IN RE POTTER, (B.A.P. 8th Cir. 1999)

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Docket Number

No. 98-6057NDF

Attorney(S)

John D. Waller, William E. McKechnie, Grand Forks, ND, for appellant. Kip M. Kaler, Fargo, ND, for appellee.

Judges

MAHONEY, Bankruptcy Judge.

Acts

Judiciary And Judicial Procedure — Bankruptcy Judges — Organization Of Courts — Appeals

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Smart Summary

Factual and Procedural Background

Thomas A. Potter, the debtor, holds a contingent remainder interest in the Lena M. Potter Trust, with his grandfather Ralph Potter as the life beneficiary. Upon Ralph Potter’s death, the trust corpus of approximately $150,000 is to be divided equally between Thomas Potter and his sister, contingent upon their survival. Potter filed a Chapter 13 bankruptcy petition on April 22, 1994, which was later converted to Chapter 7. In 1998, the bankruptcy trustee received an offer to purchase the estate’s interest in the trust for $17,000 but declined, opting to wait for the contingency to arise. The trustee then moved to close the bankruptcy case while preserving the trust interest as an unadministered asset to be administered upon realization. Potter opposed preserving the trust interest, arguing that the estate should only receive the value of the interest as of the petition date, which he claimed to be zero. The bankruptcy court granted the trustee’s motion, closing the case but preserving the trust interest, and Potter appealed this order.

Legal Issues Presented

Whether the bankruptcy estate’s interest in a contingent trust remainder includes post-petition appreciation in value or is limited to the value of the interest as of the petition date.
Whether the bankruptcy court properly ordered the case closed while preserving the trust interest as an unadministered asset subject to reopening upon realization.

Arguments of the Parties

Appellant's Arguments

Potter contended that the estate’s interest in the trust should be limited to the value of the beneficial interest as it existed on the date of filing the bankruptcy petition.
He opposed preserving the trust interest as an unadministered asset, arguing that doing so would grant the estate a more valuable interest than Potter had at the time of filing.

Appellee's Arguments

The bankruptcy trustee argued that the estate’s interest includes the entire asset, including any appreciation occurring after the petition date.
The trustee maintained that it was better for the estate to wait for the contingent interest to mature rather than accept a discounted purchase offer.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Segal v. Rochelle, 382 U.S. 375 (1966)	Broad construction of "property" in bankruptcy to include novel, contingent, or postponed interests.	The court relied on this precedent to affirm that the debtor’s contingent trust interest is property of the estate.
Barowsky v. Serelson, 946 F.2d 1516 (10th Cir. 1991)	Affirmed the application of Segal in interpreting Section 541 of the Bankruptcy Code.	Used to support the broad definition of property of the estate under Section 541.
Matter of Yonikus, 996 F.2d 866 (7th Cir. 1993)	Section 541 includes all legal and equitable interests of the debtor.	Supported the court’s interpretation that the trust interest is property of the estate.
In re Neuton, 922 F.2d 1379 (9th Cir. 1990)	Section 541 applies to contingent interests.	Reinforced the inclusion of contingent interests in property of the estate.
In re Paolella, 85 B.R. 974 (Bankr. E.D. Pa. 1988)	Post-petition appreciation in property value belongs to the bankruptcy estate.	Used to reject the debtor’s argument limiting estate’s interest to petition date value.
In re Hyman, 967 F.2d 1316 (9th Cir. 1992)	Post-petition appreciation accrues to the estate.	Supported the court’s conclusion regarding appreciation of the trust interest.
In re Prospero, 107 B.R. 732 (Bankr. C.D. Cal. 1989)	Post-petition increases in value are property of the estate.	Further supported the inclusion of appreciation in the estate’s interest.
In re Dias, 37 B.R. 774 (Bankr. D. Idaho 1984)	Trustee entitled only to value of asset as of petition date.	The court found this precedent unpersuasive due to lack of explanation and contrary statutory language.

