In re Barrera, Bankruptcy Case No. 16-13216 EEB

• Decision Date: 13 January 2020
• Docket Number: Bankruptcy Case No. 16-13216 EEB
• Citation: 620 B.R. 645
• Parties: IN RE: Julio BARRERA, Maria Moro, Debtors.
• Court: U.S. Bankruptcy Court — District of Colorado

620 B.R. 645

IN RE: Julio BARRERA, Maria Moro, Debtors.

Bankruptcy Case No. 16-13216 EEB

United States Bankruptcy Court, D. Colorado.

Signed January 13, 2020

Erik Atzbach, Englewood, CO, for Debtor.

Lacey S. Bryan, David Wadsworth, Wadsworth Garber Warner Conrardy, P.C., Littleton, CO, for Trustee.

ORDER DENYING MOTION FOR TURNOVER OF SALES PROCEEDS

Elizabeth E. Brown, Bankruptcy Judge

THIS MATTER is before the Court on the Trustee's "Motion to Compel Debtors to Turnover and Account for Property of the Estate" (the "Turnover Motion"), which is opposed by the Debtors. At issue is whether the increase in the Debtors' equity in their home that occurred during their prior chapter 13 case became property of the chapter 7 estate following conversion.

I. BACKGROUND

The Debtors filed a chapter 13 petition on April 5, 2016. At that time, their primary residence was located at 6815 Edgewood Way, Highlands Ranch, CO 80130 (the "home"). They scheduled the home's value as $396,606 as of the petition date. They listed the balance of their first mortgage, owed to Citimortgage Inc., as $243,649.62. On Schedule D, they also listed "US Department of Housing & Urban Devel." as holding a lien on their residence in the amount of $92,560.00, but they did not indicate the nature of this lien. The two liens combined totaled $336,209.62, leaving $60,396.38 in equity. They claimed a $75,000 homestead exemption pursuant to Colo. Rev. Stat. § 38-41-201(1)(a) to fully exempt the home equity.

On June 9, 2016, the Court confirmed the Debtors' amended chapter 13 plan. The plan itself did not include any valuation of the home. The form of plan used in this district requires a listing of the home's value only if there is non-exempt equity that must be accounted for in the section comparing what unsecured creditors could expect to receive in a chapter 7 liquidation. But the plan did provide that Citimortgage would retain its lien on the Property, the Debtors would pay the Trustee monthly cure payments for Citimortgage's benefit on a prepetition arrearage of $4,400, and Debtors would pay regular postpetition mortgage payments directly to this lender.¹ The plan also provided that "[a]ll property of the estate shall vest in the [Debtors] at the time of confirmation."

Approximately two years later, the Debtors sold the Property for $520,000. After paying off liens and closing expenses, they received $140,250.63 in sales proceeds. About two weeks later, they converted their case to a chapter 7 proceeding. At that time, they held $100,700.12 of the proceeds in a savings account.

The Trustee alleges that he contacted the Debtors shortly after conversion to request information about the sale, but the Debtors refused to provide it. Nor have they turned over the nonexempt proceeds.²

Faced with non-compliance, the Trustee filed the instant Turnover Motion and Adversary Proceeding No. 18-1259 EEB, Rodriguez v. Barrera, to deny the Debtors a chapter 7 discharge, claiming that their inaction constitutes a postpetition act to conceal or transfer property of the estate in violation of 11 U.S.C. § 727(a)(2)(B).³ In that adversary, the parties filed briefs on the Trustee's Motion for Partial Summary Judgment. With one other issue no longer relevant to this matter, the Trustee requested a ruling on whether the postpetition increase in equity was an asset in the converted chapter 7 case. The parties agreed to hold the Turnover Motion in abeyance pending the Court's ruling in the adversary proceeding.

The Court entered its order granting partial summary judgment in favor of the Debtors, ruling that any postpetition increase in equity belonged to them following the chapter 7 conversion. But this Order did not fully resolve the case because, at that time, the parties disputed the prepetition value of the home. If the home was actually worth $520,000 on the petition date instead of the scheduled value of $396,606, then all of the nonexempt equity would belong to the chapter 7 estate, according to the Court's ruling.

Although it was interlocutory in nature, the Trustee sought leave to appeal the adversary ruling, but the Tenth Circuit Bankruptcy Appellate Panel denied that request and dismissed it. This Court then held a status conference to determine how the parties wished to proceed. Instead of scheduling a trial on the home's prepetition value, the Trustee requested leave to dismiss the adversary action with prejudice. The Debtors did not oppose that request.

