In re Adams

• Decision Date: 09 June 2022
• Docket Number: Case No. 20-00645-swd
• Citation: 641 B.R. 147
• Parties: IN RE: Matthew Glenn ADAMS and Katherine Elizabeth Adams, fka Katherine Elizabeth VanderKlipp, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Michigan

641 B.R. 147

IN RE: Matthew Glenn ADAMS and Katherine Elizabeth Adams, fka Katherine Elizabeth VanderKlipp, Debtors.

Case No. 20-00645-swd

United States Bankruptcy Court, W.D. Michigan.

Signed June 9, 2022

Kathleen M. Dunne, Law Office of Kathleen Dunne, Greenville, MI, for Debtors.

Jeff A. Moyer, The Bankruptcy Group, Inc., Wyoming, MI, Trustee, Pro Se.

MEMORANDUM OF DECISION AND ORDER

Scott W. Dales, United States Bankruptcy Judge

I. INTRODUCTION

When Katherine and Matthew Adams (the "Debtors") converted their case last year from chapter 13 to chapter 7, they assumed they would be able to retain their residence (the "Property"). Their chapter 7 trustee, Jeff A. Moyer (the "Trustee"), however, plans to sell it. Although the parties agree that the Property has most likely appreciated in the two years since the Debtors filed their voluntary chapter 13 petition, they differ about who should get the benefit of that increased equity: the Debtors claim the appreciated value for themselves; the Trustee intends to use it to pay creditors.

To prevent the Trustee from selling the Property, the Debtors filed their Motion to Determine Proper Date for Valuation of Estate Property and Compelling Trustee to Abandon Debtors’ Residence as an Asset of the Bankruptcy Estate (ECF No. 91, the "Motion"). They argue that the Trustee "is not entitled to use a post-conversion valuation of the [Property] to claim that there is now non-exempt equity to be administered for the benefit of creditors." See Motion at ¶ 6. They contend that, while in chapter 13, they claimed an exemption in the Property and paid more than $27,296.00 to their lender and others to preserve it. Although the Debtors did not support their Motion with any affidavit or other evidence,¹ their counsel argued during both hearings that her clients paid the tax, escrow, insurance, and mortgage expenses on the Property, admittedly with the assistance of a family member who has since filed a claim on account of his payments.

The Trustee opposes the Motion, relying primarily on a recent decision of the Sixth Circuit.² The court held two hearings, with oral argument, before taking the matter under advisement. For the following reasons, the court will deny the Motion, albeit without prejudice.

II. JURISDICTION

The court has jurisdiction under 28 U.S.C. § 1334 and is authorized, by standing reference from the United States District Court, to resolve the contested matter as a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) (administration matters).

III. ANALYSIS

The Debtors filed for relief under chapter 13 on February 17, 2020 (the "Petition Date") and the court confirmed their chapter 13 plan on May 29, 2020. The main goal of their bankruptcy was to keep the Property which, according to the schedules, is titled solely in Mr. Adams's name.

Following confirmation, the Debtors continued paying into their plan, but their financial circumstances changed, making them unable to continue with their chapter 13 case. Eventually, after the chapter 13 trustee filed a motion to dismiss, they converted their case to chapter 7 on June 14, 2021 (the "Conversion Date"). Because the rules permit a debtor to convert from chapter 13 to chapter 7 as of right, without a motion,³ and because the circumstances surrounding conversion may have important implications for estate property post-conversion, the court issued a Notice of Conversion (ECF No. 59) giving interested parties thirty days to challenge the Debtors’ good faith in converting their case. See, generally, 11 U.S.C. § 348(f).⁴ No one responded to the Notice of Conversion and the court finds that the Debtors converted their case in good faith within the meaning of § 348(f). As a result, property of the estate in the Debtors’ chapter 7 case consists of the property that remained in the possession or under the control of the Debtors on the Conversion Date. See id . § 348(f)(1)(A).

Upon conversion, the Debtors also amended their schedules. (ECF No. 66). Specifically, Mr. Adams claimed an amended exemption in the Property in the amount of $3,196.77 under § 522(d)(1). The Debtors scheduled the value of the Property at $115,000.00 (as of both the Petition Date and Conversion Date), subject to a mortgage of $100,475.76 (as of the Conversion Date). Through their conversion schedules, the Debtors claim approximately $11,000.00 in non-exempt equity in the Property, much more than the single dollar in non-exempt equity in the Property according to their schedules in effect during their chapter 13 case.

