Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-06-06004/USCOURTS-ca8-06-06004-0/pdf.json

Parties Involved:
Tracy Brown
Appellee
Gary Wayne Pyatt
Appellant

Document Text:

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

_______________

No. 06-6004EM

________________

In re: *

*

Gary Wayne Pyatt, *

*

Debtor. *

*

Gary Wayne Pyatt, *

* Appeal from the United States

Debtor - Appellant, * Bankruptcy Court for the Eastern 

* District of Missouri

v. *

*

Tracy Brown, *

*

Trustee - Appellee. *

_____

Submitted: July 26, 2006

Filed: August 31, 2006 (Corrected September 1, 2006) 

_____

Before KRESSEL, Chief Judge, MAHONEY and VENTERS, Bankruptcy Judges.

_____

VENTERS, Bankruptcy Judge.

This is an appeal of the bankruptcy court’s order granting the chapter 7 trustee’s

motion for the turnover of funds transferred from the Debtor’s bank account

postpetition for the payment of checks delivered to creditors prepetition. We have

jurisdiction over this appeal pursuant to 28 U.S.C. § 158(b). For the reasons set forth

below, we reverse the decision of the bankruptcy court.

Appellate Case: 06-6004 Page: 1 Date Filed: 08/31/2006 Entry ID: 2084600
1 Kelly v. Jeter (In re Jeter), 257 B.R. 907, 909 (B.A.P. 8th Cir. 2001). 

2

I. STANDARD OF REVIEW

We review findings of fact for clear error and conclusions of law de novo.

1

 The

issue on appeal – whether the Debtor is responsible for certain postpetition transfers

of estate property – is purely legal, and will therefore be reviewed de novo.

II. BACKGROUND

The relevant facts are undisputed and straightforward. The Debtor, Gary

Wayne Pyatt, filed for protection under chapter 7 of the Bankruptcy Code on October

4, 2004. Tracy A. Brown was appointed as the trustee (“Trustee”) for the Debtor’s

case. The Debtor’s schedule of personal property (Schedule B) filed with his petition

indicated that he had $300 in an account (“Account”) at Southern Commercial Bank.

At the § 341 meeting of creditors on November 8, 2004, the Trustee learned that the

Account actually had a balance of $1,938.76 on the date of filing. The difference was

attributable to checks written by the Debtor prepetition but which were honored by the

bank postpetition. There has been no suggestion or finding that the Debtor

intentionally misrepresented the balance in the Account as of the petition date; we can

only surmise that the Debtor’s error in reporting the true balance was a result of the

Debtor’s diligence (or lack thereof) in “balancing” his checkbook.

The Trustee demanded that the Debtor turn over the $1,938.76, but the Debtor

refused. The Trustee then filed a motion for turnover which the bankruptcy court

granted. The court found, without taking additional evidence, that the $1,938.76 in

the Account was, indeed, property of the estate and that it was the Debtor’s obligation

to restore those funds to the estate. The Debtor argues here, as he did in the

bankruptcy court, that the Trustee, not the Debtor, bears the responsibility of

recovering estate property under these circumstances.

Appellate Case: 06-6004 Page: 2 Date Filed: 08/31/2006 Entry ID: 2084600
2 In re Taylor, 332 B.R. 609 (Bankr. W.D. Mo. 2005); In re Figueira, 163

B.R. 192 (Bankr. D. Kan. 1993).

3 In re Maurer, 140 B.R. 744 (D. Minn. 1992); In re Sawyer, 324 B.R. 115

(Bankr. D. Ariz. 2005); In re Dybalski, 316 B.R. 312 (Bankr. S.D. Ind. 2004).

4 See Mo. Rev. Stat. § 400.3-101. See also, Barnhill v. Johnson, 503 U.S.

393, 400-401, 112 S.Ct. 1386, 1390-91, 118 L.Ed.2d 39 (1992); In re Maurer, 140

B.R. 744 (D. Minn. 1992); In re Taylor, 332 B.R. 609 (Bankr. W.D. Mo. 2005); In

re Sawyer, 324 B.R. 115 (Bankr. D. Ariz. 2005); In re Figueira, 163 B.R. 192

(Bankr. D. Kan. 1993).

