In re Parker, Case No. 05-17912 (Bankr. N.D.N.Y. 4/3/2008)
| Decision Date | 03 April 2008 |
| Docket Number | Case No. 05-17912. |
| Parties | In re: KEVIN C. PARKER, SR., Debtor. Chapter 7 |
| Court | U.S. Bankruptcy Court — Northern District of New York |
RICHARD CROAK, ESQ. Attorney for Debtor, Albany, NY.
Currently before the court is the motion filed by the chapter 7 trustee for turnover of estate property pursuant to 11 U.S.C. § 542. The court has jurisdiction over this core matter pursuant to 28 U.S.C. §§ 157(a), 157(b)(1), (b)(2)(A) and (E), and 1334.
The relevant facts are not in dispute. Kevin C. Parker, Sr. (the "Debtor") filed a voluntary petition under chapter 7 of the Bankruptcy Code on October 9, 2005.1 (No. 1.) Christian H. Dribusch, Esq. was appointed the chapter 7 trustee ("Trustee"). Prior to filing for bankruptcy relief, the Debtor maintained a checking account at Trustco Bank. The Debtor's schedule of personal property (schedule B) filed with the petition indicates that he had $2,500 in a checking account at Trustco Bank (the "Trustco Account"). Schedule B does not disclose the address for the branch where the Trustco Account is maintained or the bank account number. The Debtor claims the Trustco Account exempt under New York Debtor and Creditor Law § 283(2) (schedule C). The meeting of creditors was conducted on November 7, 2005. By Stipulation and Order entered November 9, 2005, the Trustee's time to object to discharge pursuant to § 727 was extended to February 7, 2006, and the Debtor agreed to supply the Trustee with copies of his monthly bank statements for the three months prior to the date of filing, his check register or cancelled checks exceeding $600, and his federal and state tax returns for the year prior to the year of the filing of the petition. (No. 4.)
The Debtor's bank statements establish that $3,275.94 remained in the Trustco Account on the date the Debtor's petition was filed. By October 14, 2005, the account balance had dwindled to $2,563.63, which included a post-petition deposit of $300. Part of the difference is attributable to checks the Debtor wrote pre-petition but which were not presented and deducted from the Debtor's account until post-petition. There is nothing in the record indicating the Debtor was acting in bad faith. It appears the Debtor wrote checks in the ordinary course, and he subtracted the amount of his outstanding checks in order to value the Trustco Account at the time of filing.
The Trustee received the Debtor's bank statements and tax returns on or about November 21, 2005. By letter dated January 20, 2006, the Trustee demanded in writing that the Debtor turnover $3,324.55 from the Trustco Account, as well as $353.54 from his 2005 tax refund. The Trustee sent a follow-up letter on February 22, 2006, requesting a response to his January 20, 2006 letter.
The Debtor received his discharge on February 10, 2006. On July 5, 2006, the Trustee filed his motion seeking turnover of $3,668.09 consisting of $3,324.55 of non-exempt cash, plus a pro-rata share of the Debtor's tax refund in the amount of $353.54.2 (No. 11.) The Debtor filed opposition to the motion. (No. 14.) In his reply, the Trustee concedes that the amount at issue in the Trustco Account is $3,275.94, less the Debtor's $2,500 cash exemption, which leaves a balance of $775.94.3 At the conclusion of oral argument, the court allowed the parties additional time to submit memoranda of law. The Debtor filed a supplemental response consisting of an attorney's affirmation (No. 15). The Trustee filed a reply affirmation to the supplemental response (No. 16), and the Debtor filed a second supplemental response (No. 18.). The matter was then considered fully submitted. Neither party filed a memorandum of law.
