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Property of the Estate--To Be or Not to Be That Is the Question the Trustee Asks of Thee Part II

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Editor's Note: This article was featured in the April 2002 South Texas College of Law (Houston) Continuing Legal Education Program. Part I appeared in the December/January 2003 issue, Vol. XXI, No. 10.

Miscellaneous Cases Regarding "Property of the Estate"

A. In re Zamora, 2002 WL 334878 (Bankr. W.D. Tex., Jan. 3, 2002)1 (debtor could assign to attorney all or any portion of money held in hands of chapter 13 trustee that represented debtor's post-petition earnings). The court held that following conversion of a chapter 13 case to one under chapter 7, the debtor could pay her attorney for future services that the attorney would provide in the chapter 7 proceedings by means of an assignment of the debtor's right to receive distribution from the chapter 13 trustee of post-petition earnings still in his possession. However, to be effective, the assignment must be in writing, must clearly state the amount of money being disbursed, must clearly disclose that the disbursement is for attorneys' fees for post-conversion services and must be signed by the debtor and acknowledged before a notary. Id. at *7.

B. In re Del Castillo, 273 B.R. 677 (Bankr. M.D. Fla. 2002) (funds paid to chapter 13 trustee prior to conversion do not become property of the chapter 7 estate). This case involves a case converted from chapter 7 to 13 and back to chapter 7 upon the court's entry of an Order Denying Confirmation and Reconverting Case to Chapter 7. The court also entered an Order Governing Procedure after Conversion to Chapter 7 Case (the "procedures order"). The procedures order provided that any motion for turnover of undistributed funds held by the chapter 13 trustee shall be filed within 15 days of the date of entry of the procedures order or the funds held would be turned over to the chapter 7 trustee and be considered property of the estate. Id. at 678. The chapter 7 trustee filed a motion for turnover of funds. The debtor failed to file such motion until one year later. The chapter 7 trustee contended that the debtor forfeited her right to a turnover by not complying with the procedures order. The debtor contended that pursuant to 11 U.S.C. §348(f), she was entitled to the funds paid by her to the chapter 13 trustee before the reconversion. Id. at 678-679. The bankruptcy court pointed out that neither the Code nor the Bankruptcy Rules specifically authorize the fixing of a bar date for seeking turnover of funds after conversion. Id. at 679. Therefore, while courts have the inherent power pursuant to 11 U.S.C. §105(a) to fix bar dates, that power does not include a power to abrogate a substantive right granted to a debtor by virtue of §348(f)(1)(A). However, although the court granted the debtor's motion, he granted the trustee an allowance on general equitable principles of a quantum meruit basis to be charged against the funds to be turned over. Id.

C. In re Pegues, 266 B.R. 328 (Bankr. D. Md. 2001) (undisbursed chapter 13 funds were not included in chapter 7 estate, but had to be disbursed under confirmed plan). After the creditor refused to accept distributions made pursuant to the debtor's confirmed chapter 13 plan, the trustee moved to disallow the creditor's claim so that he could distribute funds pro rata to other creditors in accordance with the terms of the plan. The trustee's motion was denied upon conversion of the case from chapter 13 to chapter 7, and the trustee moved for reconsideration. Id. at 329. The bankruptcy court held that the undisbursed funds remaining in the chapter 13 trustee's possession when the case was converted, which represented payments that the debtor had made pursuant to her confirmed plan from her post-petition wages, were not included in the property of the estate of the chapter 7 and thus did not have to be turned over to the chapter 7 trustee; the money had to be distributed by the chapter 13 trustee in accordance with the terms of the debtor's confirmed plan. Id. at 336-337.

D. In re Edmonds, 263 B.R. 828 (E.D. Mich. 2001) (post-petition payment from profit-sharing plan held property of the estate). The debtor filed his chapter 7 petition on Dec. 15, 1999. In March 2000, he received a profit-sharing check from his employer. At the time of the bankruptcy filing, the debtor's interest in the profit-sharing payment was contingent upon the company making a profit for the year, and his being employed at the end of the year. Id. at 829. The court granted the trustee's motion for turnover of the check as property of the estate, and the debtor appealed. The district court analogized the debtor's contingent right in the profit-sharing plan to other contingent future interests that were considered part of the bankruptcy estate upon the filing of the petition and relied on Segal v. Rochelle, 382 U.S. 375 (1966), in holding that the profit-sharing payment was sufficiently rooted in the debtor's pre-bankruptcy past as to be included in the bankruptcy estate. Id. at 830-831.

