement of the case." Pyatt had a legally recognized interest
in his checking account when he filed for bankruptcy, and "checking account balances
become 'property of the estate' once a bankruptcy petition is filed." Franklin v. Kwik
Cash of Martin (In re Franklin), 254 B.R. 718, 721 (Bankr. W.D. Tenn. 2000). We
agree with the trustee that the funds transferred by the checks are property of the
estate.
Pyatt had control over the funds before the checks were honored, for under the
Uniform Commercial Code an account holder has a right to stop payment of a check
at any time before a check is honored. See U.C.C. § 4-403(a). Only when a check is
honored does the bank have a right to charge a debtor's account. Id. § 4-401. Under
the bankruptcy code a "transfer" of a check occurs when the drawee bank honors the
check, not when the payee receives it. Barnhill v. Johnson, 503 U.S. 393 (1992).
Anytime before the checks were honored, the funds represented by those checks were
within the "possession, custody, or control" of Pyatt.
At the time the trustee's motion to compel turnover was filed, however, the
checks had already been honored, and Pyatt then lacked "possession, custody, or
control" of the funds. He argues that a trustee should not be able to compel a debtor
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to turn property over when he no longer has control of it. The trustee disagrees,
contending that a motion to compel turnover may properly be brought if a debtor had
control over property when the bankruptcy petition was filed or at any time afterward.
According to the trustee, it makes no difference that Pyatt no longer had control of the
funds at the time of the turnover motion.
Here, both the debtor and the debtor's payees had "possession, custody, or
control" of the funds at some point after the bankruptcy petition was filed. Under the
trustee's reading of the provision, the trustee could proceed both against the debtor and
against the payees and obtain double satisfaction. The code's drafters apparently did
not think it necessary to prevent the trustee from obtaining double satisfaction under
§ 542(a). Cf. 11 U.S.C. § 550(d) (prohibiting double satisfaction in avoidances under
§§ 544, 545, 547-549, 553(b), and 724(a); no mention of § 542(a)). The 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.
Relying on the statutory phrase "possession, custody, or control, during the
case," the Fourth Circuit has concluded that any entity controlling property of the
estate at some point after the bankruptcy case begins may be the subject of a motion
to compel turnover. See In re Shearin, 224 F.3d 353, 356 (4th Cir. 2000).3 To focus
on the phrase "during the case" without acknowledging the other language in § 542(a)
would be misguided. See, e.g., Dolan v. U.S. Postal Serv., 126 S. Ct. 1252, 1257
3
Three years before its Shearin decision, the Fourth Circuit had held that
"[p]resent possession, either actual or constructive, of the property or its identifiable
proceeds, by the person from whom its turnover is sought, is required for recovery
under this section." Hager v. Gibson, 109 F.3d 201, 210 (4th Cir. 1997), citing
Maggio v. Zeitz (In re Luma Camera Serv., Inc.), 333 U.S. 56, 64 (1948). In his
partial dissent Judge Wilkins objected that the panel majority had improperly ignored
Hager. See 224 F.3d at 358-59.
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(2006) (proper interpretation of single phrase depends on whole statutory text). The
language of § 542(a) imposes an obligation on any entity other than a custodian who
comes into "possession, custody or control" of property of the estate after the
bankruptcy petition is filed to deliver the property to the trustee. It says nothing,
however, about whether that obligation continues after custody or control ceases, nor
does it specify whether an entity which lacks control may properly be subject to a
motion to compel turnover. The language of adjacent provisions in the bankruptcy
code (such as §§ 544, 545, 547, 548, and 549) expressly supplies the trustee with
rights and remedies. See, e.g., 11 U.S.C. § 549(a) ("[T]he trustee may avoid a transfer
of property of the estate . . . ."). In contrast, the text of § 542(a) does not directly
address what turnover remedies a trustee possesses. Instead, it prescribes a duty for
other entities to "deliver to the trustee" and "account for" certain property. Because
the text of § 542(a) does not identify the turnover rights of a bankruptcy trustee, we
must look elsewhere in order to discern their scope.
Precode practice suggests that § 542(a) permits a trustee to compel turnover
only from entities which have control of property of the estate or its proceeds at the
time of the turnover demand. Precode practice is relevant in construing the
bankruptcy code. See Dewsnup v. Timm, 502 U.S. 410, 419-20 (1992). It is
especially instructive when interpretation of a "judicially created concept" is at issue,
Midlantic Nat'l Bank v. N.J. Dep't of Envtl. Prot., 474 U.S. 494, 501 (1986), and
turnover proceedings were an uncodified creation of the courts before enactment of
the current code.
