The “estate termination theory” allows the debtors to retain proceeds from the post-confirmation sale of prepetition property, where the value of the property appreciated and was sold after the property had revested in the debtors. In re Klein, No. 17-19106 (Bankr. D. Colo. Aug. 23, 2022).
The debtors filed for chapter 13 bankruptcy listing the husband’s 12.9% interest in an LLC which owned the medical building where he had his therapy practice. After several rounds of objections and amended plan filings, the debtors and the trustee finally settled on an agreed value of that interest at $15,000. That amount took into account a “marketability discount” based on an expert’s evaluation of the market for such property. Three years into his plan, the members of the LLC agreed to sell the property, and the debtors realized $76,405. The trustee moved for turnover of the proceeds and modification of the debtors’ plan.
The court observed that the issue before it raised the long-troubling question of the relationship between section 1306 and section 1327 with respect to treatment of post-confirmation property appreciation.
Section 1306(a)(1) provides that property of the estate includes property the debtor acquires after commencement of the case and before the case is closed. Section 1327(a), however, provides that once a plan is confirmed, all parties are bound by its terms and the property of the estate vests in the debtor “free and clear of any claim or interest of any creditor provided for by the plan.” The court noted that it and other courts in the district have adopted the “estate termination theory” under which, once a plan is confirmed, all estate property revests in the debtor and is no longer part of the bankruptcy estate.
Here the trustee argued that the court should instead apply the “estate replenishment theory,” under which the chapter 13 estate continues to exist after the plan is confirmed and is continually replenished by property that fits within the parameters of section 1306. The court disagreed. It was guided by the case of In re Baker, 620 B.R. 655 (Bankr. D. Colo. Sep. 29, 2020), where the debtor exempted his interest in his residence but after the plan was confirmed, sold the home and realized a profit of $11,000 more than the cap on the homestead exemption amount. That court adopted the estate termination theory and held that the proceeds in excess of the state homestead exemption were the property of the debtor.
The court discussed Rodriguez v. Barrera (In re Barrera), 22 F.4th 1217 (10th Cir. 2022), where the debtor filed for chapter 13 bankruptcy and claimed a homestead exemption in his residence. After his plan was confirmed, he sold the home and realized significant non-exempt proceeds. When he later converted to chapter 7, the trustee sought to recover the amount in excess of the exemption. The court found that the property that become the new chapter 7 estate is the property the debtor had at the time of his original chapter 13 petition and therefore did not include post-petition appreciation. Though it acknowledged a potential conflict between sections 1306 and 1327, the court did not address whether, in the absence of conversion, the post-petition proceeds would have become part of the chapter 13 estate.
The trustee pointed out that the proceeds in this case came not from sale of a residence, but from the sale of a business and therefore constituted business earnings. The court distinguished the trustee’s cases, pointing out that one, Berkley v. Burchard (In re Berkley), 613 B.R. 547 (B.A.P. 9th Cir. 2020), involved sale of post-petition stock options, and the other, In re Solis, 172 B.R. 530 (Bankr. S.D.N.Y. 1994), involved a debtor’s manipulation of the chapter 13 system to strip his medical practice of liens before selling it shortly after his plan was confirmed.
The court found the sale of the property in this case was a result of a consensus of all the members of the LLC as a reaction to the changing landscape of working environments due to Covid. It found the proceeds were from the sale of pre-petition property rather than business earnings.
“Any other conclusion would lead to the absurd result that post-confirmation increases in asset values are required to be paid into a Chapter 13 plan while decreases in asset values do not result in a corresponding reduction of the amount paid into a Chapter 13 plan.”
The court denied the trustee’s motion.
Tags: Property of Estate
