Whose Property Is It Anyway Evaluating the Rights and Obligations of Post-confirmation Debtors and Creditors in Chapter 13

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Nov 1999

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For a number of years, bankruptcy courts have been wrestling with the issue of the status of a
debtor's chapter 13 estate once a plan of reorganization has been confirmed. Not surprisingly,
the resolution of this issue works a significant impact upon the rights of a chapter 13 debtor
vis-a-vis his post-confirmation creditors. Until now, the case law has evolved into three
separate schools of thought. Recently yet another approach has emerged to determine the
manner in which the assets of a chapter 13 debtor should be disposed.

<h3>The Code Sections</h3>

To the extent an item or right is no longer property of the debtor's estate, it is no longer
protected by the automatic stay.<a href="#1" name="1a">1</a> Whether post-confirmation earnings of the debtor must be
applied to pre-petition obligations also depends a great deal upon whether such earnings
continue to constitute property of the debtor's estate.

The general definition of "property of the estate" is set forth in §541, compromising
essentially all legal and equitable interests possessed by the debtor prior to the commencement
of its case. Under chapter 13, this definition is augmented by §1306(a),which provides:

<blockquote>
Property of the estate includes, in addition to the property specified in §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 to a case
under chapter 7, 11 or 12 of this title, whichever occurs first, and (2) earnings from
services performed by the debtor after the commencement of the case but before the case is
closed, dismissed or converted to a case under chapter 7, 11 or 12 of this title, whichever
occurs first.
</blockquote>

At first blush, this definition appears relatively self-explanatory. Property of the estate under
chapter 13 includes all interests encompassed within §541, supplemented by the same
property or interest acquired by the debtor subsequent to the filing of his petition until such
time as his case is closed, dismissed or converted. The apparent clarity of this provision
becomes blurred when interfaced with §1327, the Code provision addressing the effect of
confirmation.

Section 1327(a) provides that a confirmed plan binds the debtor and each creditor to the
terms provided for in the confirmed plan, while §§1327(b) and (c) provide that unless
otherwise provided in the plan or order confirming the plan, the confirmation of a plan vests all
the property of the estate in the debtor, free and clear of any claim or interest of any creditor
provided for by the plan. So, while §1306(a) expands the definition of property of the estate to
all property acquired by the debtor through the conclusion of his case, §1327(b) seems to
suggest that all estate property revests in the debtor upon confirmation of his plan—yet another
example of "what the Code giveth, the Code taketh away." As a result, the courts have developed
a number of approaches for determining the rights of parties to a debtor's post-confirmation
property. The first approach relies primarily on §1327(b), the second approach looks to
§1306(a), and a third approach limits post-confirmation property of the estate to that
necessary to effectuate the confirmed plan. The newest approach is described in In re Rangel,<a href="#2" name="2a">2</a>
which provides that confirmation revests estate property in the debtor, with the
post-confirmation estate to be comprised of property acquired thereafter.

<h3>Section 1327 Approach</h3>

Under this line of cases, most recently represented by Oliver v. Toth (In re Toth),<a href="#3" name="3a">3</a> emphasis is
placed on §1327's language that all estate property vests free and clear in the debtor upon plan
confirmation, unless the plan provides otherwise. The Toth court noted that a debtor is not
entitled to permanent protection from all lawsuits once he moves forward with his obligations
under a confirmed plan of reorganization. Citing the Internal Revenue Service (IRS) levy case of

In re Petruccelli,<a href="#4" name="4a">4</a> the court engaged in a literal reading of §1327(b) and refused to apply the
automatic stay to shield the debtor and his post-confirmation property from the IRS. Moreover,
if the "vesting" provided for in §1327 does not act to end the estate, then §1327 becomes
redundant and the term "vest" is deprived of any meaning separate from "possession."<a href="#5" name="5a">5</a>
The court also suggests that this approach upholds the "fresh start" public policy
consideration—i.e., the notation that subjecting post-petition creditors to the automatic stay and
blocking collection attempts following post-petition defaults would further stigmatize debtors.<a href="#6" name="6a">6</a>
From a court administration standpoint, there is no question that this approach holds a great
deal of appeal.

