In re Roberts

• Decision Date: 12 August 2014
• Docket Number: Case No.: 811–78577–reg
• Parties: In re: Glen D. Roberts and Sharon Roberts, Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

514 B.R. 358

In re: Glen D. Roberts and Sharon Roberts, Debtors.

Case No.: 811–78577–reg

United States Bankruptcy Court, E.D. New York.

Signed August 12, 2014

Richard F. Artura, Phillips, Weiner, Artura & Cox, Lindenhurst, NY, for Debtors.

Michael J. Macco, Macco & Stern LLP, Melville, NY, Trustee.

Chapter 13

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

Before the Court is a motion by the Debtors, Glen and Sharon Roberts, for an order (a) declaring that the net proceeds of approximately $122,000 from the sale of a house inherited more than 180 days post-petition are not property of the chapter 13 estate, and (b) modifying their chapter 13 plan to use a portion of the Sale Proceeds to pay the amount remaining due under the confirmed Plan (approximately $22,570) to the chapter 13 trustee, in a lump sum in full satisfaction of the Debtors' remaining monthly plan obligations. In the alternative, if the sale proceeds are found to be property of the estate and the Debtors are required to turn them over to the Trustee, they seek to downwardly modify the plan and discontinue any further monthly payments to account for decreased income resulting from Sharon's loss of employment. The chapter 13 trustee opposes the relief sought in the motion. He argues that the sale proceeds are property of the estate and asks this Court to either (1) compel the Debtors to turn them over to him for distribution to creditors in addition to the Debtors' current monthly plan obligations; or (2) upwardly modify the plan and increase monthly payments to include the sale proceeds in the distributions to creditors.

This case presents two legal issues. First, whether an inheritance received by a chapter 13 debtor more than 180 days post-petition becomes property of the estate under §§ 541 and 1306 of the Bankruptcy Code. Second, if it is property of the estate, what effect does that have on the chapter 13 plan. This case also requires the Court to address the appropriate analysis to conduct when presented with a motion by a debtor seeking a downward modification of plan payments. In this sense, this decision is a corollary to this Court's previous decision in In re Salpietro, 492 B.R. 630, 637 (Bankr. E.D.N.Y. 2013), which imposed a threshold for consideration of an upward modification sought by the trustee or a creditor.

This Court finds that the sale proceeds are property of the estate, and adopts the majority view that § 1306(a) creates an exception to the 180–day time period of § 541(a)(5) in the chapter 13 context. Thus, any inheritance received by a chapter 13 debtor “after the commencement of the case but before the case is closed, dismissed, or converted” is property of the estate. The sale proceeds are not “income” to be factored into a monthly disposable income test, but rather are an asset to be included in the liquidation—a/k/a “best interest”—analysis of § 1325(a)(4) which sets the floor for total distributions to creditors that must be made by the chapter 13 debtor. That analysis should be conducted at the time of the proposed modification, not the time of the original plan confirmation.

The Court finds that the Debtors' motion to modify the Plan should be granted. However, absent an agreement among the parties, a further hearing is required to determine the degree and direction of any modification to account for both Sharon's loss of employment and the Debtors' receipt of the sale proceeds. As this Court previously held in In re Salpietro, the projected disposable income test of § 1325(b) of the Code is not applicable to modifications, but §§ 1325(a) and 1322 are.

FACTS

The Debtors filed a joint chapter 13 petition on December 8, 2011 (the “Petition Date”). On April 5, 2012, the Court confirmed the Debtors' Second Amended Chapter 13 Plan (the “Plan”). Pursuant to the Plan, the Debtors are to make plan payments of $1,400.00 per month from January 8, 2012 through March 8, 2012, and $610.00 per month from April 8, 2012 through December 8, 2016. These payments provide a calculated pro rata distribution of not less than 10% to unsecured creditors. The Plan further provides that “[t]he future earnings of the debtor(s) are submitted to the supervision and control of the trustee.” Finally, the Confirmation Order states:

All property of the estate, including any income, earnings, or other property which may become a part of the estate during the administration of the case which property is not proposed, or reasonably contemplated, to be distributable to claimants under the Plan shall revest in the Debtor(s); provided however, that no property received by the trustee for the purpose of distribution under the Plan shall revest in the Debtor(s) except to the extent that such property may be in excess of the amount needed to pay in full all allowed claims as provided in the Plan. Such property as may revest in the Debtor(s) shall so revest upon the approval by the Court of the Trustee's Final Report and Account.

