Court Opinion

ID: 15896
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:49:20+00
Date Added: 2024-06-11T12:32:06.226535
License: Public Domain

Revised October 7, 1998

                  UNITED STATES COURT OF APPEALS
                       FOR THE FIFTH CIRCUIT

                     _______________________

                           No. 97-41006
                     _______________________

                        In the Matter of:
            EDWIN WESLEY BAKER; BRENDA BITTER BAKER,

                                                          Debtors.

            EDWIN WESLEY BAKER; BRENDA BITTER BAKER,

                                                       Appellants,

                                 v.

               JOHN A. RANK, III; PADRE PLACE ONE,
                   A TEXAS GENERAL PARTNERSHIP,

                                                        Appellees.

_________________________________________________________________

           Appeal from the United States District Court
                for the Southern District of Texas
_________________________________________________________________
                        September 28, 1998

Before GARWOOD, JONES, and WIENER, Circuit Judges.

EDITH H. JONES, Circuit Judge:

          This case arises from the Debtors’ bankruptcy filed under

Chapter 13 in 1990 and converted to Chapter 7 in 1991.     Debtors

appeal the district court’s denial of discharge, raising two

issues: (1) whether post-petition property of a Chapter 13 estate

is included in property of the estate upon conversion to Chapter 7;
and (2) whether the Debtors’ expenditure of post-petition income

for a vacation while their Chapter 13 case was pending violated

§ 727(a)(2).   Based on the version of 11 U.S.C. § 348 that applied

to cases filed before the Bankruptcy Reform Act of 1994, we AFFIRM.

                                  I.

          Debtors are both practicing attorneys, who, although not

specialists, have some experience in bankruptcy law.        After the

filing of Chapter 13, but prior to Chapter 7 conversion, Debtors

received a contingent fee of $11,700.00.        Around the same time,

Debtors received an advertisement for a Far East vacation sponsored

by their undergraduate university.

          The Debtors consulted their attorney to find out if it

would be acceptable to take this vacation.      Although the trip was

strictly for pleasure, the Debtors’ attorney advised them that they

could take the trip, as long as they continued to make the monthly

payment required under their reorganization plan.      In November of

1990, the Debtors took the vacation.

          Thereafter, a creditor and former law partner, John Rank,

III, filed a motion to have Debtors’ Chapter 13 petition dismissed

or converted to Chapter 7 on the ground that the Debtors were not

eligible for Chapter 13 relief.   Debtors voluntarily agreed to the

conversion, which occurred in January 1991.

          Rank then filed a Complaint objecting to the “global

discharge” of the Debtors’ debts.      Specifically, Rank alleged that

                                  2
Debtors violated 11 U.S.C. § 727(a)(2) by, inter alia, using their

post-petition earned legal fees for a vacation.

          The bankruptcy judge found that the contingent fee was

property earned after the commencement of the case and expended

before the case was converted to Chapter 7.    He also found that

although the use of the fee for a vacation was a “blatant violation

of Chapter 13 law,” its use did not violate any of the provisions

of 11 U.S.C. § 727 because the contingent fee was never property of

the Chapter 7 estate.   As a result, the bankruptcy judge granted

the Debtors a discharge.

          On appeal, the district court reversed, finding that the

contingent fee became property of the Chapter 7 estate when the

Chapter 13 case was converted to Chapter 7.     The district court

ordered the Debtors to pay into the Chapter 7 estate the amount of

the contingent fee.   The district court remanded the case for the

bankruptcy court to reconsider whether the Debtors were entitled to

a discharge.

          Following a subsequent appeal and remand, the bankruptcy

court ultimately entered a specific finding that the Debtors

intended to hinder their creditors.    Thus, the bankruptcy court

concluded that the Debtors violated § 727 and were not entitled to

                                 3
a   discharge.           The    district     court    entered       a   final   judgment,

essentially affirming the bankruptcy court. This appeal followed.1

                                             II.

               The issue whether the post-petition Chapter 13 income

remains property           of   the   estate       upon    conversion      to   Chapter   7

“requires an analysis of the interplay” among various provisions of

the Bankruptcy Code -- 11 U.S.C. §§ 541, 1306, which describe the

property of         the   bankruptcy       estate,        and   §   348,   which   governs

conversion of a bankruptcy case from one chapter to another.

