One of the great unanswered questions in consumer law these days is whether appreciation in the value of a home becomes part of the chapter 7 estate if the case converts from chapter 13. The courts are split.
Affirming the bankruptcy court and the Bankruptcy Appellate Panel, the Tenth Circuit held that the appreciation in the value of a home sold after confirmation of a chapter 13 plan belongs to the debtor, not to creditors, if the case converts to chapter 7.
In the January 19 opinion by Chief Circuit Judge Timothy Tymkovich, the appeals court was careful to say that it was not ruling on what the result would be in a chapter 13 case converted to chapter 7 before the home was sold.
The Facts
A couple filed a chapter 13 petition and confirmed their plan in 2016. The plan cured arrears on their home mortgage, and the debtors were making payments directly to the mortgagee on the regular monthly payments.
In the petition, the debtors listed the house with a value of about $396,000, subject to a mortgage for some $337,000. The Colorado homestead exemption at the time was $75,000, so they claimed that the equity of about $60,000 was exempt.
While current on their plan payments, the debtors sold the home in 2018 for $520,000, generating net proceeds of $140,000. Two weeks later, they converted the case to chapter 7. Having spent some of the proceeds, they were holding about $100,000 from the sale of the home on the date of conversion.
When the chapter 7 trustee let it be known that he considered the nonexempt portion of the proceeds to be estate property, the debtors attempted to reconvert the case to chapter 13, but the bankruptcy judge denied the motion. The trustee then filed a motion asking the court to compel the debtors to turn over the nonexempt portion of the proceeds.
The trustee stipulated that the value of the home on the original filing date was $396,000, the amount scheduled by the debtors.
Bankruptcy Judge Elizabeth E. Brown of Denver found the statute ambiguous and referred to legislative history. She ruled in favor of the debtor, reasoning that “property” as used in Section 348(f)(1)(A) does not include appreciation in the value of a home. The Bankruptcy Appellate Panel affirmed in an opinion by Bankruptcy Judge Terrence L. Michael, but the trustee appealed. See In re Barrera, 620 B.R. 645 (Bankr. D. Colo. 2020); and Rodriguez v. Barrera (In re Barrera), 20-003, 2020 BL 381720 (B.A.P. 10th Cir. Oct. 02, 2020). To read ABI’s report, click here.
The Circuit’s Analysis
The pivotal statute is Section 348(f)(1), which underwent 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 amendment was intended overrule caselaw holding that property obtained after filing a chapter 13 petition becomes estate property once the case converts to chapter 7.
Narrowing his holding to cases where the home was sold before conversion, Judge Tymkovich found the answer in the plain language of the statute, without need for analysis of legislative history.
Judge Tymkovich identified proceeds as a property interest different from the home itself. On the original chapter 13 filing date, there were no proceeds, only the home itself. “Based on the plain language of Section 348(f)(1)” — that estate property in a converted case is estate property “as of the date of filing of the petition” — he held that the sale proceeds “do not enter the converted Chapter 7 estate.”
Judge Tymkovich found support for his conclusion in other aspects of the statute’s plain language.
On conversion, the debtors no longer owned the home. Under the words of Section 348(f)(1), the home itself was not “under the control of the debtor on the date of conversion” and therefore was not estate property in chapter 7.
Judge Tymkovich saw additional support in Sections 1327(b) and 541(a)(6). Section 1327(b) automatically vests estate property in the debtor on confirmation of a chapter 13 plan, and under Section 541(a)(6), proceeds from estate property become property of the estate.
“Thus,” Judge Tymkovich said, “proceeds generated from the debtor’s property after confirmation do not become property of the estate as the underlying property no longer belongs to the estate.”
The Unanswered Question
Judge Tymkovich pointedly declined to say whether appreciation would have become property of the chapter 7 estate if there had been no sale of the home before conversion to chapter 7.
Had there been no sale, the home would have become estate property in chapter 7. Generally speaking, a chapter 7 trustee can sell a home and take proceeds into the estate in excess of encumbrances and the debtor’s exemption.
Given that the home and its proceeds would be estate property in chapter 7, it would seem that the trustee would retain appreciation. But perhaps that’s not the end of the story.
Assume the facts were like those in the Tenth Circuit appeal. That is to say, the chapter 13 debtors claimed an exemption in the entire equity. Further assume that there was no timely objection to the homestead exemption.
A debtor would argue that the chapter 7 trustee could not revisit the homestead exemption that supposedly locked in when there was no objection. It’s set in stone, the debtor would say, barring the chapter 7 trustee from claiming there were proceeds in excess of the homestead exemption.
On a question where the courts are split, the First Circuit has taken the position that a debtor’s homestead exemption, valid on the chapter 13 filing date, is not lost if the debtor sells the home but does not reinvest the proceeds within six months as required by state law. See Rockwell v. Hull (In re Rockwell), 968 F.3d 12, 23 (1st Cir. 2020), cert. denied, 141 S. Ct. 1372 (2021). To read ABI’s report on Rockwell, click here.
The opinions by Judge Brown and the BAP offer more elaborate explanations for why appreciation would not vest in a chapter 7 estate on conversion from chapter 13. For ABI’s discussion of a recent case where the debtors lost appreciation in a homestead on conversion, click here.
One of the great unanswered questions in consumer law these days is whether appreciation in the value of a home becomes part of the chapter 7 estate if the case converts from chapter 13. The courts are split.
Affirming the bankruptcy court and the Bankruptcy Appellate Panel, the Tenth Circuit held that the appreciation in the value of a home sold after confirmation of a chapter 13 plan belongs to the debtor, not to creditors, if the case converts to chapter 7.
In the January 19 opinion by Chief Circuit Judge Timothy Tymkovich, the appeals court was careful to say that it was not ruling on what the result would be in a chapter 13 case converted to chapter 7 before the home was sold.