3

III. DISCUSSION

Despite the seemingly common situation presented by this case – the recovery

of property of the estate transferred by means of a check written prepetition but cashed

postpetition – we have found only five reported cases addressing the question that

naturally arises in these circumstances, i.e., who is responsible for replenishing the

estate for these unauthorized postpetition transfers? The cases are divided: two hold

that the trustee bears the burden of recovering those funds from the creditors to whom

they were transferred,2

 and three hold that the debtor is responsible for returning those

funds to the estate.3

The bankruptcy court sided with the courts which hold the debtor responsible

for replenishing the estate. These courts reason that funds attributable to checks

honored postpetition constitute property of the estate, even if the check is delivered

to a creditor prepetition, because transfers by means of a check are deemed to occur

when the check is honored.4

 Therefore, they conclude, the Debtor is an “entity . . . in

possession, custody, or control” of property of the estate with the duty to physically

deliver those funds to the trustee pursuant to 11 U.S.C. § 542(a). 

Following this line of reasoning, the bankruptcy court further opined that

placing the onus of reimbursing the estate on the Debtor is appropriate because it

advances the goal of equitable distribution among creditors; debtors are in a better

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5 Taylor, 332 B.R. at 612; Figueira, 163 B.R. at 194.

6

 Fed. R. Bank. P. 4002(3).

7 Figueira, 163 B.R. at 195.

4

position to prevent, control or remedy the situation; and debtors retain the ability to

decide if further action against the postpetition transferees is warranted and

appropriate.

The cases holding the trustee responsible for avoiding the type of postpetition

transfer at issue here also begin from the premise that the funds attributable to checks

cashed postpetition are property of the estate, but they differ from the cases above in

their characterization of a debtor’s duties with respect to bank accounts. They have

concluded that a debtor’s duties with respect to bank accounts are governed by 

§ 521(1) and Fed. R. Bank. P. 1007(b)(1) and 4002(3) rather than by §§ 521(4) and

542(a) because a bank account is technically not cash, it is a debt owed by the bank

to the debtor in the amount of the funds in the account.5

 Section 521(1) and Rule

1007(b)(1) require a debtor to file a list of assets and liabilities, which assets would

include “debts” owed to a debtor in the form of bank account balances, and Rule

4002(3) requires a debtor to “inform[ing] the trustee immediately in writing of the

name and address of every person holding money or property subject to the [debtors’]

withdrawal or order,” if schedules have not yet been filed.6

 Thus, “[t]he statute and

rules do not require debtors to withdraw the funds [in a bank account] but only to

make the information available to the trustee.”7

 

Upon the commencement of a chapter 7 case, the trustee is the representative

of the estate with the responsibility to secure the property of the estate, to seek

payment of debts owed to a debtor, and to give notice “as soon as possible . . . to

every entity known to be holding money or property subject to withdrawal or order

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8

 Fed. R. Bank. P. 2015(a)(4).

9 Taylor, 332 B.R. at 612; Figueira, 163 B.R. at 194.

10 See First Nat. Bank of Clinton v. Julian, 383 F.2d 329, 338 (8th Cir.

1967) (“The general rule is that a deposit in a bank is presumed to be a general

deposit and that the relationship created between the bank and the depositor is that

of debtor and creditor . . . .”); 9 C.J.S. Banks and Banking § 270.

5

of the debtor, including every bank, savings, or building and loan association. . . .”8

So, these courts conclude, the burden of recovering postpetition transfers from a

debtor’s account should fall on a trustee, not the debtor.

