The Trustee Wants to Know: “What’s in Your Wallet?”

February 13, 2014

The Ninth Circuit case of Shapiro v. Henson stands as a warning to all bankruptcy debtors: be sure to know what is actually in your bank account on the day your bankruptcy case is filed. The Chapter 7 trustee requires all bank account records and will compare that balance to the amount listed on your bankruptcy schedules. When the amount in your bank account is substantially higher than the scheduled amount, your simple Chapter 7 bankruptcy can quickly turn into a train wreck.

At the time a Chapter 7 bankruptcy case is filed, your property becomes part of a bankruptcy estate. Property not exempt under state or federal law may be collected by the bankruptcy trustee and used to pay creditors. See Section 542(a) of the Bankruptcy Code. Accurate accounting of property and skilled use of all legal exemptions is a critical part of the pre-filing process.

Your ledger balance will not save you. In Henson, the Ninth Circuit Court of Appeals considered a Chapter 7 bankruptcy case where a debtor had a bank balance of over $6,000 on the day she filed bankruptcy. Henson had written checks for almost all of this money before filing, including a check in the amount of $3,239.00 to her attorney, but none of these checks had cleared when the bankruptcy case was filed. The bankruptcy trustee sought turn-over of the entire non-exempt amount in the bank.

Prior case law in the Eighth Circuit held that where a motion for turnover was brought against an entity by summary proceeding, possession of the property by that entity was required at the time that the motion for turnover was filed. See Brown v. Pyatt (In re Pyatt), 486 F.3d 423 (8th Cir. 2007). The debtor argued that under Pyatt, the trustee had to file a motion to compel turnover of the money in the bank account before the bank honored the outstanding checks. Since he did not, the debtor was protected by the defense of “I ain’t got it.”

The Ninth Circuit declined to follow the prior case law, and claimed the Eighth Circuit had wrongly interpreted the law in Pyatt. The court of appeals said that outstanding checks written on a bank account had no bearing on bankruptcy estate property, and the trustee was able to recover bankruptcy estate property from whomever had custody and control over the property at any time during the bankruptcy case. Bottom line: the debtor owes the trustee over $6,000 (actually, the trustee decided to go after the debtor’s attorney for part of this money, $3,239.00 to be exact). See Shapiro v Henson, Case No. 11-16019 (9th Cir. Jan. 9, 2014).

It is always good practice to obtain the current balance for all of your bank accounts on the day you file bankruptcy. It is also critical for you and your attorney to agree on the day the bankruptcy case will be filed (usually the same day you sign the bankruptcy petition and schedules). A filing delay of just one day could cause painful non-exempt property issues in your case (from a direct deposit from work, for instance).

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