The Bankruptcy Appellate Panel in the 6th Circuit affirmed an Ohio Bankruptcy Court order requiring the debtors to turn over their tax refunds to the chapter 7 trustee. The debtors filed their chapter 7 case in March 2005 and their meeting of creditors was approximately two months later. By the time of the meeting, the debtors had not yet filed their 2004 tax returns. The trustee advised the debtors that any refunds were to be turned over to the trustee upon receipt, and the debtors signed an acknowledgment of the instruction.
The tax returns were filed in July and the debtors received approximately $4,000 in refunds. The debtors claimed that their bankruptcy attorney advised them that they could exempt approximately $1,600 of the refund, and the debtors sent their counsel a check for the difference. Debtors also provided bankruptcy statements and tax returns to their attorney. Debtors were under the belief that their attorney would forward the check to the chapter 7 trustee.
For reasons that were not clear in the record, the attorney didn’t, although he did retain approximately $717 in satisfaction of outstanding attorneys fees.
In May 2006, the trustee filed a motion for turnover of the bank statements, the tax returns and the non-exempt portion of the tax refunds. Debtors’ counsel opposed the motion, and then filed a motion to withdraw his appearance three days later. The debtors also filed a response and appeared at the hearing on their own behalf. The court allowed the motion.
Based on the bank statements (which I presume were not examined by their attorney prior to filing the case), the debtors had $1,564 in their account on the day they filed their petition. Based on the exemptions they had available under Ohio law, none of the refund was exempt. The court ordered the debtors to turn over their entire federal tax refund.
The debtors did not contest that the refund was property of the estate. Their bone of contention was with their lawyer, and their arguments were grounded in the bad advice they claimed to have received. They also claimed that since they paid the balance of the refund to their attorney, they did not have the money any longer.
As for the “it was my lawyer’s fault” argument, the court held that the debtors were obligated to take that issue up with their lawyer, and suggested that the debtors could sue their lawyer. However, the case law supports the proposition that a client is generally bound by the acts and omissions of the lawyer (which is why lawyers carry malpractice insurance). As for the “we don’t have it anymore” argument, the court found that the debtors had possession the proceeds for a period of time during the pendency of the case. “Although one may be sympathetic to the Debtor’s plight, the law provides the Debtors no valid defense to the Trustee’s Motion.” Bailey v. Suhar, 380 B.R. 486 (6th Cir. BAP 2008).
