In re Lybrook
| Decision Date | 21 November 1989 |
| Docket Number | Bankruptcy No. 86-40164,Adv. No. 87-4081. |
| Citation | 107 BR 611 |
| Parties | In re Daniel Lee LYBROOK & Linda Lou Lybrook, Debtors. Margret G. ROBB, Trustee, Plaintiff, v. Daniel Lee LYBROOK & Linda Lou Lybrook, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
Margret Robb, Lafayette, Ind., for plaintiff.
David A. Rosenthal, Lafayette, Ind., for defendants.
AMENDED MEMORANDUM OF DECISION
This matter previously came before the court on the parties' cross motions for summary judgment with regard to the Plaintiff/Trustee's complaint for turnover. The complaint and the various motions asked the court to determine whether certain assets, in which the debtors have an interest, constitute property of the bankruptcy estate. The court granted partial summary judgment as to some of the property interests in question. At a subsequent pre-trial conference, the parties entered into stipulations of fact as to the issues the court was not initially able to resolve.
This case began as a Chapter 13 when the debtors filed their petition for relief on March 24, 1986. The debtors were never able to obtain confirmation of a Chapter 13 plan and the case was converted to Chapter 7 in June of 1987. This scenario would not be extraordinary but for the fact that debtors' financial position changed dramatically between the date they sought relief under Chapter 13 and the date of conversion to Chapter 7. Between these two dates, Mr. Lybrook's father changed his will to include his son as a beneficiary. He then died unexpectedly on January 17, 1987, with the result that his son became entitled to inherit assets valued at more than $70,000.00. Mr. Lybrook died more than 180 days after the date of the debtors' petition for relief under Chapter 13 and, yet, before the date of conversion to Chapter 7. The primary issue which the parties have placed before the court is whether or not this inheritance is part of the Chapter 7 bankruptcy estate. The court must also answer the same question with regard to a certificate of deposit, which existed on the date of the petition but was cashed and used to fund operations during the Chapter 13, and tax refunds for years prior to conversion.
Had this proceeding originally commenced under Chapter 7, the inheritance would not have become part of the Chapter 7 bankruptcy estate. 11 U.S.C. § 541(a)(5)(A). The Chapter 13 estate, however, is much more inclusive than the one created under Chapter 7. It encompasses not only the property that would otherwise constitute the Chapter 7 estate but also "all property of the kind specified in § 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). Accordingly, the inheritance became property of the Chapter 13 estate. The parties do not dispute this fact. The point of contention is whether the inheritance remains property of the bankruptcy estate following conversion to Chapter 7. This is a legal question on which there is no harmony of opinion and it is impossible to reconcile the opposing conclusions.1
The dispute has its origins in the provisions of § 348, which specifies the effect of conversion, and how its terms impact upon the provisions of § 541 and § 1306, which govern property of the estate. Section 541 provides that the bankruptcy estate is created upon the commencement of a case. It then identifies what becomes property of the estate and what is excluded from it. Section 1306 expands the Chapter 13 estate beyond its composition as described by § 541. It includes not only the property that would otherwise become property of the estate under § 541 but also essentially all property the debtor acquires after the commencement of the case, until it is closed, dismissed or converted. In describing the effects of conversion, § 348 does not directly address the composition of the bankruptcy estate. It states only that, with certain exceptions, conversion "does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief." 11 U.S.C. § 348(a).
Those courts which hold that post-petition property, which became property of the estate pursuant to the expansive provisions of § 1306, is not property of the Chapter 7 bankruptcy estate upon conversion reach this conclusion by focusing solely on the language of § 348 and § 541. They note that, pursuant to § 348(a), conversion from Chapter 13 to Chapter 7 does not change the date of the petition, the commencement of the case, or the order for relief. They then note that under § 541 the bankruptcy estate is created as of the date of the petition. Observing that § 1306 ceased to operate once the case was converted to Chapter 7, these decisions conclude that conversion nullified the effect of § 1306 and "served to re-define the property of the bankruptcy estate . . . within the original parameters of Code § 541." In re Marshall, 79 B.R. 147, 150 (Bankr.N.D.N. Y.1987). See also In re Lepper, 58 B.R. 896 (Bankr.D.Md.1986); In re Peters, 44 B.R. 68 (Bankr.M.D.Tenn.1984). The ultimate result of this conclusion is that the case is treated as though it has always been a Chapter 7, for the purposes of defining property of the bankruptcy estate.2
This court cannot agree with this conclusion. It is one thing to recognize that conversion does not affect the date upon which the case was commenced. It is quite another thing, however, to draw from this principle the doctrine that the case will be treated as though it had always proceeded under Chapter 7. Section 348(a) merely specifies that the date of the petition, commencement, and order for relief are unchanged. Its provisions do not mandate or necessarily imply "that upon conversion a case is to be treated in all respects as if it had originally been filed under the chapter to which it has been converted." Matter of Ford, 61 B.R. 913, 916 (Bankr.W.D.Wis. 1986); In re Tracy, 28 B.R. 189, 190 (Bankr.D.Me.1983).
