§ 143.2     In Cases Filed after October 22, 1994
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 143.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

In 1994, Congress rewrote § 348(f) of the Code with the stated legislative intent to undo the more penal of the circuit court opinions discussed immediately above.1 As amended by the Bankruptcy Reform Act of 1994, § 348(f)(1)(A) states that when a Chapter 13 case is converted to another chapter:

(A) 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.2
[2]

Section 348(f)(2) contains a specific exception to this new definition of property of the estate for a “bad-faith” conversion:

(2) If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property in the converted case shall consist of the property of the estate as of the date of conversion.3
[3]

The legislative history of these 1994 amendments to § 348 states that Congress intended to “clarify” the fractured case law,4 in favor of the view that consumer debtors should not be penalized at conversion for attempting and failing in a Chapter 13 case:

        This amendment would clarify the Code to resolve a split in the case of [sic] law about what property is in the bankruptcy estate when a debtor converts from chapter 13 to chapter 7. The problem arises because in chapter 13 (and chapter 12), any property acquired after the petition becomes property of the estate, at least until confirmation of a plan. Some courts have held that if the case is converted, all of this after-acquired property becomes part of the estate in the converted chapter 7 case, even though the statutory provisions [sic] making it property of the estate does not apply to chapter 7. Other courts have held that the property of the estate in a converted case is the property the debtor had when the original chapter 13 petition was filed.
        These latter courts have noted that to hold otherwise would create a serious disincentive to chapter 13 filings. For example, a debtor who had $10,000 equity in a home at the beginning of the case, in a State with a $10,000 homestead exemption, would have to be counseled concerning the risk that after he or she paid off a $10,000 second mortgage in the chapter 13 case, creating $10,000 equity, there would be a risk that the home could be lost if the case were converted to chapter 7 (which can occur involuntarily). If all of the debtor’s property at the time of conversion is property of the chapter 7 estate, the trustee would sell the home, to realize the $10,000 in equity for the unsecured creditors and the debtor would lose the home.
        This amendment overrules the holding in cases such as Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991) and adopts the reasoning of [Bobroff v. Continental Bank (In re Bobroff),] 766 F.2d 797 (3d Cir. 1985). However, it also gives the court discretion, in a case in which the debtor has abused the right to convert and converted in bad faith, to order that all property held at the time of conversion shall constitute property of the estate in converted case.5
[4]

If only the words Congress used in 1994 in § 348(f) were as clear as the legislative statement by Congressman Brooks. The 1994 amendments to § 348(f) are a mixture of old and new concepts. Section 348(f)(1)(A) tells us that in Chapter 13 cases filed after October 22, 1994, property of the estate “in the converted case”6 “shall consist of property of the estate as of the date of filing of the petition” but only if such property “remains in the possession of or is under the control of the debtor on the date of conversion.”7 “Property of the estate” is a term of art that has been an endless source of litigation at conversion from Chapter 13 to Chapter 7 prior to the 1994 amendments.8 One of the principal battles has been whether “property of the estate” at conversion means property of the estate defined by § 541, as in a Chapter 7 case, or property of the estate defined by § 1306, as in a Chapter 13 case. That property of the estate in the converted case consists of “property of the estate as of the date of the filing of the petition” does not tell us which notion of property of the estate applies as of that date.

[5]

For example, the debate has raged whether property of the estate includes a debtor’s postpetition wages and other personal services income when a Chapter 13 case converts to Chapter 7.9 Using the Chapter 7 definition of property of the estate in § 541, property of the estate “as of the date of the filing of the (original Chapter 13) petition” would not include postpetition earnings of the debtor that might remain “in the possession of or . . . under the control of the debtor on the date of conversion.”10 In contrast, the Chapter 13 definition of property of the estate in § 1306 would include the debtor’s postpetition earnings and personal services income—except in jurisdictions that construe § 1327(b) to vest all such property in the debtor at confirmation.11 The redundant use of property of the estate to define property of the estate in the 1994 amendments to § 348(f)(1)(A) did not resolve which definition of “property of the estate” applies at conversion. The legislative statement of intent to overrule Lybrook suggests that Congress intended a Chapter 7–based definition of property of the estate for purposes of § 348(f)(1)(A).

[6]

Bankruptcy Rule 1019, as rewritten after the 1994 amendments to § 348, somewhat ambiguously supports the view that postpetition property does not become property of the Chapter 7 estate at a good-faith conversion. Bankruptcy Rule 1019(5)(C)(i) states that at conversion of a Chapter 13 case to Chapter 7 after confirmation, the debtor is required to file “a schedule of property not listed in the final report and account acquired after the filing of the petition but before conversion, except if the case is converted from Chapter 13 to Chapter 7 and § 348(f)(2) does not apply.”12 The intent behind Bankruptcy Rule 1019(5)(C)(i) seems to be that, at a “bad faith” conversion under § 348(f)(2),13 the debtor must file a new schedule to reveal property acquired after the petition that might be captured by the Chapter 7 estate. By negative implication, the rules drafters did not require the new schedule of property acquired after the filing of the petition when the Chapter 13 case converts in good faith to Chapter 7—suggesting that the acquisition of postpetition property is irrelevant at good-faith conversion to Chapter 7.

