Rogers v. Freeman (In re Freeman)

• Decision Date: 06 March 2015
• Docket Number: CASE NUMBER NO. 09–12732–WHD
• Citation: 527 B.R. 780
• Parties: In the Matter of: Anthony B. Freeman, Debtor. Beth E. Rogers and BER Law P.C. d/b/a Rogers Law Offices, Movant. v. Anthony B. Freeman, Respondent.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

527 B.R. 780

In the Matter of: Anthony B. Freeman, Debtor.Beth E. Rogers and BER Law P.C. d/b/a Rogers Law Offices, Movant.

v.Anthony B. Freeman, Respondent.

CASE NUMBER NO. 09–12732–WHD

United States Bankruptcy Court, N.D. Georgia, Newnan Division.

Signed March 6, 2015

Lee A. Frison Jr., Lee A. Frison Jr. PC, Atlanta, GA, for Debtor.

ORDER

W. Homer Drake, U.S. Bankruptcy Court Judge

The above-styled case comes before the Court on Objection to Debtor's Property Claimed as Exempt (hereinafter the “Objection”), filed by Beth E. Rogers and BER Law Offices (hereinafter “Rogers”). Rogers seeks an order from the Court declaring that certain funds, currently held by Anthony B. Freeman (hereinafter the “Debtor”) in a State Farm retirement account, are property of the Debtor's Chapter 7 estate and cannot be claimed exempt under the Bankruptcy Code¹ and applicable state law. The Debtor opposes Rogers' request. Following a hearing held on December 3, 2014, the Court instructed the parties to file briefs by January 5, 2015. This Court has subject matter jurisdiction over the matter pursuant to 28 U.S.C. § 157(b)(1) and 28 U.S.C. § 1334, as a core proceeding defined under 28 U.S.C. §§ 157(b)(2)(A) & (B).

Factual Background

The relevant facts of this case are undisputed.² Accordingly, the Court finds the following:

1. On July 1, 2009, the Debtor received a letter from his then-current employer, Excelon Business Services Co., notifying him that his employment would be terminated on July 31, 2009, and informing him that he would receive severance pay in the total amount of $29,826.92, less deductions for taxes. See Debtor's Dep., Jan. 16, 2014, Ex. 15, at 2 (Dkt. No. 162, Ex. B).

2. On August 3, 2009, the Debtor filed for relief under Chapter 11 of the Bankruptcy Code. See Debtor's Petition (Dkt. No. 1).

3. Between September 10, 2009, and October 22, 2009, the Debtor received four checks totaling $21,635.67 (hereinafter the “Severance Income”). See Debtor's Dep., Jan. 16, 2014, Ex. 17, at 1–4 (Dkt. No. 162, Ex. B).

4. Between September 29, 2009 and November 4, 2009, the Debtor invested the Severance Income into his State Farm retirement account. See Debtor's Dep., Dec. 16, 2013, Ex. 4, at 6 & 9 (Dkt. No. 162, Ex. A).

5. Sometime on or before April 5, 2010, the Debtor received bonus income of $13,395.29 (hereinafter “2010 Bonus Income”), and on April 5, 2010, he invested it in his State Farm retirement account. See Debtor's Dep., Jan. 16, 2014, at 22–23 (Dkt. No. 162, Ex. B); Debtor's Dep., Dec. 16, 2013, Ex. 6, at 5 (Dkt. No. 162, Ex. A).

6. On July 16, 2010, the Debtor filed his Chapter 11 Disclosure Statement. See Debtor's Disclosure Statement (Dkt. No. 62) (hereinafter the “Disclosure Statement”). According to the Disclosure Statement, “payment and distributions under the Plan [were to] be funded by Debtor's income from his employment.” Id. at 6. The budget attached to the Disclosure Statement was consistent with that statement. See id., Ex. C. (showing that the Debtor's salary and rental income solely shall be used to fund the Plan).

7. On February 24, 2011, the Debtor filed his First Amended Plan of Reorganization (hereinafter the “Plan”). See Debtor's Am. Plan (Dkt. No. 89). Under Subsection A to Article VI of the Plan, titled Source of Operating Funds, the Debtor provides only that the “projections show that there will be sufficient net operating income to pay all administrative expenses and all classes of claims as provided under the Plan.” Id. at 11. Under Article X, the Plan stipulates that all property of the estate, except as provided for in the Plan or Confirmation Order, shall vest in the Debtor, “free and clear of all claims, liens, charges, and other interests of creditors arising prior to the Confirmation Date.” Id. at 12.

8. On March 1, 2011, the Court confirmed the Plan. See Ct.'s Order, Mar. 1, 2011 (Dkt. No. 91).

9. Sometime on or before April 11, 2011, the Debtor received bonus income of $10,000 (hereinafter “2011 Bonus Income”), and on April 11, 2011, he invested it in his State Farm retirement account. See Debtor's Dep., Jan. 16, 2014, at 25–26 (Dkt. No. 162, Ex. B); Debtor's Dep., Dec. 16, 2013, Ex. 7, at 5 (Dkt. No. 162, Ex. A).