Section 348 does not, by its terms, require the court to look back to the date of the petition to determine the property of the bankruptcy estate upon conversion. The courts which do so have lost sight of the spirit and purpose of § 348. They have also failed to interpret it in conjunction with the rest of the Bankruptcy Code.
Section 348 cannot be construed in isolation. Like the pieces of a mosaic, it must be viewed along with the other statutory provisions of which it is intimately a part, in order to properly understand the entire creation. In considering the impact of § 348 upon the constitution of the bankruptcy estate, we must adopt a construction which is consistent with the remaining provisions of the Bankruptcy Code.
A proper reading of § 348 indicates that it is not a source of disruption but, instead, preserves the continuity of the bankruptcy proceedings. Matter of Ford, supra, 61 B.R. at 916. It should not be read as a nullification act. It is not designed to change what has gone before but, rather, to leave matters as they exist on the date of conversion. Only to the extent necessary to assist in the administration of the bankruptcy estate, broaden the creditor body who may participate in its distribution and, concomitantly, the scope of a debtor's discharge does § 348 have other provisions of the Code operate from the date of conversion. In re Wanderlich, 36 B.R. 710, 714 (Bankr.W.D.N.Y.1984). To interpret § 348 as requiring the court to reshuffle the bankruptcy estate upon conversion is to make it a source of disruption.
When § 348 is viewed as a source of continuity, the plain language of § 541 easily becomes susceptible to the conclusion that the bankruptcy estate, following conversion from Chapter 13 to Chapter 7, is the Chapter 13 bankruptcy estate. The estate was created upon the commencement of the case. 11 U.S.C. § 541(a). At the moment of creation, it essentially consisted of all of the property in which debtor had an interest. 11 U.S.C. § 541(a)(1). The estate does not, however, remain static. It also includes "any interest in property that the estate acquires after the commencement of the case." 11 U.S.C. § 541(a)(7) (emphasis added).
Through § 1306, the estate acquires an interest in the property debtor acquires between the date of the petition and the date of conversion. By its terms, § 541(a)(7) is broad enough to include this post-petition property in the Chapter 7 bankruptcy estate, following conversion from Chapter 13. It is able to do so through a simple reading of its plain language, without resorting to strained or contorted interpretations of the consequences of conversion. Instead, it is merely a recognition that § 348 "does not purport to alter or modify the provisions or applicability of sections 541 and 1306." In re Wanderlich, supra, 36 B.R. at 714.
This result is consistent with the debtor's rights upon conversion. When a case is converted to Chapter 7, a debtor may amend its original claim of exemptions. In doing so, it is not limited to the property as it existed on the date of the petition. Instead, exemptions may be claimed out of property acquired during the course of the Chapter 13 or based upon its status as of the date of conversion rather than the date of the petition. In re Lindberg, 735 F.2d 1087 (8th Cir.1984); In re Winchester, 46 B.R. 492 (9th Cir.BAP 1984). See also In re Mutchler, 95 B.R. 748 (Bankr.D.Mont. 1989).
Issues surrounding confirmation and the post-confirmation modification of a plan also support this conclusion. In order to win confirmation of a proposed plan, the plan must be in the best interests of creditors, by distributing at least as much to creditors as they would receive upon liquidation. 11 U.S.C. § 1325(a)(4) This hypothetical liquidation analysis is based upon the bankruptcy estate as it exists at the time of confirmation and not upon its composition...
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