While the Trustee no longer wishes to deny the Debtors their discharge, he continues to seek appellate review as to the chapter 7 estate's entitlement to the nonexempt sales proceeds. Thus, he requested that the Court enter its ruling on this same legal issue in connection with the Turnover Motion. To remove any factual disputes, he has conceded on the record that the Court may assume that the prepetition value of the home is the same amount at which the Debtors scheduled it. Both parties agreed that they did not want to amend the Turnover Motion or Debtors' Response or to brief the matter any further. Thus, they have submitted the matter to the Court based on the filings they have already made in connection with the Turnover Motion and the adversary proceeding.

II. DISCUSSION

Congress amended § 348 to add subsection (f)(1) in 1994. Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). This change was prompted by a split in authority regarding what property constitutes property of the chapter 7 estate in a case that originates in chapter 13 but later converts to chapter 7. In relevant part, § 348(f)(1) now provides:

Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title—

(A) 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. Section 348(f)(1)(A)'s Clear Implications

The meaning of subsection (f)(1)(A) is elucidated by comparing it to subsection (f)(2). The latter provision states: "If the debtor converts a case under chapter 13 of this title to a case under another chapter of this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion." The difference between these two subsections is the date of determination. With a good faith conversion, the measuring date is the petition date and, therefore, prepetition assets are included but postpetition assets are not. If the conversion reflects bad faith, then both pre- and postpetition assets will be included in the chapter 7 estate. Thus, Congress has given the debtor who attempts to repay his debts in chapter 13, albeit unsuccessfully, a sort of guarantee that he will be no worse off for having tried a repayment plan, as long as he converts in good faith. This guarantee comes in the form of allowing the debtor to retain his postpetition assets, which of course he would never have had to contribute if he had originally filed a chapter 7 case.

Subsection (f)(1)(A) also clarifies that the debtor need only turnover the prepetition property "that remains in the possession of or is under the control of the debtor on the date of conversion." This language conveys two things. If prepetition property has been consumed or transferred during the chapter 13 proceeding, the debtor has no obligation to replenish it for the benefit of the chapter 7 estate. It also addresses the fact that there will likely be no "property of the estate" on the date of conversion. With confirmation of the chapter 13 plan, unless the plan expressly states otherwise, all property of the estate vests in the debtor. 11 U.S.C. § 1327(b). Post-confirmation, it reverts to its pre-bankruptcy status as "property of the debtor." Nevertheless, if the debtor retains possession or control over it at the time of conversion, it must be surrendered to the chapter 7 trustee.

A strict reading of this subsection might suggest that the Debtors in this case have no obligation to turn over to the Trustee any of the sale proceeds regardless of the home's prepetition value. The home was a prepetition asset but on the date of conversion the Debtors no longer had possession of or control over it because they had sold it. However, this Court has not found any reported decision that has arrived at that conclusion. Instead, courts have treated the proceeds from a pre-conversion sale of property as property of the estate "as of the petition date" under § 348(f)(1)(A). Some have reached this conclusion by reasoning that § 541(a)(6) includes in the definition of property of the estate "[p]roceeds, product, offspring, rents, or profits of or from property of the estate." See, e.g. , Bogdanov v. Laflamme (In re Laflamme) , 397 B.R. 194, 202 n.7 (Bankr. D. N.H. 2008) (property of converted estate includes proceeds from commissions earned pre-bankruptcy that debtor received during chapter 13 case); Wyss v. Fobber (In re Fobber) , 256 B.R. 268, 273 (Bankr. E.D. Tenn. 2000) (converted estate includes proceeds of tractor debtors sold during chapter 13 case); Pisculli v. T.S. Haulers, Inc. (In re Pisculli) , 426 B.R. 52, 62 (E.D.N.Y. 2010) (converted estate includes proceeds from truck debtor sold during chapter 13). Some courts have assumed, with little or no analysis, that the proceeds and the property are one and the same for purposes of § 348(f)(1)(A). See, e.g. , In re Niles , 342 B.R. 72, 73 (Bankr. D. Ariz. 2006) (" Niles ") (addressing proceeds from home debtor sold during chapter 13 case). And, in some cases, the parties have simply conceded this issue. See, e.g. , Warfield v. Salazar (In re Salazar), 465 B.R. 875, 878 (9th Cir. BAP 2012) (converted estate includes tax refunds attributable to prepetition period that debtors received during ...