In re Pyatt

• Decision Date: 23 May 2007
• Docket Number: No. 06-3404.,06-3404.
• Citation: 486 F.3d 423
• Parties: In re Gary Wayne PYATT, Debtor. Tracy Brown, Appellant, v. Gary Wayne Pyatt, Appellee. Robert J. Blackwell, Chapter 7 Trustee; Rice Pete Burns, Chapter 7 Trustee; James Cole, Chapter 7 Trustee; Fredrich J. Cruse, Chapter 7 Trustee; Rebert E. Eggmann, Chapter 7 Trustee; Janice A. Harder, Chapter 7 Trustee; Charles W. Riske, Chapter 7 Trustee; Leslie A. Davis, Chapter 7 Trustee; National Association of Bankruptcy Trustees, Amici on Behalf of Appellant, National Association of Consumer Bankruptcy Attorneys, Amicus on Behalf of Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

486 F.3d 423

In re Gary Wayne PYATT, Debtor Tracy Brown, Appellant, v. Gary Wayne Pyatt, Appellee Robert J. Blackwell, Chapter 7 Trustee; Rice Pete Burns, Chapter 7 Trustee; James Cole, Chapter 7 Trustee; Fredrich J. Cruse, Chapter 7 Trustee; Rebert E. Eggmann, Chapter 7 Trustee; Janice A. Harder, Chapter 7 Trustee; Charles W. Riske, Chapter 7 Trustee; Leslie A. Davis, Chapter 7 Trustee; National Association of Bankruptcy Trustees, Amici on Behalf of Appellant, National Association of Consumer Bankruptcy Attorneys, Amicus on Behalf of Appellee.

No. 06-3404.

United States Court of Appeals, Eighth Circuit.

Submitted: April 13, 2007.

Filed: May 23, 2007.

Pamela B. Leonard, argued, St. Louis, MO, for appellant.

Gary D. Bollinger, argued, St. Louis, MO, for appellee.

Bryan T. Voss, argued, O'Fallon, MO, for amicus curiae parties of Certain Chapter 7 Trustees, and The National Association of Bankruptcy Trustees.

Before MURPHY, BENTON, and SHEPHERD, Circuit Judges.

MURPHY, Circuit Judge.

Gary Wayne Pyatt filed a voluntary petition for chapter 7 bankruptcy relief. His petition did not list several checks which had been written prior to his filing but not yet honored. The trustee moved to compel Pyatt to turn over to the estate the value of these checks which amounted to $1938.76. The bankruptcy court granted the motion, and Pyatt appealed to the bankruptcy appellate panel¹ which reversed. Pyatt v. Brown (In re Pyatt), 348 B.R. 783 (8th Cir. BAP 2006). The trustee appeals, and we affirm.

On October 4, 2004 Pyatt filed his petition for bankruptcy. He stated that he had 15 or fewer creditors and debts in an amount between $0 and $50,000, reported his yearly income as about $15,000, and claimed two unmarried dependents. On his schedule of personal property Pyatt indicated that the value of what he owned was $7,470. His personal property consisted mainly of two cars: a Ford E-150 worth $750 and a Dodge minivan valued at $6,000. Pyatt also reported that he had $300 in a checking account at Southern Commercial Bank.

At the first meeting of Pyatt's creditors on November 8, trustee Tracy Brown discovered that Pyatt actually had $1,938.76 in the bank account on the date he filed for bankruptcy. Several checks written to creditors before he filed his petition had not been processed as of that date; they were honored after filing. Since Pyatt reported he had $300 in the account, he had apparently subtracted the amount of the outstanding checks in order to value his account on the date of filing. No one has suggested that he fraudulently or intentionally misrepresented the balance in his checking account.

In November 2004 Brown wrote to Pyatt, asking him to turn over $1,938.76 to the estate. When he did not comply with the trustee's demand, Brown invoked the turnover provision of the bankruptcy code, 11 U.S.C. § 542(a), and filed a motion to compel turnover on March 30, 2005. The bankruptcy court concluded that because the assets represented by the checks were still in Pyatt's account as of the date of his bankruptcy filing, the trustee was allowed to compel turnover under § 542(a).

Pyatt appealed to the bankruptcy appellate panel which reversed. The panel majority concluded that the bankruptcy trustee was in a better position to recover funds paid out by a bank to third parties after the debtor's filing. That is because only the trustee is authorized by the bankruptcy code to avoid postpetition transfers. See 11 U.S.C. § 549 (trustee may avoid unauthorized transfer occurring after commencement of case). If the trustee were to recover the transferred funds, the claims paid by the checks could be reinstated and the recovered funds could be distributed equally among all creditors. The concurring opinion disagreed that the trustee is in a better position to collect property of the estate, for the debtor is able to prevent loss to the estate, but it pointed out that § 542(a) does not authorize the procedure used by Brown because the debtor no longer had control over the funds at the time she demanded them.

