post-petition increase in equity

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The 8th Circuit Rules That Post-Petition Pre-Conversion Increase In Equity in Real Estate Is Part of the Converted Chapter 7 Estate

The rise in equity in the appellant’s residence after filing for bankruptcy but before conversion became part of her bankruptcy estate after conversion, as outlined in 11 U.S.C.S § 348(f)(1)(A). This occurred because the residence was already part of the appellant’s estate, and she maintained possession and control over it at the time of filing for bankruptcy.

FACTS

“On August 19, 2020, Machele Goetz filed a chapter 13 bankruptcy petition and plan. She owned a residence worth $130,000 and claimed a $15,000 homestead exemption under Missouri law. Freedom Mortgage held a $107,460.54 lien against the residence. It is undisputed that had the trustee liquidated the residence on the date of the petition, the estate would have received nothing net of the exemption, the lien, and the sale expenses.

“Later, on April 5, 2022, the bankruptcy court granted Goetz’s motion to convert her case from chapter 13 to chapter 7. Between the chapter 13 filing and the date of the conversion order, Goetz’s residence had increased in value by $75,000, and she had paid down a further $960.54 on the mortgage. Had the trustee liquidated the residence on the date of conversion, more than $62,000 net of the exemption, the lien, and the sale expenses would have been produced.

“After realizing that the trustee might sell the residence given the change in value, Goetz moved for the bankruptcy court to compel the trustee to abandon it. Goetz argued that the residence was of “inconsequential value and benefit to the estate” under 11 U.S.C. § 554(b), asserting that the post-petition, pre-conversion increase in equity must be excluded from the calculation of her residence’s value to the estate. The trustee resisted Goetz’s motion, arguing that, under 11 U.S.C. § 348(f), the bankruptcy estate in a converted case includes post-petition, pre-conversion increase in equity, meaning Goetz’s residence was still of value to the estate.”

ANALYSIS

Under 11 U.S.C. § 348(f)(1)(A),” the property of the estate in Goetz’s converted chapter 7 case consists of the property of the estate as of the date she filed her chapter 13 bankruptcy petition (August 19, 2020) that remained in her possession as of the date of conversion from chapter 13 to chapter 7 (April 5, 2022). …

“Goetz’s residence is property of the converted estate because she held “legal or equitable interest[]” in it as of August 19, 2020, id. § 541(a)(1), and because it remained in her possession when she converted her case to chapter 7 on April 5, 2022, id. § 348(f)(1)(A). The question is whether the post-petition, pre-conversion increase in equity in that residence is also part of the converted estate. … We start with the first half of the definition of property of the converted estate: whether the property in question was “property of the estate, as of the date of filing of the petition.” 11 U.S.C. § 348(f)(1)(A). …

Property of the Estate

“Property of the estate at “[t]he commencement of a case” includes “[p]roceeds . . . of or from property of the estate.” Id. § 541(a)(6). A voluntary case in bankruptcy commences when the petition is filed. Id. § 301(a); see also id. § 348(a) (“Conversion of a case from a case under one chapter of this title to a case under another chapter of this title . . . does not effect a change in the date of the filing of the petition [or] the commencement of the case . . . .”).”

Proceeds

“But the Code does not define “proceeds” or “equity,” so “we may look to dictionaries . . . to determine the meaning.” Schwab v. Reilly, 560 U.S. 770, 783, 130 S. Ct. 2652, 177 L. Ed. 2d 234 (2010); see also Franklin Cal. Tax-Free Tr., 579 U.S. at 126 (looking to Black’s Law Dictionary and the Oxford English Dictionary for the meaning of “define”). Proceeds are “[t]he value [*6] of land, goods, or investments when converted into money; the amount of money received from a sale.” Proceeds, Black’s Law Dictionary (11th ed. 2019). HN6 Equity is “[t]he amount by which the value of or an interest in property exceeds secured claims or liens; the difference between the value of the property and all encumbrances on it.” Equity, Black’s Law Dictionary (11th ed. 2019). An encumbrance is “[a] claim or liability that is attached to property or some other right . . . that may lessen its value, such as a lien or mortgage.” Encumbrance, Black’s Law Dictionary (11th ed. 2019).

“The post-petition, pre-conversion increase in equity in Goetz’s residence—i.e. the difference between its value and the homestead exemption and lien—is therefore proceeds “from property of the estate,” 11 U.S.C. § 541(a) (emphasis added), because it is the amount of money that the estate would receive from a sale of the residence before sale expenses. Cf. In re Potter, 228 B.R. 422, 424 (B.A.P. 8th Cir. 1999) (“Nothing in Section 541 suggests that the estate’s interest is anything less than the entire asset, including any changes in its value which might occur after the date of filing.”). Accordingly, the post-petition, pre-conversion increase in equity in Goetz’s residence was property [*7] of the estate at “[t]he commencement of [the] case.” 11 U.S.C. § 541(a).”

