The courts are split on the fate of wages earned by an individual in chapter 11 whose case converts to chapter 7. Can the debtor retain the wages, or does the money go to the chapter 7 trustee for distribution to creditors?
Disagreeing with the Collier bankruptcy treatise, District Judge John Z. Lee of Chicago came down on the side of lower courts holding that the money is for the chapter 7 estate. No circuit court has decided the issue.
Several provisions in the Bankruptcy Code dance around the question, but none answers it for conversions from chapter 11 to chapter 7.
Section 1115 was amended in 2005 to provide that money earned by an individual while in chapter 11 is part of the bankrupt estate, not separate property the individual can keep regardless. On the other hand, Section 348(f)(1)(A) expressly says that earnings while in chapter 13 go to the bankrupt if the case is converted to chapter 7.
The statute is silent about conversions from chapter 11 to chapter 7.
In a 2014 decision called Markosian v. Wu (In re Markosian), the Ninth Circuit Bankruptcy Appellate Panel let the debtor keep the earnings, seeing no reason for treating bankrupts differently if their cases were converted from chapter 11 than if they were converted from chapter 13. The panel also cited Section 541(a)(6), which provides that money earned after filing under chapter 7 belongs to the bankrupt.
Employing the expressio unius doctrine of statutory interpretation, Judge Lee reached the opposite conclusion in his March 11 opinion, saying it was “significant” that Congress only dealt with conversions from chapter 13 and not from chapter 11 in amending Section 348(f)(1)(A).
Seeing chapters 13 and 11 as “replete with policy considerations,” Judge Lee said that Congress “is better equipped at making these policy choices than the courts.”