This analysis is not perfect – a debtor does not actually fulfill the requirements

of § 521(1) and Rule 4002(3) if the bank account balance reported fails to include

checks outstanding as of the petition date – but, overall, making trustees responsible

for avoiding and recovering postpetition transfers under these circumstances is legally

and practically sound and better advances the Bankruptcy Code’s goal of equal

distribution among creditors.

Debtors’ duties with regard to bank accounts are governed by § 521(1) and

Rules 1007(b)(1) and 4002(3).9

 The fact that general deposit accounts are always

subject to the checks of the depositor and are always payable on demand does not

change the nature of a bank deposit as a debt owed by a bank to the depositor.10 A

debtor is not required to physically collect that debt on the filing date, but must report

the extent of that debt, i.e., the balance in the account, to the trustee. In that way, the

purpose of Rule 4002(3) is achieved. 

In this case, the Debtor failed to adequately perform his duties. He was under

an obligation to report the actual balance in his bank account on the date of the

petition and he failed to do this. As a result, the Trustee did not have the opportunity

to prevent the outstanding checks from being cashed by the payee. Nevertheless, the

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11 See Maggio v. Zeitz, 33 U.S. 56, 63-64, 68 S.Ct. 401, 405, 92 L.Ed. 476

(1948) (holding that a summary proceeding for turnover against debtor is

inappropriate where debtor no longer has possession of property). But cf. Boyer v.

Davis (In re U.S.A. Diversified Products, Inc.), 193 B.R. 868 (Bankr. N.D. Ind.

1995) (suggesting that Maggio has been effectively overruled by the enactment of

11 U.S.C. § 542(a) which allows a trustee to recover the asset or the “value of such

property”).

12 See, e.g., Mo. Rev. Stat. § 570.125(1).

6

proper remedy in this situation is not a motion for turnover against the debtor because

the debtor no longer had the money at the time the Trustee brought the motion,11 and,

despite suggestions to the contrary, the Trustee – not the Debtor – was in a better

position to prevent this situation from happening and to remedy the consequences

flowing therefrom. 

A trustee is in a better position to prevent transfers by postpetition check

because the trustee can do so without the risk of criminal liability. A debtor, on the

other hand, runs the risk of being prosecuted for writing a bad check if he attempts to

stop payment on an outstanding check on the eve of bankruptcy. Even though the

debtor would likely prevail if he faced criminal charges for such conduct, presuming

he acted without fraudulent intent,12 it is still inappropriate and unnecessary to place

the debtor between the “rock” of possible criminal prosecution and the “hard place”

of defending a turnover action by the trustee.

A trustee also is in a better position to remedy the damage to the estate caused

by postpetition transfers because the trustee is the only party authorized by the

Bankruptcy Code to avoid postpetition transfers, pursuant to 11 U.S.C. § 549. The

bankruptcy court alluded to the possibility that the Debtor might recover from the

payees of the checks in the amount the court ordered the Debtor to turn over to the

Trustee, but it did not specify, nor are we aware of, any Bankruptcy Code provision

that authorizes a debtor to recover funds from postpetition transferees. 

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7

Moreover, because a trustee is the only party the Code authorizes to recover

postpetition transfers, placing responsibility on the trustee for doing so under these

circumstances is also the only option that advances the goal of equal distribution

among creditors. If a trustee recovers from creditors who receive the postpetition

transfers of the kind at issue here, those creditors’ claims can could be reinstated to

the extent of the recovery, and the trustee could then equally distribute that recovery

among all of the unsecured creditors. In contrast, if a debtor is held accountable for

checks cashed postpetition (and actually has the money to repay those funds), the

trustee’s subsequent distribution of those funds would not be equal among creditors

because the creditors who have received the unauthorized postpetition transfers will

have already been paid 100 percent of what they were owed (to the extent of the

transfers), whereas other creditors would most likely receive less than 100 percent.

