Ostrander v. Brown (In re Brown), BAP NO. MS 19-024

• Decision Date: 21 May 2020
• Docket Number: BAP NO. MS 19-024,Bankruptcy Case No. 18-30653-EDK
• Citation: 614 B.R. 416
• Parties: Angilene S. BROWN, Debtor. David W. Ostrander, Chapter 7 Trustee, Appellant, v. Angilene S. Brown, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

614 B.R. 416

Angilene S. BROWN, Debtor.David W. Ostrander, Chapter 7 Trustee, Appellant,

v.Angilene S. Brown, Appellee.

BAP NO. MS 19-024

Bankruptcy Case No. 18-30653-EDK

United States Bankruptcy Appellate Panel of the First Circuit.

May 21, 2020

David W. Ostrander, Esq., on brief for Appellant.

Eric D. Kornblum, Esq., on brief for Appellee.

Before Cabán, Finkle, and Cary, United States Bankruptcy Appellate Panel Judges.

Cary, U.S. Bankruptcy Appellate Panel Judge.

David W. Ostrander, the chapter 7 trustee (the "Trustee"), appeals from the bankruptcy court's May 16, 2019 order (the "Order") denying his motion to compel turnover (the "Turnover Motion"). In that motion, the Trustee sought turnover of $18,000, the amount of a check which the debtor, Angilene S. Brown (the "Debtor"), received pre-petition but did not cash. The check represented the proceeds of a loan from the Debtor's retirement account. The crux of this appeal is whether the funds represented by the unnegotiated check are excluded from property of the estate under § 541(c)(2) or § 522(d)(12) and are therefore not subject to the Turnover Motion.¹ For the reasons set forth below, we conclude that the funds are estate property and the Debtor's attempt to exempt them fails. Accordingly, we REVERSE the Order and REMAND for entry of an order consistent with this opinion.

BACKGROUND

The Debtor filed a petition for chapter 7 relief on August 6, 2018. The next day, the Trustee was appointed. On her Schedule A/B, the Debtor disclosed that she held $50,600 in a Costco 401(k) retirement plan (the "401(k) plan"). On Schedule C, the Debtor elected the federal exemptions provided in § 522(d) and listed the 401(k) plan. She further indicated the value of her interest in the plan was $50,600 and claimed as exempt under § 522(d)(12) "100% of [the plan's] fair market value, up to any applicable statutory limit."

The Debtor appeared at the first § 341 meeting of creditors on September 25, 2018.² Based on payment advices the Debtor provided to the Trustee prior to the meeting, the Trustee questioned her about certain loan repayments to the 401(k) plan. The Debtor testified that she borrowed $18,000 from the 401(k) plan in July 2018 and admitted that the deductions on her payment advices were to repay that loan. After further questioning, the Debtor stated that she still possessed the $18,000 check (the "check") representing the loan proceeds received from the administrator of the 401(k) plan. The Debtor, however, did not list the check in her schedules. As discussed below, the Debtor's position is that her claimed exemption of the entire amount held in the 401(k) plan encompasses the sum represented by the check.

After learning about the check, the Trustee asked the Debtor to deliver it to her attorney. Although the Debtor's attorney confirmed that he had received the check from the Debtor, he never turned it over to the Trustee.

On February 27, 2019, the Trustee filed the Turnover Motion, asking the bankruptcy court to compel the Debtor to turn over $18,000 to the bankruptcy estate. In support, he asserted that the sum represented by the check was "non-exempt property of the [b]ankruptcy [e]state." (emphasis added). The Debtor objected to the Turnover Motion, asserting that the uncashed check was "still part of the 401(k) plan" and, therefore, exempt.

In his memorandum of law filed in support of the Turnover Motion, the Trustee argued:

The check, and the funds represented thereby, is property of the estate. The fact that the Debtor had not cashed the check as of the Petition Date is immaterial. The analogy would be as if the Debtor issued a personal check from her bank account to herself for $18,000 and then argued that the check was not property of the estate because it had not yet been "cashed." Another analogy would be if the Debtor held a winning lottery ticket for a certain sum of money as of the Petition Date that had not yet been "cashed" or redeemed. The money represented by that lottery ticket would clearly be property of the estate.

