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Bankruptcy Trustee Is Entitled to Pursue Funds From Checks Not Cleared on Day of Filing - In re Ruiz

October 11, 2011

As Rancho Cucamonga bankruptcy attorneys, we prefer to take cases before the client files a bankruptcy petition so that we can help prepare. Preparing for bankruptcy means a lot of things, including considering which assets are important to you, understanding the process and knowing the rules, so you cannot accidentally break them. That seems to be what happened in In re Ruiz, a case from the Bankruptcy Appellate Panel of the Tenth U.S. Circuit Court of Appeals. Jose and Carrie Ruiz wrote checks for business purchases, a charitable donation and their monthly mortgage payment just before petitioning for Chapter 7 bankruptcy. The checks had not yet cleared on the day of the petition, so their trustee argued that they technically still had the money and should be required to turn it over to the estate. A bankruptcy court in Utah disagreed, but the BAP reversed it, requiring them to turn over about $3,700.

The four checks were written between March 29 and April 23 of 2010; they filed their bankruptcy petition electronically on April 24. On their schedules, the Ruizes listed a checking account with $10.02. This was the number that would be true once the checks cleared; the account actually contained $3,764.99. The last of the four cleared on April 28. During the first meeting of creditors, the Ruizes' trustee discovered the discrepancy and moved to require them to turn over the rest of the money. This was denied by the bankruptcy court, which found that the disputed money was not debtor property. Rather, the court found that the checking account was a debt owed by the bank to the Ruizes, and that debt was the estate's property; the bank had actual control and possession of the money. The court further held that the trustee, not the Ruizes, had the obligation to collect that debt on behalf of the bankruptcy estate. The trustee appealed.

On appeal, the trustee argued that because debtors must turn over property of the bankruptcy estate, and because the money was still technically the Ruizes' property, he may properly seek it. The Ruizes deny that they controlled the money or have any duty to repay it. The BAP sided with the trustee, rejecting the bankruptcy court's reliance on Citizens Bank of Maryland v. Strumpf. Rather, the panel cited Tenth and Eighth Circuit cases, as well as precedent from numerous bankruptcy courts, holding that the money in a checking account as of the petition date is the property of the bankruptcy estate. The Ruizes had control over the funds from the day of the petition until they were debited from the account, the panel said. It analyzed the bankruptcy code's requirement that this control be "during the case," but concluded that this applies to any time during the case, not just when the trustee demands it, because to hold otherwise would enable evasion of the law. The panel took time in the opinion to recognize that this puts the debtors in a tough position, since they now do not have the money and could have been prosecuted for stopping payment. Nor is it usually practical to require the trustee to take quick action, it said. "Although this result does little to advance the Bankruptcy Code's policy of providing Debtors a fresh start through bankruptcy, it does promote an equally valid policy of providing for a fair and equitable distribution of Debtors' assets to their creditors."

The lesson our Costa Mesa personal bankruptcy lawyers take from this is that it's vital to be well informed before petitioning for bankruptcy. The Ruizes clearly did not intend to abuse the system -- they wrote checks for ordinary expenses, not luxury items -- but they happened to make a mistake. As a result, they are likely to be on the hook for most of this money. In fact, the bankruptcy appellate panel pointed out that they will end up paying the money twice, to the estate and to the original payees of the checks. This may be the legally correct conclusion, but we agree that it does nothing to help the Ruizes get a fresh start once their bankruptcy is through. For future bankruptcy filers, we strongly recommend that you talk to our Gardena individual bankruptcy attorneys before filing to avoid this kind of accidental error.

If you feel overwhelmed by your debt and don't see how you can ever pay it back, you should talk to Howard Law, P.C., about whether bankruptcy is right for you. You can call us toll-free at 1-800-872-5925 or send us a message through our website.

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