E. In re Alvarez, 224 F.3d 1273 (11th Cir. 2000) (legal malpractice claim held to be property of the estate). A state court malpractice action was brought against an attorney for negligently disregarding the client's instructions to file a chapter 11 case and instead filing a chapter 7 case. The attorney removed the action to bankruptcy court, contending that the malpractice claim was property of the estate, which could only be asserted by the trustee. Id. at 1275. The bankruptcy court held that the malpractice claim was not property of the estate, but the district court reversed, and the debtor appealed. Id. The Eleventh Circuit first looked to §541(a)(1) and noted that estate property includes all interests of the debtor in property "as of the commencement of the case." Id. at 1276. The court then found that under Florida law, the elements of this malpractice action came into existence the moment the bankruptcy petition was filed. Id. at 1276-1277. The action was therefore property of the estate because it belonged to the debtor "as of" the time the petition was filed. The court next looked to federal bankruptcy law and applied the rationale of Segal v. Rochelle, 382 U.S. 375 (1966), stating that the malpractice action was "sufficiently rooted in the pre-bankruptcy past" that it should be considered property of the debtor at the commencement of the case. Id. at 1278-1279. With the same determination being reached under state law and federal bankruptcy law, the court found it unnecessary to decide the question of which law applied.

F. In re O'Dowd, 233 F.3d 197 (3rd Cir. 2000) (post-petition malpractice action held to be property of bankruptcy estate). After filing chapter 11, the debtor commenced a legal malpractice action against an attorney who had represented her in a pre-petition purchase of an apartment building. The case ultimately converted to chapter 7, and the malpractice claim was settled. Id. at 199-200. Several years later, the debtor filed another malpractice claim, this time against her prior bankruptcy attorneys. She alleged that they had omitted a claim that should have been brought in the initial malpractice action. The defendants filed a motion to dismiss the complaint for lack of standing on the grounds that the action was property of the bankruptcy estate, which could only be brought by the trustee. Id. at 200-201. The bankruptcy court and the district court held that the second malpractice action was property of the estate, and the debtor appealed. The Third Circuit reasoned that because the first malpractice action belonged to the estate, including the claims that were allegedly not asserted, the malpractice suit in connection with those omitted claims likewise belonged to the estate. Id. at 202-204. The court stated, "[o]nly in the post-petition situation where the debtor is personally injured by the alleged malpractice, while the estate is concomitantly not affect, is it appropriate to assign the malpractice to the debtor." Id. at 204.

G. Mehan v. Sparkman (In re Mehan), 2000 WL 1010577 (Bankr. E.D. Pa. 2000) (chapter 13 trustee was not liable for payments to creditors after conversion). Where after conversion from chapter 13 to 7, the debtor sought to recover certain funds that the chapter 13 trustee actually distributed to creditors pursuant to debtor's confirmed chapter 13 plan unaware of the conversion, the court noted that the speed by which the chapter 13 trustee makes distributions should not determine the rights of creditors and debtors in the funds. Id. at *4. Payments received from debtors from post-petition property before the filing date of the motion to convert are subject to the confirmed plan. Id. Therefore, the court held that the chapter 13 trustee was not liable for the return of those funds. Id. at *5.

H. In re Cybergenics Corp., 226 F.3d 237 (3rd Cir. 2000) (fraudulent transfer claim held not property of debtor). During its chapter 11 case, the debtor-in-possession (DIP) sold all of its assets. The sale agreement and order approving sale stated that the purchaser bought "all of the rights, title and interest...in and to all of the assets and business as a going concern..." Id. at 239. The sale order was not appealed. Subsequently, the creditors' committee received permission from the bankruptcy court to bring state law fraudulent-transfer actions on behalf of the bankruptcy estate. The defendants moved to dismiss, arguing that the fraudulent transfer claims had been sold. The district court dismissed the complaint, and the committee appealed. Id. at 239-240. The appeals court reversed and found that state law fraudulent transfer claims that a DIP is authorized to pursue under §544(b) are not assets that belong to the debtor personally. Rather, the DIP acts on behalf of, and for the benefit of, all creditors when pursuing such actions. Id. at 243-247. Therefore, the fraudulent conveyance actions had not been sold, and remained available to be brought by the committee. Id.

I. In re Montgomery, 224 F.3d 1193 (10th Cir. 2000) (earned income credits (EICs) held property of the estate). The Tenth Circuit has held that EICs based on the chapter 7 debtor's pre-petition eligibility are property of the bankruptcy estate. Specifically, the debtors filed bankruptcy petitions in 1996, and the EICs were received by them in 1997 as part of their 1996 tax refunds. Id. at 1194. The court analogized EICs to tax refunds and found them to be contingent interests included in the bankruptcy estate under §541(a)(1). Id. at 1194-1195. Thus, even though the debtor's interest in the EIC was not finalized until the end of the tax year, the pre-petition portion of the EIC was estate property regardless of whether the petition was filed prior to the end of the tax year. In so holding, the court followed the Sixth Circuit case of Johnson v. Hazlett, 209 F.3d 611 (6th Cir. 2000). Id. at 1195.

