In Re: John Castleman, Sr. v. Dennis Burman ( 2023 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In the Matter of: JOHN FELIX No. 22-35604
CASTLEMAN, Sr.; KIMBERLY
KAY CASTLEMAN, D.C. No.
Debtors, 2:21-cv-00829-
JHC
------------------------------
JOHN FELIX CASTLEMAN, Sr.; OPINION
KIMBERLY KAY CASTLEMAN,
Appellants,
v.
DENNIS LEE BURMAN, Chapter 7
Trustee,
Appellee.
Appeal from the United States District Court
for the Western District of Washington
John H. Chun, District Judge, Presiding
Argued and Submitted May 9, 2023
Seattle, Washington
Filed July 28, 2023
2 CASTLEMAN V. BURMAN
Before: Michael Daly Hawkins, Richard C. Tallman, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Hawkins;
Dissent by Judge Tallman.
SUMMARY *
Bankruptcy
Affirming the district court’s order, which affirmed the
bankruptcy court’s order, the panel held that post-petition,
pre-conversion increases in the equity of an asset belong to
the bankruptcy estate, rather than to debtors who, in good
faith, convert their Chapter 13 reorganization petition into a
Chapter 7 liquidation.
When debtors filed for bankruptcy, they listed their
home among their assets. When they later converted to
Chapter 7, the home had risen in value. Debtors argued that
the home’s increased equity belonged to them and not the
bankruptcy estate under 11 U.S.C. § 348(f)(1)(A), which
provides that “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.”
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
CASTLEMAN V. BURMAN 3
On de novo review, the panel held that the plain language
of § 348(f)(1)(A), coupled with the Ninth Circuit’s previous
interpretation of 11 U.S.C. § 541(a), compelled the
conclusion that any appreciation in the property value and
corresponding increase in equity belonged to the estate upon
conversion. The panel looked to the definition of “property
of the estate” in § 541(a), which addresses the contents of
the bankruptcy estate upon filing under either Chapter 7 or
Chapter 13, and the court’s prior opinions holding that the
broad scope of § 541(a) means that post-petition
appreciation inures to the bankruptcy estate, not the debtor.
Dissenting, Judge Tallman wrote that the Bankruptcy
Code as a whole established that post-petition, pre-
conversion appreciation belonged to the debtors. He wrote
that the majority’s reading of § 348(f)(1)(A) created a circuit
split and was inconsistent with the statute’s structure, object,
policies, and legislative history.
COUNSEL
Steven Hathaway (argued), Law Office of Steven C.
Hathaway, Bellingham, Washington, for Appellants.
Peter H. Arkison (argued), Bellingham, Washington, for
Appellee.
Russell D. Garrett, Jordan Ramis PC, Portland, Oregon, for
Amicus Curiae National Association of Bankruptcy
Trustees.
4 CASTLEMAN V. BURMAN
OPINION
HAWKINS, Circuit Judge:
We must decide whether post-petition, pre-conversion
increases in the equity of an asset‒‒i.e., the difference
between a home’s value and how much is owed on the
mortgage, whether a result of market appreciation, payment
of secured debt, improvements or otherwise‒‒belong to the
bankruptcy estate or to debtors who, in good faith, convert
their Chapter 13 reorganization petition into a Chapter 7
liquidation.
Debtors John Felix Castleman, Sr. and Kimberly Kay
Castleman (the “Castlemans”) filed for Chapter 13
bankruptcy. They listed their home among their assets with
a value of $500,000, a mortgage with an outstanding balance
of $375,077, and a homestead exemption of $124,923. The
bankruptcy court confirmed a Chapter 13 plan, but after
roughly twenty months, which included a temporary job loss
and deferral of mortgage payments due to the pandemic, Mr.
Castleman contracted Parkinson’s Disease, and the couple
could no longer make their required payments. The
Castlemans exercised their right to convert to Chapter 7. In
the interim, their home had risen in value an estimated
$200,000. 1 Dennis Burman, the Chapter 7 trustee
(“Trustee”), filed a motion to sell the Castlemans’ home to
recover the value for creditors. The Castlemans objected and
argued that the home’s increased equity belongs to them and
1
In this case, it appears the increase in equity was attributable primarily,
if not exclusively, to market appreciation. Due to the deferral of
mortgage payments during the pandemic, the Castlemans actually owed
more at the time of filing for conversion ($390,763) than they did at the
time of their initial filing.
CASTLEMAN V. BURMAN 5
not the bankruptcy estate under 11 U.S.C. § 348(f)(1)(A). 2
Although courts are heavily divided on this question,3
we conclude on de novo review, Simpson v. Burkart (In re
Simpson), 557 F.3d 1010, 1014 (9th Cir. 2009), that the plain
language of § 348(f)(1)(A), coupled with this circuit’s
previous interpretation of § 541(a), compel the conclusion
that any appreciation in the property value and
corresponding increase in equity belongs to the estate upon
conversion. We therefore affirm the decisions of the
bankruptcy and district courts.
