Meier v. Katz (In re Meier)

• Decision Date: 11 March 2016
• Docket Number: 15 C 3434
• Citation: 550 B.R. 384
• Parties: In re: Robert J. Meier Debtor. Robert J. Meier, Plaintiff, v. Robert B. Katz, Trustee, Defendants.
• Court: U.S. District Court — Northern District of Illinois

550 B.R. 384

In re: Robert J. Meier Debtor.Robert J. Meier, Plaintiff

v.Robert B. Katz, Trustee, Defendants.

15 C 3434

United States District Court, N.D. Illinois, Eastern Division.

Signed March 11, 2016

Paul M. Bauch, Carolina Y. Sales, Kenneth A. Michaels, Jr., Bauch & Michaels, LLC, Chicago, IL, for Plaintiff.

Robert J. Meier, Arlington Heights, IL, pro se.

Elizabeth A. Bates, Springer Brown, LLC, Wheaton, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

John Z. Lee, United States District Judge

Robert J. Meier filed for individual bankruptcy under Chapter 11 in 2014. He then converted his case to a case under Chapter 7, which raised the question of whether the money Meier had earned after the commencement of the proceedings belonged to him or the Chapter 7 estate. A creditor filed a motion, which was joined by the Chapter 7 trustee, seeking to compel Meier to turn over the funds to the Chapter 7 estate. The bankruptcy court granted the motion, and Meier appealed. For the reasons stated below, the Court affirms the bankruptcy court's ruling.

Factual and Procedural Background¹

On March 20, 2014, Robert J. Meier filed for bankruptcy relief under Chapter 11 of the Bankruptcy Code. While the case was proceeding under Chapter 11, Meier continued working and deposited his earnings into a Debtor in Possession (“DIP”) account. Unable to effectuate a reorganization under Chapter 11, Meier converted his case from Chapter 11 to one under Chapter 7.

One of Meier's creditors subsequently filed a motion to compel Meier to turn over the funds deposited in the DIP account to the Chapter 7 trustee. The trustee, who was appointed when the case was converted to Chapter 7, joined the creditor's motion. In response, Meier argued that the earnings were not property of the Chapter 7 estate because they arose after he had filed his original bankruptcy petition. Alternatively, he argued that 85 percent of the funds were exempt from becoming property of the estate pursuant to the Illinois Wage Deduction Act, 735 Ill. Comp. Stat. 5/12–803.

The bankruptcy court sided with the trustee on both arguments and ordered that the funds in the DIP account be turned over to the trustee. Meier appealed.

Legal Standard

In reviewing bankruptcy court decisions, the Court reviews questions of law de novo and factual findings for clear error. See Kovacs v. United States , 739 F.3d 1020, 1023 (7th Cir.2014).

Analysis

I. Effect of Conversion on the Property of the Estate

Chapter 11 and Chapter 7 offer two different avenues for individuals seeking to avail themselves of the bankruptcy process. Regardless of which chapter a debtor chooses, the commencement of a bankruptcy case creates an “estate” consisting of property of the debtor. Generally speaking, a Chapter 11 estate includes property owned by the debtor at the time that the case is commenced, as well as any income earned by the debtor after the bankruptcy petition is filed. 11 U.S.C. § 1115(a)(2). Chapter 11, like Chapters 13 and 12, allows the debtor to use his property and post-petition income to pay creditors on a going forward basis.

Under Chapter 7, a trustee sells the assets of the estate, and the proceeds are distributed to the debtor's various creditors. See 11 U.S.C. §§ 704(a)(1), 726. After the debts are discharged, the debtor is able to make a fresh start “by shielding from creditors his postpetition earnings and acquisitions.” See Harris v. Viegelahn , ––– U.S. ––––, 135 S.Ct. 1829, 1835, 191 L.Ed.2d 783 (2015). The estate under Chapter 7 excludes “earnings from services performed by an individual debtor after the commencement of the case.” 11 U.S.C. § 541(a)(6).

Meier initially filed his bankruptcy proceeding under Chapter 11 and later converted it to Chapter 7. It is undisputed that, prior to the conversion, the money Meier had earned and deposited in the DIP account belonged to the Chapter 11 estate.

Section 348 governs the effect of conversion from one chapter to another. 11 U.S.C. § 348. Under § 348(a), “[c]onversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but...does not effect a change in the date of the filing of the petition.”

