Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.comWhite v. Brown
9th Circuit BAP
Published opinion No. AZ-07-1385-KPaJu
April 22, 2008
This 9th Circuit BAP opinion addresses this question: what is the effect of an asset turnover order against a Chapter 7 debtor when he responds by converting his case into a Chapter 13? The BAP's discussion of this leads to a better understanding of two concepts that can get tricky especially when combined: asset turnover orders and conversions from Chapter 7 to 13.
Adding the necessary details to the initial question: if a Chapter 7 debtor exempts from the estate the proceeds of the pre-petition sale of his homestead--about $145,000, then fails to reinvest these proceeds in another homestead within the time permitted by state law for preserving the exemption (18 months here), but instead debtor spends these funds on bad investments and living expenses, and then, after the Chapter 7 trustee reopens his case and gets a turnover order as to those homestead sale proceeds, debtor converts that case to a Chapter 13 case, will that $145,000 be considered a non-exempt asset for purposes of the best-interests test? I propose that the intuitive answer is, "No." The rationale: if debtor innocently albeit foolishly invested and lost most of the homestead sale proceeds and lived off the rest of it, then converted his case to Chapter 13, the debtor should no longer have to account for the now nonexistent assets.
According to this 9th Circuit BAP opinion, my intuitive sense would be wrong but I would not be alone--this conclusion was shared by the very strong dissenting opinion. But here's how the majority opinion analyzed this.
It started by admitting that the "bankruptcy status of the Arizona 18-month temporary homestead sale proceed exemption is a festering sore." (Note that Oregon, California and numerous other states, have such "temporary sale proceed" exemptions.)
The BAP then dealt with a necessary and contentious threshold issue: is this appeal made moot by the conversion to Chapter 13? The argument for mootness is that upon conversion to Chapter 13, the Chapter 7 trustee who got the conversion order no longer exists in the case, and indeed through § 1306(b) the debtor takes possession of all assets of the estate. An order for the debtor to turn over to himself the no-longer-existent sale proceeds, or in affect to collect on a judgment against himself in that amount, seems to make no sense.
But the BAP analyzed the turnover order as a determination, effectively a judgment, that the Chapter 7 trustee has a right to the $145,000 in non-exempt assets, one which did not come into effect and so could not be pursued until the 18-month reinvestment period had passed. So at the time of the conversion, the property of the estate included a right to recover $145,000 from the debtor. But the Chapter 13 trustee, as a successor to the original trustee, is not able to enforce the turnover "judgment" against debtor because this trustee does not have the right to possession of estate assets, debtor does. However, the Chapter 13 trustee DOES have the right to object to confirmation of a plan that does not require payments enough to cover the value of nonexempt assets. This gives the trustee standing in this dispute, and "enables de facto enforcement of the . . . turnover order by opposing confirmation of any plan that does not distribute property of the estate to creditors in the manner and sums . . . required by the Bankruptcy Code."
But once the Chapter 13 Trustee has standing, the debtor can still argue that 1) there is no legal restriction on his "use of homestead sale proceeds during the period of temporary exemption," and 2) so "he is not required to account for the postpetition loss of net homestead sale proceeds." And finally, that 3) the trustee failed to timely object to his claim of objection so is now unable to request turnover of the proceeds.
The BAP began its response to these arguments with bankruptcy law, basing it largely around a 9th Circuit opinion England v. Golden (In re Golden), 789 F.2d 698, 700 (9th Cir. 1986) applying the analogous California 6-month homestead sale proceeds exemption. Golden held that
upon the expiration of [that] sale proceeds exemption, proceeds that have not been reinvested in a new homestead "revert to the trustee." Rejecting argument that there should be credit for expenditures, the Ninth Circuit also held that the amount that reverts is the sum claimed as exempt at the time of filing.But Golden, and its BAP progeny, did not address the permissible uses of sale proceeds during the exemption period, which is largely an issue of state law: state law creates the property exemption and so in this opinion the BAP looked to state law to determine the nature of that exemption.
Without here getting into the intricacies of Arizona's proceeds-of-homestead exemption law (which again may or may not be sufficiently analogous to Oregon statute and case law), the Court then tried to figure out how the Arizona Supreme Court would respond to debtor's three arguments listed above.
First, the BAP held that use of the sale proceeds is restricted during the period of temporary exemption because a "contingent, reversionary interest" attached to the homestead proceeds upon the filing of the Chapter 7 case, and remains for the full duration of the estate.
Second, the debtor must account for the post-petition loss of the homestead proceeds because of his lack of intent to reinvest the proceeds for an exempt purpose, "as evidenced, inter alia, by trading activities in risky investments 'so contrary to' the claim of exemption as to constitute abandonment of the exemption."
And third, the Chapter 7 trustee's lack of objection to the debtor's exemption did not effect the trustee's right to request turnover. Until the temporary exemption period expired, the trustee had nothing to which to object. So trustee did not lose the right to turnover for objecting to the exemption only after learning about the spending of the proceeds.
BOTTOM LINE: This is a contentious issue, or really a set of them. Not only is there a vigorous dissent in this BAP opinion (for which I do not have space here to give due credit), prior BAP cases interpreting Golden have had dicta and concurring opinions raising concerns. The holding here, that a Chapter 7 debtor must account in his converted Chapter 13 case for temporarily exempt homestead proceeds spent contrary to the exemption's purpose, may well apply in Oregon, but requires a careful comparison of the Arizona and Oregon statutes, and of the states' case law.
by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
© 2008 Bankruptcy Litigation Support for Attorneys
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