In re Pilate

• Decision Date: 06 March 2013
• Docket Number: No. 09–00110.,09–00110.
• Citation: 487 B.R. 345
• Parties: In re Pauline PILATE, Debtor.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

487 B.R. 345

In re Pauline PILATE, Debtor.

No. 09–00110.

United States Bankruptcy Court, District of Columbia.

March 6, 2013.

Martha L. Davis, Office of the U.S. Trustee, Alexandria, VA, for U.S. Trustee for Region Four.

Jeffrey M. Sherman, John Ernest Tsikerdanos, Lerch, Early & Brewer, Bethesda, MD, for Debtor.

William D. White, McCarthy & White, PLLC, McLean, VA, Trustee.

MEMORANDUM DECISION RE TRUSTE'S MOTION FOR SUMMARY JUDGMENT

S. MARTIN TEEL, JR., Bankruptcy Judge.

The chapter 7 trustee filed a motion for summary judgment seeking a judgment for the balance of the $30,406.56 of inheritance funds the debtor received and that are property of the estate, but that the debtor has not delivered to the trustee. The debtor did not deliver to the trustee a portion of the inheritance monies because she used them to pay her tax debt. The issue is whether the debtor can be liable for a monetary judgment for the value of property she does not presently possess.

I

The debtor inherited $30,406.56, and she does not dispute that this is property of the estate. On March 10, 2011, at the chapter 7 meeting of creditors, the debtor testified that she had these funds in her possession and under her control. Tr.'s St. at 3; Tr.'s Ex. 3 (Dkt. No. 257). At the meeting of creditors, the debtor was instructed that the inheritance monies were likely property of the estate and not to spend any of the inheritance monies. Tr.'s St. at 2–3. During the remainder of 2011, the chapter 7 trustee repeatedly requested that the debtor turn over the inheritance or show why the trustee was not entitled to administer those funds. Tr.'s St. at 4. The debtor did not turn over the funds. On January 21, 2012, the trustee filed a motion for turnover in which he assumed that the debtor remained in possession of all of the funds. See Dkt. No. 232. The debtor objected. See Dkt. No. 234. She explained that she had used a portion of the inheritance to pay taxes she owed to the District of Columbia and the Internal Revenue Service, and that the trustee could not compel her to turn over property that was no longer under her control. Id.

After a hearing, the court ruled in a Memorandum Decision (Dkt. No. 239) that the trustee was entitled to recover a money judgment under 11 U.S.C. § 542(a) for the portion of the inheritance funds that the debtor had dissipated. As a consequence, the court issued an order (Dkt. No. 238) directing the debtor to deliver to the trustee all of the inheritance funds that remained in her possession, and setting a scheduling conference regarding fixing the amount of the monetary judgment the trustee was entitled to recover for the portion of the inheritance that was no longer in the debtor's possession. The court later issued a scheduling order (Dkt. No. 245) for fixing the amount of the monetary judgment under § 542(a) as a monetary judgment for the value of the inheritance funds that had been transferred or dissipated by the debtor.

On March 6, 2012, the debtor turned over to the trustee a check in the amount of $18,456.56 representing that portion of the inheritance still in her possession. The debtor also turned over to the trustee nine canceled checks, explaining through counsel that these represented payments the debtor had made on taxes she owed. Tr.'s St. at 4 & Tr.'s Ex. 5. The total amount of the nine checks, $11,950, equals the difference between the amount of the inherited funds ($30,406.56) and the amount turned over to the trustee ($18,456.56). Tr.'s St. at 4. All of the payments on taxes were made after the section 341 meeting of creditors was held on March 10, 2011, and prior to the filing of the trustee's motion for turnover. Tr.'s Ex. 5.

II

Summary judgment may be granted only if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. SeeFed.R.Civ.P. 56. “A dispute over a material fact is ‘genuine’ if ‘the evidence is such that a reasonable jury could return a verdict for the nonmoving party.’ ” Arrington v. United States, 473 F.3d 329, 333 (D.C.Cir.2006) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). In evaluating a motion for summary judgment, the court must view the evidence in the light most favorable to the nonmoving party. Id. at 333.

