In re Gorniak

549 B.R. 721, 75 Collier Bankr. Cas. 2d 751, 2016 Bankr. LEXIS 1142, 2016 WL 1411494
CourtUnited States Bankruptcy Court, W.D. Wisconsin
DecidedApril 8, 2016
DocketCase No. 13-15827
StatusPublished
Cited by1 cases

This text of 549 B.R. 721 (In re Gorniak) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, W.D. Wisconsin primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re Gorniak, 549 B.R. 721, 75 Collier Bankr. Cas. 2d 751, 2016 Bankr. LEXIS 1142, 2016 WL 1411494 (Wis. 2016).

Opinion

MEMORANDUM DECISION

ROBERT D. MARTIN, UNITED STATES BANKRUPTCY JUDGE

Debtors, Dominic and Barbara Gorniak, filed a Chapter 11 case which they converted to Chapter 7 on June 27, 2014. At the time of the conversion, the debtors maintained a debtors in possession (DIP) account which contained $8,652.43, 100% of which was post-petition earnings of the debtors. The Chapter 7 trustee sought turn-over of the $8,652.43 arguing that pursuant to 11 U.S.C. §§ 541, 1115(a)(2), 348(f), and existing case law within the Seventh Circuit interpreting these provisions, the funds held in the DIP account on the date of conversion are property of the Chapter 7 bankruptcy estate.

The debtors objected, relying on In re Evans, 464 B.R. 429 (Bankr.D.Colo.2011), and In re Markosian, 506 B.R. 273 (9th Cir. BAP 2014). Debtors argue that pursuant to §§ 348(a) and 348(f) assets of an estate at the time of conversion from Chapter 11 to 7 are treated in the same way as assets of an estate at the time of conversion from Chapter 13 to 7. Additionally, debtors assert that Harris v. Viegelahn, — U.S. -, 135 S.Ct. 1829, 191 L.Ed.2d 783 (May 18, 2015), “makes it clear that after a conversion, post-petition earnings are not property of the Chapter 7 estate.”

11 U.S.C. § 541(a)(6) provides:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all of the following property, wherever located and by whomever held:
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.

11 U.SC. § 541 (2012).

In Chapter 13, § 1306(a)(2) provides:

(a) Property of the estate includes, in addition to the property specified in section 541 of this title—
(2) earnings from services performed by the debtor after the commence[723]*723ment of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.

11 U.S.C. § 1306 (2012).

Similarly, in Chapter 11, § 1115(a)(2), provides:

(a) In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541—
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7,12, or 13, whichever occurs first.

11 U.S.C. § 1115 (2012).

Section 348(a) provides:

(a) Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsection (b) and (c) of this section 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 (2012). Additionally, §§ 348(f)(1)(A) and (2) provide:

(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—
(A) the property of the estate in the converted case shall consist of 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. ...
(2) If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.

11 U.S.C. § 348 (2012). Congress has enacted no analogue to § 348(f)(1)(A) for Chapter 11 to 7 conversions.

Several bankruptcy courts within the Seventh Circuit have addressed the expansive interpretation of § 348(a) suggested by the debtors. In 1986, in In re Ford, this court rejected the interpretation. 61 B.R. 913, 916 (Bankr.W.D.Wis.1986). In 2015, in In re Meier, relying on the Seventh Circuit’s 1992 In re Lybrook decision, the United States Bankruptcy Court for the Northern District of Illinois reached the same conclusion. 528 B.R. 162, 165 (Bankr.N.D.Ill.2015).

In In re Ford, this court analyzed a creditor’s argument that for all purposes not specifically excluded by §§ 348(b) and (c), including a determination of what assets are included in the estate, a debtor’s converted case must be treated as though it were a Chapter 7 case actually filed on the original petition date. 61 B.R. at 916. Looking to § 348(a), this court found that although that subsection provides that “a chapter 7 case which has been converted from a case under another chapter is considered to have been commenced on the date of the original petition,” that “does not mean ... that all actions taken in the case prior to conversion become nullities.” Id. at 916. Specifically, in a Chapter 11 to 7 conversion, this court held that “[t]he operation of section 348(a) of the Code does not result in the retroactive divestment of post-petition property acquired by the estate upon conversion to chapter 7.” Id. at 917-918.

The conclusion in In re Meier was based on the Seventh Circuit’s 1992 In re Lybrook decision. Debtors in Lybrook argued [724]*724that the $70,000 they received post-petition was not property of the Chapter 7 estate after conversion. Specifically, debtors looked to § 348(a) to argue that “the Chapter 7 proceeding should ... be deemed to have begun on the day the chapter 13 proceeding was filed.” In re Lybrook, 951 F.2d at 137 (quoting 11 U.S.C. § 48(a)). And. the $70,000 would not have been includable in the Chapter 7 estate at that time, so, it should be excluded following conversion. In finding against the debtors, the court was “more impressed by the bankruptcy judge’s observation that a rule of once in, always in is necessary to discourage strategic, opportunistic behavior that hurts creditors without advancing any legitimate interest of debtors.” Id. Accordingly, although the debtors proposed one “possible reading” of § 348(a), “an equally good alternative from a purely semantic perspective is that conversion from Chapter 13 to Chapter 7 does not affect the bankrupt estate but merely assures the continuity of the case for purposes of filing fees, preferences, statutes of limitations, and so forth.” Id.

In In re Meier,

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Bluebook (online)
549 B.R. 721, 75 Collier Bankr. Cas. 2d 751, 2016 Bankr. LEXIS 1142, 2016 WL 1411494, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-gorniak-wiwb-2016.