Court Opinion

ID: 2967266
Source: CourtListenerOpinion
Date Created: 2015-09-22 02:13:31.794324+00
Date Added: 2024-06-11T11:43:13.032389
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: NORMAN W. SHEARIN, JR.;
ANN SHEARIN,*
Debtors.

STEPHEN L. BEAMAN, Trustee,                                          No. 98-2566
Plaintiff-Appellee,

v.

VANDEVENTER BLACK, LLP,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of North Carolina, at Raleigh.
W. Earl Britt, Senior District Judge.
(CA-98-459-5-BR-2, BK-96-3403-8-L, AP-97-39-8-L)

Argued: April 7, 1999

Decided: August 17, 2000

Before WIDENER, MURNAGHAN, and WILKINS, Circuit Judges.

_________________________________________________________________

Affirmed by published opinion. Judge Widener wrote the opinion, in
which Judge Murnaghan concurred. Judge Wilkins wrote a concur-
ring and dissenting opinion.
_________________________________________________________________
*Mrs. Shearin's name appears in some of the papers as Anne.
COUNSEL

ARGUED: Norman Wilson Shearin, Jr., VANDEVENTER BLACK,
L.L.P., Kitty Hawk, North Carolina, for Appellant. Charlene Boykin
King, BEAMAN & KING, P.A., Wilson, North Carolina, for Appel-
lee. ON BRIEF: Michael P. Cotter, VANDEVENTER BLACK,
L.L.P., Kitty Hawk, North Carolina, for Appellant. Stephen L. Bea-
man, BEAMAN & KING, P.A., Wilson, North Carolina, for Appel-
lee.

_________________________________________________________________

OPINION

WIDENER, Circuit Judge:

Defendant, Vandeventer, Black, Meredith & Martin, L.L.P.
(Vandeventer), appeals the district court's judgment affirming the
bankruptcy court's order for turnover of funds to plaintiff, Stephen
Beaman (the Trustee) in the matter of Norman Shearin, Jr. and Ann
Shearin's Chapter 7 bankruptcy. The fund in the amount of
$28,844.10 represents Shearin's capital account as an equity partner
of the law firm, and the fund in the amount of $52,133.64 represents
a portion of year-end profits distributed to him attributable to pre-
petition work. We affirm.1

I.

We incorporate, as may apply here, the statement of facts from the
related case, Shearin v. Beaman, No. 98-2191, today decided. We also
follow that decision as it may apply here.

Additionally, the following facts are relevant in this adversary pro-
ceeding. After Shearin filed his petition in bankruptcy on July 12,
1996, the Trustee initially wrote the law firm on August 13, 1996.2
_________________________________________________________________
1 The argument that the bankruptcy court had no jurisdiction is without
merit.
2 This inquiry occurred after the Trustee had hand delivered to
Shearin's attorney a request for "[c]opies of any contracts, partnership
agreements, or otherwise, that he has with his present law firm."

                    2
The Trustee requested information from the firm's managing partner
regarding Shearin's partnership interests, along with any documents
to assist him in the administration of the bankrupt estate. The firm
promptly replied via letter on August 20, 1996 and denied that
Shearin had any interest in undistributed profits of the law firm on
July 12, 1996 "because there were no undistributed profits as of that
date." In this same letter, the law firm disclosed to the Trustee that
"Mr. Shearin's capital account was $28,844," but was inaccessible
under the law firm's partnership agreement, enclosed with the letter.
The dearth of information prompted the Trustee to inquire further into
the profit issue in a September 11, 1996 letter to the law firm. The
Trustee specifically asked about any work Shearin had credited at the
date of filing that would lead to a distribution of profits at a later date.

The law firm did not respond to the Trustee's September inquiries.
The Trustee wrote again on October 31, 1996 requesting the law
firm's response within 10 days. Due to late receipt, the law firm
responded to the request on November 27, 1996 asserting that the
information requested was confidential and refusing to provide further
information. The law firm's fiscal year ended on November 30, 1996.
In accordance with the practice of the law firm since 1991, it paid to
Shearin year-end distributions, $62,494.00 in December 1996 and
$17,976.58 in January 1997. Ann Shearin deposited these checks into
the Shearins' joint bank account. Shearin's capital account remained
in the law firm's possession.

The bankruptcy court's decision In re Shearin , A.P. No. 97-00038-
8-JLR, slip op. at 9-10 (Bankr. E.D.N.C. Feb. 17, 1998), resolved the
issues of whether the capital account and the portion of year-end prof-
its attributable to pre-petition work constituted property of the estate
under 11 U.S.C. § 541 and Virginia partnership law. We have today
affirmed the district court's judgment affirming the bankruptcy court
in that case. See Beaman v. Shearin, No. 98-2191. The bankruptcy
court decided in the companion proceeding, Beaman v. Vandeventer,
et al., A.P. No. 97-00039-8-JLR, slip op. at 10 (Bankr. E.D.N.C. Mar.
24, 1998), that the Trustee had the right to recover from the Vande-
venter firm the value of the capital account and the pre-petition profits
under 11 U.S.C. § 542(a). The district court affirmed that order.