The purpose of the Bankruptcy Code is to grant a “fresh
start to the honest but unfortunate debtor.” Marrama v.
Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (internal
quotation marks and citation omitted). Individual debtors
may petition for bankruptcy under Chapter 7 (liquidation) or
Chapter 13 (reorganization). Harris v. Viegelahn, 575 U.S.
510, 513‒14 (2015). Chapter 13 “allows a debtor to retain
his property if he proposes, and gains court confirmation of,
a plan to repay his debts over a three-to-five-year
period.” Id. at 514 (citing §§ 1306(b), 1322,
1327(b)). Chapter 13 can benefit the debtor and creditors:
the former keeps his assets, and the latter “usually collect
more under a Chapter 13 plan than they would have received
2
Unless otherwise noted, all statutory references are to the Bankruptcy
Code, 11 U.S.C. §101 et seq.
3
Compare In re Goins, 539 B.R. 510, 515‒16 (Bankr. E.D. Va. 2015),
In re Goetz, 647 B.R. 412, 416‒17 (Bankr. W.D. Mo. 2022), In re Peter,
309 B.R. 792, 794‒95 (Bankr. D. Or. 2004), and Potter v. Drewes (In re
Potter), 228 B.R. 422, 424 (B.A.P. 8th Cir. 1999), with In re Barrera, 22
F.4th 1217 (10th Cir. 2022), In re Cofer, 625 B.R. 194, 202 (Bankr. D.
Idaho 2021), In re Hodges, 518 B.R. 445, 451 (E.D. Tenn. 2014), and In
re Niles, 342 B.R. 72, 75 (Bankr. D. Ariz. 2006).
6 CASTLEMAN V. BURMAN
under a Chapter 7 liquidation.” Id.However, most debtors fail to successfully complete a
Chapter 13 repayment plan, which is why “Congress
accorded debtors a nonwaivable right to convert a Chapter
13 case to one under Chapter 7 ‘at any time.’” Id. (quoting
§ 1307(a)). The property of this converted Chapter 7 estate
is defined by § 348(f), which provides in relevant part:
(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) 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.
(emphasis added). The Trustee does not assert that the
Castlemans converted in bad faith, and the Castlemans
retained possession of the home on the date of conversion.
In interpreting the Bankruptcy Code, “the first step . . . is
to determine whether the language [of a statute] has a plain
and unambiguous meaning with regard to the particular
CASTLEMAN V. BURMAN 7
dispute.” Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d
662, 666 (9th Cir. 2014). If the plain meaning is
unambiguous, it controls. Id.; Puerto Rico v. Franklin Cal.
Tax-Free Tr., 579 U.S. 115, 125 (2016).
Section 348(f) does not define the word “property” or the
phrase “property of the estate.” However, “property of the
estate” is a term of art which appears throughout the
Bankruptcy Code. See, e.g., §§ 541, 554(a), 726(a), 1306(a);
see also Keith M. Lundin, Lundin On Chapter 13 § 46.1
(2023) (“‘Property of the estate’ is a phrase of art that is
fundamental to almost everything that happens in Chapter 13
practice.”); 4 William L. Norton III, Norton Bankruptcy Law
and Practice § 61:1 (3d ed. 2023) (“[F]or more than two
centuries ‘property of the estate’ has become a term of art
unique to bankruptcy law.”).
“Statutory construction . . . is a holistic endeavor. A
provision that may seem ambiguous in isolation is often
clarified by the remainder of the statutory scheme.” United
Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd.,
484 U.S. 365, 371 (1988). We therefore look to the
definitions of “property of the estate” set forth in other
provisions of the Code itself. See Robinson v. Shell Oil Co.,
519 U.S. 337, 340 (1997) (“The plainness or ambiguity of
statutory language is determined by reference to the
language itself, the specific context in which that language
is used, and the broader context of the statute as a whole.”).
Under § 541(a)(1), filing for bankruptcy creates an estate
which includes “all legal or equitable interests of the debtor
in property as of the commencement of the case.” The estate
also includes all “[p]roceeds, product, offspring, rents, or
profits of or from property of the estate, except such as are
earnings from services performed by an individual debtor
8 CASTLEMAN V. BURMAN
after the commencement of the case.” § 541(a)(6).
