Joining what he called the “slight minority of courts,” Chief Bankruptcy Judge Brian T. Fenimore of Kansas City, Mo., decided that the appreciation in the value of a homestead during a chapter 13 case belongs to the chapter 7 estate when the case converts.
In a footnote at the end of his November 10 opinion, Judge Fenimore was careful to say that his decision would have “no bearing on the estate’s interest in post-petition equity” had the case remained in chapter 13. In other words, debtors with nonexempt appreciation in a homestead should remain in chapter 13 because no circuit has definitively decided who gets the nonexempt equity if a home is sold after conversion from chapter 13 to chapter 7.
Typical Facts
The debtor filed a chapter 13 petition in August 2020 and confirmed a plan. The debtor scheduled her home as worth $130,000 and claimed a $15,000 homestead exemption. The home had a $107,000 mortgage.
The parties agreed that the estate would have received nothing had the home been sold on the filing date.
The debtor converted her case to chapter 7 in April 2022. The parties agreed that the home had increased $75,000 in value during the chapter 13 case. While in chapter 13, the debtor had reduced the mortgage by almost $1,000.
To forestall an effort by the chapter 7 trustee to sell the home, the debtor filed a motion to compel the trustee to abandon the home under Section 554. The debtor contended that the home still had inconsequential value for the chapter 7 estate because the equity above the mortgage and the exemption were fixed as of the chapter 13 filing date when there was no objection to the claimed exemption.
In his November 10 opinion, Judge Fenimore denied the motion to compel abandonment.
The Split
Although no provision of the Bankruptcy Code is precisely on point, Section 348(f)(1)(A) comes close. When a chapter 13 case converts to a case under another chapter, it 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 section does not say who gets appreciation in property between the filing date and the date of conversion.
Harris v. Viegelahn, 575 U.S. 510 (2015), also comes close. The Supreme Court said that property acquired after filing but before conversion does not become property of the chapter 7 estate, absent bad faith.
Judge Fenimore explained how the courts “disagree” about whether post-petition appreciation is “new” property that a debtor retains following conversion. The “slight majority” of courts, he said, hold that post-petition appreciation in the value of nonexempt property does not go to the chapter 7 estate.
Saying that he “respectfully disagrees” with the majority, Judge Fenimore followed what he called the “plain language” of the statute and awarded the increase in value to the chapter 7 estate.
Contrary to the analysis of the Tenth Circuit in Rodriguez v. Barrera (In re Barrera), 22 F.4th 1217 (10th Cir. Jan. 19, 2022), Judge Fenimore saw appreciation as being “inseparable from the residence itself.” To read ABI’s report on Barrera, click here. [Note: Barrera involved a home sold before conversion, not after.] To Judge Fenimore’s way of thinking, the broad definition of property of the estate in Section 541(a)(1) “captures the debtor’s entire ownership interest.”
Alluding to the definition of “equity” in Black’s Law Dictionary, Judge Fenimore said that “equity is not a separate item of property.” He found support for his conclusion from a Supreme Court tax case involving appreciated property.
Closer to home, Judge Fenimore cited the Eighth Circuit Bankruptcy Appellate Panel for saying that the estate’s interest is nothing less than “the entire asset, including any changes in its value which might occur after the date of filing.” Potter v. Drewes (In re Drewes), 228 B.R. 422, 424 (B.A.P. 8th Cir. 1999). He therefore held that “the post-petition changes to the residence’s equity accrue for the benefit of the chapter 7 estate.” [Note: The statement in Drewes is probably dicta when applied to the case before Judge Fenimore but is persuasive nonetheless.]
Because the home and the appreciation in value were the same asset, Judge Fenimore denied the motion to compel abandonment.
Observations
There is no conflict between Judge Fenimore’s decision and the recent Ninth Circuit Bankruptcy Appellate Panel opinion in Masingale v. Muding (In re Masingale), 22-1016, 2022 BL 394814 (B.A.P. 9th Cir. Nov. 2, 2022).
In Masingale, the BAP announced a theory allowing debtors to retain post-petition appreciation in the value of an exempt asset by claiming an exemption in “100% of fair market value,” as specified by the Supreme Court in Schwab v. Reilly, 560 U.S. 770 (2010). If there was no timely objection to the exemption, and if conversion occurs more than one year after confirmation, the exemption is final in a converted case, the BAP said.
In Judge Fenimore’s case, however, the debtor did not claim an exemption in 100% of fair market value. Instead, the opinion says that the debtor claimed a $15,000 exemption in the equity above the mortgage. The Ninth Circuit BAP said that a debtor who claims an exemption in a specific dollar amount is stuck with that amount of an exemption in a converted case. To read ABI’s report on Masingale, click here.
Joining what he called the “slight minority of courts,” Chief Bankruptcy Judge Brian T. Fenimore of Kansas City, Mo., decided that the appreciation in the value of a homestead during a chapter 13 case belongs to the chapter 7 estate when the case converts.
In a footnote at the end of his November 10 opinion, Judge Fenimore was careful to say that his decision would have “no bearing on the estate’s interest in post-petition equity” had the case remained in chapter 13. In other words, debtors with nonexempt appreciation in a homestead should remain in chapter 13 because no circuit has definitively decided who gets the nonexempt equity if a home is sold after conversion from chapter 13 to chapter 7.