In Re Petruccelli
ORDER ON MOTION FOR SANCTIONS UNDER
On September 26, 1985 debtor John Pe-truceelli filed his petition for relief under Chapter 13. His principal debts were tax obligations, the bulk of which were owed to the IRS for income taxes from 1974-1984, and for certain withholding taxes for 1980-1985. Debtor is a practicing attorney. The precipitating events for his bankruptcy filing involved seizures by the State of California of debtor’s business and trust accounts, foreclosure on his home, and the freezing of certain assets by the IRS.
Debtor proposed his plan on October 11, 1985 to pay $1,800 per month to the trustee and a resulting dividend to unsecured credi
On April 27, 1989 debtor filed a pleading styled “Ex Parte Motion for Order to Show Cause Why the Internal Revenue Service Should be Held (sic) in Contempt and for Release of Post-Petition Levy and for Sanctions Pursuant to
This Court declined to consider the motion ex parte, but set it for hearing the next day. At that hearing the Court directed that the levy would stand until further order, but the bank was to disburse no funds in the interim. The Court set an evidentiary hearing for June 29, 1989, to take evidence on whether the funds in the account levied upon were “property of the estate.”
At the evidentiary hearing several facts were established. The taxes sought by the IRS levy were post-petition obligations for 1986 and 1987. The funds levied upon were account funds earned post-petition by the debtor. Those account funds were also the source for debtor’s payments to the Chapter 13 trustee. Indeed, the IRS agreed to release $1,800 from its levy so debtor could make his plan payment before the hearing. Following the hearing and supplemental briefing, this Court took the matter under submission. This Court has jurisdiction under
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities of—
[[Image here]]
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of. the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; ....
As courts have regularly recognized, the automatic stay operates in three specific ways. It “bars certain actions against the (1) debtor, (2) property of the debtor and (3) property of the estate.”
In re Johnson,
The automatic stay operates similarly with respect to acts against the
property of the debtor.
The automatic stay applies only if the acts are to collect on prepetition debt.
The third area of operation of the automatic stay is the protection it affords to
property of the estate.
The protection here is much broader and prohibits acts against property of the estate regardless of “whether the debt arose before or after the filing of the petition.”
In re Johnson,
(a) Property of the estate includes, in addition to the property specified in section 541 of this title—
[[Image here]]
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.
There is no debate about the proposition that upon the filing of a petition under Chapter 13 an estate is created.
Debtor, however, seeks more from
The IRS responds to debtor’s argument by citing
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
The IRS argues that by operation of
The central issue for the Court is how the terms of
The problem was early recognized by the court in
In re Adams,
The
Adams
court recognized that the filing of the Chapter 13 petition caused the creation of an estate the composition of which is defined by
The expansive definition ofSection 1306 defines “property of the estate” as it exists upon the filing of a petition.... Even though post-petition wages and other property normally remain in the possession and control of the debtor prior to confirmation underSection 1306(b) , thatproperty remains “property of the estate” under Section 1306(a) ....
Circumstances change, however, upon the confirmation of a plan.... [U]nderSection 1327(b) , unless the plan or order of confirmation provides otherwise, “the confirmation of a plan vests all of the property of the estate in the debtor.” ...
Under these provisions, the expansive definition of “property of the estate” found inSection 1306 is pruned dramatically at confirmation. Any property which has not been designated in the plan or order of confirmation as necessary for the execution of the plan revests in the debtor, underSection 1327(b) , to become “property of the debtor.”
The
Adams
court was candid in expressing its interest in balancing the effect of
Thus, all wages over and above those paid to the trustee or creditors under a plan, and any property which the debtor does not propose to use in funding his plan returns to the debtor and becomes subject to the reach of his ex-spouse underSection 362(b)(2) . Therefore, although the ex-spouse’s collection action is initially held at bay by the breadth of theSection 1306 estate, once confirmation occurs, a more equitable balance is struck between the needs of the debtor to rehabilitate himself and those of his dependents seeking lawful support.
The case of
In re Root,
The Root court concluded that the IRS Notice of Levy was not a violation of the automatic stay. Apparently, the court arrived at that conclusion because:
There was no evidence that the IRS was specifically seeking to levy on that portion of the property and earnings which remained “property of the estate” post-confirmation. Had that evidence been forthcoming, the IRS would have been in violation of§ 362 .
