IN RE JASON SCOTT BROWN, Debtor, KENNETH BROWN, Appellant, v. CHRISTOPHER BARCLAY, Appellee.
No. 18-60029
United States Court of Appeals, Ninth Circuit
March 23, 2020
BAP No. 17-1068
FOR PUBLICATION
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
Appeal from the Ninth Circuit Bankruptcy Appellate Panel
Kurtz, Spraker, and Alston, Bankruptcy Judges, Presiding
Argued and Submitted November 7, 2019 Pasadena, California
Filed March 23, 2020
Before: Mary M. Schroeder, Michelle T. Friedland, and Ryan D. Nelson,
Opinion by Judge Schroeder
SUMMARY*
Bankruptcy
The panel affirmed the bankruptcy court and the Bankruptcy Appellate Panel‘s ruling in favor of a Chapter 7 trustee who contended that funds fraudulently transferred by the debtor remained property of the bankruptcy estate upon conversion from Chapter 13 to Chapter 7.
Under
COUNSEL
Michael G. Doan (argued), Doan Law Firm, Oceanside, California, for Appellant.
Yosina M. Lissebeck (argued), Lissebeck Law, San Diego, California, for Appellee.
OPINION
SCHROEDER, Circuit Judge:
OVERVIEW
When a bankruptcy proceeding is converted from a proceeding under Chapter 13 to a proceeding under Chapter 7, the contents of the Chapter 7 estate should be easily ascertainable. Congress therefore enacted
The problem in this case began when the debtor made unauthorized and fraudulent transfers of funds during the Chapter 13 proceeding. After the Bankruptcy Court converted the proceedings to Chapter 7 in response, the debtor argued that the transferred funds were no longer in the estate. The Bankruptcy Court and the Bankruptcy Appellate Panel (“BAP“) disagreed, holding that, under the circumstances, the transferred funds should remain property of the Chapter 7 estate, which would mean the Chapter 7 trustee had authority to recover them. Those courts, however, came up with three different rationales for that result. We agree that the funds should remain property of the estate, but we must endeavor to harmonize that result with the language of
The case arises out of a modest family inheritance. The debtor, Jason Brown, has three brothers, including Appellant Kenneth Brown. When their father died on July 20, 2012, he left his estate to his four sons. In the state court probate proceeding in August 2013, each of the brothers abandoned their interests in the estate to Jason.
Jason then filed his Chapter 13 bankruptcy petition on December 13, 2013 and filed his schedules and Chapter 13 plan on December 21. He scheduled an anticipated inheritance of only $2,500. A few months after that, the state court distributed the net proceeds of the estate to Jason, an amount totaling $55,487.97. Jason almost immediately, and without the approval of the Chapter 13 trustee, transferred $12,372 to each of his brothers.
Upon learning of the unauthorized transfers, the Chapter 13 trustee, as a sanction, sought conversion pursuant to
to it. At the hearing on the Chapter 13 trustee‘s motion, Jason offered no justification for either the lack of disclosure or the transfers. Jason also acknowledged that he could not account for any of the money, including the funds that he had retained after transferring equal shares to his brothers. The Bankruptcy Court ordered the conversion to Chapter 7 for cause, and, when Jason moved for reconsideration, made an express finding that Jason‘s conduct had been in bad faith. The Bankruptcy Court explained that given the uncontradicted evidence of concealment by Jason, and his failure to provide an adequate explanation for his actions, there was ample support for a bad faith finding without holding an additional hearing. It concluded that the transfers were made to avoid payments to creditors.
The Bankruptcy Court then appointed Appellee Christopher Barclay as the Chapter 7 trustee. The trustee moved to recover the funds from all four brothers, including Appellant Kenneth and debtor Jason. Appellant‘s position was that the funds transferred to him were not part of the bankruptcy estate after the conversion because they were no longer in the possession or control of the debtor, as required by
The BAP majority agreed with the Bankruptcy Court‘s first rationale, holding that because the funds were not spent in good faith on ordinary living expenses, they remained part of the converted estate. Judge Spraker wrote a separate concurring opinion. In his view, a claim to avoid the transfer of funds accrued to the Chapter 13 trustee before conversion, and that claim was unaffected by
In his appeal to this court, Appellant does not dispute the finding of bad faith but contends only that funds transferred to him were no longer in the literal possession or control of his brother, the debtor Jason, at the time of conversion, and hence not recoverable as part of the Chapter 7 estate. The trustee argues, however, that the property defined by
DISCUSSION
Chapter 13 bankruptcy is a voluntary proceeding that allows a debtor to retain
In contrast, Chapter 7 allows debtors to discharge their existing debts immediately without a long-term payment plan. But in exchange, the debtor must relinquish control of and liquidate all existing assets. The Chapter 7 trustee is to sell the property of the estate,
An issue that arises is how to define the contents of the estate that is converted from Chapter 13 to Chapter 7. One option would be to apply Chapter 7‘s rule that all assets acquired after the filing of the initial petition are retained by the debtor and do not become part of the bankruptcy estate. This approach would bar creditors from obtaining assets that were acquired by the debtor after the Chapter 13 petition was filed. In essence, this approach would put the debtor where he would have been, had he filed in Chapter 7 initially. Applying Chapter 7‘s rule upon conversion would therefore allow the debtor to keep assets that were acquired after the initial voluntary Chapter 13 petition was filed.