NCBRC and NACBA submitted amicus briefs in support of the debtor both at the 8th Circuit and the 8th Circuit B.A.P.

In re Goetz

NCBRC-NACBA Amicus Brief – Goetz

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The 8th Circuit Considers Whether Post-Petition Equity Increases During a Chapter 13 Are Part of The Bankruptcy Estate in a Converted Chapter 7

UPDATE: This 8th Circuit has since issued a decision on this case. Click here to view our article discussing their ruling.

The 8th Circuit Court of Appeals is considering the issue whether the increased value of the debtor’s residence during a chapter 13 bankruptcy is part of the chapter 7 estate upon conversion.  This is an appeal from the 8th Circuit Bankruptcy Appellate Panel affirming the bankruptcy court’s ruling that an increase in equity in real estate during a chapter 13 is part of the bankruptcy estate in a converted chapter 7 case.  Goetz v. Weber (In re Goetz), 651 B.R. 292 (B.A.P. 8th Cir. 2023).

The Debtor originally filed a chapter 13 bankruptcy. At filing the debtor there was no excess equity in her residence over her exemption and the mortgage. At confirmation property of the estate vested in the Debtor. Two years later Debtor converted her case to a chapter 7 bankruptcy. The value of her property appreciated during her chapter 13 so that approximately $62,000 could be liquidated by the trustee. The Debtor filed a motion to abandon property. The bankruptcy court denied the motion finding the increased equity part of the chapter 7 estate.

“Section 541 of the Bankruptcy Code defines property of the bankruptcy estate to include all of a debtor’s interests both equitable and legal, except those specifically excluded. 11 U.S.C. § 541. Estate property includes “[p]roceeds, 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,” and “[a]ny interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(6) and (7).

“Upon conversion from one chapter to another, this definition is [*5] adjusted. Section 348 qualifies the scope of bankruptcy estate property by clarifying that “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[.]” 11 U.S.C. § 348(f)(1)(A). If a debtor converts a case under Chapter 13 to a case under another chapter, the property the debtor acquired between the petition date and the conversion date is not property of the converted case, unless the debtor sought to convert the case in bad faith. 11 U.S.C. § 348(f)(2). …

“As the bankruptcy court observed, courts are split on the question of whether postpetition preconversion market appreciation or an increase in equity resulting from payments toward a lien inures to a debtor’s benefit upon conversion to a Chapter 7 case. …

“Goetz and the Amici Curiae insist that section 348(f) is ambiguous. They urge the Court to consider legislative history, which they maintain supports their argument that postpetition preconversion equity increases should benefit debtors. We detect no ambiguity in sections 348(f) and 541. Even if we were to conclude that section 348(f)(1)(A) is ambiguous, the legislative history of this statute does not mandate a different outcome.7 HN5 Section 348(f)(1)(A), as enacted, accomplished the purpose of the legislation as articulated in the legislative history: it eliminated a “serious disincentive to [C]hapter 13 filings” by adopting the reasoning of In re Bobroff and specifying that property a debtor acquires postpetition is not property of the converted bankruptcy estate. H.R. Rep. No. 103-835, at 57 (1994), as reprinted in [*9] 1994 U.S.C.C.A.N. 3340, 3366; see 11 U.S.C. § 348(f)(1)(A); Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797 (3d Cir. 1985). Section 348(f) does not specify that debtors are entitled to retain equity resulting from payments during the Chapter 13 case—the scenario referenced in the House Report. Likewise, the statute does not address whether debtors are entitled to retain postpetition preconversion equity resulting from market appreciation, asset improvements or repairs. To accept Goetz’s argument, one must read this clarification into the statute.

“The plain meaning of a statute is conclusive, except in the “‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’” (Citations omitted.) …

“Congress’s failure to address the example included in the legislative history does not mean this omission was inadvertent. Recognizing that statutes are often the result of compromise, we decline to accept Goetz’s invitation to assume that Congress intended that debtors may retain postpetition preconversion market appreciation and equity resulting from debt payments without language articulating this intent.

“We also reject Goetz’s claim that interpreting section 348(f) to allow the bankruptcy estate to benefit from postpetition preconversion estate property value increases treats Goetz as though she converted her case in bad faith. To the extent Goetz acquired new property after she petitioned for bankruptcy relief under Chapter 13, this property remains her property. In enacting section 348(f), Congress distinguished between property of the estate at the time of conversion that remains in the possession or control of the debtor from property acquired after petition. The former is property of the estate (Goetz’s residence), the latter is property of debtor unless she converted in bad faith. The bad faith provision neither hinders nor advances Goetz’s claim to the equity increase in her residence. It simply does not apply. Accordingly, the bankruptcy court correctly concluded that postpetition preconversion nonexempt equity accrues for the benefit of the converted Chapter 7 estate.”

No date has yet been set for oral argument.

Appellant Goetz’ Brief

NCBRC-NACBA Amicus Brief – Goetz

Appellee Trustee Webers Appellee Brief