If the IRS was seeking to levy only upon property of the Debtor which did not constitute “property of the estate”, such action would not have been in violation of§ 362 .
Any property that has been designated in the plan or order of confirmation as necessary for the execution of the plan, e.g.post-petition wages up to the amount of the plan payments each month, remain “property of the estate.”
Like the Adams court, the Root court does not tell us how those funds preserve their character as property of the estate. Unlike Adams, however, the Root court insists some sort of “estate” continues to exist post-confirmation. The court wrote:
If there is no existing estate upon confirmation, then what does the Chapter 13 Trustee administer? If there is no estate over which the Chapter 13 Trustee has control, then that Trustee is nothing more than an officious intermeddler. Even11 U.S.C. § 704(9) ... provides that the Trustee shall “... make a final report and file a final account of the administration of the estate [emphasis added] with the court.” There must be an “estate” upon and after confirmation, and that estate consists of the property and future earnings of the debtor dedicated to fulfillment of the Chapter 13 Plan.
The decision of
In re Clarke,
The
Clarke
court stated that it was persuaded that the language of
We must confess that we find neither§ 1327(b) or§ 1306 to be models of clarity, and we can think of policy reasons for either of two interpretations of what happens to “property of the estate” upon confirmation: (1) It continues being such until the ease is closed, dismissed, or converted to another Chapter; or (2) It ceases being such at the time of confirmation and forever after, unless the debtor, in his Plan, per§ 1327(c) , provides otherwise.
The
Clarke
court recognized that
... suggests that the “property of the estate” at filing, and thereafter added to it post-filing, remains as such until closing, dismissal, or conversion of the case.
Id.
Turning to
And,§ 1327(b) states that, on confirmation, all of the “property of the estate” “vests” in the debtor. In one sense, it can be argued that this means that, at that point, the “property of the estate,” vesting in the Debtor, is “property of the estate” no more. However, when it is considered at more length, it can be concluded that§ 1327(b) raises additional conceptual questions, notably the following: (1) If “property of the estate” effectively disappears at confirmation, it is not [sic] improper to state that it “vests” anywhere? (2) If Congress meant to say that property of the estate ceases to exist as such at the time of confirmation, why did it not simply say so, instead of introducing the metaphysical concept that something that has disappeared “vests” in anyone?
Id.
Of course, the creditor did not argue that property of the estate “disappeared” upon confirmation, but rather that it re-vested in the debtor as property of the debtor. Moreover, the
Clarke
court fails to discuss that the concept of “vesting” is not peculiar to
The
Clarke
court acknowledges the conflict in cases which have considered the
Despite the number of authorities in the opposite direction, we are inclined to accept the reasoning of the Root case.
We believe that a party standing in the shoes of the Movant should have a relatively slight burden to overcome to obtain relief from th§ automatic stay prospectively. Otherwise, ... a post-petition creditor ... would be unfairly frozen in place until the debtor, in leisurely fashion completes his Plan payments and is discharged. The equities in favor of the Movant here are few, in our view, but one of them is that it is unfair for the Debtor, having been “re-vested” with his “property of the estate,” to be able to sell his most valuable asset, his residential realty, but the Movant, at the same time, to be unable to touch it. In sum, the prospect of the Debtor’s selling his property out from under the Movant is, in our view, sufficient “cause” to justify prospective relief from the automatic stay, per11 U.S.C. § 362(d)(1) .
Id.
Notwithstanding the court’s inclination to follow
Root,
the
Clarke
court does not explain how the debtor can unilaterally dispose of his house post-confirmation, without any court or trustee involvement or approval, yet a post-petition creditor cannot act against the same property without relief from the automatic stay. In order for the stay of
Within a week of the
Clarke
decision, Judge Malugen of this court rendered her opinion in
In re Aneiro,
Thus, if property of the estate exists post-confirmation, debtor must seek court approval to effect a modification of the lease, since such a transaction is not in the ordinary course of debtor’s business.
To resolve the dispute, the Aneiro court had to consider whether the 1984 lease remained property of the estate after confirmation, or whether it was no longer property of the estate. If the latter, then the debtor could properly execute the 1986 revision without court approval, and the landlord would be in a position to enforce its terms. If the former, then the 1986 revision was invalid.
