Chapter 13 Debtors Retain Appreciation in Property After Conversion or Plan Amendment

May a chapter 13 debtor retain the postpetition appreciation in the value of property?

In the context of amending a plan, Bankruptcy Judge Elizabeth E. Brown of Denver wrote the definitive opinion on September 29 allowing the debtor to retain all net proceeds from the sale of a homestead. Three days later, the Tenth Circuit Bankruptcy Appellate Panel upheld one of her earlier opinions allowing the chapter 13 debtor to retain appreciation in the home after conversion to chapter 7.

The BAP Decision on Conversion to ‘7’

In January, Judge Brown came down on the side of the debtors in a case involving the sale of the debtors’ home before conversion to chapter 7. She was upheld in the BAP on October 2.

On filing their chapter 13 petition, a couple owned a home that was worth less than the combination of the mortgage and the $75,000 homestead exemption in Colorado. Two years after confirmation of their plan, the debtors sold their home for about $125,000 more than the agreed valuation on the filing date and soon converted the case to chapter 7.

The trustee filed a motion asking the debtors to turn over the net sale proceeds in excess of the homestead exemption. Judge Brown allowed the debtors to retain all of the proceeds and was affirmed in an opinion for the BAP by Bankruptcy Judge Terrence L. Michael.

The appeal turned on Section 348(f)(1), which underwent a substantial amendment in 1994.

When a chapter 13 case converts to chapter 7, the section now provides that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”

The question on appeal, Judge Michael said, was whether “property of the estate” includes postpetition appreciation in value of property owned on the chapter 13 filing date.

Two years before the amendment, the Tenth Circuit had held that the prior formulation of the section meant that property acquired during the course of the chapter 13 case became part of the chapter 7 estate.

After amendment, Judge Michael said that Section 348(f)(1) “generally” means that “the estate in the converted case does not include property acquired after the original petition date.” For support by implication, he cited Harris v. Viegelahn, 575 U.S. 510 (2015), where the Supreme Court ruled that wages earned after filing in chapter 13 do not ordinarily become estate property after conversion to chapter 7.

Noting how courts are split, the statute is ambiguous, Judge Michael said. Accordingly, he considered legislative history.

Judge Michael cited the House report on the amendment for saying that it was designed to overturn a Seventh Circuit decision allowing the chapter 7 estate to include property the debtors had inherited while in chapter 7.

More significantly, Judge Michael said that the legislative history “suggests” that Section 348(f) should not be interpreted to “disincentivize filing a chapter 13 case by penalizing debtors should the case convert to chapter 7.” He therefore held that postpetition appreciation in the value of a debtor’s prepetition property, including the increase in value of a home, “belongs to the debtor and does not become property of the estate upon conversion to chapter 7.”

Plan Amendment After Appreciation

In her decision three days earlier, Judge Brown confronted a more complex case. When the debtor filed his chapter 13 petition, his home was worth less than the combination of the mortgage and his homestead exemption.

The debtor sold his home after confirmation at a price that generated net proceeds of some $11,000 more than the mortgage and exemption combined.

The trustee filed a motion to amend the plan to require the debtor to pay the $11,000 to creditors under the plan. The debtor at the same time filed a motion to amend the plan by allowing him to retain all the proceeds while cutting the lender out of the plan because the mortgage had been paid in full.

Modifying a plan after confirmation in view of the appreciation in the value of property is more complex because several provisions in chapter 13 are involved. The main questions center on Section 1329(b), dealing with plan modifications after confirmation, and Section 1325(a)(4), which requires meeting the best interests test “as of the effective date of the plan.”

Does “effective date” mean the effective date of the original plan or the date when the plan was amended?

Like Judge Michael, Judge Brown focused on the “fundamental bargain of chapter 13 where a debtor trades his future income, not his property, to obtain a discharge.” She sided with the Collier treatise in saying that the best interests test is not recalculated based on property values at the time of plan modification.

“Demanding an increase in plan payments because of a post-confirmation sale of property or its appreciation in value would threaten the very fabric of the chapter 13 bargain,” Judge Brown said.

In allowing the debtor to retain all of the appreciation, Judge Brown analyzed a multitude of arguments and provisions in the Bankruptcy Code that might bear on the issue. Her opinion is a definitive analysis of the issue that should be cited whenever the question arises.

The opinions are Rodriguez v. Barrera (In re Barrera), 20-003 (B.A.P. 10th Cir. Oct. 2, 2020); and In re Baker, 17-14041 (Bankr. N.D. Ill. Sept. 29, 2020).