Another approach would be to apply Chapter 13‘s rule that assets acquired after the petition is filed become part of the estate. Thus, assets acquired after the Chapter 13 petition was filed would, upon conversion to Chapter 7, become part of the converted estate. This approach would give a debtor‘s creditors, upon conversion to Chapter 7, access to all such assets. Such an approach would put the debtor in a worse position than if the petition had been filed in Chapter 7 initially.
Congress tried to resolve the issue in
Second, and of immediate concern here, Congress, in
conferred by sections
This second limitation on the property of the converted estate has given rise to problems for the bankruptcy courts, when, as here, there have been unlawful expenditures during Chapter 13. See In re Salazar, 465 B.R. 875, 878–79 (B.A.P. 9th Cir. 2010) (“Courts have struggled in applying
Salazar was the first BAP case to grapple with
ordinary living expenses, those funds should be excluded from the converted estate. Id. at 882. Other bankruptcy courts have agreed that
Conversely, courts have generally allowed creditors to recover funds where the debtor has fraudulently transferred those funds out of the Chapter 13 estate to avoid creditors without authorization. For example, in Pisculli, the debtor transferred to his wife and brother-in-law funds obtained from a truck sale that should have been used to repay the debtor‘s creditors, and did so without notifying the Chapter 13 trustee. 426 B.R. at 57. The court reasoned that, because those proceeds had not been spent on ordinary living expenses, they should be included in the converted estate. Id. at 66. The court explained that, where the debtor surreptitiously transferred funds out of the estate during Chapter 13, “the debtor should not be allowed to escape the consequence [of that action] . . . simply because the proceeding has been converted to a Chapter 7 case.” Id. at 65.
Such a result is even more compelling where, as here, conversion to Chapter 7 has been imposed as a sanction for fraudulent transfers. In such cases, courts have observed that a literal application of
disposition of property of the
While the result that fraudulently transferred funds should be recoverable by creditors as part of the converted estate under section
None of these rationales, however, directly address Appellant‘s main contention. That contention is that the definition of the post conversion estate in
control of the debtor,” does not include funds transferred out of the estate, albeit fraudulently. Although the BAP majority‘s approach, to include the fraudulent expenditures as part of the converted estate because they were not spent on ordinary living expenses, seems sensible, the statute does not say that. It provides only that funds remaining within the possession or control of the debtor are part of the converted estate. Appellant further argues that the BAP should have discussed the Supreme Court‘s decision in Law v. Siegel, 571 U.S. 415 (2014). There, the Court was considering a bankruptcy court‘s equitable powers under
Appellant further contends that Judge Spraker‘s view is incompatible with the text of
The question we must answer here is whether the statutory provision,
express provision of the
The Code reflects a firm policy of not rewarding fraud or bad-faith debtors—which it realizes in numerous provisions, including the structural relationship between Chapter 13 and Chapter 7. In both Chapter 13 and Chapter 7 proceedings, unauthorized transfers of estate property by the debtor can be recovered by the trustee. See
There is thus no basis in the structure, policy, or purpose of the Bankruptcy Code for treating the fraudulent transfers as beyond the reach of the creditors merely because the estate was converted. The only argument otherwise is that Congress used language that seemingly requires actual possession or control, despite the injustice of the result. For the reasons that follow, we disagree with that statutory interpretation.
To assist us in our interpretation of the text, we look to other situations in which courts examining statutes requiring possession have recognized that an interpretation requiring actual physical possession could lead to unfair or untoward
results. In such situations, which arise principally in criminal contexts, courts have adopted a broader interpretation of “possession.” Examples are statutes penalizing the possession of contraband and statutes penalizing laundering of money that has been in the defendant‘s possession. Courts have utilized the concept of “constructive” control or possession, whereby an individual is deemed to possess items even when the individual does not actually have immediate physical possession of the item. See, e.g., United States v. Vasquez, 654 F.3d 880, 885–86 (9th Cir. 2011).
The possession of a controlled substance is a crime under our drug laws. See, e.g.,
With respect to money laundering, the criminal statute penalizes the transfer of unlawfully obtained proceeds.
The situation in this case is parallel. The debtor Jason transferred the funds out of his actual possession to a close family member, in an effort to avoid payments to his creditors that would have otherwise been required under the Bankruptcy Code. In analogous criminal contexts, courts have consistently rejected efforts to evade the operation of the law by disguising ownership of fraudulently obtained funds or contraband. See, e.g., Henderson v. United States, 135 S. Ct. 1780, 1785 (2015) (explaining that a defendant “cannot evade the strictures of [the statute] by arranging a sham transfer that leaves him in effective control of” the contraband). We apply the same approach here.
It is undisputed that the debtor Jason was trying to avoid the operation of the Bankruptcy Code when he transferred the funds to close relatives without first notifying either the Bankruptcy Court or the Chapter 13 trustee. Had there been a dispute as to his intent, we believe that an unauthorized transfer would at least give rise to a rebuttable presumption that funds remained within the debtor‘s possession or control. In this case, however, the Bankruptcy Court found, and it has never been disputed on appeal, that the debtor transferred the funds with the fraudulent purpose of avoiding payments to creditors. The brothers may, for example, have intended to give the money back to the debtor Jason after the bankruptcy was over. We therefore hold that those funds remained within his constructive possession or control, and hence should be considered property of the converted estate under
AFFIRMED.