Appreciation Is Part of Converted Chapter 7 Estate

Posted by NCBRC - October 29, 2021

Post-petition appreciation in a chapter 13 case becomes part of the chapter 7 estate upon conversion. In re Castleman, No. 19-12233 (Bankr. W. D. Wash. June 4, 2021).

When the debtors filed for chapter 13 bankruptcy their residence was valued at $500,000. At the time of conversion of the case to chapter 7, the property value had appreciated to $700,000. The trustee moved to include the appreciation in the chapter 7 bankruptcy estate and the debtors opposed the motion.

The issue turned on interpretation of section 348(f)(1) which provides:

(1) 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;

(B) 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 . . . .

The bankruptcy court discussed two approaches to the circumstances presented here. The first, represented by In re Cofer, 625 B.R. 194, 202 (Bankr. D. Idaho 2021), holds that when a debtor converts from chapter 13 to chapter 7, the value of the chapter 7 estate is based on the original valuation of estate property as of the petition date of the chapter 13 case. Under that approach, any appreciation in value inures to the benefit of the debtor upon conversion. Courts following the Cofer approach find that the statute is ambiguous and that their interpretation harmonizes with congressional intent to encourage debtors to file under chapter 13.

Other courts, represented by In re Goins, 539 B.R. 510, 516 (Bankr. E.D. Va. 2015), hold that appreciation during the chapter 13 case is captured by the new chapter 7 estate. In Goins the court assigned appreciation to the chapter 7 estate but declined to include the increase in equity resulting from the debtor’s payments on the secured debt in the chapter 13 case.

Falling in the Goins camp, the court observed that, in enacting section 348(f), Congress essentially adopted the approach taken in In re Bobroff, 766 F.2d 797 (3d Cir. 1985), where the court found a post-petition tort claim was not part of the converted estate, and by doing so, succeeded in eliminating the disincentive to chapter 13 filings. The court here distinguished between newly acquired assets and a change in value of a pre-petition asset. It found that, although there was some discussion of the issue in the House Report, Congress simply did not include any treatment of post-petition appreciation in the statute. For that reason, the court found the statute to be unambiguous but silent as to treatment of pre-conversion appreciation of an asset.

The court therefore relied on cases out of the Ninth Circuit, Wilson v. Rigby, 909 F.3d 306, 312 (9th Cir. 2018); In re Hyman, 967 F.2d 1316, 1321 (9th Cir. 1992); and In re Reed, 940 F.2d 1317, 1323 (9th Cir. 1991), finding that in chapter 7 cases, post-petition appreciation becomes part of the bankruptcy estate. Those cases relied on section 541 in finding that appreciation is inseparable from the estate property and, therefore, inures to the benefit of the estate.

The court here found nothing in section 348(f) to alter the finding in Reed and similar cases. It concluded that “the full value of the Real Property is property of the Chapter 7 estate including any post-petition appreciation.”

The case is currently on appeal in the District Court for the Western District of Washington, case no. 21-829.

Castleman Bankr WD Wash June 2021

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