Property of the Bankruptcy Estate | Bank accounts

Client: Are the funds in my bank account property of the estate?
Attorney: Well….that depends.

It depends on whether the funds are the clients.  It depends on whether the client’s children’s funds are in a “UTMA” account labeled as such.  It depends on whether the client shares a bank account with another individual or entity.  It depends on whether the client has deposited his funds into the account.  It just depends on the facts and circumstances of the client’s particular situation.

But simply put, if the debtor deposits his wages in his bank account, which is his and his alone, then chances are yes, the funds in the account are property of the bankruptcy estate.

It is important to note that it is the funds in the bank account as of the Petition date that are property of the estate, not the funds in the debtor’s check register after all outstanding checks clear.  This is a big distinction. Granted it is not likely as much an issue nowadays with POS and ACH transactions so prevalent in our spending, but it certainly something the debtor must know when filing.

In fact, I bet Mr. And Mrs. Wolfe were not so aware of this little distinction when they filed their bankruptcy Petition.  In their case, they had timely filed their 2011 Federal income tax return on October 15, 2012.  They included with their tax return a check for $8,360, the amount of their 2011 tax liability; they had borrowed the funds from their acquaintance, Larry.  The IRS received the returns and deposited the check on October 19, 2012.  The Wolfe’s then filed their chapter 7 bankruptcy petition on October 22, 2012.  Then, on October 23, 2012, the IRS check cleared their bank account, debiting $8,360 from the account.

The Trustee subsequently sought from the debtors, the $8,360 they had in their bank account as of the Petition date.  (It should be noted that due to the source of the funds, a loan, there appears to be no applicable exemption for the debtors to claim to protect the funds from administration by the estate.)  The Debtors protested.  And Judge Pappas issued a written decision on the matter.

The Court held that the funds in the bank account became property of the bankruptcy estate the moment the Wolfe’s filed their bankruptcy petition.  That at that moment, they were still in control of the $8,360 in their bank account because they could have withdrawn all the funds in cash, transferred the funds to a different account, issued a stop-payment on the check, or close the account.  And that because they had control of the funds during the pendency of the case, they had a duty to preserve those funds and turn them over to the trustee if and when so demanded.

The last thing any debtor wants after declaring bankruptcy is the bankruptcy court issuing a $8,000 money judgment against the debtor.  So when attorneys and clients discuss the timing of a bankruptcy petition, the attorney needs to ask, and the client needs to advise, as to the status of any outstanding checks.  Though the check this case involved over $8,000, which may appear unusual; it is not uncommon for debtors to have mortgage payments upwards of $1,500 – $2,000 that may be outstanding.  It might just be better to wait until those checks clear before filing.  If waiting is not an option, then it is advised take out cashier’s check or money orders and mail those out prior to filing.

 

EDIT (1/10/2014):

The 9th Circuit filed an Opinion yesterday that affirms Judge Pappas’s reasoning in the Wolfe case.  In facts very similar to the Wolfe’s the issue was not whether the funds in bank account were property of the estate, but whether the defendant must have possession of property of the estate at the time the Trustee brings his motion for the turnover of said property.  In a rather short 13 page decision the 9th Circuit held that possession of property of the estate at the time the Trustee’s motion is filed is not necessary for the Trustee to succeed on the matter.  The Court opined that to hold otherwise would allow any defendant of such an action to simply transfer the property to avoid liability to the estate.

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