When an individual’s chapter 11 case converts to chapter 7, does property acquired post-petition revert to the debtor or does it belong to the chapter 7 estate?
Bankruptcy Judges W. Homer Drake, Jr. and Elizabeth Manger are aligned on one side of the answer, with the Ninth Circuit Bankruptcy Appellate Panel on the other.
There is no explicit answer in the Bankruptcy Code when conversion is from chapter 11 to chapter 7. But for cases where conversion is from chapter 13 to chapter 7, Congress added Section 348(f)(1)(A) to provide that property in the converted case includes property of the estate at the time of the original filing that has remained in the debtor’s control at the time of conversion. In other words, on conversion from chapter 13 to chapter 7, the debtor keeps after-acquired property and wages.
Further buttressing the rights of the debtor, the Supreme Court decided Harris v. Viegelahn in 2015 by holding that undisbursed wages in possession of the chapter 13 trustee go to the debtor on conversion to chapter 7.
Section 1115 points in the other direction. Amended in 2005, that section says that money earned by an individual while in chapter 11 is part of the bankrupt estate, not separate property the individual can keep.
In Markosian v. Wu (In re Markosian), the Ninth Circuit BAP came down in favor of the debtor in 2014. The BAP saw no reason to treat bankrupts differently if their cases were converted from chapter 11 than if they were converted from chapter 13. The BAP also cited Section 541(a)(6), which provides that money earned after filing in chapter 7 belongs to the bankrupt.
In the case decided by Judge Manger on Feb. 8, the debtor had about $6,000, which he had acquired after filing his chapter 11 petition but before conversion to chapter 7.
Judge Manger, of New Orleans, agreed with Judge Drake, disagreed with the BAP and gave the money to the chapter 7 trustee. Judge Drake’s 2015 decision is Rogers v. Freeman (In re Freeman), 527 B.R. 527 (Bankr. N.D. Ga. 2015). The BAP decision is found at 506 B.R. 273.
Judge Manger was persuaded by the principle of statutory construction that Congress is presumed to act intentionally when it includes particular language in a statute but omits another. She therefore concluded that the money goes to the chapter 7 estate, by negative inference from Section 348(f)(1)(A).
When an individual’s chapter 11 case converts to chapter 7, does property acquired post-petition revert to the debtor or does it belong to the chapter 7 estate?