J. In re Page, 250 B.R. 465 (Bankr. D. N.H. 2000) (appreciation of assets in chapter 13 not part of chapter 7 estate upon conversion). The debtor filed chapter 13 on Oct. 20, 1997. The chapter 13 plan was confirmed on Dec. 18, 1998. Id. at 465. The debtor owned real estate that was valued in her schedules at $65,000. The case was converted to chapter 7 on Dec. 20, 1999. The chapter 7 trustee moved to employ a real estate agent to sell the property, which he claimed to be worth $110,000. The debtor objected, arguing that §348(f) prohibited the sale. The court analyzed §348(f) and found that the chapter 7 trustee was bound by the value of the real estate as of the date of the original petition. The trustee could not, therefore, benefit from any appreciation. The court rejected the trustee's argument that there had been no valuation of the assets in the chapter 13 case, finding that the plan confirmation established the value. Id. at 465-466. The court stated, "[r]elying on the value of the property as scheduled in the confirmation process is, in fact, the valuation for purposes of §348(f)." Id. at 466.

K. In re Stamm, 222 F.3d 216 (5th Cir. 2000) (post-commencement, pre-confirmation wages of chapter 13 debtor held to be not part of the converted chapter 7 estate). The court found that §348(f)(1)(A), which was added by the Bankruptcy Reform Act of 1994, resolved the issue by specifically stating that property of the estate in a converted case is determined "as of the date of filing of the petition." Therefore, the court held that a debtor's wages earned after the filing of a chapter 13 petition and before the confirmation of a chapter 13 plan are not part of the chapter 7 bankruptcy estate upon conversion of the case. Id. at 217-218.

L. EconoLube n' Tune v. Frausto (In re Frausto), 259 B.R. 201 (Bankr. N.D. Ala. 2000). The chapter 13 trustee moved to quash writ of garnishment, and the creditor moved to enforce garnishment or in the alternative for reconsideration of prior ruling on its administrative expense claim. Id. at 203. The court held that proceeds of settlement of the debtor's pre-petition cause of action were not included in property of the post-confirmation estate:

...While confirmation vests all property of the estate in the debtor upon confirmation free and clear of any claim or interest of pre-petition creditors provided for by the plan, it does not have that effect on post-petition creditors. Section 362(c) provides that the automatic stay of an act against property of the estate continues only until such property is no longer property of the estate (footnote omitted). Once property of the estate is transferred back to the debtor pursuant to §1327(b), only pre-petition creditors, who are bound by the plan pursuant to §1327(a) and have been specifically divested of any interest in that property pursuant to §1327(c), are precluded from pursuing that property. On the other hand, post-petition creditors who were not required to participate in the plan or permitted to participate in the confirmation process, who will receive nothing under the plan, who are not bound by the plan and whose rights in the property vesting in the debtor were not extinguished pursuant to §1327(c), are not specifically forbidden by any section of the Code from pursuing that property.
Id. at 216-217.

M. Farmer v. Taco Bell Corp., 242 B.R. 435, 437-438 (W.D. Tenn. 1999) (tort action in converted case held not property of chapter 7 estate). A chapter 7 debtor who, prior to voluntary conversion of her case from chapter 13, was injured when she slipped and fell on a restaurant floor sued the restaurant owner for negligence in state court. Id. at 436. The owner removed the action and then moved for summary judgment, claiming, among other things, that the debtor did not have standing. Id. The sole issue before the court was whether a tort claim that arises after a debtor filed chapter 13 but before conversion to chapter 7 is property of the bankruptcy estate that can only be prosecuted by the trustee in bankruptcy. Id. at 437. The court found that unless the debtor acted in bad faith by converting to chapter 7, the cause of action belonged to the debtor, and she had standing to sue. Id. at 440.

The Impact of Exemptions—Miscellaneous Cases

A. In re Dibiase, 270 B.R. 673 (Bankr. W.D. Tex. 2001) (entire contingent stock option held property of the estate—exemption denied). At the time of his bankruptcy filing, the debtor had, under an employee stock-ownership plan, the right to purchase up to 5,000 shares of company stock at a fixed price. This option was, however, tied to his years of service and subject to forfeiture if his employment terminated before completion of one year of service. The debtor claimed the option exempt under the "wild card" §522(d)(5) exemption. The debtor's other assets used up the maximum value of the wild card, and the option was valued at zero on the theory that it was not vested as of the date of bankruptcy filing. Id. at 675. The trustee objected to the exemption and sought turnover of a pro rata portion of the option. The court first found that the debtor was "fully vested" at the time of the filing because the option was a right he owned, even though it was "subject to certain limitations and the possibility of defeasance by later events." Id. at 679. There was, therefore, value in excess of zero, and the asset could not be exempt. The court then addressed the issue of turnover, and held the entire stock option to be property of the bankruptcy estate. The mere fact that the eventual value might be affected by post-petition events did not affect the determination of whether the estate owned all or a portion of the asset. In so finding, the court rejected the pro rata approach of Allen v. Levey, 226 B.R. 857 (Bankr. N.D. Ill. 1998). Id. at 682-688. Unfortunately, because the trustee only sought turnover of the prorated portion, pursuant to Allen the court could only sustain the trustee's objection and award her the portion of the option she had sought. Id. at 689.