Section 348 also contains subsection (f), which governs the fate of post-petition earnings when a case is converted from Chapter 13. Similar to § 1115(a)(2) under Chapter 11, § 1306(a)(2) provides that an estate under Chapter 13 includes any “earnings from services performed by the debtor after the commencement of the case.” 11 U.S.C. § 1306(a)(2). When a debtor converts a case from Chapter 13 to another (including Chapter 7), subsection (f) of § 348 provides that “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 the debtor on the date of conversion.” 11 U.S.C. § 348(f)(1)(A). In other words, under § 348(f), when a bankruptcy case is converted from Chapter 13 to Chapter 7, the Chapter 7 estate does not include earnings made by the debtor after the commencement of the case. There is no provision, either in § 348 or elsewhere in the Bankruptcy Code, that specifically lays out what happens to post-petition earnings when a debtor first files a petition under Chapter 11 and later converts the case to Chapter 7.

That is the question presented here. Specifically, once Meier converted his bankruptcy case from Chapter 11 to Chapter 7, did his post-petition earnings remain property of the estate (now a Chapter 7 estate, rather than a Chapter 11 estate), or did they now belong to him as though he had been proceeding under Chapter 7 all along? No circuit court has addressed this question to date, and the lower courts that have are split. Compare In Matter of Freeman , 527 B.R. 780, 789–97 (Bankr.N.D.Ga.2015) (holding that post-petition earnings by an individual debtor in Chapter 11 remain part of the estate after conversion to Chapter 7), In re Tolkin , 2011 WL 1302191, at *10 (Bankr.E.D.N.Y.2011) (same), and In re Hoyle , 2013 WL 3294273, at *5–7 (Bankr.D.Idaho 2013) (same), with In re Markosian , 506 B.R. 273, 275–77 (9th Cir. BAP 2014) (holding that post-petition earnings revert to the debtor after conversion to Chapter 7), and In re Evans , 464 B.R. 429, 438–41 (Bankr.D.Colo.2011) (same).

The cases all grapple with the same question of statutory construction, namely, did the enactment of § 348(f) create a new point of procedure (that is, that once a case is converted from Chapter 13 to Chapter 7, the estate would consist only of the debtor's property at the time of the original petition), or did it provide just one example of a broader right already created by § 348(a) (that is, that once any bankruptcy case, whether Chapter 13, 11, or 12, is converted to another chapter, the matter would proceed as though it had been under the new chapter from the beginning). The bankruptcy court concluded the former; Meier argues the latter.

The Court begins its analysis by looking at the language of § 348. See In re Southwest Airlines Voucher Litig. , 799 F.3d 701, 707 (7th Cir.2015) (“Statutory interpretation begins with the language of the statute.”). “When the plain wording of the statute is clear, that is the end of the matter.” United States v. Webber , 536 F.3d 584, 593 (7th Cir.2008). “The 'plain meaning' of a statute, however, is often illuminated not only by its language but also by its structure.” Id.

Here, the language of § 348(a), considered in isolation, could be read to support Meier's position. Under this reading, Meier's conversion of his Chapter 11 case to Chapter 7 “does not effect a change in the date of the filing of the petition,” and the Chapter 7 case would be deemed to have started when the Chapter 13 petition was first filed. Construed in this way, Meier's earnings post-petition would belong to him and not to the newly formed Chapter 7 estate.

But we must be mindful of § 348(f). After all, that subsection addresses the very situation that faces us here—although in the context of Chapter 13 proceedings—and expressly provides that the resulting estate would consist only of “property of the estate, as of the date of filing of the petition,” and not post-petition earnings such as those at issue here. Section 348(f) is important for two reasons. First, given that subsection (f) specifically lays out what happens to an estate when a case is converted from one chapter to another, it is difficult to see how the less specific (and arguably less applicable) language of § 348(a) —that a conversion “does not effect a change in the date of the filing of the petition”—can be read to address the same issue. Indeed, § 348(a) does not mention “estates” at all, and the Seventh Circuit itself noted the opaqueness of § 348(a)'s language in a case that led to § 348(f)'s enactment. See In re Lybrook , 951 F.2d 136, 137 (7th Cir.1991) (noting that a plausible reading of § 348(a) is that it “assures the continuity of the case for purposes of filing fees, preferences, statutes of limitations, and so forth”).

Second, when viewed in light of the statutory construction tool expressio unius est exclusio alterius (“to express or include one thing implies the exclusion of the other,” Black's Law Dictionary (10th ed. 2014)), it is significant that § 348(f) mentions only cases converted from Chapter 13 and does not include conversions from Chapter 11 or 12. As further discussed below, Congress certainly had Chapter 12 in mind when enacting § 348(f) in 1994 and had the opportunity to include Chapter 12 and Chapter 11 when it revised § 348(f) in 2005. But, in both instances, Congress limited the reach of § 348(f) to Chapter 13 cases.

As mentioned, Meier argues that the proper reading of § 348 is that subsection (a) states the general rule that applies in this case and subsection (f) is merely a clarification of that rule as to Chapter 13. That is...