Here, there is no genuine dispute as to any material fact, and the debtor concedes as much. See Opposition at 6. The debtor and the trustee agree that her inheritance is property of the estate and that she expended a portion of that inheritance. What remains is an issue of law: whether the debtor can be liable for a monetary judgment under § 542(a) for the funds she had dissipated before the trustee filed his motion for turnover. The debtor argues she cannot be required to turn over the value of the monies she had dissipated.

Section 542(a) of the Bankruptcy Code 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.

Referring to the type of § 542(a) relief the trustee now seeks (a monetary judgment for the amount of the dissipated property) as turnover relief is misleading, and muddles the analysis.

The term “turnover” connotes delivering identified property or its identified proceeds. The text of § 542(a), however, does not use the term “turnover” and is not limited to empowering a court to issue turnover orders.¹

It goes beyond that. When property that is subject to § 542(a) has been dissipated, the statute (with exceptions of no relevance here) still requires the entity who dissipated the property to “deliver ... and account for ... the value of such property....” Because the entity no longer possesses the property or its proceeds, delivery of the property is an impossibility. A turnover order, which if disobeyed is enforceable by way of contempt, is thus inappropriate. See Maggio v. Zeitz (In re Luma Camera Serv., Inc.), 333 U.S. 56, 68 S.Ct. 401, 92 L.Ed. 476 (1948).² The issue is whether the statutory obligation to “deliver ... and account for ... the value of [the] property” permits the remedy of a recovery of a monetary judgment for the value of the dissipated property.

Courts are split on whether the trustee may obtain a recovery of the value of property no longer in the debtor's possession, custody, or control. The Courts of Appeals for the Fourth and Seventh Circuits, and the Bankruptcy Appellate Panels for the Sixth, Ninth, and Tenth Circuits have held that current possession is not required. See Beaman v. Vandeventer Black, LLP (In re Shearin), 224 F.3d 353 (4th Cir.2000) (trustee could compel law firm to turn over the year-end profits it had paid to the debtor before the motion for turnover was filed); Boyer v. Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A. (In re USA Diversified Prods., Inc.), 100 F.3d 53 (7th Cir.1996) (law firm which held funds of the debtor during the bankruptcy case, but had transferred the funds prior to the trustee's motion for turnover, was still liable for turnover of the value of the funds); Newman v. Schwartzer (In re Newman), 487 B.R. 193, 2013 WL 646382 (9th Cir. BAP 2013) (trustee could recover the value of the tax refund that the debtor had already spent); Jubber v. Ruiz (In re Ruiz), 455 B.R. 745 (10th Cir. BAP 2011) (debtors wrote checks prepetition that had not cleared when their petition was filed and therefore the trustee could recover the amount of these funds from the debtors even though they no longer had possession of the funds); Bailey v. Suhar (In re Bailey), 380 B.R. 486 (6th Cir. BAP 2008) (the debtors were liable for turnover of their tax refund even though they had already transferred the funds). The Eighth Circuit, however, requires control of the property at the time a motion to compel turnover is brought. See Brown v. Pyatt (In re Pyatt), 486 F.3d 423, 429 (8th Cir.2007) (although the debtor had control over certain funds after his bankruptcy petition was filed, the trustee could not compel turnover of those funds because the debtor had transferred those funds before the motion to compel turnover was brought).

The decisions holding that a trustee may recover the value of property of the estate that an entity held but dissipated prior to commencement of a turnover proceeding rely on the statutory language “or the value of such property,” and reason that the entity is still liable for the value of the property even though the entity no longer controls the property itself. See In re USA Diversified Prods., Inc., 100 F.3d at 56 (“The statute, however, requires the delivery of the property or the value of the property. Otherwise, upon receiving a demand from the trustee, the possessor of property of the debtor could thwart the demand simply by transferring the property to someone else.”).

According to these decisions, all that is required is that the entity from which turnover is sought have had possession of the property at some point during the bankruptcy case. In In re Shearin, the court construed the language “during the case” in § 542(a) as “refer[ring] to the entire bankruptcy case, not just the adversary proceeding.” In re Shearin, 224 F.3d at 356. Accordingly, as long as the entity had possession of the property at some point during the bankruptcy proceeding, it could be liable for the value of that property. Id.

The Eighth Circuit disagrees and has held that liability under § 542(a) applies only where the entity has present possession of the property. See In re Pyatt, 486 F.3d 423. The court in In re Pyatt determined that § 542(a) does not change pre-Bankruptcy...