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Debtors' Inheritance Received Before Ch. 13 Case Closed Is Property of Bankruptcy Estate

Wednesday, November 6, 2013
By Diane Davis

Nov. 5 --A bankruptcy court correctly held that a Chapter 13 debtor's inheritance was property of the bankruptcy estate under Bankruptcy Code Section 1306(a), the U.S. Court of Appeals for the Fourth Circuit held Oct. 28 (Carroll v. Logan, 4th Cir., No. 13-1024, 10/28/13).

Affirming the judgment of the bankruptcy court, Judge James A. Wynn Jr. concluded that the plain language of Section 1306(a) blocks the debtors from depriving their creditors of a part of their windfall acquired before their Chapter 13 case was closed, dismissed, or converted.

According to the court, Section 1306(a) plainly extends the timeline for including “the kind” of property “specified in” Section 541 in Chapter 13 bankruptcy estates. Chapter 13 proceedings provide debtors with significant benefits, the court said. In exchange for those benefits, a Chapter 13 debtor makes a multi-year commitment to repay obligations under a court-confirmed plan, the court said.

Most courts to address the issue have found that Section 1306 modifies the Section 541 time period in Chapter 13 cases, the court said. Property of the estate in Chapter 13 cases is a broader concept as it includes property also described in Section 1306, which supplements Section 541's definition of property of the estate, the court said. 

Chapter 13 Filing

Debtors Rickey Dean and Cheri Carroll filed for Chapter 13 protection. Their repayment plan, which had been approved by the bankruptcy court, required them to pay $2,416 for six months, and then $2,480 for 54 months.

More than three years after the filing of their Chapter 13 petition, the debtors notified the bankruptcy court that Rickey Dean's mother had died in 2011, and they anticipated an inheritance of approximately $100,000. Because the debtors acquired the inherited interest before their bankruptcy case was closed, dismissed, or converted to a proceeding under another Bankruptcy Code chapter, the Chapter 13 trustee moved to modify the debtors' repayment plan to include “an amount of the inheritance, if and when received, sufficient to pay in full all of the allowed general unsecured claims.”

Over the debtors' objection, the bankruptcy court held that the debtors' inheritance was property of the bankruptcy estate, and ordered that it be included in the debtors' plan to pay unsecured creditors, who were expected to receive payment on 3.8 percent of their allowed claims under the original repayment plan. 

Debtors' Argument on Appeal

The debtors appealed to the Fourth Circuit, arguing that the inheritance should be excluded from their Chapter 13 estate under two principles of statutory interpretation: that courts “must give effect to every word of a statute,” and that “specific language in a statute governs general language.” 

Property of the Estate

Bankruptcy Code Section 541 identifies the property included in bankruptcy estates generally, the court said. Section 1306(a), the court said, then expands the definition of estate property for Chapter 13 cases specifically, stating:

(a) Property of the estate includes, in addition to the property specified in section 541 of [the Code]--

(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under Chapter 7, 11, or 12 of [the Code], whichever occurs first.

According to the court, the statutes' plain language manifests Congress's intent to expand the estate for Chapter 13 purposes by capturing the types, or “kind” of property described in Section 541 (such as bequests, devises, and inheritances), but not the 180-day temporal restriction. This is because “[t]he kind of property is a distinct concept from the time at which the debtor's interest was acquired,” the court said. On its face, Section 1306(a) incorporates only the kind of property described in Section 541 into its expanded temporal framework, the court said.

The extension of a Chapter 13 bankruptcy estate's reach until the Chapter 13 case is closed, dismissed, or converted is a “rational response to the relevant situation,” the court said. Chapter 13 proceedings, the court explained, provide debtors with significant benefits, and in exchange for those benefits, a Chapter 13 debtor makes a multi-year commitment to repay obligations under a court-confirmed plan. The repayment plan remains subject to modifications for reasons including a debtor's decreased ability to pay according to plan, and the debtor's increased ability to pay, the court said.

According to the court, the overwhelming majority of courts to have addressed the issue have agreed that Section 1306 modifies the Section 541 time period in Chapter 13 cases. Moreover, property of the estate in Chapter 13 cases is a broader concept, the court said, as it includes property also described in Section 1306, which supplements Section 541's definition of property of the estate of Chapter 13 debtors. 

Debtors' Statutory Interpretation Rejected

The court rejected the debtors' arguments that the inheritance should be excluded. Section 1306(a) is specific to Chapter 13 and defines estates solely for purposes of that reorganization chapter, the court said. In contrast, Section 541 is a general provision that provides generic contours for bankruptcy estates, the court said. Thus, even under the two statutory interpretation principles contended by the debtors, the bankruptcy court properly included the inherited property in the debtors' bankruptcy estate.

The plain language of Section 1306(a) blocks the debtors from depriving their creditors of their windfall acquired before their Chapter 13 case was closed, dismissed, or converted, the court said.

Judges Paul V. Niemeyer and Henry F. Floyd joined the opinion.

Cortney I. Walker of Sasser Law Firm, Cary, N.C., argued for the debtors/appellants. John Fletcher Logan of Office of the Chapter 13 Trustee, Raleigh, N.C., argued for the appellee trustee. Travis Sasser of Sasser Law Firm, Cary, N.C. represented the debtors/appellants on the brief. Michael Brandon Burnett of Office of the Chapter 13 Trustee, Raleigh, N.C., represented the appellee trustee on the brief.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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