Hand over all your money! 9th Circuit holds that a bankruptcy trustee can require a debtor to turn over entire bank account balance without credit for checks which cleared after bankruptcy was filed

In a personal bankruptcy, the debtor can usually exempt and therefore keep specified amounts of money in bank or savings accounts. If there is money in those accounts in excess of the available exemptions, the non-exempt cash belongs to the trustee to be used to pay creditors. Meanwhile, the debtor, with bills to pay,  has often written checks that, as of the date the bankruptcy is filed, have yet to  clear the bank account. What many people do not realize is that the bankruptcy value of these bank accounts is not the “checkbook balance”  after all checks have cleared, but “available funds”, ie. the amount of money that the bank has available on the filing date.  Nevertheless, many bankruptcy attorneys list the value of bank accounts based on what their client tells them, which is usually a guess, and disregard this important distinction.

As the Ninth Circuit reminds us, (Shapiro v Henson, 2014 WL 68998, decided January 9, 2014) this can create big problems if there are large checks outstanding (such as for mortgage payments) that clear the account after the bankruptcy is filed. Barbara Henson wrote large checks against her checking account shortly before filing bankruptcy. When the trustee demanded that she turn over the $6599.00 that was the bank “available funds” balance on the filing date, she refused, on the basis that the money had been paid out of the account towards checks written pre-bankruptcy but which cleared post-petition. The bankruptcy court agreed with Ms. Henson and denied the trustee’s motion for turnover. After the District Court affirmed, the case ended up before the Ninth Circuit Court of Appeals, which reversed.

The issue, as that Court saw it, was whether the Trustee’s power to compel turnover of bankruptcy estate property under 11 USC 542(a) is solely restricted to those entities having “possession, custody, or
control” (collectively “possession”) of such property at the time the motion for turnover is filed. In this case, the lower courts had held that the Trustee would have to pursue the parties who cashed the checks, not the debtor who no longer had the money. Based on the statutory language, the 9th Circuit held that because the debtor had possession of the funds “during the case” before the checks cleared, and because the statute allows a trustee to recover the property or its value, she was properly liable to repay the money even though it had been used to pay checks which cleared. This was supported bankruptcy “pre-code practice” before the current Bankruptcy Code was enacted in 1979. Finally, the Court cited the practical problems created by a rule  that limited the turnover power to those in possession of the property. Any such target could easily avoid liability by transferring the property away, thereby creating a “shell game” that frustrate the legitimate goal of recovering estate property for the benefit of creditors.

The Takeaway: As a bankruptcy filing approaches, debtors should use certified checks, cashier’s checks, or wire transfers for major withdrawals from bank accounts that have substantial value. Our practice is to have our clients provide us an “up to the minute” bank account balance at the time we file a bankruptcy, so we can be sure this problem does not arise. Nowadays, with online access to accounts and the ability to get available funds balances via a bank ATM, this should not be a problem.

In bankruptcy, as in so many other endeavors, sometimes sweating the details really makes the difference.

Our office is available to help individuals and businesses of all sizes find solutions to their financial problems.


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