Court's Reasoning and Analysis

The court began by affirming that the debtor’s contingent remainder interest in the trust qualifies as property of the bankruptcy estate under Section 541 of the Bankruptcy Code, consistent with the Supreme Court’s broad interpretation of "property" in Segal v. Rochelle. The court rejected Potter’s argument that the estate’s interest should be limited to the value at the petition date, emphasizing that Section 541(a)(6) explicitly includes all proceeds and profits from property of the estate, which encompasses post-petition appreciation.

The court noted that the exceptions in subsections (b) and (c) of Section 541, which could exclude certain interests, did not apply here because the trust was not a spendthrift trust and no enforceable restriction excluded the debtor’s interest. The court distinguished In re Dias, finding its conclusion unpersuasive due to lack of authority and inconsistency with the statutory text.

Ultimately, the court held that the entire trust interest, including any appreciation occurring after the petition date, is property of the estate. The court also acknowledged that the issue of reopening the case was not appealed and thus did not address it further.

Holding and Implications

The court AFFIRMED the bankruptcy court’s order closing the case while preserving the debtor’s contingent trust interest as an unadministered asset to be administered upon realization.

This decision means that the bankruptcy estate’s interest in a contingent trust includes any post-petition appreciation, rather than being fixed at the petition date value. The case closure with preservation of the asset allows the estate to realize value in the future without reopening the case prematurely. No new precedent was established beyond affirming the broad scope of property of the estate under existing statutory and case law.

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In re Thomas A. POTTER, Debtor. Thomas A. Potter, Appellant v. Wayne Drewes, Appellee.

MAHONEY, Bankruptcy Judge.

Thomas Potter, the debtor, appeals the order of the bankruptcy court entered June 17, 1998, closing this case, but preserving the debtor's interest in a testamentary trust as an unadministered asset, with the case to be reopened upon realization of the asset.

We have jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(b) and (c).

FACTUAL BACKGROUND

Debtor Thomas Potter ("Potter") holds a contingent remainder in the corpus of the Lena M. Potter Trust. Ralph Potter, the debtor's grandfather, is the life beneficiary of the trust and is currently 91 years old. Upon the death of Ralph Potter, the corpus of the trust in the approximate amount of $150,000 is to be divided equally between the debtor and the debtor's sister, should they survive Ralph Potter. The debtor is currently in his mid-forties. Counsel for the debtor conceded that the trust is not a spendthrift trust and that the likely distribution to the bankruptcy estate would be $75,000 if the debtor survives Ralph Potter.

Potter filed a voluntary petition for relief under Chapter 13 of the United States Bankruptcy Code on April 22, 1994. The case was converted to Chapter 7 on August 23, 1994. On March 26, 1998, the bankruptcy trustee received an offer to purchase the bankruptcy estate's interest in the trust assets for the sum of $17,000. The trustee concluded, however, that the bankruptcy estate would be better served by waiting for the contingency to arise and decided, therefore, to decline the purchase offer. The bankruptcy trustee then filed a motion to close the case, but be allowed to reopen to administer the asset upon realization.

In response, Potter amended his schedules to state that the value of his interest in the trust at the time the bankruptcy petition was filed was $0.00, and claimed it as exempt. Potter opposed that portion of the bankruptcy trustee's motion which sought to preserve the trust interest as an unadministered asset, maintaining that such action would serve to grant the estate a more valuable interest than that which Potter had at the time of filing.

Potter appeals the granting of the bankruptcy trustee's motion and requests that we remand the case to the bankruptcy court to determine the value of the asset at the time of filing.

For the reasons discussed below, we affirm the bankruptcy court's decision to order the case closed, but to preserve the Potter trust as an unadministered asset, with the case to be reopened upon realization of the asset.

STANDARD OF REVIEW

On appeal, we review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Fed.R.Bankr.P. 8013; In re Usery, 123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal v. Southwest Mo. Bank (In re Broadview Lumber Co.), 118 F.3d 1246, 1250 (8th Cir. 1997) (citing First Nat'l Bank of Olathe v. Pontow, 111 F.3d 604, 609 (8th Cir. 1997)).

