In re Marcus, Bankruptcy No. 88 B 17455 C.
| Citation | 128 BR 294 |
| Decision Date | 07 June 1991 |
| Docket Number | Bankruptcy No. 88 B 17455 C. |
| Parties | In re Ginger Lea MARCUS, Debtor(s). |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado |
M. Stephen Peters, Wheat Ridge, Colo.
John A. Cimino, Denver, Colo.
This matter comes before the Court upon the Chapter 7 trustee's (Trustee) objection to the debtor's claim of exemption and the response thereto filed by the debtor, Ginger Lea Marcus (Debtor). Briefs were filed, a hearing was held and oral argument was presented.
The relevant facts are as follows: On December 20, 1988, the Debtor filed a petition under Chapter 13 of the Bankruptcy Code. The Court confirmed the Debtor's plan on May 10, 1989. In the Debtor's Chapter 13 schedules, the debtor disclosed an interest in two individual retirement accounts (IRA's) totaling $4,746 and claimed as exempt property $3,559.50 of those IRA's pursuant to Section 13-54-102, C.R.S. No exemption exists for IRA's under the above statute. The only relevant statute in effect as of the date of the filing of the petition relating to exempting an IRA in bankruptcy was Section 13-54-104(1.1), C.R.S., which stated that 75% of the "avails" from an IRA account constituted exempt property for bankruptcy purposes. On June 14, 1990, Chief Judge Matheson determined that Section 13-54-104(1.1), C.R.S., was unconstitutional as it created two different levels of exemptions, one for individuals in bankruptcy and a second less permissive scheme for those not in bankruptcy. In re Mata, 115 B.R. 288 (Bankr.D.Colo.1990). As a result, debtors in Colorado bankruptcies are not currently entitled to claim any exemption in an IRA account and the entire balance of an IRA constitutes nonexempt property of the estate. On October 12, 1990, the Debtor converted her case to one under Chapter 7. On December 6, 1990, in accordance with Bankruptcy Rule 4003(b) and within 30 days after the Section 341 meeting occurred, the Trustee filed an objection to the Debtor's claim of exemption in the abovementioned IRA accounts, arguing the Debtor's claim was invalid in its entirety under the Mata rationale.
The Trustee argues that the claim of exemption should fail because the Debtor did not identify the correct exemption statute when the claim of exemption was made. He also maintains that if the Court does not rule against the Debtor because of the technical deficiency under the test enunciated by the Supreme Court in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), the Mata decision should be applied retroactively so as to deny the Debtor's claimed exemption. Alternatively, the Trustee maintains that if the Court decides not to apply In re Mata retroactively, the Court should find the Debtor is only entitled to a 75% exemption in the avails of her IRA's under Section 13-54-104(1.1), C.R.S., and is not entitled to any exemption in the corpus of her IRA.
The Debtor asserts that at the time the petition for relief under Chapter 13 was filed, Section 13-54-104(1.1), C.R.S., was valid and in effect and she relied on its provisions in reaching her decision to file for bankruptcy. She contends it would violate due process considerations and would be inequitable if the Court were to apply the Mata holding retroactively, thus nullifying her claim of exemption. Further, the Debtor states a ruling by this Court allowing a retroactive application of the Mata decision would create an administrative nightmare because it would require the U.S. Trustee to review every case pending at the time of the Mata decision, and reopen all cases involving IRA exemptions.
The parties have failed to identify the threshold issue which must be decided by the Court. Namely, the issue is whether, when a debtor converts a case from a Chapter 13 to one under Chapter 7, the date of conversion determines the date for claiming exemptions or whether the date of the original filing of the Chapter 13 petition controls. If the answer to the above question is that the date of conversion controls, then the retroactive analysis is unnecessary. Numerous courts have considered the issue.
In In re Winchester, 46 B.R. 492 (9th Cir. BAP 1984), the Bankruptcy Appellate Panel for the Ninth Circuit held that the date of conversion from a Chapter 13 to a Chapter 7 determines the applicable exemptions which can be claimed in the Chapter 7 estate. The Eighth Circuit echoed this position in In re Lindberg, 735 F.2d 1087 (8th Cir.1984), cert. denied, 469 U.S. 1073, 105 S.Ct. 566, 83 L.Ed.2d 507 (1984), and thus in Lindberg, the debtor was entitled to claim a different homestead exemption than was designated when the Chapter 13 case was filed. See also In re Salamone, 46 B.R. 19 (Bankr.E.D.N.Y.1984); In re Lybrook, 107 B.R. 611 (Bankr.N.D.Ind. 1989); In re Mutchler, 95 B.R. 748 (Bankr. D.Mont.1989) (Chapter 12 conversion to Chapter 7).
This Court can envision a further rationale for claiming exemptions in a Chapter 13 case. If the debtor receives a personal injury cash settlement, those funds could be considered disposable income which must be dedicated to the plan pursuant to 11 U.S.C. § 1325(b)(1)(B). Claiming a valid exemption in those moneys eliminates that necessity. See In re Keyworth, 47 B.R. 966 (D.Colo.1985).
Both the Winchester and Lindberg courts indicate that in a Chapter 7 case, exemptions serve a more meaningful purpose. A trustee is appointed who possesses a statutory duty to collect all property of the estate and reduce it to funds for distribution to creditors. Exempting property from a Chapter 7 estate has the effect of removing assets from the pool of property to be liquidated by the trustee. The Court finds the arguments advanced in the Winchester and Lindberg cases as they relate to exemptions to be persuasive, and holds that on the date of conversion of a Chapter 13 case to one under Chapter 7, the exemption law in effect as of the conversion date is controlling.
Thus, while an order for relief enters upon conversion, the date of the commencement of the case remains unchanged. Under 11 U.S.C. § 541, the date of the commencement of the case determines what constitutes property of the estate. But in a Chapter 13 case, 11 U.S.C. § 1306(a)(1) expands that definition by including in the estate "all property . . . that the debtor acquires after commencement of the Chapter 13 case but before the case is . . . converted to a case under Chapter 7. . . ." 11 U.S.C. § 1306(a)(1). Upon confirmation of the Chapter 13 plan, the property of the estate revests in the debtor pursuant to 11 U.S.C. § 1327(b), and the debtor is free to dispose of the property in any way desired, subject of course to the limitations contained in the confirmed plan. Consequently, "by the time of conversion the estate may have been changed completely in character and amount." In re Winchester, 46 B.R. at 495. Since 11 U.S.C. § 348(d) also entitles the debtor to discharge in a Chapter 7 claims which arose after commencement of the Chapter 13 case but prior to the conversion to Chapter 7, the after-acquired property of a Chapter 13 debtor should rightfully be included in the Chapter 13 estate. As stated in In re Lybrook, 107 B.R. at 613:
A proper reading of § 348 indicates that it is not a source of disruption but, instead, preserves the continuity of the bankruptcy proceedings. . . . It is not designed to change what has gone before but, rather, to leave matters as they exist on the date of conversion. . . . When § 348 is viewed...
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