10. The Debtor voluntarily converted this case to Chapter 7 on April 29, 2013, under Section 1112(a) of the Code. See Ct.'s Order, April 29, 2013 (Dkt. No. 129).

Respective Legal Positions

Rogers argues that funds received by the Debtor while a debtor in possession, including the Severance Income, the 2010 Bonus Income, and the 2011 Bonus Income, became and remained property of the bankruptcy estate and cannot be claimed as exempt. In support of this position, Rogers submits that the bankruptcy estate was established upon the filing of the petition, the estate acquired property during its pendency in Chapter 11, the acquired property flowed through to the Chapter 7 estate upon conversion, and the acquired property retained its initial character, rendering it ineligible for exemption. In response, the Debtor in effect argues that the estate reset upon conversion and that property of the estate is determined by looking to the date of the filing of the petition. Under the Debtor's theory, the Chapter 7 estate cannot be augmented by sections of the Code, which may have been applicable in Chapter 11, that are no longer applicable now that the case resides in Chapter 7; consequently, the Debtor believes that, since all the property in question came into the estate post-petition, none of it is property of the estate for which an exemption would be necessary.

As is often the case, the answer lies somewhere between the two positions. As discussed further below, the Court finds that: (1) the Severance Income became property of the estate upon the filing of the Chapter 11 case and the 2010 Bonus Income became property of the estate upon its being earned by the Debtor, but both of these property interests vested in the Debtor upon confirmation of the Plan and did not revest in the bankruptcy estate upon conversion of the case to Chapter 7; and (2) the 2011 Bonus Income became property of the estate upon its being earned by the Debtor post-confirmation and remained property of the estate upon conversion of the case to Chapter 7. The Court also concludes that, although the Debtor may be entitled to exempt a portion of the 2011 Bonus Income, the currently claimed exemption is defective. Accordingly, the Court sustains in part Rogers' objection to the exemption, subject to the Debtor's right to amend Schedule C to claim a proper exemption.

Analysis

Two happenings are pivotal to determining the outcome of this case: the confirmation of the Chapter 11 Plan and the conversion of this case to Chapter 7. For organizational purposes, the Court shall first analyze the effect of confirmation on property of the estate.

I.

It is settled law that once a bankruptcy case is commenced, property owned by the debtor is distinct from property that becomes part of the bankruptcy estate. In re Floyd, 423 B.R. 579, 581 (Bankr.M.D.Ga.2009) (quoting In re Bell, 225 F.3d 203, 215 (2d Cir.2000) ). Section 1141 provides that “[e]xcept as otherwise provided for in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” 11 U.S.C. § 1141(b). Despite the apparently clear language, there is a split of authority as to whether the post-confirmation conversion of a Chapter 11 case to Chapter 7 “revests” property of the debtor in the Chapter 7 estate. Judge Isicoff thoroughly summarized this debate in In re Sundale, Ltd . :

As I already noted, when a plan is silent as to the vesting of assets upon conversion after default, courts disagree whether and which assets of a reorganized debtor will revest in the bankruptcy estate upon post-confirmation conversion. This debate turns primarily on the interpretation of 11 U.S.C. § 348(a). Section 348(a) provides that, upon conversion of a chapter 11 case to a chapter 7 case, the conversion order “constitutes an order for relief under the chapter to which the case is converted,” however, subject to exceptions not applicable here, conversion “does not effect a change in the date of ... the commencement of the case....” 11 U.S.C. § 541(a)(1) provides that property of the estate is “all legal or equitable interests of the debtor in property as of the commencement of the case.”

Some courts have interpreted section 348 to mean that only property owned by the debtor when the original case was commenced will revest in the estate upon conversion of a substantially consummated chapter 11 case. Smith v. Lee (In re Smith ), 201 B.R. 267 (D.Nev.1996), aff'd, 141 F.3d 1179 (9th Cir.1998). Other courts have interpreted this provision to mean that any property held by the reorganized debtor on the confirmation date revests in the chapter 7 estate. See Carey v. Flintridge Lumber Sales, Inc. (In re RJW Lumber Co. ), 262 B.R. 91 (Bankr.N.D.Ca.2001) (court held avoidance actions revested in the chapter 7 trustee). Still other courts have held that in addition to assets that vested in the reorganized debtor on the confirmation date, assets generated post confirmation vest in the chapter 7 estate as well. See Bezner v. United Jersey Bank (In re Midway, Inc. ), 166 B.R. 585, 590 (Bankr.D.N.J.1994). In Bezner the court held that the debtor's post-confirmation pre-conversion accounts receivable became property of the chapter 7 estate upon conversion. While the court recognized that, pursuant to section 348(a), conversion of the chapter 11 case to chapter 7 “does not change the commencement date of the case and therefore does not technically create a new estate ...”, the court nonetheless held that a strict reading of these Code provisions would mean there would be no assets to distribute upon conversion, and therefore “ignores the provisions of chapter 7 providing for distribution of estate property.” Id. at 590.

A slightly different approach was used by the

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