United States District Court, E.D. Tennessee
CURTIS L. COLLIER, District Judge.
Before the Court is Chapter 7 bankruptcy trustee John P. Newton's (the "Trustee") appeal from an order of the United States Bankruptcy Court for the Eastern District of Tennessee granting Debtors David and Telena Hodges' (the "Debtors") motion to compel abandonment of property. The Trustee filed a brief (Court File No. 5), and the Debtors filed a brief in opposition (Court File No. 6). After giving careful consideration to the parties' arguments, the relevant case law, and the evidentiary record, the Court AFFIRMS the judgment of the bankruptcy court.
I. RELEVANT FACTS AND PROCEDURAL HISTORY
This appeal does not involve factual disputes. The parties stipulated to relevant facts before the bankruptcy court, and neither party objects to the bankruptcy court's following account of the facts:
On December 20, 2006, the Debtors, acting pro se, filed a Voluntary Petition commencing their case under Chapter 7 of the Bankruptcy Code. On February 12, 2007, counsel for the Debtors entered his appearance and, on February 16, 2007, the Debtors filed an amended Voluntary Petition and amended schedules. In their amended schedules, the Debtors valued the Rutledge Pike Property at $172, 000.00, subject to first and second mortgages held by First Tennessee Bank totaling $143, 593.32. On February 21, 2007, an Order Converting Case Under Chapter 7 to a Case Under Chapter 13 was entered converting the Debtors' case to Chapter 13.
At the end of their Chapter 13 bankruptcy case, because they had not filed tax returns, the Chapter 13 Trustee filed a motion to reconvert to Chapter 7. The Debtors could not pay the $8, 000.00 that the Chapter 13 Trustee determined would have been received and paid into their bankruptcy estate had they timely filed their returns, and the case was reconverted to Chapter 7 on May 31, 2012. On October 19, 2012, the Chapter 7 Trustee filed a Notice of Assets, and Beverly Lemings was authorized to be employed by the estate to sell the Rutledge Pike Property; however, to date, there have been no offers to purchase the property.
The Debtors claimed a homestead exemption in the amount of $7, 500.00 and reaffirmed their obligations to First Tennessee Bank which, as of September 5, 2012, totaled $89, 276.51, the amount owing after the Debtors made payments in the aggregate amount of $54, 316.81 through their Chapter 13 plan. Additionally, the Noland Company had recorded judgment liens on May 12, 2006, and November 16, 2006, in the amounts of $6, 928.33 and $63, 300.89, respectively. However, the Chapter 7 Trustee and Noland Company agreed that, upon the sale of the Rutledge Pike Property, the estate would receive 50% of any equity realized and Noland Company would release its judgment liens. Thereafter, on January 21, 2013, the Debtors filed the Motion to Compel Abandonment.
(Court File No. 1-24, pp. 3-4) (internal citations omitted) (emphasis added). Based on these facts, the bankruptcy court granted the Debtors' motion to compel abandonment of the property. The Trustee appealed, and the Court held a hearing on April 23, 2014 where the parties presented their arguments.
II. STANDARD OF REVIEW
The Court has appellate jurisdiction to hear appeals from final judgments and orders of the bankruptcy court pursuant to 28 U.S.C. § 158(a)(1). The bankruptcy court's factual findings are reviewed for clear error and its conclusions of law are reviewed de novo. In re Behlke, 358 F.3d 429, 433 (6th Cir. 2004). A finding of fact is considered clearly erroneous if "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Heights Cmty. Cong. v. Hilltop Realty, Inc., 774 F.2d 135, 140 (6th Cir. 1985). "[D]ue regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed.R.Bankr.P. 8013; see Anderson v. City of Bessemer City, 470 U.S. 564, 575 (1985) ("When findings are based on determinations regarding the credibility of witnesses, [the Federal Rules of Bankruptcy Procedure require] even greater deference to the trial court's findings....").
The Trustee asserts the bankruptcy court erred in reaching two conclusions: (1) that the mortgage payments made by the Debtors while they were in Chapter 13 bankruptcy belonged to them, and not the estate, upon conversion to Chapter 7 bankruptcy, and (2) that the remaining equity the estate had in the Debtor's home was of inconsequential value, and thus the Trustee should be compelled to abandon the property rather than having is sold.
A. Equity from Chapter 13 Mortgage Payments
The bankruptcy court concluded that the relevant statute, 11 U.S.C. § 348(f), and the case law interpreting it, provide that increases in the equity of the Debtors' property occuring during the Chapter 13 period (including equity produced by the Debtors paying down their mortgage) is not "property of the estate" upon conversion from a Chapter 13 to a Chapter 7 bankruptcy. Thus the $54, 316.81 in mortgage payments made by the Debtors during the ...