by 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.