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CONVERTING A BANKRUPTCY CASE
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
CONVERTING FROM A CHAPTER 13 TO A CHAPTER 7
Funds held by the chapter 13 trustee are the post-petition property of the debtor. Therefore, will be returned to the debtor. Unless, the funds were derived from pre-petition assets or pre-petition tax refunds. In that case those funds will be surrender to the chapter 7 trustee. Section 348(f)
Harris v. Viegelahn, 135 SCt 1892, 14-400, The Supreme Court (on May 18, 2015) held that a debtor who converts to a chapter 7 is entitled to return of any post-petition wages not yet distributed by the chapter 13 trustee. In this 9-0 decision, the court ruled that the moment the Chapter 13 plan is terminated, the deal is immediately off with the Trustee and creditors and all money not paid out is due back to the debtor right away.
In re Hayden, 4:15-bk-12619-BMW (Az BK Court, 6/25/18) This Court finds the reasoning in Brandon persuasive, and therefore concludes that the decision in the Harris case does not preclude this Court from approving the payment of allowed administrative expenses, including attorneys’ fees, from funds held by the Chapter 13 trustee in a case converted to Chapter 7 prior to plan confirmation.
In re Hodges, No. 13-361 (E.D. Tenn. Sept. 29, 2014) Equity created by payments into a chapter 13 plan belongs to the debtor upon conversion to chapter 7. Hodges involved a tug-of-war between the debtor and the trustee over equity in the debtor’s residence that was created by the debtor’s payments into his chapter 13 plan prior to conversion. The district court affirmed the bankruptcy court’s order that the equity belonged to the debtor and that the trustee must abandon the property.
The Third Circuit in In re Michael, 2012 U.S. App. LEXIS 22244 (3d Cir. Oct. 26, 2012), ruled for the debtor on the issue of whether the chapter 13 trustee had to turn over to the debtor funds that the trustee was holding when the debtor converted from chapter 13 to chapter 7 after confirmation of the plan. Rejecting the trustee’s position, which was supported by an amicus brief filed by all the chapter 13 trustees in the circuit, the court held that the trustee could not distribute the funds to creditors. The court reasoned that the conversion ended the chapter 13 trustee’s services and vacated the order confirming the plan. It also found that the legislative history of section 348(f) supported the conclusion that Congress did not intend for the debtor to have the disincentive to filing chapter 13 that would be caused by the risk that filing a chapter 13 case could cause the loss of postpetition property if the debtor later had to convert to chapter 7.
In re Salazar, No. 08-11597-JMM, BAP No. AZ-11-1551-DJuPa Because the Salazars had spent the prepetition tax refund in good faith to pay ordinary and necessary living expenses during the period from the petition date to the conversion date from 13 to chapter 7, the plain meaning of the language used in § 348(f)(1)(A) excluded the Prepetition Refund from property of the chapter 7 estate. We AFFIRM the bankruptcy court’s order denying the Trustee’s motion to compel turnover of the Prepetition Refund. See also Bogdanov v. Laflamme (In re Laflamme), 397 B.R. 194 (Bankr. D.N.H. 2008.
Full present value of the real property, including any appreciation between the Chapter 13 petition date and date of conversion, is property of the Chapter 7 bankruptcy estate. This is a confirmed chapter 13.
In re Castleman, US District Court, W.D. WA, 7/1/22 District court affirms: This appeal arises from the bankruptcy court’s June 4, 2021 memorandum decision and order that, upon conversion from Chapter 13 to Chapter 7, the Chapter 7 estate includes the post-petition, pre-conversion increase in equity in the Debtors’ house. Dkt. #1 at 14. Having considered the briefs of the Debtors and the Trustee, the applicable law, and the file herein, the Court affirms the bankruptcy court’s decision.
