Court Holds Bankruptcy Trustee May Collect Funds From Checks Not Cleared on Day of Bankruptcy Filing

As a Sacramento bankruptcy attorney, I typically take a client’s case before the he or she files the bankruptcy petition. I do this in order to help him or her prepare the petition before the actual filing Chapter 7 or Chapter 13. Preparation for bankruptcy can mean a lot of things, including making strategic decisions regarding which assets are important to an individual. Understanding the bankruptcy process and knowing the complex rules become an important aspect of any Chapter 7 or Chapter 13 filing in order to eliminate or minimize a person’s exposure to his or her creditors.

Unfortunately, unrepresented litigants often fail to understand the complexities involved in a case and that seems to be what happened with a debtor in In re Ruiz, a case from the Bankruptcy Appellate Panel of the Tenth U.S. Circuit Court of Appeals. In this case, Jose and Carrie Ruiz wrote checks for business purchases, a charitable donation and their monthly mortgage payment just before petitioning for Chapter 7 bankruptcy. The checks had not yet cleared on the day of the petition, so their trustee argued that they technically still had the money and should be required to turn it over to the estate. A bankruptcy court in Utah disagreed, but the BAP reversed it, requiring them to turn over about $3,700.

The Ruiz’s checks were written between March 29 and April 23 of 2010; they filed their bankruptcy petition electronically on April 24. On their schedules, the Ruiz’s listed a checking account with $10.02. This was the number that would be true once the checks cleared; however, the account actually contained $3,764.99. The last of the four cleared on April 28, 2010. During the section 341 hearing, the Ruiz’s trustee discovered the discrepancy and moved to require them to turn over the rest of the money. The bankruptcy court denied the Trustee’s motion and found that the disputed money was not debtor property. Rather, it found that the checking account was a debt owed by the bank to the Ruiz’s, and that debt was the estate’s property; the bank had actual control and possession of the money. The court further held that the trustee, not the Ruiz’s, had the obligation to collect that debt on behalf of the bankruptcy estate. The trustee appealed.

On appeal, the trustee argued that the law requires the debtors to turn over property of the bankruptcy estate, and because the money was still technically the Ruiz’s property, he may properly pursue it. The Ruiz’s denied that they controlled the money or had any duty to pay it to the trustee. The BAP sided with the trustee, rejecting the bankruptcy court’s reliance on Citizens Bank of Maryland v. Strumpf. Rather, the panel cited Tenth and Eighth Circuit cases, as well as precedent from numerous bankruptcy courts, holding that the money in a checking account as of the petition date is the property of the bankruptcy estate. The Ruiz’s had control over the funds from the day of the petition until they were debited from the account, the panel said. It analyzed the bankruptcy code’s requirement that this control be “during the case,” but concluded that this applies to any time during the case, not just when the trustee demands it, because to hold otherwise would enable evasion of the law.

The panel took time in the opinion to recognize that their decision puts the debtors in a tough position, since they now do not have the money and could have been prosecuted for stopping payment. Nor is it usually practical to require the trustee to take quick action, it said. “Although this result does little to advance the Bankruptcy Code’s policy of providing Debtors a fresh start through bankruptcy, it does promote an equally valid policy of providing for a fair and equitable distribution of Debtors’ assets to their creditors.”

The lesson to be taken from this case is that it’s imperative to be well informed before petitioning for bankruptcy. The Ruiz’s clearly did not intend to abuse the system — they wrote checks for ordinary expenses – however, they happened to make a mistake. As a result, they appear to be responsible for re-payment of this money. In fact, the bankruptcy appellate panel pointed out that they will end up paying the money twice, to the estate and to the original payees of the checks. While this result may be the legally correct conclusion, I argue that it does nothing to help the Ruiz’s get a fresh start once they receive the discharge. For future bankruptcy filers, I strongly recommend that you talk to our Sacramento area bankruptcy attorneys before filing to avoid this kind of accidental error.

If you feel overwhelmed by your debt and don’t see how you can ever pay it back, you should talk to a Sacramento Bankruptcy Attorney about whether bankruptcy is right for you. You can call us at 916-361-6028 or send us a message through our website.

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