by In an unfortunate decision, the Ninth Circuit held that current possession is not necessary to turnover of funds in a checking account. Shapiro v. Henson (In re Henson), No. 11-16019 (9th Cir. Jan. 9, 2014). When the debtor filed her chapter 7 petition she had outstanding checks in the amount of over $6,000.00 that did not clear until after the petition was filed. Pursuant to section 542(a), the trustee sought turnover of the funds in the checking account as of the petition date. The bankruptcy court denied the turnover request and the district court affirmed. On appeal, the Ninth Circuit reversed and remanded. In so holding, the Ninth Circuit broke with the Eighth Circuit’s position in an identical situation that possession is a prerequisite to turnover. In re Pyatt, 486 F.3d 423 (8th Cir. 2007).
Section 542(a) provides that an entity “in possession, custody, or control, during the case,” of estate property shall deliver such property “or the value of such property,” to the trustee. The Ninth Circuit found that the phrase “during the case,” contemplates turnover of property from one who possessed it at any time during pendency of the bankruptcy even if he or she does not possess it at the time of the motion. The court further found that the phrase “or the value of such property,” was an indication of Congress’s intention that if the party against whom turnover is sought no longer possesses the property he or she will be held responsible for its equivalent in value, usually represented by the proceeds from sale. The court also turned to pre-Code practice for guidance finding that a turnover action could historically be performed as a summary proceeding (led by a bankruptcy referee) or a plenary proceeding (comparable to a civil trial). Present possession was necessary for an order for turnover in the case of a summary proceeding but not for a plenary proceeding. This, the court concluded, established the precedent of turnover even in the absence of actual possession. Finally, the court cited the practical consideration that requiring turnover only of the entity with actual possession would frustrate the powers of the trustee as the possessor could simply transfer the property to avoid turnover.
There are many problems with this opinion, the most obvious of which is the fact that it puts a debtor in the untenable position of having to pay twice for the same product or service—once to the original recipient of the check, again to the trustee. (Although, at least in the case of purchased products rather than services, it could be argued—albeit perhaps facetiously—that the debtor could satisfy his turnover obligation by turning over the purchased product itself). It also permits the paid creditor to possibly receive more than his proportionate share of the debtor’s estate.
Additionally, as argued in the amicus brief NCBRC filed on behalf of the NACBA membership, the court’s concern about thwarting the trustee’s powers to recover estate property is adequately answered by section 549 which permits a trustee to avoid a post-petition transfer and recover the asset from the transferee. Other provisions also contribute to the trustee’s power to recover estate assets without imposing an undue burden on the debtor, such as section 543 which contemplates turnover by custodians, section 521(a)(4) which imposes surrender obligations upon the debtor, and section 542 which imposes turnover obligations on third parties. Because section 521(a)(4) deals specifically with the debtor’s obligation to surrender property to the trustee, the trustee should not able to use his strong-arm power under 542 for that purpose. By listing the account on her schedules, the debtor complied with her obligation under section 521.
Another consideration the Ninth Circuit failed to adequately address is the nature of the property of a bank account. In Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), the Supreme Court found that a debtor does not have a possessory interest in the funds in his checking account. Finding that the bank’s administrative hold on the debtor’s checking account funds did not violate the automatic stay, the Court stated,
Respondent’s reliance on these provisions rests on the false premise that petitioner’s administrative hold took something from respondent, or exercised dominion over property that belonged to respondent. That view of things might be arguable if a bank account consisted of money belonging to the depositor and held by the bank. In fact, however, it consists of nothing more or less than a promise to pay, from the bank to the depositor, see Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 276, 17 L.Ed.2d 197 (1966); Keller v. Frederickstown Sav. Institution, 193 Md. 292, 296, 66 A.2d 924, 925 (1949); and petitioner’s temporary refusal to pay was neither a taking of possession of respondent’s property nor an exercising of control over it, but merely a refusal to perform its promise.
See also In re Antweil, 931 F.2d 689 (10th Cir. 1991) (by writing check debtor merely requested that bank transfer funds). In view of this characterization of checking account funds, the debtor lacked possession of the funds and, once she filed her bankruptcy petition, also lacked custody and control over them. Therefore, the prerequisite of a turnover action—that the debtor have “possession, custody, or control, during the case,”—was not met.
Right or wrong, however, debtors’ attorneys should question their clients specifically about checks in transit prior to filing.