Debtor Control of Bank Account Establishing Ownership for the Purposes of Finding Property of the Estate

Scenario: Debtor has control over a bank account. The bank account is in the name of a company and did not show Debtor had legal title to the bank account. However, Debtor was the sole shareholder of the company who did in fact have legal title, so the Debtor had control over the funds in the account.

Court history: The Fifth Circuit Court of Appeals heard the case and considered whether the trustee was required to demonstrate that the debtor had legal ownership of bank accounts in order to establish that the funds were property of the debtor related to a fraudulent-transfer action. The court agreed with the trustee and found that the funds paid from the company account were a fraudulent transfer. The court of appeals found that establishing that debtor has control over the accounts may be sufficient to show ownership of the accounts. They also stated that the determination is a face-based case-by-case inquiry.

Practical application: A Debtor cannot simply move things to or from a bank account without effect on the bankruptcy simply because Debtors name is not actually on the account. Even without legal ownership of the account, the trustee and the court can find that the property is still part of the bankruptcy estate where the property is in the control of the Debtor.

There are certain situations where a Debtor may have legal title but the trustee and court may find that the account is not property of the bankruptcy estate. An common example is whether the Debtor has an elderly parent. The parent may put the Debtors name on the account as well as the parents name so that Debtor can access account for purposes and paying parents bills. The parents may also do this for ease of transition in the even that something would happen to the parent(s). In this circumstance it is likely that the account is not considered property of the bankruptcy estate if the Debtor does not deposit or withdraw money from the account except to paying bills of the parents. Similar is where a Debtors name is on their children’s account so that Debtor can access accounts and deposit money if necessary for the support of their dependents.

The determination of property of the bankruptcy estate can be a complicated situation and should be discussed with a qualified bankruptcy attorney. Please contact us for a free consultation.