Rodriguez v. Barrera

Appellate Case: 20-1376 Document: 010110633794 Date Filed: 01/19/2022 Page: 1
FILED
United States Court of Appeals
PUBLISH Tenth Circuit

UNITED STATES COURT OF APPEALS January 19, 2022

Christopher M. Wolpert
TENTH CIRCUIT Clerk of Court

In Re: JULIO CESAR BARRERA;
MARIA DE LA LUZ MORO,

Debtors.
----------------------------------- No. 20-1376
SIMON E. RODRIGUEZ, Chapter 7
Trustee,

Appellant,
v.
JULIO CESAR BARRERA; MARIA
DE LA LUZ MORO,

Appellees.
-----------------------------------
NATIONAL CONSUMER
BANKRUPTCY RIGHTS CENTER;
NATIONAL ASSOCIATION OF
CONSUMER BANKRUPTCY
ATTORNEYS,

Amici Curiae.

APPEAL FROM THE UNITED STATES BANKRUPTCY APPELLATE
PANEL OF THE TENTH CIRCUIT
(BAP No. 20-003-CO)
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David V. Wadsworth (Lindsay S. Riley, Wadsworth Garber Warner Conrady,
Littleton, Colorado, with him on the briefs), Sender Wasserman Wadsworth,
Denver, Colorado, for Appellant.

Erik B. Atzbach, Englewood, Colorado, for Appellees.

Before TYMKOVICH, Chief Judge, HOLMES, and McHUGH, Circuit Judges.

TYMKOVICH, Chief Judge.

Julio Cesar Barrera and Maria de La Luz Moro filed for bankruptcy under

Chapter 13 of the Bankruptcy Code hoping to reorganize their assets and

finances. Instead of selling most of their assets to obtain an immediate discharge

of their debts, they opted to keep their assets, try a reorganization plan to repay

creditors, and receive a discharge later. For some time they continued to meet the

terms of their reorganization plan. But they changed their minds following the

sale of their home, which had appreciated in value significantly since they filed

for bankruptcy.

Instead, Barrera and Moro converted their Chapter 13 bankruptcy to a

liquidation of their estate under Chapter 7. The Chapter 7 trustee (Trustee)

claimed a right to a portion of the proceeds from the sale of the home, including

the appreciation that occurred after their Chapter 13 petition was filed. This case

is about who is entitled to the proceeds from the sale of the home. Specifically,

do the sale proceeds from the real property of the estate belong to the Chapter 7

estate or to the debtors?

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To answer this question, we must analyze 11 U.S.C. § 348(f)(1)(A), which

states that “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[.]” We conclude

this statutory language directs that the sale proceeds from the home belong to the

debtors. We therefore AFFIRM the Bankruptcy Appellate Panel.

I. Background

We first discuss background bankruptcy principles and then turn to the

relevant facts.

A. The Bankruptcy Code

An understanding of a few bankruptcy mechanics is necessary to

comprehend this case and our conclusions. Bankruptcy provides “a fresh

[financial] start to the honest but unfortunate debtor.” Marrama v. Citizens Bank

of Mass., 549 U.S. 365, 367 (2007) (internal quotations omitted). Debtors can

liquidate their assets or promise future income to repay their creditors in

exchange for a discharge of their debts. Individuals have two common paths to

discharge in the Bankruptcy Code: Chapter 7 and Chapter 13.

In Chapter 7 bankruptcies, debtors give up their property that is not entitled

to an exemption in exchange for a discharge of their debts. A trustee liquidates

the debtor’s pre-petition, non-exempt property and then distributes the proceeds

to the debtor’s creditors. See 11 U.S.C. § 704(a)(1). The debtor receives an

immediate discharge and is therefore entitled to keep his future income and any
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assets acquired post-discharge. Id. § 727. But this often comes at a cost, as the

debtor may lose a home and all other non-exempt assets. See Harris v.

Viegelahn, 575 U.S. 510, 513–14 (2015) (recognizing the “steep price” of

Chapter 7’s immediate discharge, which is that a debtor “must forfeit virtually all

his prepetition property”).

