Is A Chapter 13 Debtor Or Their Creditors Entitled To The Post-Petition Appreciation In The Value Of Real Estate Sold During The Pendency Of A Chapter 13 Plan?

In a recent case entitled In Re: Larzelere, a New Jersey bankruptcy judge determined that a debtor who had a confirmed chapter 13 plan and sold real estate during the pendency of that plan is entitled to keep the post-petition appreciation in the value after the sale. In the Larzelere case, a debtor had confirmed a 5-year income based chapter 13 plan requiring payment of $600 a month to creditors from future earnings. The debtor owned a home with equity of $23,000 above his federal homestead exemption at the time of filing the case. Three years into the plan, the debtor filed a motion to sell the home for a price $130,000 in excess of the market value disclosed on the Bankruptcy Petition at the time of filing of the case. The debtor proposed to pay $14,000 owed on the confirmed plan in a lump sum. The chapter 13 trustee objected arguing that the post-petition appreciation in the value of the home was an estate asset required the debtor to pay unsecured creditors in full with a 100% plan distribution.

The proposed home sale was approved by the judge, but the Court ultimately required briefing by counsel as to the issue of the legal entitlement to the sale proceeds. Several provisions of chapter 13 were analyzed as part of the legal issue before the court. Section 1306 of the Bankruptcy Code provides that property of the bankruptcy estate in chapter 13 includes property acquired after the case is closed, dismissed or converted. Section 1327(b) of the Bankruptcy Code states that property of the bankruptcy estate re-vests in the debtor upon confirmation of the plan. Further, section 1327(c) of the Bankruptcy Code states that property once revested in a debtor on confirmation is free and clear of all claims or interests provided for in the plan.

In this particular case, the judge reviewed conflicting decisions from other jurisdictions. There is no binding precedent in the Third Circuit, New Jersey court’s highest level of appellate authority if the US Supreme Court has not addressed the issue. The First Circuit Court of Appeals had ruled that creditors were entitled to the appreciation in the value of a sale of property after the confirmation of the plan and during the pendency of the case. The Ninth Circuit bankruptcy appellate panel allowed a chapter 13 debtor to retain the post-petition increase in the value of the non-exempt assets. Ultimately, the bankruptcy judge in New Jersey determined that the case holdings from other jurisdictions were probably not reconcilable but determined that he would allow this debtor to continue pay creditors under the plan and keep the proceeds of the sale. The court’s legal conclusion was to rule that the proceeds of the sale did not become property of the chapter 13 bankruptcy estate.

This case is not determinative of a common issue that arises with chapter 13 trustees when there is appreciation in the value of property during a Chapter 13 case. Any sale approved by the Court as part of a chapter 13 plan that results in excess sale proceeds more than the value the debtor estimated for the property at the time of filing of the case can result in an objection by a creditor or the Trustee that a higher distribution should be made to creditors. The standard position of the trustees is that any non-exempt equity should be paid to creditors. As a matter of negotiation, there is the prospect for a resolution of the issue with a Trustee because the decision of one bankruptcy judge in a district is not binding precedent on other judges in the district.

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