In In re Goins, the court found the trustee was entitled to
any post-petition appreciation in assets of the estate,
explaining: “[T]he equity attributable to the post-petition
appreciation of the property is not separate, after-acquired
property . . . The equity is inseparable from the real estate,
which was always property of the estate under Section
541(a).” 539 B.R. at 516; see also In re Goetz, 647 B.R. at
416 (the broad definition of “property of the estate” in
§ 541(a) “captures the debtor’s entire ownership interest in
each asset that exists on the petition date without fixing the
estate’s interest to the precise characteristics the asset has on
that date”). Other courts have held that any post-petition
increase in the property’s equity is the “proceeds, product,
offspring, rents or profits” of the estate’s original property
under § 541(a)(6), and so became part of the estate when the
case commenced. See In re Potter, 228 B.R. at 424; In re
Peter, 309 B.R. at 794‒95.
In this circuit, we have likewise concluded that the broad
scope of § 541(a), and especially § 541(a)(6), means that
post-petition “appreciation [i]nures to the bankruptcy estate,
not the debtor.” Schwaber v. Reed (In re Reed), 940 F.2d
1317, 1323 (9th Cir. 1991). We recently re-affirmed this in
Wilson v. Rigby, noting that when a debtor files for
bankruptcy, the “proceeds, product, offspring, rents, or
profits” which become part of the estate under § 541(a)(6)
“include[] the appreciation in value of a debtor’s home.”
909 F.3d 306, 309 (9th Cir. 2018). The Castlemans point out
that Wilson was originally filed as a Chapter 7 case, but the
definition of property of the estate in § 541(a) applies
equally to Chapter 13. There is no textual support for
concluding that § 541(a) has a different meaning upon
conversion from Chapter 13. As the district court in this case
CASTLEMAN V. BURMAN 9
aptly summarized the significance of these prior Ninth
Circuit decisions:
It is well settled that in a Chapter 7 case, all
property that the debtor acquires post-petition
is excluded from the estate. See, e.g., Harris,
575 U.S. at 514 (citing § 541(a)(1)).
Therefore, if appreciation were a separate,
after-acquired property interest, it would
have to inure to the debtor. The Ninth
Circuit, in finding that appreciation inures to
the estate under § 541(a)(6), has necessarily
found that increased equity in a pre-petition
asset cannot be a separate, after-acquired
property interest. This logic applies with
equal force in a conversion case.
Many of the courts who have reached a different
conclusion regarding post-petition changes in equity have
relied on various statements or examples in the legislative
history surrounding § 348(f), which was enacted to clarify
whether new property acquired during the course of Chapter
13 proceedings becomes property of the converted estate
(under § 348(f)(2), this occurs only if the debtor was acting
in bad faith). See, e.g., In re Cofer, 625 B.R. at 200‒02; In
re Nichols, 319 B.R. at 856. However, because we conclude
the language of § 348(f), when read in conjunction with the
remainder of the Bankruptcy Code, is not ambiguous, we do
not look to legislative history for guidance. Robinson, 519
10 CASTLEMAN V. BURMAN
U.S. at 340 (“Our inquiry must cease if the statutory
language is unambiguous.”). 4
Some courts have also relied on the implicit operation of
§ 1327(b), which provides: “Except as otherwise provided
in the plan or the order confirming the plan, the confirmation
of a plan vests all of the property of the estate in the
debtor.” Under this reasoning, equity increases from the
time of the initial filing up until plan confirmation would
inure to the estate, then from time of confirmation until
conversion would vest in the debtor, and finally upon
conversion, any additional post-conversion changes would
benefit the estate. See, e.g., In re Barrera, 22 F.4th at 1223‒
24. However, we find it difficult to believe Congress
envisioned this valuation and accounting process without
making any explicit cross-reference to § 1327(b), and
because in other instances where Congress wanted to
exclude assets or certain interests of the debtor from the
bankruptcy estate, it has done so with specificity. See, e.g.,
4
We recognize that some courts have found § 348(f) to be ambiguous.
However, the existence of a division of judicial authority does not itself
establish ambiguity in the text. See, e.g., Roberts v. Sea-Land Servs.,
Inc., 132 S. Ct. 1350 (2012) (holding provision of Longshore and Harbor
Workers’ Compensation Act is unambiguous despite disagreement
between Fifth, Ninth and Eleventh Circuits); Mohamad v. Palestinian
Auth., 132 S. Ct. 1702 (holding term used in Torture Victim Protection
Act was unambiguous despite disagreement among several circuits);
Reno v. Koray, 515 U.S. 50, 64‒65 (1995) (“A statute is not ambiguous
for purposes of lenity merely because there is a division of judicial
authority over its proper construction.”) (internal quotation and citation
omitted). As we have explained, even if § 348(f) in isolation might be
ambiguous, when read in connection with the remainder of the
bankruptcy statute as already interpreted by this circuit, its meaning
becomes clear. See United Sav. Ass'n of Tex., 484 U.S. at 371 (“A
provision that may seem ambiguous in isolation is often clarified by the
remainder of the statutory scheme.”).
