Young v. Key Bank

• Court: Court of Appeals for the First Circuit
• Decided: September 29, 1995
• Docket: 95-1369
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                            UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT
                                FOR THE FIRST CIRCUIT



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          No. 95-1369



                      IN RE:  DERALD E. YOUNG AND MARY P. YOUNG,



                                       Debtors.



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                          DERALD E. YOUNG AND MARY P. YOUNG,



                                     Appellants,



                                          v.



                              KEY BANK OF MAINE, ET AL.,



                                      Appellees.



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                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                              FOR THE DISTRICT OF MAINE



                       [Hon. Gene Carter, U.S. District Judge]
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                                        Before



                          Selya and Boudin, Circuit Judges,
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                             and Saris,* District Judge.
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               Ralph W. Brown for appellants.
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               Jana  S. Stabile, with whom  Michael S. Haenn  was on brief,
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          for appellees.



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                                  September 29, 1995



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          *Of the District of Massachusetts, sitting by designation.



SELYA,  Circuit Judge.    This appeal  raises an  issue
                    SELYA,  Circuit Judge.
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          which, but for its  effect on the parties  before us, might  well



          deserve  a  place  among  the inhabitants  of  Madame  Tussauds's



          Waxworks.  The tale follows.



                    We begin with basic bankruptcy bromides.  Chapter 13 of



          the Bankruptcy  Code, 11 U.S.C.     1301-1330, enables individual



          debtors to reorganize  their financial affairs,  so to speak,  by



          extending due  dates  and servicing  their  debts out  of  future



          income pursuant to  a payment plan crafted  under the supervision



          of the bankruptcy court.  In contrast, Chapter 7 of  the Code, 11



          U.S.C.    701-766, provides for what is commonly termed "straight



          bankruptcy."    It contemplates  the  liquidation  of a  debtor's



          estate, the  distribution  of  available assets  to  his  or  her



          creditors,   and   ultimate   relief  from   liability   for  all



          dischargeable  debts.   Because the  two chapters mark  a natural



          progression   from  difficult  financial  straits  to  unpassable



          financial straits, a proceeding under Chapter 13 may be converted



          into  a proceeding under Chapter  7 if the  reorganization of the



          debtor's affairs founders.  See 11 U.S.C.   1307.
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                    When such a conversion occurs, the Chapter 7 proceeding



          "relates back" in the sense that the Chapter 7 petition is deemed



          to have been filed on the filing date of the  original Chapter 13



          petition.  See 11  U.S.C.   348(a).   An enigma arises,  however,
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          where  a  debtor has  earned income  during  the pendency  of the



          Chapter  13 petition,  because the  statutory mosaic  makes clear



          that  a Chapter 13 estate includes post-petition earnings, see 11
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U.S.C.    1306(a)(2), and  a Chapter 7  estate does  not, see  11
                                                                    ___



          U.S.C.   541(a).  Therein  lies the rub.  For many  years, courts



          could  not agree on  an answer to  the question  of whether post-



          petition income paid to  a Chapter 13 trustee became  property of



          the  Chapter 7 estate  on conversion of  an insolvency proceeding



          from  a workout to a straight bankruptcy, even though such income



          would  not be  property of  the estate  had the  debtor initially



          filed his  or her petition  under Chapter  7.  In  this case  the



          lower courts ruled  that such post-petition income  inures to the



          benefit of the Chapter 7 trustee.  This appeal ensued.



                    The material facts are undisputed.  The debtors, Derald



          and  Mary Young, owned and operated  a conglomeration of business



          enterprises  including Damn  Yankee Gifts, Damn  Yankee Balloons,



          Damn  Yankee Pewter, and Damn  Yankee Sheepskin.   On October 22,



          1992, the Youngs petitioned for relief from their creditors under



          Chapter  13.   A  payment plan  emerged.   The  bankruptcy  court



          approved it, and the debtors agreed to abide by it.



                    While attempting to satisfy the  terms of the plan, Mr.



          and Mrs. Young tendered a total of $24,498 in interim earnings to



          the  Chapter 13 trustee.   But, to paraphrase  the Scottish poet,



          the best-laid plans  of creditors and debtors often go awry.  Cf.
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          Robert Burns, To a Mouse (1785).  The payment plan collapsed when
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          the Youngs found themselves  unable to sell off certain  assets. 



          Key Bank of Maine,  a secured creditor, took steps to protect its



          interests and,  over the debtors' objection,  forced a conversion



          of the  Chapter 13  proceeding into a  straight bankruptcy  under


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Chapter 7.



                    The Youngs subsequently moved to determine the property



          of the  Chapter 7 estate in  order to settle the  status of their



          post-petition  contribution.   Initially,  the  bankruptcy  court



          accepted the debtors' position  and held that the funds  were the



          property of  the Chapter  13 trustee.    On reconsideration,  the



          court revoked its  earlier order  and decided,  favorably to  Key



          Bank, that the  funds were the property of the  Chapter 7 estate.



          On July 20,  1994, the bankruptcy  judge entered a  new order  to



          that effect.  The  debtors appealed to the district  court, which



          upheld the July 20 order.  We now reverse.