We review this appeal from the district court's order de novo. See
In re Wilson, 149 F.3d 249, 251 (4th Cir. 1998).

                     3
II.

This appeal requires us to construe 11 U.S.C. § 542 of the Bank-
ruptcy Code, the turnover provision. Section 542(a) provides that one
with possession or control of estate property "shall deliver to the
trustee, and account for, such property or the value of such property
. . . ." 11 U.S.C. § 542(a). Section 542(c) provides an exception to the
turnover duty for parties who transfer property in good faith and with
neither actual notice nor actual knowledge of the commencement of
the bankruptcy case. See 11 U.S.C. § 542(c). The holder may also be
excused from turnover duty if the property held is of inconsequential
value to the estate. See 11 U.S.C. § 542(a). The firm argues that (1)
neither the capital account nor the pre-petition profits distributed to
Shearin post-petition are property of the estate; (2) the firm did not
have possession, control, or custody of the profits at the time the
adversary proceeding was brought; (3) the firm cannot turnover to the
Trustee what it no longer has; and (4) at the time the firm paid the
profits, it had a good faith dispute with the Trustee over the inclusion
of profits and the capital account in the estate.

A.

We have today held in Shearin v. Beaman, No. 98-2191, that
Shearin's capital account and the portion of year-end profits attribut-
able to his pre-petition work constitute property of the estate.3 We
adhere to that holding here.

The law firm's second argument, that it had no possession of pre-
petition year-end profits, applies exclusively to the turnover of those
profits paid to Shearin.4 The law firm paid Shearin his year-end prof-
_________________________________________________________________
3 Throughout this opinion, such profits are referred to as property of the
estate. Those profits are part of the estate under 11 U.S.C. § 541(a)(1)
and (6). They flow from Shearin's partnership interest and his right to
profits therefrom. See Va. Code Ann. § 50-24 and § 50-26 (Michie
1950).
4 The law firm's second contention does not apply to the capital
account because the law firm has remained in possession of Shearin's
capital account throughout the bankruptcy case and these adversary pro-
ceedings. The account was valued at $28,844.10 on the date of the male
debtor's petition. We agree with the bankruptcy court's assessment that
this asset offers "substantial value to the estate . . . ."

                    4
its in December 1996 and January 1997, whereas this adversary pro-
ceeding began in March 1997, and the case began July 12, 1996 upon
the filing of the petition. The claim is that such profits were paid to
Shearin in December, 1996 and January, 1997, prior to the com-
mencement of the adversary proceeding. Section 542(a) provides a
broader remedy than solely the turnover of property held at the time
of an adversary proceeding, which could occur well after the filing of
a bankruptcy petition. It provides that "an entity . . . in possession,
custody, or control, during the case, of property that the trustee may
use, sell, or lease under section 363 . . . shall deliver to the trustee,
and account for, such property or the value of such property . . . ."
11 U.S.C. § 542(a) (emphasis added). We construe the language "dur-
ing the case" to refer to the entire bankruptcy case, not just the adver-
sary proceeding.5 Accord Boyer v. Carlton, Fields, Ward, Emmanuel,
Smith & Cutler, P.A. (In re USA Diversified Prods., Inc.), 100 F.3d
53, 55 (7th Cir. 1996) (applying section 542(a) to"[o]ne who during
a bankruptcy proceeding is `in possession, custody, or control' of
property" belonging to the debtor's estate); Redfield v. Peat, Marwick,
Mitchell, & Co. (In re Robertson), 105 B.R. 440, 457 (Bankr. N.D.
Ill. 1989) (stating that the statute "plainly applies to estate property
that was possessed by anyone `during the case' whether or not they
still have it"). The law firm in this case had possession and control
over pre-petition profits generated in the current fiscal year before
July 12, 1996, the date of the bankruptcy filing, 6 and retained control
and possession of those profits until year-end distribution in Decem-
ber 1996 and January 1997. Accordingly, Shearin's year-end profits,
pro-rated to July, 12, 1996, are subject to turnover, and the firm, hav-
ing possessed7 such profits must"account for" that property "or the
_________________________________________________________________
5 For the general distinction between a case and proceeding in bank-
ruptcy see 3 Norton, Bankruptcy Law & Practice § § 138:2; -3 (2d ed.
1997).
6 Before trial in the companion proceeding, the parties stipulated that
between December 1, 1995 and June 30, 1996, Shearin's receipts totaled
$276,229.00, and that his year-end receipts totaled $322,443.00. The
bankruptcy court concluded that 85.6% of the debtor's receipts and con-
tribution to the year-end profits, were generated pre-petition.
7 We know that the law firm had control of these profits during the
bankruptcy proceedings because it dispersed bi-monthly draws to the
male debtor and adjusted his year-end distribution to reflect those
advancements, pursuant to the partnership agreement.

