IN RE: JOHN CASTLEMAN, SR., ET AL V. DENNIS BURMAN, No. 22-35604 (9th Cir. 2023)
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Debtors, husband and wife filed for Chapter 13 bankruptcy. They listed their home among their assets with a value of $500,000, a mortgage with an outstanding balance of $375,077, and a homestead exemption of $124,923. The bankruptcy court confirmed a Chapter 13 plan, but after roughly twenty months, which included a temporary job loss and deferral of mortgage payments due to the pandemic, the husband contracted Parkinson’s Disease, and the couple could no longer make their required payments. Debtors exercised their right to convert to Chapter 7. In the interim, their home had risen in value by an estimated $200,000. The Chapter 7 trustee (“Trustee”) filed a motion to sell Debtors home to recover the value for creditors.
The Ninth Circuit affirmed the district court’s order which affirmed the bankruptcy court’s order, the panel held that post-petition, pre-conversion increases in the equity of an asset belonging to the bankruptcy estate rather than to debtors who, in good faith, convert their Chapter 13 reorganization petition into a Chapter 7 liquidation. The panel held that the plain language of Section 348(f)(1)(A), coupled with the Ninth Circuit’s previous interpretation of 11 U.S.C. Section 541(a), compelled the conclusion that any appreciation in the property value and corresponding increase in equity belonged to the estate upon conversion. The panel looked to the definition of “property of the estate” in Section 541(a), which addresses the contents of the bankruptcy estate upon filing under either Chapter 7 or Chapter 13, and the court’s prior opinions holding that the broad scope of Section 541(a) means that post-petition appreciation inures to the bankruptcy estate, not the debtor.
Court Description: Bankruptcy. Affirming the district court’s order, which affirmed the bankruptcy court’s order, the panel held that post-petition, pre-conversion increases in the equity of an asset belong to the bankruptcy estate, rather than to debtors who, in good faith, convert their Chapter 13 reorganization petition into a Chapter 7 liquidation.
When debtors filed for bankruptcy, they listed their home among their assets. When they later converted to Chapter 7, the home had risen in value. Debtors argued that the home’s increased equity belonged to them and not the bankruptcy estate under 11 U.S.C. § 348(f)(1)(A), which 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 or is under the control of the debtor on the date of conversion.” On de novo review, the panel held that the plain language of § 348(f)(1)(A), coupled with the Ninth Circuit’s previous interpretation of 11 U.S.C. § 541(a), compelled the conclusion that any appreciation in the property value and corresponding increase in equity belonged to the estate upon conversion. The panel looked to the definition of “property of the estate” in § 541(a), which addresses the contents of the bankruptcy estate upon filing under either Chapter 7 or Chapter 13, and the court’s prior opinions holding that the broad scope of § 541(a) means that post-petition appreciation inures to the bankruptcy estate, not the debtor.
Dissenting, Judge Tallman wrote that the Bankruptcy Code as a whole established that post-petition, pre- conversion appreciation belonged to the debtors. He wrote that the majority’s reading of § 348(f)(1)(A) created a circuit split and was inconsistent with the statute’s structure, object, policies, and legislative history.
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