CASTLEMAN V. BURMAN 11
§ 541(a)(6) (excluding post-petition earnings by an
individual in a Chapter 7 case) and § 541(b) (excluding
various specific items from the estate, such as funds used to
purchase a 529 education plan). If, as the dissent suggests,
Congress actually intended to exclude from the revived
estate any increase in equity of an estate asset that may have
occurred from the time of plan confirmation to conversion,
it could have amended § 348(f) further to make this result
clear. As written, § 348(f) only clarified that newly-
acquired, post-petition property would not become part of
the converted estate if the debtor had been acting in good
faith.
In sum, the plain language of § 348(f)(1) dictates that
any property of the estate at the time of the original filing
that is still in debtor’s possession at the time of conversion
once again becomes part of the bankruptcy estate, and our
case law dictates that any change in the value of such an asset
is also part of that estate. In this case, that property increased
in value. In other cases, the value might decline, or the value
of one asset in the estate might increase while other property
depreciates in value. This is simply a happenstance of
market conditions, which sometimes will benefit the debtor
and sometimes benefit the estate. 5 The district court and
bankruptcy court correctly concluded that the Castlemans’
home (including any post-petition, pre-conversion increase
in equity) was again part of the bankruptcy estate pursuant
5
Note that, for example, the debtor’s homestead exemption is fixed as
of the “snapshot” value on the date of the original filing. See Hyman v.
Plotkin (In re Hyman), 967 F.2d 1316, 1321 (9th Cir. 1992) (“Were we
to accept the Hymans’ argument that they’re entitled to post-filing
appreciation, we would also have to hold that a debtor is subject to post-
filing depreciation, which would give debtors in falling property markets
less than the [homestead exemption] guaranteed them by state law.”).
12 CASTLEMAN V. BURMAN
to § 348(f)(1) and available to the Trustee for the benefit of
the creditors. 6
AFFIRMED. 7
TALLMAN, Circuit Judge, dissenting.
As counsel for the trustee aptly put it, John and Kimberly
Castleman “tried to do good and tried to pay off their bills”
by petitioning for bankruptcy under Chapter 13 and
proposing a plan to repay their creditors. 1 But, unable to
complete the repayment plan, they were forced into a
Chapter 7 liquidation. We now must decide whether
appreciation in the value of their home during Chapter 13
proceedings becomes part of the converted Chapter 7
bankruptcy estate—an issue which has confounded judges
all over the country. In holding that postpetition, pre-
conversion increases in equity belong to the estate, the court
both creates a circuit split and effectively punishes the
Castlemans for filing under Chapter 13 with the forced sale
6
As noted above, in this case it appears that the increased equity was
attributable to market conditions. However, the district court indicated
that the debtors could file an administrative priority claim for mortgage
payments they had made in accordance with the confirmation plan for
the benefit of the estate pursuant to § 503(b). See In re Peter, 309 B.R.
at 795. The resolution of any such claim is not before us at this time.
7
The motion filed by National Association of Bankruptcy Trustees for
leave to file an amicus brief [Dkt. Entry No. 17] is granted. The amicus
brief filed on January 9, 2023, is deemed filed.
1
Oral Argument at 14:07, Castleman, Sr., v. Burman, No. 22-35604 (9th
Cir. May 9, 2023), https://www.youtube.com/watch?v=_TBWjDPd10k.
CASTLEMAN V. BURMAN 13
of their home. Because that outcome is not the best reading
of the Bankruptcy Code or our precedents, I respectfully
dissent.
I
A
Upon filing for bankruptcy, a debtor’s assets are
immediately transferred to a bankruptcy estate. 11 U.S.C.
§ 541(a). However, the debtor may exempt some property—
such as an equitable interest in real property used as a
residence—from the estate. See § 522(b)(3)(A), (d)(1). This
exemption is commonly referred to as the “homestead
exemption.” In 2019, Washington State allowed a maximum
homestead exemption of $125,000. WASH. REV. CODE
§ 6.13.030 (2019). After creation of the estate, the
bankruptcy court appoints a trustee to oversee it for the
benefit of creditors and other interested parties. See 11
U.S.C. §§ 704, 1302. If, after accounting for encumbrances
and exemptions, a particular asset is “of inconsequential
value and benefit to the estate,” a debtor may ask the court
to “order the trustee to abandon” it. § 554(b).
Filing under Chapter 7 “allows a debtor to make a clean
break from his financial past, but at a steep price: prompt
liquidation of the debtor’s assets.” Harris v. Viegalahn, 575
U.S. 510, 513 (2015). The trustee will sell the non-exempt
property of the estate and distribute the proceeds to creditors.
Id. (citing §§ 704(a)(1), 726). But the Chapter 7 estate does
not include wages earned or assets acquired by the debtor
after filing for bankruptcy. Id. at 513-14. After liquidation,
the debtor’s pre-petition debts will generally be discharged.
