Warning: 9th Circuit Rules Post-Petition Appreciation Belongs to the Bankruptcy Estate

In July 2007, the 9th Circuit Bankruptcy Appellate Panel issued a decision in In Re Chappell, a Western District of Washington Chapter 7 bankruptcy case, Case No. 04-18810. That decision is rocking the 9th Circuit for various reasons, one of which is the Court’s finding that when a Chapter 7 case with assets remains open, that any increase in value of assets within the Estate, that increase belongs to the estate. In the Chappell case, the case had been open for two years when the Trustee decided to sell the homestead, in which the debtors had claimed a specific (and less than its value) homestead exemption. In the two years while the case was open, the value of the residence/homestead had significantly increased and the Trustee claimed the increased value. In the past, the estate is a snapshot in time for valuation purposes: whatever the value is at the moment of filing the bankruptcy petition, that value is the value.

Careful debtor’s counsel should make sure that their client’s case is closed in a timely manner, and that the Chapter 7 Trustee has filed their report of “no assets” with the Bankruptcy Court. If the property in the estate is not administered in the bankruptcy case, the asset is deemed abandoned when the case is closed. Attorneys would want to monitor the docket and be sure that all cases have closed or perhaps take the pro-active step of filing a Motion to Compel Abandonment. Some attorneys have suggested that one way to circumvent a result like the Chappell decision is to have the debtors insert a statement for each item of property that “Debtor claims entire interest in property, present value of $xxx”.