Yoon v. Minter-Higgins

• Citation: 399 B.R. 34
• Decision Date: 08 February 2008
• Docket Number: No. 2:07-CV-151-TS.,2:07-CV-151-TS.
• Parties: Stacia L. YOON, Trustee, Appellant, v. Alesia MINTER-HIGGINS, Appellee.
• Court: U.S. District Court — Northern District of Indiana

399 B.R. 34

Stacia L. YOON, Trustee, Appellant, v. Alesia MINTER-HIGGINS, Appellee.

No. 2:07-CV-151-TS.

United States District Court, N.D. Indiana.

February 8, 2008.

COPYRIGHT MATERIAL OMITTED

Stacia L. Yoon, Genetos Retson Yoon & Molina LLP, Merrillville, IN, trustee pro se.

Kevin B. Relphorde, Gary, IN, for appellee.

OPINION

THERESA L. SPRINGMANN, District Judge.

The Trustee of a bankruptcy estate, Stacia L. Yoon, sought the turnover of funds that were in Alesia Minter-Higgin's credit union account when Minter-Higgins filed her Chapter 7 bankruptcy petition. However, the funds in the account had since been depleted because the bank honored checks and debit card payment requests that predated the bankruptcy petition. The bankruptcy court denied the Trustee's motion for turnover of the funds that had been transferred from the account, finding that the transfers were authorized under the bankruptcy code. The Trustee appeals the bankruptcy court's order pursuant to 28 U.S.C. § 158, arguing that the court's legal conclusions were erroneous.

BACKGROUND

On July 5, 2005, Alesia Minter-Higgins (the Debtor) filed a Chapter 7 bankruptcy petition. The filing of this petition created a bankruptcy estate, comprised of all of the Debtor's legal or equitable interests in property as of the start of the case. The bankruptcy estate included the property of the Debtor, wherever it was located, and by whomever it was held. 11 U.S.C. § 541(a). Yoon, as the Chapter 7 Trustee, was required to collect and reduce to money the property of the bankruptcy estate. 11 U.S.C. § 704(a)(1).

The debtor in a Chapter 7 bankruptcy case has several obligations, which are listed in § 521. One requirement is that the debtor surrender all property of the bankruptcy estate to the Chapter 7 Trustee. Id. § 521(a)(4). Another section of the code provides, with exceptions not relevant to the instant case, that an "entity" in possession, custody, or control of property that the trustee may use, sell, or lease, or that the debtor may exempt, shall deliver to the trustee, and account for, such property or the value of such property. 11 U.S.C. § 542(a) (describing duty to turn over property to the estate). This section also acts to require the debtor to turn over estate property. See id. § 101(15) (defining "entity" to include a "person"); id. § 101(41) (defining "person" to include "individual").

Acting pursuant to § 542(a), the Trustee sought the turnover of funds that the Debtor held in an account with Advance Federal Credit Union (AFCU) as of the date of the Chapter 7 petition, July 5, 2005. On this date, the account had a balance of $383.13. For reasons discussed later, this motion was unsuccessful.

The filing of the bankruptcy petition automatically imposed a stay as to certain actions. 11 U.S.C. § 362 (automatic stay provision). Section 362(a)(3) operates as a stay of "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." However, the section of the statute imposing the automatic stay lists several exceptions to the stay. Relevant to this case, § 362(b)(11) provides that the filing of a bankruptcy case does not operate as a stay of "the presentment of a negotiable instrument and the giving of notice of and protesting dishonor of such an instrument." 11 U.S.C. § 362(b)(11).

That exception became relevant in this case when several checks that the Debtor wrote before she filed for bankruptcy were still outstanding when she filed her petition. These items, along with several prearranged automatic debits to creditors, were not presented to, and finally charged to, her AFCU account until later. Because this post-petition activity depleted her credit union account, the Debtor objected to the Trustee's motion to turnover the $383.13 AFCU account balance that existed on the date she filed for bankruptcy. She requested that her account be diminished by the items, totaling $415.40, that were presented for payment post-petition. The bankruptcy court agreed with the Debtor and issued oral findings of fact and conclusions of law.

The bankruptcy court reaffirmed its holding in a written opinion on March 23, 2007, see In re Minter-Higgins, 366 B.R. 880 (Bankr.N.D.Ind.2007), after the Trustee moved the court to alter or amend its judgment pursuant to Federal Rule of Bankruptcy 9023 and Federal Rule of Civil Procedure 59. The bankruptcy court held that the balance in the AFCU account on the petition date was an asset of the bankruptcy estate. However, the court concluded that, because post-petition payments of outstanding pre-petition checks were authorized transfers pursuant to § 362(b)(11), they represented a permissible diminution of the bankruptcy estate. The bankruptcy court held that the Trustee could not recover the value of those transfers from the Debtor, or from the transferees through separate adversarial proceedings.