Calder v. Job (In re Calder), 973 F.2d 862, 865 (10th Cir. 1992).

Before enactment of the Bankruptcy Reform Act of 1994 (H.R. 5116),

this       issue   was    confusing    and    had    created        a   split   among   the

circuits.2         This opinion governs cases filed before October 22,

       1
      We review a bankruptcy court’s findings of fact for clear
error and conclusions of law de novo.   See Affiliated Computer
Sys., Inc. v. Sherman (In re Kemp), 52 F.3d 546, 550 (5th Cir.
1995).
       2
      See In re Calder, 973 F.2d 862, 865-66 (10th Cir. 1992)
(holding that post-petition Chapter 13 income remains property of
the estate upon conversion to Chapter 7); In re Lybrook, 951 F.2d
136, 138 (7th Cir. 1991) (Posner, J.) (same); In re Lindberg, 735
F.2d 1087, 1089-90 (8th Cir. 1984) (same). But see In re Young, 66
F.3d 376, 378 (1st Cir. 1995); In re Bobroff, 766 F.2d 797, 803-04
(3d Cir. 1985).
     Congress amended the Bankruptcy Code, adding 11 U.S.C.
§ 348(f), to resolve the circuit split. The Amendment provides
that “the estate in a converted case consists only of property of
the estate as of the date of the original filing that remains in
the possession of the debtor on the date of conversion.” In re
Sandoval, 103 F.3d 20, 23 (5th Cir. 1997). Although Congress took
issue with In re Lybrook, the amendment does not apply to this case

                                              4
1994, as to which the Fifth Circuit has not taken sides in the

circuit split.

            Section 541 states that the bankruptcy estate is created

upon the commencement of a case and identifies what is to comprise

property of the estate.   For Chapter 13, § 1306 expands the estate

beyond § 541 to include “all property of the kind specified in

[§ 541] that the debtor acquires after the commencement of the case

but before the case is closed, dismissed, or converted.” 11 U.S.C.

§ 1306(a)(1).    Finally, § 348 provided, before its amendment to

include § (f)(1)(a), that with certain exceptions, 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.” 11 U.S.C.

§ 348(a).     Section 348, however, did not directly address the

composition of the Chapter 7 estate following conversion from

Chapter 13.

            In Bobroff v. Continental Bank (In re Bobroff) the Third

Circuit held that § 1306 cannot be used to determine which property

“comprises the estate” upon conversion to Chapter 7. 766 F.2d 797,

because it explicitly bars retroactive application of the statute
to cases that commence before October 22, 1994. See id.; see also
Pub. L. No. 103-394, § 702, 108 Stat. 4106, 4150 (“[T]he amendments
made by this Act shall not apply with respect to cases commenced
under title 11 of the United States Code before the date of the
enactment of this Act.”).
     We also note that under § 348(f)(2), in the event of a “bad
faith” conversion to Chapter 7, Lybrook appears to have been
adopted by Congress.

                                  5
803 (3d Cir. 1985).     The court reasoned that the incentive toward

Chapter 13 filings would be greatly diminished if “debtors must

take the risk that property acquired during the course of an

attempt at repayment will have to be liquidated for the benefit of

creditors if Chapter 13 proves unavailing.”              Id.        Moreover, “‘no

reason of policy suggests itself why the creditors should not be

put back in precisely the same position as they would have been had

the debtor never sought to repay his debts.’” Id. at 803 (quoting

In re Hannan, 24 B.R. 691, 692 (Bankr. E.D.N.Y. 1982)).                    The court

concluded that to hold that Chapter 13 income remains property of

the estate upon conversion to Chapter 7 would be inconsistent with

the    Bankruptcy   Code’s     “goal    of   encouraging      the    use    of   debt

repayment plans rather than liquidation.”             Id.

            Although    this    approach      has   merit,     the     alternative

position adopted by a number of the circuits is more persuasive.

We agree with the Tenth Circuit when it observed that “[a] proper

reading of § 348 indicates that it is not a source of disruption

but,    instead,    preserves     the       continuity   of    the     bankruptcy

proceedings.”       In re Calder, 973 F.2d at 866 (quoting Robb v.