In Chapter 13 bankruptcies, debtors reorganize their finances and commit

future disposable earnings to the repayment of creditors instead of liquidating

assets. 11 U.S.C. § 1322(a)(1). The debtor’s existing assets—like a house or

car—are generally not liquidated; instead, the debtor keeps them. Id. § 1325(b).

Distribution of the debtor’s future disposable earnings to creditors is dictated by a

court-approved plan, which typically lasts three to five years. Upon confirmation

of the plan, “all of the property of the estate” vests “in the debtor.” Id. § 1327(b).

A discharge is granted only after the debtor successfully completes the plan. Id.

§ 1328. A reorganization is beneficial to both debtors and creditors. Debtors can

protect existing assets from liquidation, and creditors are assured they will

receive at least as much repayment—and often more—as they would have under

Chapter 7. See id. § 1325(a)(4), (5); see also Harris, 575 U.S. at 514.

Because of the benefits to debtors and creditors stemming from Chapter 13

bankruptcies, Congress has enacted statutes to incentivize debtors to opt for

reorganization over liquidation. See In re Dewsnup, 908 F.2d 588, 591–92 (10th

Cir. 1990). One of these incentives is the non-waivable right of debtors to

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convert a Chapter 13 bankruptcy to another chapter at any time. See 11 U.S.C.

§ 1307(a).

Before the Bankruptcy Reform Act of 1994, circuit courts disagreed about

whether a debtor’s converted Chapter 7 estate included property interests

acquired after the Chapter 13 filing but before conversion to another chapter.

Compare In re Bobroff, 766 F.2d 797 (3d Cir. 1985) (holding Chapter 13 debtor’s

tort claims that accrued post-petition, pre-conversion were not part of the

converted Chapter 7 estate), with In re Lybrook, 951 F.2d 136 (7th Cir. 1991)

(holding real estate inherited by Chapter 13 debtor post-petition, pre-conversion

was part of the converted Chapter 7 estate).

Congress resolved this pre-Bankruptcy Reform Act circuit split by enacting

11 U.S.C. § 348(f) in 1994. This statute provides that conversion from one

chapter to another does not start a new bankruptcy case, but instead it transforms

the nature of the existing bankruptcy case. See 11 U.S.C. § 348(a) (explaining

conversion “does not effect a change in the date of the filing of the petition, the

commencement of the case, or the order for relief”).

The statute also specifically addresses conversions from Chapter 13 to

Chapter 7. When a case is converted from Chapter 13 to Chapter 7, “property of

the estate in the converted case shall consist of the 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[.]” Id. § 348(f)(1)(A) (emphasis

added). In other words, after conversion, the Chapter 7 estate generally consists

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of the same interests in property that would have been included in the estate had

the debtor originally filed under Chapter 7, so long as the debtor has possession

or control of those interests at conversion. But if a debtor converts in bad faith—

broadly defined, as we explain below—more of the debtor’s interests are included

in the converted estate: “[T]he property of the estate in the converted case shall

consist of the property of the estate as of the date of conversion.” Id. § 348(f)(2)

(emphasis added); see also Harris, 575 U.S. at 518.

Those debtors who try a repayment plan, but ultimately fail, are generally

no worse off upon a good-faith conversion than if they had originally filed under

Chapter 7. And those debtors who convert from Chapter 13 to Chapter 7 in bad

faith are punished because their otherwise immune post-petition property

interests are available for liquidation and distribution to creditors.

Notwithstanding Congress’s apparent attempt to clarify the proper makeup

of a converted estate with the enactment of 11 U.S.C. § 348(f), courts have since

split on whether property interests acquired post-petition, but pre-conversion are

property of the converted estate or of the debtor. This interpretive conflict

underlies this appeal.

B. The Bankruptcy

Julio Cesar Barrera and Maria de La Luz Moro (Debtors) filed for

bankruptcy on April 5, 2016. Instead of liquidating their assets in exchange for

an immediate discharge via a Chapter 7 bankruptcy, they opted for a Chapter 13

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reorganization plan, committing to a long-term repayment plan using future

income to pay creditors.

