James R. Fregeau v. Peter N. Metrou, Trustee

Filing 13

MEMORANDUM Opinion and Order signed by the Honorable Edmond E. Chang. For the reasons stated in the Opinion, the bankruptcy court's order directing turnover and judgment are affirmed. Status hearing of 06/30/2015 is vacated. Civil case terminated. Emailed notice(slb, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
IN RE FREGEAU,
Debtor.

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15 C 01687
Judge Edmond E. Chang

MEMORANDUM OPINION & ORDER
Debtor James Fregeau appeals the bankruptcy court’s order granting the
Chapter 7 trustee’s motion for turnover of a cashier’s check for $141,000.1 For the
reasons discussed below, the bankruptcy court’s order is affirmed.
I. Background
On September 20, 2013, James Fregeau filed a voluntary petition for
bankruptcy under Chapter 13. Dkt. 1, Voluntary Petition.2 In his bankruptcy
schedules, Fregeau listed a trading account at ABN AMRO with an approximate
value of $40,000, but he noted that the “[e]xact value [was] difficult to ascertain [sic]
because some trades are pending.” Dkt. 10, Schedule B at 2. It turned out that at
the time the petition was filed, the value of the trading account was actually
$141,000. Dkt. 31, Motion to Vacate Turnover at 2. At some point after he filed his
bankruptcy schedules, Fregeau withdrew all of the funds from the trading account.
Id.

1The

Court exercises subject-matter jurisdiction under 28 U.S.C. § 158(a)(1).
ease of reference, for documents first filed during the bankruptcy case, the
Court cites to the bankruptcy court’s docket entry number (“Dkt. [number]”) from In re
Fregeau, No. 13-38642 (Bankr. N.D. Ill.), followed by a description of the document in
question. Citations to this Court’s docket are noted as “R. [docket entry number].”
2For

At the November 13, 2013 meeting of the creditors, Fregeau told the Chapter
13 trustees and his creditors the actual value of the trading account. Dkt. 23, Ch. 13
Mot. Turnover ¶¶ 3-4. Fregeau also told them that he had a cashier’s check for the
full amount. Id. Not surprisingly, the Chapter 13 trustee told him to hold onto the
check until the Chapter 13 plan could be amended. Id. ¶ 5. The next day, the
Chapter 13 trustee sent Fregeau a letter asking him to turn over the cashier’s check
by November 15. Dkt. 23-1, Nov. 14, 2013 Letter; Ch. 13 Mot. Turnover ¶ 6. When
Fregeau failed to do so, one of his creditors moved for turnover of the funds. Ch. 13
Mot. Turnover ¶ 7 and Prayer for Relief. The day before the bankruptcy court was
set to hear the motion, Fregeau’s attorney moved to withdraw from the case.
Dkt. 24, Mot. Withdraw. The bankruptcy court granted the motion to withdraw, and
Fregeau was unrepresented at the turnover hearing. Dkt. 27, Order Granting Mot.
Withdraw; R. 11, Appellant’s Br. at 2. After the hearing, the bankruptcy court
granted the motion to turn over the trading-account funds (now in the form of the
cashier’s check) to the Chapter 13 trustee. Dkt. 26, Order Granting Ch. 13 Mot.
Turnover.
Shortly after the bankruptcy court’s decision, Fregeau hired new counsel,
who immediately moved to vacate the turnover order. Appellant’s Br. at 2. In the
motion to vacate, Fregeau claimed (apparently for the first time) that he could not
turn over the $141,000 cashier’s check because, sometime between the November
13, 2013 creditors’ meeting and the November 22, 2013 turnover order, he had
“negotiated it and … used the funds to attempt to win additional monies at a Las

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Vegas casino.” Mot. Vacate Turnover ¶ 11; Dkt. 97, Debtor’s Resp. Chap. 7 Mot.
Turnover at 1 (conceding that he had the cashier’s check at the November 13, 2013
meeting). The bankruptcy court denied Fregeau’s motion to vacate the turnover
order. Dkt. 41, Order on Mot. Vacate Turnover.
Instead of making an attempt to enforce the order for turnover at that time,
the Chapter 13 trustee moved to convert Fregeau’s case into a proceeding under
Chapter 7. Dkt. 36, Mot. Convert. The bankruptcy court ordered the conversion and
appointed Appellee Peter Metrou as trustee for the Chapter 7 estate. Dkt. 50, Order
Granting Mot. Convert; R. 12, Appellee’s Resp. Br. at 3. After the conversion,
Fregeau filed amended schedules and financial statements. In his amended
schedules, he listed the full value of the ABN AMRO trading account as $141,000.
Dkt. 59, Am. Schedule B at 1. In his statement of financial affairs, Fregeau also
listed “[v]arious trading losses and gambling losses” from 2012 and 2013 whose
“[v]alue [was] not yet determined.” Dkt. 61, Am. Stmt. Fin. Affairs at 4.
In December 2014, the Chapter 7 trustee moved for turnover of the $141,000
cashier’s check. Dkt. 89, Chap. 7 Mot. Turnover. Fregeau again responded that he
could not turn over the check because he had already negotiated it and gambled
away the proceeds. Debtor’s Resp. Chap. 7 Mot. Turnover at 2-3. The bankruptcy
court was not convinced. In the hearing on the motion for turnover, the court found
that Fregeau’s “bald statement” that he did not have the money was not credible in
light of his amended schedules and financial statements. Dkt. 111, Hrg. Tr. at 4:213. The court concluded, therefore, that “the subject funds [were] still property of

