In re Castleman

• Decision Date: 04 June 2021
• Docket Number: Case No. 19-12233-MLB
• Citation: 631 B.R. 914
• Court: U.S. Bankruptcy Court — Western District of Washington
• Parties: IN RE: John Felix CASTLEMAN, Sr. and Kimberly Kay Castleman, Debtors.

631 B.R. 914

IN RE: John Felix CASTLEMAN, Sr. and Kimberly Kay Castleman, Debtors.

Case No. 19-12233-MLB

United States Bankruptcy Court, W.D. Washington.

Signed June 4, 2021

Peter H. Arkison, Bellingham, WA, for Trustee Dennis Lee Burman.

Steven C. Hathaway, Attorney at Law, Bellingham, WA, for Debtor.

MEMORANDUM DECISION

Marc Barreca, U.S. Bankruptcy Court Judge

INTRODUCTION

The issue before me is whether the debtor or the Chapter 7 bankruptcy estate receives the benefit of appreciation in property value for the period between filing of a Chapter 13 case and conversion of that case to Chapter 7. Choosing between conflicting judicial approaches, I determine that the Chapter 7 estate receives the benefit as appreciation is not a distinct and separate asset under the Bankruptcy Code and nothing in the statute fixes the value of estate assets at the date of petition.

The Chapter 7 Trustee (hereafter the "Trustee") has filed a Motion RE: Section 348(f)(1) (hereafter the "Motion," Dkt. No. 72) seeking a determination that property of the Chapter 7 estate includes the current market value of John and Kimberly Castleman's (hereafter collectively the "Debtors") real property and that the Trustee be authorized to market the residence of the Debtors. Debtors respond, asserting that the appreciation in value between the filing of the Chapter 13 petition and conversion to Chapter 7 is not property of the bankruptcy estate (Dkt. No. 75). The Trustee filed a reply in support of his position (Dkt. No. 78).

I heard oral argument on May 12, 2021 and took the matter under advisement. Having reviewed the relevant pleadings and having heard arguments from the parties, I conclude that the full present value of the real property, including any appreciation between the Chapter 13 petition date and date of conversion, is property of the Chapter 7 bankruptcy estate.

JURISDICTION

I have jurisdiction over the parties and the subject matter of this Motion pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O) and 1334.

FACTS

On June 13, 2019, the Debtors filed for relief under Chapter 13 of the Bankruptcy Code (Dkt. No. 1). On September 25, 2019, the Debtors' Chapter 13 plan was confirmed (Dkt. No. 32). On February 5, 2021, the Debtors' case converted to Chapter 7 (Dkt. No. 53).

Debtors listed real property located at 5857 Everson Goshen Road, Bellingham, WA (hereafter the "Real Property") in their original schedules with a value of $500,000.00 (Dkt. No. 10). Debtors also listed debt secured by the Real Property in the amount of $375,077.00 and claimed a homestead exemption in the amount of $124,923.00 (Dkt. No. 10). The Trustee asserts that the Real Property is currently worth at least $700,000.00.¹ See Declaration of Kai Rainey, Dkt. No. 72. The Trustee further asserts that any increase in value should inure to the benefit of the Chapter 7 bankruptcy estate (Dkt. No. 72).

ANALYSIS

I. Declaratory Relief

Before turning to the substantive legal arguments there is a procedural issue that should be addressed. Normally, both requests for determination of whether an asset is property of the estate and for declaratory relief require an adversary proceeding. See Federal Rule of Bankruptcy Procedure 7001(2) and (9). Parties, however, may waive this right. See In re Cogliano , 355 B.R. 792, 806 (B.A.P. 9th Cir. 2006) ("When the question of whether property is part of the estate is in controversy, Rule 7001(2) requires an adversary proceeding, absent waiver or harmless error ....") (emphasis added).

Here, neither party requests an adversary proceeding and there is no procedural detriment to either party in addressing the legal issues as a contested matter. Moreover, at oral argument both parties agreed that the issue should be resolved through this contested matter rather than through an adversary proceeding. I will therefore adjudicate the matter in its current procedural posture.

II. Two Approaches to Interpreting § 348(f)(1)

Section 348(f)(1) provides:

(1) 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;

(B) valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under chapter 11 or 12, but not in a case converted to a case under chapter 7, with allowed secured claims in cases under chapters 11 and 12 reduced to the extent that they have been paid in accordance with the chapter 13 plan ....

