Taking sides on a question where the courts are split, the Bankruptcy Appellate Panel for the Eighth Circuit puts chapter 13 debtors at risk of losing their homes if the price of real estate has risen and the debtors sell their homes or convert their cases to chapter 7.
Unless the case goes to the Eighth Circuit and the Court of Appeals reads the statute differently, chapter 13 debtors need to remain in their homes until they have completed plan payments and received their discharges, and the cases have been closed.
Pity the debtor who is forced to sell her home, perhaps to take a job in another city or because of divorce. By losing the equity above the homestead exemption, the debtor may not be able to purchase a comparable home elsewhere.
Affirming Chief Bankruptcy Judge Brian T. Fenimore of Kansas City, Mo., the BAP held on June 1 that the post-petition appreciation in the value of a home belongs to creditors if the case converts to chapter 7.
Typical Facts
The debtor filed a chapter 13 petition and confirmed a plan. She scheduled her home as worth $130,000 and claimed a $15,000 homestead exemption. The home had a $107,000 mortgage. Everyone agreed that the estate would have received nothing had the home been sold on the filing date. In other words, the debtor was not buying back the equity in her home through the plan. The home revested in the debtor on confirmation.
The debtor converted her case to chapter 7 about two years after filing. 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. After paying the mortgage and the debtor’s $15,000 homestead exemption, the trustee was laying claim to some $62,000.
To stop the chapter 7 trustee from selling 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 November, Judge Fenimore denied the debtor’s motion to compel abandonment. In re Goetz, 647 B.R. 412 (Bankr. W.D. Mo. Nov. 10, 2022). To read ABI’s report, click here. The debtor appealed, but the BAP affirmed, in an opinion by Bankruptcy Judge Shon Hastings.
The Debtor’s Theories
The debtor had several theories underpinning her claimed right to retain post-petition appreciation. She wasn’t alone: The National Association of Consumer Bankruptcy Attorneys and the National Consumer Bankruptcy Rights Center submitted a brief in support of the debtor.
The debtor theorized that she retained all of the equity because the home had revested in her on confirmation and the increased equity did not exist on filing. The debtor and the amici urged the panel to rely on legislative history in connection with the amendment to Section 348(f)(1)(A). They also argued that turning the appreciation over to the trustee would treat the debtor as though she had converted the case in bad faith.
None of the arguments persuaded the panel.
The Split
Two statutory provisions come into play. Neither is on point.
When a chapter 13 case converts to a case under another chapter, Section 348(f)(1)(A) 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.
More expansively, Section 541(a) provides that estate property includes “(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case” and “(7) Any interest in property that the estate acquires after the commencement of the case.”
Judge Hastings said that the “courts are split on the question of whether postpetition preconversion market appreciation or an increase in equity resulting from payments toward a lien inures to a debtor’s benefit upon conversion to a Chapter 7 case.”
“Some courts,” Judge Hastings said, believe that post-petition appreciation is new property carved out of the converted estate by Section 348(f)(1)(A). Others use “a slightly different rationale” by focusing on legislative history and policy to say that taking away appreciation penalizes a debtor for making a stab at chapter 13.
Courts taking away appreciation, Judge Hastings said, do not see the new value as a separate asset acquired after filing but as a constituent part of the home on the filing date.
Plain Meaning Carries the Day
For Judge Hastings, the “plain meaning of a statute is conclusive.” She declined to assume that Congress amended Section 548(f) to mean that debtors may retain “postpetition preconversion market appreciation” because there was no “language articulating this intent.” She therefore held that “the bankruptcy court correctly concluded that postpetition preconversion nonexempt equity accrues for the benefit of the converted Chapter 7 estate.”
Judge Hastings also dismissed the idea that revesting on confirmation took the home and its appreciation out of the estate. She said that “neither section 1327(b) nor the relevant provision of the confirmation order applies in the converted Chapter 7 case.”
“Rather,” Judge Hastings said, Section 348 “governs the scope of estate property upon conversion.”
Reliance on the state’s exemption statute was likewise of no avail. The exemption did not take the entire home out of the estate, only $15,000.
Finally, Judge Hastings was influenced by the use of present-tense verbs in Section 544(b), governing abandonment. Because the statute refers to property that “is burdensome” or “is of inconsequential value,” the idea that the “homestead exemption claim limited the estate’s interest in her residence to its value on the petition date is not persuasive.”
Holding that “the postpetition preconversion equity increase in [the debtor’s] residence is property of the bankruptcy estate,” Judge Hastings upheld denial of the motion aiming to compel the trustee to abandon the home.
Questions
Assume that Section 348(f)(1)(A) does not exclude appreciation from the chapter 7 estate:
(1) Wasn’t the homestead exemption final when no one objected early in the chapter 13 case? What authority allows the chapter 7 trustee or a creditor to reopen final exemptions?
(2) Why limit the revaluation of homes to situations where the case converts or the debtor sells the home?
(3) Real estate prices have risen dramatically throughout the country in the last three years. Why not routinely revalue homes throughout chapter 13 cases?
(4) Why not revalue all other estate property continually until the chapter 13 debtor receives a discharge and the case is closed?
Taking sides on a question where the courts are split, the Bankruptcy Appellate Panel for the Eighth Circuit puts chapter 13 debtors at risk of losing their homes if the price of real estate has risen and the debtors sell their homes or convert their cases to chapter 7.
Unless the case goes to the Eighth Circuit and the Court of Appeals reads the statute differently, chapter 13 debtors need to remain in their homes until they have completed plan payments and received their discharges, and the cases have been closed.
Pity the debtor who is forced to sell her home, perhaps to take a job in another city or because of divorce. By losing the equity above the homestead exemption, the debtor may not be able to purchase a comparable home elsewhere.
Affirming Chief Bankruptcy Judge Brian T. Fenimore of Kansas City, Mo., the BAP held on June 1 that the post-petition appreciation in the value of a home belongs to creditors if the case converts to chapter 7.