Sometimes trying to untangle pre-petition collection efforts as a result of a bankruptcy filing can be tricky.  In a recent case, the New Jersey District Court (In re Paul, Civil Case No. 12-cv-07855, Bank. Case No. 11-31653 on July 9, 2013), made those lines a little bit more clear.

A judgment was obtained by a creditor and thereafter, a writ of execution to levy on the debtor’s bank account was issued.   The Sheriff’s Office levied on funds in the debtor’s account and a hold was placed on the debtor’s funds in that account.  The creditor then filed a motion for turnover which was granted and an order entered shortly thereafter.

Prior to the Sheriff’s office executing on the bank account pursuant to the turnover order, the debtors filed a Chapter 7 bankruptcy petition. The debtors received a discharge from bankruptcy without the levied funds being considered part of the bankruptcy estate.  The bankruptcy case was then closed by final decree.

Some months after the discharge was entered, the debtors filed a motion to re-open their bankruptcy case to seek return of the funds on the basis that the actual turnover of the funds occurred post-petition and thus were property of the debtors that should have been included in the their bankruptcy estate.  The Bankruptcy Court denied the defendants motion and appeal followed by the debtors and the District Court affirmed the Bankruptcy Court’s decision.

The debtors argued that the turnover order did not transfer title to the levied funds and thus were subject to an avoidable lien on the petition date because the turnover order was not a self-executing transfer, meaning another step still must be taken to transfer the money out of the account.  They argued that the money should have been part of the bankruptcy estate

The District Court held that the entry of the turnover order divested the debtors interest in the funds, there was no lien or levy on the funds as of the petition date and therefore the debtors no longer had legal or equitable interest in the funds.