Taking sides with the minority on a question where the lower courts are divided, the bankruptcy judges in Kansas decided that the fruits of a post-petition personal injury claim belong to the chapter 13 debtor, not to creditors.

The decision seems to mean chapter 13 debtors are also not required to share post-petition inheritances, lottery winnings and other windfalls that have no connection to prepetition assets.

More specifically, the Kansas judges made two holdings: (1) When confirming an amended chapter 13 plan, the valuation of estate property for the best interests test is made as of the date of confirmation of the modified plan; but (2) property that was newly acquired after the original petition is not included in the best interests test.

The Meager Plan and the Big Settlement

The debtor confirmed a meager chapter 13 plan in 2016. It may have been a case where the debtor was forced into chapter 13 because she couldn’t afford to pay a retainer before bankruptcy to file under chapter 7.

The confirmed 56-month plan paid the filing fee, the debtor’s counsel’s fees and car payments. The plan had nothing for unsecured creditors.

About three years into the plan, the debtor was in an accident, resulting in a $295,000 settlement in her favor. The net available to the debtor was about $140,000.

The chapter 13 trustee filed a motion to modify the plan and divert $20,000 from the settlement to pay unsecured claims in full. The debtor opposed. Pending the outcome of the dispute, $20,000 was held in escrow.

To confirm the amended plan, the trustee contended that the best interests test should take the settlement into account.

In his July 21 opinion, Bankruptcy Judge Dale L. Somers of Topeka, Kan., ruled for the debtor. Judge Somers said that the other Kansas bankruptcy judges, Robert D. Berger and Mitchell L. Herren, agreed with his analysis.

The Applicable Statutes

The outcome entailed construction of four sections in the Bankruptcy Code.

To confirm an amended plan, Section 1329(b)(1) requires satisfaction of the Section 1325(a) confirmation standards.

The Section 1325(a)(4) best interests test requires that “the value, as of the effective date of the plan, [of property to be distributed to unsecured creditors] is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.”

Section 1306(a) provides that estate property in chapter 13 includes property acquired after filing but before the case is closed, dismissed or converted.

Finally, Section 348(f)(1)(A) provides that property of the estate in a chapter 7 case that was converted from chapter 13 includes “property of the estate, as of the date of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”

The statutes do not tell us whether the effective date of the plan is the original confirmation date or the date of confirmation of the amended plan.

The Split Among the Lower Courts

The chapter 13 trustee primarily relied on Barbosa, and so did Judge Somers, up to a point. See In re Barbosa, 235 B.R. 540, 552 (Bankr. D. Mass. 1999), aff’d, Barbosa v. Solomon, 243 B.R. 562 (D. Mass. 2000), aff’d, 235 F.3d 31 (1st Cir. 2000).

In Barbosa, the chapter 13 debtor sold prepetition property for substantially more than the value ascribed to the property in the plan. The court held that the value as of the “effective date of the plan” in Section 1325(a)(4) is the value on confirmation of the amended plan, not the value as of the original chapter 13 filing.

If the measuring date was the original confirmation date, an increase in the value of property after confirmation wouldn’t matter, assuming that the original valuation as of filing was immutable.

Judge Somers cited “numerous” cases reaching the same result. Indeed, he cited a case precisely on point. In In re Villegas, 573 B.R. 844 (Bankr. W.D. Wa. 2017), the court allowed the chapter 13 trustee to modify the plan to take over proceeds from a post-petition settlement of a personal injury claim.

To the contrary, Judge Somers cited the Eighth Circuit Bankruptcy Appellate Panel and other cases “holding that postpetition postconfirmation assets are not included in the best interests test for purposes of approval of a modified plan.” [Emphasis in original.]

The Eighth Circuit BAP held that the “effective date of the plan” is not modified by an amendment. Therefore, settlement proceeds arising post-petition were not considered in the liquidation analysis under the best interests test.

Judge Somers admitted there was no easy answer to the question of whether proceeds from a post-petition personal injury claim are included among estate assets when applying the best interests test.

The Effective Date Is the Date of Amendment

Judge Somers reported how two of his predecessors on the Kansas bankruptcy bench had followed Barbosa, including recently retired Bankruptcy Judge Robert E. Nugent. Judge Somers agreed with his former colleagues that Barbosa has the correct answer about the testing date for an amended chapter 13 plan.

But that wasn’t the end of the story.

Although the testing date for the best interests test may be the date of confirmation of the amended plan, what property is included in the estate at the time of amendment?

Newly Acquired Property Isn’t Considered in Best Interests

On one hand, Section 1306 brings after-acquired property into the chapter 13 estate. But Section 348(f) seems to have another answer.

Judge Somers concluded that Section 348(f) controls, not Section 1306. Remember, on conversion from chapter 13 to chapter 7, Section 348(f) says that property of the estate in the converted chapter 7 case includes property of the estate as of the filing that remained in the debtor’s possession or control at the time of conversion.

In other words, Judge Somers said, the “converted estate excludes Section 1306 property.” In other words, “if Debtor’s case were converted to Chapter 7, unsecured creditors would not benefit from the settlement of Debtor’s postpetition personal injury claim.”

For the same reason, the estate on an amended plan should not include property with no connections to property on the original filing date.

Judge Somers stated the holding like this:

Debtor’s postpetition personal injury claim did not exist on the date of filing; its proceeds would not be available to a Chapter 7 trustee, and are excluded from the best interest test calculation.

Based on Barbosa, Judge Somers said that the majority include post-petition windfalls in the best interests calculation. However, he cited Colliers and two other treatises by judges or former judges who reject the majority’s holdings.

Judge Somers denied the trustee’s motion to amend the plan, thus allowing the debtor to retain all of the net proceeds from the personal injury settlement. He stated his two holdings like this:

[T]he best interest test applies to a modified plan, and the effective date of the plan for calculation of the distribution to unsecured creditors in a hypothetical liquidation is the date of the amendment. However, in reliance on § 348(f), the Court holds that the postpetition personal injury claim is not included in the calculation.