Finally, whether characterized as concern for fundamental fairness or

practicality, it simply makes more sense to directly collect the postpetition transfers

from the creditors who received the transfers rather than from the debtors who,

presumably, innocently made the payments prepetition. In a perfect world, there

would be a place on a debtor’s schedules or statement of financial affairs where

outstanding checks could be readily listed, thereby alerting the trustee of the possible

need to notify the bank to stop payment on those checks. In the absence of such

perfection, however, debtors should be encouraged to disclose that information to

their attorneys who, in turn, can communicate that to the trustee in some fashion. And

the transfers that slip through the cracks could be avoided by the trustee.

V. CONCLUSION

For the reasons stated above, we reverse the bankruptcy court’s order granting

the Trustee’s motion to compel turnover.

Appellate Case: 06-6004 Page: 7 Date Filed: 08/31/2006 Entry ID: 2084600
13 The majority raises the specter of potential criminal liability if the debtor

stops payment on outstanding checks. It cites Mo. Revised. Stat. § 570.125(1) for

that fear. That Missouri statute makes it a crime to fraudulently stop payment of an

instrument if a person knowingly, with the purpose to defraud, stops payment on a

check or draft given in payment for the receipt of goods or services. It seems to me

that there is clearly no purpose to defraud if a bankruptcy debtor stops payment on

a check in fulfillment of the debtor’s duties under a federal statute. 

8

KRESSEL, Chief Judge, concurring.

 While I agree with the majority’s conclusion that the bankruptcy court’s

turnover order should be reversed, I differ entirely from the majority in my reasons

and therefore write separately. First of all, I disagree with the basic rationale of the

opinion that the trustee is in a better position than the debtor is to collect what was,

admittedly, property of the estate. When a case is filed, the balances in the debtor’s

bank accounts are property of the estate. In cases like this one, where there are

outstanding checks that will be presented to the bank within days or even hours of the

commencement of the case, the trustee is virtually helpless to prevent the loss of the

asset. The debtor, on the other hand, is perfectly capable of preventing that loss. The

debtor can make sure that there are no outstanding checks when the case is filed by

not writing checks in the period before filing, by delaying filing the petition or by

writing checks far enough in advance so that they have been paid before the petition

is filed. The debtor can provide actual notice of the commencement of the case to the

bank, thus, creating a duty on the part of that institution to not pay the checks when

they are presented post-petition or the debtor can also stop payment on all outstanding

checks when the case is commenced.13

But frankly, I consider all of this to be beside the point. This is not a question

of what is the better policy, but rather, what the statute requires. As the majority

indicates in its opinion, there is no doubt that the funds on deposit in the debtor’s

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9

account when the case was filed was property of the estate. This is true whether one

thinks of that property as cash, a credit of some sort, or a debt owed by the bank to

the debtor. Once that concession is made, then I do not think it can be gainsaid that

the debtor is, at a minimum, an entity in control of that property, from the moment the

case is commenced to the time the outstanding checks are presented to and paid by the

bank. There may be others who are under the same obligation, including the bank

itself, but the debtor is certainly one of the entities who has a statutory obligation to

turn the funds over to the trustee. As a result of this clear statutory mandate, I would

conclude that the debtor, in fact, violated his obligations under § 542(a) by not turning

over to the trustee the funds in his bank account at the moment he filed his case.

While there may be remedies against the debtor for his failure to comply with

his statutory responsibility, turnover is not among them. As the Supreme Court said

in Maggio v. Zeitz (In re Luma Camera Service, Inc.), 333 U.S. 56 (1948), in referring

to a turnover proceeding, 

It is essentially a proceeding for restitution rather than

indemnification, with some characteristics of a proceeding

in rem; the primary condition of relief is possession of

existing chattels or their proceeds capable of being

surrendered by the person ordered to do so. It is in no

sense based on a cause of action for damages for tortious

conduct such as embezzlement, misappropriation or

improvident dissipation of assets.

333 U.S. at 63.

The Court goes on to say that the remedy is “appropriate only when the

evidence satisfactorily establishes the existence of the property or its proceeds, and

possession thereof by the defendant at the time of the proceeding.” 333 U.S. at 63-64.

