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Chapter 7 Trustees Can Demand Turnover of Property No Longer in a Party’s Possession

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The Ninth Circuit Court of Appeals recently decided a case that has very troubling results for bankruptcy filers. In Shapiro v. Henson (In re Henson), No. 11-16019 (9th Cir. Jan. 9, 2014), the court held that bankruptcy trustees have the power to recover bankruptcy estate property and the trustee’s power is not restricted to just property of the bankruptcy estate at the time the motion for turnover is filed.

In the Henson case, Barbara Henson filed for Chapter 7 bankruptcy protection with $6,955.19 in her checking account. She also wrote several checks that had not cleared her checking account yet on the day she filed. The checks did not clear her bank account until sometime after her bankruptcy petition was filed. Brian Shapiro (the bankruptcy trustee in the case) demanded Ms. Henson turnover all the funds in her checking account to him except for the $800 that was exempted/protected. Ms. Henson refused to turn over the funds because she indicated the checks were now cleared and the funds were no longer in her possession for her to turnover. One of the checks was written out to her bankruptcy lawyer for fees related to her bankruptcy case. The trustee deducted that amount from the amount Ms. Henson owed and instead went after the bankruptcy attorney directly to get the funds back. The trustee filed a motion to turnover the remaining funds under §542(a) but the bankruptcy court denied the trustee’s motion because Ms. Henson did not have possession of the funds at the time the motion was filed. The trustee appealed this decision to the U.S. District Court, District of Nevada. The result was the same as the bankruptcy court’s decision so the trustee appealed that decision yet again to the Ninth Circuit Court of Appeals.

Under 11 U.S.C. §542(a), an entity that is in possession, custody, or control of the bankruptcy estate property or property that may be exempted, during the case, needs to deliver the property or value of the property to the trustee. The Ninth Circuit ruled in favor of the trustee, stating that the trustee may request for a turnover of the property against an entity that has or had possession of the property at any time during the bankruptcy case even if they no longer have possession of the property at the time the motion for turnover is filed. If the entity cannot turn over the property because it is no longer in the entity’s possession, the entity may turnover the value of such property. Therefore, Ms. Henson may need to turnover property that is not part of the bankruptcy estate (post-petition funds earned) to the trustee to satisfy the motion for turnover. This results in Ms. Henson having to pay twice for the same thing: once when she wrote checks for her bills prior to filing for bankruptcy but cleared out of her bank account after her filing and the second time is when she has to pay the trustee the amount that was in her checking account at the time she filed for bankruptcy even if she no longer has those funds.

At the end of the day the lesson to be learned from this is to be sure to let your bankruptcy attorney know what checks you have outstanding at the time you file your bankruptcy case. Failure to do so may result in you having to pay your bills twice.