In re Ruiz

• Citation: 66 Collier Bankr.Cas.2d 120,455 B.R. 745
• Decision Date: 17 August 2011
• Docket Number: BAP No. UT–10–069.,Bankruptcy No. 10–25368.
• Parties: In re Jose L. RUIZ, also known as Joe Ruiz, and Carrie Ruiz, also known as Carrie Lee Ruiz, Debtors.Gary E. Jubber, Trustee, Appellant,v.Jose L. Ruiz and Carrie Ruiz, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit

455 B.R. 745

66 Collier Bankr.Cas.2d 120

In re Jose L. RUIZ, also known as Joe Ruiz, and Carrie Ruiz, also known as Carrie Lee Ruiz, Debtors.Gary E. Jubber, Trustee, Appellant,

v.Jose L. Ruiz and Carrie Ruiz, Appellees.

BAP No. UT–10–069.

Bankruptcy No. 10–25368.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Aug. 17, 2011.

David R. Hague (Gary E. Jubber, Trustee, and Ashton J. Hyde with him on the brief) of Fabian & Clendenin, Salt Lake City, UT, for Appellant.T. Jake Hinkins of Hinkins Law, LLC, South Jordan, UT, for Appellees.Before CORNISH, Chief Judge, BROWN, and KARLIN, Bankruptcy Judges.

OPINION

KARLIN, Bankruptcy Judge.

Appellant, Gary E. Jubber, Trustee (the “Trustee”), appeals the bankruptcy court's decision denying his motion to require Appellees, Jose L. Ruiz and Carrie Ruiz (“Debtors”), to turn over estate assets. After oral argument and a review of the record, we reverse the order of the bankruptcy court.

I. BACKGROUND

During the one month period preceding the filing of their Chapter 7 bankruptcy petition, electronically filed on Saturday, April 24, 2010, Debtors wrote four checks on a checking account they held at Zions Bank (the “Zions account”). These four checks were in the following amounts and designated purposes: 1) $2,196.50 on March 29, 2010 to purchase hay used in Debtors' business; 2) $200.00 on April 1, 2010 for a charitable donation; 3) $240.00 on April 16, 2010 for a business purpose; and 4) $1,118.47 on April 23, 2010 to pay Debtors' monthly mortgage payment. None of these checks had been honored by Zions Bank on the date they filed their petition.

Debtors filed their Schedules of Assets and Liabilities, Statement of Financial Affairs, and Statement of Social Security Number (which contains only the last four digits of that number) with their petition. On the schedules, Debtors listed various checking and savings accounts, including the Zions account. Debtors indicated under penalty of perjury that the Zions account balance on the date of filing was $10.02. In reality, there was $3,764.99 in the account, because none of the four checks had been honored. All four checks then cleared within four days of the filing: one check cleared the account on Monday, April 26, two cleared on Tuesday, April 27, and the last cleared one day later, on Wednesday, April 28.

The Trustee was appointed as the panel Chapter 7 Trustee on the same date the petition was filed.¹ He conducted a first meeting of creditors pursuant to 11 U.S.C. § 341 ² on June 10, 2010. During or before that § 341 meeting, the Trustee discovered that none of these checks had cleared the Zions account prior to the filing date.³ As a result, the Trustee filed a motion to require Debtors to turn over the amount that had been in the Zion account on the date of the petition.

II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely filed appeals from final judgments and orders of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.⁴ Neither party elected to have this appeal heard by the United States District Court for the District of Utah. The parties have, therefore, consented to appellate review by this Court.

The Trustee filed his notice of appeal within fourteen days of the bankruptcy court's Memorandum Opinion denying the Motion for Turnover, and therefore the appeal was timely.⁵

III. STANDARD OF REVIEW

“For purposes of standard of review, decisions by judges are traditionally divided into three categories, denominated questions of law (reviewable de novo ), questions of fact (reviewable for clear error), and matters of discretion (reviewable for ‘abuse of discretion’).” ⁶ The parties agree, as does this Court, that this appeal involves only questions of law. Therefore, the matter is subject to a de novo review. De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision.⁷

IV. BANKRUPTCY COURT DECISION

The bankruptcy court, while recognizing a split in authority on this issue, held that the Trustee could not recover from Debtors the amount that was in the checking account on the date of filing. Although the court recognized that the Debtors' interest in the account on the date of filing became property of the estate, it dismissed the Trustee's contention that the funds in the checking account constituted estate property. Instead, the bankruptcy court held that the checking account merely constituted a debt owed by the bank to the Debtors, and it was the right to collect on this debt, rather than the funds themselves, that constituted property of the estate.⁸

