Conflicting Outcomes, Between 2014 9th Circuit BAP Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014), and 2 Bankruptcy Court Decisions from Other Circuits
Conflicting outcomes, between 2014 9th Circuit BAP Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014), and 2 bankruptcy court decisions from other Circuits, which are In re Lincoln, BR ___, bky case number 16-12650 (Bankr. E.D. La. Feb. 8, 2017) and the 2015 Rogers v. Freeman (In re Freeman), 527 B.R. 527 (Bankr. N.D. Ga. 2015).
The issue in all 3 cases is the same, and is this: When an individual’s chapter 11 case converts to chapter 7, does property acquired post-petition revert to the debtor or does it belong to the chapter 7 estate?
There is no explicit answer to that question, in the Bankruptcy Code, when conversion is from chapter 11 to chapter 7.
But for cases where conversion is from chapter 13 to chapter 7, Congress added Section 348(f)(1)(A) to provide that property in the converted case includes property of the estate at the time of the original filing that has remained in the debtor’s control at the time of conversion. In other words, on conversion from chapter 13 to chapter 7, the debtor keeps after-acquired property and wages. Further buttressing the rights of the debtor, the Supreme Court decided Harris v. Viegelahn in 2015 by holding that undisbursed wages in possession of the chapter 13 trustee go to the debtor on conversion to chapter 7.
11 USC 1115 points in the other direction. Amended in 2005, that section says that money earned by an individual while in chapter 11 is part of the bankrupt estate, not separate property the individual can keep.
In Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014) the Ninth Circuit BAP came down in favor of the debtor in 2014. The BAP saw no reason to treat bankruptcy debtors differently if their cases were converted from chapter 11 than if they were converted from chapter 13. The BAP also cited Section 541(a)(6), which provides that money earned after filing in chapter 7 belongs to the bankrupt.
In the case decided by Judge Manger on Feb. 8, the debtor had about $6,000, which he had acquired after filing his chapter 11 petition but before conversion to chapter 7.
The 2 bankruptcy decisions, Lincoln and Freeman, supra, disagreed with the BAP Markosian decision, and ordered the property acquired by the debtor after the Chapter 11 bankruptcy case was filed, and before the Chapter 11 case was converted to Chapter 7, which was still in debtor’s possession, must be turned over to the Chapter 7 trustee, by debtor, when the case was converted from 11 to 7. Judge Manger (Lincoln case) was persuaded by the principle of statutory construction that Congress is presumed to act intentionally when it includes particular language in a statute but omits another. She therefore concluded that the money goes to the chapter 7 estate, by negative inference from Section 348(f)(1)(A).
This issue could someday go to the US Supreme Court, if this issue gets appealed up to US Circuit Courts, and the Circuit Courts of 2 or more Circuits disagree.