The following is a case update written by Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret. and former member of the 9th Cir BAP), analyzing a recent decision of interest:

The Bankruptcy Appellate Panel for the Ninth Circuit recently ruled that a chapter 13 debtor is not required to use post-confirmation proceeds from prepetition assets to pay creditors when the property revests in the debtor after confirmation.  Black v. Leavitt (In re Black), 609 B.R. 518, 2019 WL 7344909 (BAP 9th Cir. 2019). 

To view the full opinion, click here.

FACTS

Debtor Richard L. Black filed a chapter 7 case pro se, scheduling, among other assets, a rental property.  When he learned he would lose the property in the chapter 7, he converted the case to chapter 13 and scheduled the rental property with a value of $44,000 with no secured debt.  His first amended plan proposed to pay $250 per month for fifty-nine months, with a single lump sum payment of $45,000 during the final month of the plan from sale or refinance of the rental property.  Although he was a below median debtor for whom the applicable commitment period was thirty-six months, he proposed a five-year plan presumably to be able to make sufficient total payments to satisfy the best interest test which requires that unsecured creditors receive at least as much as would be distributed to them in a liquidation.  The plan also provided that “any property of the estate scheduled under § 521 shall vest in Debtor upon confirmation of this Plan.”  The court confirmed the amended plan without objection.

Three years later, debtor filed a motion to sell the property for $107,000, from which he would pay $45,000 to his unsecured creditors and retain the balance for himself.  The trustee objected to the motion, not the sale itself but rather the retention of any proceeds by the debtor, asserting the proceeds were property of the debtor that were acquired after commencement of the case and therefore were estate property under § 1306(a)(1).  The bankruptcy court approved the sale, finding that the property was estate property and ordering that $49,000 should be paid to the trustee, with the balance held pending further order of the court.

The trustee filed a motion to modify the plan under which debtor would be required to pay all disposable income to the plan for the plan term as well as turn over non-exempt property of the estate to be distributed to the unsecured creditors.  The debtor objected to the motion on multiple grounds.  After a hearing, the bankruptcy court granted the motion, ordering the debtor to turn over the additional sale proceeds to the trustee as “nonexempt property of the bankruptcy estate under 11 U.S.C. § 541(a).”

The debtor filed a timely appeal with the BAP, which reversed the confirmation order.

REASONING

The trustee asserted two primary reasons that debtor must pay to the plan the  proceeds from the sale that exceeded the $45,000 due to the creditors under the terms of the confirmed plans:  (1) in response to the debtor’s motion to sell, she argued that the proceeds were property of the chapter 13 estate as “property that the debtor acquires after commencement of the case but before the case is closed, dismissed, or converted” under § 1306(a)(1); and (2) in support of her motion to modify, she argued that the modified plan would require the debtor to “pay all disposable income to the Plan for the plan term as well as turn over non-exempt property of the estate.”  The bankruptcy court made no ruling on the disposable income issue but ordered the debtor to turn over the excess proceeds as non-exempt property of the estate.  The BAP considered both the disposable income and the property of the estate arguments and rejected the merit of both.

Relying on its own precedent, as it must, the BAP summarily rejected that the proceeds were disposable income, following McDonald v Burgie (In re Burgie), 239 B.R. 406 (9th Cir. BAP 1999).  That case was directly on point.  Although a debtor could voluntarily use proceeds from prepetition property to make plan payments, he could not be compelled to use them to pay creditors under a confirmed plan.

It next addressed the property of the estate claim and just as summarily rejected it, expanding on the precedent set by Burgie.  Under the plan provisions and allowed by § 1322(b)(9), the property of the estate revested in the debtor upon confirmation.  Although recognizing a split in authority on the point, in the BAP’s view the revesting provision of the plan meant that the debtor owned the property outright and was entitled to any postpetition appreciation.  As a result, he need not pay over the excess proceeds since the confirmed plan did not anticipate such payment.  He need only perform on the promise he made in the plan, which he had done by paying over the $49,000.

AUTHOR’S COMMENT

As noted by the BAP, its decision creates a circuit split with the First Circuit’s Barbosa v. Solomon, 235 F. 3d 31 (1st Cir. 2000).  If the BAP’s reasoning is adopted by the Ninth Circuit, perhaps the Supreme Court will grant a petition for certiorari to resolve the issue.  As it stands, this is good news for chapter 13 debtors who own non-exempt real property when they file and choose to sell it before plan completion – or, as here, to facilitate plan completion.  To the extent the property value appreciated in a district where estate property revests in the debtor upon confirmation, the debtor gets to keep that added value.  I would not be surprised if chapter 13 trustees in the Ninth Circuit start anticipating the possibility of that occurring and start insisting on plan provisions which allow the plan to recapture any excess proceeds.  It will then be up to the bankruptcy judges to decide whether to require that recapture before confirming the plan.

Of particular note, however, is that for this holding to apply, the estate property must revest in the debtor upon confirmation.  Although not discussed by the BAP, § 1327(c) makes revesting of estate property in the debtor an automatic result of plan confirmation, unless the plan provides otherwise.  For districts whose mandatory plans do provide otherwise, such as the Central District of California whose plan delays revesting until plan completion, it follows that debtors will be required to pay over excess proceeds because the appreciation of estate property is estate property.  The underpinnings of the BAP’s reasoning will be inapplicable.

For those who want a quick synopsis of the precedent which the BAP must follow, I recommend reading Footnote 6.  For the past several years, the BAP has had an ability to sit en banc under 9th Cir. BAP R. 8024-1(c)(1) if someone wishes to challenge its precedent.

These materials were written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret. and former member of the 9^th Cir BAP) with editorial contributions by Monique Jewett-Brewster of Hopkins & Carley, a Law Corporation, Immediate Past Chair of the CLA Business Law Section, and also a member of the ad hoc group.  Thomas Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomas Reuters.