In re Norman Shearin

• Decision Date: 07 April 1999
• Docket Number: PLAINTIFF-APPELLE,V,DEFENDANT-APPELLANT,No. 98-2566,98-2566
• Citation: 224 F.3d 353
• Parties: (4th Cir. 2000) IN RE: NORMAN W. SHEARIN, JR.; ANN SHEARIN, <A HREF="#fr1-*" name="fn1-*">* DEBTORS. STEPHEN L. BEAMAN, TRUSTEE,VANDEVENTER BLACK, LLP, Argued:
• Court: U.S. Court of Appeals — Fourth Circuit

Page 353

224 F.3d 353 (4th Cir. 2000)

IN RE: NORMAN W. SHEARIN, JR.; ANN SHEARIN,^* DEBTORS.

STEPHEN L. BEAMAN, TRUSTEE, PLAINTIFF-APPELLEE,

V.

VANDEVENTER BLACK, LLP, DEFENDANT-APPELLANT.

No. 98-2566

U.S. Court of Appeals, Fourth Circuit

Argued: April 7, 1999

Decided August 17, 2000

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: 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 Appellee. ON Brief: Michael P. Cotter, Vandeventer Black, L.L.P., Kitty Hawk, North Carolina, for Appellant. Stephen L. Beaman, Beaman & King, P.A., Wilson, North Carolina, for Appellee.

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 concurring and dissenting opinion.

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 prepetition 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 proceeding. After Shearin filed his petition in bankruptcy on July 12, 1996, the Trustee initially wrote the law firm on August 13, 1996.² 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, 224 F.3d 346 (Bankr. E.D.N.C. Feb. 17, 1998), resolved the issues of whether the capital account and the portion of year-end profits 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, (Bankr. E.D.N.C. Mar. 24, 1998), that the Trustee had the right to recover from the Vandeventer 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).

II.

This appeal requires us to construe 11 U.S.C. § 542 of the Bankruptcy 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 attributable 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 prepetition year-end profits, applies exclusively to the turnover of those profits paid to Shearin.⁴ The law firm paid Shearin his year-end profits in December 1996 and January 1997, whereas this adversary proceeding 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 commencement 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 "during the case" to refer to the entire bankruptcy case, not just the adversary 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 December 1996 and January 1997. Accordingly, Shearin's year-end profits, pro-rated to July, 12, 1996, are subject to turnover, and the firm, having possessed⁷ such profits must"account for" that property "or the 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 Diversified 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...