[7]

It is not obvious why new Rule 1019(5)(C)(i) is confined to conversions after confirmation. Perhaps the rules drafters had in mind the vesting effect of § 1327(b);14 however, confirmed plans often overcome the vesting effect in § 1327(b),15 and even if property vests in the debtor at confirmation under § 1327(b), some courts have held that the estate rebuilds after confirmation with postconfirmation property that could be drawn into the Chapter 7 estate at conversion.16 All in all, amended Bankruptcy Rule 1019(5)(C)(i) is not particularly helpful in the debate about the entitlement to postpetition property in Chapter 13 cases filed after the 1994 amendments to § 348.

[8]

The phrase “remains in the possession of or is under the control of the debtor on the date of conversion” in § 348(f)(1)(A) contains new concepts that will undoubtedly lead to litigation. For example, is money deducted from a debtor’s paycheck and paid to the Chapter 13 trustee “in the possession of or . . . under the control of the debtor”? The Eighth Circuit’s pre-1994 view in Rezendez v. Lindquist17 was that once a debtor’s wages were paid to the Chapter 13 trustee, the funds “no longer belong to the debtors, but became part of their estate.”18 By statute, the debtor controls all property of the estate in a Chapter 13 case;19 and, except as provided at confirmation, the debtor remains in possession of all property of the estate.20 In a case filed after October 22, 1994, if the confirmed plan did not prevent the vesting of property in the debtor, are funds paid to and held by the Chapter 13 trustee at conversion still “property of the estate” in the “possession . . . or control” of the debtor? Is it “control” that the debtor can convert or dismiss at any time before confirmation, compelling the return of the money under § 1326(a)(2)?21

[9]

Courts consulting the legislative intent behind the 1994 amendments to § 348(f) will conclude that postpetition wages held by the Chapter 13 trustee at good-faith conversion and property interests acquired during the Chapter 13 case are not property of the Chapter 7 estate and should be returned to the debtor even at conversion after confirmation. Citing the 1994 amendments to § 348(f)(1)(A), the U.S. Court of Appeals for the Fifth Circuit held, “[I]ncome acquired after the original filing of the Chapter 13 petition and before conversion is not part of the converted estate . . . . Section 348(f)(1), where applicable, establishes that the postpetition income does not remain property of the estate upon conversion.”22 Reasoning that postpetition earnings did not exist at the petition for § 348(f)(1)(A) purposes, several bankruptcy courts have concluded that funds held by the Chapter 13 trustee at conversion belong to the debtor without regard to whether a plan was confirmed during the Chapter 13 case.23

[10]

The U.S. District Court for the Western District of Tennessee has held that a slip-and- fall action that accrued after the Chapter 13 petition belongs to the debtor after a good-faith conversion to Chapter 7. In Farmer v. Taco Bell Corp. (In re Farmer),24 the debtor filed Chapter 13 in 1995. The debtor fell in a Taco Bell restaurant in 1997. After the fall, the debtor voluntarily converted to Chapter 7 but did not list the cause of action as an asset in the Chapter 7 schedules. After conversion, the debtor filed a state court action against Taco Bell. Without condoning the debtor’s failure to list the cause of action, the district court explained that the 1994 amendments to § 348 gave the debtor the postpetition cause of action at conversion in good faith:

In amending section 348, Congress specifically decided to reject the [In re Lybrook, 951 F.2d 136 (7th Cir. 1991),] approach in favor of the [Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797 (3d Cir. 1985),] approach. . . . [C]ourts that have decided cases involving conversions under the 1994 amendment have held that after-acquired property belongs to the debtor pursuant to § 348(f)(1)(A) unless the conversion was made in bad faith. . . . Plaintiffs’ cause of action in the present case arose after confirmation of the Chapter 13 plan but prior to the conversion to a Chapter 7 bankruptcy. Section 348(f)(1)(A) clearly dictates that any property acquired during that time-frame is not part of the bankruptcy estate. Therefore, unless plaintiffs acted in bad faith by converting to Chapter 7, the present cause of action belongs to the plaintiffs and they have standing to sue.25
[11]

The issue in Farmer of entitlement to a postpetition cause of action shows a dark side when the debtor fails to disclose a lawsuit during the Chapter 13 case, converts to Chapter 7 and then files the lawsuit in a nonbankruptcy court. Discussed in more detail elsewhere,26 the personal injury bar is increasingly alert to the defense of “judicial estoppel” when the plaintiff is or was a debtor in a Chapter 13 case and the cause of action was not revealed in the schedules. Consideration of § 348(f)—or, more often, failure to consider § 348(f)—can be outcome determinative of judicial estoppel analysis.

[12]

If you start with the insight that Farmer is correctly decided, then it is easy to appreciate why the Court of Appeals for the state of Washington rejected the defense of judicial estoppel in Johnson v. Si-Cor, Inc.27 A month after filing a Chapter 13 case, the debtor in Johnson broke a tooth on a small stone in a McDonald’s breakfast sandwich. The debtor did not amend the Chapter 13 schedules. After confirmation, the case converted to Chapter 7. The debtor received a discharge. Six months later the debtor sued McDonald’s. McDonald’s defended that the debtor was judicially estopped to maintain the lawsuit that was not disclosed. Correctly analyzing property of the estate, the Washington Court of Appeals concluded that Mr. Johnson was under no obligation to disclose a lawsuit that belonged to the debtor, not the bankruptcy estate:

[A]fter Mr. Johnson’s Chapter 13 was converted to a Chapter 7, he was entitled to retain the proceeds of his lawsuit against McDonald’s, free from any claim of the bankruptcy trustee or creditors of his bankruptcy . . . . Fed. R. Bankr. P. 1019(5)(B)(i) . . . does not require the debtor to disclose after-acquired property unless the debtor’s case was converted in bad faith from Chapter 13 to Chapter 7. . . . The existence of a post-petition personal injury claim, which would not have been property of the Chapter 7 estate or available for distribution to unsecured creditors, would not have been relevant to the bankruptcy court’s decision either to close the case or to grant Mr. Johnson a discharge.28
[13]