B. In re Hunter, 261 B.R. 789 (Bankr. M.D. Fla. 2001) (post-petition income from spendthrift trust held part of bankruptcy estate). The debtor was the beneficiary of a testamentary, spendthrift trust from which she was receiving income at the time she filed her chapter 7 bankruptcy case. The trustee sought turnover of the income received by the debtor from the trust for a period of 180 days from the date of bankruptcy filing. The debtor argued that the trust, including the income received, was excepted from the bankruptcy estate. Id. at 790-791. The court agreed with the debtor that the corpus of the trust was excepted from the estate because the trust validly limited alienation and seizure by creditors under applicable state law. Id. at 792. However, the court agreed with the trustee that the trust income acquired within 180 days after the petition date was property of the estate. The court cited §541(a)(5) and found that the debtor had acquired this property by bequest, thereby making it property of the estate. Id. at 792-793.

C. In re Gillespie, 269 B.R. 383 (Bankr. E.D. Ark. 2001). ("alter ego" self-settled trust held property of the estate—exemption denied). An Arkansas bankruptcy court has found that the irrevocable trust formed by the debtor several years before her bankruptcy filing was in fact her "alter ego" based on the failure of the trust to file separate tax returns, the debtor claiming repeatedly to be the individual owner of the assets when seeking loans and all funds from the corporations purportedly owned by the trust being funneled to the individual debtor as needed. The trust purportedly held the shares of several corporations whose assets included a liquor store, a resort condominium, a rental house, a certificate of deposit, the debtor's residence, an adjoining lot and a farming operation. The court found that the debtor ignored the formalities regarding the trust, was oblivious to the distinction between the trust res and the income, and considered the assets of the trust to be hers for all purposes. Id. at 384-391. The court concluded that the trust was a subterfuge and that the debtor had used the cloak of the trust to perpetuate wrong. Therefore, the court found that the debtor's interest in the trust became property of the estate, entitling the trustee to obtain custody of and liquidate those assets for the benefit of creditors. Id. at 391.

D. In re Zupansic, 259 B.R. 388 (Bankr. M.D. Fla. 2001) (trustee allowed to sell exempt asset). The debtor scheduled a vehicle with a market value of $2,525 and an exempt value of $2,000. Id. at 389. An appraisal done by the trustee indicated a market value of $5,500, so the trustee filed an objection to the exemption, which was overruled as untimely. Subsequently, the trustee filed a motion for turnover of the vehicle for liquidation, which was granted with the instruction to remit to the debtor the exempt portion of the sale, i.e., $2,000. Id. On appeal, the district court affirmed and held that a trustee's failure to object to the value of a stated exemption does not waive the estate's right to recover sums in excess of the claimed exemption. Id. at 390. Thus, the court found that only if the claimed exemption equaled the stated value of the property, thereby effectively rendering the entire asset exempt, would the trustee be barred from challenging the value of the property. Id.

E. In re Soost, 2001 WL 585693 (8th Cir. BAP Minn., June 1, 2001) (exemption limited to $1 claimed amount). The debtor claimed a $1 exemption on the non-residential real estate that was valued at $26,000. After receiving his discharge, the debtor moved to avoid a creditor's judgment lien on the non-residential real estate. Id. at *1. The bankruptcy court issued an order avoiding the lien, but only to the extent it impaired the debtor's $1 exemption. Id. The debtor appealed, arguing that in the absence of a timely objection, the entire asset became exempt. Id. The Eighth Circuit BAP held that claiming a $1 exemption in non-residential real estate that was valued at $26,000 did not render the property immune from sale. Here, it was indicated that the property was worth $26,000, and the debtor chose to exempt only $1 of that value. Id. at *2. Thus, the debtor's schedules did not fairly disclose an intent to exempt the entire asset, and the exemption "effectively exempted an interest in the subject real estate equal to $1 in value, nothing more." Id. at *4. Therefore, the exempted interest in the real estate was limited to $1.

F. In re Zibman, 268 F.3d 298 (5th Cir. 2001) (debtor could not increase state law exemption rights through bankruptcy filing). The debtors sold their Texas homestead and deposited the sale proceeds in an unsegregated account. They did not purchase another Texas homestead within six months of the sale. Id. at 300-301. The applicable Texas exemption provided that proceeds of a homestead sale are exempt if they are reinvested in another homestead within six months of sale. Id. at 302. The trustee objected to the debtors' exemption of the proceeds and sought turnover. The bankruptcy court and the district court held for the debtors under the theory that the exemption was frozen as of the bankruptcy filing. Thus the debtors were not required to reinvest the proceeds. Id. at 301. However, the Fifth Circuit reversed and held that the debtors' state law exemptions in bankruptcy cannot exceed that to which they would have been entitled under state law if bankruptcy had not been filed. Citing Owen v. Owen, 500 U.S. 305 (1991), the Fifth Circuit stated that nothing in the Code limits the power of a state to restrict the scope of its exemptions. Id. at 302. The court found that the six-month limitation was "inextricably intertwined with the exemption the state has chosen to provide for proceeds from the sale of a homestead." Id. at 304. Thus, when the debtors did not reinvest the proceeds in a Texas homestead within six months, even though two of those months were post-petition, the proceeds lost their exempt status and were subject to turnover to the estate. Id. at 305.

