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.FRBP 1007 Lists, Schedules, Statements, and Other Documents