In re Powell

IN RE: CLARENCE POWELL and BETTY J. POWELL, Debtors.

No. 20-80154

United States Bankruptcy Court, C.D. Illinois

April 7, 2022

OPINION

Thomas L. Perkins United States Chief Bankruptcy Judge

This Chapter 13 case is before the Court on a motion to modify filed by the Chapter 13 Trustee, Marsha Combs-Skinner, under §1329(a)(1) seeking modification of the confirmed plan to increase the distribution to unsecured creditors due to property inherited by the Debtor, Clarence Powell, more than 180 days after the date of filing. The Debtors oppose the motion, contending that the inherited property is not property of the estate and does not provide a basis for modifying their plan to increase payments to unsecured creditors.

FACTUAL BACKGROUND

The facts are not disputed. The Debtors filed their joint petition for relief under Chapter 13 on February 4, 2020 and their plan was confirmed on October 8, 2020, providing that the Debtors would make monthly payments to the Trustee for sixty months totaling $93, 780. On January 22, 2021, the confirmed plan was modified on the Debtors' motion alleging a COVID related job interruption and seeking relief under the CARES Act, extending the term to seventy-seven months and increasing the total payments to $97, 050. The confirmed plan as modified would pay only a small percentage of the approximately $30, 000 in filed unsecured claims.

Significantly in paragraph 8 of the official form Chapter 13 plan used by the Debtors, dealing with "Property of the Estate," they checked the box to elect the following provision:

"Upon confirmation, all property of the estate shall vest in the Debtor. Notwithstanding this provision, the Trustee retains the right to assert a claim to any additional property of the estate that the Debtor acquires post-petition pursuant to 11 U.S.C. §1306."

The second sentence quoted above was added specially by the bankruptcy judges of the Central District of Illinois to the official form Chapter 13 Plan adopted for use in this district.

On November 24, 2020, 294 days after the petition date, Clarence Powell's mother passed away. On February 11, 2021 pursuant to Rule 1007(h) of the Federal Rules of Bankruptcy Procedure, the Debtors filed a schedule of post-petition property disclosing that Mr. Powell inherited his mother's home in Oglesby, Illinois valued at $140, 000 with no mortgage, along with furnishings valued at $0 claiming no exemption in the inherited assets. The schedule includes a statement of Mr. Powell's need to clear title to the real estate through probate and of his intent to thereafter sell the house.

The Chapter 13 Trustee filed a motion under §1329(a)(1) to modify the plan to increase the total amount to be paid by the Debtors to an amount sufficient to pay unsecured claims in full, based upon the value of the inherited property. The Debtors object to the proposed modification on the grounds that the inherited real estate is not property of the bankruptcy estate. The parties have filed briefs in support of their respective positions.

ANALYSIS

In their brief, the Debtors make two alternative arguments without addressing the effect of paragraph 8 of their plan. First, they argue that the 180-day post-petition time frame for inherited property to be included as property of the estate, set forth in §541(a)(5), continues to be effective in Chapter 13 cases notwithstanding §1306. Second, they contend that the Seventh Circuit, in Matter of Heath, 115 F.3d 521 (7th Cir. 1997), adopted the "estate transformation approach." Under that approach, as defined by other courts, property acquired by a Chapter 13 debtor after plan confirmation does not enter the estate unless necessary to fund the payments required under the confirmed plan. From this perspective, any property interest acquired by a Chapter 13 debtor after plan confirmation would only become property of the estate if the acquisition had been expected and disclosed by the debtor and a corresponding future payment increase provided for in the plan or confirmation order. Unexpected acquisitions would not become property of the estate, meaning the confirmed plan could not be modified to capture and administer that new value for the benefit of unsecured creditors. The Debtors argue that Heath is a circuit precedent that controls the outcome of this dispute.

The Debtors do not dispute the most fundamental aspect of "property of the estate," that inclusion of property in the bankruptcy estate makes that property or its value available for distribution to creditors. Rousey v. Jacoway, 544 U.S. 320, 325 (2005); Begier v. I.R.S., 496 U.S. 53, 58 (1990). To help the debtor obtain a fresh start, the Bankruptcy Code permits the debtor to claim an exemption in certain assets. Allowance of an exemption removes the exempted property, or a portion of its value if the exemption has a value limit, from the estate and, accordingly, from the reach of creditors. See Rousey, 544 U.S. at 325. The Debtors claim no exemption in the property inherited by Mr. Powell.