G. In re Michael, 262 B.R. 296 (Bankr. M.D. Pa. 2001) (exemption of pre-petition, lump-sum worker's compensation award denied). The debtor suffered a work-related injury and concluded a worker's compensation lump-sum settlement whereby he received $42,000 to cover all claims in regard to the injury. Upon receipt of the funds, the debtor deposited them in a bank account where they remained at the time of his bankruptcy filing. The account was scheduled and claimed exempt under 11 U.S.C. §522(d)(10). The trustee objected to the exemption, and the debtor added §522(d)(11)(E) as a further basis for exemption. Id. at 297. The court first found that worker's compensation awards are not included in the items covered by the statute. Then, the court held that §522(d)(10) applies to compensation for actual bodily injury, such as the loss of a limb, and is not intended to include the suffering or loss of earnings. Id. at 298. The court then analyzed §522(d)(11) and determined it did include worker's compensation benefits, but was limited to the debtor's "right to receive them." Id. at 298-299. Thus, the statute did not apply to "proceeds the debtor sets aside prior to the filing of a bankruptcy proceeding that are directly traceable to such a benefit." Id. at 298. The court noted that the language of §522(d)(11) provides for tracing of assets, but §522(d)(10) does not. Id. at 299.

H. In re Bowder, 262 B.R. 919 (Bankr. D. Minn. 2001) (IRA exemption denied). The debtor exempted an IRA account with a balance of $16,791 under §522(d)(10)(E). The trustee objected, arguing that the account was not an exemptible retirement plan under the statute. Id. at 920. The bankruptcy court agreed with the trustee and found that because the IRA could be withdrawn at any time, it was not payable "on account of illness, disability, death, age or length of service," as required by the statute. Id. at 921-922. The court held the IRA account to be essentially a savings account with favorable tax treatment, and the fact that there was a 10 percent penalty for withdrawal before the age of 59 years did not alter the character of the asset. Id.

I. In re Dudley, 249 F.3d 1170 (9th Cir. 2001) (IRA exemption allowed). The debtors rolled over their ERISA-qualified plans into an IRA and withdrew approximately $107,000 to pay living expenses. When they filed chapter 7, $110,271 remained in the account. They sought to exempt these funds under an applicable California statute as amounts held for support when the debtors retire. Id. at 1173-1174. The trustee argued that the IRA account was not being used for retirement purposes, as evidenced by the pre-petition withdrawals. Id. at 1174. The bankruptcy court agreed, concluding that the IRA must be "designed and used for retirement purposes," which was not the case here. The district court affirmed, and the debtors appealed to the Ninth Circuit. The Ninth Circuit reversed, holding that an IRA may qualify for exemption if it is designed and used "principally" for retirement purposes, as opposed to "only" for retirement purposes. Id. at 1176. The court stated, "[t]he fact that a debtor has withdrawn or will withdraw sums from an IRA for non-retirement purposes will not automatically disqualify the debtor from claiming the amount remaining in the IRA as exempt." Id.

J. Tavenner v. Smoot, 257 F.3d 401 (4th Cir. 2001) (transfer of exemptible property held avoidable). The debtor received a settlement under the Federal Employer's Liability Act, which he conveyed to a corporation whose shareholders were his wife and children. Id. at 404-405. When he filed his chapter 7 bankruptcy, the trustee brought an action to avoid the transfer and recover the funds. The bankruptcy court held for the trustee. Id. at 405. The district court affirmed, and the debtor appealed to the Fourth Circuit. The court followed the majority position that transfers of exemptible property are subject to avoidance. The court noted that §522(g) permits debtors to exempt property recovered by the trustee through his avoidance powers under certain circumstances, indicating that transfers of exemptible property can be avoided by the trustee. Id. at 406-407. Because the transfer in this case was not an involuntary one, as required by §522(g), it could not be exempted after avoidance and recovery by the trustee. Interestingly, the court noted that had the debtor not made the transfer, he could have properly exempted these funds under applicable Virginia law. Id. at 406.