It is the Trustee's position that the monies in the Debtor's bank account became property of the estate under § 541(a)(1) as of the filing date. The Trustee asserts that the Trustco Account is a chose in action evidencing a debt owed by Trustco to the Debtor as of the filing date. It is the Trustee's position that " .' "(Trustee's Reply to Suppl. Response ¶ 3.) Thus, the Trustee concludes that the entire balance in the Trustco Account as of the date of filing is property of the bankruptcy estate, and the checks written, but not yet presented, should not to be deducted from the account balance as of the filing date. The Trustee analogizes this to a situation where a debtor writes checks and, thereafter, his account is restrained by a creditor. The bank would freeze the account, and any check presented after the restraint would not be honored. Likewise, the Trustee asserts that any checks presented after the bankruptcy filing should be deducted from the debtor's exempt portion of the monies on deposit and not the estate's portion. The Trustee asserts that if the Debtor wished to protect his exempt funds he should have advised the bank that (1) he filed for bankruptcy protection, (2) his account was now property of the bankruptcy estate, and (3) checks presented for payment postpetition should not be honored. The Trustee could have then liquidated the account, remitted the exempt portion to the Debtor and administered the balance for the benefit of all creditors. The Trustee provides no case law in support of his position.
The Debtor responds that the Trustco Account balance should be reduced by the amount of the checks written pre-petition, but negotiated post-petition, for purposes of calculating nonexempt property. The Debtor asserts that the Trustee's analogy of the restraint against a bank account is flawed. The Debtor admits the filing of the bankruptcy acts as a type of restraint on a debtor's ability to expend money. The Debtor points out, however, that the restraint is not actual. The Debtor acknowledges that if he spends non-exempt funds, he would be required to reimburse the bankruptcy estate. He notes, however, that he does not lose the ability to access his checking account.
The Debtor's position is that any recovery by the Trustee must be pursuant to § §547 or 549. As a result, any recoupment would come from the creditor that received the preferential payment, not the debtor who gave it. The Debtor declares that the Trustee's suggestion that he should have advised his bank not to honor his outstanding pre-petition checks is unworkable as the fees charged by a bank would be exorbitant, and he essentially would no longer be able to use his account. The Debtor claims there is no non-exempt cash from the Trustco Account for the Trustee to administer. The Debtor cites no case law in support of his position.
With respect to the Debtor's tax refund, the Trustee asserts that § 541(a)(1) provides that a bankruptcy estate is comprised of all legal and equitable interests of the debtor in property as of the commencement of the case. The Trustee relies upon the reference to Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966), in the legislative history of § 541(a)(1) to support his position that the right to a tax refund is property of the estate. (See House Report No. 965, 95th Congress, 1st Session, p.367 (1977)).
The Debtor responds that the Trustee cites no statutory basis to support his demand for turnover of his tax refund. The Debtor notes that he was not entitled to receive the refund until at least three months after the commencement of his case, and he was not in possession of the refund for even a longer period of time thereafter. The Debtor is of the opinion that because the tax year in question did not end until after his petition was filed the refund is not property of the estate. The Debtor argues that he could not have known the amount of his refund when his § 341 meeting was closed in November 2005 and, even if he had possessed his relevant tax records at that time, he would not have been entitled to receive his refund until after the time to object to discharge had expired. The Debtor indicates he is not certain whether he actually received his refund before or after he received his discharge. The Debtor claims the Trustee's timing for demanding a pro-rata share of his refund is inequitable. It is the Debtor's position that once he received his discharge, his expectation was that his case was all but complete. In addition, the Debtor clams there are too many unknown variables weighing against the Trustee's entitlement to a pro rata portion of his tax refund, including potential setoffs by the state and federal governments and a determination as to whether the Debtor overpaid his tax liability pre- or post-petition. The Debtor also asserts that most individuals are unaware of whether or not they will be entitled to a tax refund in any given year; thus, it is unlikely bad faith enters the equation. In the event a debtor anticipates a tax refund, those monies are usually spent before they are received on items such as real property taxes, a needed home improvement, etc. The Debtor also expresses concern that if the court were to rule in the Trustee's favor, trustees could theoretically hold cases open for months awaiting a potential tax refund.
The Trustee is seeking turnover from the Debtor pursuant to § 542. Section 542(a) provides, in relevant part, that "an entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 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...
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