This statutory language appears in each of Chapter 13, Chapter 12 and Subchapter V of the Bankruptcy Code:
- “Property of the estate includes . . . all property . . . that the debtor acquires after the commencement of the case”; and
- “confirmation of a plan vests all of the property of the estate in the debtor . . . free and clear of any claim or interest of any creditor”;
- See §§ 1306 & 1327(b)&(c), §§ 1207 & 1227(b)&(c), and §§ 1141(b)&(c) & 1181(a) (emphasis added).
But while such inclusion and vesting language appears in all the three small-reorganization bankruptcy schemes, the meaning of such language is uncertain.
Five different approaches to that meaning exist and are explained (with four approach being rejected and one approach adopted) in this Chapter 13 opinion:
- In re Marsh, 647 B.R. 725 (Bankr. W.D. Mo. 2023).
Presumably, the In re Marsh analysis will also apply to the corresponding provisions of Chapter 12 and Subchapter V with equal effect.
Facts
Debtors file their Chapter 13 bankruptcy, scheduling a $140,000 ownership interest in their residence:
- Mortgage Holder asserts a $124,842.71 lien against Debtors’ residence; and
- Debtors claim a $15,000 homestead exemption in that residence.
Debtors’ Chapter 13 plan provides: (i) the Trustee will make payments on the residence mortgage for the five-years term of the plan, and (ii) non-priority unsecured creditors will receive nothing.
The Bankruptcy Court confirms Debtors’ Plan without objection.
Then, Debtors file a motion to sell their residence for $210,000. The motion is approved with no objection, and the sale is scheduled to close, resulting in “net proceeds of approximately $78,000.”
Then, Debtors file a motion to retain the net proceeds from the sale, “to be used for obtaining a new residence and other expenses”:
- the Chapter 13 Trustee objects, (i) arguing that the net proceeds are property of the bankruptcy estate, and (ii) requesting that the net proceeds be used, instead, to pay all allowed claims in full; and
- Debtors argue, in response, that the proceeds (i) are not property of the estate, and (ii) are unavailable to the Trustee.
Statutory Provisions
The dispute between Debtors and the Trustee, in In re Marsh, is governed by the interplay between the following two statutes.
–On “Property of the estate”
11 U.S.C. § 1306(a) provides (emphasis added):
“(a) Property of the estate includes, in addition to the property specified in section 541 of this title—(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted . . .”
Note regarding Chapter 12 and Subchapter V:
- Chapter 12 has the exact-same provision in § 1207; and
- Subchapter V has the exact-same provision in § 1186(a) for plans confirmed under § 1191(b)—i.e., for non-consensual plan confirmations.
–On “Vesting” in the Debtor
11 U.S.C. § 1327(b)&(c) provide (emphasis added): “(b) . . . the confirmation of a plan vests all of the property of the estate in the debtor. (c) . . . the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.”
Note regarding Chapter 12 and Subchapter V:
- Chapter 12 has the exact-same language in § 1227(b)&(c); and
- Subchapter V has the exact-same provisions as § 1327(b) in § 1141(b), but § 1141(c) uses this language: “after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors . . .”
Five Approaches
Five differing approaches to resolving the In re Marsh dispute have emerged. What follows is a summary of each from the In re Marsh opinion.
One: Estate Termination Approach
Because § 1327 vests all property in debtor at confirmation, the Chapter 13 estate terminates at confirmation, except as provided in debtor’s plan.
The Eighth Circuit and other courts expressly reject this approach because:
- the trustee’s post-confirmation authority to administer the estate and several sections of the bankruptcy code show that the bankruptcy estate continues to exist after confirmation (citing 11 U.S.C. §§ 345, 347, 349(b)(3), 704, 1302(b)(1), and 1327);
- the estate termination approach would render several provisions of the Bankruptcy Code “meaningless or superfluous,” and the structure and operation of the Bankruptcy Code demonstrate that the estate continues to exist after confirmation.
Two: Estate Preservation Approach
The bankruptcy estate continues after confirmation, retains all pre-confirmation property, and also includes any property the debtor acquires after confirmation.
This approach specifically holds that “vesting” under § 1327 removes nothing from the bankruptcy estate—that’s because:
- § 1327’s vesting provision merely fixes debtor’s right to possess and deal with estate property after confirmation;
- property of the debtor and property of the estate are “one and the same,” both before and after confirmation; and
- the automatic stay continues to protect all property after confirmation.
Courts rejecting this approach say that it does not adequately reconcile § 1306 and § 1327 because:
- it undermines § 1327 by construing it as giving debtor something less than an immediate, absolute interest in vested property; and
- it is at odds with the § 1327(c) mandate that “the property vesting in the debtor . . . is free and clear of any claim or interest of any creditor provided for by the plan.”