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the estate and, therefore, subject to turnover.” Id. It granted the trustee’s motion for
turnover and entered judgment against Fregeau and in favor of the trustee “in the
amount of $141,000.” Dkt. 103, Order Directing Turnover and Judgment. Fregeau
timely appealed from the bankruptcy court’s order. R. 1, Notice of Appeal.
II. Standard of Review
A federal district court has jurisdiction, under 28 U.S.C. § 158(a), to hear
appeals from the rulings of a bankruptcy court. On appeal, the district court reviews
the factual findings of the bankruptcy court under the clearly erroneous standard
and reviews the bankruptcy court’s legal findings de novo. Wiese v. Cmty. Bank of
Cent. Wis., 552 F.3d 584, 588 (7th Cir.2009). The bankruptcy court’s finding that
Fregeau was in possession of the cashier’s check is a finding of fact reviewed for
clear error. Under that standard, an appellate court will not reverse simply because
it would have decided the case differently; instead, a reviewing court must ask
whether, considering all of the evidence, “it is left with the definite and firm
conviction that a mistake has been committed.” Easley v. Cromartie, 532 U.S. 234,
242 (2001) (internal quotation marks and citation omitted).
III. Analysis
Ordinarily, the property of a bankruptcy estate is fixed as of the date the
initial petition was filed. See 11 U.S.C. § 541; In re Meyers, 616 F.3d 626, 628 (7th
Cir. 2010) (stating that under § 541, “the time of the petition (the ‘commencement of
the case[ ]’) is the key point for identifying the assets of the estate”) (internal
citations omitted). This is the “fresh start” of bankruptcy; the assets of the estate as

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of the filing date are used to pay the debtor’s creditors, and the debtor emerges from
bankruptcy with the debts discharged. Matter of Paeplow, 972 F.2d 730, 733 (7th
Cir. 1992). Petitions under Chapter 13, however, are focused on voluntary debt
repayment rather than liquidation. In re Schaitz, 913 F.2d 452, 453 (7th Cir. 1990).
Chapter 13 allows a debtor with regular income to establish a plan in order to pay
off his debts over time. Id.; 11 U.S.C. § 109(e) (requiring Chapter 13 debtors to have
“regular income”). To that end, the bankruptcy estate in a case under Chapter 13
includes property of the debtor acquired after the filing of his petition.3 11 U.S.C.
§ 1306(a) (including in the estate “all property of the kind specified in [§ 541] that
the debtor acquires after the commencement of the case but before the case is
closed, dismissed, or converted”); In re Willett, 544 F.3d 787, 791 (7th Cir. 2008).
Because the Chapter 13 estate includes property acquired post-petition, it is
often larger than a Chapter 7 estate would be. 3-348 COLLIER

ON

BANKRUPTCY

¶ 348.02. This expansion of the Chapter 13 estate once created problems for debtors
whose cases under Chapter 13 were later converted to cases under Chapter 7. See,
e.g., In re Michael, 699 F.3d 305, 314-16 (3d Cir. 2012). Conversion of a bankruptcy
case from one chapter to another “does not effect a change in the date of the filing of
the petition,” 11 U.S.C. § 348(a), so it was unclear to courts whether post-petition
property (which was included in the estate under Chapter 13) would remain part of
the estate when the case was converted to Chapter 7 (for which the estate property
is fixed as of the petition date), see In re Stamm, 222 F.3d 216, 217 (5th Cir. 2000)
3The

Chapter 13 debtor also retains possession of the estate property before a plan is
confirmed. 11 U.S.C. § 1306(b).