Thus, it is not only common sense that a person cannot be ordered to turn over

property that the person does not have, the Supreme Court has clearly and

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10

unequivocally held such in Maggio. A turnover order must be supported by “proof

that the property has been abstracted from the bankruptcy estate and is in the

possession of the party proceeded against. It is the burden of the trustee to produce

this evidence, however difficult this task may be.” Oriel v. Russell, 278 U.S. 358

(1929). 

In this case, not only did the trustee not present evidence that the debtor was in

possession of the property which was the subject of the proceeding, but conceded that

he was not. On this point, the trustee relies on the language “during the case.”

However, I think this misconstrues the statute, both grammatically and legally and

flies in the face of the court’s holding in Maggio. The language quoted imposes the

turnover obligation on any party into whose possession property of the estate comes

during the case, but that does not mean that that obligation survives that entity’s loss

of possession. 

I think the trustee is mistakenly treating § 542 as creating a recovery or damage

remedy. Nowhere does the statute explicitly grant the trustee any rights. Compare

this to §§ 544, 545, 547, 548, and 549, all of which explicitly grant rights to the trustee

and define them. Section 550 goes on to indicate from whom the trustee may recover

property. Thus, on its face, § 542 does not give the trustee a remedy or a cause of

action, but rather, imposes a duty on others. The trustee is limited to enforcing that

duty. Notably, § 542 is not listed in § 550 and thus is not subject to the statutory

limitation that “the trustee is entitled to only a single satisfaction under subsection (a)

of this section.” 11 U.S.C. § 550(d). The trustee’s interpretation of the statute would

allow the trustee to obtain turnover from every single entity into whose possession a

piece of property came during the case. It would also allow, for example, the trustee

to obtain an order of turnover from the debtor, of a car that had been earlier

repossessed by a secured creditor. He would also be entitled to a turnover order

directed to every member of the family who drove the car before it was repossessed.

Obviously, this cannot be the law. In fact, it is to the contrary.

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Turnover orders should not be issued, or approved on

appeal, merely on proof that at some past time property

was in possession or control of the accused party . . . .

Maggio, 333 U.S. at 65. In the same vein, obligating the entity in possession to

turnover either the property or its value is not a temporal provision, but only an

alternative obligation imposed upon the entity in possession, that does not survive the

entity’s loss of possession of the property.

In footnote 11, the majority dismisses Maggio by citing to an Indiana

bankruptcy court’s opinion “suggesting that Maggio has been effectively overruled

by the enactment of 11 U.S.C. § 542(a) . . . .” Not only do I not think that § 542(a)

overruled Maggio, I think it is a codification of it. The Bankruptcy Act that existed

before October 1, 1979, contained no turnover obligation. That obligation was

judicially created and in existence upon the enactment of the Bankruptcy Reform Act

of 1978, P.L. 95-598. The Act included § 542. “The normal rule of statutory

construction is that if Congress intends for legislation to change the interpretation of

a judicially created concept, it makes that intent specific.” Midlantic Nat’l Bank v.

N.J. Dept. of Envtl. Prot., 474 U.S. 494, 501 (1986). “The court has followed this

rule with particular care in construing the scope of bankruptcy codifications.” Kelly

v. Robinson, 479 U.S. 36, 47 (1986). To the extent that the statutory language might

have some ambiguity in it, the Supreme Court has told us that we are to assume that

the law is the same under the Bankruptcy Code as it was under the Bankruptcy Act.

In summary, I think that while the debtor violated his obligations under

§ 542(a) by allowing the transfer of funds out of his bank account after he filed his

petition and while I think that the trustee undoubtedly has remedies as a result of that

transfer against the debtor and others, I would hold that turnover is not one of those

remedies. Requiring turnover of property or its value from the debtor (or for that

matter, from any entity) who is not in possession of that property is contrary to

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12

common sense, Supreme Court precedent, and the statute itself. I therefore concur

in the majority decision reversing the bankruptcy court.

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