Filing Bankruptcy in Arizona with Checks Still Pending

Pending transactions, such as checks and debits must be considered prior to filing the bankruptcy petition. This issue was addressed with In re Brubaker, 443 B.R. 176 (2011), when a debtor filed bankruptcy with a scheduled account balance of $513, when in fact the actual account balance was $5,862.38. The discrepancy was checks still pending. The bankruptcy trustee argued that because these funds were still in Debtor’s account, the entire balance was property of the bankruptcy estate pursuant to 11 U.S.C. Section 542. Debtors argued that checks written pre-petition, but negotiated post-petition, are not part of the account balance to be included within the bankruptcy estate (Debtor’s unsuccessfully citing In re Pyatt 486 F.3d 423 (8th Circuit 2007).

The issue was whether the pending checks were property of the bankruptcy estate? The Court referenced the basic tenants of the bankruptcy estate, including that the commencement of the case creates the estate and that 11 U.S.C. Section 541(a) captures “all legal or equitable interests of the debtor in property as of the commencement of the case” wherever located and independent of whom it be held by. In the absence of controlling federal law, property interest are governed by state law. Under state law (this case presiding out of Florida), it was held Debtors had sufficient possession and control of all funds at the time of filing, even control over the pending checks. If this case had been filed in Arizona, I suspect the Court would find for a similar result.

The second issue was “who is responsible for reimbursing the bankruptcy estate” – the debtors or the recipient of the checks? The Court held that at the time of filing, a debtor’s interest in property is extinguished, while simultaneously, a trustee vests rights as the legal representative of the bankruptcy estate. As a fundamental rule, a trustee only inherits the rights and title of the debtors. In this instance, only the debtor could have “stopped payment” on the checks.

The Court held Debtors are required to cooperate with the trustee (11 U.S.C. Section 521 (a)(3)) and turn over all non-exempt property. Additionally, the Court found that an entity, other than a custodian, in possession, custody, or control, during the case, of non-exempt property…shall deliver to the trustee or account for such, either the property or value thereof (11 U.S.C. 542(a)). In this instance, the Court held Debtor’s were not “custodians” within the definition set forth under 11 U.S.C. Section 101(11), and therefore it was the Debtors that must reimburse the estate for the uncashed checks.

In summary, this wasn’t an Arizona case, but it is very likely the Court would find for the same result. A Debtor should work with an attorney and carefully time the filing of a bankruptcy case to ensure all account balances fit within Arizona’s statutory scheme to protect account balances.

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