In re Castleman, 19-12235 (Bankr. W.D. WA, June 7, 2021) The issue before me is whether the debtor or the Chapter 7 bankruptcy estate receives the benefit of appreciation in property value for the period between filing of a Chapter 13 case and conversion of that case to Chapter 7. Choosing between conflicting judicial approaches, I determine that the Chapter 7 estate receives the benefit as appreciation is not a distinct and separate asset under the Bankruptcy Code and nothing in the statute fixes the value of estate assets at the date of petition. I conclude that the full present value of the real property, including any appreciation between the Chapter 13 petition date and date of conversion, is property of the Chapter 7 bankruptcy estate.
Chapter 13 appreciation in real property value (after confirmation of plan) belongs to Debtor.
In re Black, BAP NV 18-1352-FBH, BK 2:14-bk-12402-ABL (11/21/19) Debtor Richard L. Black obtained confirmation of a chapter 13 plan that required him to pay $45,000 to his creditors when he sold or refinanced his rental property. About three years later, he sold the property for $107,000. He proposed to pay $45,000 to his creditors and to retain the excess sale proceeds for himself. Chapter 13 trustee Kathleen A. Leavitt (“Trustee”) moved to modify Mr. Black’s confirmed plan to require him to pay the excess sale proceeds to his unsecured creditors. The bankruptcy court approved the modified plan.
Mr. Black appeals, arguing that he was not required to commit the excess proceeds to his plan payments. He also argues that the Trustee’s motion was untimely and that the modified plan did not meet the statutory requirements for plan confirmation.
We hold that the Trustee’s modified plan was timely and complied with the applicable statutes. But we agree with Mr. Black that he was entitled to retain the excess sale proceeds. Accordingly, we REVERSE.
In our view, the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation. When the bankruptcy court confirmed Mr. Black’s plan, the Property revested in Mr. Black. See In re Jones, 420 B.R. at 515. As such, it was no longer property of the estate, so the appreciation did not accrue from estate property. Cf. Schwaber v. Reed (In re Reed), 940 F.2d 1317, 1323 (9th Cir. 1991) (“No doubt Debtor’s argument that appreciation enured to him would have merit if his entire interest in the residence had been set aside or abandoned to him; it was not.”
In re Lynch, 363 B.R. 101 (B.A.P. 9th Cir., 2007). held that appreciation in value of property during ch 13 does not belong to ch 7 trustee upon conversion unless conversion in bad faith. The value is determined as of the filing date of the 13. However, Lynch disagreed with Niles regarding whether the 7 trustee is bound by the debtor’s values in the 13 schedules. Lynch holds the 7 trustee can have a hearing to determine the value as of the filing of the ch 13. See also In re NILES, 342 B.R. 72 (D.AZ March 28, 2006.) The Court concludes that the funds in excess of the exemption amount received as a result of the postconfirmation, preconversion sale of Debtor’s home are not subject to turnover to the Trustee.
See also: In re Cofer, (1/8/21, D. Idaho) Decided that appreciation of homestead is not part of chapter 7 when filed as a 13.
In re Barrera 12/20/19, 10th Cir. Court of Appeals) appreciated in chapter 13 not part of chapter 7 estate.
In re Sobczak, 369 B.R. 512 (9th Cir. BAP 2007). In a case arising out of Arizona, the BAP reversed the Bankruptcy Court’s dismissal of the debtor’s case, holding that (a) the debtor in a case converted from Chapter 7 to Chapter 13 had standing to move for dismissal of his bankruptcy, but (b) dismissal of the debtor’s bankruptcy in the circumstances presented was improper. The BAP found that the debtor’s realization that in bankruptcy he was limited by §522 to Ohio’s $5,000 homestead exemption, rather than the Arizona $150,000 exemption that would apply if he were not in bankruptcy, was not a proper basis for allowing the debtor to move under §1307 to dismiss his case.
A debtor’s right to convert from Chapter 7 to 13 is at least presumptive (with the burden on the party opposing conversion), and some courts (reviewing the legislative history) view it as absolute (assuming that the debtor is eligible for relief under that chapter and the case had not previously been converted). For a discussion, see In re Condon, 358 BR 317 (6th Cir. 2007)(stating that debtor’s conduct must be egregious to warrant denial of conversion) and/or In re Marrama, 430 F.3d 474 (1st Cir. 2005)(concluding that the bankruptcy court could deny the debtor’s motion if it found that the debtor engaged in bad faith conduct).
