DocketNumber: 06-6004EM
Citation Numbers: 348 B.R. 783
Judges: Kressel, Chief Judge, Mahoney and Venters, Bankruptcy Judges
Filed Date: 8/31/2006
Status: Precedential
Modified Date: 8/7/2023
This is an appeal of the bankruptcy court’s order granting the chapter 7 trustee’s motion for the turnover of funds transferred from the Debtor’s bank account postpetition for the payment of checks delivered to creditors prepetition. We have jurisdiction over this appeal pur
I.STANDARD OF REVIEW
We review findings of fact for clear error and conclusions of law de novo.
II.BACKGROUND
The relevant facts are undisputed and straightforward. The Debtor, Gary Wayne Pyatt, filed for protection under chapter 7 of the Bankruptcy Code on October 4, 2004. Tracy A. Brown was appointed as the trustee (“Trustee”) for the Debtor’s case. The Debtor’s schedule of personal property (Schedule B) filed with his petition indicated that he had $300 in an account (“Account”) at Southern Commercial Bank. At the § 341 meeting of creditors on November 8, 2004, the Trustee learned that the Account actually had a balance of $1,938.76 on the date of filing. The difference was attributable to checks written by the Debtor prepetition but which were honored by the bank postpetition. There has been no suggestion or finding that the Debtor intentionally misrepresented the balance in the Account as of the petition date; we can only surmise that the Debtor’s error in reporting the true balance was a result of the Debtor’s diligence (or lack thereof) in “balancing” his checkbook.
The Trustee demanded that the Debtor turn over the $1,938.76, but the Debtor refused. The Trustee then filed a motion for turnover which the bankruptcy court granted. The court found, without taking additional evidence, that the $1,938.76 in the Account was, indeed, property of the estate and that it was the Debtor’s obligation to restore those funds to the estate. The Debtor argues here, as he did in the bankruptcy court, that the Trustee, not the Debtor, bears the responsibility of recovering estate property under these circumstances.
III.DISCUSSION
Despite the seemingly common situation presented by this case — the recovery of property of the estate transferred by means of a check written prepetition but cashed postpetition — we have found only five reported cases addressing the question that naturally arises in these circumstances, i.e., who is responsible for replenishing the estate for these unauthorized postpetition transfers? The cases are divided: two hold that the trustee bears the burden of recovering those funds from the creditors to whom they were transferred,
The bankruptcy court sided with the courts which hold the debtor responsible for replenishing the estate. These courts reason that funds attributable to checks honored postpetition constitute property of the estate, even if the check is delivered to a creditor prepetition, because transfers by means of a check are deemed to occur when the check is honored.
Following this line of reasoning, the bankruptcy court further opined that placing the onus of reimbursing the estate on the Debtor is appropriate because it advances the goal of equitable distribution among creditors; debtors are in a better position to prevent, control or remedy the situation; and debtors retain the ability to decide if further action against the postpe-tition transferees is warranted and appropriate.
The cases holding the trustee responsible for avoiding the type of postpetition transfer at issue here also begin from the premise that the funds attributable to checks cashed postpetition are property of the estate, but they differ from the cases above in their characterization of a debt- or’s duties with respect to bank accounts. They have concluded that a debtor’s duties with respect to bank accounts are governed by § 521(1) and Fed. R. Bank. P. 1007(b)(1) and 4002(3) rather than by §§ 521(4) and 542(a) because a bank account is technically not cash, it is a debt owed by the bank to the debtor in the amount of the funds in the account.
Upon the commencement of a chapter 7 case, the trustee is the representative of the estate with the responsibility to secure the property of the estate, to seek payment of debts owed to a debtor, and to give notice “as soon as possible ... to 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.... ”
This analysis is not perfect — a debtor does not actually fulfill the requirements of § 521(1) and Rule 4002(3) if the bank account balance reported fails to include checks outstanding as of the petition date — but, overall, making trustees responsible for avoiding and recovering post-petition transfers under these circumstances is legally and practically sound and better advances the Bankruptcy Code’s goal of equal distribution among creditors.
Debtors’ duties with regard to bank accounts are governed by § 521(1) and Rules 1007(b)(1) and 4002(3).
