NACBA Argues that Possession Necessary for Turnover Obligation

Posted by NCBRC - December 17, 2012

NACBA has filed an amicus brief in the case of In re Henson, No. 11-16019 (9th Cir.), seeking a finding by the Ninth Circuit that the trustee may not use his turnover power under section 542 to require a debtor to pay into the estate funds that are no longer in the debtor’s possession. In this case, the debtor had written a check prior to bankruptcy which was not cashed until after the bankruptcy filing. Instead of using his avoidance power under section 549 to recover the funds from the payee, the trustee sought to obtain the money from the debtor, thereby exposing the debtor to double payment and allowing the payee to receive more than he would have been entitled to through bankruptcy distribution.

Historically, possession has been a prerequisite to turnover. The trustee, however, argues that the reduction of property to its “value” in the current Code section 542, eliminates the possession requirement. The court in In re Pyatt, 486 F.3d 423 (8th Cir. 2007), rejected this argument finding that pre- and post-Code law permit recovery from the debtor of the value of property only where the debtor actually possesses that value, as in a situation in which the debtor has sold estate property and holds the proceeds from that sale.

NACBA argues that in enacting the Code, Congress created distinct sections to apply to different parties that may have possession of estate property. Section 543 deals with turnover by custodians, section 521(a)(4) imposes surrender obligations upon the debtor, and section 542 imposes turnover obligations on third parties. Because 521(a)(4) deals specifically with the debtor’s obligation to surrender property to the trustee, the trustee cannot use his strong-arm power under 542 for that purpose. The district court properly concluded that possession is a requirement for the trustee to be able to demand turnover of funds from the debtor.

Henson NACBA amicus


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