When a chapter 7 bankruptcy case is filed, a trustee is appointed to gather and sell the debtor’s assets. To aid in this effort, the trustee is empowered to avoid certain transfers pursuant to Bankruptcy Code sections 544 - 550. The trustee also is empowered, pursuant to Bankruptcy Code § 542, to seek turnover of assets belonging to the estate. The Ninth Circuit Court of Appeals recently held that a party may be required to turnover estate property even if the party is no longer in possession of such property. See Shapiro v. Henson, 2014 WL 68998 (9th Cir. Jan. 9, 2014).
Henson filed chapter 7 bankruptcy with approximately $7,000 in her bank account. She had written several checks drawn on the account before the bankruptcy petition, but the bank did not honor the checks until after the petition. After Henson spent the money, the chapter 7 trustee sent a letter, and then filed a motion, seeking turnover of the funds under Bankruptcy Code § 542(a). The bankruptcy court denied the motion because Henson no longer had possession of the funds. The district court affirmed.
On appeal, the Ninth Circuit reversed. It held that the trustee could recover the funds even though Henson no longer had them at the time the trustee filed his turnover motion. The Ninth Circuit based its decision on the text of § 542(a). That section provides, in relevant part: