Court Opinion

ID: 9693562
Source: CourtListenerOpinion
Date Created: 2023-08-25 16:50:09.441766+00
Date Added: 2024-06-11T18:19:48.456379
License: Public Domain

PAPPAS, Bankruptcy Judge,
dissenting:
The majority aptly describes this Circuit’s case law concerning the bankruptcy status of state law temporary homestead sale proceeds exemptions as “a festering sore.” In my opinion, the best salve for this condition would be a reconsideration by the Ninth Circuit of its decision in Golden, which grants a chapter 7 bankruptcy trustee what this Panel described in Smith as a post-bankruptcy “contingent, reversionary interest” in a debtor’s exempt homestead sale proceeds. Even so, this appeal is not an appropriate patient for such treatment. Because the appeal is moot, it should be dismissed, and I dissent.
A
Almost two years after the debtor filed his petition, the bankruptcy court granted the chapter 7 trustee’s motion compelling the debtor to “turn over”8 the full amount of exempt homestead sale proceeds that he held on the date the bankruptcy case was commenced. Unfortunately, the debtor had spent the funds. Realizing that any hope for obtaining debt relief in chapter 7 had now evaporated, the debtor sought and obtained a conversion of his bankruptcy case to chapter 13 so that he could propose, and hopefully confirm, a debt repayment plan.9
*707The fact that this is now a chapter 13 case cannot be ignored. Under § 348(e), “[c]onversion of a case under section 706 ... of this title terminates the service of any trustee or examiner that is serving in the case before such conversion.” Simply put, there no longer is a chapter 7 trustee empowered to collect and liquidate the assets of the bankruptcy estate. See 11 U.S.C. § 704(a)(1). Indeed, there is no one the debtor could pay to discharge his obligation under the order, even were he able to do so.
Instead, a chapter 13 trustee has now been appointed who, under the Bankruptcy Code, holds no right to possession of the debtor’s assets, including the funds in question. While a curious result, under the Code, that right now belongs to the debtor. See 11 U.S.C. § 1306(b) (providing that “Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.”). In other words, the bankruptcy court’s order on appeal, directing the debtor to turn over funds to a nonexistent chapter 7 trustee, constitutes an anomaly.
So how can this appeal proceed when the original appellee no longer exists? The majority responds that the appeal should go forward because, upon conversion, the chapter 13 trustee was “automatically substituted” for the chapter 7 trustee. But assuming this conclusion is correct,10 it is of no particular moment. Whether the chapter 13 trustee is a proper party to this appeal or not, he can exercise no rights greater than the Code bestows upon him. Deciding whether the bankruptcy court correctly ordered the debtor to pay the amount of the homestead sale proceeds to a nonexistent chapter 7 trustee is now, at best, an academic exercise.
The majority believes a live issue remains for resolution because the propriety of the turnover order issued by the bankruptcy court in the chapter 7 case may impact the chapter 13 trustee’s position, and the bankruptcy court’s analysis, concerning whether the debtor’s plan satisfies the “best interests of creditors test” under § 1325(a)(4).11 I disagree.
In reality, the debtor’s and chapter 13 trustee’s position on plan confirmation, and the relevance of the bankruptcy court’s turnover order, are completely dependent *708upon what sort of plan the debtor eventually attempts to confirm. If the debtor sponsors a plan that provides for a distribution to unsecured creditors of an amount less than that required by § 1325(a)(4),12 the chapter 13 trustee may object to that plan, and the losing party in that contest may seek review on appeal. If, instead, the debtor elects to propose a plan that pays the $144,816.96 or more to creditors, whether the bankruptcy court’s ruling in the chapter 7 case was correct or not is truly inconsequential.
I appreciate that, currently, the debtor has proposed a plan in the bankruptcy court, the terms of which are dependent upon the outcome of this appeal. While this is a clever tactic, the debtor may not thereby bestow jurisdiction on this Panel to render an advisory opinion concerning a moot issue. The Panel can only speculate about what sort of plan the debtor will finally propose for confirmation, what objections that plan may generate, what other problems may exist with respect to confirmation of that plan,13 and what rulings the bankruptcy court will make to resolve the issues. That the bankruptcy court’s decision in the converted chapter 7 case might have an impact upon the bankruptcy court’s decision to confirm the debt- or’s proposed plan is not a proper basis for the Panel to engage in theoretical speculation.
In sum, the majority’s decision affirming the bankruptcy court’s turnover order represents a resolution in search of a controversy. If the debtor, trustee or some other party with proper standing is disappointed with the decision of the bankruptcy court when (and if) a plan is actually submitted for confirmation, that party may seek review. The issue raised in this appeal is, at best, hypothetical, and this appeal should be dismissed as moot.
B
Since the majority reaches the merits, I am obliged to comment further.
That there would be painful, recurring issues concerning the exempt status of homestead sale proceeds in Arizona bankruptcy cases and others was predictable. The Ninth Circuit’s decision in Golden, together with this Panel’s various decisions applying it, creates an uneasy tension between classic chapter 7 bankruptcy policy, which, with very limited exceptions, measures the respective property rights of a debtor and the bankruptcy estate on the *709date of bankruptcy, and state exemption law, which as here, determines the debt- or’s exemption rights based upon events occurring (or not) over as much as eighteen months after bankruptcy. In Ford v. Konnoff (In re Konnoff), 356 B.R. 201, 208-210 (9th Cir. BAP 2006), I attempted to predict some of the challenges to be faced by debtors, trustees, and ultimately, bankruptcy courts, by postponing the characterization of property as exempt. This appeal presents yet another example of the difficulties experienced in bankruptcy cases in implementing Golden, Smith, Konnoff, et al.
The Bankruptcy Code provides that the bankruptcy estate consists of all of a debt- or’s legal or equitable interests in property as of the commencement of the bankruptcy case “wherever located and by whomever held.” 11 U.S.C. § 541(a)(1). Under § 704(a)(1), the chapter 7 trustee is required to “collect and reduce to money the property of the estate.... ”
Exempt assets are property of the estate, but because any proceeds from the sale of exempt assets are distributed to the debtor, not to creditors, chapter 7 trustees generally do not take possession of them, at least when they cannot be sold for an amount greater than needed to satisfy the exemption. However, if both the debtor and the bankruptcy estate hold an interest in homestead sale proceeds (even a “temporary, reversionary interest”), consistent with the statutory duty, a prudent chapter 7 trustee must promptly move to secure such asset. I therefore strongly disagree with the majority’s suggestion that “[b]y the terms of § 542(a), the question of turnover [in this case] did not ripen until the debtor could no longer exempt the homestead sale proceeds, [and, accordingly,] the chapter 7 trustee was entitled to wait to demand turnover until the temporary exemption period expired.”
Surely, the Code empowers a bankruptcy court to fashion an order giving a chapter 7 trustee concurrent, if not exclusive, control over monies in which both the debtor and the estate hold an interest. See 11 U.S.C. § 105(a) (“The [bankruptcy] court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”). But here, the chapter 7 trustee did not move to sequester the homestead sale proceeds that were subject to the estate’s reversionary interest, and instead stipulated to release those funds to the debtor. Because the chapter 7 trustee was something less than aggressive, the debtor inadvisedly speculated with most of the homestead sale proceeds, and used the remainder of them for “living expenses.”14
*710I acknowledge that, under Golden, a chapter 7 trustee does not bear the risk of loss for “the debtor’s activities during the temporary exemption period.... ” But it is too simple to indict all debtors for dipping into otherwise exempt money to meet daily needs. While the debtor’s decision to invest the homestead funds proved very unwise, this case highlights the practical problems created when, under Golden, a trustee and bankruptcy court waits as much as eighteen months before finally deciding whether homestead sale proceeds are, or are not, to be administered as part of the bankruptcy estate. Congress did not contemplate this approach when, in § 522(b)(2)(A) of the pre-BAPCPA Code, it provided that property protected from the reach of a debtor’s creditors under applicable law on the date of the bankruptcy filing is exempt.
The Panel is bound to follow Golden. But given the opportunity, the Ninth Circuit should reconsider that decision and hold that, under the Bankruptcy Code, homestead sale proceeds which are exempt from creditor’s claims under applicable state law on the date a petition is filed are, for purposes of that bankruptcy case, exempt. Such a holding is not only correct under the Code, it would avoid the recurring interpretative and practical challenges presented by Golden to debtors, trustees and bankruptcy courts.