                 5
value of said property." See In re USA Diversified Prods., Co., 100
F.3d at 55 (quoting section 542(a)).

The firm's third contention concerns its lack of possession and
inability to turn over the profits already distributed which is answered
by In re USA Diversified Prods., Co., with which we agree. The court
in that case decided that section 542(a) "requires the delivery of the
property or the value of the property" and that to read it otherwise
would enable possessors of property of the estate to escape trustees'
demands "simply by transferring the property to someone else." 100
F.3d at 56.

We also agree with the court's construction of § 542(c) in Diversi-
fied Products, that an overly literal construction of § 542(c) is not the
correct construction of that provision. For example, merely "actual
notice" or "actual knowledge of the commencement of the case" is not
alone sufficient to impose liability upon a holder of the property of
the bankrupt unless "the relevant knowledge or notice is knowledge
or notice to a possessor of property that a bankruptcy proceeding had
begun and that the property in the possessor's custody was property
of a debtor in that bankruptcy proceeding." 100 F.3d at 57. In the case
at hand, the letters passing between the Trustee and Vandeventer and
the trial testimony and exhibits not only show that the firm knew that
the bankruptcy case had begun, but also that the interest of Shearin
in the pre-petition profits and in the capital account was claimed by
the Trustee to be the property of Shearin in that bankruptcy.

The fact that the firm paid the pre-petition profits to Shearin prior
to the filing of the adversary proceeding by the Trustee is also raised
as a defense. The firm, as controlling authority, relies on our decision
in Hager v. Gibson, 109 F.3d 201 (4th Cir. 1997), which the firm
characterizes as holding that the property in question to be subject to
the turnover statute, § 542(a), "must be in the present possession [of
the law firm] when the adversary proceeding was brought." Br. p.32.
Vandeventer's reliance on that part of our opinion, see Hager, 109
F.3d at 211, upon which the sought-for conclusion is based, relating
to Hager's lack of possession at the time of the adversary proceeding,
however, is entirely misplaced. In the Hager case, we held that,
because Hager did not have possession of the money at any time,
"Hager, therefore, has not possessed either the $40,000 or any pro-

                     6
ceeds from its use as a result of that transaction and may not, for that
reason, be required to turn the sum over under § 542(a)." 109 F.3d at
210-11. The notation in the opinion of the bankruptcy court in this
case, that Hager's receipt and disposal of the sum of $40,000 pre-
petition made the case clearly outside of § 542(a)'s reach, was correct
as far as its reference to time goes, but its statement that Hager had
received the property pre-petition is simply an error.

In sum, Shearin's partnership interest was property of the debtor
and became property of the estate on July 12, 1996. This interest enti-
tled Shearin to the year-end profits flowing from his pre-petition work
and to his capital account, which he had contributed pre-petition. See
Shearin v. Beaman, No. 98-2191. The law firm knew enough to
"place a reasonable person on notice, requiring the firm to conduct a
reasonable inquiry to determine" the proper disposition of the profits
and capital account. In re USA Diversified Prods., Inc., 100 F.3d at
57. The bankruptcy court's assessment of the law firm's duty to "con-
sult with the [T]rustee or make sufficient inquiry into the relevant
facts before distributing the profits" was correct.

Any argument of Vandeventer to the effect that the Trustee had
elected a remedy by proceeding first against the Shearins is without
merit. The Trustee may make only one collection, however. We note
that the argument of Vandeventer is divided into eight separate parts,
plus two sub-parts. We have tried to consider all of them. Any omis-
sion on our part to have mentioned every such assignment of error
explicitly in our opinion is no indication it may have merit, for we
have considered all of the points raised and are of opinion that none
have merit.

The judgment of the district court is accordingly

AFFIRMED.

WILKINS, Circuit Judge, concurring in part and dissenting in part:

The majority affirms the order of the district court in its entirety.
I agree that Shearin's capital account and the portion of the year-end
profits attributable to his pre-petition work constitute property of the

                     7
estate. However, I believe the bankruptcy court erred in ordering the
law firm to turn over the amount of the 1996 year-end profit disburse-
ment because the firm had already relinquished possession of the dis-
bursement by the time this adversary proceeding was commenced. I
therefore respectfully dissent from the majority opinion to the extent
that it holds otherwise.