§ 727(a). “Thus, while a Chapter 7 debtor must forfeit
virtually all his prepetition property, he is able to make a
14 CASTLEMAN V. BURMAN
‘fresh start’ by shielding from creditors his postpetition
earnings and acquisitions.” Harris, 575 U.S. at 514.
A Chapter 13 estate works quite differently: the debtor
retains possession of all property, § 1306(b), and proposes a
plan to repay creditors over a three-to-five-year period.
§§ 1321-22. If the bankruptcy court confirms the plan,
confirmation “vests all of the property of the estate in the
debtor” unless the plan or a court order says otherwise.
§ 1327(b). However, “property accumulated during the
repayment period becomes part of the bankruptcy estate and
is used to repay creditors.” Brown v. Barclay (In re Brown),
953 F.3d 617, 620 (9th Cir. 2020). The Bankruptcy Code
encourages Chapter 13 filings because they can “benefit
debtors and creditors alike.” Harris, 575 U.S. at 514.
Debtors may keep assets, such as a home or car, and creditors
“usually collect more under a Chapter 13 plan than they
would have received under a Chapter 7 liquidation.” Id.
When a debtor converts from Chapter 13 to Chapter 7 in
good faith, the property of the converted estate is defined by
§ 348(f)(1)(A), which provides that 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 This statute removes a potential
disincentive to Chapter 13 filings: if all assets acquired after
filing of the Chapter 13 petition were available to creditors
after conversion, the debtor would be “in a worse position
than if the petition had been filed in Chapter 7 initially.”
2
If a debtor converts in bad faith, § 348(f)(2) makes postpetition, pre-
conversion acquisitions available to creditors. Here, all agree the
Castlemans converted in good faith due to a pandemic layoff and Mr.
Castleman’s unfortunate medical diagnosis.
CASTLEMAN V. BURMAN 15
Brown, 953 F.3d at 620. By limiting the converted estate to
the property a debtor had at the time of the initial petition,
§ 348(f) “put[s] the debtor where he would have been, had
he filed in Chapter 7 initially.” Id.
B
On June 19, 2019, when the Castlemans petitioned for
bankruptcy under Chapter 13, their home was worth an
estimated $500,000. They claimed a homestead exemption
of $124,923, which was only $77 less than the legally
allowed maximum under then-existing Washington law.
The Castlemans also reported that their home was
encumbered by a secured mortgage of $375,077. The
bankruptcy court confirmed their Chapter 13 plan on
September 25, 2019, and the Castlemans made payments
under the plan for twenty months, including a mortgage
payment.
On January 12, 2021, with Mr. Castleman unable to work
and facing a significant loss of income, the couple moved to
convert their case to Chapter 7. After conversion, the
Chapter 7 trustee hired a realtor, who estimated the
Castlemans’ Bellingham home was worth $700,000 as of
April 19, 2021. Believing the home now had value to the
estate, the trustee filed a motion to sell it so that the
additional equity could be distributed to creditors. The
Castlemans objected, arguing that postpetition, pre-
conversion increases in equity are not “property of the
estate” upon conversion under § 348(f)(1)(A). This is the
question that divides our panel.
16 CASTLEMAN V. BURMAN
II
A
The Castlemans’ reading of § 348(f) is correct. In
interpreting the Bankruptcy Code, we must begin with the
text. Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d 662,
666 (9th Cir. 2014). There is no debate that the phrase
“property of the estate” in § 348(f) is a term of art in
bankruptcy law or that the term should be defined by looking
to the “broader context of the [Bankruptcy Code] as a
whole.” Robinson v. Shell Oil Co., 519 U.S. 337, 341
(1997). But the court errs in how it applies those principles
here. By adopting the trustee’s preferred interpretation of
§ 348(f), the majority sacrifices the text of the bankruptcy
statutes on the altar of simplicity.
The court rightly begins by looking to § 541(a), which
defines the property of the bankruptcy estate upon filing
under either Chapter 7 or Chapter 13. Section 541(a)(1)
declares that the estate includes “all legal or equitable
interests of the debtor in property as of the commencement
of the case.” It also includes all “[p]roceeds, 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.”
§ 541(a)(6). We have already held that in a Chapter 7 case,
§ 541(a)(6) means that “appreciation enures to the
bankruptcy estate, not the debtor.” Schwaber v. Reed (In re
Reed), 940 F.2d 1317, 1323 (9th Cir. 1991). This is because
in Chapter 7, the “proceeds, product, offspring, rents, or
profits of or from property of the estate” under § 541(a)(6)
“include[] the appreciation in value of a debtor’s home.”
Wilson v. Rigby, 909 F.3d 306, 309 (9th Cir. 2018).
