Cooperation: It’s Not Just a Good Idea, It’s the Law
By Wendell Sherk, Missouri Attorney on Jul 5, 2007 in Bankruptcy Cases of Interest, Bankruptcy Practice and Procedure, Chapter 7 Bankruptcy, Missouri
In a previous note, I discussed how a bankruptcy debtor is obligated to assist the trustee in liquidating non-exempt assets for the benefit of creditors. As I pointed out before, the court could deny or revoke your discharge if you don’t. The Tenth Circuit Bankruptcy Appellate Panel also points out another downside of failing to cooperate: They might take your other stuff instead.
In this case, the debtors owned rights in the TV show “Cheaters” and received a small portion of the income from it. Although they did properly disclose the ownership in their paperwork and to the trustee, they did not turn over the proceeds they received soon afterwards. By the time the trustee came calling asking for his money, the debtors had spent the money (about $17,000), including about $13,000 which they received after the trustee filed a motion asking the judge to order them to hand it over. And they again failed to pay back the money after ordered to do so.
In a developing trend in the bankruptcy world, the trustee sought and the court granted a motion to “surcharge” the exempt property of the debtors to recover his money, plus his costs of doing so. The 10th Circuit BAP, by a 2-1 margin, approved the surcharge as an appropriate remedy.
It appears the debtors tried but failed to assert an exemption in the “Cheaters” rights and proceeds. Unfortunately, they were precluded procedurally from pursuing that defense and the BAP declined to review that aspect of the case.
Likely to the surprise of the debtors, the BAP also concluded that surcharging the debtor’s otherwise protected property was not a form a punishment. It was simply meant to put the debtors and the bankruptcy estate in the position they would have been had the debtors not spent the estate’s money. Presumably the debtors received goods or services they needed for the money they spent and the estate would now receive the money it lost from the retirement accounts the debtors would otherwise have been able to keep.
The BAP pointed out that the punishment of denying or revoking their discharge would only have punished the debtors but still left the estate creditors “out” the money that should have gone to them — and left the trustee obligated to try to collect it somehow. Under a separate provision of the law, the trustee could have recovered at least some of this money from whoever the debtors paid it, though. This appears to not have been considered.
Implicitly the BAP seems to assume the creditors would have been permanently helpless to collect from the debtors after a discharge of the debts was denied. That seems unlikely since the debtors would have been largely wasting their time filing bankruptcy in the first place if creditors could never make them pay.
At any rate, the “take away” lesson from the “Cheaters” case is that selling the estate’s property, or spending its money, can result in losing other property you were entitled to keep otherwise — and property you may need far more in the long run. Assuming you get to stay in bankruptcy and receive a discharge. So even though in most cases no property is going to be taken by the trustee, if there’s a chance something will be — don’t touch it until you know for sure it’s OK.
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