In re Castillo (March 27, 2014)

Issue(s): Whether property of the estate under § 541(a)(5) excludes interest that were inherited after the first 180 days of the Debtors’ Chapter 13 petition was filed. Whether the Debtors had a duty to disclose the inherited interests under Rule 1007(h). Whether the Trustee has met his burden to show that the conversion from a Chapter 13 to a Chapter 7 was based on the Debtor’s bad faith under § 348(f)(2).

Holding(s): Inherited interests received after the first 180 days after a Chapter 13 petition is filed are property of the Chapter 13 estate per § 1306(a)(1) which states that property of the estate is comprised of the property specified in § 541, and includes “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.” The Court noted that the majority of cases conclude that § 1306(a) was intended to increase, not limit, the scope of the estate. The Debtors, however, did not have a duty to disclose the inheritance as Rule 1007(h) is limited to property of the estate defined under § 541(a)(5), not § 1306(a). Because 1007(h) does not require disclosure of the inherited fractional interest in the home, Debtors argued that there can be not bad faith under § 348(a)(2). The law in the Fifth Circuit, however, has consistently held that a debtor has a continuing obligation to disclose post-petition claims, cause of action, and assets. The Court therefore, reviewed whether the Trustee had met his burden to show that conversion itself was based on the Debtors’ bad faith. The Court adopted the Mullican Test (Moser v. Mullican (In re Mullican), 417 B.R. 389 (Bankr. E.D. Tex. 2008), aff’d, 417 B.R. 408 (E.D. Tex. 2009)) for application of § 348(a)(2) and found, based on the totality of circumstances, the Trustee had not met his burden in establishing bad faith.

In re Castillo (March 27, 2014)
Issue:  Whether Debtor’s failure to disclose property she inherited after filing under Chapter 13 but before converting to Chapter 7 indicated a bad faith conversion, rendering that property part of Debtor’s Chapter 7 estate per 11 U.S.C. § 348(f)(2).

Holding:  Debtor’s fractional interest in a home she inherited after filing under Chapter 13 but before converting to Chapter 7 was part of her Chapter 13 estate, but not part of her Chapter 7 estate.  The property was part of Debtor’s Chapter 13 estate under § 1306(a) even though she inherited it more than 180 days after filing her petition.  It is arguable whether Federal Rule of Bankruptcy Procedure 1007(h) required Debtor to disclose the inheritance, but Fifth Circuit precedent holds that debtors have a continuing obligation to disclose assets obtained post-petition.  Debtor’s failure to disclose the inherited asset did not, however, establish that she converted her case to Chapter 7 in bad faith.  Courts determine bad faith under the totality of the circumstances, and the circumstances of this conversion did not indicate bad faith.  The inherited property was, therefore, not part of the Chapter 7 estate per 11 U.S.C. § 348.

Ingalls v. Phillips (November 4, 2009)
Ingalls v. Phillips (November 3, 2009)
Issue: Should Trustee’s Complaint for turnover of funds that the Trustee asserts were improperly retained by Defendant in connection with his representation of Debtor be granted?
Holding: Yes. No matter how this case is dissected, Defendant has no legal authority for his retention of the funds paid to him by the Debtor during the Chapter 13 part of this case without Court permission and in violation of a prior Court order.