<h3>Section 1306 Approach</h3>

The second line of "vesting" does not alter the existence of the bankruptcy estate. All property
of the debtor, including property acquired post-confirmation, remains property of the estate
subject to the protection afforded by the automatic stay. This line of cases is represented by the
Eighth Circuit Court of Appeals decision in Security Bank of Marshall Town v. Neiman.<a href="#7" name="7a">7</a>

In Neiman, Robert and Susan Brown were hog farmers who filed chapter 13 in 1982. The
largest secured creditor's claim was secured by the hogs, which were worth only about 50
percent of the outstanding indebtedness. The value of the secured claim was paid during the
course of the chapter 13 bankruptcy, and the lender released its security interest on the hogs.
Subsequently, and during the course of the chapter 13, the Browns continued to incur debt in
the operation of their hog farm. Post-petition creditors were paid out of farm operation
revenues. Unfortunately, the reorganization failed, and the Browns converted to chapter 7,
resulting in a battle between the post-petition creditors paid by the Browns and the chapter 7
trustee. The bankruptcy court determined that the post-petition claims were entitled to
administrative claim status. The district court affirmed the lower court's decision, and the
trustee appealed the matter to the Eighth Circuit Court of Appeals.

The appeals court viewed the issue before it as being limited to whether the chapter 13 estate
existed after confirmation of the chapter 13 plan. If no estate existed at the time of the
post-petition payments, then the post-petition creditors would not be entitled to administrative
priority status in the ensuing chapter 7.

The appeals court refused to find the "vesting" language of §1327(b) to be mutually
exclusive to the "property of the estate" language of §1306(a), stating, "...Even if property of
the estate vests in the debtor at confirmation, that does not necessarily mean that the estate no
longer exists. The estate can continue to exist as a legal entity after confirmation even if it holds
no property."<a href="#8" name="8a">8</a>

In support of its conclusion, the court cited a number of Code provisions relating to the
existence of an estate post-confirmation, including §1322(a)(1) (providing for supervision
and control by the trustee over monies and property of the estate committed to the plan), §345
(providing the trustee is authorized to deposit or invest money of the estate), §347(a)
(providing the trustee shall stop payment on any unpaid checks 90 days after the filed
distribution and the remaining property of the estate is to be paid into the court),
§1302(b)(1) (requiring the trustee to make a final report and file a final account of the
administration of the estate) and §349(b)(3) (stating that unless the court orders otherwise,
dismissal of a chapter 13 case revests the property of the estate in the entity in which such
property was vested immediately before the commencement of the case). The court reasoned that
in addition to §1306(a), these provisions would be rendered superfluous under the §1327
approach.

While the rationale of the Eighth Circuit Court of Appeals is at least as credible as that recited
under the §1327 approach, there can be no question that the facts of the Browns' bankruptcy
went a long way toward the conclusion reached by the bankruptcy court and, ultimately, the
court of appeals.

<h3>Middle-of-the-Road Approach</h3>

The third approach is known as the "middle-of-the-road approach." Most recently represented
by the In re Leavell<a href="#9" name="9a">9</a> case, this approach holds that upon confirmation of the plan, property that
is necessary to implement the chapter 13 plan remains property of the estate and continues to
enjoy the protection of the automatic stay. In Leavell, the court cited a number of reasons for
adopting this approach. First, there must be some property of the estate remaining after
confirmation for the chapter 13 trustee to administer and upon which the trustee makes a final
report.<a href="#10" name="10a">10</a> Second, to determine that §1327(b) eliminates the existence of property of the
estate after confirmation would render §1306 superfluous.<a href="#11" name="11a">11</a> Third, relating the scope of the
estate to that needed to implement the chapter 13 plan would give full effect to §1306(b).<a href="#12" name="12a">12</a>

Section 1306(b) provides that except as provided in a confirmed plan or order confirming a
plan, the debtor shall remain in possession of all property of the estate. As this section does not
apply until confirmation, there is no reason to grant the debtor possession if the estate is not to
continue. Fourth, the clear language of §1306 demonstrates that confirmation of the plan is not
relevant to determine whether property is or is not property of the estate.<a href="#13" name="13a">13</a> The court
logically pointed that if Congress had intended for confirmation to so drastically affect the
definition of property of the estate as contained in §1306, it could have drafted a provision
similar or identical to that contained in §1141.

While there is a great deal of appeal to a middle-of-the-road approach, there are also several
serious problems. First, the approach seems to run afoul of the Code policy that all of the
debtor's disposable income, not just a portion, should be dedicated to payments under a plan of
reorganization. Although it gives weight to both §§1306(a) and 1327(b), the
middle-of-the-road approach also ignores certain aspects of these provisions.