. To be fair, as the majority acknowledges, an order requiring a debtor to turn over to the trustee cash the debtor admits he spent amounts to a money judgment. Ironically, then, the trustee became a creditor competing with the debtor’s other post-bankruptcy creditors for his few nonexempt assets.

. Though it is unclear how the debtor could otherwise cope with the chapter 7 trustee’s claim against him, the trustee nonetheless challenged the debtor's motives in seeking to convert his bankruptcy case to chapter 13, arguing that the debtor was acting in bad faith. See Marrama v. Citizens Bank of Massachusetts, - U.S. -, -, 127 S.Ct. 1105, 1107-1112, 166 L.Ed.2d 956 (2007) (holding that a debtor’s bad faith conduct in connection with a chapter 7 case constitutes an appropriate basis for a bankruptcy court to deny a debtor's motion to convert to a chapter 13 case). The bankruptcy court overruled the chapter 7 trustee's objection, expressly finding in its order that “[t]here is no egregious behavior exhibiting 'bad faith' ... so as to prohibit Debtor from converting his case from Chapter 7 to Chapter 13.” Order Converting Case to Chapter 13 at ¶ 1 (November 15, 2007), Bankruptcy Docket No. 83. The chapter 7 trustee did not *707appeal the conversion order. While the debt- or’s decision to engage in speculative investments during his bankruptcy case surely seems foolish in retrospect, given the bankruptcy court’s decision, we must presume that he is acting in good faith in seeking to pay his debts via a chapter 13 plan.