The
Aneiro
court reviewed several of the decisions which concluded that
The mere revesting of the property in the debtor upon Chapter 13 plan confirmation does not convert property of the estate into property of the debtor. Instead, the revested property remains property of the estate subject to theterms of the order of confirmation and all the protections of § 362(a) . While the debtor may own and possess the property of the estate, he is not free for all purposes to do with it as he pleases. Section 1322(a)(1) provides for “supervision and control” by the trustee over monies and property committed to the plan.... The ownership rights of the debtor in the property of the estate are limited at least to the extent that the property is committed to successful performance under the plan.
Interestingly, the
Aneiro
court found support for its construction of the effect of
The Conferees are concerned that farmers be able to obtain post confirmation credit. The Conferees are in agreement that current law allows Chapter 13 debtors to do so. Because section 1227 is modeled aftersection 1327 , family farmers may provide in their plans for post-confirmation financing secured by assets that have revested in the debtor. The debtor may also use revested property to the extent it is not encumbered by the plan or order of confirmation to secure post-confirmation credit.
If Congress had intended for confirmation to so drastically affect the expansive definition of property of the estate found in§ 1306 , it knew how to draft such a provision.
(
In contrast to the cases that accord great weight to the language of
Because the Debtor’s plan did not provide otherwise, all the property of the estate vested, upon confirmation, in the Debtors. Consequently no estate, as is provided for in11 U.S.C. Section 1306 and Section 541, is in existence.
The issue was dealt with in a footnote in
In re Walker,
The Trustee questioned whether a debtor has the right to dispose of real estate after confirmation of the Chapter 13 plan. Upon confirmation title to the property of the estate vests in the debtors.11 U.S.C. § 1327(c) [sic]. The Debtors had an unrestricted right to dispose of the real estate.
The court in
In re Lewis,
The stay provisions are inapplicable to Seneca in this case because the debt arose after the commencement of the case.... An action against the debtor is not stayed under11 U.S.C. § 362(a)(3) which prevents obtaining possession of property of the estate since the confirmation order provided that all the debtor’s property revested in the debtor, though, the Court retained jurisdiction thereof.
In re Johnson,
Thus, in this case the tax refund of $629.00 for the 1982 tax year to which debtors became entitled during the pend-ency of their case might appear to have been property of the estate protected by the automatic stay which continues in a Chapter 13 case underSection 362(c)(1) until property of the estate is no longer property of the estate....
Adams, however, explains that upon confirmation of a Chapter 13 plan, all property of the estate not dedicated to performance of the plan becomes property of the debtor underSection 1327(b) . Thus, upon confirmation, debtors’ tax refund, which was formerly property of the estate and which was not dedicated to the plan became property of the debtors and subject to the reach of ORS underSection 362(b)(2) .... Upon confirmation of debtors’ plan on January 23, 1981, ORS was free to collect its post-petition debts for child support from any property of the debtors not dedicated to their plan.
In
In re Denn,
This section [1327(b) ] removes, upon confirmation of the plan, property from the estate and revests that property in the debtor, thus reversing the transfer effectuated by the filing of the bankruptcy petition. Arguably then, under this section, confirmation brings theSection 362(b)(2) exception to the automatic stay into effect and would allow the defendants here to collect the arrearages from the debtor’s post-petition wages.
The Bankruptcy Appellate Panel of the Ninth Circuit had occasion to consider the operation of
There is no need for a debtor to have the protection of a true exemption in a Chapter 13 case because§ 1306(b) allows the debtor to remain in possession of all the property of the estate. Additionally,§ 1327(b) vests all of the property of the estate in the debtor upon confirmation of a plan.
Once the property is revested in the debt- or after confirmation, he can do anything with it so long as it is not subject to a lien provided for in the plan or order confirmation.11 U.S.C. §§ 1327(b) and (c) . Thus, during the course of a plan, which can last as long as five years, a debtor may sell, abandon, consume, or trade-in most of his assets. Combining this with the possibility of after-acquired property means that by the time of conversion the estate may have been changed completely in character and amount.
