The NACBA membership has filed an amicus brief in the case of Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. August 20, 2013) seeking affirmance of the lower courts’ opinions. There, the debtor filed a chapter 13 petition, but after a good faith attempt to fulfill his obligations under the plan, he converted to chapter 7. The trustee sought to distribute debtor’s wages collected pursuant to the plan but not yet distributed at the time of conversion.
In its brief, NACBA argues that the trustee seeks to turn back the clock on an issue resolved by Congress in 1994 when it added section 348(f) to the Bankruptcy Code. That section provides that when a case is converted from chapter 13 to chapter 7, the “property of the estate” in the new chapter 7 case consists of the debtor’s property as of the date of the original petition. Only in the case of bad faith conversions is the property of the estate determined as of the date of conversion. Because, under section 541(a)(6), a debtor’s post-petition wages are not a component of a chapter 7 estate, undistributed, post-petition wages in the possession of a chapter 13 trustee at the time a debtor converts to chapter 7 are the property of the debtor, not his creditors.
A look at the legislative history of section 348(f) supports this view. Prior to 1994, there was a split in the circuits as to what effect conversion had on post-petition property already in possession of the trustee but not yet distributed to creditors. Some courts adopted a “once in, always in,” approach under which the funds were considered to have “vested” in the creditors. See, e.g., In the Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991); Resendez v. Lindquist, 691 F.2d 397, 399 (8th Cir. 1982); In re Waugh, 82 B.R. 394 (Bankr. W.D. Pa. 1988). Other courts found that such funds belonged to the debtor. See, e.g., In re Plata, 958 F.2d 918 (9th Cir. 1992); In re Doyle, 11 B.R. 110 (Bankr. E.D. Pa. 1981). See also In re Bobroff, 766 F.2d 797 (3d Cir. 1985) (relying on policy reasoning to find that tort action which accrued post-petition but pre-conversion belongs to debtor).
Congress expressly resolved this split in favor of the latter approach. In enacting section 348(f), Congress explained: “This amendment overrules the holding in cases such as Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991) and adopts the reasoning of 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 the converted case.” H.R. Rep. 103-835, 103rd Cong., 2d Sess. 1994, 1994 U.S.C.C.A.N. 3340, 3366.
Since 1994, circuit courts have uniformly found that undistributed post-petition property belongs to the debtor upon conversion. See, e.g., In re Michael, 699 F.3d 305 (3d Cir. 2012) In re Stamm, 222 F.3d 216, 217-18 (5th Cir. 2000) In re Young, 66 F.3d 376, 378 (1st Cir. 1995).
The brief argues that the trustee’s “third option” of treating property as neither belonging to the estate, nor belonging to the debtor, but as having “vested” in the creditors upon confirmation of the chapter 13 plan is unsupported by statutory interpretation. Section 1326(a) imposes a distribution obligation on the chapter 13 trustee which terminates upon closure of the chapter 13 case, but does not grant any rights to the creditors. Section 348(f) as interpreted by these cases resolves the issue in favor of incentivizing debtors to attempt to repay creditors without the fear of negative repercussions if those good faith efforts fail.
Tags: Property of Estate, conversion