The Trustee cited to Marchand v. Whittick (In re Whittick), 547 B.R. 628 (Bankr. D.N.J. 2016), in which a New Jersey bankruptcy court held that a loan check issued to and received by the debtor from his retirement account one day prior to his bankruptcy filing was property of the bankruptcy estate even though the check was not cashed until after the bankruptcy filing. Relying on Whittick, the Trustee maintained that the loan proceeds could not be excluded from the bankruptcy estate under § 541(c)(2) because they had been distributed to the Debtor and were "within her possession and control" when her bankruptcy case was filed. In addition, the Trustee complained that the Debtor had not amended her schedules to disclose or exempt the $18,000 represented by the check.

Following a non-evidentiary hearing, the bankruptcy court denied the Turnover Motion. Ruling from the bench, the court adopted the Debtor's reasoning that the check represented exempt property from her retirement account and declined to follow the Whittick decision, stating:

I do agree with the [D]ebtor that the [Trustee's] analogies fail. The check here was drawn on an account of a third party, not the [D]ebtor's own funds, and they remained in an exempt account until she cashed those funds.... [T]he [D]ebtor had an equitable future contingent interest in the loan proceeds once the loan application was approved, but the fact that the [D]ebtor didn't cash the check means that they're still exempt funds.

In the Whittick case the debtor postpetition deposited the check, but that doesn't - - I just completely disagree with the judge from New Jersey.... I'm surprised that that's the outcome that that judge came to because I just consider the funds as still being in that 401(k) account at the time the bankruptcy case was filed and, therefore, they're exempt funds.

On the same date, the bankruptcy court entered the Order which provided: "For the reasons stated in open court, [the Turnover] Motion is denied."

This appeal followed.

JURISDICTION

We have jurisdiction to consider appeals from final orders. See 28 U.S.C. § 158(a)(1) & (b)(1) ; see also Ritzen Grp., Inc. v. Jackson Masonry, LLC, ––– U.S. ––––, 140 S. Ct. 582, 587, 205 L.Ed.2d 419 (2020) ; Bullard v. Blue Hills Bank, 575 U.S. 496, 135 S. Ct. 1686, 1692, 191 L.Ed.2d 621 (2015). A bankruptcy court order denying a motion for turnover is a final, appealable order. Redmond v. Erickson (In re Erickson), No. KS-11-005, 2011 WL 3793831, at *2 (10th Cir. BAP Aug. 26, 2011) ; Weinman v. Graves (In re Graves), 396 B.R. 70, 72 (10th Cir. BAP 2008), aff'd as modified, 609 F.3d 1153 (10th Cir. 2010). Therefore, we have jurisdiction.

STANDARD OF REVIEW

We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Wiscovitch Rentas v. Molina González (In re Morales García), 507 B.R. 32, 42 (1st Cir. BAP 2014) (citation omitted). Orders denying motions to compel turnover are reviewed de novo. In re Graves, 396 B.R. at 72.

DISCUSSION

I. The Standards

A. Section 542(a) and Turnover

The Trustee sought an order under § 542(a) compelling the turnover of $18,000. Section 542(a) provides, in relevant 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, 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.

11 U.S.C. § 542(a). To succeed in a cause of action for turnover, the trustee must establish that:

(1) the property is (or was during the bankruptcy case) in the possession, custody or control of a noncustodial third party; (2) the property constitutes property of the estate; (3) the property is of the type that the trustee could use, sell or lease pursuant to section 363 or that the debtor could exempt under section 522; and (4) that the property is not of inconsequential value or benefit to the estate.

Wiscovitch Rentas v. Rodriguez Mojica (In re Rodriguez Cossio), Adv. Pro. No. 18-00049, 2019 WL 3889525, at *4 (Bankr. D.P.R. Aug. 16, 2019) (quoting Alan N. Resnick & Henry J. Sommer, 5 Collier on Bankruptcy ¶ 542.03 (16th ed. 2019)).

There is no contest that the check is in the possession, custody or control of a noncustodial third party; is of the type that the Trustee could use, sell, or lease pursuant to § 363; and has value or benefit to the estate. This leaves the question of whether the $18,000 check constitutes property of the estate. The Trustee has consistently maintained the check is estate property. The Debtor's position appears to be that even if it were, it is exempted from property of the estate under § 522(d)(12).

B. Property of the Estate under § 541(a) and the § 542 Exception

Property of the estate broadly includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "[E]very conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541." In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993), abrogated on other grounds by Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) (citation omitted).

Section 541(c)(2) provides that "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." 11 U.S.C. § 541(c)(2). The U.S. Supreme Court ruled that "applicable nonbankruptcy law" as used within § 541(c)(2) refers not only to state law but also embraces federal law such as the Employee Retirement Income Security Act of 1974 ("ERISA"). Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 2246, 119 L.Ed.2d 519 (1992). "The result of Patterson...