CASTLEMAN V. BURMAN 17
The majority decides that because we have held
appreciation becomes part of the estate in a Chapter 7 case,
the same must be true in Chapter 13. 3 Admittedly, this is a
simple resolution to an issue that has vexed bankruptcy
courts across the country. 4 But simplicity cannot take
precedence over the text of the Bankruptcy Code, and if we
read § 348(f) in light of the Code “as a whole”—rather than
just § 541(a)—Wilson is not dispositive. See Robinson, 519
U.S. at 341. The remainder of the Bankruptcy Code clarifies
that in Chapter 13 cases, “property of the estate” is defined
differently. § 348(f)(1)(A).
As discussed, a Chapter 7 estate is short-lived: it sweeps
in all the debtor’s property upon filing and is promptly
liquidated to pay creditors. § 541(a)(1); Brown, 953 F.3d at
620. But in Chapter 13, the debtor retains possession of all
property, § 1306(b), and proposes a plan to repay creditors
3
The trustee’s briefing faults the Castlemans for not claiming the
increase in equity as exempt. But property which does not become part
of the converted estate belongs to the debtor regardless of exemptions.
See Harris, 575 U.S. at 521.
4
Compare In re Goins, 539 B.R. 510, 515-16 (Bankr. E.D. Va. 2015)
(holding appreciation belongs to the estate), In re Goetz, 647 B.R. 412,
416-17 (Bankr. W.D. Mo. 2022) (same), aff’d, 651 B.R. 292 (B.A.P. 8th
Cir. 2023), In re Hayes, Case No. 15-20727-MER, 2019 Bankr. LEXIS
4203, at *22, (Bankr. D. Colo. March 28, 2019) (same), and In re Peter,
309 B.R. 792, 794-95 (Bankr. D. Or. 2004) (same), with In re Barrera
(Barrera I), 620 B.R. 645, 649-54 (Bankr. D. Colo. 2020) (holding
appreciation belongs to the debtor), aff’d, Barrera II, No. BAP CO-20-
003, 2020 WL 5869458 (B.A.P. 10th Cir. Oct. 2, 2020), In re Cofer, 625
B.R. 194, 202 (Bankr. D. Idaho 2021) (same), In re Hodges, 518 B.R.
445, 451 (E.D. Tenn. 2014) (same), In re Niles, 342 B.R. 72, 75-76
(Bankr. D. Ariz. 2006) (same), In re Boyum, No. 05–1044–AA, 2005
WL 2175879, at *2-3 (D. Or. Sept. 6, 2005) (same), and In re Nichols,
319 B.R. 854, 857 (Bankr. D. Ohio 2004) (same).
18 CASTLEMAN V. BURMAN
over a period of years. See §§ 1321-22. If the bankruptcy
court confirms that plan, confirmation “vests all of the
property of the estate in the debtor” unless the plan or a court
order says otherwise. § 1327(b) (emphasis added). 5 Thus,
upon confirmation of a Chapter 13 plan, the debtor is once
again the owner of the property. Cal. Franchise Tax Bd. v.
Jones (In re Jones), 420 B.R. 506, 514-15 (B.A.P. 9th Cir.
2009), aff’d, 657 F.3d 921, 928 (9th Cir. 2011); see also
Berkley v. Burchard (In re Berkley), 613 B.R. 547, 552-53
(B.A.P. 9th Cir. 2020).
It follows that when a Chapter 13 plan has been
confirmed, appreciation accrues to the debtor. In Black v.
Leavitt (In re Black), our Bankruptcy Appellate Panel (BAP)
considered a case where the debtor moved to sell a rental
property after the bankruptcy court had confirmed a Chapter
13 plan revesting that property in the debtor. 609 B.R. 518,
521 (B.A.P. 9th Cir. 2019). The bankruptcy court ordered
the debtor to turn over the proceeds of the sale to the trustee.
Id. at 523. On appeal, the trustee argued that the proceeds
and any postpetition appreciation in the property’s value
were part of the estate under §§ 541(a)(6) and 1306. Id. at
528. The BAP rejected that argument, holding that “the
revesting provision of the confirmed plan means that the
debtor owns the property outright and that the debtor is
entitled to any postpetition appreciation.” Id. at 529.
The Tenth Circuit reached a similar conclusion in
Rodriguez v. Barrera (Barrera III), 22 F.4th 1217 (10th Cir.
2022). There, the debtors confirmed their Chapter 13 plan,
sold their home, and then converted from Chapter 13 to
Chapter 7 under § 348(f)(1)(A). Id. at 1221-22. Observing
that “only proceeds ‘of or from property of the estate’
5
No such provision or order exists in this case.
CASTLEMAN V. BURMAN 19
become property of the bankruptcy estate” under
§ 541(a)(6), the Tenth Circuit concluded that section is
“operative only before confirmation of the Chapter 13 plan
because confirmation ‘vests all of the property of the estate
in the debtor.’” Id. at 1223 (quoting § 1327(b)). “Thus,
proceeds generated from the debtor’s property after
confirmation do not become property of the estate as the
underlying property no longer belongs to the estate.” 6 Id.