Trustee Brown appeals. She argues that because the funds in question were still in Pyatt's bank account on the date he filed bankruptcy, he was obligated to produce them for the estate. When he failed to do so, she had the right under § 542(a) to compel him to turn them over even though the checks had been honored and the funds disbursed. The trustee contends that failure to affirm the bankruptcy court would limit a trustee's ability to recover funds for the bankruptcy estate and impede its efficient administration. Trustee's amici² point out that her motion to compel turnover sought the value of the property, not the property itself. Pyatt was therefore required to turn over the amount of money in his bank account on the filing date.

Pyatt responds that § 542(a) codifies the turnover rules in effect before the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2595. Under those rules a trustee could only seek the turnover of funds which were currently in the possession of a debtor. He argues that he cannot be compelled to turn over money he no longer possesses. Debtor's amicus emphasizes that an account holder is the creditor of the bank and that nothing in the bankruptcy code requires debtors to collect all debts owed to them at the time they file for bankruptcy. Amicus further contends that Brown has other more appropriate statutory tools at her disposal in order to recover the funds transferred by the checks.

The facts here are undisputed and we face only questions of law. Like the bankruptcy appellate panel, we review the bankruptcy court's interpretation of the bankruptcy code de novo. In re Farmland Indus., Inc., 397 F.3d 647, 650 (8th Cir.2005).

The turnover provision of the code reads in pertinent part:

[A]n 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 . . . 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.

11 U.S.C. § 542(a). By referring to § 363, a section which authorizes the trustee to "use, sell, or lease . . . property of the estate," the drafters of § 542(a) made it clear that the turnover obligation applies to property of the estate. Property of the estate is defined by 11 U.S.C. § 541(a)(1) as "all legal and equitable interests of the debtor in property as of the commencement of the case." Pyatt had a legally recognized interest in his checking account when he filed for bankruptcy, and "checking account balances become `property of the estate' once a bankruptcy petition is filed." Franklin v. Kwik Cash of Martin (In re Franklin), 254 B.R. 718, 721 (Bankr.W.D.Tenn.2000). We agree with the trustee that the funds transferred by the checks are property of the estate.

Pyatt had control over the funds before the checks were honored, for under the Uniform Commercial Code an account holder has a right to stop payment of a check at any time before a check is honored. See U.C.C. § 4-403(a). Only when a check is honored does the bank have a right to charge a debtor's account. Id. § 4-401. Under the bankruptcy code a "transfer" of a check occurs when the drawee bank honors the check, not when the payee receives it. Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). Anytime before the checks were honored, the funds represented by those checks were within the "possession, custody, or control" of Pyatt.

At the time the trustee's motion to compel turnover was filed, however, the checks had already been honored, and Pyatt then lacked "possession, custody, or control" of the funds. He argues that a trustee should not be able to compel a debtor to turn property over when he no longer has control of it. The trustee disagrees, contending that a motion to compel turnover may properly be brought if a debtor had control over property when the bankruptcy petition was filed or at any time afterward. According to the trustee, it makes no difference that Pyatt no longer had control of the funds at the time of the turnover motion.

Here, both the debtor and the debtor's payees had "possession, custody, or control" of the funds at some point after the bankruptcy petition was filed. Under the trustee's reading of the provision, the trustee could proceed both against the debtor and against the payees and obtain double satisfaction. The code's drafters apparently did not think it necessary to prevent the trustee from obtaining double satisfaction under § 542(a). Cf. 11 U.S.C. § 550(d) (prohibiting double satisfaction in avoidances under §§ 544, 545, 547-549, 553(b), and 724(a); no mention of § 542(a)). The absence of such a prohibition suggests that the drafters did not intend to authorize a trustee to proceed under § 542(a) against everyone who may have had control over property of the estate at some point after the petition was filed.

Relying on the statutory phrase "possession, custody, or control, during the case," the Fourth Circuit has concluded that any entity controlling property of the estate at some point after the bankruptcy case begins may be the subject of a motion to compel turnover. See In re Shearin, 224 F.3d 353, 356 (4th Cir.2000).³ To focus on the phrase "during the case" without acknowledging the other language in § 542(a) would be misguided. See, e.g., Dolan v. U.S. Postal Serv., 546 U.S. 481, 126 S.Ct. 1252, 1257, 163 L.Ed.2d 1079 (2006) (proper interpretation of single phrase depends on whole statutory text). The language of § 542(a) imposes an obligation on any entity other than a custodian who comes into "possession, custody or control" of property of the estate after the bankruptcy petition is filed to deliver the property to the trustee. It says nothing, however, about whether that obligation continues after custody or...