Black Decision Sheds Light On Vesting Questions

shedding light on vesting

Clouds of uncertainty have hovered over Chapter 13 debtors who find that they need to sell appreciated property before the case is over.

Does appreciation occurring after filing go to creditors on the theory that the appreciation is property of the estate?

Or does the vesting of property at confirmation entitle the debtor to any post petition appreciation?

With the 9th Circuit BAP’s decision in Black, we have some more light on the issue.  Or at least, for those of us in the 9th Circuit.

The BAP faced head-on the interplay between concepts of vesting and property of the estate.  The court held that property vested in the debtor belonged to the debtor free of the claims of unsecured creditors.

So, on the sale of the property prior to completion of the case, the appreciation went to the debtor and the original Chapter 13 plan limited what creditors got.

Facts going in

At the commencement of the case, Debtor Black owned a rental property valued at $44,000.  He claimed no exemption in the property.

His confirmed plan vested assets in the debtor at confirmation.  The plan provided for monthly payments of $250 for 59 months, and a final payment of $45,000 in month 60, funded by sale or refinance of the property.

In other words, the amount the creditors got through the plan was based on what the property was worth when Black filed.

Three years into the plan, the below median income Debtor proposed to sell the property for $107,000, pay the trustee $45,000, and keep the appreciation for himself.

The trustee objected, contending that all of the net sale proceeds must be used to fund the plan.  The bankruptcy court agreed.

Competing arguments

On appeal, the trustee pointed to §1306(a)(1) for the proposition that property of the estate includes property the debtor acquires after commencement of the case but before the case is closed.  The debtor “acquired” the appreciation during the case, therefore it is available to pay creditors.

She bolstered her position, pointing to §541(a)(6) that provides that proceeds or profits from property of the estate are also property of the estate.

Debtor retorted that the vesting of property in him at confirmation under §1327(b) entitled him to the appreciation.  This argument brought us back to the unfortunate fact that 42 years after the Bankruptcy Code was enacted, we have no agreement as to what “vesting” means.

Here, the BAP agreed with the debtor:  if the property vested in Black, his creditors had no claim on the appreciation.

Appellate decision

The BAP started with its decision in Burgie:  proceeds of the sale of prepetition property are not disposable income.  Further, while the debtor can choose to use capital assets to fund his plan, he cannot be compelled to.

So long as Mr. Black satisfies the terms of his confirmed plan, he does not have to commit the excess proceeds of the sale to pay his general unsecured creditors.

Rebuffing the trustee’s argument that the proceeds were property of the estate, the BAP said squarely that revesting means that Black “owned the property outright, free of his creditors’ claims”, citing Cal. Franchise Tax Bd. v. Jones, subsequently affirmed by the 9th Circuit..

The panel reiterated its rejection of the modified estate preservation approach crafted in the First Circuit’s Barbosa decision, while noting that the 9th Circuit’s decision affirming the BAP’s holding in Jones declined to choose among the four outstanding theories of vesting.  Gee, thanks, Niners.

Takeaways from Black

In short, the appeals court tells us that vesting of property in the debtor cuts off creditor’s rights in the property.  So, property owners filing bankruptcy can choose Chapter 13 with its multi year duration without gambling that appreciation over the life of the plan is at risk of devolving to their creditors.

Vesting at confirmation of the plan, rather than upon entry of the discharge, becomes a no-brainer.

Black seems to undermine attempts by trustees to modify plans mid case and conduct a new liquidation analysis that looks at current values of assets to increase the amount the debtor pays to creditors.  After confirmation, modification of the plan looks solely at disposable income.

Questions that linger

We are left, unfortunately, with a myriad of remaining questions.

Section 1306 tells us that property acquired during the Chapter 13 is property of the estate.  Does property acquired between filing and confirmation, defined by §1306 as property of the estate, factor into the liquidation analysis of §1325?

(a)Except as provided in subsection (b), the court shall confirm a plan if—…

(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date;

Section 1325 explicitly looks at a hypothetical Chapter 7 liquidation to measure the best interests of creditors.  With the exceptions of kinds of assets set out in §541(a)(5), post petition acquisitions by a Chapter 7 debtor are not property of the estate, and therefore not exposed to creditors.

And if a Chapter 7 liquidation is the measuring stick, how do we explain Dale, where the same 9th Cir. BAP held that a post petition inheritance received outside of the 180 day window in §541 must be turned over to the Chapter 13 trustee as property of the estate?

If pre petition property, like Black’s rental,  vests at confirmation, does any post petition newly acquired asset also become the property of the debtor, free and clear of claims  by creditors?

Which leaves us to ponder just what does it mean when property acquired during Chapter 13 becomes property of the estate.

So, don’t worry that all the wonder and intrigue of the Bankruptcy Code has been drained away.  Mysteries persist.


Image courtesy of Flickr and Carol Highsmith collection at Library of Congress