KSB

Judge Nugent

10-13887 Pauls (Doc. # 45) - Document Text

SO ORDERED.
SIGNED this 5th day of December, 2011.

 

OPINION DESIGNATED FOR ON - LINE PUBLICATION
BUT NOT PRINT PUBLICATION


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


IN RE:
)
RANDY NICHOLAS PAULS, ) Case No. 10-13887
RUTH ANN PAULS, ) Chapter 7
)
Debtors. )

____________________________________)
MEMORANDUM OPINION

Timing is everything in bankruptcy. Section 542(a) requires that any “entity” having control
of an asset of the bankruptcy estate deliver it or account for its value to the Trustee.1 Here, Randy
Pauls wrote a check to his wife’s grandmother several days before debtors filed this case. Though
she deposited the check in her bank prepetition, the Pauls’ bank did not pay it until the day after they

1 Unless otherwise noted, all statutory references are to the Bankruptcy Code as amended
and codified at 11 U.S.C. § 101 et seq.

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filed their bankruptcy. Because the Pauls remained in control of the funds in their checking account
on the petition date, they must deliver them to the Trustee of their bankruptcy estate, or account to
the Trustee for their value.2

I. FINDINGS OF FACT
On November 15, 2010 when they filed this case, Randy and Ruth Ann Pauls owed Great
Plains Federal Credit Union more than $20,000 collectively on a car loan secured by a 2002 Chevy
Venture and a personal unsecured loan. Ruth Ann’s grandparents, Ralph and Helen Rosenblad, cosigned
both loans. When the Rosenblads learned that the Pauls were contemplating bankruptcy, they
wanted to pay part of or both loans because they “didn’t want to be involved in the bankruptcy.”
But rather than pay Great Plains directly, Helen Rosenblad wrote Randy Pauls a check for $11,000
on October 25, 2010.3

Randy carried the check to Great Plains on October 30, making a couple of car payments and
depositing the remaining $10,105 in his “shares account” *3832.4 After conferring with his
bankruptcy counsel though, Randy withdrew that amount from the shares account a week later and
transferred it to his checking account at Great Plains.5 On November 8, he wrote a check to Helen
for $9,531.90.6 On that same day, Helen wrote a check for $7,546 payable to Great Plains to pay off

2 The Court conducted an evidentiary hearing in this matter on November 15, 2011. The
Trustee, Carl B. Davis of Wichita, Kansas, represented the estate and the debtors appeared by
their counsel, Ronald L. Leslie of Hutchinson, Kansas.

3 Ex. A.

4 Ex. B.

5 Ex. C and D.

6 Ex. F. The memo line on the check reads “Paid Back.”

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the signature loan.7 Then, on Friday, November 12, she deposited Randy’s check in her bank, the
First National Bank of Hutchinson.8

The next Monday, November 15, the Pauls filed this case. Because their November 8 check
to Helen had yet to be honored by Great Plains, the $9,531 remained in their checking account.
Great Plains honored the check the next day.9 On November 15 and December 15, Helen paid the
monthly car loan payment of $661.17 to Great Plains, and then paid the car loan in full in January
of 2011 with a check for $12,788.92.10

On February 28, 2011 the Trustee filed a motion to compel turnover of the funds in the
Pauls’ bank account on the date of filing.11 That amount is $9,713.49 and included the November
8 check amount of $9,531.90.12

II. Legal Analysis and Conclusions
A.
Property Controlled by the Debtor on the Petition Date Must be Delivered or
Accounted For.
Section 541 broadly defines property of the estate as including all legal or equitable interests
of the debtor in property at the petition date. Section 542(a) directs that an entity in possession or
control of property of the estate turn it over to the Trustee or account for its value. Here, the question
is whether the funds in the Pauls’ checking account on November 15, 2010 were their property. The

7 Ex. G.
8 Ex. F.
9 Ex. E.
10 Ex. H, I, and J.
11 Dkt. 21.
12 Ex. E.


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Pauls contend that since the source of the funds was Mrs. Rosenblad and that she loaned them the
money to pay debts to Great Plains that she had guarantied, the funds were not the Pauls’ property
on the petition date. Kansas law and bankruptcy law suggest otherwise.

