The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
In a recent opinion, the United States Bankruptcy Court for the District of Kansas (the Court) ruled that when the contingency on a chapter 13 debtor’s interest in trust property was removed post petition, the value of that interest became property of the bankruptcy estate, was subject to the best interest of creditors’ test, and therefore must be distributed to unsecured creditors by way of a modified chapter 13 plan. In re Wright, 2022 WL 17661135 (Bankr. D. Kan. Dec. 13, 2022).
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Debtor Terri Lynn Wright (debtor) and her chapter 13 trustee (trustee) stipulated to the facts which control this opinion. Debtor and her husband filed a chapter 13 petition in July 2019. Their confirmed plan provided for a very low percentage distribution to the approximately $14,000 of unsecured claims; it also provided, in its standard terms, that the property of the estate would revest in debtors upon discharge or dismissal of the case. When the case was filed, debtor was one of the beneficiaries (along with her siblings) of her parents’ trust, which had become irrevocable after both had died prepetition. The trust owned 40 acres of land in Oklahoma and had no spendthrift provisions. However, the trust granted a life estate to one her brothers, Ronnie True, who was to receive trust income and could continue to reside in a home on the property until his death. If he died with no descendants, the property would then be sold or deeded to the brothers and sisters.
Debtor did not disclose her interest in the trust in her schedules, so no valuation of that contingent interest was included in the best interest of creditors’ test required by Bankruptcy Code section 1325(a)(4) when the chapter 13 plan was confirmed. This test requires a debtor to pay as much to her unsecured creditors under a chapter 13 plan as they would receive if the estate were liquidated in a chapter 7. Ronnie True died five months after the case was filed; a portion of the 40 acres was sold and the remainder valued by the trustee of the trust, such that the estimated value of debtor’s interest was almost $50,000.
Debtor filed a motion, asking the Court to allow her to retain any distribution from the trust, the first notice of her interest in the trust. Trustee filed a counter motion to modify the plan to compel payments to unsecured creditors based on the value of debtor’s interest in the trust. The Court consolidated the motions and ruled based on the stipulated facts, denying debtor’s motion and granting the modification requested by trustee.
The Court had two issues to address in ruling on the motions. First, it had to decide whether the property of the chapter 13 estate included debtor’s contingent interest in the trust. If so, it would deny debtor’s motion and turn to trustee’s motion to modify. Then it would address the second issue: whether the value of the estate’s interest in the trust should be set on the petition date or the modification date for the purpose of the best interest of creditors’ test in the motion to modify.
Addressing whether the interest in the trust was estate property, the Court looked first to the broad definition of property of the estate in Bankruptcy Code section 541 and easily determined that debtor’s interest, which was contingent only on the life of Ronnie True, was indeed estate property, citing multiple cases which determined that contingent interests were estate property. Even though on the petition date it was unknown when the contingency would be met such that the interest could be monetized, the interest nevertheless became estate property under applicable authority. When the contingency was met by the death of the life estate beneficiary during the course of the chapter 13, it became possible for the value of the interest to be determined for the purposes of chapter 13 distribution. Since the trust had no spendthrift provisions and the value of the interest had not been considered when the plan was confirmed due to nondisclosure, the Court denied debtor’s motion since the distribution she wished to retain was undeniably property of the chapter 13 estate because under the plan terms it would not revest in her until discharge.
The Court then turned to the best interest of creditors’ test and its application to the trustee’s motion to modify the plan. It first ruled that since the contingency had been satisfied, the post petition appreciation of the estate’s property belonged to the estate, citing with favor a case from the Eighth Circuit BAP, In re Potter, 228 B.R. 422 (8th Cir. BAP 1999) where the BAP had reasoned that “[n]othing in § 541 suggest that the estate’s interest is anything less than the entire asset, including any changes in its value which might occur after the date of filing.” In following that authority, the Court rejected counter arguments that a post petition increase in value of an asset created a “new” asset which would not be included in the estate.
Once it determined the post petition increase in value was estate property, the Court then considered the wording of the best interest test in section 1325(a)(4), incorporated into motions to modify by section 1329 (b)(1): “the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.” (emphasis added). The Court, citing only its own opinion, In re Taylor, 631 B.R. 346 (Bankr. D. Kan. 2021), for authority, ruled that “[a]s applied to the proposed amended plan, the effective date of the plan is the date of the amended plan.” Having so ruled, the Court then deemed that the stipulated value of debtor’s interest, almost $50,000, became available for distribution to the unsecured creditors by the chapter 13 trustee, thereby granting the motion to modify.
Including the contingent interest in the estate is well-settled in bankruptcy law; cases abound which so rule. Therefore, I concur with the first part of the Court’s analysis. Where I see controversy is the two-fold determination that made the value available for distribution to the unsecured creditors. Case law is not settled on whether post petition appreciation in value of an assist belongs to a chapter 13 estate or a debtor, even when the property has not revested in the debtor, when the case was not converted to a chapter 7. In addition, the ruling that the effective date of a plan confirmed in 2019 is changed to the 2022 date of modification is, in my view, a strained reading of section 1325(a)(4). As I noted, the Court cited only its own case as authority for its conclusion. This remains an open question, with scant appellate authority on the issue. The Court’s summary analysis adds little to the debate.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., 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.