In re Goins
MEMORANDUM OPINION
This matter comes before the Court on an issue of importance in cases converted from Chapter 13 to Chapter 7: whether the Debtor or the Chapter 7 Trustee is entitled to any appreciation in property of the estate that accrued post-petition while the ease was pending in Chapter 13. The Debtor in this case filed a voluntary petition under Chapter 13 on October 27, 2011. Docket No. 1. He listed his home with a value of $98,000.00, with a mortgage in the amount of $107,791.80. Docket No. 10, Schedule A. The Court confirmed the Debtor’s Amended Chapter 13 Plan on June 18, 2012. Docket No. 36. Although the Plan treated certain homeowners association’s liens against the Debtor’s property, it did not address any mortgage arrearages with respect to the property (apparently, there were none).
The Debtor filed a Notice of Voluntary Conversion to Chapter 7 on May 8, 2015. Docket No. 47. The case was converted to Chapter 7 on May 12, 2015. Docket No. 52.
On July 15, 2015, the Chapter 7 Trustee filed an Application to Employ a real estate agent in order to sell the Debtor’s property. Docket No. 68. The Trustee seeks to list the property for $147,500.00. Docket No. 69 ¶ 5 (Listing Agreement). The Debtor filed an Objection to the Trustee’s Application and a Motion to Compel the Abandonment of the property. Docket Nos. 70, 71. The Trustee subsequently filed an Opposition to the Debtor’s Motion to Compel Abandonment. Docket No. 78.
The parties stipulated at the hearing that, when the Debtor initially filed his petition under Chapter 13, the mortgage debt had a balance of approximately $103,000.00. The parties further stipulated that, as of today, the mortgage debt has a balance of approximately $76,000.00. The Chapter 7 Trustee agrees with the Debtor that the decrease in the mortgage balance of approximately $27,000.00 is due to the Debtor’s having paid the mortgage during his Chapter 13 case. The Trustee further agrees that the Debtor is entitled to the buildup of equity attributable to the Debtor’s post-petition mortgage payments. The parties disagree, however, on who is entitled to the equity that accrued as a result of the appreciation of the property during the pendency of the Debtor’s Chapter 13 case. If the Trustee’s estimate of value ($147,500.00) is borne out by a sale, then the mortgage balance of roughly $76,000.00 would be paid, costs of sale would be paid, the Chapter 7 Trustee would be entitled to a commission, and there would be equity left over from the sale of the property (after payment of the
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference entered by the U.S. District Court for this District on August 15,1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate), and (N) (orders approving the sale of property).
A Bankruptcy Code Section 3^8 (f)(1), Pre-BAPCPA.
Prior to its amendment in 2005, Bankruptcy Code Section 348(f)(1) read as follows:
Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title—
(A) 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; and
(B) valuations of property and of allowed secured claims in the chapter 13 case shall apply in the converted case, with allowed secured claims reduced to the extent that they have been paid in accordance with the chapter 13 plan.
11 U.S.C. § 348(f)(1) (pre-BAPCPA) (emphasis added).
The legislative history to Section 348(f) states as follows:
This amendment would clarify the Code to resolve a split in the case law about what property is in the bankruptcy estate when a debtor converts from chapter 13 to chapter 7. The problem arises because in chapter 13 ..., any property acquired after the petition becomes property of the estate, at least until confirmation of the plan. Some courts have held that if the case is converted, all of this after-acquired property becomes part of the estate in the converted chapter 7 case, even though the statutory provisions making it property of the estate do not apply to chapter 7. Other courts have held that the property of the estate in a converted case is the property the debtor had when the original chapter 13 petition was filed.
These latter courts have noted that to hold otherwise would create a serious disincentive to chapter 13 filings. For example, a debtor who had $10,000 equity in a home at the beginning of the case, in a State with a $10,000 homestead exemption, would have to be counseled concerning the risk that after he or she paid off a $10,000 second mortgage in the chapter 13 case, creating $10,000 in equity, there would be a risk that the home could be lost if the casewere converted to chapter 7 (which can occur involuntarily). If all of the debt- or’s property at the time of conversion is property of the chapter 7 estate, the trustee would sell the home, to realize the $10,000 in equity for the unsecured creditors and the debtor would lose the home.
H.R.Rep. No. 103-835 at 57 (1994), as reprinted in 1994 U.S.C.C.A.N. 3340, 3366.
A number of pre-BAPCPA case law held that the debtor was entitled to any post-petition appreciation in his or her property. These cases usually relied on the theory that confirmation of the debtor’s Chapter 13 Plan constituted an implicit finding that the property had the value ascribed to it in the debtor’s Schedules and Plan. Warren v. Peterson,
Two cases rejected the “implicit finding of value” approach, but ended up in the same place: the courts used the Chapter 13 filing date, not the date of conversion, for purposes of valuation in the converted Chapter 7 case. In re Lynch,
B. The 2005 Amendment to Section 3i8(f)(l)(B), and The PosL-BAPC-PA Case Law Under Section 3k8(f).
In 2005, Congress amended Section 348(f)(1)(B), as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) Amendments to the Code. As a result, Section 348(f)(1)(B) now reads:
valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under chapter 11 or 12, but not in a case converted to a case under chapter 7, with allowed secured claims in cases under chapters 11 and 12 reduced to the extent that they have been paid in accordance with the chapter 13 plan[.]