In addition, determining what portion of a debtor's assets is "necessary" to implement the
approved plan involves a primarily subjective analysis and the corresponding inconsistencies
in the result.

<h3>The Rangel Approach</h3>

The court in In re Rangel<a href="#14" name="14a">14</a> cited the drawbacks of the middle-of-the-road approach. In Rangel,

Chief Judge William Hillman pursued a thoughtful analysis of all of the §1327, §1306 and
middle-of-the-road approaches and found each one wanting. Guided by Chicago v. Fisher (In re
Fisher),<a href="#15" name="15a">15</a> in which the court concluded that the property of the estate that vests in a debtor at
confirmation is that which comprises the property of the estate as of the date of
confirmation,<a href="#16" name="16a">16</a> the court found that this approach best reconciles the inconsistencies of
§§1306 and 1327. In addition to better defining the property that vests in the debtor at
confirmation, this approach would further limit the assets that would be included in a chapter 7
conversion to those present at the time of the filing of the chapter 13 petition. Furthermore, the
automatic stay would enable the debtor to consummate a plan and would protect post-petition
creditors by the presence and distinction of post-confirmation estate property.<a href="#17" name="17a">17</a> The rationale
for embracing a new view of this issue and rejecting the established approaches was
summarized by the court:

<blockquote>
If the theory behind chapter 13 is that a debtor is to devote disposable income to the
repayment of creditors, it is unclear why the Code should be interpreted to enable a debtor to
incur more debt. Second, the Code and local rules contemplate oversight of the obtaining of
credit post-petition. Third, the Code provides a mechanism for the repayment of a creditor
who has extended credit for property or services which were necessary for a debtor to
effectuate the plan. That Congress chose not to include all post-petition creditors seems to
indicate that those creditors who extend credit for property or services which are not
necessary to the plan do so at the peril of not being able to collect on that debt until the
debtor is free from the bankruptcy...Such a conclusion makes sense in light of the Code policy
that all of a debtor's income, not just a portion, should be dedicated to the plan.<a href="#18" name="18a">18</a>

</blockquote>

More recently, the Rangel approach was approved and adopted over the IRS's objection in Holden
v. USA (In re Holden).<a href="#19" name="19a">19</a> The logic of this approach will certainly result in its adoption by a
great number of courts in the future.

<h3>Conclusion</h3>

The approach represented by Fisher and Rangel presents a great deal of logical appeal. First, it
significantly limits the extent to which either §1306 or §1327 may be deemed superfluous.
Unlike the middle-of-the-road approach, it provides parameters to the property of the estate
vesting in the debtor post-petition and is more consistent with the conversion provision of
§348(f)(1)(A). It avoids the subjective analysis of what property is "necessary" to effectuate
a plan, as required under the middle-of-the-road approach. Nonetheless, with four separate
approaches to the same issue, the time may now be ripe for consideration by the Supreme Court.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> 11 U.S.C §362(a)(2)(3)(4). <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 191 (Bankr. D. Mass., 1999)</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 992 (Bankr. N.D. Ga. 1996)</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 5 (Bankr. S.D. Calif. 1990)</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. at 996</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 997</a>. <a href="#6a">Return to article</a>

<a name="7">7</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d. 687 (8th Cir. 1993)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 690</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 536 (Bankr. E.D. Va. 1995)</a>. <a href="#9a">Return to article</a>

<a name="10">10</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 539</a>. <a href="#10a">Return to article</a>

<a name="11">11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 540</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#13a">Return to article</a>

<a name="14">14</a> Note 2, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#14a">Return to article</a>

<a name="15">15</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 958 (N.D. Ill. 1997)</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> This decision originated at the bankruptcy court level with Judge Wedoff in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Fisher, 198 B.R. 721 (Bankr. N.D. Ill. 1996)</a>. <a href="#16a">Return to article</a>

<a name="17">17</a> Id. at 198. <a href="#17a">Return to article</a>

<a name="18">18</a> Id. at 195. <a href="#18a">Return to article</a>

<a name="19">19</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 156 (Bankr. D. Vt., 1999)</a>. <a href="#19a">Return to article</a>

Journal Authors

David B. Wheeler

Journal Date

Monday, November 1, 1999 - 12:00