. The majority cites a Panel decision also written by Judge Klein, Searles v. Riley (In re Searles), 317 B.R. 368, 375-76 (9th Cir. BAP 2004), aff'd, 212 Fed.Appx. 589 (9th Cir.2006), along with § 325 of the Bankruptcy Code and Rule 2012(b), to support its conclusion that, upon conversion, a chapter 13 trustee has “automatic standing’’ and steps into the shoes of the displaced chapter 7 trustee. However, a careful reading of the Code and Rule reveals that they actually address the status of a "successor trustee," or in the words used therein, one who replaces a trustee who fills "[a] vacancy in the office of trustee during a case” such as ”[w]hen a trustee dies, resigns, is removed, or otherwise ceases to hold office....” Neither the Code nor Rule expressly address the precise situation here: conversion of a case from chapter 7 to chapter 13.

. We can only speculate about whether resolution of the exemption issue will be critical in the context of the debtor's chapter 13 case. The majority states the chapter 13 trustee is entitled to “insist upon the issue preclusive effect of the [exemption] determination” made by the bankruptcy court. But even without the Panel's blessing, it is doubtful the bankruptcy court would change its position, if indeed the issue becomes significant during the confirmation process.

. The majority is incorrect in assuming that, to satisfy § 1325(a)(4), the debtor’s plan must propose to pay at least $144,816.96 to his unsecured creditors. The hypothetical liquidation analysis required by this Code provision to determine if creditors are receiving as much under a proposed chapter 13 plan as they would receive in a liquidation is not based upon the liquidation value of the debt- or’s assets on the petition date, or even some later date, but is measured "as of the effective date of the plan.As a result, if at the time the debtor's plan is presented to the bankruptcy court for confirmation it appears that the chapter 7 trustee’s turnover order would be uncollectible, a plan could conceivably satisfy § 1325(a)(4) by paying unsecured creditors much less than $144,816.96. But the point is, this Panel simply can not anticipate how much the debtor must pay to creditors under a plan until one is actually presented to the bankruptcy court for confirmation — something that has not yet occurred.

. Of course, § 1325(a)(4) is but one of many standards the debtor must satisfy in order to achieve confirmation. See 11 U.S.C. § 1325(a)(l)-(9). Indeed, the bankruptcy court could conceivably find that a plan that does not pay creditors the amounts he lost day-trading with the homestead sale proceeds is not proposed in good faith, as required by § 1325(a)(3). Again, until the debtor shows that all of the other requirements for confirmation of his proposed plan are met, the issue raised by this appeal is not squarely presented for our review.

. In the bankruptcy court's view, the debtor ''squandered” all of the money. It declined to accept as fact that the debtor used $23,000 of the homestead sale proceeds for living expenses, even though the debtor and chapter 7 trustee stipulated that he did so. There is no Arizona case law holding that a creditor may obtain a money judgment against a debtor who spends exempt cash homestead sale proceeds during the reinvestment period. However, the bankruptcy court and majority predict that the Arizona Supreme Court would interpret its exemption statutes to prohibit a debtor's use of the proceeds “in a manner inconsistent with Arizona’s exempt purposes.”
The import of this ambitious assumption is not altogether clear. Whatever it means, though, it guarantees even more litigation will be required before the Arizona bankruptcy court, this Panel, and the Ninth Circuit can divine the contours of what is, and is not, a “permissible use” of “temporarily exempt” homestead sale proceeds. For example, in dictum, the bankruptcy court speculated that it is appropriate for a debtor to use homestead sale proceeds to fund a retirement plan. White, 377 B.R. at 645 n. 42. But is it permissible for a debtor to use such funds to pay for rent or utilities, or other normal expenses for maintaining a household (i.e., “to provide shelter”)? Is it inconsistent with Arizona ex*710emption law for the debtor to use the exempt proceeds to buy a replacement vehicle, or to pay for a dependent's medical treatments? I, for one, do not believe that, in a chapter 7 context, Congress intended to postpone a debtor’s right to a financial fresh start while these questions are settled, probably by litigation, nor to allow trustees and bankruptcy courts to play such a pervasive, supervisory role in a debtor’s post-bankruptcy life.