Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-01107/USCOURTS-caed-2_05-cv-01107-2/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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28 Unless otherwise noted, all chapter and section references are 1

to the Bankruptcy Code.

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

In re: )

)

SALVADOR B. and ) 2:05-cv-1107-GEB

DOLORES SALAS, )

) Bankruptcy Court Case No.

Debtors. ) 04-31266-D-7

)

) ORDER

SALVADOR B. and )

DOLORES SALAS, )

)

Appellants, )

v. )

)

MICHAEL MCGRANAHAN, )

Bankruptcy Trustee, )

)

Appellee. )

)

This is an appeal from a ruling of the United States

Bankruptcy Court that denied Appellants’ motion to force Appellee,

the trustee of the chapter 7 estate, to abandon the estate’s

interest in Appellants’ residence. The bankruptcy court ruled the 1

non-exempt equity created by the appreciation of Appellants’

residence after the filing of their chapter 13 petition belonged to

the converted chapter 7 estate. A tentative ruling on the appeal

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It is unclear why this tentative ruling was placed online. 2

At oral argument, Appellee raised the significance of the fact 3

that Appellants’ property did not vest with them upon conversion of

their chapter 13 proceeding to a chapter 7 proceeding. Appellants

countered that Appellee had waived this issue since it was not presented

to the bankruptcy court, and Appellee did not rebut this argument. The

record reveals Appellee did make passing reference of the vesting issue

to the bankruptcy court and in his brief on appeal. (See Appellants’

Excerpts of the Record at 21; Appellee’s Br. at 6.) However, “[a]

district judge is . . . entitled to disregard a ground raised but not

pressed.” National Metalcrafters, Div. of Keystone Consol. Industries

v. McNeil, 784 F.2d 817, 825 (7th Cir. 1986). Since Appellee presented

the vesting issue in a “perfunctory and underdeveloped . . . manner” and

did not press the issue at oral argument, this argument will not be

reached. Id. 

2

issued September 15, 2006. Salas v. McGranahan, 2006 WL 2650160

(E.D. Cal. Sept. 15, 2006). Oral argument was held September 18, 2

2006. For the reasons stated below, the decision of the 3

bankruptcy court is reversed and this matter is remanded.

STANDARD OF REVIEW

The issues to be decided on appeal are questions of law,

and therefore the de novo standard applies. In re Bammer, 131 F.3d

788, 792 (9th Cir. 1997); In re Jodoin, 209 B.R. 132, 135 (9th Cir.

BAP 1997). 

BACKGROUND

On December 30, 2002, Appellants filed a petition for

bankruptcy protection under chapter 13. Appellants included in

their petition their personal residence located in Stockton,

California, (the “Stockton Property”) and valued it at $190,000. 

Two creditors holding deeds of trust on the Stockton Property filed

secured claims totaling $131,603.17, resulting in equity of

$58,396.83 in the Stockton Property. Appellants also claimed a

$75,000 homestead exemption in their petition under California Code

of Civil Procedure § 704.710 et seq. No objections were filed

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against the homestead exemption or the valuation of the Stockton

Property. On May 7, 2003, Appellants’ chapter 13 plan was

confirmed. Because of the two secured claims and Appellants’

homestead exemption, no non-exempt equity existed in the Stockton

Property when the plan was confirmed.

On February 17, 2004, Appellants’ chapter 13 case was

converted to chapter 7 due to their inability to meet the plan’s

requirements. Appellee was appointed trustee of the chapter 7

estate.

Between confirmation of the chapter 13 plan and the

subsequent conversion to chapter 7, the Stockton Property

appreciated to a fair market value of approximately $305,000. This

created equity in the Stockton Property above Appellants’ homestead

exemption.

On January 21, 2005, Appellants filed a motion in the

bankruptcy court for an order that would have required Appellee to

abandon the estate’s interest in the post-petition appreciation of

the Stockton Property. Appellants argued there was no non-exempt

equity in the Stockton Property to benefit their creditors since

none existed when the chapter 13 plan was confirmed, and any

appreciation equity over the amount existing when the chapter 13

plan was confirmed belonged to Appellants under section 348(f). 

Appellee countered that this appreciation equity enured to the

benefit of the estate. The bankruptcy court denied Appellants’

motion in a minute order filed April 26, 2005, ruling any equity in

the Stockton Property above Appellants’ homestead exemption

belonged to the estate.

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Section 541(a)(6) provides that property of the estate 4

includes “[p]roceeds, product, offspring, rents, or profits of or from

property of the estate, except such as are earnings from services

performed by an individual debtor after the commencement of the case.”

The other Ninth Circuit decisions cited by Appellee for this 5

proposition are: In re Alsberg, 68 F.3d 312 (9th Cir. 1995); and In re

Hyman, 967 F.2d 1316 (9th Cir. 1992).

4

DISCUSSION

Appellants argue the language and legislative history of

section 348(f), as well as the pertinent case law, all “support[]

the position that . . . it is the [Stockton Property’s] value as of

the date the [c]hapter 13 was filed that becomes property of the

[c]hapter 7 estate upon conversion” and any “post-petition

appreciation belongs to [Appellants] . . . .” (Appellants’ Br. at

6, 10.) Appellee disagrees, relying on the Ninth Circuit’s

interpretation of language in section 541(a)(6) “to mean that

appreciation enures to the bankruptcy estate, not the debtor.” In 4

re Reed, 940 F.2d 1317, 1323 (9th Cir. 1991). (Appellee’s Br. 5

at 4.) Appellants counter that section 348(f) rather than

section 541(a)(6) applies “when a [c]hapter 13 [case] is converted

to a [c]hapter 7 [case,]” (Appellants’ Br. at 10), and argue that

the Ninth Circuit authority on which Appellee relies “does not 

. . . deal[] with the effect of [section 348(f)] when a confirmed

[c]hapter 13 case is converted to a [c]hapter 7 case.” 