The careful analysis in Farmer and Johnson stands in stark contrast to what the U.S. Court of Appeals for the Eleventh Circuit did (or did not do) in Billups v. Pemco Aeroplex, Inc. (In re Burnes).29 Six months after a Chapter 13 petition, the debtor in Burnes became aware of employment discrimination and filed a charge with the EEOC. The debtor did not amend the Chapter 13 schedules. Two years later, the debtor and 35 other plaintiffs filed an employment discrimination lawsuit. Ten months after filing the lawsuit, the debtor converted to Chapter 7. Without mention of § 348(f), the Eleventh Circuit held that judicial estoppel barred the debtor from any damages recovery in the employment discrimination lawsuit:

[The debtor] had knowledge of his claims during the bankruptcy proceedings. . . . [The debtor] stood to gain an advantage by concealing the claims from the bankruptcy court. It is unlikely he would have received the benefit of a conversion to Chapter 7 followed by a no asset, complete discharge had his creditors, the trustee, or the bankruptcy court known of a lawsuit claiming millions of dollars in damages. . . . [D]isclosing this information would have likely changed the result of his bankruptcy.30
[14]

The Eleventh Circuit in Burnes was either unaware of § 348(f) or misapprehended the content of the estate at conversion from Chapter 13 to Chapter 7. The debtor did not stand to gain from failing to reveal the postpetition lawsuit—absent evidence of bad faith, at conversion the lawsuit was the debtor’s property. It is unlikely that disclosure of the lawsuit would have changed the outcome of the Chapter 7 case after the 1994 amendments to § 340. Judicial estoppel turned cruelly against the debtor based on the Eleventh Circuit’s misunderstanding of property of the estate at conversion from Chapter 13 to Chapter 7.

[15]

The Eleventh Circuit is hardly alone in failing to appreciate the 1994 amendments to § 348(f). Several courts have concluded that when conversion occurs after confirmation, the money held by the Chapter 13 trustee is treated differently than other property acquired during the Chapter 13 case for purposes of § 348(f)(1)(A). In one of the first reported cases to interpret § 348(f) in a battle for the money held by the Chapter 13 trustee at conversion after confirmation, the bankruptcy court concluded that the 1994 amendments to § 348(f)(2) did not resolve the issue, and, relying on pre-1994 case law, the court distributed the money to creditors consistent with the confirmed plan under § 1326(a)(2).31 These courts pay lip service to § 348(f)(1)(A) by refusing the Chapter 7 trustees’ efforts to capture the money on hand at conversion, but these courts hold that the rights of creditors under the confirmed plan trump the debtor’s rights in wages already paid to the trustee. These courts authorize distributions by the Chapter 13 trustee notwithstanding that § 348(e) terminated the trustee’s services at the moment of conversion. This outcome puts the Chapter 13 trustee at some risk and collides with other cases in which individual creditors have been permitted to levy upon the funds held by the trustee when a Chapter 13 case fails.32

[16]

Perhaps the most important unexpected impact of the 1994 amendments to § 348(f) will be in cases wrestling with the question whether appreciation in property during the Chapter 13 case becomes property of the Chapter 7 estate at conversion. The typical fact pattern is real property owned by the debtor at the Chapter 13 petition that appreciates in value during the Chapter 13 case. If a plan was confirmed, chances are good (but not certain) that the property was valued to determine the best-interests-of-creditors test at confirmation.33

[17]

Discussed in more detail below,34 § 348(f)(1)(B) provides that at good faith conversion from Chapter 13 to Chapter 7 “valuations of property and of allowed secured claims in the chapter 13 case shall apply in the converted case, with allowed secured claims reduced to the extent that they have been paid in accordance with the chapter 13 plan.”35 Is it the real property itself that becomes property of the Chapter 7 estate at conversion, or is it the “value” of that property determined during the Chapter 13 case? If no value was determined during the Chapter 13 case, what comes into the Chapter 7 estate—the value of the property at the original Chapter 13 petition or the value of the property at conversion? Does it make a difference whether appreciation occurred during the Chapter 13 case because of changes in the market as opposed to improvements to the property by the debtor? How do we account for debt reduction during the Chapter 13 case as a result of payments by the debtor before conversion? Does the Chapter 7 estate bear the risk of depreciation during the Chapter 13 case?

[18]

Several courts have tackled some of these issues with results that don’t fully integrate. In In re Kuhlman,36 at the Chapter 13 petition the debtor’s residence was worth $275,000. Three months later at conversion to Chapter 7, the property was revalued at $290,000. The Chapter 7 trustee sold the property for $345,000. The bankruptcy court resolved in the trustee’s favor a dispute over the appreciated value of the property:

Since the Kuhlmans never obtained confirmation of a plan while they were in Chapter 13, and their home was never otherwise valued for any purpose during that time, they do not meet the valuation requirement of § 348(f)(1)(B) and the statute is, accordingly, not applicable to this situation. Therefore, all of the appreciation in the property, including the appreciation applicable to the time the case was in Chapter 13, belongs to the bankruptcy estate.37
[19]

The absence of a valuation during the Chapter 13 case supports the conclusion in Kuhlman that § 348(f)(1)(B) was not available. But this conclusion does not explain why § 348(f)(1)(A) captured the appreciation in the residence for the Chapter 7 trustee. Property of the estate in the converted case is defined in § 348(f)(1)(A) as “property of the estate, as of the date of filing of petition.” Kuhlman decides without discussion that appreciation in property after the petition is property of the estate as of the date of filing of the petition notwithstanding that the appreciation did not exist at the petition.

