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Stalnaker v. Allison, et al. – Determining Bankruptcy Property

Blogs from March, 2014

Legal Balance

Sometimes in bankruptcy filings‚ there will be disputes between the debtor and the trustee regarding what property should be included as part of the bankruptcy estate.

In a Chapter 7 Woodland Hills bankruptcy case‚ property that is part of the estate is subject to seizure and sale by the trustee in order to satisfy creditors. Property that isn’t part of the bankruptcy estate belongs solely to the debtor and is not subject to seizure or sale by the trustee.

When it comes to the legal maneuvering necessary to keep certain property out of the bankruptcy estate‚ there are no guarantees‚ but an experienced attorney is critical.

The recent case of Stalnaker v. Allison‚ et al.‚ reviewed by the U.S. Bankruptcy Appellate Panel for the Eighth Circuit‚ centered on this very issue.

This case involved a business that initially filed for Chapter 11 bankruptcy protection. What later became an issue was the transfer of $2 million in investor funding to two entities – about $800‚000 to the company in Chapter 11 and another $1.2 million to one of that company’s vendors.

The following year‚ the Chapter 11 case was converted to a Chapter 7 and a trustee was appointed. The company that had originally given this money filed a request for payment with the trustee. The $800‚000 was paid back to the company‚ but the issue in question became what should become of the remaining $1.2 million.

The trustee claimed it was property of the bankruptcy estate. However‚ company administrators countered it was not part of the estate because it was being held in a trust‚ so it was not property of the estate.

The matter was tried‚ and in February 2013‚ the bankruptcy court entered an order stating that the funds were not property of the state‚ that the estate was entitled to be reimbursed for legal expenses it incurred in litigating the matter and further outlined a procedure for those fees to be reimbursed.

It was later determined that this reimbursement should amount to about $62‚000. Post-trial briefs were filed‚ but the bankruptcy court did not respond to these. Several appeals were filed. The trustee asserted the fees should never have been awarded‚ while the debtors argued the order for fees wasn’t sufficient.

The bankruptcy appellate court said that while it could take the lower court’s silence as an implicit rejection of these claims‚ it believed the better alternative was to remand the case back to the bankruptcy court and have it explain the reasons for accepting or rejecting them. From there‚ if parties chose to appeal‚ they could do so.

Thus‚ the appellate court determined the matter was premature for it to consider.

This case‚ being that it involved a business‚ vendors and investors‚ was more complicated than most. Still‚ that doesn’t mean complications can’t arise when parsing out what is part of the bankruptcy estate and what isn’t.

Holding Cash

Some examples of what is generally included in your bankruptcy estate:

  • Property you own and possess at the time you file – even if you owe money on it.
  • Property you own‚ but don’t possess when you file.
  • Property you are entitled to receive.
  • Community property.
  • Marital property.
  • Revenue generated by other property in your bankruptcy estate.
  • Property that is fraudulently transferred prior to your filing.

If you are hesitant to file for bankruptcy for fear that you may lose your property‚ you can discuss these concerns with an experienced bankruptcy attorney.

If you are contemplating bankruptcy in Woodland Hills‚ contact Cal West Law to schedule your free consultation. Call (818) 446-1334.

Additional Resources:
Stalnaker v. Allison‚ et al.‚ Feb. 5‚ 2014‚ U.S. Bankruptcy Appellate Panel for the Eighth Circuit

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