Posts Tagged ‘Judge Pappas’

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  That at that moment, they were still in control of the $8,360 in their bank account because they could have withdrawn all the funds in cash, transferred the funds to a different account, issued a stop-payment on the check, or close the account.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.

Is that an Heirloom in My Room?

What is an heirloom?  Is a gift from Mom an heirloom?  What about a gift from Grandma?  What if the gift was simply an ordinary aluminum boat you could pickup at Cabela’s?

Well, there are two criteria that must be met for an asset to be deemed an heirloom:

1. the asset must be subject to multi-generational transfers, and

2. must possess unique characteristics that differentiate it from other similar items, such as antiquity, novelty, or history.

The exemption statute at issue here, Idaho Code § 11‐605, provides:

(1) An individual is entitled to exemption of the following property to the extent of a value not exceeding seven hundred fifty dollars ($750) on any one (1) item of property and not to exceed a total value of seven thousand five hundred dollars ($7,500) for all items exempted under this subsection:

* * * *
(c) Family portraits and heirlooms of particular sentimental value to the individual.

“An heirloom is “an item of property which has passed through at least one generation before it became property of the debtor.” In re Hearn, 97.1 IBCR at 22.  Stated another way, in order to achieve heirloom status, more than one generational transfer of the item in question is required.” In re Merrill, ID BK Case No. 12-40663-JDP, (Sept. 24, 2012).

“If this initial burden is met, the debtor must then show that the property has some characteristics of uniqueness that differentiate it from other similar items, such as antiquity, novelty, or history.” Id.

In the Merrill case, which only focuses on the first element, the Debtors’ son had purchased a boat from an aunt before he died intestate.  The Debtors took possession of the boat with the intention to pass it to their grandson when he reaches the age of majority.  Thus the boat really only passed from the Debtors’ son to the Debtors (the Court apparently did not consider the purchase of the boat a “generational transfer”).  So while this transfer between the Debtors’ and their son involves multiple generations (two), the asset must pass through at least one generation, not simply passed to one generation.  Thus at least 3 generations must be involved. 

“Even if this transfer from a descendant to an ancestor could be considered a passing of property from one generation to another, in the heirloom analysis, it represents but a single generational transfer, not the multi‐generational passing required by the case law in this District.” Id.

Thus a gift from Mom will not suffice as an heirloom.  I do not believe a gift from Grandma would suffice either – though I’m sure someone will try to argue that skipping a generation suffices as passing through it.

The two cases cited by Merrill appear to address only the first element, and not what constitutes sufficient “history” for an asset to have unique characteristics.  And I have not personally researched the issue, but I would surmise that if an asset satisfies the first element of an heirloom, then it likely has sufficient intrinsic history and sentimental value to meet the second element.  But again, that depends on the asset and the facts of each generational transfer – as I don’t think the issue is so clear with an aluminum boat Grandpa bought at Cabela’s 10 years ago and is now in the Debtors’ possession.

Investment or Loan?

It’s hard to determine sometimes whether the  contribution to an enterprise is an investment or a loan.  The rule of thumb that I always went by was that if it was expected, at the time of the contribution, that the the contributor would earn a share of the enterprise’s profits, then it was an equity investment.  If it was expected that the contribution just be repaid (albeit with interest), then it is a loan.  An investor takes more risk that there might not be a return on his investment – and thus will have no recourse against the enterprise for it simply failing – but should the enterprise thrive, the investor will thrive as well.  The lender too has risk, but not as great as the investor.  And should the enterprise not repay the funds, the lender can seek legal remedies to collect on the loan.  However the lender does not get to thrive with the enterprise as the investor does – the lender simply gets paid back per the terms of the loan.

A recent case in our district,  In re Gables Management, had this very issue at matter when a chapter 7 trustee contended that a contribution to an enterprise was not a loan, but an investment and therefore not entitled to distribution from the estate.  In undertaking his analysis, Judge Pappas noted that the determination of whether a contribution is a loan or an investment requires a labor intensive analysis of the facts surrounding the contribution and the relationship of the parties at the time of the contribution and after.  The Court then applied the Howey-Forman factors: 1. contribution of money, 2. common enterprise, & 3. a reasonable expectation of profits to be derived from the entrepreneurial or management efforts of others.  The court found that the creditors’ contribution to the debtor was a loan, not an expectation of profits, and overruled the Trustee’s objection to creditors’ proof of claim.  It was this 3rd factor that turned in favor of the creditors.  I’m glad I still have my thumb.

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