11 U.S.C. §§ 348(f)(1)(A) and (B).

Courts have adopted two major approaches when analyzing the impact of 11 U.S.C. § 348(f)(1) on changes in property value or net equity between the petition date and the date of conversion from Chapter 13 to Chapter 7. Some courts have held that any increase in net value of an asset the debtor owned at the date of petition that remains in the debtor's possession or control at conversion to Chapter 7 inures to the benefit of the debtor, absent bad faith. See In re Barrera , 620 B.R. 645, 652–54 (Bankr. D. Colo. 2020), aff'd , BAP No. CO-20-003, 2020 WL 5869458 (B.A.P. 10th Cir. (Colo.) Oct. 2, 2020) ; In re Cofer , 625 B.R. 194, 202 (Bankr. D. Idaho 2021) ; In re Lynch , 363 B.R. 101, 107 (B.A.P. 9th Cir. 2007) ; In re Niles , 342 B.R. 72, 76 (Bankr. D. Ariz. 2006). I will hereafter refer to this as the " Cofer Approach." Other courts have held that any appreciation or increase in net value inures to the Chapter 7 estate. See In re Goins , 539 B.R. 510, 516 (Bankr. E.D. Va. 2015) ; see also In re Peter , 309 B.R. 792, 795 (Bankr. D. Or. 2004).² I will hereafter refer to this as the " Goins Approach."

A. The Cofer Approach

In Cofer , the debtor converted her case from Chapter 13 to Chapter 7. Following conversion, the Chapter 7 trustee sought to limit the amount of the debtor's homestead to the value at the date of petition and argued that any post-petition appreciation in value inured to the Chapter 7 estate. In analyzing Section 348(f)(1), the court held that the statute was ambiguous and relied on the statute's legislative history to determine that the post-petition, pre-conversion appreciation in value of the Chapter 13 debtor's home inured to the benefit of the debtor. 625 B.R. at 200–02.

Similarly, in Barrera , the court determined that Section 348(f)(1) is ambiguous and that the statute should be interpreted in light of the legislative history of the 1994 Amendments. The court also concluded that any appreciation in value inures to the benefit of the debtor as that outcome follows the intention of Congress to encourage debtors to file under Chapter 13. 620 B.R. at 652–54.

The Ninth Circuit Bankruptcy Appellate Panel ("BAP") also concluded that the statute is ambiguous and relied on the legislative history of the 1994 Amendments in determining that any post-petition, pre-conversion appreciation inures to the debtor's benefit. See In re Lynch , 363 B.R. at 107. In Lynch , the Chapter 7 trustee appealed from an ordering compelling him to abandon the debtor's residence. Id. at 102. The BAP ultimately reversed the bankruptcy court as there had been no binding valuation of the real property as of the date of petition. However, the BAP also noted that the legislative history indicates that debtors should retain equity created during the Chapter 13 case. Id. at 107.

B. The Goins Approach

In Goins , following conversion of the debtor's case from Chapter 13 to Chapter 7, the trustee sought to sell the debtor's real property and the debtor moved to compel abandonment. The real property had increased in value between the date of petition and conversion and the debtor had made payments reducing debt secured by the property. The trustee asserted that the Chapter 7 estate was entitled to the appreciation in value but stipulated that the debtor would receive any increase in equity due to his payments on the secured debt during the Chapter 13 case. The court determined that the Chapter 7 estate was entitled to the appreciation. Goins , 539 at 511–15.³

Similarly, in In re Peter , the court held that even if the net value of an asset changes during the Chapter 13 case due to the debtor's payments on secured debt, the increase in equity inures to the Chapter 7 estate. In Peter , the debtor paid off debt secured by a vehicle prior to conversion of his Chapter 13 to Chapter 7. The court concluded that "pursuant to § 348(f)(1)(A), upon conversion, property of the Chapter 7 estate consists of property of the estate as of the date of filing of the petition," the vehicle was property of the estate on the date of petition, and that "[t]he statute does not limit the subsequent Chapter 7 estate to equity in property of the estate" at the petition date. 309 B.R. at 793–95.

I conclude that the Goins Approach is the correct interpretation of Section 348(f)(1).

III. Appreciation Inures to the Bankruptcy Estate

A. Legislative History of § 348(f)(1)

The plain meaning of legislation should be 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." Griffin v. Oceanic Contractors, Inc. , 458 U.S. 564, 571, 102 S. Ct. 3245, 3250, 73 L.Ed. 2d 973 (1982). In such cases, the intention of the drafters, rather than the strict language, controls. [ Id. ]

United States v. Ron Pair Enterprises, Inc. , 489 U.S. 235, 242–43, 109 S. Ct. 1026, 1030, 103 L.Ed. 2d 290 (1989).

When faced with interpreting the meaning of a statute, the Court begins with the language of the statute itself. United States v. Ron Pair Enterprises, Inc. , 489 U.S. 235, 241, 109 S. Ct. 1026, 1030, 103 L.Ed. 2d 290 (1989). If the language is clear, the Court's inquiry ends, and the Court will enforce the statute according to its terms.

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