[20]

When a Chapter 13 plan was confirmed before conversion, the courts have found an “implicit” valuation that implements the policy in § 348(f) with respect to appreciating property. For example, in In re Slack,38 the debtors valued real property at $43,000 in the Chapter 13 schedules. After confirmation, the case converted to Chapter 7 and a creditor objected to the Chapter 7 trustee’s abandonment of the real property, arguing that the value had gone up and there was equity for creditors. The bankruptcy court overruled the objection, explaining:

Even though the court made no specific finding of value, when the chapter 13 plan was confirmed (without objection) there was an implicit finding that the scheduled value, $43,000.00, was proper. . . . Under § 348(f)(1)(B) upon conversion from chapter 13 to chapter 7 the same $43,000.00 value must be used.39
[21]

Similarly, in Warren v. Peterson,40 a nearly five-year-old Chapter 13 case converted, and the Chapter 7 trustee acted to sell the debtor’s residence based on its appreciated value. The district court held that § 348(f) was enacted to prevent Chapter 7 trustees from grabbing appreciated property at conversion from Chapter 13:

This Court holds that an order confirming a chapter 13 bankruptcy plan is an implicit valuation of the scheduled property. . . . Before confirming a chapter 13 bankruptcy plan, the bankruptcy court must find that all of the provisions of 11 U.S.C. § 1325(a) are satisfied. . . . Compliance with [§ 1325(a)(4)] requires the bankruptcy court to rely on the scheduled values of the debtor’s property in order to determine the amount unsecured creditors would be paid if the bankruptcy estate were liquidated under chapter 7. . . . Since the scheduled values are scrutinized by both the bankruptcy court and the creditors before a chapter 13 plan is confirmed, sufficient procedural protections exist to ensure that debtors are not deliberately undervaluing their property. . . . [T]reating an order confirming a bankruptcy plan as an implicit valuation of the property within the bankruptcy estate is consistent with the congressional intent underlying section 348(f). . . . Section 348(f) was added to the bankruptcy code to protect debtors such as Warren from the risk of losing additional property if they seek to reorganize under chapter 13.41
[22]

On slightly different logic, the bankruptcy court in In re Page42 held that appreciation during a Chapter 13 case prior to conversion was not property of the Chapter 7 estate. In Page, the Chapter 13 debtor scheduled real estate at $65,000. A plan was confirmed, and conversion to Chapter 7 occurred more than two years later. The Chapter 7 trustee went after the appreciated property, but the bankruptcy court found that the real property was not revalued at conversion: “Based on the $65,000 valuation, there was no equity in the property for the trustee to sell. . . . [T]he Court sees no reason to distinguish between property acquired after the original petition date which is clearly not part of the Chapter 7 estate from [sic] appreciation of property during a Chapter 13 proceeding.”43

[23]

If appreciation of property during a Chapter 13 case and acquisition of property during a Chapter 13 case are treated the same at good-faith conversion—neither becomes property of the Chapter 7 estate—then it should be irrelevant for § 348(f)(1) purposes whether there was a valuation during the Chapter 13 case. Section 348(f)(1)(A) would control without regard to valuation for § 348(f)(1)(B) purposes.

[24]

And then there is In re Wegner,44 which finds a niche somewhere between Kuhlman and Page. At the Chapter 13 petition in 1995, the debtor’s real property was worth $42,000. A plan was confirmed, and the debtor made payments for nearly four years. In 1999, the case converted to Chapter 7. During the Chapter 13 case, equity developed in the real property from two sources—the property appreciated in value, and the debtor made payments of principal on the home mortgage. The Chapter 7 trustee claimed all of the equity. The bankruptcy court held that appreciation belonged to the debtor but equity from payments went into the Chapter 7 estate, subject to exemption:

Upon conversion from Chapter 13 to Chapter 7, the home became property of this Chapter 7 case because the home remained in the possession and control of the debtor on the date of conversion. . . . Section 348(f)(1)(B), as amended, provides that property of this Chapter 7 estate is to be valued as it was in the previous Chapter 13 case. At the time the Chapter 13 case was filed, the debtor’s home was valued at $42,000, and at the time of conversion the home was valued at $51,500. Under § 348(f)(1)(B), debtor’s home is valued at $42,000 for purposes of the present Chapter 7 case. Since the debtor’s home is valued at $42,000, there is a $9,500 increment of property value that is excluded from this Chapter 7 bankruptcy estate under § 348(f), and it constitutes property of the debtor. Section 348(f)(1)(B) assures that property of a successor Chapter 7 case excludes the amount by which property appreciates during the pendency of a Chapter 13 case. A debtor thus gets a fresh start in their financial affairs as of the date a Chapter 13 case is filed. . . . Since the $9,500 increment of value is excluded from the estate by § 348(f), it is unnecessary and redundant to assert that the $9,500 is excluded from the estate because it is exempt. I conclude that this $9,500 is not property of the Chapter 7 estate under § 348(f). Section 348(f)(1)(B) requires that the Chapter 13 valuations of property and of allowed secured claims shall apply in the converted case with the secured claim reduced to the extent of payments made under the Chapter 13 plan. The Chapter 13 claim secured by the debtor’s home was $42,800, and the plan proposed to pay that claim in full. That claim has been reduced to $39,000 because $2,900 in principal payments were made during the pendency of the Chapter 13 case. As previously stated, the debtor’s home had a value of $42,000 for the purposes of the Chapter 13 case. Deducting the $39,900 in debt from the $42,000 value, there is a $2,100 equity cushion which constitutes property of this Chapter 7 bankruptcy estate. . . . To the extent that an equity cushion is attributed to appreciation in the property, § 348(f)(1)(B) protects the debtor by using the Chapter 13 unappreciated value for purposes of the successor Chapter 7 case. On the facts of this case, that protects the debtor by excluding $9,500 of the appreciation from the Chapter 7 estate . . . . Section 348 does not explicitly protect an equity cushion that is created by payments made during the pendency of the Chapter 13 case.45
[25]