11 U.S.C. § 348(f)(1)(B) (emphasis added).
The legislative history from the BAPC-PA Amendments states as follows, with respect to the amended Section 348(f)(1)(B):
Sec. 309. Protecting Secured Creditors in Chapter 13 Cases. Section 309(a) of the Act amends Bankruptcy Code section 348(f)(1)(B) to provide that valuations of property and allowed secured claims in a chapter 13 case only apply if the case is subsequently converted to one under chapter 11 or 12. If the chapter 13 case is converted to one under chapter 7, then the creditor holding security as of the petition date shallcontinue to be secured unless its claim was paid in full as of the conversion date. In addition, unless a prebankrupt-cy default has been fully cured at the time of conversion, then the default in any bankruptcy proceeding shall have the effect given under applicable non-bankruptcy law.
H.R.Rep. No. 109-31(1), at 73 (2005), as reprinted in 2005 U.S.C.C.A.N. 88, 140.
One commentator has suggested that the purpose of the 2005 amendment was to protect secured creditors from the effect of any bifurcation of their liens that may have occurred during the course of the Chapter 13 case. David G. Carlson, “Cars and Homes in Chapter IS After the 2005 Amendments to the Bankruptcy Code, ” 14 Am. Bankr.Inst. L.Rev. 301, 385 (Winter 2006).
There have not been many post-BAPC-PA cases interpreting the amended version of Section 348(f)(1)(B). The case of In re Robinson,
The case of In re Hodges,
The Trustee in this case relies on the case of In re Martinez, No. 7-10-11101 JA,
The Court finds the Martinez case to be distinguishable from the current case because Martinez involved a motion to avoid a judicial lien under Section 522(f). See Martinez,
C. The Estate is Entitled to any Postr-Petition Appreciation in the Property Pursuant to Bankruptcy Code Section 511 (a)(6).
This brings the Court back to the issue: which party is entitled to the post-petition appreciation of the property? The Trustee argues that the 2005 amendment to Section 348(f)(1)(B) did away with any notion of implicit valuation as a result of confirmation in a Chapter 13 case, because Section 348(f)(1)(B) now expressly provides that valuations from Chapter 13 do not carry over into converted Chapter 7 eases. The Court finds in favor of the Trustee here, but not because the -2005 amendment to Section 348(f)(1)(B) legislatively overruled the implicit valuation cases. See 11 U.S.C. § 348(f)(1)(B). Rather, the Court agrees that the Trustee is entitled to the post-petition appreciation in the property because the real estate was always property of the estate under Section 541(a) of the Code. Section 541(a)(1) broadly defines property of the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case,” “wherever located and by whomever held.” 11 U.S.C. § 541(a)(1). Further, Section 541(a)(6) provides that all “proceeds, product, offspring, rents or profits of or from property of the estate” constitutes property of the estate. 11 U.S.C. § 541(a)(6). Numerous cases relying on Section 541(a)(6) have held that post-petition appreciation in property belongs to the estate. See In re Hyman,
There is an irreconcilable conflict between these cases, which look to Section 541(a)(6), and the cases cited in Part A above (Warren v. Peterson, In re Slack, In re Niles, and In re Page), which look to Section 348(f)(1)(A) for the answer. In the Court’s view, the cases under Section 541(a)(6) are applicable because the equity attributable to the post-petition appreciation of the property is not separate, after-acquired property, to which we might look to Section 348(f)(1)(A). The equity is inseparable from the real estate, which was always property of the estate under Section 541(a).
The example in the legislative history to Section 348 (“a debtor who had $10,000 equity in a home at the beginning of the case, in a State with a $10,000 homestead exemption, would have to be counseled concerning the risk that after he or she paid off a $10,000 second mortgage in the chapter 13 case, creating $10,000 in equity arguably sheds light on the “pay-down” cases, i.e., the cases where the Debtor creates equity by paying down secured debt during the course of the case. See H.R.Rep. No. 103-835 at 57 (1994), as reprinted in 1994 U.S.C.C.A.N. 3340, 3366. It is not helpful, however, in determining which party, the Debtor or the Trustee, is entitled to the equity created by appreciation of the property while the Debtor is in Chapter 13.
For the foregoing reasons, the Court holds that the Debtor is not entitled to the appreciation in his property that accrued during the course of his Chapter 13 case, and the Trustee is entitled to sell the property.
Conclusion
For the foregoing reasons, the Court will enter a separate Order under which:
1. The Trustee’s Motion for appointment of a real estate agent will be granted. Counsel for the Trustee will submit an Order approving the employment of the real estate agent within ten days.
2. The Debtor’s Motion to compel an abandonment of the property will be denied. Counsel for the Trustee also will submit an Order denying the Debtor’s Motion within ten days.
The Clerk will mail copies of this Memorandum Opinion, or will provide cm-ecf notice of its entry, to the parties below.
Notes
. The Debtor filed a separate adversary proceeding to avoid the homeowners association's liens as being wholly unsecured. Adv. Pro No. 12-01186-BFK. This was resolved by the entry of a Consent Judgment Order on July 30, 2012. Id., Docket No. 7.
. Section 554(b) of the Code provides:
On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.
11 U.S.C. § 554(b).
. Using round numbers, if the property were to sell for $147,500.00, there would be a 6% real estate commission ($8,850), the Debtor would be entitled to $27,000.00, there would be other costs of sale of up to 5% ($7,375), the mortgage of $76,000.00 would be paid, and the Trustee would be entitled to a statutory commission of $10,625.00, leaving approximately $17,650.00 either for distribution to the creditors or to be returned to the Debtor as his post-petition equity. The Debtor did not claim an exemption in the property.
. Section 348(f)(2) makes an exception for debtors who are found to have converted their cases in bad faith; if so, property of the estate includes all property as of the date of the conversion. 11 U.S.C. § 348(f)(2). There is no suggestion that the Debtor in this case converted his case in bad faith.
. A number of pre-BAPCPA cases also held that the Debtor is entitled to any equity buildup resulting from the payment of his or her mortgage or other secured debt during the course of the Chapter 13 case. See In re Burt, No. 01-43254-JJR-7,