Opinion
No. 904-1845-PM
February 22, 1991
Turnover-Property of the Estate — Preferences — Bank Accounts — ax Levies. — A prepetition levy placed upon money located in a debtor's bank account has the effect of extinguishing the debtor's interest in the account. The funds were held in trust for the Internal Revenue Service. Transfer of the funds could not be avoided as a preference, since there is no transfer of the debtor's interest in property. Thus, turnover of the funds to the bankruptcy estate is inappropriate. Funds held by the bank were ordered to be released to the IRS.
See Sec. 542(a) at ¶ 9513 and Sec. 547(b) at ¶ 9529.
This matter came before the court for hearing upon the complaint filed by the debtor, E. John Vito, Inc., against the First American Bank of Maryland ("First American") and the United States of America. The complaint seeks the release of funds held by First American under a Notice of Levy served upon it by the Internal Revenue Service on May 21, 1990. On June 1, 1990, this bankruptcy case under Chapter 11 was filed by the debtor. By order of the court, entered with the consent of the parties, First American was released of all further liability with respect to the complaint provided it disbursed the proceeds of the account levied to such payee as the court directs.
The two-count amended complaint seeks turnover of property to the estate under 11 U.S.C. § 542 and avoidance of the transfer as a preference under 11 U.S.C. § 547(b). For the reasons stated below, both counts fail.
First, the transferred funds were not transfers of property of the debtor but were instead transfers of property held in trust for the government pursuant to 26 U.S.C. § 7501. Such payments therefore cannot be avoided as preferences inasmuch as 11 U.S.C. § 547(b) concerns transfers of an interest of the debtor in property. Begier v. I.R.S., 110 S.Ct. 2258, 2267 (1990).
Second, while it is true that under the holding of United States v. Whiting Pools, Inc., 462 U.S. 198, 208-09 (1983), the reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization, a prepetition levy upon money in accounts, even on the eve of filing, has the effect of extinguishing the debtor's interest in the account. In re Rose, 112 B.R. 12, 14-15, (BC E.D. Tex. 1989) (citing, United States v. Eiland, 223 F.2d 118, 121-22 (4th Cir. 1955) and Cross Electric Company v. United States, 664 F.2d 1218 (4th Cir. 1981)). Therefore, turnover under 11 U.S.C. § 542(a) is inappropriate in that the funds are no longer in the category of property that the debtor could use, sell, or lease.
An order will be entered in accordance with the foregoing.