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Appellate Court Rules that Inheritance Received After Filing of Chapter 13 Bankruptcy Petition is Part of Bankruptcy Estate

Quinn Dombrowski [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrWhen a debtor files a bankruptcy petition, a bankruptcy estate is created that exists as a distinct legal entity. The court-appointed trustee has the authority to manage this estate, and the debtor’s non-exempt property becomes the estate’s property. Property obtained by the debtor after the filing date may also become estate property, depending on the circumstances and the chapter of the Bankruptcy Code that the debtor chooses. A debtor in a Chapter 13 case disputed the trustee’s claim to money received by inheritance more than 180 days after the filing date. In a decision that turned on principles of statutory construction, the Ninth Circuit Bankruptcy Appellate Panel (BAP) ruled that the inheritance was estate property. In re Dale, 505 B.R. 8 (9th Cir. BAP 2014).

The debtors, a married couple, filed a Chapter 13 petition in October 2011. In August 2012, the husband’s mother passed away, and he received about $30,000 in inheritance. At that time, the bankruptcy court had not yet confirmed a Chapter 13 bankruptcy plan. The debtors filed a declaration notifying the court of the inheritance in December 2012.

The trustee demanded that the debtors turn over the full amount of inheritance funds to the estate. In January 2013, he filed a motion to dismiss the Chapter 13 case, partly for failing to disclose the inheritance and turn over any non-exempt amounts. The debtors argued that the inheritance was not part of the bankruptcy estate. After a hearing in May 2013, the bankruptcy court ruled that the estate was entitled to the inheritance and ordered the debtors to turn over all funds to the trustee. The debtors appealed to the BAP.

The Bankruptcy Code states that any property received by a debtor “by bequest, devise, or inheritance” within 180 days of the petition filing date becomes property of the estate if it would have been estate property, had the debtor owned it on the filing date. 11 U.S.C. § 541(a)(5)(A). The debtors claimed that, since they received the inheritance more than 180 days after the filing date, the inheritance was not subject to this provision. In Chapter 13 cases, however, the estate also includes “all property of the kind specified” in § 541 acquired “after the commencement of the case but before the case is closed, dismissed, or converted.” 11 U.S.C. § 1306(a)(1).

The question for the BAP was whether the 180-day time limit in § 541 applied to § 1306. The debtors pointed to the words “all property of the kind” in § 1306 and claimed that “kind” described property subject to the 180-day limit. The BAP summarized this as an argument that the specific language of § 541 overrides the more general language of § 1306.

The BAP rejected the debtors’ argument, finding that, while § 541 imposed a strict time limit, § 1306 lifted that time limit. It also noted that, while § 541 uses language that sounds specific, it is actually the more general provision, since it applies in all bankruptcy cases instead of only in Chapter 13 proceedings. It affirmed the lower court’s order to turn over the inheritance to the trustee.

Devin Sawdayi, a Los Angeles bankruptcy attorney, has represented individuals and families in Chapter 7 and Chapter 13 bankruptcy cases since 1997. Contact us online or at (310) 475-939 today to schedule a free and confidential consultation to see how we can help you.

More Blog Posts:

Exemption of Annuities Allowed in Chapter 7 Bankruptcy Case, Over Trustee’s Objection, Los Angeles Bankruptcy Lawyer Blawg, April 27, 2015

Ninth Circuit Rules that Bankruptcy Trustee Has Authority to Recover Debtor’s Property at Any Time While the Case Is Pending, Los Angeles Bankruptcy Lawyer Blawg, December 30, 2014

More than Just a Sweet Ride: A Car May Be Exempt from Bankruptcy Estate Under California’s “Wildcard” Exemption, Appellate Court Holds, Los Angeles Bankruptcy Lawyer Blawg, June 11, 2013

Photo credit: Quinn Dombrowski [CC BY-SA 2.0], via Flickr.