Section 542(a) of Title 11 provides:

           Except as provided in subsection (c) or (d) of this section,
          an entity, other than a custodian, in possession, custody, or
          control, during the case, of property that the trustee may use,
          sell, or lease under section 363 of this title, or that the debtor
          may exempt under section 522 of this title, 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.

11 U.S.C.A. § 542(a) (West 1993).

Citing Boyer v. Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A. (In re USA Diversified Prods., Inc.), 100 F.3d 53, 56 (7th Cir.
1996) [hereinafter Diversified], the majority concludes that § 542(a)
does not require that the profits have been possessed by the law firm
at the time the turnover petition was initiated in order for the statute
to apply. See ante, at 6. Were we writing on a clean slate, I might be
inclined to follow Diversified as well. However, we are not writing
on a clean slate, as this court adopted a contrary interpretation of
§ 542(a) in Hager v. Gibson, 109 F.3d 201, 210-11 (4th Cir. 1997).
See Smith v. Moore, 137 F.3d 808, 821 (4th Cir. 1998) ("It is well
established that a decision of this Court is binding on other panels
unless it is overruled by a subsequent en banc opinion of the Court
or an intervening decision of the United States Supreme Court.");
3 William L. Norton, Jr., Norton Bankruptcy Law and Practice 2d
§ 52:4, at 6 n.12.5 (Supp. 2000) (noting conflict between Diversified
and Hager).

In Hager, a bank made a $150,000 loan to a corporation, and the
loan was personally guaranteed by the corporation's two fifty-percent
stockholders, Hager and Roop. See Hager, 109 F.3d at 203. When the

                     8
loan balance stood at $129,764.04, Hager purchased the note from the
bank, using a $40,000 check drawn on the corporate account and an
$89,764.04 check drawn on his personal account. See id. When the
corporation subsequently filed for bankruptcy, the Trustee brought an
action seeking, inter alia, the $40,000. See id. at 204. The bankruptcy
court granted summary judgment to the Trustee, and the district court
affirmed. See id. at 206.

This court analyzed the issue of whether the Trustee could obtain
the $40,000 under the turnover statute as follows:

           Hager contends that this section does not authorize recov-
          ery of the $40,000 applied in payment of the . . . note
          because he was not, when the adversary proceeding was
          brought, "an entity in possession, custody, or control during
          the case" of that property. We agree. Present possession,
          either actual or constructive, of the property or its identifi-
          able proceeds, by the person from whom its turnover is
          sought, is required for recovery under this section. See
          Maggio v. Zeitz, 333 U.S. 56, 64, 68 S. Ct. 401, 405-06, 92
L. Ed. 476 (1948) (applying pre-code judicially developed
          turnover principles in so holding); In re Sun Spas by Schaef-
          fer, Inc., 122 B.R. 452, 455 (Bankr. M.D. Fla. 1990); In re
          Gailey, Inc., 119 B.R. 504, 514 (Bankr. W.D. Pa. 1990).
          Here, the Trustee contends that Hager was in possession of
          proceeds of the $40,000 when the adversary proceeding was
          brought by virtue of his ownership of the . . . note partially
          purchased with that sum. But, as we have previously pointed
          out, that misstates the nature and effects of that transaction.
          Rightly analyzed, the $40,000 was applied to reduce[the
          corporation's] indebtedness on the note, thereby reducing
          the balance owing upon it, hence its value upon Hager's
          then purchasing it from [the bank] with his own check for
          the balance remaining. Hager therefore has not possessed
          either the $40,000 or any proceeds from its use as a result
          of that transaction and may not for that reason be required
          to turn the sum over under § 542(a).

Id. at 210-11 (emphasis added).

                    9
As the excerpt indicates, Hager's challenge was based entirely on
the fact that he lacked possession of the $40,000 or its proceeds when
the turnover proceeding was initiated, and our reversal of the district
court was based solely on our application of the rule that possession
of property or its proceeds at the time the adversary proceeding is ini-
tiated is required in order for the property to be subject to the turnover
statute.*See id. at 210. Because the law firm here was not in posses-
sion of the disbursement or any proceeds thereof when the adversary
proceeding was initiated, I would apply the rule announced in Hager
and hold that the bankruptcy court erred in ordering the firm to turn
over funds in the amount of the disbursement.
_________________________________________________________________
*The majority opinion implies that the result in Hager was based on
the fact that Hager never had possession of the $40,000 or its proceeds,
not on the mere fact that he did not possess the money when the turnover
proceeding was initiated. See ante, at 6. Although we mentioned in
Hager that Hager actually never possessed the $40,000 or its proceeds,
we noted that fact only in the context of explaining that Hager did not
possess the $40,000 or its proceeds when the turnover proceeding was
initiated. See Hager, 109 F.3d at 210-11.

                  10