Business Law

In re Cofer (Bankr. D. Idaho)

The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, analyzing a recent decision of interest:

SUMMARY

In In re Cofer, ___ B.R. ___, 2021 Bankr. LEXIS 112171 (Bankr. D. Idaho January 8, 2021) (“Cofer”), the United States Bankruptcy Court for the District of Idaho (the “Court”), overruling a motion by the Chapter 7 trustee, held that an increase in equity of a debtor’s home that occurred between the date she filed her Chapter 13 petition and the date of her post-plan confirmation conversion to Chapter 7 inured to her benefit rather than the estate’s

The case can be found here. 

FACTS

The debtor filed a Chapter 13 case in April 2019. She scheduled her home as being worth $100,250 and claimed a homestead exemption of $100,000. In light of a mortgage lien against the property, the court set her exemption at just over $32,000. In September 2013 the debtor confirmed a Chapter 13 plan that expressly revested her home in her, as provided in Bankruptcy Code (the “Code”) § 1327(b) (“§ 1327(b)”). She proved unable to make her plan payments, and the trustee moved in March 2020 to convert the case to Chapter 7; before the Court ruled on the motion, she then converted the case herself.

Evidently the home had increased significantly in value (or perhaps was undervalued to begin with?). Believing its value now to be about $140,000, the trustee therefore moved the court to find that the appreciation that occurred after the original petition date belonged to the Chapter 7 estate rather than the debtor, and therefore the Court should limit the debtor’s homestead exemption to the original $32.000. The debtor opposed the motion. Although it rejected some of the debtor’s arguments, the court ultimately ruled for her by awarding her the value of the appreciation in the property.

REASONING

The trustee argued that the property revested in the estate upon conversion. The debtor countered that she retained ownership on conversion under Code § 348(f)(1)(A) (“§ 348(f)(1)(A)”). It states that “property of the estate in [a case converted from Chapter 13 to any other Chapter] . . . 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 as of the date of the conversion.” The debtor’s theory was that the home was in her possession and under her control when the conversion occurred because the plan revested it in her. But as the Court pointed out, that view in effect re-writes the section to place only estate property as of the conversion in the converted estate, whereas the statute clearly and unambiguously says that the time to test when the property at issue was estate property is the date of the filing of the petition. The Court noted that under Code § 348(a) conversion of a case does not change the date of filing of the petition. Hence, since the home was estate property on the petition date and remained in the debtors possession and control on the conversion date, it was estate property in the Chapter 7 stage of the case. In reaching this conclusion, the Court relied on canons of statutory interpretation that forbid statutory interpretations that in effect nullify another statute (in this case that would have been § 348(f)(1)(A). In this analysis, the Court was siding with some, but not all other courts that have considered the issue.

The Court next considered an alternative attempt by the debtor to benefit from the increased value in her home. She relied on Code § 348(f)(1)(B), which broadly governs valuation of property in converted cases. It says that valuations of property in a Chapter 13 case apply only in such cases converted to Chapters 11 or 12. Hence, she maintained, the prior low valuation of her home in the Chapter 13 phase of her case no longer governed her exemption claim. The Court rejected this theory, too, once again relying on another provision of the Code. Code § 522(a)(2) says that exemptions are determined as of the petition date and, as noted above, § 348(a), the petition date in a case converted from Chapter 13 to Chapter 7, remains the date of the Chapter 13 petition.

In the end, the Court nevertheless sided with the debtor in her quest to benefit by the preconversion appreciation in the house. The debtor argued that since in Chapter 7 cases converted from Chapter 13 postpetition earnings and other acquired property belong to the debtor under § 348(f)(1)(B) (summarized above), the same should be true for postpetition appreciation in value. That section was added by an amendment that, according to Congress, was designed to clarify the fate of certain property in Chapter 13-to-Chapter 7 conversions. The point was that since a property and earnings a debtor acquires postpetiton in a Chapter 7 case belong to him, the same rule should apply when a case is converted to Chapter 7 from Chapter 13. But the problem post-amendment is that § 348(f)(1)(B) does not by its terms address appreciation.

As acknowledged by the Court, there is a split in authority on the question. The Court agreed with the cases and publications that focus on the disincentive to filing Chapter 13 rather than Chapter 7 that excluding appreciation would present, a concern because the former is considered more socially beneficial since it pays creditors more and allows the debtor to keep more of his property than a Chapter 7. If a debtor is going to risk losing all the additional value he creates in property by making payments on it postpetition in a Chapter 13 before forced or involuntary conversion to Chapter 7, he may eschew Chapter 13 in the first place and put elsewhere the postpetition earnings he can keep in a Chapter 7. These cases see “property” as used in § 348(f)(1)(B) as including the value property has; for them, there is no distinction between new property, new earnings and new value. For them, and the Court, the risk that debtors will game the system by trying Chapter 13 first, keeping their property and improving its value postpetition only to convert to Chapter 7 to protect that value, is mitigated by § 348(f)(2)’s reservation to the Court to override its effect if it finds the debtor acted in bad faith.

AUTHORS’ COMMENT

The basic arguments on both sides are credible given the language of § 348(f)(1)(B). It appears from the split in authority on this issue that Congress mishandled the amendment by not specifying the fate of increased value by payments or market appreciation. But the ability of the courts to intervene under § 348(f)(2) so that a debtor’s bad faith is not rewarded perhaps tips the balance towards affording the debtors presumptive protection of the increased value.

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson 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 Thomson Reuters.

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