Applying a strict statutory interpretation of § 348(f)(1)(A) of the Bankruptcy Code, the Tenth Circuit Court of Appeals (the Court) held that appreciation in the value of the debtors’ home which occurred postpetition in a case, filed as a chapter 13 but converted to chapter 7 after plan confirmation and sale of the property, accrues to the benefit of the debtors, not the chapter 7 estate. Rodriguez v. Barrera (In re Barrera), 2022 WL 163891 (10th Cir. January 19, 2022).
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Debtors Julio Barrera and Maria de La Luz Moro (Debtors) filed a chapter 13 petition in April 2016. They owned a house in Colorado valued at $396,000 on the petition date, with secured debt of about $336,000 and homestead-exempt equity of about $60,000. They confirmed a plan in June 2016 and made payments under the plan until April 2018. They decided to sell their house, then valued at $520,000, from which sale they netted about $140,000. After the sale, the Debtors converted the case to a chapter 7.
The chapter 7 trustee (Trustee) asserted that the non-exempt equity which they received from the sale was property of the chapter 7 estate. Accordingly, he moved the bankruptcy court for turnover of the assertedly nonexempt funds. The bankruptcy court, relying primarily on the legislative history behind the 1994 enactment of § 348(f)(1)(A), which sets forth what assets of a chapter 13 debtor become property of a chapter 7 estate upon conversion, denied the turnover motion. The Tenth Circuit Bankruptcy Appellate panel affirmed on similar grounds.
Trustee appealed to the Court, which affirmed based on different reasoning.
The Court stated its task precisely: “We must interpret 11 U.S.C. § 348(f)(1)(A) to determine whether the sale proceeds from the appreciation in value of a debtor’s property after filing a Chapter 13 petition but before converting the bankruptcy to Chapter 7 is property of the Chapter 7 estate or the debtor.” Unlike the lower courts, the Court ruled the statute was not ambiguous, so legislative history need not be consulted. The language itself was precise: “property 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.” (Emphasis in the opinion)
The Court then determined that the property sought by the Trustee, the proceeds from the home sale, were not the same asset as the house which existed on the petition date. Therefore, under the plain language of the statute, those proceeds did not enter the chapter 7 estate. The Court’s analysis could have ended there. However, it also noted that the automatic revesting provision of § 1327(b), which provides that the property of the estate revests in the debtor upon confirmation, also supported its conclusion. Since the appreciation occurred after the property revested, any increase in value inured to the Debtors’ benefit, not the already dissolved estate. Finally, although it found reliance on legislative history was not compelled where a statute was not ambiguous on its face, it agreed with the lower courts that the history behind the 1994 amendments to the Bankruptcy Code also supported the conclusion that postpetition, preconversion appreciation in value belonged to the Debtors.
The Court also noted that if a debtor acted in bad faith when converting a case from a chapter 13 to a chapter 7, § 348(f)(2) provides that property of the estate would consist of all property as of the date of conversion, not the petition date. This provision would prevent abuse.
The Trustee attempted to persuade the Court that this issue was settled in other jurisdictions, including citing to a series of Ninth Circuit cases. As the Court noted, none of those cases was on point. They all addressed whether, in a chapter 7, postpetition appreciation inured to the benefit of the estate, answering definitively in the affirmative. But none of them answered who gets post confirmation appreciation in a case converted from a 13 to a 7, a question which remains undecided in the Ninth Circuit and many others.
The Court’s ruling here is actually quite narrow, as it turned on the difference in the asset – house versus proceeds. It did not answer the still-open question of who gets the appreciation if the homestead increases in value, beyond any applicable exemption, but is not sold and then the case is converted. Trial courts have split on that issue. In a district where the property revests in the debtor under § 1327(b) after confirmation, a good argument can be made the appreciation belongs to the debtor. However, in districts such as my own (C.D. CA) where the confirmation order delays revesting until completion of the plan, more creative arguments must be made to support the argument that the appreciation belongs to the debtor.
This review was written by the Hon. Meredith Jury (United States 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.