DISCUSSION

Prior to enactment of the Bankruptcy Act of 1978, the United States Supreme Court specifically considered the definition and the reach of the term "property" in Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966), stating that "the term `property' has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed." Segal v. Rochelle, 382 U.S. at 379, 86 S.Ct. at 515, 15 L.Ed.2d at 432. When Congress enacted Section 541 of the Bankruptcy Code, it affirmatively adopted the Supreme Court's analysis of property that was contained in Segal. Barowsky v. Serelson, 946 F.2d 1516, 1518 (10th Cir. 1991) (footnote and citations omitted). Section 541 of the Bankruptcy Code defines "property of the estate" broadly to include all of the debtor's interests, both legal and equitable. Matter of Yonikus, 996 F.2d 866, 869 (7th Cir. 1993) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 and nn 8, 9, 103 S.Ct. 2309, 2313 and nn. 8, 9, 76 L.Ed.2d 515 (1983)). The breadth of Section 541 is limited only by subsections (b) and (c). Courts have thus consistently held that Section 541 applies to contingent interests. See In re Neuton, 922 F.2d 1379, 1382-83 (9th Cir. 1990) (collecting cases).

(b) Property of the estate does not include —

(1) Any power the debtor may exercise solely for the benefit of an entity other than the debtor;

(2) Any interest of the debtor as a lessee under a lease of nonresidential real property . . .

(3) Any eligibility of the debtor to participate in programs authorized under the Higher Education Act of 1965 . . .

(c) (2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title.

Potter does not dispute that the trust interest is property of the estate. Instead, he contends that the estate's interest under Section 541(a)(1) is limited to the value of that beneficial interest as it existed on the date of the filing of the petition for relief. The bankruptcy court did not adopt Potter's argument and we agree. Nothing in Section 541 suggests that the estate's interest is anything less than the entire asset, including any changes in its value which might occur after the date of filing. In fact, quite to the contrary, Section 541(a)(6) specifically includes as part of the estate all "[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." A change in the value of an asset does not fall within the purview of "earnings from services performed by an individual debtor," nor does such a change fall within the exceptions of subsections (b) or (c) of Section 541, which are quoted in footnote 2 above. An increase in the value of an asset might best be described as appreciation. Except to the extent of the debtor's potential exemption rights, post-petition appreciation in the value of property accrues for the benefit of the trustee. In re Paolella, 85 B.R. 974, 976 (Bankr. E.D. Pa. 1988). See also In re Hyman, 967 F.2d 1316 (9th Cir. 1992); In re Prospero, 107 B.R. 732, 736 (Bankr. C.D. Cal. 1989). Unless there is a valid spendthrift provision which exclude's the debtor's trust interest pursuant to Section 541(c)(2), " every right of the debtor under the trust becomes property of the estate." Collier on Bankruptcy, § 541.11[6][a], p. 541-54.7 (15th. ed. rev. 1998) (emphasis added).

Potter cites In re Dias, 37 B.R. 774 (Bankr. D. Idaho 1984), in support of his assertion that the trustee is entitled only to the value of the asset as of the petition date. The court in Dias does in fact conclude that the change in value of the asset after the petition date belongs to the debtor; however, the court does so without explanation or citation to other authority. In view of the fact that Section 541 makes no mention of limiting the trustee to any particular value, and in view of the text of Section 541(a)(6), we conclude that the analysis regarding value in Dias is not persuasive. Whether or not Potter survives the life beneficiary, Potter's entire trust interest, including any appreciation thereon, is property of the estate.

Although the issue of reopening the case at some future date was addressed to a limited extent by the parties in their briefs and at oral argument, the issue was not appealed by Potter and therefore need not be further addressed.

CONCLUSION

We affirm the bankruptcy court's decision to order the case administratively closed, but to preserve the bankruptcy estate's interest in the Potter trust as an unadministered asset, with the case to be reopened upon realization of the asset.