In re McCaffrey

Docket Number21-30891
Decision Date30 August 2023
PartiesIn re:Michael Edward McCaffrey, Sr. Debtor.
CourtU.S. Bankruptcy Court — Northern District of New York

Chapter 7

Steven R. Dolson, Esq. Chapter 7 Trustee Theodore Lyons Araujo, Esq. Attorney for Debtor Bankruptcy Law Center Bodow Law Firm PLLC


Wendy A. Kinsella, United States Bankruptcy Judge

Before the Court is the Chapter 7 Trustee's ("Trustee") Motion for Turnover Pursuant to 11 U.S.C. § 542(a) and Motion for Violation of the Automatic Stay and/or Contempt against the Debtor (the "Motion" at Doc. 50).[1] The Trustee seeks an order (i) directing Michael Edward McCaffrey, Sr. ("Debtor") to turnover at least $35,000.00 on the grounds that such funds are property of the bankruptcy estate, (ii) finding that Debtor exercised control over property of the estate in violation of 11 U.S.C. § 362(a)(3), and (iii) imposing sanctions pursuant to 11 U.S.C § 362(k) for that violation. Debtor opposes the Motion and seeks an Order denying the Motion with prejudice. See Debtor's Response; Trial Tr. 94.

As required by Federal Rule of Civil Procedure 52 ("FRCP"), made applicable to this bankruptcy proceeding by Federal Rule of Bankruptcy Procedure 7052 ("FRBP"), the Court renders the following findings of fact and conclusions of law. For the reasons detailed below, the Court grants the Motion in part in the reduced amount as set forth herein and denies the balance of the relief requested.


The Court has core jurisdiction over the parties and the subject matter of this contested matter in accordance with 28 U.S.C §§ 1334 and 157(b)(2)(A) and (b)(2)(E). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.


On November 30, 2021 (the "Petition Date"), Debtor filed a Chapter 7 Voluntary Petition (the "Petition"). On Schedule A/B, Debtor listed that he had $100 in cash. Debtor thereafter amended his Schedule A/B to reflect a cash balance of $50 (Doc. 15). He also scheduled 100% ownership interests in various businesses, including Real Cash Property, LLC and Basic Family, LLC. The Statement of Financial Affairs does not reflect any transfers made in the 2 years leading up to the filing.

After the 341 meeting was held and continued eight times, on the request of the Office of the United States Trustee ("UST") with Debtor consent, an Order granting a Rule 2004 Examination ("2004 Exam") was entered. Upon the conclusion of the 2004 Exam, the UST commenced the Adversary Proceeding against Debtor requesting Debtor's discharge be denied pursuant to 11 U.S.C. § 727(a)(2) (4), and (5) based on, inter alia, his alleged concealment and dissipation of cash that was estate property.[2] Several of the allegations in the UST Complaint overlapped with the transactions at issue here. Because Debtor failed to answer or otherwise respond to the UST Complaint and Motion for a Default Judgment, the Default Judgment denying Debtor's discharge pursuant to 11 U.S.C. §§ 727(a)(2) and (5) was entered. After the disposition of the Adversary Proceeding, the Trustee filed the Motion.

The Trustee asserts that while Debtor testified under oath at the nine 341 meetings and the 2004 Exam, he failed to account for the "whereabouts" of certain funds that were transferred in and out of his various bank accounts. See Motion at ¶ 19. Based on the doctrine of continued possession, the Trustee argues that a presumption exists that Debtor still had those funds on the Petition Date. See generally Trustee's Supplement. As a result, the Trustee seeks an order requiring immediate turnover from Debtor of at least $35,000.00 pursuant to 11 U.S.C. § 542(a). See Motion at ¶ 27. In addition, the Trustee claims that Debtor's actions in exercising control over cash that is an estate asset constitute a violation of 11 U.S.C. § 362(a)(3), entitling the Trustee to an award of sanctions, attorneys' fees and costs under Sections 362(k) and 105(a).

In response, Debtor acknowledges he has a very complicated banking and corporate formation history. See Debtor's Response at ¶ 5. However, he contends all of the funds referenced in the Motion were reported to the Trustee. Id. at ¶ 7. More importantly, a $35,000 post-petition deposit into a business account originated from a loan advanced by an unrelated third party after Debtor filed bankruptcy. Id. at ¶ 8. After oral argument was held on the Motion, the Court scheduled an evidentiary hearing (the "Hearing") that was held and concluded on April 18, 2023.

