Eighth Circuit BAP Holds Increase in Equity Belongs to Estate in Converted Case

Goetz v. Weber (In re Goetz), No. 22-6009 (8th Cir. BAP June 1, 2023)

On June 1, 2023, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit affirmed a bankruptcy court’s denial of a motion by the Debtor Machele Goetz to compel abandonment of the estate’s interest in her home. The panel agreed with the lower court’s adoption of the majority position that, under Bankruptcy Code §§ 348(f)(1)(A) and 541(a)(1), any increase in equity after the petition date in a chapter 13 case later converted to chapter 7 belongs to the estate.

The events leading to this decision started when Goetz, after having her chapter 13 case confirmed, sought to convert it to a chapter 7 case. At that point, the value of the property that Freedom Mortgage had a lien on had increased from $130,000 to $205,000. Meanwhile, the mortgage had marginally decreased by about $1,000 to about $107,000. Before the conversion, a property sale would not have yielded proceeds beyond the debt, exemption, and sale costs. However, after the conversion, a sale would have generated more than $62,000 after covering the mortgage, the $15,000 homestead exemption, and sale costs.

When the trustee indicated a plan to sell the property, Goetz moved to compel its abandonment, but the Bankruptcy Court denied her request. The court concluded that the increase in equity between the petition and conversion dates was part of the chapter 7 bankruptcy estate and that the residence held more than an “inconsequential value and benefit to the estate” under Bankruptcy Code § 554. Although there is a split of authorities, the bankruptcy court, identified and sided with a slight majority position holding that the increase in value belongs to the estate.

Goetz appealed, with the National Association of Consumer Bankruptcy Attorneys and National Consumer Bankruptcy Rights Center supporting her as amici. On appeal, the Debtor argued that the bankruptcy court was mistaken in concluding that market appreciation and an equity increase before the conversion date belong to the estate. She further argued that her residence was removed from the bankruptcy estate when it transferred to her or when she claimed an exemption for it.  The bankruptcy appellate panel disagreed with both arguments and affirmed.

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