Answering a question left open by the Tenth Circuit in Rodriguez v. Barrera (In re Barrera), 22 F.4th 1217 (10th Cir. Jan. 19, 2022), Bankruptcy Judge Joseph G. Rosania, Jr., of Denver decided that a chapter 13 debtor retains appreciation in the value of nonexempt property that the debtor owned on the filing date but sold in the course of the chapter 13 case.

In Barrera, the Tenth Circuit held that nonexempt appreciation in the value of a home sold after confirmation of a chapter 13 plan belongs to the debtor, not to creditors, if the case converts to chapter 7 after the sale. The appeals court specifically declined to opine on the result if the debtors were to remain in chapter 13 after the sale. To read ABI’s report on Barrera, click here.

A couple confirmed a chapter 13 plan, after disputes with the chapter 13 trustee concerning the value of a limited liability corporation in which the husband owned a 13% interest. The LLC was the owner of a small office building in which the husband maintained his office.

To confirm the plan, the debtors obtained a valuation of the husband’s interest in the LLC from a chapter 7 panel trustee. The panel trustee opined that the interest was worth $15,000. The couple confirmed their five-year plan based on the $15,000 valuation.

Three years into the plan, the other owners of the LLC decided to sell the office building. The sale resulted in net proceeds to the husband-debtor of about $75,000. The chapter 13 trustee filed a motion aiming to compel the debtors to turn over the sale proceeds and to modify the plan.

The debtors objected and won. Judge Rosania allowed the debtors to retain the sale proceeds in his August 23 opinion.

The case called for Judge Rosania to find the answer in what he called the “apparent contradiction” between Sections 1325(a)(4) and 1306.

In addition to property in Section 541, Section 1306 says that property of the estate in chapter 13 includes property of the type in Section 541 “that the debtor acquires” after filing but before the case is closed.

Section 1325(a)(4) requires the plan to provide value to creditors, as of the effective date of the plan, that is “not less” than what would be paid “if the estate of the debtor were liquidated in Chapter 7 . . . on such date.”

In addition, Section 1327(b) provides that “the confirmation of a plan vests all of the property of the estate in the debtor,” unless the plan or the confirmation order provides otherwise.

Judge Rosania framed the question as whether the proceeds from the sale of prepetition property “should be contributed to the chapter 13 plan.” Under the “estate termination theory” espoused by other bankruptcy judges in Colorado, he said that “property vested with the debtors upon confirmation was no longer property of the estate.”

Other courts, Judge Rosania said, adopted the “estate replenishment theory” where the estate “refills” with property acquired after confirmation without regard to whether the property is necessary to perform the plan. The replenishment theory, he said, requires “continued revaluation of estate property throughout the term of the plan.”

To resolve the contradiction in the statute that the Tenth Circuit recognized in Barrera, Judge Rosania “determined [that] the revesting requirement under 11 U.S.C. § 1327(b) is more specific than the general language of 11 U.S.C. § 1306(a)(1)” and that “the estate termination theory gives meaning to both statutes.”

To rule in favor of the debtor, Judge Rosania observed that the sale proceeds were generated from the sale of a business entity and were not earnings under Section 1306(a)(2).

Of greater significance, perhaps, he said that the value of the interest in the LLC “was appropriately disclosed and reconciled in the best-interest-of-creditors test” and “revested with the Debtors upon confirmation.”

Judge Rosania held that the “estate termination theory . . . allows the Debtors to retain proceeds from the post-confirmation sale of prepetition property under the facts and circumstances of this case.”