Fraudulently Transferred Property Remains Part of Estate Upon Conversion from Chapter 13 to 7

In In re Brown (Brown v. Barclay), No. 18-60029 (March 23, 2020), the Ninth Circuit Court of Appeals held that property transferred in bad faith by the Debtor during the pendency of a Chapter 13 case was property of the estate upon conversion of the case to Chapter 7. Generally, only assets that remain in the debtor's control or possession upon conversion from Chapter 13 to Chapter 7 become property of the estate. Further, pursuant to Section 348(f)(1)(A), assets acquired after the Chapter 13 filing do not become property of the estate upon conversion to Chapter 7.

In Brown, the case was converted as a sanction for the debtor's fraudulent transfer of assets. While it may seem self-apparent that such transferred assets would remain property of the estate upon conversion to Chapter 7, Section 348(f)(1)(A) is not completely clear on this point. The opinion discussed at length previous opinions interpreting the relevant section and the particular language of the section, as well as the overarching policy of the Bankruptcy Code, to make completely clear that where funds were transferred with the "fraudulent purpose of avoiding payments to creditors," such funds remained in the debtor's possession and control and are property of the Chapter 7 bankruptcy estate.

In fact, the debtor conceded that had the case remained in Chapter 13, or had it been initially filed in Chapter 7, the trustee could have recovered the funds. Thus, the only logical conclusion is that the funds fraudulently transferred during the Chapter 13 case would become property of the estate upon conversion to Chapter 7. The decision was largely the result of the unequivocal bad acts of the debtor, so the result may have been different were the facts not so egregious. There may be further litigation on this issue, and in fact the opinion cites prior similar decisions, based on different facts.

For the full opinion, please click here.

If you have any questions, please contact Melissa Lowe or any of the other attorneys at Shulman Bastian Friedman & Bui LLP at 949-340-3400.

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