                    At  the  time  the  events leading  to  this  conundrum



          occurred, the authorities were divided.  Many courts held, as did



          the courts  below, that post-petition earnings  comprised part of



          the Chapter 7 estate  when a Chapter 13 proceeding  was converted



          to a straight bankruptcy.  See, e.g., In re Calder, 973 F.2d 862,
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          866 (10th  Cir. 1992); In re Lybrook, 951 F.2d 136, 137 (7th Cir.
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          1991); In re Tracy, 28 B.R.  189, 190 (Bankr. D.Me. 1983).  Other
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          courts espoused the opposite view.  See, e.g., In re Bobroff, 766
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          F.2d  797, 803 (3d  Cir. 1985); In  re Borrero, 75  B.R. 141, 142
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          (Bankr. D.P.R. 1987);  In re  Peters, 44 B.R.  68, 70-72  (Bankr.
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          M.D.Tenn.   1984).1     The  division   in  the   authorities  is

                              
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               1In yet  a third variation on  the theme, a  few courts held

          that  if  post-petition  earnings  were  accumulated  before  the

          confirmation of a  Chapter 13  payment plan, such  funds did  not

          become property of the  Chapter 7 estate upon conversion;  but if

          the funds were earned  subsequent to the confirmation of  a plan,

          they  would then  become property  of the  Chapter 7  estate upon

          conversion.   See,  e.g., In  re Schmeltz,  114 B.R.  607, 610-13
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understandable.  The question  is excruciatingly close, respected



          jurists disagree  as to how it can best be answered, and as Judge



          Posner acknowledged,  the arguments on  either side  of the  line



          offer  "equally good alternative[s]."   Lybrook, 951 F.2d at 137.
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          Thus, for all intents and purposes the law was indeterminate when



          this question  came before  the courts  below,  and those  courts



          resolved the indeterminacy in a plausible way.



                    Nevertheless,  judges  sometimes   view  issues   quite



          differently,  and our  responsibility  to the  parties before  us



          requires  that, on  a  matter of  law  committed to  our  plenary



          review, see In  re G.S.F. Corp.,  938 F.2d  1467, 1474 (1st  Cir.
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          1991), we must interpret the applicable statutes as we read them,



          consistent  with our exposition of discerned congressional intent



          and  without  paying  special  deference  to  the  courts  below.



          Fulfilling  our  proper  function  here, we  reach  a  conclusion



          contrary to that reached by the bankruptcy judge and the district



          judge.  Consequently, we hold that post-petition income earned by



          and contributed  to a Chapter 13  estate (prior to  the change in



          the  law discussed  infra) did  not, upon  the conversion  of the
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          proceeding  to  a straight  bankruptcy,  become  property of  the



          Chapter 7 estate.



                    At this point, the plot thickens.  Ordinarily, we would



          now proceed to present an analysis of the bases for our decision,



          explicating  our   reasoning  in   suitable  detail.     But  the

                              
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          (Bankr.  N.D.Ind. 1990); In re  Holly, 109 B.R.  524, 526 (Bankr.
                                   ____________

          S.D.Ga. 1989);  In  re  Richardson,  20  B.R.  490,  492  (Bankr.
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          W.D.N.Y. 1982).



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circumstances of this case are well out of the ordinary, and they



          counsel a different, more muted course.  We explain briefly.



                    Perhaps  because of  the split  in authority  about how



          best  to synchronize  Chapter 13  and Chapter  7,  Congress acted



          within  the past year to demystify the situation.  The Bankruptcy



          Reform  Act of 1994 answered the very question that confronts us.



          It essentially  codified the  Bobroff rule, enacting  a statutory
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          provision designed to  ensure that, on conversion from  a Chapter



          13 proceeding,



                    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.



          11 U.S.C.   348(f)(1)(A) (1994).   In all future cases, this rule



          (subject to  a statutory  "bad  faith" exception  not of  concern



          here) will govern.   But the newly crafted statute does not apply



          in  this  case:    the  Bankruptcy  Reform  Act  explicitly  bars



          retroactive  application of  the statutory  solution  to accruals



          antedating the Act's effective date (October 22, 1994).  See Pub.
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          L. No.  103-394,   702, 108  Stat. 4106, 4150.   The Youngs filed



          their  Chapter  13 petition  exactly two  years earlier,  and the



          Chapter 13 trustee had the disputed funds in hand well before the



          amendment's effective date.   As a result, section 348(f)  is not



          controlling in this case.



                    Be  that as  it may,  it ill  behooves us  to play  the



          ostrich, struthiously pretending that the neoteric statute is not



          now in force.  Though the  amendment does not affect the  outcome



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of  this appeal,  it  punctuates our  opinion  and strips  it  of



          virtually  all precedential  value.   Where, as  here, we  face a



          lingering question of law that is defunct except  as to a handful



          of ongoing cases, we see no point in writing at  length either to



          elucidate our  rationale  or to  justify our  construction of  an



          ambiguous  statute  that  Congress  has  lately  taken  pains  to



          clarify.  Cf. In re San Juan Dupont Plaza Hotel  Fire Litig., 989
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          F.2d 36, 38 (1st  Cir. 1993) (suggesting that an  appellate court



          should  not  write  opinions  "simply   to  hear  its  own  words



          resonate").  This is  especially true in the instant  case, since



          other  courts  have  spelled   out  the  reasons  supporting  our



          conclusion.  See Bobroff, 766 F.2d at 803; Peters, 44 B.R. at 70-
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          72.   Given this peculiar  concatenation of circumstances, we are



          confident  that going further  would merely add  another floor to



          the Tower of Babel.


The judgment of the district court is reversed, and the
                    The judgment of the district court is reversed, and the
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          cause  is remanded  to the  district court  with instructions  to
          cause  is remanded  to the  district court  with instructions  to
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          vacate the  order of the bankruptcy  court and to remit  the case
          vacate the  order of the bankruptcy  court and to remit  the case
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          for the entry of a decree consistent herewith.  All  parties will
          for the entry of a decree consistent herewith.  All  parties will
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          bear their own costs.
          bear their own costs.
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