Splitting with the Tenth Circuit, a divided panel on the Ninth Circuit held that the post-petition appreciation in the value of a home belongs to creditors when a chapter 13 debtor converts the case to chapter 7.
The dissenter on the Ninth Circuit said that the majority “effectively punishes the [debtors] for filing under Chapter 13 with the forced sale of their home. Because that outcome is not the best reading of the Bankruptcy Code or our precedents,” the dissenter said he would have held, “consistent with the Tenth Circuit, that postpetition, preconversion appreciation belongs to the [debtors] rather than the converted Chapter 7 estate.”
Forced to Sell the Home
Eighteen months after confirming a chapter 13 plan, a couple were forced to convert their case to chapter 7 because the husband developed Parkinson’s Disease and could no longer work.
In the chapter 13 case, the debtors had scheduled their home as being worth $500,000. There was no equity in the home given the $375,000 mortgage and the debtor’s claimed homestead exemption of $125,000.
After conversion, the chapter 7 trustee alleged that the property was worth $700,000 and filed a motion for authority to sell the home. The debtors argued that the valuation at conversion didn’t matter because appreciation during chapter 13 belonged to them.
Bankruptcy Judge Marc Barreca of Seattle disagreed with the debtors and held that post-petition, pre-conversion appreciation belongs to the chapter 7 estate. In re Castleman, 631 B.R. 914 (Bankr. W.D. Wash. June 4, 2021). To read ABI’s report, click here.
The debtors appealed and lost again in district court. In re Castleman, 21-00829, 2022 BL 229708, 2022 US Dist. Lexis 116941, 2022 WL 2392058 (W.D. Wash. July 1, 2022). To read ABI’s report, click here. The debtors appealed to the circuit.
The Majority Opinion
For the majority, Circuit Judge Michael D. Hawkins said that the courts are “heavily divided.” He cited the Tenth Circuit for holding that post-petition appreciation in a nonexempt asset belongs to the debtor on conversion from chapter 13 to chapter 7. See In re Barrera, 22 F.4th 1217 (10th Cir. 2022). To read ABI’s report, click here. However, he did not cite his own Ninth Circuit Bankruptcy Appellate Panel for reaching the same result as the Tenth Circuit by giving appreciation to the debtor. See Black v. Leavitt (In re Black), 609 B.R. 518 (B.A.P. 9th Cir. Dec. 31, 2019). To read ABI’s report, click here.
Among the courts bestowing appreciation on creditors, Judge Hawkins cited the bankruptcy court’s opinion in In re Goetz, 647 B.R. 412 (Bankr. W.D. Mo. Nov. 10, 2022). To read ABI’s report, click here. [Note: Judge Hawkins did not cite the Eighth Circuit Bankruptcy Appellate Panel’s affirmance in Goetz v. Weber (In re Goetz), 651 B.R. 292 (B.A.P. 8th Cir. June 1, 2023). To read ABI’s report, click here. Note also that Goetz is on appeal to the Eighth Circuit.]
Several statutes are in play. Section 348(f)(1), which underwent substantial amendment in 1994, 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 to overrule caselaw holding that property obtained after filing a chapter 13 petition becomes estate property once the case converts to chapter 7.
Primarily relied on by the majority, Section 541(a)(6) provides that estate property includes “[p]roceeds, 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.”
Citing In re Goins, 539 B.R. 510, 516 (Bankr. E.D. Va. 2015), Judge Hawkins said that the equity is “inseparable” from the real estate. Citing previous Ninth Circuit opinions and Section 541(a)(6), he said that post-petition appreciation in real estate belongs to the estate, not the debtor. Schwaber v. Reed (In re Reed), 940 F.2d 1317, 1323 (9th Cir. 1991); and Wilson v. Rigby, 909 F.3d 306, 309 (9th Cir. 2018). [Note: Judge Hawkins did not mention that the two Ninth Circuit opinions dealt with cases in chapter 7, not conversions from chapter 13.]
Although the two opinions were chapter 7 cases, Judge Hawkins found “no textual support for concluding that § 541(a) has a different meaning upon conversion from Chapter 13.”
Judge Hawkins said that “many” cases reached a different conclusion by reference to the legislative history surrounding the 1994 amendment to Section 348(f). Those courts read the amendment’s legislative history as saying that appreciation after filing in chapter 13 belongs to the debtor.
