By Ryan C. Wood

When filing for bankruptcy protection all assets must be listed the bankruptcy petition schedules. This includes the amount of money the filer has in their bank accounts at the time the bankruptcy petition is filed. What if the bankruptcy filer wrote checks for their mortgage, car payment and cell phone before the bankruptcy petition was filed and the checks did not clear the bank account at the time the bankruptcy petition was filed? Does the amount listed in Schedule B for the balance of the bank accounts need to include the amount of the checks written but not cleared?

The answer is the amount listed in Schedule B should be the balance of the bank accounts at the time of filing. That is it. No deduction should be made for checks written but not cleared. In the Northern District of California many Chapter 7 trustees request bankruptcy attorneys provide their clients bank account statements that include the date the case was filed. The bankruptcy code does not specifically require this information be provided to the trustee, but there is a duty to cooperate with the trustee and they could easily obtain this information in a Fed. R. Bankr. P. 2004 examination. If the balance at the time of filing is significantly different in the bank account statement then what is listed in Schedule B you will have a problem. If there is no remaining exemption to protect the difference the trustee can request turnover of the unprotected funds.

What took place in a recently published 9th Circuit Court of Appeals case touches on this issue and whether a debtor must turnover property of the estate that is in their possession only at the time the motion for turnover is filed. Not what is originally listed in their bankruptcy schedules at the time the petition was filed. Please see, D.C. No. 2:10-cv-11726-ECR-GWF. In the Henson bankruptcy case, Ms. Henson had about $6,300 in her bank accounts at the time the case was filed with about $800 being protected by the applicable bankruptcy exemptions. So about $5,500 was not exempt and part of the bankruptcy estate for the benefit of creditors. Ms. Henson wrote a number of checks prior the petition being filed and transferred $3,239 to her bankruptcy lawyers account. Trustee Shapiro therefore filed a motion for Henson and her attorney to turnover the unexempt funds. At the time trustee Shapiro filed the motion for Henson to turnover the money she no longer had possessed it.

Assets of the Bankruptcy Estate and Preservation or Use While the Case is Open

The Ninth Circuit Court of Appeals determined that a trustee’s turnover power pursuant to the plain language of Section 542(a) of the Bankruptcy Code is not restricted to property of the estate at the time the motion for turnover is filed. Section 542(a) provides that, “An entity . . . in possession, custody, or control, during the case, of property of the estate, or exempt property, 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.” During the case means the entire case and the statute states a trustee can seek turnover from a party that has or had possession of the asset. That is really pretty broad language. The 9th Circuit Court of Appeals continues by pointing out Section 542(a) also provides the trustee can request turnover of the value of such property. So the party that is being asked to turnover the property does not necessarily have to be in possession of the property any longer. The 8th Circuit does require that a party being requested to turnover property of the estate must have possession, custody, or control of the property at the time the motion for turnover is filed. This issue may go Supreme Court of the United States given this split in application of Section 542(a). For now, if a debtor is in possession of assets of the bankruptcy estate that are not exempt, then the debtor should probably take care to preserve those assets until the case is closed or the court enters an order compelling the trustee to abandon all assets of the bankruptcy estate.