While they argue that the inherited property is not property of the estate, the Debtors do not dispute that the effect of a determination that it is property of the estate by operation of §1306(a)(1) would mean that the inherited property or its value becomes available for the benefit of unsecured creditors. Generally, in Chapter 13 cases, the estate from which creditors may be paid includes wages and property acquired while the case is pending. Harris v. Viegelahn, 575 U.S. 510, 514 (2015). Modification of a confirmed plan under §1329 of the Bankruptcy Code is the procedure by which property acquired after confirmation may be administered for the benefit of creditors in furtherance of the policy that debtors who choose relief under Chapter 13 are committing to pay their creditors over a three to five year period based upon the debtor's "ability-to-pay," which may improve or decline during the repayment term.

It is well-established that §1329 carries the ability-to-pay standard forward to the end of the plan term so that positive changes in the debtor's financial circumstances may warrant a plan modification to increase distributions to creditors. Germeraad v. Powers, 826 F.3d 962, 971 (7th Cir. 2016) (collecting cases). This conclusion is evidenced by the 1984 amendments to §1329(a) to permit trustees and unsecured creditors (not just debtors) to request plan modification. Id. at 971-72. Post-confirmation plan modification to decrease distributions may be sought by a debtor who has suffered a decrease in income or by the trustee or an unsecured creditor to increase distributions if the debtor gains an increase in income or a windfall such as an inheritance. In re Trumbas, 245 B.R. 764, 767 (Bankr. D. Mass. 2000).

§1306(a)(1) versus §541(a)(5) Generally applicable in all bankruptcy cases, §541(a) uses the commencement of the case (the filing of the bankruptcy petition) as the temporal cutoff point for determining what property interests of the debtor become property of the bankruptcy estate. Section 541(b) excludes from the estate ten kinds of property interests, reflecting a congressional policy choice that those property interests should be outside the reach of creditors in bankruptcy. Apart from those exclusions, all other property interests acquired by a debtor before the case is commenced are part of the estate while property interests acquired after the case is commenced are, with one exception, not included in the estate and are not subject to the claims of prepetition creditors. The exception is §541(a)(5), which extends the inclusion period for 180 days after the petition filing date for, among other things, property that the debtor acquires or becomes entitled to acquire by bequest, devise or inheritance.

Specifically with respect to Chapter 13 cases, the Bankruptcy Code extends the temporal cutoff point for property interests included as estate property, thereby creating an enlarged estate for purposes of Chapter 13 cases as compared to cases under Chapter 7. Under §1306(a)(1), the property of the estate inclusion period is extended throughout the plan's repayment term to capture property "of the kind specified" in §541 "that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first." 11 U.S.C. §1306(a)(1).^[1] Since §1306 itself provides a temporal extension, the phrase "of the kind" used in §1306(a)(1) is best construed to incorporate the types of property described in §541, including a bequest, devise or inheritance under §541(a)(5), but not the180-day temporal restriction that would apply in Chapter 7. In re Tinney, 2012 WL 2742457 (Bankr. N.D. Ala.); Carroll v. Logan, 735 F.3d at 150. The extended temporal cutoff point of §1306(a), being specific to Chapter 13 cases, is controlling over the generally applicable line of demarcation set forth in §541(a)(5). Id. at 152.

The Debtors' first argument, that §541(a)(5)'s 180-day post-petition time limit for certain property including inheritances to be included in the estate remains applicable in Chapter 13 cases, has been rejected by a large majority of courts, with the result that the Chapter 13 estate includes inheritances, insurance proceeds and other windfalls acquired by the debtor more than 180 days after the petition date. Carroll v. Logan, 735 F.3d 147, 151 (4th Cir. 2013) (an "overwhelming majority of courts" agree that §1306 extends the §541(a)(5) time period in Chapter 13 cases, collecting cases and treatises); In re Moore, 602 B.R. 40, 46 (Bankr.E.D.Tenn. 2019); In re Dale, 505 B.R. 8, 12 (9th Cir. BAP 2014); In re Drew, 325 B.R. 765, 770 (Bankr. N.D.Ill. 2005)...