Doing the Splits When a Legislative Solution to Resolve a Circuit Split Creates a New Circuit Split
Annette W . Jarvis , Greenberg Traurig , LLP Secretary , American College of Bankruptcy
The effect of conversion of a Chapter 13 case to a Chapter 7 case has created confusion where there has been an increase in equity in a debtor ’ s residence during the pendency of the Chapter 13 case . The issue becomes whether this increased equity is property of the estate upon conversion or property of the debtor . The circuit split stems from the interpretation of Section 348 ( f ), which was enacted in 1994 to resolve a prior circuit split on whether interests acquired post-petition but pre-conversion are property of the converted estate or of the debtor . In the application of Section 348 ( f ) to post-petition , pre-conversion appreciation , the circuits evidence disagreement over the plain meaning of the text and related provisions of the Bankruptcy Code , but also acknowledge disagreements among the courts over the importance of some very persuasive legislative history accompanying the enactment of that section .
In looking at this issue , we start with a classic case broadly defining property of the estate in In re Potter , 228 B . R . 422 ( B . A . P . 8th Cir . 1999 ). In Potter , the issue was whether a contingent remainder in property owned by the debtor ’ s grandfather , then aged 91 , was property of the estate . The debtor had filed a Chapter 13 and then converted it four months later to a Chapter 7 and amended his schedules to list this contingent interest at a zero value as of the date of the Chapter 13 filing because there was no right to the value in the remainder on the date of filing . While it is unclear why the Chapter 7 case took so long to administer - nearly four years after conversion - the Chapter 7 trustee moved to close the case with permission to reopen the case upon the realization of this contingent asset . In deciding that property of the estate under Section 541 includes contingent assets and the “ entire asset , including any changes in its value which might occur after the date of filing ,” this opinion sets up the debate on appreciation that is at the core of this circuit split . Id . at 424 .
The Tenth Circuit , in addressing the issue of post-petition , pre-conversion equity in a debtor ’ s home , carefully considered the text without relying on the legislative history of Section 348 ( f ) as had the lower courts . It concluded that a sale of a home during a Chapter 13 case and before conversion to a Chapter 7 , where the sale captured significant postpetition appreciation in value , resulted in that value being property of the debtors , and not property of the estate , in the Chapter 7 case . It noted that , “ Congress resolved this pre- Bankruptcy Reform Act circuit split by enacting 11 U . S . C . § 348 ( f ) in 1994 .” In re Barrera , 22 F . 4th 1217 , 1220 ( 10th Cir . 2022 ). This section provided that , “ property of the estate in the converted case shall consist of the property of the estate , as of continued on page 20
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