Debtor lacked sufficient regular income to fund a chapter 13 plan
In re: ALICIA MARIE RICHARDS BAP No. CC-21-1178-LTF (9th Circuit, Mar 24,2022) Not Published Ruling : Alicia Richards appeals the bankruptcy court’s denial of her motion to convert her chapter 71 case to one under chapter 13. Ms. Richards filed the motion shortly after the chapter 7 trustee began marketing Ms. Richards’ residence. The bankruptcy court denied the motion on grounds of bad faith and because Ms. Richards lacked sufficient regular income to fund a chapter 13 plan. We AFFIRM.
In re Ronald C. Markovich, BAP No. MT–95–2298–RyJR. Bankruptcy No. 95–50151–7. (9th Cir, March 28, 1997) After debtor obtained discharge in his Chapter 7 case, and creditor subsequently obtained nondischargeability judgment, debtor moved to vacate discharge and to convert case to Chapter 13. The Bankruptcy Court, John L. Peterson, Chief Judge, denied motion, and debtor appealed. The Bankruptcy Appellate Panel, Ryan, J., held that: (1) debtor lacked standing to vacate discharge order under statute allowing only certain specified parties to seek to revoke discharge, and (2) bankruptcy court did not have inherent equitable power to revoke Chapter 7 discharge outside statutory framework.
Baroni v. Seror (In re Baroni), 21-55076 (9th Cir. 6/8/22) The Ninth Circuit recently wrote a checklist identifying the questions a bankruptcy court must answer when deciding whether to grant a motion for dismissal or conversion of a chapter 11 case to chapter 7. The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate . . . .Judge Forrest said that the plan did not give estate property back to the debtor on confirmation free and clear of creditors’ claims and interests. She upheld the direction to turn the escrow fund over to the trustee, because revesting the assets in the debtor “upon conversion to Chapter 7 would frustrate the intent of the Plan and is contrary to many of its provisions.”
Diane Mann v Duan Copeland “In re Copeland”, CV 18-03311, the AZ District Court ruling that the Property of Chapter 11 Estate is property of Chapter 7 Estate upon conversion. The Court disregarded the BAP ruling in In re Markosian, 506 B.R. 273 (B.A.P. 9th Cir. 2014)
Constructive control is sufficient and may be inferred where the debtor participated and directed the fraud.
In re Brown, 18-60029, 9th Cir. BAP 17-1068 Looking to federal criminal cases for guidance as to what constitutes possession or control, property fraudulently transferred during a Chapter 13 case can be recovered by a Chapter 7 trustee after the case is converted. Section 348(a)(1) does not require that the debtor have actual possession or control of the property fraudulently transferred during the Chapter 13 case. Constructive control is sufficient and may be inferred where the debtor participated and directed the fraud.
Funds Transferred Without Authorization During Chapter 13 Case Remain Property of the Estate upon Conversion
Brown v. Barclay (In re Brown) 953 F.3d 617 (9th Cir. 2020) Debtor and three brothers were heirs to father’s estate. Siblings transferred their interest in the inherited funds. Debtor filed chapter 13. Debtor received funds and transferred a share to each sibling without a court order.
Under 11 U.S.C. § 348(f)(1)(A), upon conversion from Chapter 13 to Chapter 7, the converted estate consists of the assets that remain in the possession or control of the debtor at the time of conversion. Here, the debtor made unauthorized and fraudulent transfers of funds during the Chapter 13 proceeding. The panel held that, following conversion for cause to Chapter 7, upon the bankruptcy court’s finding of the debtor’s bad faith in making the transfers, the transferred funds remained property of the Chapter 7 estate, which meant that the Chapter 7 trustee had authority to recover them. Interpreting § 348 in light of the structure of the Bankruptcy Code as a whole, including its object and policy, the panel held that, because the debtor transferred the funds with the fraudulent purpose of avoiding payments to creditors, the funds remained within his constructive possession or control, and hence should be considered part of the converted estate.