On the petition date, the property of the Chapter 13 bankruptcy estate

included real property jointly owned by the Debtors in Highlands Ranch,

Colorado. The Debtors included the following information in their schedules:

Value of the Property: $396,606.00

Liens on the Property: (1) lien in favor of
CitiMortgage, Inc. and
(2) lien in favor of the
U.S. Department of
Housing and Urban
Development, totaling
$336,209.62

Exempt Equity in $60,396.38 per the
the Property: Colorado Homestead
Exemption (can claim up
to $75,000)

Because the combination of the liens and the homestead exemption

exceeded the value of the house, the Debtors’ equity in the house was exempt as

of the petition date. In June 2016, the Debtors’ Chapter 13 plan was confirmed

and all of the property of the estate was revested in the Debtors. See 11 U.S.C.

§ 1327(b) (“Except as otherwise provided in the plan or the order confirming the

plan, the confirmation of a plan vests all of the property of the estate in the

debtor.”). Following confirmation, the Debtors made monthly cure payments on

their mortgage arrears to the Chapter 13 trustee and paid regular mortgage

payments directly to CitiMortgage, Inc. in accordance with the confirmed plan.

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Time passed, and the value of the Debtors’ home increased. In April 2018,

while still complying with the confirmed Chapter 13 plan, the Debtors sold the

house for $520,000. After payment of the liens, taxes, and closing costs, the

Debtors pocketed $140,251 in sale proceeds. About two weeks later, the Debtors

filed a notice of voluntary conversion to Chapter 7 under 11 U.S.C. § 1307. The

Debtors also spent some of the proceeds from the sale. Thus, as of the

conversion date, the Debtors retained only $100,700.12 of the sale proceeds in a

savings account.

After the Trustee contacted the Debtors about whether the non-exempt

portion of the equity should be part of the Chapter 7 bankruptcy estate, the

Debtors filed a motion to convert their case back to Chapter 13, which the

bankruptcy court denied. Now stuck in Chapter 7, the Debtors were forced to

combat the Trustee’s attempts to require them to turn over the non-exempt

portion of the house proceeds to the Chapter 7 estate.

C. Procedural History

The Trustee filed a motion to compel the Debtors to turn over property of

the estate, targeting the non-exempt portion of the house proceeds. To eliminate

factual disputes, the Trustee stipulated that the petition-date value of the house

equals the value scheduled by the Debtors in their initial Chapter 13 filing

($396,606). The bankruptcy court denied the Trustee’s motion. The court

reasoned that 11 U.S.C. § 348(f)(1)(A) is ambiguous as to what constitutes

“property,” but based on the legislative history of the statute, it means the

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property of the estate as it existed on the Chapter 13 petition date, with all its

attributes, including the amount of equity that existed on that date. Thus,

according to the bankruptcy court, “property” in § 348(f)(1)(A) does not include

any of the appreciation in value of the house that occurred from the filing of the

Chapter 13 petition to the filing of the Chapter 7 conversion. That value is

therefore excluded from the Chapter 7 estate upon conversion.

The Tenth Circuit Bankruptcy Appellate Panel (BAP) affirmed the

bankruptcy court’s denial of the Trustee’s motion for similar reasons.

II. Analysis

We must interpret 11 U.S.C. § 348(f)(1)(A) to determine whether the sale

proceeds from the appreciation in value of a debtor’s property after filing a

Chapter 13 petition but before converting the bankruptcy to Chapter 7 is property

of the Chapter 7 estate or the debtor. We conclude it is property of the debtor.

Our review of this statutory interpretation question is de novo. See In re

Taylor, 899 F.3d 1126, 1129 (10th Cir. 2018). We start with the statutory

language and look to the plain meaning of 11 U.S.C. §§ 348 and 541. Section

348(f)(1)(A) explains that “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[.]” (Emphasis added).

