Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-01107/USCOURTS-caed-2_05-cv-01107-1/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)

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

This tentative ruling issues in advance of the hearing *

scheduled in this matter to aid the parties in their preparation for

argument.

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

)

) TENTATIVE RULING*

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

non-exempt equity created by the appreciation of Appellants’

residence after the filing of their chapter 13 petition belonged to

Case 2:05-cv-01107-GEB Document 22 Filed 09/15/06 Page 1 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

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

to the Bankruptcy Code.

2

the converted chapter 7 estate. For the reasons stated below, the 1

decision of the bankruptcy court is reversed and remanded.

STANDARD OF REVIEW

The issue to be decided on appeal is one of law, and is

therefore reviewed de novo. 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

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

Case 2:05-cv-01107-GEB Document 22 Filed 09/15/06 Page 2 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Section 541(a)(6) provides that property of the estate 2

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 3

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

(continued...)

3

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 to benefit their creditors in the Stockton Property since

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

appreciation equity created after the chapter 13 plan was confirmed

belonged to Appellants under section 348(f), not the estate. 

Appellee countered 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.

DISCUSSION

Appellants argue section 348(f)(1)(B) fixes the value of

the Stockton Property to the converted chapter 7 estate at the

amount set forth in their confirmed chapter 13 plan. 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 re Reed, 940 F.2d 2

1317, 1323 (9th Cir. 1991). (Appellee’s Br. at 4.) Appellants 3

Case 2:05-cv-01107-GEB Document 22 Filed 09/15/06 Page 3 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 (...continued) 3

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

4

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.) Appellants argue that the Ninth Circuit

authority on which Appellee relies does not involve the situation

where a chapter 13 plan was confirmed, and the court had to apply

section 348(f) because the case was subsequently converted to

chapter 7. Appellants are correct; the Ninth Circuit decisions on

which Appellee relies do not involve application of section 348(f).

Section 348(f), which governs the valuation of property

in a bankruptcy estate when a bankruptcy case is converted from one

chapter to a different chapter, was enacted by Congress in 1994. 

The statute states:

(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;

(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, with allowed

secured claims in cases under

chapters 11 and 12 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

Case 2:05-cv-01107-GEB Document 22 Filed 09/15/06 Page 4 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

A 2005 amendment to this subsection altered its language to 4

explicitly exclude chapter 13 to chapter 7 conversions from coverage.

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 5

to chapter 7 in bad faith.

5

chapter under this title in bad faith, the

property of the estate in the converted case

shall consist of the property of the estate as

of the date of conversion.4

Section 348(f) provides that the value of the Stockton

Property is governed by section 348(f)(1)(B), which states that in

the absence of bad faith, the “valuations of property . . . in the

Chapter 13 case shall apply in the converted case . . . .” 11 5

U.S.C. § 348(f)(1)(B).

“Section 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). “While

the Ninth Circuit itself has not yet addressed this issue, other

courts within [and outside] the Ninth Circuit have cited with

approval the general conclusion that confirmation of a plan

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

75 (Bankr. D. Ariz. 2006); see also In re Peter, 309 B.R. 792, 795

(Bankr. D. Or. 2004) (stating that without plan confirmation there

is no valuation to entitle the debtor to post-petition

appreciation); In re Kuhlman, 254 B.R. 755, 758 (Bankr. N.D. Cal.

2000) (stating that chapter 13 plan confirmation acts as an

implicit valuation for purposes of section 348(f)(1)(B), but

holding that where there was no plan confirmation, there was no

valuation and, therefore, the debtor was not entitled to postCase 2:05-cv-01107-GEB Document 22 Filed 09/15/06 Page 5 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Although “some courts disagree with the concept of implicit 6

valuation[,] . . . the rationale for rejecting the concept is not

compelling. In In re Jackson, 317 B.R. 511 (Bankr. N.D. Ill. 2004), the

court stated that often parties simply rely on the scheduled value of

all the debtor's property and not simply one piece, and may neither have

the opportunity nor the need to value one item in the bundle of assets

belonging to the debtor. Further, determining the actual value of each

piece of property is often not necessary in determining whether the

proposed plan meets the best interests test of 11 U.S.C. section

1325(a)(4). In addition, allowing the debtor to reap the benefit of

such appreciation, according to the Jackson court, would encourage

debtors to file chapter 13, undervalue their property and then later

seek conversion after confirmation. This Court disagrees. With respect

to the latter contention, Section 348(f)(2) expressly contains a

requirement that conversion be proposed in good faith and debtors must

proceed throughout bankruptcy in good faith. Further, excusing the

trustee or the creditors from insisting on a formal valuation proceeding

if there are any potential questions as to valuation at the time of

confirmation is a bit extreme. The law consistently places a burden on

litigants to protect their rights and object if those rights are not

being protected.” In re Niles, 342 B.R. at 74 n.1. 

6

petition, pre-conversion appreciation). This conclusion comports 6

with the legislative intent of the Bankruptcy Reform Act of 1994,

which 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). The

interpretation of section 348(f)(1)(B) provided in Niles, Wegner,

and Kuhlman as to “implicit valuation” and its binding effect on

the converted estate is persuasive and comports with the text and

legislative purpose of the statute. 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.

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

Case 2:05-cv-01107-GEB Document 22 Filed 09/15/06 Page 6 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

the commencement of the chapter 13 case . . . .” (Appellee’s

Opening Brief, May 2, 2006, 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. 

Denying the debtor the increase in value upon conversion would . .

. act as a disincentive to filing chapter 13 in the first

instance.” In re Niles, 342 B.R. at 76. 

Therefore, 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. Consequently, Appellants, not the estate, are entitled to

the post-petition appreciation equity. The decision of the

bankruptcy court is reversed and the matter is remanded to the

bankruptcy court for further proceedings consistent with this

opinion.

Dated: September 15, 2006

/s/ Garland E. Burrell, Jr.

GARLAND E. BURRELL, JR.

United States District Judge

Case 2:05-cv-01107-GEB Document 22 Filed 09/15/06 Page 7 of 7