On April 3, 2007, the Trustee filed her notice of appeal, which was entered on this Court's docket on May 7, 2007. On June 25, 2007, the Trustee filed the Appellant's Brief. The Appellee has not filed a brief or otherwise responded to the Appellant's arguments.

DISCUSSION

A district court sits as an appellate court in this matter. Fed. R. Bankr.P. 8013; In re Smith, 286 F.3d 461, 464-65 (7th Cir.2002). The issue before this Court is whether the bankruptcy court was correct to conclude that 11 U.S.C. § 362(b)(11) authorizes the post-petition transfer of estate property and that, accordingly, a Chapter 7 debtor should not be required to replace money that cleared her checking account post-petition. The Trustee argues that this holding is contrary to law and should be reversed. This Court applies a de novo standard of review to the bankruptcy court's conclusions of law. Smith, 286 F.3d at 465.

Neither party disputes that the $383.13 balance that was in the Debtor's AFCU account on July 5, 2005, became property of the bankruptcy estate. See 11 U.S.C. § 541(a)(1) (describing estate as "all legal or equitable interests of the debtor in property as of the commencement of the case"); Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) (holding that a "transfer" of property is only made with respect to a negotiable instrument when it is finally honored by the drawee financial institution). The bankruptcy court held as much. But this is where the Trustee's agreement with the bankruptcy court ends. The Trustee challenges the court's remaining conclusions that (1) post-petition transfers of this property are authorized when they concern the presentation of a negotiable instrument and (2) that the Trustee cannot avoid the transfers or recover their value. The Trustee argues while § 362(b)(11) is an exception to the automatic stay, it does not authorize the transfer of property. The Trustee maintains that when post-petition transfers of property occur because a transferee cashes a check that was written pre-petition, it is the debtor who bears the burden of reimbursing the estate for the value of the transfers to the payees. The Trustee submits that the debtor maintains control of the funds in the bank account and is obligated to turn them over to the trustee for administration as an asset of the estate.

A. Section 362(b)(11)

As the bankruptcy court acknowledged, "[t]he key to the issues presented in this contested matter is 11 U.S.C. § 362(b)(11), which excepts the presentment of a negotiable instrument for payment from the operation of the automatic stay." (Bankr. Order at 8.) The court began its discussion of § 362(b)(11) by stating, first, the purpose of the automatic stay and, second, the purpose of the exception to the stay set forth in § 362(b)(11). This Court agrees with those stated purposes. (See Bankr. Order at 9) (quoting Aiello v. Providian Fin. Corp., 239 F.3d 876, 879 (7th Cir. 2001) (describing stay as primarily for the protection of unsecured creditors and also for the debtor's protection), and Roete v. Smith, 936 F.2d 963, 966 (7th Cir.1991) (stating Congress' intent that the automatic stay was not to interfere with the rights of a holder of a negotiable instrument to deposit a check for the purpose of preserving rights on the instrument)).

Indeed, the purpose of the exception for negotiable instruments has been well noted. It is to "protect financial institutions without notice of bankruptcy and to facilitate commerce." In re Superior Toy & Mfg. Co., 183 B.R. 826, 837 (Bankr. N.D.Ill.1995) (citing In re Mills, 167 B.R. 663, 664 (Bankr.D.Kan.) aff'd 176 B.R. 924 (D.Kan.1994)).

The apparent purpose of § 362(b)(11) is to insure the efficiency of the United States check processing system, to protect the stream of commerce, and to provide protection to banks processing checks because there is no way that financial institutions can ascertain the bankruptcy status of the numerous people whose checks are processed each day. See Franklin v. Kwik Cash of Martin (In re Franklin), 254 B.R. 718, 721 (Bankr.W.D.Tenn.2000).

In re Meadows, 379 B.R. 737, 743 n. 8 (Bankr.S.D.Ohio 2008).

Under the Uniform Commercial Code, presentment of an instrument is often a prerequisite to asserting remedies against secondary obligors, such as indorsers of the instrument. This exception to the stay permits the presentment of the instrument, which may enable the holder to enforce the instrument against secondary obligors. Significantly, the provision does not authorize enforcement against the debtor. Instead, the exception is limited to presentment of the instrument. Mere presentment does not affect the estate's assets and, at best, fixes the debtor's liability.

3-362 Collier on Bankruptcy, P 362.05 (15th ed. rev.) (discussing purpose of § 362(b)(11)).

This Court cannot, however, agree with the bankruptcy court's conclusion that § 362(b)(11)'s exception for the presentment of negotiable instruments and its recognized purpose means that "...