Bankruptcy Reopened to Add Insurance Proceeds to Estate

The bankruptcy court properly reopened the debtor’s chapter 7 case to permit the trustee to administer insurance proceeds where the debtor’s interest in the funds pre-dated his bankruptcy even though he did not actually acquire the funds until post-discharge. Wojcik v. Gold (In re Daher), No. 14-8028 (B.A.P. 6th Cir. Dec. 4, 2014).

Aurora, the holder of the note and first mortgage on the debtor’s residence, filed a foreclosure suit in accordance with state law and obtained judgment. Three months later, in March 2007, the debtor discovered damage to the home and filed a homeowner’s insurance claim. Soon thereafter, the insurance company issued a check for over $50,000 in the name of debtor, Aurora, and Wells Fargo dba America’s Servicing Co (ASC). The debtor made repairs to the residence and signed the check over to Aurora. A Sheriff’s sale to Aurora was confirmed in May, 2007. The debtor then filed a chapter 7 bankruptcy petition. In his schedules, he did not list the insurance check, which was no longer in his possession but had not been cashed. After discharge the debtor discovered that the insurance check was in the hands of the Ohio Division of Unclaimed Funds. He filed suit in state court for declaratory judgment that he had the sole claim to the funds. The state court ruled in favor of the debtor and the bankruptcy court, having reopened the case at the request of the trustee, found that the funds were property of the bankruptcy estate. [The funds were placed in debtor’s counsel’s IOLTA account and debtor’s counsel, Gold, was also a named appellant] It granted the trustee’s motion for turnover.

On appeal, the bankruptcy appellate panel began with the bankruptcy court’s broad discretion to reopen a case under section 350 for the purpose of administering an asset that the trustee was not aware of at the time of the bankruptcy. The debtor argued that the motion for turnover went beyond the scope of the purpose for reopening the case which, the debtor argued, was for the limited purpose of “permitting the Chapter 7 Trustee to represent this Bankruptcy Estate’s interest in the State Court proceedings.” The panel found that although the initial order was limited, a subsequent agreed order stated “the parties shall proceed with the appropriate pleadings before the Bankruptcy Court in order to obtain the Bankruptcy Court’s determination regarding whether the funds at issue are property of the bankruptcy estate,” and was, therefore, broad enough to permit the trustee to seek turnover of the funds. The panel went further, stating that once a case is reopened for any reason, the bankruptcy court is within its discretion to take steps to administer the case.

Turning to section 541(b)(1) the court addressed whether the funds were properly considered part of the bankruptcy estate. The debtor argued that because he had an obligation to turn over the insurance check to Aurora, the funds fell under the exception to 541(b)(1) that estate property does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” The panel was not persuaded. It found that property that may adhere to the benefit of the debtor is property of the estate under section 541(b)(1) even though it may benefit another as well. Where the debtor owned the insurance policy and the mortgage companies were simply loss payees, “[t]he Debtor’s contractual obligation to pay the proceeds of the insurance policy to the mortgage company does not negate his interest in the funds. The bankruptcy court correctly determined that the Debtor had a vested interest in the insurance proceeds starting in 2007 and going through 2010. If the Debtor had not had a vested interest in the proceeds in 2010, then the state court would not have had a basis to award him the proceeds in 2013. Accordingly, the bankruptcy court correctly found that the Debtor had an interest in the proceeds at the time the case was commenced, beyond just the power of endorsement that the Debtor claims.” The transfer of the funds to the first mortgagee benefited the debtor by reducing the amount owed on the mortgage.

Finally, the panel rejected the debtor’s argument that his interest in the proceeds post-dated his bankruptcy because he did not become entitled to the funds until the state court rendered its judgment. Where the damage, the claim against the insurance policy, and the check from the insurance company all came pre-petition, the panel found that the state court judgment did not create an interest in the debtor, but merely removed the competing interest in Aurora by virtue of the foreclosure sale.

The panel affirmed the bankruptcy court’s finding that the check was property of the estate that was properly turned over for administration by the trustee.

Daher BAP 6th opinion