Three: Conditional Vesting Approach
§ 1327 gives the debtor “an immediate and fixed right to the future enjoyment of the bankruptcy estate,” but that right is not final until the debtor “has faithfully completed his obligations under the plan and is entitled to a discharge.”
The result is that “assets that the debtor acquire[s] after confirmation must be included in the bankruptcy estate,” and are subject to the trustee’s administration.
This approach results in “a legitimate quid pro quo”: in exchange for a discharge and retaining assets under the protection of the automatic stay, debtors must disclose all pre- and post-confirmation assets and account for them under the plan.
The Court rejects this approach because it:
- suffers from the flaw of disregarding § 1327’s mandate that property vests in the debtor “free and clear” of creditors’ claims at confirmation; and
- creates uncertainty about the extent of each parties’ interests in property during the life of the Chapter 13 plan.
Four: Estate Transformation Approach
The “estate consists of the property and future earnings of the debtor dedicated to fulfillment of the Chapter 13 plan,” regardless of whether the debtor acquires that property before or after confirmation.
The post-confirmation estate must include property necessary to fulfill the plan, because §§ 1322 and 1327(b) imply that the plan and confirmation order control the extent of vesting under § 1327.
Courts developed this approach as a compromise between the two extremes of the estate termination and the estate preservation approaches.
This approach attempts to honor, in part, the vesting provision of § 1327(b), while acknowledging the inclusive language of § 1306(a).
Though attractive in concept, neither the Bankruptcy Code’s plain language nor the practicalities of Chapter 13 support this approach:
- no textual basis exists for distinguishing between post-confirmation property that is “necessary” and that which is “not necessary” to fulfill the Chapter 13 plan;
- §§ 1322 and 1327 are not so broad as to make property of the estate all property necessary to the plan—those provisions, instead, require that the plan or confirmation order designate property that does not vest in the debtor at confirmation; and
- it is difficult to apply in practice, because (i) reasonable parties may disagree about what property is “necessary” to fulfill the plan at any given time, and (ii) the necessity of property may change throughout the Chapter 13 case.
Five: Estate Replenishment Approach
Pre-confirmation property of the estate becomes property of the debtor at confirmation, and post-confirmation property replenishes the estate.
This approach reconciles § 1306 and § 1327 by construing vesting under § 1327 as an event that occurs only at confirmation. Specifically:
- on the petition date, § 541 sweeps the debtor’s property into the estate;
- between the petition date and date of confirmation, § 1306 augments the estate with additional property the debtor acquires;
- each time a plan or modified plan is confirmed, § 1327 vests all then-existing property in the debtor, unless the plan or confirmation order provides otherwise—but any property the debtor acquires after confirmation is not subject to § 1327(b) because it was not in existence at confirmation; and
- after confirmation, § 1306(a) once again deems property acquired by the debtor after confirmation as property of the estate.
Critics of this approach typically reject it as giving insufficient weight to either § 1306 or § 1327—i.e.:
- some critics say it reads § 1306 too broadly and gives insufficient weight to § 1327(b), undermining the Chapter 13 bargain a debtor makes when trading debtor’s future income devoted to the plan for debtor’s assets;
- other critics say it reads § 1306 too narrowly and exaggerates the effect of § 1327 by (i) pretending debtor has an absolute entitlement to vested property and (ii) ignoring that the Bankruptcy Code conditions debtor’s entitlement to vested property on debtor’s faithful fulfillment of the plan.
All are valid critiques.
Adopting # 5—the Estate Replenishment Approach
Despite its flaws, the Court adopts the fifth approach (the Estate Replenishment Approach) as best reconciling § 1306 and § 1327. That’s because it:
- gives effect to § 1306 by including in the estate, at least temporarily, all property debtor acquires after the petition date but before the case is closed, dismissed, or converted;
- gives effect to § 1327 by honoring the vesting of property free and clear of creditors’ claims;
- makes a clear demarcation between pre-confirmation property (which vests in the debtor) and post-confirmation property (which becomes property of the estate);
- differentiates between property of the debtor and property of the estate more predictably than other approaches; and
- avoids creating a distinction among types of post-confirmation estate property where there exists no textual basis to do so.
Fifth Approach Applied
The court goes on to apply the fifth approach to the facts of the case, resulting in the following conclusions:
- proceeds from the sale of Debtors’ residence are property of their Chapter 13 estate; but
- that does not mean Debtors are prevented from retaining at least a portion of the proceeds under a modified plan; and
- after further trial under a plan modification, Debtors are allowed to retain proceeds from sale of their residence in the amount of $62,684.09, with the Trustee allowed to use the remaining proceeds of $10,278.59.
Conclusion
Here’s is a huge “Thank you” to the Bankruptcy Court in the Western District of Missouri for the In re March explanation and analysis of the “vesting” provisions in chapters 13 and 12 and in Subchapter V.
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