The bankruptcy court’s technical application of § 348(f)(1) in Wegner gives effect to both §§ 348(f)(1)(A) and 348(f)(1)(B), but the outcome seems odd. As in Page, appreciation in the value of property during the Chapter 13 case stayed with the debtor at conversion; but the equity created in Wegner by payments to a secured creditor during the Chapter 13 case ends up in the hands of unsecured creditors in the Chapter 7 case (subject to exemption). The mortgage holder got $2,900 in principal payments during the Chapter 13 case, and unsecured creditors get that same $2,900 a second time out of the “equity” created during the Chapter 13 case. At confirmation of the Chapter 13 plan, only the mortgage holder had any entitlement to that $2,900 because there was no equity in the real property. The “equity” that Wegner awards to unsecured creditors through the Chapter 7 case arose after the Chapter 13 petition just as surely as the equity created by appreciation of the property.

[26]

Drawing upon the legislative history quoted above, it seems to have been congressional intent to take a snapshot of the estate at the filing of the original Chapter 13 petition and, based on that inventory, include in the Chapter 7 estate at conversion only the portion that remains in the possession or control of the debtor. The spirit of § 348(f)(1)(A) is best captured by a rule that property acquired by the Chapter 13 estate or by the debtor after the Chapter 13 petition does not become property of the Chapter 7 estate at a good-faith conversion. The method of acquisition after the Chapter 13 petition should not matter: postpetition property does not become property of the Chapter 7 estate at conversion, whether acquired with earnings by the debtor, by transfer to the debtor—for example, an inheritance after 180 days after the petition—or by appreciation in the value of a prepetition asset.

[27]

Section 348(f)(1)(A) could reward shenanigans by debtors in failing Chapter 13 cases. If property of the estate in the converted case consists only of property that “remains in the possession of or is under the control of the debtor on the date of conversion,” then debtors have incentives to relinquish possession and control of assets during the Chapter 13 case. Can the debtor deplete the (potential) Chapter 7 estate by strategically transferring assets during the Chapter 13 case? If neither the plan nor the order of confirmation preserved the estate from the vesting effect of § 1327(b),46 the debtor can dispose of the estate during the Chapter 13 case, without violating any provision of the Bankruptcy Code. Would lawful preconversion asset transfers constitute “bad faith” for purposes of new 348(f)(2)?47

[28]

What effect will § 348(f)(1)(A) have on a debtor’s exemption rights in the Chapter 7 case after conversion?48 Section 522(b) permits an individual debtor to claim exemptions “from property of the estate.”49 At good-faith conversion, § 348(f)(1)(A) excludes from the Chapter 7 estate property that is not in the possession or control of the debtor. If money held by the Chapter 13 trustee at conversion is not in the possession or control of the debtor, then is it ineligible for exemption in the Chapter 7 case? Is it property of the debtor with respect to which the debtor does not have to use up an exemption? The cases requiring distribution consistent with the confirmed plan of money held by the Chapter 13 trustee at conversion must also be concluding that wages deducted during the Chapter 13 case are neither property of the Chapter 7 estate nor property of the debtor. Ironically, it follows that making payments to the trustee consistent with a confirmed plan before conversion forfeits the debtor’s opportunity to exempt the wages held by the trustee at conversion.50


 

1  See § 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994.

 

2  11 U.S.C. § 348(f)(1)(A), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994).

 

3  11 U.S.C. § 348(f)(2), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). See § 316.2 [ Bad-Faith Conversion ] § 143.5  Bad-Faith Conversion.

 

4  See § 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994.

 

5  140 Cong. Rec. H10,752, 10,770–71 (section-by-section analysis by Congressman Brooks).

 

6  The 1994 amendment of § 348(f) is not limited to conversions from Chapter 13 to Chapter 7. The new rules for determining property of the estate (and valuations of property and of allowed secured claims) contained in § 348(f) apply at conversion of a Chapter 13 case to any other chapter of title 11. See § 146.1  Standing, Procedure and Grounds for Conversion to Chapter 11, § 146.2  Strategic Considerations: Costs and Benefits of Conversion to Chapter 11 (conversion to Chapter 11), § 146.3  Incentives to Convert to Chapter 11 after BAPCPA and § 147.1  Standing, Procedure and Strategic Considerations (conversion to Chapter 12).

 

7  11 U.S.C. § 348(f)(1)(A) (emphasis added).

 

8  See § 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994.

 

9  See § 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994.

 

10  11 U.S.C. § 348(f)(1)(A).

 

11  See §§ 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate and 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994.

 

12  Fed. R. Bankr. P. 1019(5)(C)(i).

 

13  See below in this section.

 

14  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

15  See § 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11  Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b).