The case most often cited in discussing
Thus, it is contemplated in both chapter 11 (unless a trustee is appointed) and chapter 13, that the debtor remain in possession of all of the property of the estate between the time of the filing of the petition for relief and the order of confirmation. Title to such property, however, remains in the estate and is subject to the control of the court. Upon confirmation, not only does the debtor have the right to possession of the property which was property of the estate, but he is then vested with title to the property of the estate. This title vests in the debtor free and clear of the claims of pre-confirmation creditors except as otherwise provided in the plan or the order of confirmation. No longer is disposition of the property (except as otherwise provided in the plan or the order) controlled by the court. While the debtor has the obligation to comply with the plan and failure to do so could result in dismissal or conversion to chapter 7, the debtor nevertheless may use, sell or lease the property within or outside the ordinary course of business without the necessity of notice and a hearing or order of the bankruptcy court. The debtor’s right of control of the property is the same as if no bankruptcy case had ever been filed except to the extent that the plan or order confirming the plan provides otherwise. Post-confirmation creditors may deal with the debtor as if no bankruptcy case were pending.
... that conflict can be resolved by concluding that the debtor’s wages go into the estate pursuant to11 U.S.C. § 1306 as long as the estate exists or until the case is “closed, dismissed or converted.” But in accordance with11 U.S.C. § 1327 , the estate may cease to exist prior to the case being “closed, dismissed or converted” when the plan so provides and the plan is confirmed.
In re Mason,
As already noted in the discussion of the original
Mason
decision, Judge Hess there observed that Chapter 11 contains provisions identical to
§ 1141 . Effect of confirmation.
[[Image here]]
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
Some of the courts which have confronted the issue of
For purposes of the present discussion, one of the more interesting Chapter 11 decisions is
In re Paradise Valley Country Club,
Judge Brumbaugh found that pursuant to11 U.S.C. § 1141(b) , the confirmation of the plan vested all property of the estate in the debtor, and that the stay was therefore not in effect under 362(c)(1) when the suit was commenced.
I also approve of Judge Brumbaugh’s reliance on the recent case of In re Morgan and Morgan, Inc.,24 B.R. 518 (Bkrtcy.S.D.N.Y.1982) which states:
[T]he debtor is not entitled to a permanent umbrella shielding it from all lawsuits while it makes its payments under the plan of arrangement. The order of confirmation marked the commencement of the period when a debt- or was weaned from dependence on the bankruptcy court’s injunctive powers so as to stand on its own feet with respect to post-confirmation matters.
Without conducting an exhaustive review, it is nevertheless apparent that courts which have considered
The automatic stay ofsection 362 remains in effect while a Chapter 11 plan is pending confirmation. Upon the plan’s confirmation, and simultaneous discharge of the debtor undersection 1141(d) , however, the automatic stay terminates pursuant tosection 362(c) and creditors may proceed to collect post-confirmation debts from the debtor. At confirmation, all the property of the estate is vested in the debtor, thereby terminating the estate’s existence....
Similarly, in
Prince v. Clare,
Except as otherwise provided in the Plan or the order confirming the plan, the confirmation of the plan vested all of the property of the bankruptcy estate in the debtor Prince. (Citations omitted.) The purpose of revesting the property in the debtor is to make the debtor in possession master of his own fate in the commercial world, free of the press of those creditors to whom he was indebted before he became a Chapter 11 supplicant. (Citation omitted.) After the Plan was confirmed, the bankruptcy court no longer controlled disposition of such property; after confirmation, Prince’s control of the revested property was the same as if no bankruptcy case had ever been filed, except to the extent that the Plan or order confirming the Plan provides otherwise.
Returning to a review of cases involving petitions under Chapter 13, it is pertinent to consider the opinion of the Ninth Circuit Court of Appeals in
In re Nash,
At the outset, it is important to recognize that
Nash
did not involve application of
However, ownership over all of the property of the estate, including the $907.14, vested in the Nashes once the plan was confirmed. 11 U.S.C. § 1327(b) . See 5 Collier, supra note 1, 111327.01, at 1327-3.
The Nashes’ ownership of the $907.14 is further supported by the fact that a Chapter 13 dismissal “revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.”11 U.S.C. § 349(b)(3) . The legislative history of§ 349(b) states that “[t]he basic purpose of the subsection is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.” (Citation omitted.)
The debtor's plan and the order of confirmation did not provide for the residence to remain property of the estate to fund the plan. (Citations omitted.) Therefore, the residence, which had become property of the estate upon filing of the petition by the debtor, revested in debtor upon confirmation of the plan. See11 U.S.C. Section 1327(b) . Accordingly, the residence is no longer property of the estate and the automatic stay does not apply.
