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October 19, 2007

Appreciation of Property During the Chapter 7 Dilemma

There is a lot a lip service given to the fact that exemptions are determined as of the petition date.  But if the property, exempt at filing, appreciates in value during the administration of the estate, who gets the benefit of the appreciation?  In the Ninth Circuit the answer is clearly - the estate.  The Chappell case confirms that.  The argument is that the property is not exempt as of the date of filing, x amount of value in the property is exempt.  Since exempt property is still property of the estate, the only thing the debtor has the right to is the amount of the exemption in the property - at some point in time depending on the trustee's activity during the administration of the estate.   

But this analysis goes against the history of bankruptcy in my opinion.  In the earliest days, the 1700s, states had insolvency laws that permitted a person to be discharged from jail in return for a surrender of his property.  There was some property he did not have to surrender - whatever the state decided was the minimum the debtor needed to have a meaningful existence.  In the Bankruptcy Act of 1800, the debtor was permitted to keep "necessary wearing apparel and necessary bed and bedding."  That was the sum total of allowed exemptions.  The whole idea has always been that in exchange for all your property that creditors have the right to seize anyway, you get a fresh start - the discharge.

Tara Twomey pointed out to me that it makes sense if there is property which has equity for the estate, as of the petition date.  The trustee can decide to sell it now or later.  But if there is no equity as of the filing date, the property should immediately revert to the debtor once the opportunity to object to the exemption has run.      

Klein v. Chappell (In re Chappell),  ---- B.R. ----, 2007 WL 2200594,  (9th Cir. BAP  July, 2007)
Issue:  Is “postpetition appreciation of exempt property . . . treated the same under the federal exemption scheme as under a state’s exemption scheme?”

Holding:  Yes, the appreciation belongs to the estate.   

Judge Thomas Glover
Riblet, Klein, Montali
Opinion by Riblet

The debtors filed chapter 7 and claimed their residence in Washington exempt under the federal exemption, Section 522.    The trustee did not object.  The debtor did not seek abandonment.  Two years later the bank filed a Motion for Relief.  The trustee opposed the motion arguing that the property had appreciated $200,000 leaving $140,000 for the estate if sold.  The trustee asked the bankruptcy court to rule that the appreciation belonged to the estate.  The court denied the motion ruling, according to the BAP, that “the residence was withdrawn from administration pursuant to § 522(l) at the expiration of the time to object to exemptions and there was no remaining interest in the residence for the trustee to administer.”  Note:  Washington has not “opted out” of the federal exemption scheme.

The BAP reversed saying, “In view of the United States Supreme Court’s accordance of equivalence of treatment to federal and state exemptions, we disagree with the debtors’ contention that by claiming a federal residence exemption they were entitled to an ‘aggregate’ interest in the entirety of their residence.”  This is especially so here where the debtors exempted a specific amount on Schedule C.

As to the lengthy delay by the trustee, the BAP said, “The debtors here are in large part the ‘victims’ of their own inaction.  Their chapter 7 petition was filed on June 30, 2004.  The record reveals they took no action to extricate their property from the estate until two years later when the secured creditor sought relief from the automatic stay and the trustee expressed his intent to sell.” 

Note:  This case has a nice summary of the law that the estate gets the post-filing appreciation of the property of the estate.  It also analyzes the effect of stating a specific amount of dollar exemption on Schedule C.  The debtor is limited to that amount.   

October 19, 2007 in 9th Circuit Briefs | Permalink


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