The 8th Circuit Rules That Post-Petition Pre-Conversion Increase In Equity in Real Estate Is Part of the Converted Chapter 7 Estate

Posted by JIm Haller - March 16, 2024

The rise in equity in the appellant’s residence after filing for bankruptcy but before conversion became part of her bankruptcy estate after conversion, as outlined in 11 U.S.C.S § 348(f)(1)(A). This occurred because the residence was already part of the appellant’s estate, and she maintained possession and control over it at the time of filing for bankruptcy.

FACTS

“On August 19, 2020, Machele Goetz filed a chapter 13 bankruptcy petition and plan. She owned a residence worth $130,000 and claimed a $15,000 homestead exemption under Missouri law. Freedom Mortgage held a $107,460.54 lien against the residence. It is undisputed that had the trustee liquidated the residence on the date of the petition, the estate would have received nothing net of the exemption, the lien, and the sale expenses.

“Later, on April 5, 2022, the bankruptcy court granted Goetz’s motion to convert her case from chapter 13 to chapter 7. Between the chapter 13 filing and the date of the conversion order, Goetz’s residence had increased in value by $75,000, and she had paid down a further $960.54 on the mortgage. Had the trustee liquidated the residence on the date of conversion, more than $62,000 net of the exemption, the lien, and the sale expenses would have been produced.

“After realizing that the trustee might sell the residence given the change in value, Goetz moved for the bankruptcy court to compel the trustee to abandon it. Goetz argued that the residence was of “inconsequential value and benefit to the estate” under 11 U.S.C. § 554(b), asserting that the post-petition, pre-conversion increase in equity must be excluded from the calculation of her residence’s value to the estate. The trustee resisted Goetz’s motion, arguing that, under 11 U.S.C. § 348(f), the bankruptcy estate in a converted case includes post-petition, pre-conversion increase in equity, meaning Goetz’s residence was still of value to the estate.”

ANALYSIS

Under 11 U.S.C. § 348(f)(1)(A),” the property of the estate in Goetz’s converted chapter 7 case consists of the property of the estate as of the date she filed her chapter 13 bankruptcy petition (August 19, 2020) that remained in her possession as of the date of conversion from chapter 13 to chapter 7 (April 5, 2022). …

“Goetz’s residence is property of the converted estate because she held “legal or equitable interest[]” in it as of August 19, 2020, id. § 541(a)(1), and because it remained in her possession when she converted her case to chapter 7 on April 5, 2022, id. § 348(f)(1)(A). The question is whether the post-petition, pre-conversion increase in equity in that residence is also part of the converted estate. … We start with the first half of the definition of property of the converted estate: whether the property in question was “property of the estate, as of the date of filing of the petition.” 11 U.S.C. § 348(f)(1)(A). …

Property of the Estate

“Property of the estate at “[t]he commencement of a case” includes “[p]roceeds . . . of or from property of the estate.” Id. § 541(a)(6). A voluntary case in bankruptcy commences when the petition is filed. Id. § 301(a); see also id. § 348(a) (“Conversion of a case from a case under one chapter of this title to a case under another chapter of this title . . . does not effect a change in the date of the filing of the petition [or] the commencement of the case . . . .”).”

Proceeds

“But the Code does not define “proceeds” or “equity,” so “we may look to dictionaries . . . to determine the meaning.” Schwab v. Reilly, 560 U.S. 770, 783, 130 S. Ct. 2652, 177 L. Ed. 2d 234 (2010); see also Franklin Cal. Tax-Free Tr., 579 U.S. at 126 (looking to Black’s Law Dictionary and the Oxford English Dictionary for the meaning of “define”). Proceeds are “[t]he value [*6] of land, goods, or investments when converted into money; the amount of money received from a sale.” Proceeds, Black’s Law Dictionary (11th ed. 2019). HN6 Equity is “[t]he amount by which the value of or an interest in property exceeds secured claims or liens; the difference between the value of the property and all encumbrances on it.” Equity, Black’s Law Dictionary (11th ed. 2019). An encumbrance is “[a] claim or liability that is attached to property or some other right . . . that may lessen its value, such as a lien or mortgage.” Encumbrance, Black’s Law Dictionary (11th ed. 2019).

“The post-petition, pre-conversion increase in equity in Goetz’s residence—i.e. the difference between its value and the homestead exemption and lien—is therefore proceeds “from property of the estate,” 11 U.S.C. § 541(a) (emphasis added), because it is the amount of money that the estate would receive from a sale of the residence before sale expenses. Cf. In re Potter, 228 B.R. 422, 424 (B.A.P. 8th Cir. 1999) (“Nothing in Section 541 suggests that the estate’s interest is anything less than the entire asset, including any changes in its value which might occur after the date of filing.”). Accordingly, the post-petition, pre-conversion increase in equity in Goetz’s residence was property [*7] of the estate at “[t]he commencement of [the] case.” 11 U.S.C. § 541(a).”

NCBRC and NACBA submitted amicus briefs in support of the debtor both at the 8th Circuit and the 8th Circuit B.A.P.

In re Goetz

NCBRC-NACBA Amicus Brief – Goetz

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