9th Circuit: Funds Offset by Checks in Transit Are Subject to §542(a) Turnover (Henson)

Ninth Circuit on Bankruptcy Trustee’s §542(a) Turnover Power:

On January 9, 2014, the Ninth Circuit issued an opinion in Shapiro v. Henson (In re Henson), where the debtor had filed her Chapter 7 case before over $6,000 in outstanding checks had cleared.  The trustee sought turnover of the funds that were in the debtor’s checking account as of the petition date, which were not exempted.  The bankruptcy court denied the turnover request because Ms Henson was not in possession of the funds at the time of the request.  The district court affirmed, and the trustee appealed to the Ninth Circuit.

11 U.S.C. § 542(a) provides: “[A]n entity . . . in possession, custody, or control, during the case, of [property of the estate, or exempt property], 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.”

In an opinion by Judge N. Randy Smith, the Court held that the phrase “possession … during the case” contemplates possession at any time during the case, and that the phrase “or the value of such property” indicated intent by Congress to provide an alternative if a debtor no longer possessed a specific item of property (i.e. if it had been sold).  The Court also looked to historical practice in turnover actions, where present possession was not always necessary, and also to the practical consideration that if possession were required, a debtor could easily frustrate the trustee’s turnover powers by simply transferring the property.

The opinion puts the Ninth Circuit at odds with the Eighth Circuit, which held the contrary position in In re Pyatt (486 F.3d 423).

The upshot to people considering filing a bankruptcy case: Funds in your bank account at the time of filing are property of the estate, even if offset by checks in transit, and (in the 9th Circuit, at least), a chapter 7 trustee may demand turnover of those funds even if you no longer possess them.

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