Brown v. Barclay, No. 18-60029 (9th Cir. 2020)
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After debtor made unauthorized and fraudulent transfers of funds during the Chapter 13 proceeding, the bankruptcy court converted the proceedings to Chapter 7 in response, and then debtor argued that the transferred funds were no longer in the estate.
The Ninth Circuit affirmed the Bankruptcy Court and the Bankruptcy Appellate Panel's determination that the transferred funds should remain property of the Chapter 7 estate, which would mean that the Chapter 7 trustee had authority to recover them. The panel held that debtor transferred the funds with the fraudulent purpose of avoiding payments to creditors and those funds remained within his constructive possession or control. Therefore, the funds should be considered property of the converted estate under 11 U.S.C. 348(f)(1)(A).
Court Description: 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 11 U.S.C. § 348(f)(1)(A), upon conversion from Chapter 13 to Chapter 7, the converted estate consists of the assets that remain in the possession or control of the debtor at the time of conversion. Here, the debtor made unauthorized and fraudulent transfers of funds during the Chapter 13 proceeding. The panel held that, following conversion for cause to Chapter 7, upon the bankruptcy court’s finding of the debtor’s bad faith in making the transfers, the transferred funds remained property of the Chapter 7 estate, which meant that the Chapter 7 trustee had authority to recover them. Interpreting § 348 in light of the structure of the Bankruptcy Code as a whole, including its object and policy, the panel held that, because the debtor transferred the funds with the fraudulent purpose of avoiding payments to creditors, the funds remained within his constructive possession or control, and hence should be considered part of the converted estate. IN RE BROWN 3
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