Section 348(f)(1)(A)’s explicit reference to “property of the estate” is

defined in § 541 to include “all legal or equitable interests of the debtor in
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property[.]” 11 U.S.C. § 541(a)(1). It also defines “property of the estate” to

include “[p]roceeds . . . from property of the estate.” Id. § 541(a)(6). If proceeds

were the same interest as the anchor legal or equitable interest, the inclusion of

§ 541(a)(6) would be redundant alongside § 541(a)(1). Thus, § 541 recognizes

that “all legal and equitable interests” are legally distinct from “proceeds” from

those interests. 1

The Trustee cites a long list of cases that he insists establishes that

proceeds gained post-petition, pre-conversion are property of the estate. 2 But the

cases he relies on are distinguishable. They address primarily whether proceeds

from the sale of property are generally part of a Chapter 7 estate or whether

appreciation in the value of property is part of the estate in a Chapter 13 to

Chapter 7 conversion. They do not address our question here: whether, in a post-

1
The parties discuss at length whether post-petition, pre-conversion appreciation
in value of the house is included in the Chapter 7 estate upon conversion. And
this is the question the bankruptcy court and the BAP addressed in finding for the
Debtors. But we need not decide whether appreciation in a house still owned by
debtors at the time of conversion is property of the debtors or the estate. That is
not the case before us. We are dealing with proceeds from the sale of the house,
not the house itself. Thus, our conclusion relies only on whether cash remaining
from a post-petition, pre-conversion real property sale is included in the Chapter
7 estate upon conversion. As we explain in this section, it is not.
2
See Aplt. Br. at 17–18 (citing Wilson v. Rigby, 909 F.3d 306, 308–09 (9th Cir.
2018); In re Orton, 687 F.3d 612, 619 (3d Cir. 2012); In re Gebhart, 621 F.3d
1206, 1211 (9th Cir. 2010); Hyman v. Plotkin, 967 F.2d 1316, 1321 (9th Cir.
1992); In re Potter, 228 B.R. 422, 424 (9th Cir. BAP 1999); In re Celentano, No.
10-22833 NLW, 2012 WL 3867335, at *5 (Bankr. D.N.J. 2012) (unpublished); In
re Prospero, 107 B.R. 732, 735 (Bankr. C.D. Cal. 1989); In re Paolella, 85 B.R.
974, 976 (Bankr. E.D. Pa. 1988)).

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confirmation conversion from Chapter 13 to Chapter 7, proceeds from the post-

petition sale of property are identical to the underlying property that the debtor

possessed on the Chapter 13 petition date. Based upon § 348(f)(1)(A)’s plain

language, when read alongside § 541(a), they are not.

Based on the plain language of § 348(f)(1)(A), then, the sale proceeds—a

property interest distinct from the physical house from which they were derived—

do not enter the converted Chapter 7 estate. See 11 U.S.C. § 348(f)(1)(A); see

also David Carlson, The Chapter 13 Estate and Its Discontents, 17 Am. Bankr.

Inst. L. Rev. 233, 280 (2009) (“If this principle is taken seriously, then proceeds

of what historically was property of the estate do not go to the chapter 7 trustee.

Although it is easy to forget, proceeds are, strictly speaking, after-acquired

property.” (emphasis in original)). The physical house was not “in the possession

of or . . . under the control of the [D]ebtor[s] on the date of conversion”—they

had sold it. 11 U.S.C. § 348(f)(1)(A). And the proceeds from the sale of the

physical house did not exist on the date of filing the Chapter 13 petition, so the

proceeds cannot have “remain[ed] in the possession of or [have been] under the

control of the debtor on the date of conversion[.]” Id. (emphasis added).

The automatic vesting provision of § 1327(b) supports our conclusion that

the proceeds from the sale of the Debtors’ house are not included in the Chapter 7

estate. Under § 541(a)(6), only proceeds “of or from property of the estate”

become property of the bankruptcy estate. In a typical Chapter 13 case, this

provision is operative only before confirmation of the Chapter 13 plan because

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confirmation “vests all of the property of the estate in the debtor.” Id. § 1327(b).