 

16  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate. See also § 215.1 [ Opposing a Preconfirmation Modification of the Plan ] § 114.7  Opposing a Preconfirmation Modification of the Plan.

 

17  691 F.2d 397 (8th Cir. 1982). See § 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994.

 

18  691 F.2d at 399.

 

19  See 11 U.S.C. § 1303, discussed in § 44.1 [ Debtor Has Exclusive Control of Estate Property ] § 45.1  Debtor Has Exclusive Possession and Control of Estate Property.

 

20  See 11 U.S.C. § 1306(b).

 

21  See § 44.5  Return of Payments to Debtor, § 44.7  Disposition of Preconfirmation Payments after BAPCPA, § 142.5  On Postpetition Claims§ 143.1  In Cases Filed before October 22, 1994 and § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

22  Stamm v. Morton (In re Stamm), 222 F.3d 216, 217–18 (5th Cir. 2000).

 

23  In re Gregson, No. 02-12525C-7G, 2003 WL 21230610, at *1 (Bankr. M.D.N.C. May 28, 2003) (unpublished) (Funds paid to Chapter 13 trustee from operation of business prior to confirmation belong to the debtor at conversion. “[U]nder § 348(f)(1)(A), when a chapter 13 case is converted to chapter 7, the property of the estate in the chapter 7 case consists of property that was held by the debtor when the chapter 13 case was filed and which remains in the possession or control of the debtor when the conversion occurs, unless the conversion was done in bad faith. . . . [F]unds held by the Chapter 13 Trustee when this case was converted did not exist when the Chapter 13 case was filed . . . such funds were acquired by the Debtor during the pendency of the Chapter 13 case. It follows that such funds did not become property of the estate in Debtors’ Chapter 7 case, but instead should be paid to the Debtors.”); In re Zamora, 274 B.R. 268, 270 (Bankr. W.D. Tex. 2002) (At conversion to Chapter 7, funds held by Chapter 13 trustee belong to the debtor. “Because post-petition earnings are, by definition (and common sense), not property of the estate as of the date of the commencement of the case, once a chapter 13 case is converted to chapter 7 (or dismissed, for that matter), any monies that represent post-petition earnings that may remain in the hands of the chapter 13 trustee belong not to the bankruptcy estate but to the debtor.”); In re Del Castillo, 273 B.R. 677, 679 (Bankr. M.D. Fla. 2002) (At reconversion from Chapter 13 to Chapter 7 before confirmation, citing § 348(f)(1)(A) but without mention of § 1326(a)(2), debtor is entitled to funds held by the Chapter 13 trustee, but Chapter 7 trustee is entitled to “an allowance on general equitable principles of a quantum meruit basis” because debtor failed to seek turnover within the 15 days allowed by a “procedures order.”); In re Gordon, No. 95-54032-JDW, 1998 WL 34013505, at *2 (Bankr. M.D. Ga. Apr. 24, 1998) (unpublished) (Citing § 348(f), at conversion after confirmation, money turned over to Chapter 7 trustee by Chapter 13 trustee is not property of the Chapter 7 estate and must be returned to the debtor notwithstanding tax liens attached to that money. “Since the money transferred from the Chapter 13 Trustee to the Chapter 7 Trustee is no longer property of the estate . . . such funds should be turned over to Debtors. . . . [T]he Court expresses no opinion on the issue of whether the IRS can attempt to enforce its tax liens against the money in question in a non-bankruptcy forum.”).

 

24  242 B.R. 435 (W.D. Tenn. 1999).

 

25  242 B.R. at 438–40. Accord In re Bejarano, 302 B.R. 559, 561–62 (Bankr. N.D. Ohio 2003) (Because conversion from Chapter 13 to Chapter 7 was not bad faith, a personal injury lawsuit and tax refund that arose after the Chapter 13 petition are not property of the Chapter 7 estate.“[U]nder § 348(f) the general rule is that when a case is converted from a Chapter 13 to a Chapter 7, any property acquired by the debtor after the commencement of the case, but prior to conversion, does not become property of the estate in the converted case. The exception to this rule is if the case was converted in ‘bad faith.’ . . . [N]o inference of ‘bad faith’ arises solely because a debtor acquires a postpetition, but preconversion asset, and thereafter elects to convert their case on account of the protection afforded by § 348(f)(1).”); In re Carter, 260 B.R. 130, 133–34 (Bankr. W.D. Tenn. 2001) (Life insurance proceeds on the death of one joint debtor do not become property of the Chapter 7 estate when Chapter 13 case was filed more than a year before the joint debtor died and there is no evidence of bad faith at conversion for § 348(f) purposes. “Mr. and Mrs. Carter filed a joint chapter 13 petition on August 3, 1999. More than a year later on November 22, 2000, they filed a notice of conversion . . . . Mrs. Carter did not acquire an interest in the life insurance proceeds until January 18, 2001, on the date of Mr. Carter’s death. Clearly, the acquiring of this interest in property occurred outside the 180 day window as contemplated in section 541(a)(5)(C) of the Code. . . . Section 348(f)(1)(A) now states that property of the estate in a converted case consists of all the property of the estate as of the date of filing the petition. . . . [O]nly one ‘petition’ is filed per case. . . . No . . . bad faith exists in this case.”); DiBraccio v. Ferretti (In re Ferretti), 230 B.R. 883, 888–90 (Bankr. S.D. Fla. 1999) (In dicta, at good-faith conversion to Chapter 7, postpetition property and appreciation of prepetition property belong to the debtor. “[T]he 1994 Amendments to 11 U.S.C. § 348(f) . . . codified the rule that post-petition appreciation of assets and assets acquired post-petition are property of the debtor—not property of the estate after conversion. Moreover, 11 U.S.C. § 348(f)(2) eliminates the policy concern that debtors may use conversion to abuse the bankruptcy process. . . . [T]he statutory scheme of 11 U.S.C. § 348(f)(1) indicates that the relevant date for determining property of the Chapter 7 estate after conversion from Chapter 13 is the original filing date.”).

