Pre-petition, the debtor-defendant invented a clip which holds mesh against solar panels to prevent animals from damaging the panels. The debtor did not patent or copyright his invention. The debtor was contacted by and entered into an oral agreement with a certain company, whereby the company would manufacture, market, and sell the clip and make monthly payments to the debtor. The payments to the debtor varied based on the amount of sales generated by the clip in the preceding month, and there was no agreement between the debtor and the company as to the duration of the payments.
The debtor subsequently filed for relief under Chapter 7 of the Bankruptcy Code and listed his interest in the payments in his Schedules. At the 341 meeting, where the debtor was represented by appearance counsel, the Chapter 7 trustee questioned the debtor about the payments and requested, inter alia, that any further payments from the company be forwarded to the trustee. The debtor forwarded payments to the trustee for the two months that followed the 341 meeting. Thereafter, the debtor received his discharge.
Based on conversations with his retained counsel, the debtor believed that his bankruptcy case was “done and over” after he received his discharge. As a result, the debtor did not forward any of the eight payments he received post-discharge to the trustee, which prompted the trustee to move for turnover of the payments. The debtor was subsequently contacted by his counsel to discuss the motion for turnover, after which the debtor, again, believed that his bankruptcy case was completed. The debtor’s counsel then moved to withdraw from the case.
The following month, the trustee commenced an adversary proceeding against the company directly for turnover of the payments. Several months later, the trustee commenced an adversary proceeding against the debtor for revocation of discharge under 11 U.S.C. §§ 727(d)(2) and 727(d)(3), and turnover of the payments in the amount of about $5,000. Approximately two weeks later, the trustee settled with the company in the amount of about $5,000. The company then ceased making any further payments to the debtor. The debtor believed that because the company paid the $5,000 to the trustee, he was no longer required to pay that amount to the trustee.
The Court found in favor of the debtor on the trustee’s first claim under 11 U.S.C. § 727(d)(2) for the debtor’s failure to deliver the payments to the trustee. Citing In re Reid, No. 02-34592, 2006 WL 2475332 (Bankr. W.D. Ky. Aug. 25, 2006), aff’d, appeal dismissed sub nom. Schilling v. Reid, 372 B.R. 1 (W.D. Ky. 2007), the Court found that the debtor lacked a knowing intent to defraud because his failure to deliver property resulted from a reasonable belief that his bankruptcy case was completed. The Court noted that at two critical junctures in his bankruptcy case—the 341 meeting and the filing of the motion for turnover—the debtor was all but abandoned by his retained counsel. As a layperson, the debtor acted under the reasonable understanding that he was relieved from the obligation to provide the payments to the trustee because (i) his bankruptcy case was closed, and (ii) the trustee recovered a similar amount directly from the company.
The Court also found in favor of the debtor on the trustee’s second claim under 11 U.S.C. § 727(d)(3) for the debtor’s failure to comply with the turnover order. Citing various Tenth Circuit precedent, the Court noted that a debtor’s non-compliance with a court order must be willful or intentional for revocation of discharge. The Court found that the debtor’s non-compliance with the turnover order was neither willful nor intentional because it resulted from his reasonable belief that his bankruptcy case was completed.
The Court found in favor of the trustee on his third claim for turnover under 11 U.S.C. § 542(a). However, citing Hill v. Muniz (In re Muniz), 320 B.R. 697, 699–700 (Bankr. D. Colo. 2005), the Court limited the trustee’s recovery to the payments that the debtor had in his possession at the time that the turnover motion was filed. The Court found that the debtor only had about $1,500, not $5,000, in his possession when the turnover motion was filed and granted.