In the absence of bad faith, post-petition appreciation does not enter the chapter 7 estate upon conversion from chapter 13. Rodriguez v. Barrera (In re Barrera), No. 20-1376 (10th Cir. Jan. 9, 2022). NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor in this case.
When the debtors filed for chapter 13 bankruptcy, the value of their home was less than the sum of the liens plus their homestead exemption. However, the value of their home appreciated such that, when they sold it during their bankruptcy, the sale proceeds exceeded the liens and exemption by $140,251. They then converted to chapter 7, and the trustee moved for turnover of the non-exempt portion of the proceeds. The bankruptcy court denied the motion and the BAP affirmed.
On appeal, the Tenth Circuit court noted that prior to 1994 circuit courts were split as to whether post-petition appreciation of property during a chapter 13 case became part of a converted chapter 7 case. Congress addressed the issue when it enacted section 348(f)(1)(A), which states that “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[.]”
Notwithstanding Congress’s effort to clarify the issue, courts remain split as to whether post-petition, pre-conversion sale proceeds from the appreciation in value of a debtor’s property are part of the converted case. The court here found the answer in the plain language of the statutes. The court began with the phrase “property of the estate” which section 541 defines as all legal or equitable interests held by the debtor, including proceeds from such interests. The court took pains to clarify that “proceeds” and “legal or equitable interests” are two distinct concepts.
Finding that the lower courts reached the correct conclusion, the court reasoned that the physical residence was not in the debtors’ possession at the time of the conversion. Therefore, under the plain language of section 348(f)(1)(A), it did not become property of the converted estate. And although “proceeds” are included in the definition of estate property under section 541, the proceeds in this case did not exist at the time of the original petition. For that reason, they could not be considered to have remained in the debtor’s possession at the time of conversion as required by section 348(f).
The court found further support for its position in section 1327(b) which provides that once the chapter 13 plan is confirmed, all estate property vests in the debtor and, therefore, at the time the debtors sold the home it was no longer part of the chapter 13 estate. The court noted that the legislative history also supported its conclusion. When discussing section 348(f) Congress specified that it was overruling Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991), which held that post-petition acquisition of real estate became part of converted estate, and adopting the reasoning of In re Bobroff, 766 F.2d 797 (3d Cir. 1985), which held that a post-petition cause of action was not part of the converted estate.
As a final note, the court acknowledged the concern that debtors could use conversion to game the system, but it found that danger to be addressed by section 348(f)(2) which provides that if a conversion is done in bad faith, the chapter 7 estate expands to capture post-petition property.
The court affirmed.
