Differing with the First Circuit, the Ninth Circuit Bankruptcy Appellate Panel allowed a chapter 13 debtor to retain the post-petition increase in value of a nonexempt asset.
Building on a prior Ninth Circuit BAP opinion, Bankruptcy Judge Robert J. Faris said in his December 31 decision that the “chapter 13 deal” allows a debtor to retain all prepetition property, such as money and real estate, in exchange for committing all postpetition disposable income to the payment of unsecured creditors’ claims.
The decision is important. Were it otherwise, the debtor’s property would be subject to revaluation throughout the life of a chapter 13 case. The debtor would not know until the end whether he might be forced to pay more for a discharge if some of his property had appreciated in value.
The Facts
Reduced to essentials, the complicated facts and procedural history were these:
The debtor owned nonexempt rental real estate that he scheduled with a value of $44,000.
Given his modest income, the debtor’s commitment period was three years.
The debtor confirmed a chapter 13 plan calling for payments of $250 a month for 59 months. Evidently, he stretched out the plan for five years rather than three to lower his monthly payments.
In addition, the plan called for the debtor to sell the real property and pay an additional $45,000 to unsecured creditors.
Although the commitment period was three years, the plan allowed the debtor to make payments for a longer period, “but in no event” for more than 60 months. The plan revested estate property in the debtor on confirmation.
More than three years after confirmation, the bankruptcy court approved the sale of the property for $107,000. The chapter 13 trustee proposed an amended plan where creditors would receive not only the promised $45,000 but also an additional $50,700, representing the remainder of the net proceeds of the sale after deduction for the costs of sale.
The bankruptcy court approved the amended plan over the debtor’s objection. The debtor appealed to the BAP and won.
The Competing Statutes
The appeal boiled down to the question of which provision of the Bankruptcy Code controlled. The debtor stood behind Sections 1327(b) and (c), which vest all estate property in the debtor on confirmation and provide that revested property is “free and clear of any claim or interest of any creditor provided for by the plan.”
Based on Sections 1327(b) and (c), the debtor contended that the real estate revested in him on confirmation free of creditors’ claims, allowing him to pay nothing more to creditors than the $45,000 provided in the plan.
The trustee urged the BAP to follow Section 1306(a), which defines property of the estate to include all property specified in Section 541 plus all property described in Section 541 “that the debtor acquires after commencement of the case but before the case is closed, dismissed, or converted . . . .”
The trustee argued that appreciation in the value of the real estate was property that the debtor acquired after filing and thus must be earmarked for creditors.
Burgie
In his 25-page opinion deciding which section to follow, Judge Faris was not writing on a blank slate. See McDonald v. Burgie (In re Burgie), 239 B.R. 406 (B.A.P. 9th Cir. 1999). He said that “Burgie is on point.”
In Burgie, the debtors sold their homestead soon after chapter 13 confirmation, generating net proceeds of $63,000 after paying off the mortgages. The debtors purchased a new home using $43,000 of the proceeds and stated that they intended to use the remaining $20,000 to support themselves and cover plan payments.
The BAP in Burgie decided that the debtors could retain the $20,000 rather than pay it in a lump sum to creditors.
In Burgie, the BAP said:
The chapter 13 deal permits a debtor to retain all prepetition property, including earnings, assets, money in the bank and real estate. In exchange for keeping all of these assets, the debtor must commit all postpetition disposable income to the payment of creditors under a chapter 13 plan for a period of three to five years. If the debtor makes all of the payments required under the plan, all of the debtor’s dischargeable debts are discharged, and the debtor keeps all of the prepetition assets.
Id. at 410.
Of significance in the case on appeal, Burgie continued:
Postpetition disposable income does not include prepetition property or its proceeds. This is the chapter 13 debtor’s bargain. Creditors of a chapter 13 debtor have no claim to any of these assets.
Id.
Burgie went on to say that the result does not depend on whether the property at issue is exempt. The BAP held that “the debtor is entitled to keep all of the debtor’s prepetition property, whether or not it qualifies under the applicable exemption laws.” Id. at 411.
Applying Burgie and the Split
In the case on appeal, the debtor had owned the real property on filing, and it revested in him on confirmation. Because Burgie was on point, Judge Faris reversed the lower court and held that the debtor owned the property “outright, free of his creditors’ claims.”
The trustee urged the BAP to follow Barbosa v. Soloman, 235 F.3d 31 (1st Cir. 2000), where the First Circuit held that appreciation in the value of prepetition property is property that the estate acquires after confirmation and therefore belongs to creditors.
Judge Faris acknowledged the split of authority and cited decisions going both ways. However, he said the Ninth Circuit BAP already had “squarely rejected Barbosas’s approach in” California Franchise Tax Bd. v. Jones (In re Jones), 420 B.R. 506, 515 (B.A.P. 9th Cir. 2009), aff’d California Franchise Tax Bd. v. Kendall (In re Jones), 657 F.3d 921, 928 (9th Cir. 2011).
Required to follow its own precedent and Ninth Circuit authority, Judge Faris held that “the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation.” He said the bankruptcy court erred by requiring the debtor to turn over excess sale proceeds to creditors.
How to Avoid the Result
Richard P. Carmody told ABI how a chapter 13 trustee or creditors could avoid the result reached by the BAP:
If creditors believe that there is a potential for future appreciation of the Debtor’s property, especially property to be sold to fund the plan (a red flag), they should try to delay the revesting of the property at confirmation in order to capture the appreciation.
Carmody is of counsel to Adams & Reese LLP, which maintains offices in Atlanta and Birmingham, Ala., among other locations.
Differing with the First Circuit, the Ninth Circuit Bankruptcy Appellate Panel allowed a chapter 13 debtor to retain the post-petition increase in value of a nonexempt asset.
Building on a prior Ninth Circuit BAP opinion, Bankruptcy Judge Robert J. Faris said in his December 31 decision that the “chapter 13 deal” allows a debtor to retain all prepetition property, such as money and real estate, in exchange for committing all postpetition disposable income to the payment of unsecured creditors’ claims.
The decision is important. Were it otherwise, the debtor’s property would be subject to revaluation throughout the life of a chapter 13 case. The debtor would not know until the end whether he might be forced to pay more for a discharge if some of his property had appreciated in value.
The Facts
Reduced to essentials, the complicated facts and procedural history were these:
The debtor owned nonexempt rental real estate that he scheduled with a value of $44,000.
Given his modest income, the debtor’s commitment period was three years.
The debtor confirmed a chapter 13 plan calling for payments of $250 a month for 59 months. Evidently, he stretched out the plan for five years rather than three to lower his monthly payments.
In addition, the plan called for the debtor to sell the real property and pay an additional $45,000 to unsecured creditors.