The Tenth Circuit declined to decide whether
postpetition, pre-conversion appreciation would be included
in the converted estate when the property has not been sold
before conversion. Id. at 1223 n.1. But while this case does
not involve a pre-conversion sale, we have already held that
postpetition appreciation—like the cash proceeds from the
sale in Barrera III—is “proceeds” of estate property under
§ 541(a)(6). Wilson, 909 F.3d at 309. Here, the underlying
property is the Castlemans’ home, and their Chapter 13 plan
was confirmed on September 29, 2019. When that occurred,
6
The majority claims this interpretation of § 1327(b) would require a
third valuation at confirmation because the trustee would be entitled to
pre-confirmation appreciation. Op. at 10-11. But the Tenth Circuit did
not adopt this approach, see Barrera III, 22 F.4th at 1223-24, and neither
should we. In most Chapter 13 cases, the debtor must propose a plan
within 14 days of the petition date, see FED. R. BANKR. P. 3015(b), and
the creditors’ meeting generally occurs within 50 days of the petition
date, see FED. R. BANKR. P. 2003(a). A confirmation hearing must occur
within 45 days of that. 11 U.S.C. § 1324(b). Thus, for most debtors, a
Chapter 13 plan will either be confirmed within a few months of the
initial petition, or else the case will be dismissed or converted. A
property will virtually never significantly change in value in such a short
period—in fact, the realtor hired in this case estimated the 2021 value of
the Castlemans’ home by reviewing sales of comparable homes over a
period of six months. If we followed our sister circuit’s approach, all
postpetition appreciation would belong to the Castlemans.
20 CASTLEMAN V. BURMAN
the home was no longer “property of the estate” and
therefore any appreciation in its value is not “[p]roceeds . . .
of or from property of the estate.” 7 § 541(a)(6). I would
hold, consistent with the Tenth Circuit, that postpetition, pre-
conversion appreciation belongs to the Castlemans rather
than the converted Chapter 7 estate. See United States v.
Anderson, 46 F.4th 1000, 1005 (9th Cir. 2022) (“In cases
requiring statutory interpretation . . . we will not create a
circuit split unnecessarily.”).
B
While the text of the Bankruptcy Code as a whole
establishes that postpetition, pre-conversion appreciation
belongs to the Castlemans, the majority’s reading of
§ 348(f)(1)(A) is also inconsistent with the statute’s
structure, object, policies, and legislative history. See
Hawkins, 769 F.3d at 666; Brown, 953 F.3d at 623.
In the early 1990s, a circuit split developed on the
question of what property should be included in a Chapter 7
estate upon conversion from Chapter 13. Some courts held
that “upon conversion, all postpetition earnings and
acquisitions became part of the new Chapter 7 estate, thus
augmenting the property available for liquidation and
distribution to creditors.” Harris, 575 U.S. at 517 (citing
Calder v. Job (In re Calder), 973 F.2d 862, 865-66 (10th Cir.
1992), and In re Lybrook, 951 F.2d 136, 137 (7th Cir. 1992)).
However, the Third Circuit had taken the opposite view in
7
The court implies this approach would mean that debtors must bear the
risk of depreciation as well. Op. at 11. But depreciation in a home’s
value would not change the amount of the debtor’s homestead
exemption, see Law v. Siegel, 571 U.S. 415, 424-25 (2014), and a trustee
would probably abandon any asset which depreciated such that it had no
value to the estate. See § 554(a).
CASTLEMAN V. BURMAN 21
Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797,
802-03 (3d Cir. 1985), and held that a tort claim which
accrued during Chapter 13 proceedings was not part of a
Chapter 7 estate upon conversion and belonged to the debtor.
Congress resolved this dispute in the Bankruptcy Reform
Act of 1994, which added § 348(f) to the Bankruptcy Code.
See Pub. L. No. 103-394, § 311, 108 Stat. 4106, 4138 (1994)
(prior to 2005 amendment). The House Report on the Act
made it clear Congress intended to adopt the Third Circuit’s
view:
This amendment overrules the holding in
cases such as Matter of Lybrook, 951 F.2d
136 (7th Cir. 1991) and adopts the reasoning
of In re Bobroff, 766 F.2d 797 (3d Cir. 1985).
However, it also gives the court discretion, in
a case in which the debtor has abused the
right to convert and converted in bad faith, to
order that all property held at the time of
conversion shall constitute property of the
estate in the converted case.