 

26  See § 47.7 [ Causes of Action ] § 46.11  Causes of Action—Including Judicial Estoppel Issues.

 

27  28 P.3d 832 (Wash. Ct. App. 2001).

 

28  28 P.3d at 911–12.

 

29  291 F.3d 1282 (11th Cir. 2002).

 

30  291 F.3d at 1288.

 

31  In re Hardin, 200 B.R. 312, 313–14 (Bankr. E.D. Ky. 1996) (The 1994 amendments to § 348(f) resolved Chapter 7 trustee’s entitlement to property at conversion from Chapter 13 but did not resolve who gets money held by Chapter 13 trustee at conversion after confirmation. Citing In re Galloway, 134 B.R. 602 (Bankr. W.D. Ky. 1991), money held by Chapter 13 trustee at conversion is properly distributed to creditors consistent with § 1326(a)(2). “The dispute before the Court does not involve the chapter 7 trustee since the 1994 Amendments to the Bankruptcy Code . . . have made clear that the debtor’s payments from post-petition earnings pursuant to a chapter 13 plan are not part of the Chapter 7 estate upon conversion from chapter 13 to chapter 7 . . . [citing Young v. Key Bank of Maine (In re Young), 66 F.3d 376 (1st Cir. 1995)] . . . . While Congress has clarified the disposition of such funds as between the chapter 7 estate and the debtor, it did not address the rights that creditors of the Chapter 13 estate may have to those funds in the hands of the trustee when conversion of the case occurs post-confirmation. . . . The Bankruptcy Code affirmatively sets forth the trustee’s obligation to distribute the funds pursuant to the plan at 11 U.S.C. § 1326(a)(2). . . . [C]onfirmation vests rights in the creditors which require that post-petition wages paid to the chapter 13 trustee be distributed by him to those creditors even after conversion of the case to one under chapter 7. While the Court reaches this conclusion based upon the provision of § 1306, § 1326 . . . the Court believes that equitable factors also compel the same result . . . the delay occasioned in the confirmation process, the reliance of creditors upon the distribution called for in the confirmed plan, the finality afforded a confirmed plan when enforcement is sought by the debtor, and the forbearance by many creditors in asserting other rights which they may have . . . in reliance upon funds being accumulated by the trustee for distribution after confirmation occurs.”). Accord In re Simmons, 286 B.R. 426, 430–31 (Bankr. D. Kan. 2002) (At conversion to Chapter 7, proceeds from the sale of real property during the Chapter 13 case are distributed to creditors pursuant to the confirmed plan. Confirmed plan required the sale of real property. After the sale but before Chapter 13 trustee distributed the proceeds, debtors converted to Chapter 7. Citing § 348(f)(1)(A): “upon conversion, only that property of the estate at the time of the filing of the Chapter 13 petition that ‘remains in the possession of or is under the control of the debtor on the date of conversion’ becomes property of the Chapter 7 estate . . . . If the land and its proceeds had not been devoted to the plan, § 1327(b) would have caused either of them to vest in the debtors at confirmation, and if they remained in the possession or control of the debtors at conversion, they would be property of the Chapter 7 estate as § 348(f)(1)(A) provides. . . . Not only were the sale proceeds devoted to the plan from the beginning, they were also in the possession of the Chapter 13 trustee at conversion, and they still are. Consequently, having been devoted to the plan, the sale proceeds were not acquired by the debtors post-confirmation through § 1327(b) and are not property of the Chapter 7 estate following conversion under § 348(f)(1)(A). . . . The proceeds are still subject to the plan and, in this court’s opinion, the Chapter 13 trustee can still wind up the estate and complete the plan distribution under the court’s supervision.”); In re Pegues, 266 B.R. 328, 331–37 (Bankr. D. Md. 2001) (At conversion to Chapter 7, postpetition wage deductions held by the Chapter 13 trustee are distributed to allowed claim holders consistent with the confirmed plan; Chapter 13 trustee can object to claims in order to redistribute returned funds to allowed claim holders. “Since the enactment of Section 348(f), most courts have determined that revised Section 348 only makes sense if the definition of ‘property of the estate’ set forth in Section 541(a) is applied. . . . Where (as in this case) the monies remaining in the chapter 13 trustee’s hands are derived from post-petition wage withholding payments, pursuant to Section 348(f) and applying the definition in Section 541(a), such monies are not property of the bankruptcy estate. . . . The money should not be paid over to the chapter 7 trustee. . . . Once the debtor makes plan payments pursuant to a confirmed plan proposed by the debtor, the debtor relinquishes all right in those payments. . . . [T]he creditors provided for under such confirmed plan are entitled to distributions as provided for in such plan. . . . [T]his conclusion gives effect to the specific limitation to the debtor’s right to refund set forth in Section 1326(a)(2) . . . . [P]ost-petition wages paid by the debtor to the chapter 13 trustee for disbursement under a confirmed plan should be distributed by the chapter 13 trustee in accordance with the terms of the confirmed plan. Although the service of the chapter 13 trustee is terminated by Section 348(e), it is clear that Congress intended that the chapter 13 trustee shall wind up the affairs of the chapter 13 estate, including disbursing monies on hand to the appropriate recipient. The request for disallowance of the secured claim of a creditor who has refused a payment is nothing more than a request by the chapter 13 trustee to be permitted to disburse the returned funds in accordance with the provisions of the plan. . . . The court’s decision in this case which allows the trustee to both disburse funds after conversion and to file objections to abandoned claims in order to disburse funds is consistent with Rule 1019. In order to comply with Rule 1019, the chapter 13 trustee necessarily must file objections to such claims.”); Mehan v. Sparkman (In re Mehan), Nos. 96-11385, 00-0002, 2000 WL 1010577, at *4–*5 (Bankr. E.D. Pa. July 19, 2000) (unpublished) (On a complaint for turnover against the Chapter 13 trustee, debtor is not entitled to recover payments distributed to creditors by the Chapter 13 trustee after the date of conversion when the trustee was not aware of conversion. “In the instant case, the funds at issue were distributed by the Defendant before he had knowledge that the Debtor’s Chapter 13 case was converted to Chapter 7. . . . [C]onversion of the case from Chapter 13 to Chapter 7, while terminating the Chapter 7 [sic] estate and the trust established for beneficiaries of the plan, does not revoke what was lawfully ordered under the plan. . . . ‘[C]reditors’ rights to payments are vested upon the Chapter 13 Trustee’s disbursement to them.’ . . . [T]he Defendant Chapter 13 trustee is not liable for the return of those funds.”); In re Bell, 248 B.R. 236, 239–40 (Bankr. W.D.N.Y. 2000) (Money held by the Chapter 13 trustee at conversion should be distributed to creditors consistent with the confirmed plan and does not become property of the Chapter 7 estate for purposes of distribution or exemptions. The 1994 amendment to § 348(f)(1)(A) “failed to clarify what happens to undistributed plan payments when there is a conversion from a Chapter 13 case where there was a confirmed plan . . . . I agree with the decisions of the Bankruptcy Courts in [In re Galloway, 134 B.R. 602 (Bankr. W.D. Ky. 1991),] and [In re Hardin, 200 B.R. 312 (Bankr. E.D. Ky 1996),] and prospectively hold that undistributed plan payments in a Chapter 13 case where there has been a confirmed plan should be distributed by the Chapter 13 Trustee pursuant to the provisions of the confirmed plan and the order confirming the plan, notwithstanding that the case has been converted to a Chapter 7 case. . . . I do not believe that the Undistributed Plan Payments are assets of the Chapter 7 case.” This holding is “consistent with the intent of Congress when it amended Section 348(f)(1)(A) to exclude from the Chapter 7 estate those classic assets which a Chapter 13 debtor might acquire post-petition . . . [and] is consistent with Rule 1019(5)(B)(ii) which contemplates that when a case converts from Chapter 13 to Chapter 7, the Chapter 13 Trustee will complete the administration of the Chapter 13 estate and then file a final report and account.”).

