The so-called snapshot rule, calling for valuation of a chapter 7 debtor’s property as of the filing date, doesn’t apply when the debtor moves to compel the trustee to abandon under Section 554(b), the Sixth Circuit held.
Although the appeals court had a case with unusual facts, the holding would probably apply in a typical case.
The chapter 7 debtor owned a home with a $62,000 first mortgage. The home was also subject to a $275,000 second mortgage owing to a bank. The home was worth less than the two mortgages together. Ordinarily, the trustee would abandon a home that was overencumbered. But the facts were more complicated.
When the debtor granted the $275,000 mortgage to the bank before filing, the debtor owed the bank about $1 million arising from his personal guarantee of debts owed to the bank by a defunct business the debtor had owned. As additional security for the $1 million debt, the owner had assigned receivables to the bank that were owing to the debtor by the purchaser of the defunct company’s assets. Payments by the asset purchaser would be applied toward the $275,000 mortgage.
The asset purchaser had been making payments to the bank, but the entire $275,000 was still outstanding on the chapter 7 filing date. However, the regular payments being made by the purchaser meant that the entire $275,000 would be paid off about 10 months after the filing date.
About three months after filing, the debtor filed a motion under Section 554(b) to compel the trustee to abandon the home. Employing the snapshot rule, the debtor reasoned there was no equity in the property as of the filing date. The final hearing on the motion to abandon was not held until several months after the $275,000 mortgage had been paid off.
The bankruptcy judge invoked the snapshot rule and granted the motion compelling the trustee to abandon the home, which by that time had substantial equity that the debtor would retain. The bankruptcy judge found as a fact that the $275,000 mortgage was being paid down after filing by the debtor’s post-filing income. The trustee appealed, but the district court affirmed.
In an opinion on May 11, Circuit Judge David McKeague reversed.
Judge McKeague began with the proposition that the home was estate property. “The harder question,” he said, was whether the equity created after filing was estate property or not. The answer was informed, in part, by Section 541(a)(6), which says that “earnings from services” after filing are not estate property.
In a typical case, the modest equity created after filing is not an estate asset because the debtor would have been paying down the mortgage with post-petition wages “from services.” That wasn’t true in the case on appeal, however.
Judge McKeague set aside the bankruptcy court’s finding that the equity was created by services. There was no evidence in the record to support the finding. Rather, the record revealed that the debtor performed no services for which the purchaser paid down the mortgage.
Judge McKeague then turned to the debtor’s second argument: Under the snapshot rule, there was no equity in the home on the filing date. The judge said “it makes little sense to apply the snapshot rule here.”
To disregard the snapshot rule, Judge McKeague compared the language in the relevant statutes. Section 541(a)(1) defines estate property to include legal and equitable interests of the debtor “as of the commencement of the case . . . .” Section 554(b), governing motions to compel abandonment, uses the present tense in referring to property that “is burdensome” or “that is of inconsequential value . . . .”
Every court he found that had dealt with “an analogous abandonment dispute” had looked at the equity “at the time the abandonment motion came before it.” Furthermore, equity is not the only issue. The circuit had previously held that the court should consider whether “administration of the property will benefit the estate,” quoting In re K.C. Mach. & Tool Co., 816 F.2d 238, 245 (6th Cir. 1987). [Emphasis in original.]
In the case at bar, Judge McKeague said that a third party “had quickly paid down” the mortgage during the pendency of the bankruptcy case. To compel abandonment “based on nothing more than the snapshot rule and a simple equity calculation — was legal error,” he said.
Because the equity did not result from post-petition services, Judge McKeague reversed and directed the bankruptcy court to deny the motion to compel abandonment.
The so-called snapshot rule, calling for valuation of a chapter 7 debtor’s property as of the filing date, doesn’t apply when the debtor moves to compel the trustee to abandon under Section 554(b), the Sixth Circuit held.
Although the appeals court had a case with unusual facts, the holding would probably apply in a typical case.
The chapter 7 debtor owned a home with a $62,000 first mortgage. The home was also subject to a $275,000 second mortgage owing to a bank. The home was worth less than the two mortgages together. Ordinarily, the trustee would abandon a home that was overencumbered. But the facts were more complicated.
When the debtor granted the $275,000 mortgage to the bank before filing, the debtor owed the bank about $1 million arising from his personal guarantee of debts owed to the bank by a defunct business the debtor had owned. As additional security for the $1 million debt, the owner had assigned receivables to the bank that were owing to the debtor by the purchaser of the defunct company’s assets. Payments by the asset purchaser would be applied toward the $275,000 mortgage.
The asset purchaser had been making payments to the bank, but the entire $275,000 was still outstanding on the chapter 7 filing date. However, the regular payments being made by the purchaser meant that the entire $275,000 would be paid off about 10 months after the filing date.