H.R. REP. NO. 103-835, at 57 (1994), reprinted in 1994
U.S.C.C.A.N 3340, 3366. The report included a specific
example:
[Courts following the Bobroff approach] have
noted that to hold otherwise would create a
serious disincentive to chapter 13 filings. For
example, a debtor who had $10,000 equity in
a home at the beginning of the case, in a State
with a $10,000 homestead exemption, would
have to be counseled concerning the risk that
22 CASTLEMAN V. BURMAN
after he or she paid off a $10,000 second
mortgage in the chapter 13 case, creating
$10,000 in equity, there would be a risk that
the home could be lost if the case were
converted to chapter 7 (which can occur
involuntarily). If all of the debtor’s property
at the time of conversion is property of the
chapter 7 estate, the trustee would sell the
home, to realize the $10,000 in equity for the
unsecured creditors and the debtor would
lose the home.
Id. Clearly, Congress believed that home equity which
accrued during Chapter 13 proceedings should not be
included in the converted estate.
The example in the House Report discusses an increase
in equity resulting from the paydown of a secured loan, but
the court’s decision today covers equity from any source and
creates the same disincentive to Chapter 13 filings. When
the Castlemans filed for bankruptcy, all of their home equity
was exempt. Between that exemption and a secured
mortgage, the home had no value to the estate. Had they
filed under Chapter 7, they could have either resolved the
case quickly or moved to force the trustee to abandon the
property. See § 554(b); Barrera I, 620 B.R. at 655-54.
Instead, the Castlemans committed themselves to a five-year
Chapter 13 plan, paid creditors out of their postpetition
income, and made payments on their mortgage. By the time
they were forced to convert to Chapter 7, their home had
appreciated in value, so the trustee sought to sell it.
Allowing that sale leaves them “in a worse position than if
the[ir] petition had been filed in Chapter 7 initially”—the
CASTLEMAN V. BURMAN 23
exact situation Congress sought to prevent. Brown, 953 F.3d
at 620.
The majority refuses to consider this history because it
finds the text of the Bankruptcy Code unambiguously shows
that appreciation belongs to the estate. Op. at 9. I
respectfully disagree. But that assertion is all the more
remarkable in light of the Tenth Circuit’s decision in
Barrera III, 22 F.4th at 1223, and the majority’s recognition
that courts are “heavily divided” on the proper meaning of
§ 348(f). 8 Op. at 5. Indeed, even counsel for the trustee
seemed to believe that § 348(f) was ambiguous: when asked
at oral argument, he admitted the statute is poorly drafted
and agreed that “there is no way to reconcile” the text of
§ 348(f) with § 541(a). 9 To be sure, legislative history is
often unhelpful as an aid to statutory construction. See
ANTONIN SCALIA & BRYAN A. GARNER, READING LAW 376-
78 (2012). But here, it is consistent with the text of the
Bankruptcy Code, directly relevant to the case at hand, and
unequivocally confirms that appreciation in the value of the
Castlemans’ home should not become part of the converted
estate.
III
Because reasonable judicial minds disagree, there is—
once again—a need for Congress to clarify the operation of
§ 348. Though I dissent from my colleagues’ reading of the
8
Certainly a division of authority, standing alone, does not establish
ambiguity. But other courts have identified powerful arguments for a
different reading of § 348(f), and the creation of a circuit split in
particular is to be “avoid[ed] if at all possible.” Anderson, 46 F.4th at
1008. We ought to employ the full panoply of statutory interpretation
tools before departing from the Tenth Circuit’s approach.
9
Oral Argument at 24:06-24:52.
24 CASTLEMAN V. BURMAN
statute, it is far from unfounded. Whether Congress thinks
postpetition, pre-conversion appreciation of an asset in the
course of Chapter 13 proceedings should or should not
become part of the converted Chapter 7 estate, it should
amend § 348(f) to make the answer clear. At least one
scholar has already proposed amendments to § 348(f) which
would resolve the dispute. See Lawrence Ponoroff,
Allocation of Property Appreciation: A Statutory Approach
to the Judicial Dialectic, 13 WM. & MARY BUS. L. REV. 721,
756-57 (2022). States may also wish to amend their
homestead exemptions. See § 522(b)(3)(A). For example,
while the change came too late to help the Castlemans,
Washington State responded to our decision in Wilson by
allowing debtors to exempt “[a]ny appreciation in the value
of the debtor’s exempt interest in the property during the
bankruptcy case.” See Act of May 12, 2021, Ch. 290 § 5,
2021 Wash. Sess. Laws 2306-07 (codified at WASH. REV.
CODE § 6.13.070(2) (2022)).
In the absence of legislative action, it remains our duty
to read § 348(f) and say what the law is. I have no doubt that
in holding that postpetition, pre-conversion appreciation
becomes part of the converted bankruptcy estate, my
colleagues in the majority have discharged that duty to the
best of their abilities. But in striving to do the same, I find
the text, structure, and history of the statute compel the
opposite conclusion. Because I would hold that the
appreciation belongs to the Castlemans, I respectfully
dissent.