(Appellants’ Reply Br. at 4.) 

The Ninth Circuit decisions on which Appellee relies do

not involve application of section 348(f). Congress enacted

section 348(f) as part of the Bankruptcy Reform Act of 1994, and

that section governs the valuation of property in a bankruptcy

estate when a bankruptcy case is converted from a chapter 13

proceeding to a chapter 7 proceeding. The statute states:

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A 2005 amendment to this subsection altered its language to 6

explicitly exclude from coverage chapter 13 to chapter 7 conversions.

However, the amendment does not apply in this case because Appellants’

bankruptcy case commenced before the non-retroactive amendment was

enacted. See Bankruptcy Abuse Prevention and Consumer Protection Act of

2005, Pub. L. No. 109-8, § 1501 (2005) (effective in cases commenced 180

days after enactment).

Appellee makes no claim that Appellants converted their case 7

to chapter 7 in bad faith.

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(f)(1) Except as provided in paragraph (2),

when 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; and

(B) valuations of property and of

allowed secured claims in the chapter

13 case shall apply in the converted

case, with allowed secured claims

reduced to the extent that they have

been paid in accordance with the

chapter 13 plan.

(2) If the debtor converts a case under chapter

13 of this title to a case under another

chapter under this title in bad faith, the

property in the converted case shall consist of

the property of the estate as of the date of

conversion.6

Because this is a converted case, the value of the Stockton

Property is governed by section 348(f).7

Since “[s]ection 348(f) does not provide specific

guidance of what constitutes a ‘valuation’ in a [c]hapter 13

case[,]” Bargeski v. Rose, 2006 WL 1238742, at *4 (D. Md. March 31,

2006), it is necessary to examine the section’s legislative

history. See Nuclear Info. and Res. Serv. v. U.S. Dep’t of Transp.

Research and Special Programs Admin., 457 F.3d 956, 960 (9th Cir.

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2006) (“Courts can only look to legislative history to determine

congressional intent if a statute is ambiguous.”). The Bankruptcy

Reform Act of 1994 brought section 348(f) into the Bankruptcy Code

to “encourage debtors to reorganize their affairs through chapter

13 rather than to immediately liquidate their property under

chapter 7.” Warren v. Peterson, 298 B.R. 322, 326 (N.D. Ill.

2003); see also In re Archie, 240 B.R. 425, 431-32 (S.D. Ala. 1999)

(“the Bankruptcy Code was meant to encourage income earners with

financial problems to attempt chapter 13 rather than filing chapter

7 as a first resort”) (citing In re Pearson, 214 B.R. 156, 164

(Bankr. N.D. Ohio 1997) for the proposition that the legislative

history to section 348(f) showed Congress’s “concern that debtors

not be discouraged from filing chapter 13 cases because of their

fear of losing benefit of initial chapter 7 filing”). 

Several courts have found the legislative history

supports the “general conclusion that confirmation of a plan

constitutes an implicit valuation.” In re Niles, 342 B.R. 72, 74,

76 (Bankr. D. Ariz. 2006); see also Warren, 298 B.R. at 326

(“[R]ecognizing implicit valuations is consistent with

congressional intent as it encourages debtors to file chapter

13.”); In re Slack, 290 B.R. 282, 287 (Bankr. D. N.J. 2003)

(relying on section 348(f)’s legislative history to hold a “chapter

13 plan[’s] confirm[ation] . . . [i]s an implicit finding that the

scheduled value . . . [i]s proper”); In re Page, 250 B.R. 465, 466

(Bankr. D. N.H. 2000) (relying on section 348(f)’s legislative

history to hold that “the value of the property as scheduled in the

confirmation process is, in fact, the valuation for purposes of

section 348(f)”); c.f. In re Kuhlman, 254 B.R. 755, 758 (Bankr.

N.D. Cal. 2000) (agreeing with reasoning of In re Page and stating

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“confirmation of a [c]hapter 13 plan is an implicit valuation which

meets the requirement of [section 348(f)], so that post[-]petition

appreciation belongs to the debtor[,]” but holding that where there

was no plan confirmation, there was no valuation and, therefore,

the debtor was not entitled to post-petition appreciation); but see

In re Jackson, 317 B.R. 511, 513-14 (Bankr. N.D. Ill. 2004)

(disagreeing with the concept of implicit valuation). The

interpretation of section 348(f) that confirmation of the chapter

13 plan is an “implicit valuation” that applies to the converted

estate comports with the text and legislative purpose of the

statute. However, Appellee argues that “the [post-petition]

appreciation is not property in and of itself” but instead “is

merely a characteristic of the property” which Appellants acquired

“prior to the commencement of the chapter 13 case . . . .” 

(Appellee’s Br. at 4.) “While admittedly an increase in value to

real property is not the same as after-acquired property as that

term is traditionally defined under bankruptcy law, it is similar

in nature and justifies the same result.” In re Niles, 342 B.R. at

76. Therefore, the order confirming Appellants’ chapter 13

bankruptcy plan was an implicit valuation of the scheduled

property, which is binding on the converted chapter 7 estate.

For the stated reasons, the value of the Stockton

Property to the chapter 7 estate was circumscribed by section

348(f)(1)(B) and limited to the value given it in Appellants’

confirmed chapter 13 plan. Therefore, the decision of the

bankruptcy court is reversed and the matter is remanded to the 

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bankruptcy court for further proceedings consistent with this

opinion.

IT IS SO ORDERED.

Dated: September 26, 2006

/s/ Garland E. Burrell, Jr.

GARLAND E. BURRELL, JR.

United States District Judge

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