Newman v. Schwartzer (In re Newman)

Newman v. Schwartzer (In re Newman), --B.R.-- (9th Cir. B.A.P. February 4, 2013)
The Bankruptcy Appellate Panel for the Ninth Circuit affirmed the decision of the Bankruptcy Court holding that, although the Debtor had spent a tax refund prior to the entry of an order for turnover under Bankruptcy Code Section 542, he was liable to the Chapter 7 Trustee for the value of the refund despite lack of present possession of the property.
Procedural context:
Appeal from the United States Bankruptcy Court for the District of Nevada (J. Riegle), ordering the turnover of property by the Debtor to the Chapter 7 Trustee pursuant to Bankruptcy Code Section 542, and for sanctions, reviewed de novo.
Eugene Scott Newman, Jr., Chapter 7 debtor ("Debtor"), spent a tax refund of $4,727 that had been neither scheduled as an asset nor listed as an exemption. Upon a motion by Lenard Schwartzer, the Chapter 7 Trustee ("Trustee"), the Bankruptcy Court entered an order compelling the turnover of the tax refund ("Turnover Order"), and the Debtor appealed, simultaneously filing an amendment to his Schedules to assert an exemption. The Bankruptcy Appellate Panel upheld the findings of the Bankruptcy Court and ruled that the tax refund constituted property of the estate as "an interest in property" as of commencement of the case and as community property under Nevada law. The fact that the Debtor had spent the refund prior to the Turnover Order did not defeat the Trustee's right to compel turnover, because the refund constituted property in the Debtor's "possession, custory or control" during the case, and, pursuant to Bankruptcy Code Section 542, the Debtor must account to the Trustee for either the property or its value. There is no requirement for the "present possession" of property before turnover can be compelled under Section 542. Moreover, the Debtor's argument that the refund was exempt as an "earned income credit" under Nevada law could not be considered, because the exemption was not asserted prior to the Bankruptcy Court's entry of the Turnover Order. Although the Debtor could have brought a motion under Federal Rule of Civil Procedure 60(b) to assert "excusable neglect," such a motion can only be presented to a bankruptcy court and not to an appellate court.
Jury, Kirscher, and Dunn, Bankruptcy Judges

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