In re Gardner

• Decision Date: 03 April 2015
• Docket Number: Case No. 14-33734
• Parties: In Re: Tiffany Michelle Gardner, Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio

In Re: Tiffany Michelle Gardner, Debtor.

Case No. 14-33734

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO WESTERN DIVISION

April 3, 2015

Chapter 7

JUDGE JOHN P. GUSTAFSON

MEMORANDUM OPINION AND ORDER ON MOTION OBJECTING TO EXEMPTIONS

This case comes before the court on the Chapter 7 Trustee's Motion Objecting to Exemptions Pursuant to Bankruptcy Rule 4003(b) [Doc. #11], Debtor's Response to Trustee's Objection to Exemptions on Debtor's 2014 Refunds [Doc. #21], and the Brief in Support of Objection to Exemptions [Doc. #24] filed by the Trustee.

The issue, as framed by the Debtor, is: "which bank 'balance', the 'account balance' or the 'available balance' should be used to analyze a debtor's estate when calculating assets and exemptions on the date of a Chapter 7 filing. Specifically, whether or not transactions that occurred at a merchant, online, and/or at an ATM over the weekend (during non-banking business hours) should be classified as 'transactions' that reduced the value of the bank balance for purposes of calculating the bankruptcy estate at the moment of filing." [Doc. #21, p. 2].

Page 2

The facts in this case do not appear to be in dispute¹. [Doc. #24 p. 1]. Debtor filed her Chapter 7 at 12:02 p.m. on Monday, October 13, 2014. [Docs. #1, p. 2 & #21, p. 2]. In preparation for her bankruptcy filing, the Debtor was asked to print out balances on her account at an ATM machine for purposes of calculating assets and exemptions. [Doc. #21, p. 2]. The receipt the Debtor obtained reflected that her checking account had an "Acct Bal" (hereinafter "Account Balance") of $949.76, and an "Avl Bal" (hereinafter "Available Balance") in the amount of $144.69. [Id.]. The difference of $805.07 between the Account Balance and the Available Balance were monies that the Debtor had used for:

• Three separate purchases totaling $220.21.

• A $245.55 payment to Time Warner.

• A $340 cash withdrawal².

The issue before the court is whether it is the amount of the "Account Balance" or the "Available Balance" that would be recoverable by the Chapter 7 Trustee through a turnover action brought against the Debtor under 11 U.S.C. §542(a). If such an action against the Debtor could be maintained for the full "Account Balance" - the full amount in the Debtor's bank account at the time of filing - that would reduce the unused exemption amount available to protect Debtor's tax refunds.

Debtor cites to certain account related documents that Fifth Third Bank makes available at its "online help desk". [Doc. #21, p. 3]. These documents state that an Account Balance is: "The balance as of the previous business day reflects all funds in your account, including deposits, withdrawals and other transactions that were posted to your account through the previous business day." [Id., & Ex. A].

In contrast, the Available Balance is described in Fifth Third's online document as: "The available balance reflects funds in your account available for immediate use. Your available balance is your balance as of the previous business day's processing, plus or minus any pending transactions, direct deposits that have not posted, or Bank holds (i.e. Deposited funds being held for verification)." [Id. & Ex. A]."

At the hearing on this matter, the court suggested that the parties might wish to use, at least as a research tool, the Supreme Court's decision in Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), a preferential transfer case which held that a "transfer" of property is only made with respect to a negotiable instrument when it is finally honored by the drawee financial institution.

Page 3

LAW

The District Court has jurisdiction over this Chapter 7 case pursuant to 28 U.S.C. §1334(a) as a case under Title 11. This matter has been referred to this court by the District Court under its general order of reference. 28 U.S.C. §157(a); General Order 2012-7 of the United States District Court for the Northern District of Ohio. A proceeding regarding exemptions from property of the estate is a core proceeding that the court may hear and decide. 28 U.S.C. §157(b)(1), (b)(2)(B) & (E).

A decision on the objection to exemption starts with an issue on which there is a split of authority, and then enters into a relatively new area of commercial activity where there appears to be very little bankruptcy case law that is directly on point.

I. CHAPTER 7 TRUSTEE'S ABILITY TO USE §542(a) TO RECOVER THE VALUE OF PROPERTY NO LONGER IN THE DEBTOR'S POSSESSION.

There is no dispute that shortly after filing, the bank debited the Debtor's account for the difference between "Account Balance" and the "Available Balance".³ At the time the Objection to Exemption was filed by the Chapter 7 Trustee, the Debtor was no longer in possession of the funds that would be the subject of a "turnover" action under Section 542(a). The courts are split as to whether a debtor must remain in possession of the property at the time the motion for turnover is filed, or whether possession of the property at the time the underlying bankruptcy case was filed is sufficient. Compare, In re Pyatt, 486 F.3d 423 (8th Cir. 2007)(no turnover action permitted when debtor had lost control of fund removed from account when prepetition checks were honored postpetition) with, Shapiro v. Henson, 739 F.3d 1198 (9th Cir. 2014)(trustee's turnover power was not restricted to property of estate at time that turnover motion was filed); Beaman v. Vandeventer Black, LLP ( In re Shearin ), 224 F.3d 353, 356 (4th Cir. 2000)(control of property of the estate immediately after the bankruptcy case itself was filed was sufficient for trustee's motion to compel turnover); Boyer v. Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A. (In re USA Diversified Prods., Inc.), 100 F.3d 53, 56 (7th Cir. 1996)(§542(a) provides for turnover "of the value" of property no longer in possession of the defendant).