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(“[T]he issue of whether post-petition Chapter 13 income remains property of the
estate on conversion to Chapter 7 was confusing and had created a circuit split.”).
To address this issue, Congress added § 348(f)(1) to the bankruptcy code,
which excludes property acquired post-petition property from the estate when a
case is converted from Chapter 13 to another chapter: “[P]roperty of the estate in
the converted case shall consist of property of the estate, as of the date of filing of
the petition, that remains in the possession of or is under the control of the debtor
on the date of conversion.” 11 U.S.C. § 348(f)(1)(A); see also H.R. REP. 103-835, at 57
(1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3366 (addressing the split among
courts and noting concern about a “disincentive to chapter 13 filings”). Under this
section, the estate of the converted case is “determined by the debtor’s interest at
the time the Chapter 13 case was filed, not when it was converted,” just as if the
debtor had originally filed a petition under Chapter 7. Google, Inc. v. Central Mfg.
Inc., 316 F. App’x 491, 495 (7th Cir. 2008). Property that was acquired after the
petition was filed is generally returned to the debtor upon conversion to Chapter 7.
In re Stamm, 222 F.3d at 217-18.
Although § 348(f)(1) is typically analyzed in the context of property acquired
after the petition is filed, the issue in this case is not post-petition gains, but postpetition losses. Section 348(f)(1) defines the estate of a converted case as “property
of the estate, as of the date of filing of the petition, that remains in the possession of
or is under the control of the debtor on the date of conversion.” See 11 U.S.C.
§ 348(f)(1)(A) (emphasis added). Based on this language, property that was part of

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the debtor’s estate on the petition date does not become part of the converted estate
if it is no longer in the debtor’s possession or control when the case is converted (at
least inasmuch as the dissipated property was lawfully used to pay for ordinary
living or business expenses).4 See, e.g., In re Michael, 699 F.3d at 313 n.5 (noting
that “[n]ot all property will meet th[e] requirement [of § 348(f)(1)]. For example, a
debtor whose title to particular property is terminated by a divorce decree while his
Chapter 13 case is pending no longer has control of the property when the case is
converted to Chapter 7”) (citing Yoon v. Krick, 373 B.R. 593, 608 (Bankr. N.D. Ind.
2007)); In re LaFlamme, 397 B.R. 194, 205-06 (Bankr. D.N.H. 2008) (“Property of
the Debtor’s converted chapter 7 estate will … consist of the property in the chapter
13 estate on the Petition Date under § 541(a) less those amounts lawfully removed
by the Debtor in good faith to pay ordinary and necessary living expenses during
the period from the Petition Date to the Conversion Date.”) Here, the parties agree
that the $141,000 in the trading account was Fregeau’s property on the date he filed
the petition. See Appellant’s Br. at 1; Appellee’s Resp. Br. at 2. The question is

4There

is some disagreement as to whether, assuming that Fregeau did gamble
away the $141,000 prior to the second motion for turnover, the funds would be excluded
from the estate under § 341(f)(1)(A). The trustee argues that allowing a debtor to
wrongfully dissipate estate property and then avoid consequences when the case is
converted would essentially provide a safe harbor for wrongdoing. See Appellee’s Resp. Br.
at 10-12. Such a rule, the trustee argues, would produce absurd results at odds with
Congress’s intention in amending the bankruptcy code. See id. The trustee’s view finds
support in some courts. See Pagano v. Pergament, 2012 WL 1828854, at *4-5 (E.D.N.Y. May
16, 2012); In re Fobber, 256 B.R. 268, 279 (Bankr. E.D. Tenn. 2000); In re Pisculli, 426 B.R.
52, 63 (E.D.N.Y. 2010), aff’d 408 F. App’x 477 (2d Cir. 2011)). But because the Court affirms
the bankruptcy court’s factual finding that Fregeau was in possession of the funds at the
time the case was converted, it is not necessary to reach this question.

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whether those funds “remain[ed] in the possession of or [ ] under the control of
[Fregeau] on the date of conversion,” and thus became part of the Chapter 7 estate.
The bankruptcy court found that the funds were still in Fregeau’s possession
at the time of conversion. In a hearing on the record, the bankruptcy court
explained its reasoning for finding that Fregeau was still in possession of the funds.
According to the court, the only support for Fregeau’s claim that he gambled the
$141,000 away was his own “bald statement.” Hrg. Tr. at 3:25-4:9. This statement
appeared only in Fregeau’s pleadings, and was unsupported by any other evidence.
Id. On the other hand, Fregeau’s own amended schedules and financial statements
contradicted his claim that he had gambled the money away. Id. In the amended
financial statement, Fregeau had the opportunity to include the supposed gambling
losses, and he did not. Id. (“The debtor’s own sworn schedules did not support his
claim that he lost the money gambling.”). The bankruptcy court found that, based
on this evidence, the trading-account funds were in Fregeau’s possession and thus
part of the estate (and subject to turnover). Id.
Looking at the “entire evidence,” this Court is not “left with the definite and
firm conviction that a mistake has been committed.” Easley, 532 U.S. at 242
(internal quotation marks and citation omitted). On November 13, 2013, Fregeau
testified under oath at the meeting of the creditors that he had the cashier’s check
in his possession. Appellant’s Br. at 1; see also Fed. R. Bankr. P. 2003 (stating that
the debtor will be examined under oath at the meeting of the creditors held under
11 U.S.C. § 341). By November 22, 2013, a little more than a week later, he claims