While the determination of whether a transfer has occurred for bankruptcy purposes is a
matter of federal law, courts look to state law to determine the respective property interests in the
transferred property.13 As this Court has previously held, the appropriate state law here is Article 3
of the Uniform Commercial Code as adopted by Kansas. KAN.STAT.ANN. § 84–3–408 (1996) states
that a check does not of itself operate as an assignment of funds in the hands of the drawee [bank]
and that the drawee is not liable on the instrument until the drawee accepts it.14 The Kansas
Comment to § 84-3-408 speaks to the situation here—where the bankruptcy trustee asserts the funds
are property of the estate:

Similarly, the drawer's trustee in bankruptcy may claim the account as an asset of the
estate if the petition in bankruptcy is filed after the check was drawn but before final
payment . . . As another variation on the bankruptcy theme, this section probably
means that a “transfer” of funds in the account to the payee for voidable preference
purposes occurs upon final payment by the drawee bank, not upon execution of the
check.15

The 10th Circuit Bankruptcy Appellate Panel faced a very similar set of facts in In re Ruiz,

where it noted that the debtor had the ability to “withdraw all funds in their account, to close the

account, to stop payment on any outstanding checks, and to transfer the funds from the account to

13 Butner v. United States, 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“ ...
Congress has generally left the determination of property rights in the assets of a bankrupt's
estate to state law.”).

14 See In re Spencer, 362 B.R. 489, 490-91 (Bankr. D. Kan. 2006).
15 KAN.STAT.ANN. § 84-3-408 (1996), Kansas Comment, 1996.
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another account.”16 The Panel concluded that this amounted to “control during the case” within the
meaning of § 542(a).

B. The Pauls’ Control of the Funds at Filing Requires the Pauls to Turn Them Over.
While it may be that Helen Rosenblad loaned Randy Pauls the funds that were ultimately
represented by the $9,531 check, Pauls did not hold those funds for her in any representative
capacity. He owned the money and could use it in any manner. Even though he had written her a
check to “return” the money, that check had not yet been honored by his bank and the funds
remained in his control. He therefore had, and has, a duty to account for them under § 542.

That the Pauls no longer have the money is not a defense to turnover. As the BAP held in
Ruiz, current possession of estate property is not a required element of turnover because § 542(a)’s
express reference to recovery of either the property of its value contemplates the possibility that a
debtor has had and subsequently lost control of estate assets. To hold otherwise would be to say that
anyone in possession of estate property could evade the duty to deliver it to the trustee by
transferring it to someone else.17 In short, the Pauls’ control over the funds on the date of filing is
sufficient control “during the case” to subject them to turnover.

III. Conclusion and Decree
The facts in this case are lamentable: an elderly grandmother’s attempt to assist her
granddaughter and husband by co-signing and paying their debts results in the debtors being liable
for funds they have repaid to her and that she, in turn, has paid to their creditor. But unfortunate facts

16 455 B.R. 745, 750 (10th Cir. BAP 2011).
17 See In re Diversified Products, Inc., 100 F.3d 53, 56 (7th Cir. 1996).
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do not soften the outcome that the law coldly compels.18 Randy and Ruth Ann Pauls had control of
the $9,713.49 in their checking account on the date of their bankruptcy petition and must be ordered
to account to the Trustee for it as § 542(a) requires.

The Trustee’s motion for turnover is GRANTED and the debtors are ORDERED to turn over
to the Trustee $9,713.49.

# # #

18 As further noted by the Ruiz Panel, the Pauls could have avoided this unfavorable
result by merely waiting until all outstanding checks had cleared the bank before filing their
petition. Ruiz, supra at 753.

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