Chapter 7 Trustee Bound by Pre-Conversion Agreement

Posted by NCBRC - February 17, 2023

The chapter 7 trustee was bound by the chapter 13 trustee’s pre-conversion concession that the creditor’s liens were valid, and therefore the chapter 7 trustee could not prevent the creditor from receiving the proceeds from the sale of the property securing the liens. In re Hillis, No. 20-70372 (Bankr. M.D. Ga. Jan. 11, 2023).

When the debtors filed for chapter 13 bankruptcy they listed Southern Pine Credit Union as a creditor with security interests in a lawn mower, two John Deere loaders, and a Nissan Armada. During the pendency of the bankruptcy, the debtors sought and received an order approving the sale of the lawn mower and the two loaders with the proceeds going to Southern Pine in satisfaction of the loans secured by all the vehicles including the Nissan Armada. The Trustee consented to the sale, and Southern Pine offered no opposition. The court approved the sale and ordered the creditor to release the lien on the Nissan Armada upon receipt of the proceeds.

The debtors completed the sale but converted to chapter 7 before they had received the proceeds. Southern Pine moved for relief from stay because it had not yet received the proceeds from the sale. Soon after it filed the motion, the debtors transferred the proceeds to Southern Pine. The chapter 7 trustee, believing the underlying liens might be avoidable, objected to the motion for relief from stay and made a verbal demand at the meeting of creditors for turnover of the funds. Southern Pine responded that the trustee was barred by res judicata from reneging on the pre-conversion agreement. The debtors filed a turnover motion seeking an order requiring the creditor to release the lien on the Nissan as required by the court’s order approving the sale.

The court began by finding that the chapter 7 trustee had standing in the case because, under section 348(f)(1)(A), the proceeds from the sale of the vehicles became part of the converted estate. Under that provision property in an estate converted from chapter 13 to chapter 7 consists of property the debtors held at the time of their chapter 13 petition which they continue to hold at the time of conversion. The court found that the sale agreement gave the debtor a contractual right to the proceeds which became property of the new estate.

The court agreed with Southern Pine, however, that the chapter 7 trustee was barred by res judicata from challenging the pre-conversion agreement to transfer the proceeds to the creditor in full satisfaction of its liens. The only issue in that regard was whether the chapter 7 trustee was in privity with the chapter 13 trustee such that the chapter 7 trustee should be bound by an agreement entered into by his predecessor. The court found the elements for res judicata as set forth in Griswold v. County of Hillsborough, 598 F.3d 1289, 1292 (11th Cir. 2010), were satisfied. Specifically, where section 704(a)(5) empowers the chapter 7 trustee to oppose the allowance of an improper claim, section 1302(b)(1) empowers the chapter 13 trustee to exercise the powers granted in section 704(a)(5). The court observed that when the two trustees have corresponding duties, performance of those duties by the first binds the second.

Here, the chapter 13 trustee did not object to the debtors’ motion to sell the property, including the understanding in the motion that Southern Pine had valid liens. Nor was the motion contingent upon the debtors’ staying in chapter 13. The court also rejected the trustee’s argument that because section 348(f) permits him to reevaluate the property of the estate, he is entitled to challenge the validity of the liens. The court found the trustee’s reading of the statute to be too broad. Valuation of property does not include lien validity.

The court concheld Southern Pine’s motion was moot by reason of its having received the proceeds from the sale. It ordered Southern Pine to release the lien as requested by the debtors, and overruled the trustee’s objections.

Hillis Bankr MD Ga Jan 2023


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