Thus, proceeds generated from the debtor’s property after confirmation do not

§ 348(f)(1)(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”



Chapter Confirmation Sale of home Chapter 7
13 petition conversion
filing date date

= all legal or equitable interests of the debtor in property
as of the commencement of the case (§ 541(a)(1))
= proceeds from property of the estate (§ 541(a)(6))
= confirmation of a plan vests all the property of the
estate in the debtor (§ 1327(b))
become property of the estate as the underlying property no longer belongs to the

estate. 3

3
We recognize this interpretation potentially creates a conflict with 11
U.S.C. § 1306, which provides that property of the estate includes all
property—as defined 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.” 11 U.S.C.
§ 1306(a)(1). Many courts have attempted to resolve the inherent tension
between § 1327’s revestment provision and § 1306’s after-acquired
property provision. See In re Larzelere, B.R. , 2021 WL 3745428, at
*3–4 (Bankr. D.N.J. Aug. 24, 2021) (collecting cases); In re Baker, 620
B.R. 655, 665 (Bankr. D. Colo. 2020) (same). Given that the Debtors’
proceeds here did not exist at the commencement of the case and thus did
(continued . . .)
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The Trustee’s view that the post-confirmation proceeds from the sale of the

Debtors’ house became property of the estate ignores § 1327(b)’s revestment

provision. At the time the Debtors sold their house, the Debtors’ Chapter 13 plan

had been confirmed and the house had been revested in the Debtors. As a result,

the Debtors’ house was not property of the Chapter 13 estate when the Debtors

sold it. The proceeds generated from the sale of the house were therefore not

“proceeds . . . of or from property of the estate.” See id. § 541(a)(6).

Although the bankruptcy court and the BAP reached the same outcome we

do here, they did so by asserting the statutory language is ambiguous and pivoting

to legislative history. The BAP quoted the House of Representatives’ Committee

on the Judiciary Report on the Bankruptcy Act of 1994, which discussed the

amendment to § 348 as follows:

This amendment would clarify the Code to resolve a
split in the case law about what property is in the
bankruptcy estate when a debtor converts from chapter 13
to chapter 7. The problem arises because in chapter 13
(and chapter 12), any property acquired after the petition
becomes property of the estate, at least until confirmation
of a plan. Some courts have held that if the case is
converted, all of this after-acquired property becomes
part of the estate in the converted chapter 7 case, even
though the statutory provisions making it property of the
estate do not apply to chapter 7. Other courts have held
that property of the estate in a converted case is the

not become part of the converted Chapter 7 estate under § 348(f)(1)(A), we
need not decide whether the proceeds ever became part of the Chapter 13
estate.
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property the debtor had when the original chapter 13
petition was filed.
...
This amendment overrules the holding in cases such
as Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991) and
adopts the reasoning of In re Bobroff, 766 F.2d 797 (3d
Cir. 1985). However, it also gives the court discretion, in
a case in which the debtor has abused the right to convert
and converted in bad faith, to order that all property held
at the time of conversion shall constitute property of the
estate in the converted case.

Aplt. App. at 250–51. The Third Circuit in Bobroff determined that a Chapter 13

debtor’s tort claims that accrued post-petition, pre-conversion were not part of the

converted Chapter 7 estate. Conversely, the Seventh Circuit in Lybrook

concluded that real estate inherited by a Chapter 13 debtor post-petition but pre-

conversion was part of the converted Chapter 7 estate. See In re Bobroff, 766

F.2d at 803; In re Lybrook, 951 F.2d at 137. So, the legislative history supports

the outcome to which the plain text already points: the pre-conversion house-sale

proceeds are not property of the Chapter 7 estate. Because the text, structure, and

context of these provisions confirm our analysis, we need not rely on the

legislative history.

We recognize that our interpretation of § 348(f)(1)(A) potentially allows

converting debtors to sell property of the estate after confirmation of the Chapter

13 plan prior to conversion to shield the value of those assets from creditors. But

11 U.S.C. § 348(f)(2) already ensures that if a debtor converts in “bad faith,” “the

property of the estate in the converted case shall consist of the property of the

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estate as of the date of conversion.” 4 (Emphasis added.) What’s more, the

Bankruptcy Code appears to anticipate that debtors may be able to take these

types of actions in some instances. Specifically, it permits a debtor to protect

assets to the detriment of his creditors as long as those actions are not taken in

bad faith. See, e.g., Hanson v. First Nat. Bank in Brookings, 848 F.2d 866, 868

(8th Cir. 1988) (“[U]nder the Code, a debtor’s conversion of non-exempt property

to exempt property on the eve of bankruptcy for the express purpose of placing

that property beyond the reach of creditors, without more, will not deprive the

debtor of the exemption to which he otherwise would be entitled.”); but see In re

Fobber, 256 B.R. 268, 279 (Bankr. E.D. Tenn. 2000) (“[Section] 348(f) was

never designed to be a safe harbor for debtors who fraudulently and

surreptitiously dispose of property of the estate while in chapter 13.”).