The Sixth Circuit Bankruptcy Appellate Panel has rejected Pyatt, and followed the line of cases permitting a Chapter 7 trustee to use §542(a) to seek recovery of property that was property of the estate at the time of filing. In re Bailey, 380 B.R. 486 (6th Cir. BAP 2008)(refusing to reduce amount of non-exempt tax refund required to be turned over to the trustee by amount debtors had paid to their attorney prior to the filing of the turnover action). The holdings in Bailey and Shapiro v. Henson are correct, and will be

Page 4

followed in this decision. A Chapter 7 trustee may maintain a turnover action⁴ even where the Debtor no longer is in possession of the property that is the subject of the action.

II. THE "FLOATING CHECK" CASES.

The majority of decisions that have addressed whether a Chapter 7 trustee can use a turnover action to recover the full amount in a debtor's checking account at the time of filing have held that a Chapter 7 trustee is entitled to recover the full balance, without reduction due to prepetition checks that were honored postpetition. See, Shapiro v. Henson, 739 F.3d 1198 (9th Cir. 2014); In re Ruiz, 455 B.R. 745 (10th Cir. BAP 2001); In re Brubaker, 426 B.R. 902 (Bankr. M.D. Fla. 2010); Yoon v. Minter-Higgins, 399 B.R. 34 (N.D. Ind. 2008); In re Spencer, 362 B.R. 489 (Bankr. D. Kan. 2006); In re Todd, 359 B.R. 863 (Bankr. N.D. Ohio 2007); In re Sawyer, 324 B.R. 115 (Bankr. D. Ariz. 2005); In re Dybalski, 316 B.R. 312 (Bankr.S.D. Ind.2004); and see generally, David R. Hague, Turnover Actions and the "Floating Check" Controversy, 2013 Utah Law Rev. 63 (2013).

Based on these decisions, Chapter 7 trustees examine bank account balances on the date of filing, and any reduction in that amount due to checks clearing postpetition is dealt with by: 1) debtors using exemptions to cover checks that clear postpetition; 2) a motion for turnover of the value of the fund in the account at the time of filing; or 3) an action against the recipient of the funds received via the postpetition check clearing process.

III. YOON V. MINTER-HIGGINS' HOLDING THAT PRE-ARRANGED POSTPETITION DEBIT TRANSACTIONS DO NOT REDUCE THE BALANCE THE TRUSTEE CAN RECOVER.

In Yoon v. Minter-Higgins, the District Court reversed the Bankruptcy Court's decision denying the trustee's motion for turnover of the amount in the debtor's checking account at the time of the filing of the Chapter 7 petition. Yoon v. Minter-Higgins, 399 B.R. 34 (N.D. Ind. 2008).

In addition to prepetition checks that had cleared postpetition, the bank account had been depleted by "several pre-arranged automatic debits to creditors" which were not charged to the debtor's account until after the filing. Yoon v. Minter-Higgins, 399 B.R. at 37. The District Court treated the "pre-arranged debits" in the same manner as the prepetition checks, denying any reduction in the amount the debtor was required to turnover to the Chapter 7 trustee based upon the postpetition debits.

Page 5

While it appears that the result, as stated,⁵ in the District Court's Yoon decision is correct, there is a factual difference in the debit transfers in the present case that requires a different analysis, and potentially a different result.

IV. PRE-ARRANGED DEBIT TRANSACTIONS ARE LEGALLY DIFFERENT FROM TRANSACTIONS INVOLVING THE USE OF A DEBIT CARD.

The Electronic Fund Transfer Act⁶ (hereinafter "EFTA") is the primary federal statute that governs debit card use:

Enacted in 1978 as an amendment to the Consumer Credit Protection Act, 15 U.S.C. § 1601 et seq., EFTA creates a "framework [of] rights, liabilities, and responsibilities of participants in electronic fund transfer systems," id. §1693(a). The statute covers a wide range of electronic money transfers - from ATM withdrawals and debit-card payments to banking by phone - and subjects them to a litany of procedural requirements designed to protect consumers from transactions made in error or without their consent. See id. §§1693a(6), 1693b-1693f.

Wike v. Vertrue, Inc., 566 F.3d 590, 592 (6th Cir. 2009).

The provisions of the...