Siding with the Ninth Circuit and distinguishing a seemingly similar decision from the Tenth Circuit, the Eighth Circuit held that appreciation in the value of a home during a chapter 13 case belongs to creditors if the case converts to chapter 7 and the appreciation is not covered by the exemption.
With the possible exception of the Tenth Circuit, chapter 13 debtors who live in other circuits are at risk of losing their homes if they convert their cases to chapter 7 or sell the properties while they remain in chapter 13. Consequently, a chapter 13 debtor contemplating the sale of a home should first consult counsel, who should obtain a reliable valuation of the property and research decisions by the presiding judge on the issue.
Even if the presiding judge has ruled in favor of debtors in similar circumstances, counsel should tell their clients that an appellate court might reach a different conclusion, and the debtors may lose their homes.
Perhaps also, chapter 13 clients should be told early in the representation that they should not consider selling their homes unless the appreciation in equity remains covered by the homestead exemption. Clients also should be told that conversion to chapter 7 can result in loss of the home if appreciation exhausts the homestead exemption.
Home Sold During Chapter 13
The debtor confirmed a chapter 13 plan and kept her home. She scheduled her home as worth $130,000 and claimed a $15,000 homestead exemption, the maximum in Missouri. The home had a $107,000 mortgage.
The trustee did not object to the exemption, because the estate would have received nothing had the home been sold on the filing date, taking the costs of sale into consideration. The plan called for the home to revest 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 chapter 7 trustee wanted to sell the home, aiming to recover about $62,000 for creditors.
To prevent a sale, the debtor filed a motion to compel abandonment under Section 554. Chief Bankruptcy Judge Brian T. Fenimore of Kansas City, Mo., denied the 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 Eighth Circuit Bankruptcy Appellate panel affirmed in an opinion by Bankruptcy Judge Shon Hastings. 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.
The Circuit Agrees with the BAP
The debtor appealed to the Eighth Circuit but failed to persuade Circuit Judge Bobby E. Shepherd in an opinion on March 8, 2024. He said that the statutory text in Sections 348(f)(1)(A) and 541(a)(6) begins and ends the analysis.
When a chapter 13 case converts to a case under another chapter, Section 348(f)(1)(A) provides:
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.
Section 541(a)(6) provides that estate property includes:
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.
The home was the debtor’s property on the original filing and was also her property at the time of conversion. Therefore, the home was property of the chapter 7 estate by virtue of Section 348(f)(1)(A). Without difficulty, Judge Shepherd next concluded that the post-filing increase in equity represented “proceeds” that became chapter 7 estate property under Section 541(a)(6).
Judge Shepherd held “that, under the plain text of the Code, the post-petition, pre-conversion increase in equity in [the debtor’s] residence is property of the converted chapter 7 estate.” He devoted the remaining three pages of his eight-page decision to rebutting the debtor’s arguments.
The debtor contended that the entire home had been exempted when there was no objection to her exemption claim at the time of filing. Judge Shepherd said that the allowed exemption only gave the debtor the maximum state exemption of $15,000, “not the in-kind exemption of the entire residence.” [Emphasis in original.]
Next, the debtor argued that the home revested in her on confirmation of the chapter 13 plan. Judge Shepherd “easily” rejected the argument, saying that no provision of chapter 13 “holds sway” once the case converts to chapter 7, citing Harris v. Viegelahn, 575 U.S. 510, 520 (2015).
The snapshot rule fared no better. A picture of the estate on the original filing date, he said, has “no bearing on whether the post-petition, pre-conversion increase in equity in [the debtor’s] residence is property of the converted estate” because Section 522(a)(2) “is expressly confined to that section only.”
As a matter of policy, the debtor urged the circuit to recognize that a debtor is not to be punished for “attempting chapter 13.” Judge Shepherd said he was “sensitive” to the hardship the decision would impose on the debtor, but he quoted the Supreme Court for saying that “policy arguments” cannot “overcome” provisions in the Bankruptcy Code.
Finally, the debtor wanted the Eighth Circuit to follow the Tenth Circuit’s decision in In re Barrera, 22 F.4th 1217 (10th Cir. 2022). There, the Tenth Circuit allowed the debtor to retain the appreciation in a home sold before conversion. To read ABI’s report, click here.
Judge Shepherd said that the Tenth Circuit answered “a different question.” He affirmed the BAP.
Siding with the Ninth Circuit and distinguishing a seemingly similar decision from the Tenth Circuit, the Eighth Circuit held that appreciation in the value of a home during a chapter 13 case belongs to creditors if the case converts to chapter 7 and the appreciation is not covered by the exemption.
With the possible exception of the Tenth Circuit, chapter 13 debtors who live in other circuits are at risk of losing their homes if they convert their cases to chapter 7 or sell the properties while they remain in chapter 13. Consequently, a chapter 13 debtor contemplating the sale of a home should first consult counsel, who should obtain a reliable valuation of the property and research decisions by the presiding judge on the issue.
Even if the presiding judge has ruled in favor of debtors in similar circumstances, counsel should tell their clients that an appellate court might reach a different conclusion, and the debtors may lose their homes.
Perhaps also, chapter 13 clients should be told early in the representation that they should not consider selling their homes unless the appreciation in equity remains covered by the homestead exemption. Clients also should be told that conversion to chapter 7 can result in loss of the home if appreciation exhausts the homestead exemption.