Summary
holding that earnings paid to a Chapter 13 trustee pursuant to a confirmed plan do not become part of the Chapter 7 estate upon conversion, without analyzing what should be done with these funds
Summary of this case from Viegelahn v. Harris (In re Harris)Opinion
No. 95-1369
Heard September 14, 1995.
Decided September 29, 1995.
Ralph W. Brown for appellants.
Jana S. Stabile, with whom Michael S. Haenn was on brief, for appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MAINE.
This appeal raises an issue which, but for its effect on the parties before us, might well deserve a place among the inhabitants of Madame Tussauds's Waxworks. The tale follows.
We begin with basic bankruptcy bromides. Chapter 13 of the Bankruptcy Code, 11 U.S.C. § 1301-1330, enables individual debtors to reorganize their financial affairs, so to speak, by extending due dates and servicing their debts out of future income pursuant to a payment plan crafted under the supervision of the bankruptcy court. In contrast, Chapter 7 of the Code, 11 U.S.C. § 701-766, provides for what is commonly termed "straight bankruptcy." It contemplates the liquidation of a debtor's estate, the distribution of available assets to his or her creditors, and ultimate relief from liability for all dischargeable debts. Because the two chapters mark a natural progression from difficult financial straits to unpassable financial straits, a proceeding under Chapter 13 may be converted into a proceeding under Chapter 7 if the reorganization of the debtor's affairs founders. See 11 U.S.C. § 1307.
When such a conversion occurs, the Chapter 7 proceeding "relates back" in the sense that the Chapter 7 petition is deemed to have been filed on the filing date of the original Chapter 13 petition. See 11 U.S.C. § 348(a). An enigma arises, however, where a debtor has earned income during the pendency of the Chapter 13 petition, because the statutory mosaic makes clear that a Chapter 13 estate includes postpetition earnings, see 11 U.S.C. § 1306(a)(2), and a Chapter 7 estate does not, see 11 U.S.C. § 541(a). Therein lies the rub. For many years, courts could not agree on an answer to the question of whether post-petition income paid to a Chapter 13 trustee became property of the Chapter 7 estate on conversion of an insolvency proceeding from a workout to a straight bankruptcy, even though such income would not be property of the estate had the debtor initially filed his or her petition under Chapter 7. In this case the lower courts ruled that such post-petition income inures to the benefit of the Chapter 7 trustee. This appeal ensued.
The material facts are undisputed. The debtors, Derald and Mary Young, owned and operated a conglomeration of business enterprises including Damn Yankee Gifts, Damn Yankee Balloons, Damn Yankee Pewter, and Damn Yankee Sheepskin. On October 22, 1992, the Youngs petitioned for relief from their creditors under Chapter 13. A payment plan emerged. The bankruptcy court approved it, and the debtors agreed to abide by it.
While attempting to satisfy the terms of the plan, Mr. and Mrs. Young tendered a total of $24,498 in interim earnings to the Chapter 13 trustee. But, to paraphrase the Scottish poet, the best-laid plans of creditors and debtors often go awry. Cf. Robert Burns, To a Mouse (1785). The payment plan collapsed when the Youngs found themselves unable to sell off certain assets. Key Bank of Maine, a secured creditor, took steps to protect its interests and, over the debtors' objection, forced a conversion of the Chapter 13 proceeding into a straight bankruptcy under Chapter 7.
The Youngs subsequently moved to determine the property of the Chapter 7 estate in order to settle the status of their post-petition contribution. Initially, the bankruptcy court accepted the debtors' position and held that the funds were the property of the Chapter 13 trustee. On reconsideration, the court revoked its earlier order and decided, favorably to Key Bank, that the funds were the property of the Chapter 7 estate. On July 20, 1994, the bankruptcy judge entered a new order to that effect. The debtors appealed to the district court, which upheld the July 20 order. We now reverse.