Lybrook (In re Lybrook), 107 B.R. 611, 612 (Bankr. N.D. Ind. 1989),

aff’d, 135 B.R. 321 (N.D. Ind. 1990), aff’d, 951 F.2d 136 (7th Cir.

1991)).    The court went on to explain:

       When § 348 is viewed as a source of continuity, the plain
       language of § 541 easily becomes susceptible to the

                                        6
      conclusion that the bankruptcy estate, following
      conversion from Chapter 13 to Chapter 7, is the Chapter
      13 bankruptcy estate. The estate was created upon the
      commencement of the case. 11 U.S.C. § 541(a). At the
      moment of creation, it essentially consisted of all of
      the property in which debtor had an interest. 11 U.S.C.
      § 541(a)(1).    The estate does not, however, remain
      static. It also includes “any interest in property that
      the estate acquires after the commencement of the case.”
      11 U.S.C. § 541(a)(7) (emphasis added).

      Through § 1306, the estate acquires an interest in the
      property debtor acquires between the date of the petition
      and the date of conversion. By its terms, § 541(a)(7) is
      broad enough to include this post-petition property in
      the Chapter 7 bankruptcy estate, following conversion
      from Chapter 13. It is able to do so through a simple
      reading of its plain language, without resorting to
      strained or contorted interpretations of the consequences
      of conversion. Instead, it is merely a recognition that
      § 348 “does not purport to alter or modify the provisions
      or applicability of sections 541 and 1306.”        In re
      Wanderlich, 36 B.R. 710, 714 (Bankr. W.D.N.Y. 1984).

Id.

            This construction requires that all post-petition income

of the Chapter 13 estate remains property of the estate upon

conversion to Chapter 7.      Moreover, it prevents Chapter 13 from

becoming a financial planning device designed to give debtors a

temporary reprieve from their creditors.        As Judge Posner, writing

for the Seventh Circuit, explained, “a rule of once in, always in

is necessary to discourage strategic, opportunistic behavior that

hurts   creditors   without   advancing   any   legitimate   interest   of

debtors.”   In re Lybrook, 951 F.2d at 137.      Otherwise, a debtor has

an incentive to proceed under Chapter 13 in order to keep “his

                                   7
creditors at bay.”   Id. “[I]f his position deteriorates further it

is the creditors who will bear the loss, while if he should get

lucky and win a lottery or a legal judgment, or inherit money . . .

he will be able to keep his windfall” upon conversion to Chapter 7.

Id. at 137-38.

          And, contrary to the Third Circuit’s view, holding that

post-petition Chapter 13 property remains property of the estate

upon conversion to Chapter 7 does not necessarily conflict with

congressional efforts to encourage Chapter 13 repayment plans.

Although the Third Circuit alternative “makes an initial filing

under Chapter 13 less risky, . . . it also encourages conversions

from Chapter 13 to Chapter 7.   In the end, as many or more personal

bankruptcies may end up in Chapter 7 as would be the case if

property once it was included in the Chapter 13 estate remained in

the bankrupt estate following conversion.”    Id. at 137.

          We conclude that the district court did not err when it

found that before the enactment of U.S.C. § 348(f)(1)(a), post-

petition property of a Chapter 13 estate remains property of the

estate upon conversion to Chapter 7.3

     3
      On post-submission brief, Debtors argue that § 103(h) renders
§ 1306 applicable only in Chapter 13. Assuming this argument has
not been waived, it is unpersuasive for essentially the same
reasons relied upon by the Tenth Circuit. See In re Calder, 973
F.2d at 866 (“In reaching the opposite conclusion, some courts have
relied on the fact that § 103(h) makes § 1306 applicable only in
Chapter 13. These courts reason that upon conversion, with § 1306

                                  8
                                 III.

          Debtors’ fallback contention is that their expenditure of

post-petition income for a vacation while their Chapter 13 case was

pending did not violate § 727.

