Kenneth Brown v. Christopher Barclay, 953 F.3d 617

Jason Brown filed Chapter 13 on Dec. 13, 2013 and scheduled a small anticipated inheritance; the state probate later distributed $55,487.97 to him.
While in Chapter 13 and without trustee approval, Jason transferred $12,372 to each of his three brothers and could not account for the remainder.
The Chapter 13 trustee moved to convert to Chapter 7 for cause based on fraud and concealment; the Bankruptcy Court found bad faith and ordered conversion.
The Chapter 7 trustee (Barclay) sought to recover the amounts transferred to the brothers as estate property after conversion.
Appellant Kenneth argued § 348(f)(1)(A) excludes funds not in the debtor’s possession or control at conversion; lower courts held the funds remained estate property.
The Ninth Circuit affirmed, holding that fraudulently transferred funds can be treated as within the debtor’s constructive possession or control and thus part of the converted estate.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether § 348(f)(1)(A) excludes funds fraudulently transferred out of the debtor before conversion	Transferred funds were not "in the possession of or under the control of the debtor" at conversion and thus excluded from converted estate	§ 348 should be interpreted to include fraudulently transferred funds to avoid rewarding bad faith; constructive possession applies	Court held funds remained part of converted estate because constructive possession/control suffices when transfers were fraudulent; affirmed
Whether the Chapter 13 trustee’s avoidance claim is extinguished by conversion	If funds are excluded from the converted estate, avoidance remedies cannot be pursued in Chapter 7	Avoidance claims that accrued pre-conversion survive; alternatively, constructive-possession analysis preserves recovery	Court relied on constructive-possession rationale (and noted accrued claims survive) to permit recovery in Chapter 7
Whether courts improperly used equitable power (per Law v. Siegel) to override § 348	Using equitable principles to include transferred funds unlawfully circumvents the statute	Court can interpret ambiguous statutory language consistent with Code policy against rewarding fraud; this is statutory interpretation, not an equitable override	Court distinguished Siegel and interpreted § 348(f)(1)(A) to include constructive possession; not an improper use of § 105

Law v. Siegel, 571 U.S. 415 (2014) (bankruptcy court cannot use equitable powers to contravene specific statutory provisions)
Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (wages acquired during Chapter 13 not in converted estate under § 348(f)(1)(A) if not in debtor's possession at conversion)
In re Salazar, 465 B.R. 875 (B.A.P. 9th Cir. 2010) (unauthorized but ordinary living expenses excluded from converted estate)
In re Pisculli, 426 B.R. 52 (Bankr. E.D.N.Y. 2010) (fraudulent transfers not for ordinary living expenses included in converted estate)
Wyss v. Fobber, 256 B.R. 268 (Bankr. E.D. Tenn. 2000) (excluding fraudulently transferred assets from converted estate would reward bad faith)
United States v. Vasquez, 654 F.3d 880 (9th Cir. 2011) (constructive possession recognized as sufficient for legal control/possession)