At the time the events leading to this conundrum occurred, the authorities were divided. Many courts held, as did the courts below, that post-petition earnings comprised part of the Chapter 7 estate when a Chapter 13 proceeding was converted to a straight bankruptcy. See, e.g., In re Calder, 973 F.2d 862, 866 (10th Cir. 1992); In re Lybrook, 951 F.2d 136, 137 (7th Cir. 1991); In re Tracy, 28 B.R. 189, 190 (Bankr.D.Me. 1983). Other courts espoused the opposite view. See, e.g., In re Bobroff, 766 F.2d 797, 803 (3d Cir. 1985); In re Borrero, 75 B.R. 141, 142 (Bankr.D.P.R. 1987); In re Peters, 44 B.R. 68, 70-72 (Bankr.M.D.Tenn. 1984). The division in the authorities is understandable. The question is excruciatingly close, respected jurists disagree as to how it can best be answered, and as Judge Posner acknowledged, the arguments on either side of the line offer "equally good alternative[s]." Lybrook, 951 F.2d at 137. Thus, for all intents and purposes the law was indeterminate when this question came before the courts below, and those courts resolved the indeterminacy in a plausible way.
In yet a third variation on the theme, a few courts held that if post-petition earnings were accumulated before the confirmation of a Chapter 13 payment plan, such funds did not become property of the Chapter 7 estate upon conversion; but if the funds were earned subsequent to the confirmation of a plan, they would then become property of the Chapter 7 estate upon conversion. See, e.g., In re Schmeltz, 114 B.R. 607, 610-13 (Bankr.N.D.Ind. 1990); In re Holly, 109 B.R. 524, 526 (Bankr.S.D.Ga. 1989); In re Richardson, 20 B.R. 490, 492 (Bankr.W.D.N.Y. 1982).
Nevertheless, judges sometimes view issues quite differently, and our responsibility to the parties before us requires that, on a matter of law committed to our plenary review, see In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir. 1991), we must interpret the applicable statutes as we read them, consistent with our exposition of discerned congressional intent and without paying special deference to the courts below. Fulfilling our proper function here, we reach a conclusion contrary to that reached by the bankruptcy judge and the district judge. Consequently, we hold that post-petition income earned by and contributed to a Chapter 13 estate (prior to the change in the law discussed infra) did not, upon the conversion of the proceeding to a straight bankruptcy, become property of the Chapter 7 estate.
At this point, the plot thickens. Ordinarily, we would now proceed to present an analysis of the bases for our decision, explicating our reasoning in suitable detail. But the circumstances of this case are well out of the ordinary, and they counsel a different, more muted course. We explain briefly.
Perhaps because of the split in authority about how best to synchronize Chapter 13 and Chapter 7, Congress acted within the past year to demystify the situation. The Bankruptcy Reform Act of 1994 answered the very question that confronts us. It essentially codified the Bobroff rule, enacting a statutory provision designed to ensure that, on conversion from a Chapter 13 proceeding,
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.
11 U.S.C. § 348(f)(1)(A) (1994). In all future cases, this rule (subject to a statutory "bad faith" exception not of concern here) will govern. But the newly crafted statute does not apply in this case: the Bankruptcy Reform Act explicitly bars retroactive application of the statutory solution to accruals antedating the Act's effective date (October 22, 1994). See Pub.L. No. 103-394, Section(s) 702, 108 Stat. 4106, 4150. The Youngs filed their Chapter 13 petition exactly two years earlier, and the Chapter 13 trustee had the disputed funds in hand well before the amendment's effective date. As a result, section 348(f) is not controlling in this case.
Be that as it may, it ill behooves us to play the ostrich, struthiously pretending that the neoteric statute is not now in force. Though the amendment does not affect the outcome of this appeal, it punctuates our opinion and strips it of virtually all precedential value. Where, as here, we face a lingering question of law that is defunct except as to a handful of ongoing cases, we see no point in writing at length either to elucidate our rationale or to justify our construction of an ambiguous statute that Congress has lately taken pains to clarify. Cf. In re San Juan Dupont Plaza Hotel Fire Litig., 989 F.2d 36, 38 (1st Cir. 1993) (suggesting that an appellate court should not write opinions "simply to hear its own words resonate"). This is especially true in the instant case, since other courts have spelled out the reasons supporting our conclusion. See Bobroff, 766 F.2d at 803; Peters, 44 B.R. at 70-72. Given this peculiar concatenation of circumstances, we are confident that going further would merely add another floor to the Tower of Babel.
The judgment of the district court is reversed, and the cause is remanded to the district court with instructions to vacate the order of the bankruptcy court and to remit the case for the entry of a decree consistent herewith. All parties will bear their own costs.