National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

§ 554 – Abandonment of property of the estate

by on

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

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

by on

Sixth Circuit Questions “Person-Aggrieved” Standard for Appeal

The debtors’ claim against lenders for charging improper fees during their bankruptcy belonged to the bankruptcy estate, but the lenders’ appeal of the bankruptcy court’s order of abandonment was dismissed because they lacked a direct financial stake in the outcome of the bankruptcy court’s decision and, therefore were not “persons-aggrieved.” In so holding, the Sixth Circuit indicated that had the lenders challenged the “person-aggrieved” standard it would likely have been found to have been abrogated by subsequent Supreme Court precedent and congressional action. Schubert v. Litton Loan Servicing, No. 21-3969 (6th Cir. March 28, 2023).

The debtors alleged that from 2000 to 2004, while they were in bankruptcy, Litton Loan Servicing, L.P., JPMorgan Chase Bank, N.A., and Ocwen Financial Corporation (collectively, “the lenders”), breached their mortgage agreement by collecting fees to which they were not entitled. The debtors received their discharge in 2006 without having disclosed the claim against the lenders to the bankruptcy court, apparently because they only discovered the overcharges a decade later during foreclosure proceedings. Upon discovery, the debtors sued the lenders in state court for breach of contract. The lenders argued that the claim belonged to the bankruptcy estate. The debtors had the state court case stayed and they reopened their bankruptcy case, seeking abandonment of the claim. The lenders opposed abandonment and countersued for an injunction to prevent the debtors from pursuing the state action. The debtors moved to dismiss the lenders’ complaint.

After a hearing, the bankruptcy court denied the debtor’s motion to dismiss and ruled that the claim belonged to the estate. It ordered the trustee to abandon the claim and declined to issue an injunction. Upon appeals by both sides, the district court affirmed.

The case came before the Sixth Circuit on the lenders’ appeal of the abandonment order, and the debtor’s appeal of the denial of their motion to dismiss.

As an initial matter, the court found the lenders had standing to pursue the appeal. The prospect of state court litigation established the necessary “injury fairly traceable to the defendant’s conduct and likely redressable by a favorable decision.”

Another jurisdictional question was more troublesome. The court found the lenders did not pass the “person-aggrieved” test, which bars appeals in bankruptcy by a party “who lack[s] a direct financial stake in the appeal’s outcome.” The person-aggrieved test was included in section 158 of the Bankruptcy Code until Congress removed it in the 1978 amendments to the Code.

The court indicated that the test, which has been deemed to be jurisdictional, is a likely candidate for abrogation in light of the subsequent Supreme Court decision in Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 125–27 (2014). Lexmark prohibited a court from limiting its jurisdiction for prudential or policy reasons. “[W]hen Congress creates a right to sue consistent with the Constitution, a court may not take it away.”

However, the lenders did not seek abrogation of the test, so the court rendered its decision based on the test’s continued viability. It found that the lenders did not have the requisite financial stake in the appeal’s outcome because they sought only to preclude state court litigation. “[U]nder our precedent, staving off the threat of litigation doesn’t count. In re LTV Steel Co., Inc., 560 F.3d 449, 452–53 (6th Cir. 2009).”

The court turned next to the debtors’ appeal of the bankruptcy court’s denial of their motion to dismiss the lenders’ adversary complaint. The circuit court stated that the lenders had standing to bring the adversary complaint for the same reason they had standing to appeal. The court also rejected the debtor’s argument that the bankruptcy court lacked the power to determine which claims belong in the estate, finding that that determination is well within the bankruptcy court’s administrative powers under section 157(b)(2)(A).

Finally, the court disagreed with the debtors’ contention that the lenders were not parties in interest. On the contrary, the lenders had “a practical stake in maintaining the settlement of claims the bankruptcy produced.” Had the claim against them been raised during the bankruptcy proceedings, they could have addressed it at that time.

The court dismissed the lenders’ appeal and affirmed the ruling that was the subject of the debtors’ appeal.

In a concurring opinion, Judge Moore stated that the person-aggrieved standard, rather than being at odds with more recent law, “reflects a zone-of-interests analysis that is consistent with Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014).” Judge Moore observed that the person-aggrieved standard, while most often requiring a financial stake in the proceedings, may also be met when there is a public interest in the outcome of an appeal. In her opinion, when properly applied, the person-aggrieved standard “directs the courts to perform a zone-of-interest analysis in line with Lexmark.”

She agreed with the majority, however, that the lenders’ appeal did not fall under the zone-of-interests the abandonment statute, section 554, was intended to address. That provision was designed to prevent trustees from pursuing the sale of property only to increase the trustee’s commission without benefit to the estate. In this case, the lenders’ appeal was solely intended to free them from state court litigation and would not benefit the bankruptcy estate. Therefore, the appeal was outside the zone of interest.

Schubert 6th Cir March 2023