UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
No. 95-1369
IN RE: DERALD E. YOUNG AND MARY P. YOUNG,
Debtors.
DERALD E. YOUNG AND MARY P. YOUNG,
Appellants,
v.
KEY BANK OF MAINE, ET AL.,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Gene Carter, U.S. District Judge]
Before
Selya and Boudin, Circuit Judges,
and Saris,* District Judge.
Ralph W. Brown for appellants.
Jana S. Stabile, with whom Michael S. Haenn was on brief,
for appellees.
September 29, 1995
*Of the District of Massachusetts, sitting by designation.
SELYA, Circuit Judge. This appeal raises an issue SELYA, Circuit Judge.
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.
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,
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
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.
Robert Burns, To a Mouse (1785). The payment plan collapsed when
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
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,
866 (10th Cir. 1992); In re Lybrook, 951 F.2d 136, 137 (7th Cir.
1991); In re Tracy, 28 B.R. 189, 190 (Bankr. D.Me. 1983). Other
courts espoused the opposite view. See, e.g., In re Bobroff, 766
F.2d 797, 803 (3d Cir. 1985); In re Borrero, 75 B.R. 141, 142
(Bankr. D.P.R. 1987); In re Peters, 44 B.R. 68, 70-72 (Bankr.
M.D.Tenn. 1984).1 The division in the authorities is
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
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.
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.
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
Free access — add to your briefcase to read the full text and ask questions with AI
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
No. 95-1369
IN RE: DERALD E. YOUNG AND MARY P. YOUNG,
Debtors.
DERALD E. YOUNG AND MARY P. YOUNG,
Appellants,
v.
KEY BANK OF MAINE, ET AL.,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Gene Carter, U.S. District Judge]
Before
Selya and Boudin, Circuit Judges,
and Saris,* District Judge.
Ralph W. Brown for appellants.
Jana S. Stabile, with whom Michael S. Haenn was on brief,
for appellees.
September 29, 1995
*Of the District of Massachusetts, sitting by designation.
SELYA, Circuit Judge. This appeal raises an issue SELYA, Circuit Judge.
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.
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,
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
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.
Robert Burns, To a Mouse (1785). The payment plan collapsed when
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
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,
866 (10th Cir. 1992); In re Lybrook, 951 F.2d 136, 137 (7th Cir.
1991); In re Tracy, 28 B.R. 189, 190 (Bankr. D.Me. 1983). Other
courts espoused the opposite view. See, e.g., In re Bobroff, 766
F.2d 797, 803 (3d Cir. 1985); In re Borrero, 75 B.R. 141, 142
(Bankr. D.P.R. 1987); In re Peters, 44 B.R. 68, 70-72 (Bankr.
M.D.Tenn. 1984).1 The division in the authorities is
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
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.
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.
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
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
(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.
W.D.N.Y. 1982).
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
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.
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
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
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-
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
cause is remanded to the district court with instructions to cause is remanded to the district court with instructions to
vacate the order of the bankruptcy court and to remit the case vacate the order of the bankruptcy court and to remit the case
for the entry of a decree consistent herewith. All parties will for the entry of a decree consistent herewith. All parties will
bear their own costs. bear their own costs.