Debtor Not Required to Turnover Proceeds From Sale of Appreciated Property

Posted by NCBRC - January 8, 2020

A chapter 13 debtor may not be compelled to turn over proceeds from the sale of appreciated real estate which had revested in him post-confirmation and was therefore no longer part of the bankruptcy estate. Black v. Leavitt (In re Black), No. 18-1351 (B.A.P. 9th Cir. Dec. 31, 2019).

The debtor filed chapter 7 bankruptcy listing real property valued at $52,300 for which he sought to take his homestead exemption. The trustee objected on the grounds that the property was used as rental property rather than the debtor’s residence. The debtor received his chapter 7 discharge and moved to convert the case to chapter 13. The bankruptcy court sustained the trustee’s objection to the exemption and granted his motion for turnover. It then granted the debtor’s motion to convert.

In his chapter 13 petition, the debtor listed the property as rental and valued it at $44,000. Although he was a below-median debtor, his confirmed plan provided that he would pay $250 per month for fifty-nine months, and pay a lump sum of $45,000 upon sale or refinancing of the rental property. After making payments on the plan for forty-eight months, the debtor sold the property for $107,000. He immediately paid the remaining amount due under the plan out of the proceeds from the sale. The trustee moved to modify the plan to require the debtor to turnover the proceeds from the sale of the property for distribution to unsecured creditors. The bankruptcy court granted the modification and the debtor appealed.

On appeal, the bankruptcy appellate panel began with the debtor’s argument that because he had completed all plan payments before the trustee moved for modification, her motion was untimely under section 1329(a) which permits modification at any time before completion of plan payments. The panel disagreed.

In Fridley v. Forsythe (In re Fridley), 380 B.R. 538 (B.A.P. 9th Cir. 2007), the court held that, to prevent a debtor from shielding post-petition property from payment into the plan by early pay-off, a chapter 13 debtor seeking to shorten his plan period must do so through modification. Because the debtor here made his lump sum payment prior to the expiration of the fifty-nine-month plan term and did not move to modify the plan, he did not fulfill the requirements necessary to preclude the trustee from moving for modification. The fact that the debtor was below-median and statutorily required to commit to a plan of only thirty-six months was irrelevant in light of the actual terms of the plan.

The panel also disagreed with the debtor’s contention that the trustee’s proposed modification did not comply with section 1329, 1322 or 1325 because it did not provide specifics such as the date of turnover, details of liquidation, the new payment amount or length, or proof of his ability to make the payments. The panel found that the trustee was not required to submit an entirely new plan, but could, and did, incorporate most of the debtor’s previous plan with only a few changes relating to the disposition of the sale proceeds. It therefore held that the form of the proposed modification was proper.

Turning to the gist of the appeal, the panel found that the bankruptcy court erred in ordering the debtor to turn over the proceeds of the sale above and beyond that which was required by the terms of the original plan. In so holding, the panel addressed an apparent conflict between section 1327(b) and sections 1306 and 541. Under section 1327(b), as well as the terms of the debtor’s plan, the property of the estate revested in the debtor upon confirmation. The trustee argued, however, that section 1306, which incorporates into the estate property the debtor acquires post-petition, and 541(a)(6), which incorporates proceeds or profits from estate property, applied to bring the proceeds of the sale into the debtor’s estate for distribution to unsecured creditors.

Finding that section 541(a)(6) did not apply, the panel harkened back to the decision in McDonald v. Burgie (In re Burgie), 239 B.R. 406 (B.A.P. 9th Cir. 1999), where the debtors sold their homestead property post-confirmation and used some of the proceeds to purchase a new home. The bankruptcy court denied the trustee’s motion to compel turnover of the remaining $20,000 in sale proceeds. The BAP affirmed, finding that the structure of chapter 13, under which debtors commit future income to a plan in exchange for retention of pre-petition assets, put those pre-petition assets out of reach of the trustee once they revested in the debtor. Based on Burgie, the panel here found that the debtor’s real property was no longer part of the estate once the plan was confirmed and the debtor could not be compelled to turn over the proceeds from its sale.

Acknowledging a split in the circuits on the issue, the panel also disagreed with the trustee’s position that appreciation of the value of the property from $44,000 to $107,000 constituted after-acquired property which became part of the estate under section 1306(b). The panel reasoned that the property’s appreciation occurred after plan confirmation at a time when the property had revested in the debtor. Therefore, the increase in value was not to property of the estate. The panel declined to equate an increase in value of a pre-petition asset with property “acquired” post-petition within the meaning of section 1306.

The panel therefore concluded that the bankruptcy court erred in granting the trustee’s motion to modify. It reversed.

Black 9th BAP Dec 2019


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