The trustee in a Chapter 7 proceeding has authority to recover property belonging to the bankruptcy estate from the debtor or another person or entity, even if they did not have “possession, custody, or control” of the property at the time the trustee sought recovery, according to the Ninth Circuit Court of Appeals in Shapiro v. Henson, 739 F.3d 1198 (9th Cir. 2014). Both the bankruptcy court and the district court denied the trustee’s turnover motion on the grounds that the debtor did not have “possession, custody, or control” of the property at the time the trustee filed the motion. The appellate court held that the trustee may seek turnover from anyone who had “possession, custody, or control” at any point during the bankruptcy case. This could expand a trustee’s power considerably and place additional obligations on debtors.
The debtor filed for Chapter 7 bankruptcy in August 2009. At that time, she had a checking account at Bank of America with a balance of almost $7,000. She had written several checks before filing the petition, which the bank did not honor until after she filed. The court-appointed trustee requested turnover of the funds in the account in October 2009, on the grounds that the funds had become the property of the bankruptcy estate. The debtor refused to comply, claiming that she was no longer in possession of the funds because the bank had honored her pre-petition checks. The trustee filed a turnover motion against the debtor under 11 U.S.C. § 542(a).
The bankruptcy court denied the trustee’s motion. It held that the checks became part of the bankruptcy estate when the petition was filed, but that the trustee could not compel the debtor to turn over the funds under § 542 if she no longer had possession of them. The district court affirmed the bankruptcy court’s order, noting that the trustee could pursue the creditors who received the funds from the checks, and that the trustee could have “double satisfaction” by seeking turnover from both the debtor and the creditors. In re Henson, 449 B.R. 109, 113 (Bankr. D. Nev. 2011).
The Ninth Circuit reversed both lower courts, applying a different interpretation of § 542. The statute makes reference, the court noted, to entities that have “possession, custody, or control” of bankruptcy estate property “during the case,” and states that those entities “shall deliver” such property to the trustee. Shapiro, 739 F.3d at 1200, quoting 11 U.S.C. § 542(a). The court interpreted this to mean that the trustee may seek turnover of property belonging to the estate from any entity that possesses it, or that has possessed it “at some point during the bankruptcy case.” Shapiro, 739 F.3d at 1200.
The statute also allows the trustee to recover the value of the property, which an entity could provide even if it no longer has possession of the property itself. While the lower courts seemed to place the burden of recovering bankruptcy estate property on the trustee, the Ninth Circuit’s ruling places the burden on the debtor and other entities who might have possession of estate property. The trustee only needs to identify who has, or has had, possession of estate property during the case.
For more than 18 years, bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 proceedings. To schedule a free and confidential consultation with a knowledgeable advocate, contact us today online or at (310) 475-9399.
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