Consumer Debtor Not Responsible For Items Clearing Bank Account Post-Petition

By: Deanna Scorzelli

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In a novel approach, the Court uses the § 362(b)(11)

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exception from the automatic stay to insulate a consumer debtor from the trustee’s attempt to require her to “turnover” the amounts reflected by pre-petition checks and debits that were paid by her bank shortly after filing bankruptcy and thus were no longer in the account at the time it was remitted to the estate. In In re Minter-Higgins

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the Chapter 7 Trustee sought turnover from the debtor of money that had been in the debtor’s bank account at the instant of filing for bankruptcy. The debtor objected to the turnover, however, because she had issued checks and initiated debit transfers before filing for bankruptcy that were not honored by the bank until after the filing.  If the Trustee were successful in obtaining the turnover, the debtor would be liable to the estate for the amount of those items and effectively pay twice – once when the funds in her account were used to honor the check and debit transfers and a second time in response to the turnover. 

 

Although there is a split in the reported cases,

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this court rejected the reasoning of both lines.  The court instead relied on 11 U.S.C. § 362(b)(11) for the proposition that “presentment by the payees of the debtor’s checks and debit requests . . . subsequent to the date of the petition was excepted from the operation of the automatic stay.”

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In other words, the Trustee would not have been able to recover the amount of the transfer from the transferees of the checks.

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Therefore, the court determined as a matter of “fairness” that the Trustee should not be able to recover from the debtor either. The court said that “[t]here is an inherent unfairness . . . in having the debtor pay back something that the trustee can’t recover from transferees.”

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The court held that the Trustee could not have recovered from the debtor for post-petition transfers as a result of the debtor’s pre-petition check and debit expenditures. This decision highlights the conflicting objectives of bankruptcy law by weighing the goal of enabling debtors to begin anew against the need to preserve money in the estate for unsecured creditors.

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In this instance, the court ruled in the interest of the debtor.

 

This case demonstrates that courts are sometimes persuaded by their sympathy for debtors. The concession to debtors, however, imposes inevitable costs on creditors, which the court seems to ignore. In holding for the debtor, the court focuses on the fact that the transfers were “ordinary transactions” made in the course of everyday life.

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The transfers were for groceries and gasoline: items essential to the debtor’s existence. The court implies that the outcome may have been different if the transfers were for extravagant items and suggests that the § 548 fraudulent transfer provision may be used to address improper transfers.

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  Based on its empathy for subsistence, the court decided that it would be unfair to hold the debtor responsible for ordinary items clearing her bank account post-petition since she lacked control of when items might be presented.

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Rather than require the debtor to pull herself out of the hole, the court bailed out the debtor at the expense of the unsecured creditors, because allowing the debtor to escape the turnover diminished the size of the estate from which creditors could obtain payment.