A debtor or a trustee may not use a turnover motion under Section 542(b) to compel a judgment debtor to satisfy the judgment, according to Bankruptcy Judge David M. Warren of Wilmington, N.C. In other words, the threat of contempt of a turnover order cannot be used to collect a judgment.
The chapter 11 debtor sued in bankruptcy court and obtained a $78,000 judgment by default. The clerk issued a writ of execution, directing the U.S. marshal to levy on the judgment debtor’s property.
The U.S. marshal seized a bank account in the judgment debtor’s name, but the account was empty. Next, the debtor filed a motion under Section 542(b) intending for Judge Warren to issue a turnover order directing the judgment debtor to turn over assets and property in satisfaction of the judgment. Presumably, failure to satisfy the judgment in compliance with the turnover would result in a finding of contempt.
Judge Warren declined the invitation in an opinion on December 8.
Section 542(b) says that “an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee . . . .” The section means that someone may pay a matured debt to “the trustee without the necessity of a court order,” Judge Warren said.
To qualify under Section 542(b), the sought-after property must be estate property, Judge Warren said. At the present time, the debtor’s property was the judgment, not any property in the possession of the judgment creditor. A turnover proceeding is not “a substitute for collecting on a judgment through normal execution proceedings,” he said.
More specifically, Judge Warren said he would “not enter a turnover order that will bypass standard execution procedures on the Default Judgment.”
Because the debtor already held a judgment, Judge Warren said that the debtor should not file another adversary proceeding to compel payment of the judgment. Another lawsuit would only culminate in entry of another money judgment. “If the Debtor desires the court to provide supplemental aid in execution of the Default Judgment,” he said, the debtor should file a “motion . . . within the Avoidance AP and not the Debtor’s bankruptcy case.”
If an order for execution is returned unsatisfied, Judge Warren said that the debtor then “may file a motion in the Avoidance AP for the court to utilize [state law on supplemental proceedings] to order that available property held by [the debtor] or another third party be surrendered or sold to satisfy the Default Judgment.”
Judge Warren denied the turnover motion.
A debtor or a trustee may not use a turnover motion under Section 542(b) to compel a judgment debtor to satisfy the judgment, according to Bankruptcy Judge David M. Warren of Wilmington, N.C. In other words, the threat of contempt of a turnover order cannot be used to collect a judgment.
The chapter 11 debtor sued in bankruptcy court and obtained a $78,000 judgment by default. The clerk issued a writ of execution, directing the U.S. marshal to levy on the judgment debtor’s property.
The U.S. marshal seized a bank account in the judgment debtor’s name, but the account was empty. Next, the debtor filed a motion under Section 542(b) intending for Judge Warren to issue a turnover order directing the judgment debtor to turn over assets and property in satisfaction of the judgment. Presumably, failure to satisfy the judgment in compliance with the turnover would result in a finding of contempt.