Spradlin v. Khouri, et al.

Case Type:
Case Status:
15-8031 (6th Circuit, Jan 04,2017) Published
When a postpetition transfer completely divests a debtor’s interest in property, that property is not subject to turnover under § 542, but may still be avoided under § 549. If only possession of property of the estate has been transferred, the estate retains whatever state law interest that the debtor had in that property and fraudulently transferred property only becomes property of the estate when the transfer is avoided.
Procedural context:
The chapter 7 trustee brought complaint under § 542 against debtor’s criminal attorneys seeking a turnover of a postpetition payment by debtor to her attorneys to defend her in a criminal matter. The trustee did not seek to recover the funds under § 549.The bankruptcy court held that, assuming the funds belonged to the debtor, once the funds were transferred to the attorney, they no longer belonged to the debtor, and turnover was not an appropriate remedy since the fees were no longer property of the estate and the trustee failed to present any evidence that debtor retained any interest in the funds including failing to present any retainer agreement between the debtor and her attorneys. Whether property is part of the bankruptcy estate is a question of law and reviewed de novo. The 6th Circuit BAP affirmed.
Debtor filed chapter 13 and declared that she had $1,500 in a checking account and no cash on hand. Subsequently, her home was searched by the Kentucky Attorney General’s Medicare Fraud Unit during which, $270,000 was found in an unlocked safe. Debtor’s case was converted to chapter 7. Debtor was then indicted for fraudulently claiming Social Security benefits, bankruptcy fraud and money laundering. Debtor’s mother deposited $51,000 into a joint account she held with the debtor and $50,000 was immediately transferred to debtor’s criminal attorneys – the defendants in the trustee’s turnover action. Debtor was convicted on all counts against her which conviction was affirmed by the 6th Circuit.
Delk, Humphrey, Opperman (Humphrey)

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