Chapter 13 converted to 7 – does the trustee or the homeowner have right to sale proceeds or appreciation?
In re Cofer, 19-40361 (D. Idaho Jan. 8, 2021). On an issue where courts are split, Chief Bankruptcy Judge Joseph M. Meier of Boise, Idaho, followed the Tenth Circuit Bankruptcy Appellate Panel by holding that post-petition appreciation in the value of a homestead belongs to the debtor when a case converts from chapter 13 to chapter 7.
Based on the foregoing, Trustee’s Motion, Dkt. No. 97, will be granted in part and denied in part. The portion of the Motion seeking a determination that Debtor’s homestead exemption is limited to $32.020.56 will be granted. The Court rejects Debtor’s contentions that the Home is not property of the estate and that, if it were property of the estate, the Debtor could claim an exemption as of the date of conversion. However, Trustee’s argument that the estate is entitled to postpetition appreciation upon conversion fails. Thus, Trustee’s Motion will be denied to the extent that it seeks a determination that postpetition appreciation is property of the estate. The Court will enter an appropriate order.
In re Julio Barrera, Maria Moro, BK 16-13218 (10th Cir. BAP, US BK court, D. Colorado, 10/2/20) Home ownership lies at the center of the American dream. Chapter 13 of the Bankruptcy Code provides many Americans with a chance to keep their home when all else fails. Unfortunately, not every chapter 13 case is successful. Congress recognized this and gave debtors who can no longer meet their obligations under a chapter 13 plan the opportunity to convert the case to chapter 7, where liquidation of nonexempt assets is contemplated. The question placed before us today is a simple one, presented on a silver platter of stipulated facts: if a homestead appreciates in value while a debtor is striving under chapter 13, and the case is later converted to chapter 7, who is entitled to the increase in value: the debtors, or the chapter 7 trustee? The trial court (the “Bankruptcy Court”) ruled for the debtors. The trustee appeals. We affirm.
In re Caroline Niles, BR-04-06943 (AZ BK court 3/28/2006) On April 22, 2004, Debtor Caroline Niles filed for Chapter 13 relief. At the time of her filing, Debtor valued her Gilbert, Arizona home in her Schedules at $180,000 with a mortgage owing of $160,000. Debtor claimed a homestead exemption under Arizona Revised Statute section 33-1101(A). Her Plan was confirmed on November 19, 2004, with no objections. Funding for the Plan was to come solely from Debtor’s future earnings. In August of 2005, Debtor sold her Gilbert home and netted $118,317.75, which exceeded the applicable homestead exemption by $18,317.75. CONCLUSION: the Court concludes that the funds in excess of the exemption amount received as a result of the postconfirmation, preconversion sale of Debtor’s home are not subject to turnover to the Trustee.
Note – the Niles court’s most persuasive analysis focuses on the language of § 348(f)(1)(A) and its legislative history discussed below. Relying on this, many other courts have reached the conclusion that any postpetition increase in equity in a prepetition asset, whether from appreciation or from the debtor’s repayment of secured debt, is not property of the estate on conversion from chapter 13 to chapter 7. See In re Hodges, 518 B.R. 445, 447-49 (Bankr. E.D. Tenn. 2014); In re Robinson, 472 B.R. 854, 856 (Bankr. M.D. Fla. 2012); Leo v. Burt (In re Burt), 2009 WL 2386102 (Bankr. N.D. Ala. July 31, 2009); Kendall v. Lynch (In re Lynch), 363 B.R. 101, 106-07 (9th Cir. BAP 2007); In re Pruneskip, 343 B.R. 714, 717 (Bankr. M.D. Fla. 2006); In re Woodland, 325 B.R. 583 (Bankr. W.D. Tenn. 2005); In re Boyum, 2005 WL 2175879 (D. Or. Sept. 6, 2005); In re Nichols, 319 B.R. 854 (Bankr. S.D. Ohio 2004).