K. In re Booth, 259 B.R. 413 (Bankr. M.D. Fla. 2001) (sua sponte extension of exemption deadline). In this case, a pre-confirmation order contained a provision extending the time to file objections to claimed exemptions to 30 days after the meeting of creditors after any conversion of the case to chapter 7 or 11. Id. at 414. In holding sua sponte that the order was an effective extension of the deadline for filing objections to exemptions, the court looked to amended Bankruptcy Rule 4003 and §105(a) of the Code. Bankruptcy Rule 4003 was amended, effective Dec. 1, 2000, to allow a "party in interest" rather than "the trustee or any creditor" to object. Id. at 415. The court noted that the amended Rule now provides that the court may "for cause" extend the objection period if a "party in interest files a request for an extension." The court cited §105(a), which states that no provision of the Bankruptcy Code providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action to prevent an abuse of process. Id. at 416. The court thus found that it could sua sponte extend the exemption deadline through the pre-confirmation order and that cause existed to provide the chapter 7 trustee the opportunity to review and object to exemptions following conversion, thereby preventing potential abuses that might otherwise occur absent such an extension. Id.

L. In re Alexander, 236 F.3d 431 (8th Cir. 2001) (exemptions in converted case determined as of petition date). The debtor claimed a homestead exemption, and the chapter 13 trustee objected on the basis that the debtor did not live at or occupy the property when the petition was filed. The case was converted to chapter 7. When the conversion took place, the debtor had moved and was residing at the subject property. The debtor again claimed the homestead exemption, and the chapter 7 trustee objected. The debtor argued that the second objection was untimely because it occurred later than 30 days after the initial meeting of creditors in the chapter 13 case. Id. at 431-432. The debtor also argued that the exemption was allowable under In re Lindberg, 735 F.2d 1087 (8th Cir. 1984), which held that equity required debtors to be allowed to claim their exemptions as of the date of conversion. Id. at 432. The court first rejected the timeliness challenge to the objection, noting that both the trustees had filed objections within 30 days of the respective meeting of creditors pursuant to Bankruptcy Rule 4003(b). Id. The court then considered the Lindberg case, and determined that it was overruled by Congress when §348(f)(1) was added to the Code in 1994, and legislative history revealed that Congress intended to overrule Lindberg. Id. at 433. Therefore, the court found that the bankruptcy court correctly sustained the chapter 7 trustee's objection to the homestead exemption.

M. In re Anderson, 269 B.R. 27 (8th Cir. BAP 2001) (debtor's interest in ex-wife's IRA not exempt). A property settlement entered into by the debtor and his ex-wife in connection with their divorce awarded a portion of the ex-wife's IRA account to the debtor, having a value of $25,000. No actual transfer of these funds had occurred prior to the filing of the chapter 7 case. Id. at 29. The debtor claimed an exemption therein, and the trustee objected. The bankruptcy court sustained the objection, and the debtor appealed. Id. The BAP agreed with the bankruptcy court that the assets had to be directly derived from the debtor's employment in order to fit under the claimed exemption. Id. at 31. Although the funds in the IRA account were the result of the ex-wife's employment, the debtor obtained his interest in those funds through the divorce settlement and not through his own employment. This conclusion would not be altered by the debtor's suggestion that, under the tax code, once a transfer of IRA funds is awarded in a marriage dissolution, the IRA is automatically deemed to be the IRA of the transferee and therefore retains its tax-preferred status. Id. at 32.

N. In re Wiesner, 267 B.R. 32 (Bankr. D. Mass. 2001) (insurance proceeds from loss of exempt asset held property of the estate). This case presents the question of who is entitled to insurance proceeds triggered by the post-petition destruction of the debtor's real estate and certain personal property. The debtor claimed the applicable state law exemptions for his residence and its contents. Less than 10 hours after his bankruptcy filing, he died as a result of a fire that destroyed the residence and contents. There was a fire insurance policy on the premises, which was not claimed as exempt. The trustee subsequently settled with the insurance company, and moved for court approval of the settlement. The administrator of the debtor's probate estate filed a motion to dismiss the bankruptcy case and objected to the trustee's settlement. Id. at 34-36. The court first denied dismissal of the case. Id. at 34-35. Citing In re Peterson, 897 F.2d 935 (8th Cir. 1990), the court ruled that the deceased debtor was entitled to a bankruptcy discharge and that death of the debtor would not abate administration under chapter 7. Id. at 35, n. 1. The court then considered the settlement and held the fire insurance policy to be an asset of the estate that was separate from the debtor's exempt residence and contents. Id. at 36-37. Under applicable state law, the court found that the right to the insurance proceeds did not derive from the property itself, but from the insurance contract. Id. at 37-38. Therefore, because the insurance contract was not exempted, the proceeds were payable to the estate.

