Court Opinion

ID: 21692
Source: CourtListenerOpinion
Date Created: 2010-04-25 07:48:09+00
Date Added: 2024-06-11T15:04:10.629312
License: Public Domain

REVISED - September 12, 2000

         UNITED STATES COURT OF APPEALS
                  FIFTH CIRCUIT

                     ____________

                     No. 99-11290
                     ____________

In The Matter of: JASON GREGORY
STAMM; LESLEY DEE STAMM,

                        Debtors.
_______________________________

JASON GREGORY STAMM;
LESLEY DEE STAMM,

                        Appellants,

versus

HARVEY L. MORTON,
Trustee,

                        Appellee.

_______________________________________________________

                 CONSOLIDATED WITH
_______________________________________________________
                      ____________

                     No. 99-11319
                     ____________

In the Matter of: DAVID PAUL MANGRUM

                        Debtor.
________________________________
DAVID PAUL MANGRUM,

                        Appellant.

versus

HARVEY L. MORTON,

                        Appellee.

______________________________________________________

                  CONSOLIDATED WITH
______________________________________________________
                     ____________

                     No. 99-11323
                     ____________

In the Matter of: ROMERO CAZARES;
ROSA LOPEZ FUENTES,

                        Debtors.
________________________________

ROMERO CAZARES;
ROSA LOPEZ FUENTES,

                        Appellants.

versus

HARVEY L. MORTON,

                        Appellee.

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                            Appeals from the United States District Court
                                For the Northern District of Texas

                                          August 25, 2000

Before JOLLY, HIGGINBOTHAM, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

       These consolidated appeals arise from three separate district court orders affirming identical

final judgments of the bankruptcy court. They present a single disputed issue that is purely legal.

We reverse and remand.

       In each case, Debtors (Appellants) filed a Chapter 13 petition. Debtors made payments from

their earnings to the Chapter 13 Trustee (Appellee). Debtors were unable to confirm a plan and

converted the proceedings to a Chapter 7 petition. Upon conversion, the Chapter 13 Trustee

distributed to the Chapter 7 Trustee the Debtors’ payments made from earnings. The Chapter 7

Trustee filed a Motion for Determination of whether the funds were the property of the Chapter 7

estate. The bankruptcy court held that the post-commencement pre-confirmation payments were the

property of the Chapter 7 estate. The district court affirmed. We review the bankruptcy court’s

conclusions of law de novo. See Affiliated Computer Sys., Inc. v. Sherman (In re Kemp), 52 F.3d
546, 550 (5th Cir. 1995).

       Debtors contend that 11 U.S.C. § 348(f)(1)(A), which was added by the Bankruptcy Reform

Act of 1994, see Pub. L. No. 103-394, § 311, 108 Stat. 4106, 4137-38 (1994) (the “Act”), mandates

that the funds be returned to them. The relevant portion of section 348(f)(1) 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—

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        (A) property of the estate in the converted case shall consist of the 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) (2000) (emphasis added).

        Debtors argue that the post-commencement pre-confirmation wages paid to the Chapter 13

Trustee were not property of the estate on the date of filing. Therefore, the plain language of Section

348(f)(1) dictates that funds are not part of the Chapter 7 estate, and must be returned to the Debtors.

We agree.

        Prior to the Act’s amendments to Section 348, the issue of whether post-petition Chapter 13

income remains property of the estate on conversion to Chapter 7 was confusing and had created a

circuit split. See Baker v. Rank (In re Baker), 154 F.3d 534, 536 (5th Cir. 1998) (discussing the split

and noting that the issue was confusing because it involved the interplay of several Code

provisions—§ 541, § 1306, and § 348); compare In re Bobroff, 766 F.2d 797, 803-04 (3d Cir. 1985)

(rejecting applicability of § 1306 and holding that income does not remain property of the estate) with

In re Lybrook, 951 F.2d 136, 138 (7th Cir. 1991) (holding that income remains property of the estate)

and In re Lindberg, 735 F.2d 1087, 1089-90 (8th Cir. 1984) (same holding as Lybrook). In Baker,

we weighed in for the first time on the issue and sided with Lybrook. See Baker, 154 F.3d at 536-37.

 However, we expressly noted that our opinion was limited to cases in which the Act was

inapplicable. See id. at 536 n.2. We stated that Congress added Section 348(f) “to resolve the circuit

split,” quoted the relevant statutory language, and noted that Congress “took issue with In re

Lybrook.” Id. The clear implication of Baker is that Section 348(f)(1), where applicable, establishes

that the post-petition income does not remain property of the estate upon conversion.

        Similar dicta was contained in Lowe v. Sandoval (In re Sandoval), 103 F.3d 20, 23 (5th Cir.

                                                  -4-
1997). There we also noted that the Act was designed to resolve the circuit split on the instant issue.

See id. We stated that Section 348(f)(1)(A) “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.” Id. For support, we cited to legislative history “explaining that

the amendment was designed to overrule In re Lybrook.” Id. (citing 140 CONG. REC. H10752-01

(Oct. 4, 1994)); see also 140 CONG. REC. H10752-01, H10770-10771 (1994) (stating that “[t]his

amendment would clarify the Code to resolve a split in the . . . law about what property is in the

bankruptcy estate when a debtor converts from chapter 13 to chapter 7" and that “[t]his amendment

overrules the holding in cases such as Matter of Lybrook and adopts the reasoning of In re Bobroff”

(internal citations omitted))). All the other circuits to have discussed Section 348(f)(1)(A) in dicta

have agreed with Sandoval that it establishes that income acquired after the original filing of the

Chapter 13 petition and before conversion is not part of the converted estate. See In re Young, 66
F.3d 376, 378 (1st Cir. 1995) (noting that § 348 (f)(1)(A) resolved the circuit split by “essentially

codif[ying] the Bobroff rule”); In re Alexander, 239 B.R. 911, 916 (B.A.P. 8th Cir. 1999) (concluding

that Lindberg “has been superseded by the 1994 Bankruptcy Code amendments,” which “clearly

indicate[] that in a case converted from chapter 13, property of the estate in the converted case is

determined according to the filing date of the original chapter 13 petition”); In re Kollar, 176 F.3d
175, 178 (3d Cir. 1999) (same).

        Several bankruptcy courts have been forced to decide the issue before us. They have

uniformly agreed that Section 348(f)(1)(A) establishes that property acquired after the Chapter 13

filing and before discharge under Chapter 7 is not part of the converted estate. See, e.g., Farmer v.

Taco Bell Corp., 242 B.R. 435, 439 (Bank. W.D. Tenn. 1999); In re Sargente, 202 B.R. 1023, 1025

                                                   -5-
(Bank. S.D. Fla. 1996). There is no authority, from any court, to support the contrary position.

       Therefore, we find that the Debtors’ wages, earned after the filing of their Chapter 13 petition

and before discharge under Chapter 7, are not part of the Chapter 7 estate. The bankruptcy court

erred in finding to the contrary.1 The judgment of the district court is reversed. We remand to the

bankruptcy court for a determination of the exact sum due each Debtor and for distribution.2

REVERSED AND REMANDED

       1
                The bankruptcy court’s ruling relied on § 1306. It did not rely on § 348(f)(2), which
establishes that the Lybrook rule applies to “bad faith” conversions to Chapter 7. See 11 U.S.C. §
348(f)(2); Baker, 154 F.3d at 536 n.2. Appellee did not and does not argue that § 348(f)(2) is
applicable here.
       2
               In determining the proper distributions, the bankruptcy court may consider the
Trustee’s potential claims for compensation of professionals under § 503(b) of the Code.

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