Bill Rochelle is on vacation. Please enjoy this piece written by Guest Writer Paul R. Hage, who co-chairs Taft, Stettinius & Hollister, LLP’s Bankruptcy and Restructuring practice group in Southfield, Mich., and is an executive editor of the ABI Journal.
Hon. Mark Randon of the U.S. Bankruptcy Court for the Eastern District of Michigan recently weighed in on an issue that has divided bankruptcy courts over the past few years. Debtors who opt for chapter 13 often do so to save their homes. Because of the appreciation in home values in recent years, debtors frequently find themselves with equity in their homes that was not contemplated at the time of plan confirmation. When, post-confirmation, a chapter 13 debtor sells his or her home, who gets the benefit of the appreciation: the debtor, or his or her creditors? In In re Elassal, Judge Randon adopted the so-called “estate replenishment approach” and held that sale proceeds derived from post-confirmation appreciation of a home belong to the debtor.
An Unexpected Asset
In 2021, the debtor confirmed a chapter 13 plan, committing three years of disposable income to keep her assets, including a $250,000 home. The home was encumbered by $228,000 in liens. Although unsecured creditors would have received nothing in a chapter 7 liquidation (the debtor could have exempted the equity in the home), the debtor’s plan contemplated payment of a minimum of $1,227.16 toward $93,805.83 in general unsecured claims.
Two years later, the debtor sold her home for $435,000. The sale netted $177,695.13 in proceeds after payment of liens. The debtor filed a motion seeking authorization to use the sale proceeds to buy a new home, while continuing to make her promised plan payments to creditors. The chapter 13 trustee objected, arguing that the debtor could only keep the net proceeds from the sale after she had paid her unsecured creditors in full.
A Deep Split in the Case Law
In all chapters of the Bankruptcy Code, Section 541(a) creates a bankruptcy estate that broadly sweeps in “all legal or equitable interests of the debtor in property as of the commencement of the case” and all “[p]roceeds, product, offspring, rents, or profits of or from property of the estate….” Section 1306(a)(1) expands on the property-of-the-estate concept by pulling in, among other things, all property “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.”
Based on the foregoing, one might assume that post-petition appreciation in a chapter 13 debtor’s home becomes property of the estate. However, Section 1327(b) generally provides that the confirmation of a plan vests all of the property of the estate in the debtor.” Moreover, Section 1327(c) provides that the vested property is generally “free and clear of any claim or interest of any creditor provided for by the plan.” The argument is frequently raised that because, upon confirmation of the plan, the home is vested in the debtor, then the proceeds from the sale of such home do not become property of the estate.
In an effort to reconcile the apparent contrasting language in Sections 1306 and 1327, courts have come up with no fewer than five different approaches to the question of how the post-confirmation vesting of property in the debtor affects the entitlement to the appreciation from a post-confirmation sale of a home. Some approaches result in the appreciation becoming property of the estate and being distributed to creditors. Others allow the debtor to retain the appreciation. There is a deep split in the caselaw.
The Estate-Replenishment Approach Dictates that the Debtor Retains the Proceeds
Judge Randon adopted the so-called “estate-replenishment approach” to harmonize Sections 1306 and 1327, which, unlike other approaches in the caselaw, avoided rendering any statutory provision superfluous. Under that approach, property that vests in the debtor cannot re-enter the estate, but property later acquired by the debtor becomes property of the estate, which continues to exist throughout the duration of the plan.
Applying the “estate replenishment approach,” the court held that the sale proceeds did not replenish the estate because they were not newly acquired property. The proceeds, the court stated, “cannot be untethered” from the home, which the debtor was permitted to keep under the plan. This result, the court reasoned, was consistent with the policies of chapter 13 and the bargain struck between the debtor and her creditors. The court further reasoned that, because chapter 13 debtors assume the risk of depreciation in their revested assets, “It stands to reason they should also enjoy the benefit of any post-confirmation appreciation of revested property when sold.”
Hon. Mark Randon of the U.S. Bankruptcy Court for the Eastern District of Michigan recently weighed in on an issue that has divided bankruptcy courts over the past few years. Debtors who opt for chapter 13 often do so to save their homes. Because of the appreciation in home values in recent years, debtors frequently find themselves with equity in their homes that was not contemplated at the time of plan confirmation. When, post-confirmation, a chapter 13 debtor sells his or her home, who gets the benefit of the appreciation: the debtor, or his or her creditors? In In re Elassal, Judge Randon adopted the so-called “estate replenishment approach” and held that sale proceeds derived from post-confirmation appreciation of a home belong to the debtor.