O. In re Radford, 265 B.R. 827 (Bankr. W.D. Mo. 2000) (pre-petition social security benefits exempt). The chapter 7 trustee objected to the debtor's claim of exemption with respect to a pre-petition, lump-sum payment of a social security disability benefit in the amount of $11,377.50, which the debtor had deposited into his personal bank account. Id. at 828. The exemption was claimed under §407 of the Social Security Act. The trustee argued that a social security payment loses its exempt character once it is paid to a claimant and, alternatively, that in order to exempt the entire payment, the debtor must demonstrate that the payment is necessary for his care and support. Id. The court reviewed §407 and noted that social security benefits already paid to a claimant are not subject to execution, levy, attachment, garnishment or other legal process, and therefore were fully exempted. The court noted that by the use of the word "paid or payable" in §407, Congress intended to protect both future social security payments and identifiable accumulated social security payments from the claims of creditors. Id. at 829. The court further noted that there was no necessity requirement as to social security benefits already paid as long as a debtor explicitly claimed those payments as exempt pursuant to §407. Id. at 830; but, see In re Treadwell, 699 F.2d 1050, 1052 (11th Cir. 1983) ("If a debtor chooses the Bankruptcy Code exemptions, he gives up the protection of §407, freeing accumulated social security benefits for the satisfaction of creditors").

P. In re Wegner, 243 B.R. 731 (Bankr. D. Neb. 2000) (debtor's eligibility for homestead exemption determined as of conversion date). In a case converted from chapter 13 to 7, the chapter 7 trustee objected to the debtor's claimed homestead exemption under Nebraska law on the basis that when the chapter 13 petition was filed, there was no equity in the home and the debtor was unmarried and ineligible to claim a Nebraska homestead exemption. Id. at 732. The bankruptcy court held that (1) the $9,500 increase in the value of the debtor's home between the date the chapter 13 petition was filed and the conversion date was property of the debtor, (2) the $2,100 equity cushion in the home, resulting from payments made during the pendency of the chapter 13 plan was estate property, (3) a debtor may claim a homestead exemption at the time of conversion, (4) a debtor's eligibility for the homestead exemption was determined as of the conversion date, not the original chapter 13 date, and (5) the debtor could claim the $2,100 equity attributable to debt reduction as exempt under the Nebraska homestead exemption. Id. at 734-735. Interestingly, the court took the position that although Lindberg was overruled by §348(f), that amendment does not effect the date to determine the debtor's eligibility to claim a homestead; i.e., Lindberg is still dispositive of the eligibility issue. Id. at 733. Specifically, the court found that the valuation of the home was governed at the date of the chapter 13 filing under §348(f)(1)(B), but that under that same subsection, the equity cushion became property of the estate. Id. at 734-735. In any event, the court noted that the amendments to §348(f) do not deal with the issue of whether a debtor could claim the equity cushion as exempt property; i.e., §348(f) does not protect the equity cushion that is created by payments made during the pendency of the chapter 13 case. Id. at 735. In support of its position that the debtor is permitted to claim an exemption at the time of conversion, the court noted that the Code does not prohibit the same under either §348 or 522. The rationale stated by the court was that the purposes and consequences of exemptions "differ so much in chapter 13 and chapter 7, a debtor should be permitted to claim exemptions based on circumstances that exist at the time of conversion from chapter 13 to chapter 7." Id. at 736. In further support, the court cited to Bankruptcy Rule 1019, which provides that when a case is converted, if schedules, inventories, etc. were not filed, the debtor needed to file same. Id.; but, see In re Baker, 154 F.3d 534 (5th Cir. 1998); In re Ferretti, 230 B.R. 883 (Bankr. S.D. Fla. 1999) (deciding that so much of the Lindberg opinion that fixed the conversion date as the exemption date has been superseded by the 1994 amendments).

Q. In re Smith, 235 F.3d 472 (9th Cir. 2000) (case conversion did not give rise to new 30-day period for filing objections to exemptions). The debtor appealed the denial of his effort to exempt from his bankruptcy estate property that he characterized as a "private retirement plan." Id. at 473. The court addressed two issues: (1) whether the indefinite continuance of a §341 meeting tolls the period of time for filing an objection to property claimed as exempt as §522(l), and (2) whether conversion from chapter 11 to 7 triggers a new period within which to file objections to property already excluded as exempt during the chapter 11. The court answered both questions in the negative. In analyzing Bankruptcy Rule 2003(e), the court held that adjournment cannot be effective unless it is accompanied by an announcement of the adjourned date and time. Id. at 475-477; but, see In re Decarolis, 259 B.R. 467 (1st Cir. BAP 2001) (the trustee may continue the meeting of creditors without setting a date.); In re Clark, 262 B.R. 508 (9th Cir. BAP 2001) (creditors' meeting could be effectively continued if the trustee announces a continued date within a reasonable time, at most within 30 days after the last held meeting has occurred.) As to the issue concerning conversion, in following In re Bell, 225 F.3d 203 (2nd Cir. 2000), the court further found that conversion of a case from chapter 11 to 7 does not create a new 30-day period for objections to exemptions. Id. at 477-478.