Judge Hawkins did “not look to legislative history for guidance” because he concluded that the statute was not ambiguous.
Citing the Tenth Circuit’s Barrera decision, Judge Hawkins said that “some” courts give appreciation to the debtor by relying on Section 1327(b), the statute that revests estate property in the debtor on chapter 13 confirmation. However, he said that “§ 348(f) only clarified that newly acquired, post-petition property would not become part of the converted estate.”
“In sum,” Judge Hawkins said, “the plain language of § 348(f)(1) dictates that any property of the estate at the time of the original filing that is still in [the] debtor’s possession at the time of conversion once again becomes part of the bankruptcy estate, and our case law dictates that any change in the value of such an asset is also part of that estate. In this case, that property increased in value.”
In a footnote after affirming the lower court’s holding that appreciation enhanced the chapter 7 estate, Judge Hawkins said that the decision did not resolve the debtors’ argument to have an administrative claim for payments they made on the mortgage after confirmation of the chapter 13 plan.
The Dissent
Circuit Judge Richard C. Tallman opened his dissenting opinion by saying that the majority created “a circuit split and effectively punishes the [debtors] for filing under Chapter 13 with the forced sale of their home.” As a result, he said that “the majority sacrifices the text of the bankruptcy statutes on the altar of simplicity.”
Judge Tallman characterized the majority as reaching a “simple resolution” by holding that appreciation in chapter 13 goes to the estate “because we have held [that] appreciation becomes part of the estate in a Chapter 7 case.”
“But simplicity,” Judge Tallman said, “cannot take precedence over the text of the Bankruptcy Code, and if we read § 348(f) in light of the Code ‘as a whole’ — rather than just § 541(a) — [Wilson v. Rigby] is not dispositive.” The “remainder” of the Bankruptcy Code, he said, “clarifies” that “property of the estate” is defined differently in chapter 13 than it is in chapter 7.
In view of Section 1327(b), Judge Tallman said that the debtor once again becomes the owner of the home on confirmation. “It follows,” he said, “that when a Chapter 13 plan has been confirmed, appreciation accrues to the debtor.”
Judge Tallman quoted the decision by “our Bankruptcy Appellate Panel” in Black for “holding that ‘the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation.’” Black, supra, 609 B.R. at 529. The Tenth Circuit, he said, “reached a similar conclusion” in Barrera.
Judge Tallman went on to cite Barrera for holding that Section 541(a)(6) is only operative before confirmation because confirmation revests property in the debtor. He then quoted the Tenth Circuit for saying that proceeds generated from property after confirmation do not become estate property.
Consistent with the Tenth Circuit, Judge Tallman said that he “would hold . . . that postpetition, preconversion appreciation belongs to the [debtors] rather than the converted Chapter 7 estate.”
On top of the majority’s erroneous interpretation of the statute, Judge Tallman said that “the majority’s reading of § 348(f)(1)(A) is also inconsistent with the statute’s structure, object, policies, and legislative history.” Citing the legislative history accompanying the adoption of Section 348(f)(1)(A) in 1994, he said, “Clearly, Congress believed that home equity which accrued during Chapter 13 proceedings should not be included in the converted estate.”
Where the majority declined to take guidance from legislative history, Judge Tallman said it was “consistent with the text of the Bankruptcy Code, directly relevant to the case at hand, and unequivocally confirms that appreciation in the value of the [debtors’] home should not become part of the converted estate.”
To this writer, Judge Tallman cast his reading of the statute in terms of fairness. Had the debtors originally filed in chapter 7, he said that all of their home equity would have been exempt. By having taken a shot at chapter 13, he said they were left in a “worse position,” which he called “the situation Congress sought to prevent.”
Although he recommended that Congress once again amend Section 348(f) “to make the answer clear,” Judge Tallman said he “would hold that the appreciation belongs to the [debtors].”
Splitting with the Tenth Circuit, a divided panel on the Ninth Circuit held that the post-petition appreciation in the value of a home belongs to creditors when a chapter 13 debtor converts the case to chapter 7.
The dissenter on the Ninth Circuit said that the majority “effectively punishes the [debtors] for filing under Chapter 13 with the forced sale of their home. Because that outcome is not the best reading of the Bankruptcy Code or our precedents,” the dissenter said he would have held, “consistent with the Tenth Circuit, that postpetition, preconversion appreciation belongs to the [debtors] rather than the converted Chapter 7 estate.”