Id. After noting the contrary decisions in Clarke and Aneiro, the court continued:
Clarke relies on dictum in Root but misconstrues it as holding that all property of the estate, not just that used to fund the plan, remains property of the estate upon confirmation despite11 U.S.C. Section 1327(b) . The Aneiro Court similarly misconstrues the Adams decision.
Moreover, Clarke and Aneiro disregard numerous cases that have held that the estate ceases to exist in Chapter 11 cases upon confirmation of the plan pursuant to11 U.S.C. Section 1141(b) , the exact analog of11 U.S.C. Section 1327(b) . (Citations omitted.)
Finally, Clarke and Aneiro assert that11 U.S.C. Section 1306 , which spells out what is property of the estate in a Chapter 13 case, requires property of the estate to remain in the estate upon revest-ing in the debtor. The residence here is property of the estate by virtue of11 U.S.C. Section 541 , which is incorporated bySection 1306 .... However,sections 541 and 1306 do not purport to answer the question of when property of the estate ceases to be property of the estate. That question is resolved by resort to such provisions asSection 1327(b) (in the case of a confirmed plan) or11 U.S.C. Section 349(b)(3) (in the case of a dismissal).
This Court concludes that the reasoning of
In re Mason,
In this Court’s view, canons of statutory construction support such a result. As the district court observed in
Laughlin v. U.S.I.R.S.,
A basic doctrine of statutory construction declares that where possible, two-statutes must be read so as to give meaning to each statute.
Similarly, when
There are policy reasons, also, which support such a conclusion. The legislative history of § 1227, cited by the court in
In re Aneiro,
Parenthetically, the Court notes that standard language in the plans regularly used in this district appear to recognize the debtor’s ability to freely deal with property post-confirmation because it attempts to restrict that ability. The language provides: “Trustee may file to dismiss case if debtors) incur post petition debts without the written consent of trustee and debtor(s) fail to keep such obligations current in payment.”
The court in
In re Mason,
In one sense, it seems unfair that post-petition creditors ... are in any way stymied in attempting to collect their debts. Carrying this concept too far may make a Chapter 13 post-confirmation debtor a credit pariah, with whom no person informed of his status would deal.
Of course, there are countervailing policy considerations, as well. As characterized by the Clarke court:
On the other hand, a debtor who is making his best financial effort to pay all of his creditors equally under a Chapter 13 Plan should not have his scarce resources and “property of the estate” invaded and the Plan doomed to failure because of a claim from an upstart post-petition creditor.
It remains for this Court to apply its conclusion to the facts in the case at bar. As noted in earlier discussion, the facts of
In re Adams,
In the case at bar, there was approximately $8,500 in debtor's account when the IRS served its levy. Which of those $8,500 were committed to the $1,800 monthly plan payment? What about the next month’s plan payment? What about the funds necessary to support the debtor from month to month which, if seized, could prevent the debtor from making the plan payments? In this Court’s view, it is not enough to say the funds necessary to make plan payments remain property of the estate and thus subject to the automatic stay, because the funds generally have no independent identity. Under such circumstances, a debtor could play a shell game on post-petition creditors, always claiming the non-committed funds are under a different shell
The confirmed plan in the instant case provides:
Debtor submit [sic] all future income to the supervision and control of trustee during the pendency of this case and agree to pay sufficient funds to the Trustee on or before five years from commencement of this case to fully complete this Plan.
However, in this Court’s view, the “supervision and control” language in the plan is insufficient to postpone revesting in the debtor under
“... Debtor submits all future earnings or other future income to such supervision and control of the trustee as is necessary for the execution of the Amended Plan. Property of the estate shall vest in the Debtor upon dismissal, conversion or discharge under 11 U.S.C. 1307 or 1328 except as the Court for cause may order otherwise while the case is pending.” (Emphasis added.)
In
In re Walker,
However, paragraph X of Walker’s plan provides: “Property of the estate shall revest in the Debtor at such time as a discharge is granted or the case is dismissed.”
In this Court’s view, the better approach, as recognized by many of the cases, is that revesting of all of the property of the estate occurs upon confirmation as contemplated by
Conclusion
For all the foregoing reasons, the Court finds that the funds in debtor’s account at the time of the IRS levy were not property of the estate because they had revested in the debtor. Because the IRS was seeking to collect on post-petition debt from property of the debtor, not property of the estate, the automatic stay of
IT IS SO ORDERED.