In their most recent amendment (ECF No. 103), the Debtors now list the value of the Property as $140,000.00; in the most recent version of Schedule C, Mr. Adams now claims an exemption in the Property under § 522(d)(1) in the amount of $22,559.00. The Debtors have not amended the mortgage debt on Schedule D since their case was converted ($100,475.76). As the schedules now stand, the court estimates there may be approximately $16,966.00 in non-exempt equity in the Property, and perhaps more depending on its market value.

During the pendency of their chapter 13 case, the Debtors fairly consistently made payments through their plan to their mortgage holder, Caliber Home Loans, Inc. ("Caliber"), until their financial circumstances caused them to fall behind. After the Conversion Date, Caliber filed a motion for relief from the automatic stay. Although the Debtors opposed Caliber's motion, the Trustee did not. At the hearing on its motion for relief from stay, Caliber was not prepared to offer evidence in support of its requested relief, so the court denied the motion.

The court entered the Debtors’ chapter 7 discharge on November 10, 2021, relieving them of the obligation to make payments on most debts that arose before the Conversion Date. 11 U.S.C. § 727(b).

Following the court's denial of Caliber's motion, a relative of the Debtors, Roger VanderKlipp, evidently paid Caliber sufficient funds ($10,602.95) to reinstate their mortgage and forestall Caliber from filing another motion for stay relief. See Proof of Claim No. 17-1. At the hearings on the Motion, the Debtors also argued that they have paid insurance, and kept the taxes current on the Property, further protecting the equity for the benefit of the bankruptcy estate. The reinstatement preserved the estate's interest in the Property by forestalling foreclosure. There is no suggestion, in the record or otherwise, however, that the Trustee asked the Debtors or Mr. VanderKlipp to reinstate the mortgage after the Debtors’ default or to take any other steps to preserve the Property.

Although the Motion itself does not specify any estimate of the Property's value,⁵ the Debtors argue that its post-petition appreciation due to the current market, as well as their (and Mr. VanderKlipp's) payments to Caliber, have increased the equity in the Property. Because this increase is in no way attributable to the efforts of the Trustee, they argue that the increase should inure to them, not their chapter 7 bankruptcy estate. The Trustee disagrees.

First, the Debtors argue that "[a]bsent a bad-faith conversion, the proper date for valuing estate property in a converted case is the date the original petition was filed." See Motion at ¶ 14. They reach this conclusion by emphasizing language within § 541(a)(1) to the effect that "once a petition is filed, the bankruptcy estate is comprised of all legal and equitable interests in property as of the commencement of the case." Id. at ¶ 14(a) (emphasis original).

This argument, however, confuses the value of estate property with the legal or equitable interests in that property, as of the commencement of the case. Section 541 is concerned with the latter, not the former. The purpose of the statute is to aggregate to the greatest extent possible, albeit with some exceptions, every stitch of property belonging to a debtor so that it can be used to pay claims, including exemption claims. The court regards the value of any property as an attribute or incident of the property, not a separate right or interest in the property. See In re Castleman, 631 B.R. 914, 919 (Bankr. W.D. Wash. 2021) ("Post-petition appreciation is not treated as a separate asset from pre-petition property and inures to the bankruptcy estate, not the debtor."). Instead, various "interests" in property will determine who, among competing claimants, will benefit from the property's value. The Bankruptcy Code addresses the valuation of estate property for various purposes and at different times during a case in sections other than § 541. Compare 11 U.S.C. § 541 (referring to "interests" but omitting any reference to "value") with, e.g. , §§ 348(f)(1)(B), 522(b)(3)(A), 506(a)(2), 542(a), 547(d), 554(b), 1225(a)(4), 1225(a)(5)(B)(ii), 1225(b)(1)(A), 1325(a)(4), 1325(a)(5)(B)(ii), 1325(b)(1), and 1129 (all of which specifically address "value" for various purposes).

The court's understanding conforms generally to the opinion expressed in a recent, albeit unpublished, decision of the United States Court of Appeals for the Sixth Circuit. See Coslow v. Reisz , 811 Fed. App'x 980, 983 (6th Cir. 2020) ("in general, post-petition increases in equity do become part of the bankruptcy estate, as long as the equity isn't payment for post-petition services."). Coslow is highly persuasive despite the panel's decision not to publish it.

No one would dispute, for example, that outside of bankruptcy Mr. Adams (as the owner of the fee simple interest in the Property) would be entitled to any appreciation in its value, and the Supreme Court has long held that "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Butner v. United States , 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Indeed, the right to benefit from the appreciation of one's property is among the most valuable "sticks" in the "bundle of sticks" (to use the Supreme Court's analogy in United...