On an issue where the lower courts are divided, Bankruptcy Judge Marc Barreca of Seattle disagreed with the Tenth Circuit Bankruptcy Appellate Panel and a fellow bankruptcy judge in the Ninth Circuit.
In his June 4 opinion, Judge Barreca decided that the post-petition appreciation in the value of an asset belongs to the chapter 7 estate if the case converts from chapter 13.
The debtors confirmed a chapter 13 plan and converted the case to chapter 7 about 18 months after filing. They had scheduled their home as being worth $500,000 at filing. Using a $500,000 valuation, there was no equity in the property on filing in view of a $375,000 mortgage and the debtor’s claimed homestead exemption of $125,000.
After conversion, the chapter 7 trustee filed a motion for authority to sell the home, alleging that the home was worth $700,000. The debtors contended that the valuation at conversion was of no import because appreciation after the chapter 13 filing belonged to them.
Judge Barreca was therefore confronted with taking sides on a split: Does post-petition appreciation in the value of an asset belong to the debtors when a case converts from chapter 13 to chapter 7?
The case turned on the interpretation of Section 348(f)(1), which was amended in 1994 to clear up a split on a different but related issue. At the time, some courts held that property acquired during a chapter 13 case belonged to the chapter 7 trustee on conversion. Others held that chapter 13 debtors were entitled to keep property acquired after a chapter 13 filing but before conversion.
Congress amended Section 348(f)(1)(A) to say that debtors keep property acquired during chapter 13. As amended, 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 [chapter 13] petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”
Although the amendment allowed debtors to retain newly acquired property, the amendment didn’t explicit address appreciation in the value of an asset that was in the estate at the time of the chapter 13 filing.
Judge Barreca cited the courts finding the statute ambiguous with respect to appreciation in the value of an estate asset between the chapter 13 filing and conversion to chapter 7. They allowed the debtors to retain the uptick, on the theory that depriving them of appreciation would penalize debtors who filed chapter 13 petitions. Among others, he cited In re Barrera, 620 B.R. 645 (Bankr. D. Colo. 2020), aff’d, BAP No. CO-20-003, 2020 WL 5869458 (B.A.P. 10th Cir. (Colo.) Oct. 2, 2020); and In re Cofer, 625 B.R. 194 (Bankr. D. Idaho 2021).
To read ABI’s reports on Barrera and Cofer, click here and here.
On the other side of the fence, Judge Barreca cited cases finding no ambiguity in the statute and awarding appreciation to the chapter 7 trustee. See, e.g., In re Goins, 539 B.R. 510 (Bankr. E.D. Va. 2015). In Goins, the court gave appreciation to the trustee, but the parties had stipulated that the debtor would have credit for payments reducing the secured debt during the chapter 13 case.
The Goins approach is “the correct interpretation of Section 348(f)(1),” Judge Barreca said. The amendment to the section is not ambiguous, he said, and “does not at all address the effect of conversion on paydown of secured debt during the Chapter 13 case or changes in the value of pre-petition assets.”
Judge Barreca said he does not believe that post-petition appreciation is “treated as a separate asset from pre-petition property and inures to the bankruptcy estate, not the debtor.” Quoting Goins, he said that the “equity is inseparable from the real estate, which was always property of the estate under Section 541(a).”
Judge Barreca therefore held that “the full value of the Real Property is property of the Chapter 7 estate including any post-petition appreciation.”
Observations
In cases like this, isn’t the issue really about valuation and the point in time when valuation is made? Perhaps issues like waiver and estoppel also matter.
In Judge Barreca’s case, there was no “real” $500,000 valuation at the time of filing. Neither the chapter 13 trustee nor any creditor objected to the debtor’s scheduled value. Perhaps the home was really worth $700,000 at filing, had someone objected to the debtor’s valuation.
When it comes to valuation in a converted case, perhaps waiver and estoppel compel everyone to accept the $500,000 valuation as of filing.
Now, let’s assume that the property was really worth $700,000 on conversion. The question still remains: At what point in time is the valuation made? At filing or on conversion?
True, Section 348(f)(1) doesn’t give us the answer explicitly. The same question often arises in other contexts in bankruptcy cases, and we are told that the time of valuation depends on the purpose of valuation. On a motion to modify the stay, for instance, it’s valuation at the time of the motion, not the value of the property at filing.
So, what about chapter 13 conversions? What’s the purpose of valuation? What policies underlay the selection of a time for valuation?
We do know that debtors aren’t supposed to be penalized for filing in chapter 13. Is that the answer?
Had the debtors filed originally in chapter 7, they would have kept their home because there was no equity, assuming no one objected to the scheduled $500,000 valuation.
If there ever was a question where the answer should come from policy, this is one. Answers should be based on sound policy not teased from the language of a statute that does not provide a straightforward answer.
In other words, let judges be judges.
On an issue where the lower courts are divided, Bankruptcy Judge Marc Barreca of Seattle disagreed with the Tenth Circuit Bankruptcy Appellate Panel and a fellow bankruptcy judge in the Ninth Circuit.
In his June 4 opinion, Judge Barreca decided that the post-petition appreciation in the value of an asset belongs to the chapter 7 estate if the case converts from chapter 13.
The debtors confirmed a chapter 13 plan and converted the case to chapter 7 about 18 months after filing. They had scheduled their home as being worth $500,000 at filing. Using a $500,000 valuation, there was no equity in the property on filing in view of a $375,000 mortgage and the debtor’s claimed homestead exemption of $125,000.
After conversion, the chapter 7 trustee filed a motion for authority to sell the home, alleging that the home was worth $700,000. The debtors contended that the valuation at conversion was of no import because appreciation after the chapter 13 filing belonged to them.
Judge Barreca was therefore confronted with taking sides on a split: Does post-petition appreciation in the value of an asset belong to the debtors when a case converts from chapter 13 to chapter 7?
The case turned on the interpretation of Section 348(f)(1), which was amended in 1994 to clear up a split on a different but related issue. At the time, some courts held that property acquired during a chapter 13 case belonged to the chapter 7 trustee on conversion. Others held that chapter 13 debtors were entitled to keep property acquired after a chapter 13 filing but before conversion.