 

32  See discussion beginning at § 153.1  In General.

 

33  See § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1  In General: Plan Payments vs. Hypothetical Liquidation.

 

34  See § 145.2  In Cases Filed after October 22, 1994 and § 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.

 

35  11 U.S.C. § 348(f)(1)(B).

 

36  254 B.R. 755 (Bankr. N.D. Cal. 2000).

 

37  254 B.R. at 758.

 

38  290 B.R. 282 (Bankr. D.N.J. 2003).

 

39  290 B.R. at 286–87.

 

40  298 B.R. 322 (N.D. Ill. 2003).

 

41  298 B.R. at 325–26.

 

42  250 B.R. 465 (Bankr. D.N.H. 2000).

 

43  250 B.R. at 466. Accord DiBraccio v. Ferretti (In re Ferretti), 230 B.R. 883, 888–90 (Bankr. S.D. Fla. 1999) (In dicta, at good-faith conversion to Chapter 7, appreciation of prepetition property belongs to the debtor. “[T]he 1994 Amendments to 11 U.S.C. § 348(f) . . . codified the rule that post-petition appreciation of assets and assets acquired post-petition are property of the debtor—not property of the estate after conversion. . . . [I]f a Chapter 13 debtor’s assets appreciate post-petition, or if the debtor acquires post-petition assets, such added value accrues to the benefit of the debtor.”).

 

44  243 B.R. 731 (Bankr. D. Neb. 2000).

 

45  243 B.R. at 734–35.

 

46  See §§ 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11  Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) and 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

47  See § 316.2 [ Bad-Faith Conversion ] § 143.5  Bad-Faith Conversion.

 

48  See also §§ 317.1 [ Exemptions at Conversion ] § 144.1  Exemptions at Conversion and 318.1 [ Lien Avoidance at Conversion ] § 144.2  Lien Avoidance at Conversion.

 

49  11 U.S.C. § 522(b).

 

50  See, e.g., In re Bell, 248 B.R. 236 (Bankr. W.D.N.Y. 2000) (At conversion from Chapter 13 to Chapter 7 after confirmation, the debtor cannot amend exemptions to claim the money held by the Chapter 13 trustee because that money is properly distributed to creditors consistent with the plan and does not become property of the Chapter 7 estate.). See also § 317.1 [ Exemptions at Conversion ] § 144.1  Exemptions at Conversion for further discussion of exemptions at conversion.