Having determined that it was only the right to collect on a promise to pay from Zions Bank to the Debtors that constituted property of the estate, the bankruptcy court then turned to the issue of whether Debtors had any duty to collect on that promise to pay for the benefit of the estate. The bankruptcy court held that Debtors had constructively turned over this property by disclosing to the Trustee in their schedules the existence of the checking account. The court then held that the Debtors were under no duty to collect on debts owed to the bankruptcy estate, and that it was the Trustee's obligation to collect on that debt, either directly from Zions Bank if he sought turnover, or from the payees of the funds through avoidance proceedings. Based on these findings, the bankruptcy court denied the motion for turnover.

V. DISCUSSION

The starting point for analyzing the Trustee's motion for turnover is with the language of the pertinent statute, 11 U.S.C. § 542(a), which provides that “an entity ... in possession, custody, or control, during the case, of property [of the estate] ... shall deliver to the trustee ... such property or the value of such property[.]” According to the Trustee, because Debtors were in control of the funds contained in their checking account on the date they filed their petition, the Trustee may properly seek turnover of those funds directly from Debtors for ultimate distribution to their creditors. Debtors deny that they were in control of the funds in the checking account, and more importantly, that they have any duty to repay those funds.

A. The funds in the checking account were property of the bankruptcy estate.

The first question is what precisely constituted property of the bankruptcy estate on the date of filing. The bankruptcy court held that it was only Debtors' right to collect on a debt from the bank that constituted property of the estate, not the funds themselves. This Court disagrees.

The primary basis for Debtors' contention, as well as the bankruptcy court's holding, that the estate's interest in the checking account amounted to nothing more than a beneficial interest in Zions Bank's promise to pay the funds held in the account (as opposed to the money in the account), is derived from language contained in Citizens Bank of Maryland v. Strumpf.⁹ In Strumpf, a Chapter 13 debtor had both a checking account and a delinquent loan with the creditor bank on the date he filed his petition. When the petition was filed, the bank placed an administrative hold on that part of the funds contained in the checking account required to offset any pre-petition debt that debtor owed the bank on the loan. The debtor brought an action against the bank, alleging that the bank had violated the automatic stay under § 362(a)(7), because the “administrative hold” was actually an improper “setoff” of the debtor's funds in violation of the automatic stay.

The Supreme Court held that the bank's actions did not constitute a setoff, and thus it had not violated the automatic stay.¹⁰ Following that holding, the Court also briefly dismissed the debtor's contentions that the bank had violated § 362(a)(3) and § 362(a)(6), noting that the bank did not actually take possession of any of the debtor's property or exercise control over debtor's property. Instead, the Court held that the bank merely failed to perform its promise to pay the debtor the funds held in the account.¹¹

Although this Court recognizes that the language contained in the concluding paragraph of Strumpf does facially support Debtors' position, the context of that case is entirely different from the case currently before this Court. Strumpf solely involved the automatic stay and the relationship between the bank and the debtor in that context. The issue of what constituted property of the estate under § 541 was neither argued nor decided. For that reason, this language in Strumpf is not dispositive under the facts, or the issue presented, in this case.

The relationship between Zions Bank and Debtors was considerably different than the typical debtor-creditor relationship that existed in Strumpf. Debtors maintained the right to withdraw the funds in their account at any time, to direct Zions Bank to deliver the funds to any third party, or to leave the funds on deposit. Although Zions Bank did make a promise to pay the funds in the account to Debtors, the checking account constituted much more than that promise and Debtors' rights to those funds exceeded those of a typical creditor.

Well established Tenth Circuit precedent directs that “the scope of section 541 is broad and should be generously construed[.]” ¹² The bankruptcy court's attempts to narrow the scope of § 541 in relation to funds on deposit in a checking account does not satisfy the standard the Court must apply when considering § 541. Given the limited applicability of Strumpf to the facts of this case, and the broad scope the Court is required to use in applying § 541, the Court adopts the prevailing view of nearly every court to consider this issue by holding that the funds in the Zions account, rather than merely the promise to pay over those funds, constituted property of the bankruptcy estate.¹³

B. Debtors had control over the funds in the checking account...