Another court has split with the Ninth Circuit Bankruptcy Appellate Panel by holding that property acquired during an individual’s chapter 11 case becomes property of the chapter 7 estate on conversion.
A man filed a chapter 7 petition in Arizona, owning a car at the time. While in chapter 7, he sold the car, bought another, and traded that car to buy yet another. He later converted the case to chapter 11 and purchased another car while in chapter 11. Eventually, the debtor reconverted the case to chapter 7.
The chapter 7 trustee demanded turnover of the cars.
Following In re Markosian, 506 B.R. 273 (B.A.P. 9th Cir. 2014), an analogous case from the Ninth Circuit Bankruptcy Appellate Panel, the bankruptcy judge denied the turnover motion and allowed the debtor to retain the cars.
The trustee appealed. In an opinion on October 22, District Judge Steven D. Logan of Phoenix concluded that Markosian was “an erroneous interpretation of Section 348(a).”
The Code Provisions
When a case converts from one chapter to another, Section 348(a) provides that the original filing date remains the filing date in the converted case.
In 1994, Congress adopted Section 348(f)(1)(A), which applies to cases converted from chapter 13. In those cases, property of the estate in the converted case consists of property on the original filing date. If the conversion was in “bad faith,” estate property in the converted case is property of the estate “as of the date of conversion.”
For individuals’ cases converted from chapter 11 to another chapter, there is no provision equivalent to Section 348(f)(1)(A).
In 2005, Congress adopted Section 1115(a)(2). If the debtor in chapter 11 is an individual, property of the estate includes income from personal services performed after commencement of the case but before the case is closed, dismissed, or converted.
Markosian and Meier
In Markosian, the BAP observed that a chapter 13 debtor, by virtue of Section 348(f), is allowed to exclude post-petition income from the chapter 7 estate. The BAP saw no reason why the result should be different when an individual debtor converts from chapter 11 to chapter 7.
In In re Meier, 550 B.R. 384 (N.D. Ill. 2016), a district judge reached the opposite result. According to Judge Logan, the Illinois court found no reason in the amendments for having the same result when the conversion is from chapter 11.
Meier is Now the Majority
“Since Markosian,” Judge Logan said, “courts have generally followed the rationale of Meier,” but they admit that the statutes are ambiguous.
To decide which case to follow, Judge Logan employed the canon of interpretation that says that Congress intended the result if language is included in one provision but omitted from another. In response, the debtor argued Congress could not have included Section 1115(a)(2) in Section 348(f) because Section 1115(a)(2) did not exist when Congress adopted Section 348(f).
Judge Logan was most persuaded by the absence of safeguards in cases of bad faith conversion from chapter 11 like those in Section 348(f) to deal with bad faith conversions from chapter 13. He gave the example of a debtor who uses post-petition income in chapter 11 to acquire property and then converts to chapter 7 to avoid sharing the after-acquired property with creditors.
Judge Logan therefore held that “post-petition personal service income earned by a Chapter 11 debtor prior to his or her conversion to Chapter 7 constitutes property of the Chapter 7 bankruptcy estate.”
Judge Logan remanded the case for the bankruptcy court to sort out the issues, because some cars were purchased in the original chapter 7 case and one was bought while the debtor was in chapter 11. He also said that the bankruptcy court must opine on the significance of the initial conversion from chapter 7 to chapter 11.
To see ABI’s reports on other cases reaching the same result as Judge Logan, click here, here and here.
Another court has split with the Ninth Circuit Bankruptcy Appellate Panel by holding that property acquired during an individual’s chapter 11 case becomes property of the chapter 7 estate on conversion.
A man filed a chapter 7 petition in Arizona, owning a car at the time. While in chapter 7, he sold the car, bought another, and traded that car to buy yet another. He later converted the case to chapter 11 and purchased another car while in chapter 11. Eventually, the debtor reconverted the case to chapter 7.
The chapter 7 trustee demanded turnover of the cars.
Following In re Markosian, 506 B.R. 273 (B.A.P. 9th Cir. 2014), an analogous case from the Ninth Circuit Bankruptcy Appellate Panel, the bankruptcy judge denied the turnover motion and allowed the debtor to retain the cars.
The trustee appealed. In an opinion on October 22, District Judge Steven D. Logan of Phoenix concluded that Markosian was “an erroneous interpretation of Section 348(a).”