The leading case on pre 1978 turnover proceedings is Maggio v. Zeitz (In re
Luma Camera Service, Inc.), 333 U.S. 56 (1948). There, the president of a bankrupt
enterprise was ordered to turn over property which he did not have. He was jailed for
contempt when he did not comply with the order. The Supreme Court held that the
president was not a proper defendant in a turnover action, for turnover proceedings
are permissible "only when the evidence satisfactorily establishes the existence of the
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property or its proceeds, and possession thereof by the defendant at the time of the
proceeding." Id. at 63-64 (emphasis added). The use of a turnover remedy was
inappropriate "if, at the time it is instituted, the property and its proceeds have already
been dissipated." Id. at 64. Precode practice thus required control of the property at
the time the motion to compel turnover was brought.
The trustee's amici argue, however, that § 542(a) does not preserve the Maggio
rule because it allows the trustee to demand "the value" of the property instead of the
property itself. If present possession of the property were required they contend, §
542(a) would not allow a trustee to demand turnover of anything but the property
itself. This argument overlooks the fact that by authorizing a turnover proceeding
against a debtor who had control "of the property or its proceeds," 333 U.S. at 63(emphasis added), Maggio allowed the estate to recover the liquidated value of
property. Thus under both precode practice and current law, if a debtor transfers
property of the estate and receives value for it, a trustee may compel him to turn over
the value of the property because he still has control over the proceeds of the property.
The trustee finally argues that our interpretation of the statute renders § 542(c)
superfluous. Section 542(c) provides that an entity which lacks actual knowledge or
notice of the bankruptcy case is allowed to transfer property of the estate. The trustee
characterizes § 542(c) as "an affirmative defense" to a turnover action. Such a
defense, the trustee argues, would not be necessary if an entity had to possess property
of the estate before a trustee could initiate an action to compel turnover. This
argument incorrectly assumes that § 542(c) carves out an exception to the possible
universe of defendants in a turnover proceeding, but the function of § 542(c) is to limit
the turnover duty created in § 542(a), rather than to limit the possible defendants in a
turnover proceeding. Whether or not an entity happens to be exempted under § 542(c)
from the duty to turn over property of the estate, both the bankruptcy code and
precode practice dictate that an entity lacking present possession of property cannot
be the subject of a motion to compel turnover. An entity can thus fall outside the
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exemption of § 542(c) and be subject to the turnover duty, but still not be a proper
defendant in a turnover proceeding. Although Pyatt would have had the duty to turn
over all the money in his checking account before his checks were honored, the trustee
cannot now compel him to turn over property which is no longer within his control.4
The trustee also relies on In re USA Diversified Products, Inc., 100 F.3d 53 (7th
Cir. 1996). There the Seventh Circuit said that a defendant in a turnover proceeding
did not have to possess property of the estate for a trustee to compel its turnover. The
court was concerned that if present possession were required, "the possessor . . . could
thwart the demand simply by transferring the property to someone else." Id. at 56.
This concern can be addressed using 11 U.S.C. § 549, which gives the trustee the
power to avoid postpetition transfers of property of the estate. Here in fact, Brown
may invoke § 549 in order to proceed against the payees of the checks and bring the
transferred funds back into the administration of the estate. Moreover, a trustee who
follows Fed. R. Bankr. P. 2015(a), which directs a trustee "as soon as possible" after
a bankruptcy filing to notify "every entity known to be holding money or property
subject to withdrawal or order of the debtor, including every bank, savings, or
building and loan association," would learn if an account balance reported by a debtor
is inaccurate. This notification would trigger 11 U.S.C. § 542(b) which provides that
"an entity that owes a debt that is property of the estate . . . shall pay such debt to, or
on order of, the trustee." That provision would obligate the bank to turn over the full
amount of the checking account to the trustee, since a bank account is a debt the bank
owes to the depositor. Brown thus has the power to return the funds to the estate.
Accordingly, the judgment of the bankruptcy appellate panel is affirmed.
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4
11 U.S.C. § 549(a)(2)(A), which gives a trustee the power to avoid a
postpetition transfer authorized by § 542(c), is further evidence that the § 542(a)
turnover obligations are distinct from a trustee's rights. For even though such a
transfer is exempted from the turnover duty, the trustee nevertheless has the power to
avoid the transfer.
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