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that he had gambled all of it away in Las Vegas. Mot. Vacate Turnover ¶ 11.
Although Fregeau has repeatedly said (through his attorney in pleadings) that he
gambled away the proceeds in that week, there is no record evidence supporting his
statements. There is of course nothing wrong with offering evidence that is “selfserving”; much evidence offered by a party is of that type. But Fregeau did not even
offer a sworn declaration to support the in-pleadings assertion, nor did he offer to
testify under oath and under cross-examination an evidentiary hearing. And, here,
when given the opportunity to report the purported gambling losses to the
bankruptcy court through his amended schedules, Fregeau did not do so. Instead,
he listed vague, unspecified gambling losses. Although Fregeau did imply that he
had some gambling losses in his amended schedules, it is entirely reasonable to
infer that his failure to specifically list substantial gambling losses (of funds that
were already subject to turnover prior to conversion) in his sworn schedules
undermines Fregeau’s “bald statement” that he no longer had the funds. The
bankruptcy court’s determination that Fregeau was still in possession of the check
at the time of the second motion for turnover is supported by the evidence in the
record, and there is no basis on which to conclude that it was clearly erroneous.
Fregeau makes a related argument that the funds cannot be the subject of an
order for turnover because an order to turnover funds that he does not have would
be a “legal nullity.” Appellant’s Br. at 9. This argument also attacks the bankruptcy
court’s factual finding that Fregeau had not gambled away the funds. The
bankruptcy court considered Fregeau’s argument that “his dissipation [of the funds]

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makes it impossible for him to comply with any order requiring turnover,” and
rejected it based on the same factual findings. Hrg. Tr. at 3:18-4:13 (discrediting
Fregeau’s “bald statement” that he gambled away the funds and concluding that the
funds were “subject to turnover”). As discussed above, these findings are not clearly
erroneous. So Fregeau’s argument that the turnover order could not be entered
because he did not have the property fails.5
In sum, the bankruptcy court’s finding that Fregeau was in possession of the
$141,000 on the conversion date and at the time for turnover are not clearly
erroneous. The trading-account funds are therefore part of the converted Chapter 7
estate under § 348(f)(1) and are subject to turnover. The bankruptcy court’s order
directing turnover and entering judgment against Fregeau and in favor of the
trustee “in the amount of $141,000” is affirmed.6

5And

in any event, the bankruptcy court also entered a judgment against Fregeau
and in favor of the trustee for the value of the trading account funds. See Order Directing
Turnover and Judgment.
6In his response brief, the trustee asks this Court to, “as a practical matter, …
uphold the Bankruptcy Court’s judgment directing turnover of the Proceeds and entering
judgment in favor of the Trustee and against the Debtor for the cash value of the Proceeds.”
Appellee’s Resp. Br. at 14 (emphasis in original). The use of the phrase “as a practical
matter” and the emphasis on both forms of relief make Appellee’s final request somewhat
unclear. The bankruptcy court’s order appears to have both granted the motion for turnover
of the funds and entered a judgment against Fregeau and in favor of the trustee “in the
amount of $141,000.” Order Directing Turnover and Judgment; see also Hrg. Tr. at 4:22-25
(“The trustee’s motion for turnover is granted, and judgment will be entered in favor of the
trustee and against the debtor in the amount of $141,000.”). If the trustee is simply asking
this Court to affirm the entirety of the bankruptcy court’s order, that request is granted..
But, to the extent the trustee is asking the Court to enlarge his rights under the
bankruptcy court’s order, the request is denied. Without a cross-appeal by the trustee, this
Court can only affirm the judgment of the court below. See Ill. School Dist. Agency v. Pac.
Ins. Co., 571 F.3d 611 (7th Cir. 2009) (“The appellee may not, in the absence of a crossappeal, attack the decree with a view either to enlarging his own rights thereunder or of
lessening the rights of his adversary.”).

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IV. Conclusion
For the reasons stated above, the bankruptcy court’s order for turnover of the
assets [Dkt. 103] is affirmed.
ENTERED:

s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge

DATE: June 26, 2015

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