[Order, dated April 6, 2006, Dkt # 26]

On September 17, 2013, Glen's mother died intestate. Glen and his sister each inherited a half share of their mother's house. On October 22, 2013, Glen and his sister entered into a contract to sell the house for $270,000.00. Glen's share, half of the net proceeds, is approximately $122,000.00 (the “Sale Proceeds”). On October 14, 2013, Sharon's employment terminated, thereby reducing the Debtors' total monthly income.

On January 10, 2014, the Debtors moved the Court to: (1) authorize the sale of the house; (2) declare that the Sale Proceeds are not property of the estate; and (3) modify the Plan to pay the remaining $22,570.00 due under the Plan, in full satisfaction of the Debtors' Plan obligations. In the alternative, if the Court were to find the Sale Proceeds to be property of the estate, the Debtors move to modify the Plan to cease regular plan payments and turn over the Sale Proceeds to the Trustee in full satisfaction of the Debtors' Plan obligations. The chapter 13 trustee (“Trustee”) opposes the motion on the grounds that the Debtors' post-petition inheritance is property of the estate, and therefore under § 1325(a)(4) any proposed modified plan must pay creditors at least $122,000. The Trustee wants the Debtors to turn over the Sale Proceeds to him or, in the alternative, upwardly modify their Plan to increase payments to account for the Sale Proceeds.

On February 6, 2014, the Court held a hearing on the motion. At the hearing, the Court granted the motion in part, authorizing the sale of the house with the caveat that the Debtors' counsel hold the Sale Proceeds in escrow pending this Memorandum Decision.

DISCUSSION

The first issue before the Court is whether the Sale Proceeds are property of the estate. If property of the estate, then the Sale Proceeds must be turned over to the Trustee in addition to the Debtors' obligation to continue to make regular Plan payments. If not property of the estate, then the Debtors have no obligation other than their obligations as established pursuant to their confirmed Plan; in fact, they intend to utilize a portion of the Sale Proceeds to satisfy the remainder of the Plan payments, approximately $22,570.

Section 541(a)(5) includes within a debtor's bankruptcy estate “[a]ny interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date (A) by bequest, devise, or inheritance.” 11 U.S.C. § 541(a)(5) (emphasis added). Section 1306(a) provides that “[p]roperty of the estate includes, in addition to the property specified in section 541 of this title (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.” 11 U.S.C. § 1306(a).

There is no dispute that if Glen had inherited the house before or within 180 days after the Petition Date, the Sale Proceeds would constitute property of the estate.Here, Glen inherited the house more than 180 days after the Petition Date, but while the case was still open and unconverted. Therefore, whether or not the Sale Proceeds are property of the estate hinges on whether the 180–day time limitation of § 541(a)(5) applies in chapter 13 cases.

The majority view is that “§ 1306 modifies the § 541 time period in Chapter 13 cases,” so that any property of the kind referred to in § 541(a)(5) acquired post-petition, while the case is pending under chapter 13, is property of the estate. See, e.g.,Vannordstrand v. Hamilton (In re Vannordstrand), 356 B.R. 788 (10th Cir. BAP 2007); see alsoCarroll v. Logan, 735 F.3d 147 (4th Cir. 2013); In re Ormiston, 501 B.R. 303, 307 (Bankr.E.D.N.C.2013); Moser v. Mullican (In re Mullican), 417 B.R. 389 (Bankr.E.D.Tex.2008) (“property that a Chapter 13 debtor acquires post-petition becomes property of the estate pursuant to § 1306(a)(1), in contrast to the post-petition acquisitions that do not become part of a Chapter 7 or Chapter 11 estate”), aff'd417 B.R. 408 (E.D.Tex.2009); In re Euerle, 70 B.R. 72, 73 (Bankr.D.N.H.1987).

The minority view is that § 1306(a) does not substitute the time limitations of § 541(a)(5). Rather, the reference in § 1306(a)(1) to “property of the kind specified” in § 541 is meant to incorporate the time limitations set forth in § 541(a)(5). SeeIn re Key, 465 B.R. 709 (Bankr.S.D.Ga.2012); Le v. Walsh (In re Walsh), 07–60774, 2011 WL 2621018 (Bankr.S.D.Ga. June 15, 2011); In re Schlottman, 319 B.R. 23 (Bankr.M.D.Fla.2004).

The Debtors ask this Court to adopt the minority view and argue that principles of statutory interpretation dictate “that effect should be given to every word of a statute whenever possible,” Leocal v. Ashcroft, 543 U.S. 1, 3, 125 S.Ct....