          The bankruptcy court held that Debtors were not entitled

to a discharge because “the use of post-Chapter 13 petition funds

for a Far East vacation prior to conversion of their joint case to

Chapter 7” hindered their creditors and was, therefore, violative

of § 727(a)(2).4   As that court found, (1) “the trip was for

inapplicable, property of the estate is defined solely by § 541.
The flaw in this reasoning is that it ignores the effect of §
541(a)(7). During the pendency of the case in Chapter 13 -- when
§ 1306 applies -- § 1306 includes in “[p]roperty of the estate”
after-acquired property and postpetition earnings from services
performed by the debtor. 11 U.S.C. § 1306(a). Upon conversion to
Chapter 7, § 541(a)(7) includes in the Chapter 7 estate “[a]ny
interest in property that the estate acquires after the
commencement of the case.” 11 U.S.C. § 541(a)(7). Reading these
two provisions together, we hold that all property in plaintiff’s
Chapter 13 estate -- including any funds included pursuant to
§ 1306 -- are part of the postconversion Chapter 7 estate.”
(citations omitted)).
     4
      Appellants argue that the factual finding of intent to hinder
a creditor is clearly erroneous because at trial the bankruptcy
judge found that the vacation expenditure was not made with the
intent to hinder, and that he only reversed his position because he
felt he was governed by the law of the case. This is incorrect.
Although the bankruptcy judge found no § 727 violation in his
discussion of reimbursement expenses, in his discussion of the Far
East vacation, the bankruptcy judge granted his discharge solely on
the ground that § 727 did not apply to post-petition Chapter 13
income upon conversion to Chapter 7. The bankruptcy judge never
made a finding on the issue of whether the Debtors intended to
hinder creditors until the district court reversed his legal
conclusion on conversion and post-petition Chapter 13 property.

                                  9
pleasure and no one attempted to argue that the trip was an

educational business expense”; and (2) although their attorney may

have advised them that the trip was okay, such advice was so

patently wrong, no reasonable debtor, and, more importantly, no

attorney of either of the Debtors’ caliber could reach such a

conclusion.

          Debtors contend that they cannot be denied a global

discharge because § 727 does not apply to Chapter 13.   The Debtors

reason that “[s]ince the use of contingent fees occurred before the

case was converted to Chapter 7, § 727 simply does not apply.”

          We disagree.

          A plain reading of § 727, in pari materia with § 348(a),

reveals that Debtors’ claim is without merit. Section 727 requires

a court to grant a debtor a discharge unless

     (2) the debtor, with intent to hinder, delay, or defraud
     a creditor or an officer of the estate charged with
     custody of property under this title, has transferred,
     removed, destroyed, mutilated, or concealed, or has
     permitted to be transferred, removed, destroyed,
     mutilated, or concealed--

     . . . .

     (B) property of the estate, after the date of the filing
     of the petition;

11 U.S.C. §727(a) (emphasis added).   This court has plainly held

that §§ 348(a) and (b), taken together, specifically incorporate 11

U.S.C. § 727(b) and permit contests of discharge in a converted

                                10
case.    Bank of La. v. Pavlovich (In re Pavlovich), 952 F.2d 114,

117 (5th Cir. 1992).5

           In this case, after the filing of Chapter 13, but prior

to Chapter 7 conversion, Debtors received a contingent fee of

$11,700.00.   They used this money to take a personal vacation to

the Far East.     At no time have the Debtors asserted that this

vacation had a business or educational purpose.   On the contrary,

Debtors admitted that the vacation was intended to give themselves

relief from the “emotional storm they had been enduring as a result

of their financial disaster.”     As the bankruptcy judge found,

“[T]he notion that a Far East vacation is a reasonable living

expense is so ludicrous it requires no comment.”         The judge

correctly held that the conduct blatantly violated Chapter 13.

Because Debtors’ conduct occurred after the date they filed for

Chapter 13, and because the court expressly found that this conduct

hindered their creditors, it is relevant for consideration under

§ 727(a)(2)(B) and justified a denial of discharge.

     5
      11 U.S.C. § 348(a) specifies that “except as provided in
subsection[ ] (b), [conversion] does not effect a change in the
date of the filing of the petition . . . or the order for
relief . . . .” Section 348(b) states that “. . . in section[ ]
727(b), . . . ‘the order for relief under this chapter’ [in a case
converted from Chapter 13] means the conversion of such case to
such chapter.”

                                 11
                               IV.

          For the foregoing reasons, the judgment is AFFIRMED.

Judge Wiener concurs in the result only.

                               12