R. In re Thurman, 255 B.R. 730 (Bankr. M.D. Tenn. 2000) (401(k) plan obtained in divorce settlement held not exempt). Prior to her chapter 7 filing, the debtor and her ex-husband agreed that she would receive funds from his 401(k) plan, and this was included in their divorce settlement. The debtor claimed the full amount of the plan exempt under the applicable Tennessee pension plan exemption statute. The trustee objected, contending that the payments the debtor would receive were literally proceeds of a divorce settlement and therefore not exempt. Id. at 731. The court found that the exempt asset was the "debtor's right to receive" payments from certain types of pension plans described in the statute. This did not include a "right to receive" from a divorce settlement. Id. The court stated, "[i]f the debtor's right to receive meant right to receive from a divorce settlement or litigation settlement or other contract right, then any debtor could shelter that income from creditors." Id.

S. In re Ferretti, 230 B.R. 883 (Bankr. S.D. Fla. 1999) (chapter 7 trustee does not receive new opportunity to object to debtor's exemptions upon conversion). Following conversion of case from chapter 13 to 7, the chapter 7 trustee objected to the exemption of certain automobile accident proceeds claimed by the debtor prior to conversion. Id. at 884. The question before the court was whether the Code affords the chapter 7 trustee a new opportunity in the 30 days following the §341 meeting in the converted case to object to the debtor's exemptions when no bad faith in conversion has been shown. Id. The court held that the Code does not provide the chapter 7 trustee with an opportunity to review such exemptions. In its discussion of the various provisions dealing with exemptions, the court noted:

...The question before this court arises from the lack of clarity in Rule 4003(b)—whether the "meeting of creditors" referred to in this rule is the original meeting of creditors in the chapter 13 case or the meeting scheduled after conversion in the chapter 7 case...
...Although the rule [2003(a)] does not contain specific direction to the U.S. Trustee to conduct a meeting of creditors after conversion, such a duty is implied when the rule is read together with the provisions of 11 U.S.C. §348(a) stating the effect of conversion.... Because an order of conversion constitutes an order for relief under the chapter to which the case is converted [§348(a)], Rule 2003(a) mandates the U.S. Trustee to call a meeting of creditors...
Additionally, the provisions of Rule 1019(2) setting new filing periods for certain actions after conversion argue against the notion that a new objection period exists for challenging the exemptions claimed in the pre-conversion case. Rule 1019(2) specifies new time periods for filing claims and for filing complaints objecting to discharge or dischargeability, but noticeably absent from the list of new time periods is a new deadline for filing objections to exemptions.
Id. at 887. The court rejected the policy reasons given by the chapter 7 trustee: (1) possible manipulation of the system by debtors, (2) the chapter 13 trustee or creditors are less interested in exemptions because the creditors will receive distributions from the estate, and (3) post-petition creditors whose claims are treated as if they arose pre-petition never have an opportunity to object to exemptions. Id. at 889-891. In its analysis, the court noted that the cases cited supporting the policy arguments were decided before the amendment to §348(f). Specifically, the court noted:
...the statutory scheme of 11 U.S.C. §348(f)(1) indicates that the relevant date for determining property of the chapter 7 estate after conversion from chapter 13 is the original filing date. Using analogous arguments, numerous courts have held that the right to exemptions after conversion should be determined by the facts and law as it existed on the date of the original bankruptcy petition.
Id. at 889.

T. Lowe v. Sandoval (In re Sandoval), 103 F.3d 20 (5th Cir. 1997) (debtor's right to homestead exemption in conversion situation determined as of the date of commencement of chapter 13). The trustee objected to the debtors' modified homestead exemption claim in property to which they moved after commencement of their chapter 13 case but prior to the conversion of the case to chapter 7. Id. at 21. The bankruptcy court denied the objection by concluding that exemptions in conversion cases should be measured as of the date of conversion rather than the date of the filing of the original petition. Id. at 21. The district court affirmed. However, the Fifth Circuit reversed. Specifically, the debtor asked the court to adopt the reasoning in In re Lindberg, 735 F.2d 1087 (8th Cir. 1984), which held that the date of conversion from a chapter 13 to a chapter 7 proceeding determines what exemptions may be claimed. Id. The court disagreed, especially in light of the enactment of 11 U.S.C. §348(f)(1)(A), which Congress intended to overrule In re Lynbrook. 140 CONG. REC. H10752-01 (Oct. 4, 1994); Id. at 23. Therefore, the court held that the debtors' homestead exemption had to be determined as of the date of filing rather than as of the date of conversion. Id. at 23.


Footnotes

1 The author is greatly appreciative of some of the synopses provided herein, which were prepared by Samuel K. Crocker, Attorney at Law, Nashville, Tenn., and were presented at the Spring Education Seminar hosted by the National Association of Bankruptcy Trustees on April 5-6, 2002. Return to article

Journal Date: 
Saturday, February 1, 2003
Bankruptcy Rule: 

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