951 F.2d 136 (7th Cir. 1991), 90-2926, Matter of Lybrook

Docket Nº:90-2926.
Citation:951 F.2d 136
Party Name:In the Matter of Daniel L. LYBROOK and Linda Lou Lybrook, Debtors-Appellants.
Case Date:December 18, 1991
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 136

951 F.2d 136 (7th Cir. 1991)

In the Matter of Daniel L. LYBROOK and Linda Lou Lybrook,


No. 90-2926.

United States Court of Appeals, Seventh Circuit

December 18, 1991

Argued Oct. 15, 1991.

Margaret G. Robb, Bartlett, Robb & Sabol, Cynthia L. Garwood, Cooke, Bache, Laszynski & Moore, Lafayette, Ind., for Margret G. Robb.

David A. Rosenthal, Lafayette, Ind., for Daniel L. Lybrook and Linda Lou Lybrook.

Before BAUER, Chief Judge, and POSNER and FLAUM, Circuit Judges.

POSNER, Circuit Judge.

Does property that a bankrupt acquires while he is in Chapter 13 remain in the bankrupt estate if he later converts the bankruptcy to Chapter 7 (the usual fate of a Chapter 13 filing) even if it would not have been part of the Chapter 7 estate had he proceeded under that chapter from the start? Chapter 13, which is to personal bankruptcy as Chapter 11 (reorganization) is to corporate bankruptcy, In re Schaitz, 913 F.2d 452 (7th Cir.1990); 5 Collier on Bankruptcy pp 1300.01-.02 (Lawrence P. King ed. 15th ed. 1991), allows the bankrupt to keep all his assets if the unsecured claims against him do not exceed $100,000 and the bankruptcy court confirms a plan for the payment of the creditors over time. 11 U.S.C. §§ 109, 1322, 1325. The bankrupt can convert his Chapter 13 bankruptcy to Chapter 7 at will. 11 U.S.C. § 1307(a).

The Lybrooks, who operate a modest farm in Indiana, filed a Chapter 13 petition in March 1986. One of their creditors objected on the ground that the Lybrooks' unsecured debts exceeded $100,000. That issue was never resolved. The Lybrooks had a bad farming year and could not work

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out a plan with their creditors. In June 1987 the Lybrooks converted to Chapter 7 and a trustee was appointed.

In January of that year Mr. Lybrook had inherited $70,000 worth of farm land from his father under a will made after the petition for bankruptcy had been filed. (The father's previous will had left no property to the son.) In December 1987 the trustee sought an order directing the Lybrooks to turn over the inherited property. The bankruptcy judge obliged, 107 B.R. 611, and the district judge affirmed. 135 B.R. 321. The order is final for purposes of appeal to this court under 28 U.S.C. § 158(d) because it resolved a free-standing dispute of the sort that, outside of bankruptcy, would be an independent lawsuit. In re Szekely, 936 F.2d 897, 899-900 (7th Cir.1991).

If Lybrook pere had died within 180 days of the filing of the original bankruptcy petition, the bequest would have been includable in the bankrupt estate even if the petition had been filed under Chapter 7. 11 U.S.C. § 541(a)(5)(A). But as he died more than 180 days after the filing, it would not have been includable had he filed under that chapter. The Chapter 13 estate, however, is larger than the Chapter 7 estate. It includes "all property of the kind specified in [section 541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted." 11 U.S.C. § 1306(a)(1). There is no 180-day limitation. The bequest was property "of the kind specified" in section 541, so it went into the Chapter 13 estate in January 1987. The question is whether it continued into the Chapter 7 estate when the Lybrooks converted the bankruptcy proceeding to that chapter several months later.

In arguing that it did not, the Lybrooks place great weight on section 348(a) of the Bankruptcy Code, which provides that conversion of a case from one chapter to another "does not effect a change in the date of the filing of the petition, [or] the commencement of the case." If the Chapter 7 proceeding should therefore be deemed to have begun on the day the Chapter 13 proceeding was filed, then, given that the Chapter 7 estate is limited (roughly speaking--for remember the 180-day provision) to property belonging to the debtor on the date of filing, 11 U.S.C. § 541, and Lybrook hadn't yet received his bequest then, the bequest is not part of the bankrupt estate. That is a possible reading, but an equally good alternative from a purely semantic perspective is that conversion from Chapter 13 to Chapter 7 does not affect the bankrupt estate but merely assures the continuity of the case for purposes of filing fees, preferences, statutes of limitations, and so forth.

Given this semantic impasse the Lybrooks switch to policy and argue that Congress's desire to encourage debtors to use Chapter 13 in lieu of Chapter 7...

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