The Testimony

At the Hearing, Debtor appeared along with Theodore Lyons Araujo, Esq. as his counsel, and Steven R. Dolson, Esq. appeared as the Chapter 7 Trustee.[3] On direct examination by the Trustee, Debtor reviewed various deposits and withdrawals in the month leading up to the Petition Date from bank accounts owned individually and by Real Cash Property, LLC, and Basic Family, LLC. Debtor testified he was the sole member of Real Cash Property, LLC and Basic Family, LLC and had exclusive control over the respective businesses' bank accounts. Trial Tr. 38, 41. When questioned about each transaction, he stated he lacked an independent recollection of any of the deposits or withdrawals, but acknowledged the bank account statements for Debtor individually (Exhibit L), Real Cash Property, LLC (Exhibit M), and Basic Family, LLC (Exhibit N) included checks that appeared to have his signature. Trial Tr. 36-46.

With respect to his personal bank account, Debtor similarly testified he "did not recall" most deposits and withdrawals. In addressing the particular transactions identified in the Motion, the Trustee inquired as to a $2,000 withdrawal and $28,000 withdrawal on November 19, 2021, and a $2,350 withdrawal on November 29, 2021, from that account but Debtor did not remember the purpose or the location of the $4,350 in cash. However, Debtor recalled a prepetition transfer of funds to a retirement account and payment through cash withdrawals for certain business debts to contractors working on his businesses' real property. Trial Tr. 60, 87.

With respect to the business transactions, Debtor testified that he had formed various limited liability companies to purchase and "flip" properties because he also maintained a New York State real estate license and those business activities and bank accounts needed to be separate. Trial Tr. 56. In connection with the house flipping business, from August 2021 to the Petition Date, he estimated he had between 5-12 subcontractors working on construction projects. Trial Tr. 86. Paying in cash was his standard procedure because it was required by the contractors. Trial Tr. 60-63, 87. He continued to use the corporate entities of Real Cash Property, LLC and Basic Family, LLC after the bankruptcy filing, paying bills that were incurred by the businesses and for radio ads. Trial Tr. 46-47 and 66. When presented with a deed reflecting the transfer of real property by Real Cash Property, LLC in 2022, he was able to explain the details of that $26,000 sale to Home Headquarters. Trial Tr. 53-55.

On examination by his counsel, Debtor testified that he obtained a $35,000 loan from Harriet Turner after the filing (the "Loan") and produced a copy of a loan agreement dated as of December 2, 2021 ("Loan Agreement;" Debtor's Ex. 1). Debtor stated that the deposit of $35,000 into the Real Property Cash, LLC account on December 6, 2021 came from the proceeds of that loan (the "Loan Proceeds"). When questioned about a $300 check payable to Harriet Turner dated December 1, 2021, before the Loan Agreement was executed, Debtor speculated he may have incorrectly dated the check for the alleged loan repayment, and noted it was not cashed until December 15, 2021. Trial Tr. 92.

At numerous points during the Hearing, Debtor unequivocally testified he did not have any cash on hand on the Petition Date. Debtor also described a recent early Alzheimer's diagnosis[4]that may be the cause of his confusion and inability to recall certain information. He admitted some of the answers he provided at the 341 meetings and 2004 Exam were incorrect but he felt compelled to respond even without the requisite knowledge because of pride. Trial Tr. 83. At the conclusion of the Hearing, the Court reserved on its decision.

I. Turnover of Property of the Estate under 11 U.S.C. § 542(a)

Under the Bankruptcy Code, Debtor has the obligation to surrender to the Trustee all property of the estate. 11 U.S.C. § 521(a)(4). "Where the turnover of property does not occur voluntarily, the Trustee has the authority to compel the Debtor to turnover the property. . . ." In re Vasquez, 581 B.R. 59, 65 (Bankr. Vt. 2018) (quotation omitted); see 11 U.S.C. § 542(a).

In a motion for turnover under Section 542, "the burden of proof. . . is at all times on the party seeking turnover [and] [t]hat party must establish a prima facie case." In re Weiss-Wolf, Inc., 60 B.R. 969, 975 (Bankr. S.D.N.Y. 1986) (citing Gorenz v. State of Illinois Dept. of Agriculture, 653 F.2d 1179 (7th Cir. 1981)). To maintain "a cause of action for turnover, the trustee has the burden of proof, by a preponderance of the evidence, that . . . the property constitutes property of the estate. . . ." 5 Collier on Bankruptcy ¶ 542.03 (16th ed. 2023); see also In re Ir. Bank Resolution Corp., 559 B.R. 627, 644 (Bankr. D. Del. 2016).

Property of the estate under Section 541(a)(1) is "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1); City of Chicago v. Fulton, 141 S.Ct. 585, 589, 208 L.Ed.2d 384, 388 (2021). The scope of ...

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