In this case, the Debtor failed to adequately perform his duties. He was under an obligation to report the actual balance in his bank account on the date of the petition and he failed to do this. As a result, the Trustee did not have the opportunity to prevent the outstanding checks from being cashed by the payee. Nevertheless, the proper remedy in this situation is not a motion for turnover against the debtor because the debtor no longer had the money at the time the Trustee brought the motion,
A trustee is in a better position to prevent transfers by postpetition check because the trustee can do so without the risk of criminal liability. A debtor, on the other hand, runs the risk of being prosecuted for writing a bad check if he attempts to stop payment on an outstanding check on the eve of bankruptcy. Even though the debtor would likely prevail if he faced criminal charges for such conduct, presuming he acted without fraudulent intent,
A trustee also is in a better position to remedy the damage to the estate caused by postpetition transfers because the trustee is the only party authorized by the Bankruptcy Code to avoid postpetition transfers, pursuant to 11 U.S.C. § 549. The bankruptcy court alluded to the possibility that the Debtor might recover from the payees of the checks in the amount the court ordered the Debtor to turn over to the Trustee, but it did not specify, nor are we aware of, any Bankruptcy Code provision that authorizes a debtor to recover funds from postpetition transferees.
Moreover, because a trustee is the only party the Code authorizes to recover post-petition transfers, placing responsibility on the trustee for doing so under these circumstances is also the only option that advances the goal of equal distribution among creditors. If a trustee recovers from creditors who receive the postpetition transfers of the kind at issue here, those creditors’ claims can could be reinstated to the extent of the recovery, and the trustee could then equally distribute that recovery among all of the unsecured creditors. In contrast, if a debtor is held accountable for checks cashed postpetition (and actually has the money to repay those funds), the trustee’s subsequent distribution of those funds would not be equal among creditors because the creditors who have received the unauthorized postpetition transfers will have already been paid 100 percent of what they were owed (to the extent of the transfers), whereas other creditors would most likely receive less than 100 percent.
IV. CONCLUSION
For the reasons stated above, we reverse the bankruptcy court’s order granting the Trustee’s motion to compel turnover.
. Kelly v. Jeter {In re Jeter), 257 B.R. 907, 909 (8th Cir. BAP 2001).
. In re Taylor, 332 B.R. 609 (Bankr.W.D.Mo.2005); In re Figueira, 163 B.R. 192 (Bankr.D.Kan.1993).
. In re Maurer, 140 B.R. 744 (D.Minn.1992); In re Sawyer, 324 B.R. 115 (Bankr.D.Ariz.2005); In re Dybalski, 316 B.R. 312 (Bankr.S.D.Ind.2004).
.See Mo.Rev.Stat. § 400.3-101. See also, Barnhill v. Johnson, 503 U.S. 393, 400-401, 112 S.Ct. 1386, 1390-91, 118 L.Ed.2d 39 (1992); In re Maurer, 140 B.R. 744 (D.Minn.1992); In re Taylor, 332 B.R. 609 (Bankr.
. Taylor, 332 B.R. at 612; Figueira, 163 B.R. at 194.
. Fed. R. Bank. P. 4002(3).
. Figueira, 163 B.R. at 195.
. Fed. R. Bank. P.2015(a)(4).
. Taylor, 332 B.R. at 612; Figueira, 163 B.R. at 194.
. See First Nat. Bank of Clinton v. Julian, 383 F.2d 329, 338 (8th Cir.1967) (“The general rule is that a deposit in a bank is presumed to be a general deposit and that the relation
. See Maggio v. Zeitz, 333 U.S. 56, 63-64, 68 S.Ct. 401, 405, 92 L.Ed. 476 (1948) (holding that a summary proceeding for turnover against debtor is inappropriate where debtor no longer has possession of properly). But cf. Boyer v. Davis (In re U.S.A. Diversified Products, Inc.), 193 B.R. 868 (Bankr.N.D.Ind.1995) (suggesting that Maggio has been effectively overruled by the enactment of 11 U.S.C. § 542(a) which allows a trustee to recover the asset or the “value of such property”).
. See, e.g., Mo.Rev.Stat. § 570.125(1).