Nevertheless, the issue of bad faith is not before us, so we need not decide

4
Indeed, the power of bankruptcy courts to make bad-faith determinations is
broad. See 11 U.S.C. § 105 (stating that a bankruptcy court may, “sua sponte,
tak[e] any action or mak[e] any determination necessary or appropriate to enforce
or implement court orders or rules, or to prevent an abuse of process”); see also
Marrama, 549 U.S. at 375 (discussing the “broad authority granted to bankruptcy
judges to take any action that is necessary or appropriate ‘to prevent an abuse of
process’ described in § 105(a) of the Code”). In these fact-intensive inquiries,
bankruptcy courts look at the “totality of circumstances” and have wide
discretion in considering all the facts. See, e.g., In re Pac. Rim Invs., LLP, 243
B.R. 768, 773 (Bankr. D. Colo. 2000); In re Siegfried, 219 B.R. 581, 585 (Bankr.
D. Colo. 1998) (finding a debtor’s conversion from Chapter 13 to Chapter 7 was
in bad faith due in part to the debtor’s “pattern of dissembling, failure to fully or
accurately disclose financial affairs, disingenuous explanations of wrongful
conduct and unfair manipulation of the bankruptcy system to the detriment of his
creditors”).

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whether the Debtors acted in bad faith here. 5 It is our job to interpret the

statutory text, and it is up to Congress to set the parameters in which debtors and

creditors operate. 6

5
Though not at issue in this case, the Bankruptcy Code may also limit the extent
to which debtors converting from Chapter 13 to Chapter 7 can shield their assets
from secured creditors. The Code states that
if the debtor and an entity entered into a security
agreement before the commencement of the case and if
the security interest created by such agreement extends
to property of the debtor acquired before the
commencement of the case and to proceeds . . . of such
property, then such security interest extends to such
proceeds . . . acquired by the estate after the
commencement of the case to the extent provided by
such security agreement and by applicable
nonbankruptcy law, except to any extent that the court,
after notice and a hearing based on the equities of the
case, orders otherwise.

11 U.S.C. § 552(b)(1). Creditors may also request a modification of a confirmed
Chapter 13 plan to account for proceeds from the post-confirmation sale of an
asset by the debtor. See id. § 1329(a). Creditors are protected when a plan is
modified because any modification of a confirmed plan requires the bankruptcy
court to consider the best interests of the creditors. See id. § 1329(b)
(incorporating § 1325(a)(4)). The court will only modify a plan if creditors
receive the same or greater value under the modified plan as they would under a
Chapter 7 liquidation. Id.; In re Baker, 620 B.R. at 658. There may also be other
techniques creditors can deploy if they fear surviving assets will be sold after
Chapter 13 confirmation.
6
We understand that several bankruptcy courts have reached the opposite
conclusion in similar cases, electing to treat post-petition, pre-conversion
proceeds as property of the estate. See, e.g., In re Laflemme, 397 B.R. 194, 203
(Bankr. D.N.H. 2008) (treating commissions the debtor earned pre-petition, but
did not receive until after filing the petition, as property of the estate upon
conversion from Chapter 13 to Chapter 7); In re Grein, 435 B.R. 695, 702 (Bankr.
D. Colo. 2010) (“[E]ven though the Debtors . . . did not possess nor control the
[assets] at the time of reconversion, these assets are property of the reconverted
(continued . . .)
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* * *

The most faithful reading of the statutory text supports the conclusion that

the proceeds from the sale of the Debtors’ house belong to the Debtors, not the

Chapter 7 estate.

III. Conclusion

We accordingly AFFIRM the Bankruptcy Appellate Panel.

Chapter 7 estate because literal application of 11 U.S.C. § 348(f)(1)(A) would
produce absurd results and permit debtors to engage in carte blanche fraud.”).
Nevertheless, we believe the text is plain and guides our result here. If Congress
believes that debtors are abusing § 348(f)(1)(A), it can address any unintended
consequences.
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