Rodriguez v. Barrera (In re Barrera)

IN RE JULIO CESAR BARRERA and

MARIA DE LA LUZ MORO, Debtors.

SIMON E. RODRIGUEZ, Chapter 7 Trustee, Appellant, v. JULIO CESAR BARRERA and MARIA DE LA LUZ MORO, Appellees.

BAP No. CO-20-003

Bankr. No. 16-13216-EEB

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

October 2, 2020

NOT FOR PUBLICATION^*

Chapter 7

OPINION

Appeal from the United States Bankruptcy Court for the District of Colorado

Before CORNISH, MICHAEL, and LOYD, Bankruptcy Judges.

MICHAEL, Bankruptcy Judge.

Home ownership lies at the center of the American dream. Chapter 13 of the Bankruptcy Code provides many Americans with a chance to keep their home when all else fails. Unfortunately, not every chapter 13 case is successful. Congress recognized this and gave debtors who can no longer meet their obligations under a chapter 13 plan the opportunity to convert the case to chapter 7, where liquidation of nonexempt assets is contemplated. The question placed before us today is a simple one, presented on a silver platter of stipulated facts: if a homestead appreciates in value while a debtor is striving under chapter 13, and the case is later converted to chapter 7, who is entitled to the increase in value: the debtors, or the chapter 7 trustee? The trial court (the "Bankruptcy Court") ruled for the debtors. The trustee appeals. We affirm.

I. Factual Background

Julio Cesar Barrera and Maria de la Luz Moro (the "Debtors") filed a chapter 13 petition on April 5, 2016. They listed real property at 6815 Edgewood Way, Highlands Ranch, Colorado (the "Residence"), in Schedule A of their petition with a fair market value of $396,606. There were two liens against the Residence. CitiMortgage Inc. held a first lien of $243,649, and the United States Department of Housing and Urban Development held a second lien of $92,560.¹ The Debtors asserted an uncontested $75,000 homestead exemption in the Residence under Colorado Revised Statutes § 38-41-201. The combination of consensual liens and homestead exemption exceeded the value of the Residence, resulting in no nonexempt equity on the petition date.²

The Bankruptcy Court confirmed the Debtors' chapter 13 plan of reorganization (the "Plan") on June 9, 2016. The Plan required the Debtors to cure approximately $4,400 in mortgage arrears and to make postpetition mortgage payments directly to CitiMortgage Inc. The Plan vested all property of the bankruptcy estate in the Debtors upon confirmation.

The Debtors sold the Residence for $520,000 in April 2018. After payment of lienholders, $140,250.63 in remaining proceeds of sale (the "Net Proceeds") was received by the Debtors.³ The Debtors voluntarily converted their case to chapter 7 shortly thereafter. At the time of conversion, approximately $100,000 of the Net Proceeds remained in a savings account.

Simon Rodriguez, chapter 7 trustee in the Debtors' case (the "Trustee"), filed a motion for turnover on July 5, 2018, seeking turnover of the Net Proceeds in excess of the $75,000 homestead exemption pursuant to 11 U.S.C. § 542⁴ (the "Motion for Turnover"). The Debtors objected, arguing none of the Net Proceeds were property of the bankruptcy estate. In order to remove any issue of fact, the Trustee stipulated that the scheduled value of the Residence ($396,606) was its fair market value on the date the chapter 13 petition was filed.⁵ The sole issue before the Bankruptcy Court was whetherthe Trustee or the Debtors were entitled to the appreciation in value of the Residence between the date of filing of the chapter 13 and the date of conversion to chapter 7.

The Bankruptcy Court entered an order denying the Motion for Turnover (the "Turnover Order") on January 13, 2020.⁶ The Bankruptcy Court concluded § 348(f)(1)(A)'s use of the term "property" is ambiguous. After examining the legislative history of § 348(f), the Bankruptcy Court held that

According to this legislative history, one of the principal reasons for the enactment of this new provision was Congress' concern that the chapter 7 trustee was getting the postpetition increase in equity in the debtor's home. These statements reflect that a proper interpretation of "property" is the property as it existed on the petition date, with all its attributes, including the amount of equity that existed on that date.⁷

The Bankruptcy Court found its interpretation aligned with and advanced Congress's stated intent to not penalize a debtor for filing a chapter 13 case and later converting to chapter 7.⁸ Accordingly, the Bankruptcy Court determined that the Debtors had no nonexempt equity in the Residence as of the petition date, and the postpetition increase in value of the Residence was not property of the chapter 7 bankruptcy estate.

