In the case of Shapiro v. Henson, 739 F. 3d 1198 (2014), the Ninth Circuit Court of Appeals held that a bankruptcy trustee’s power to compel turnover of estate property is NOT limited to entities having possession, custody, or control of such property at the time the trustee files the motion for turnover.

In that case, the trustee moved to compel turnover of bank account funds that exceeded the exemption limit at the time the debtor filed bankruptcy. The debtor had written several checks prepetition that were honored post-petition, thus, the debtor did not have the funds in her bank account at the time the trustee filed the motion and refused to comply. The Court found the trustee was entitled to recover the non-exempt funds.

The trustee’s power to compel turnover comes from 11 U.S.C. § 542(a): “[A]n entity . . . in possession, custody, or control, during the case, of [property of the estate, or exempt property], shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.”

The court reasoned that two phrases in the statute are determinative: (1) “during the case”, and (2) “or the value of such property”:

(1) This means that the trustee has the power to bring a motion for turnover against an entity who either has or ever had possession of that property [of the estate] “at some point during the bankruptcy case.”

(2) The explicit language here indicates that the property need not be in the possession of the entity at the time the trustee’s motion for turnover is filed, i.e., “possession cannot be required” to compel turnover since turnover of its value is an adequate remedy. If this remedy were not available, an entity could simply transfer non-exempt property out of reach of the bankruptcy trustee in order to avoid liability and frustrate the trustee’s purpose.

KEYWORDS: Trustee Power to Compel Turnover, Motion for Turnover, Non-Exempt Property, Property of the Bankruptcy Estate, 11 U.S.C. Section 542, Ninth Circuit Court of Appeals, Shapiro v. Henson