Chapter 13 Conversion to Chapter 7: What Asset Values are used?

19 Oct Chapter 13 Conversion to Chapter 7: What Asset Values are used?

So you filed for Chapter 13 bankruptcy, but for some reason or another, it just didn’t work out and you’ve now converted to Chapter 7.  You have already listed all assets in the Chapter 13, your case was previously confirmed, and no other assets remain undisclosed after converting.  Are the previous asset values you listed in the original chapter 13 now binding on the Chapter 7 Trustee, Creditors, and any other interested parties?

Case law is spread on this issue.  There is no Ninth Circuit case on point, but a recent BAP decision provides that the Chapter 7 Trustee is not bound by the previous values in the original Chapter 13 Schedules.  In the case of In re Lynch, 363 B.R. 101 (9th Cir. BAP 2007), the Bankruptcy Appellate Panel held that confirmation of a chapter 13 plan does not implicitly value a debtor’s house.  This decision parted from the majority position and followed the minority position.  Previously, the majority position was summed up as follows:

While the Ninth Circuit itself has not yet addressed this issue, other courts within the Ninth Circuit have cited with approval the general conclusion that confirmation of a plan constitutes an implicit valuation. See In re Peter, 309 B.R. 792 (Bankr. D. Or. 2004) (citing In re Kuhlman and In re Wegner for the proposition that without plan confirmation there is no valuation preconversion to entitle the debtor to the postpetition, preconversion appreciation); In re Kuhlman, 254 B.R. 755, 758 (Bankr. N.D. Cal. 2000) (agreeing with the court in In re Page that plan confirmation acts as an implicit valuation for purposes of Section 348(f)(1)(B), but holding that where there was no plan confirmation, there was no valuation and, therefore, the debtor was not entitled to postpetition, preconversion appreciation). This appears to be the majority holding across the country. See In re Slack, 290 B.R. 282 (Bankr. D.N.J. 2004) (holding that confirmation was an implicit valuation for purposes of Section 348 upon conversion); Warren v. Peterson, 298 B.R. 322 (D.N.D. Ill. 2003) (holding that order confirming chapter 13 plan was implicit valuation); In re Page, 250 B.R. 465 (Bankr. D.N.H. 2000) (holding that inherent in confirming a chapter 13 plan is the court’s finding that the creditors would receive more under the plan than in a chapter 7 liquidation and that to make such a finding, the court must determine the value of the property or rely on the value of the property as scheduled).

Nevertheless, the Lynch case has turned the tides and is very persuasive since it came from the Bankruptcy Appellate Panel and will probably influence most judges to allow valuations of assets at later dates despite confirmation.  This is precisely what happened in a recent case I had last week where Judge Adler ruled:

Trustee’s Motion for Valuation of Partnership Interest and for Approval of Sale GRANTED. The sale of a minority interest in the partnership to the majority partner who holds a right of first refusal is supported by the exercise of the trustee’s business judgment. The sale price is more than the debtor valued this interest [debtor valued it at “0”] and appears to be the best offer the trustee has received. There is no evidence that any appreciation has occurred since the debtors’ filed their Ch. 13 case since the Trustee’s evidence of value on the date of filing is the only evidence submitted. Court adopts reasoning of In re Lynch, 363 B.R. 101 (9th Cir. BAP 2007) for proposition that Ch. 13 debtor’s valuation nonbinding if valuation was unchallenged or unnecessary during Ch.13 confirmation process.

Presently, the debtors are debating appeal.  A direct appeal to the Ninth Circuit in this case would get final resolution and new law for all courts to follow in the Ninth Circuit.  Until then, however, its probably wise to seek a separate valuation hearing in addition to confirmation if it is foreseeable that asset values might later be an issue in other proceedings such as conversion, mortgage lien stripping, exemptions, etc.

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