II. Jurisdiction & Standard of Review

"With the consent of the parties, this Court has jurisdiction to hear timely-filed appeals from 'final judgments, orders, and decrees' of bankruptcy courts within the [United States Court of Appeals for the] Tenth Circuit."⁹ No party elected to have this appeal heard by the United States District Court for the District of Colorado; thus, the parties have consented to our review.

"A decision is considered final if it 'ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'"¹⁰ "An order denying turnover of property . . . is a final, appealable order."¹¹ Therefore, the Turnover Order is a final order for purposes of 28 U.S.C. § 158.

Whether a bankruptcy court correctly applied § 542 to undisputed facts is a question of law reviewed de novo.¹² The question of whether postpetition appreciation of a debtor's homestead is property of the bankruptcy estate under § 348(f)(1)(A) also involves a legal conclusion, which we review de novo.¹³ "De novo review requires anindependent determination of the issues, giving no special weight to the bankruptcy court's decision."¹⁴

III. Discussion

At the heart of this appeal is the Bankruptcy Court's interpretation of § 348(f)(1), which provides,

[W]hen a case under chapter 13 of this title is converted to a case under another chapter under this title—

(A) 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;

(B) valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under chapter 11 or 12, but not in a case converted to a case under chapter 7 . . . .¹⁵

The United States Court of Appeals for the Tenth Circuit (the "Tenth Circuit") last considered § 348 almost thirty years ago. In In re Calder, the Tenth Circuit applied a prior version of § 348, holding that upon conversion from chapter 13 to chapter 7, all property of the chapter 13 estate, including property acquired postpetition, becomes property of the chapter 7 estate.¹⁶ Since Calder, Congress amended § 348 by adding subsection (f).¹⁷

The Bankruptcy Reform Act of 1994 addressed the issue of what happens to property a debtor acquires postpetition but prior to conversion through the addition of subsection (f) to § 348. Generally, subsection (f) provides that when a debtor converts a case from chapter 13, the estate in the converted case does not include property acquired after the original petition date.¹⁸ The Supreme Court addressed the implications of § 348(f) in Harris v. Viegelahn, where it held wages acquired postpetition ordinarily do not become a part of the chapter 7 estate upon conversion.¹⁹ Harris v. Viegelahn effectively overruled Calder and established that "[a]bsent a bad-faith conversion, § 348(f) limits a converted Chapter 7 estate to property belonging to the debtor 'as of the date' the original Chapter 13 petition was filed."²⁰

a. Ambiguity in Section 348(f)

The question before this Court is whether § 348(f)'s definition of the phrase "property of the estate" includes postpetition appreciation in value of an asset owned by a debtor on the petition date. The Trustee asserts the Bankruptcy Court erred when it concluded § 348(f)(1)(A)'s use of the term "property" is ambiguous, which allowed the Bankruptcy Court to consider the statute's legislative history. We disagree.

The Trustee recognizes that "[t]he goal of statutory interpretation is to 'ascertain the congressional intent and give effect to the legislative will.'"²¹ The Tenth Circuit has provided ample instruction in the use of legislative history to determine congressional intent as part of statutory interpretation. A court's analysis of congressional intent begins with a statute's plain language, "giv[ing] undefined terms their ordinary meanings, considering 'both the specific context in which the word is used and the broader context of the statute as a whole.'"²² In addition, "[i]f Congress has spoken directly to the issue, that is the end of the matter; the court . . . must give effect to Congress's unambiguously expressed intent."²³ If there is no ambiguity on the face of the statute's language, the analysis ends. However, "[i]f the statute's plain language is ambiguous as to congressional intent, 'we look to the legislative history and the underlying public policy of the statute'" to derive Congress's intent.²⁴ Statutory language is ambiguous "if it 'is capable of being understood by reasonably well-informed persons in two or more different senses.'"²⁵

The plain language of § 348(f)(1)(A) states, "property of the estate in the converted case shall consist of property of the estate, as of the date of filing of thepetition."²⁶ The Trustee asserts "property of the estate" as used in this section includes "[a]ppreciation in the value of real property."²⁷ The Trustee explains that because § 541(a)(1) includes "all legal or equitable interests of the debtor in property" as property of the estate and § 541(a)(6) "expressly provid[es] that '[p]roceeds' are a form of 'property,'"²⁸ the Bankruptcy Code evidences Congress's intent to...