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BAP holds that post-petition earnings earned during Chapter 11 revert to debtors upon conversion to Chapter 7

The U.S. Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") recently held in Wu v. Markosian (In re Markosian), BAP No. NC-13-1339-JuKiD (9th Cir. BAP March 12, 2014), that a bonus earned by the debtor by his employer for services performed while the case was pending in Chapter 11 reverted to the debtors upon conversion of the case to Chapter 7 and was not the property of the Chapter 7 bankruptcy estate. Earnings received post-petition in a Chapter 11 case are generally the property of the estate under Section 1115(a)(2) of the Bankruptcy Code but are not the property of the estate in a Chapter 7 case under Section 541(a)(6) of the Bankruptcy Code. The BAP based its decision on Section 348(f)(1)(A) of the Bankruptcy Code which excludes a debtor's post-petition earnings from the property of a Chapter 7 estate upon conversion from a Chapter 13 case. The BAP found no difference between the conversion of a Chapter 13 case to a Chapter 7 case versus the conversion of a Chapter 11 case to a Chapter 7 case. However, in Markosian, the case was originally filed as a Chapter 7, converted to Chapter 11, and then converted back to Chapter 7. The BAP, citing to Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 255 (9th Cir. BAP 1988), found that property of the estate is determined as of the filing date of the Chapter 11 petition, not the conversion date. In this case, on the Petition Date, the case was originally filed in a Chapter 7 case, so Section 541(a)(6) of the Bankruptcy Code excluded post-petition earnings from the estate. Thus, income that came into the Chapter 11 estate is recharacterized as the property of the debtor upon conversion. Query whether the Court would come to the same result if the filing was originally commenced as a Chapter 11 such that on the petition date, post-petition earnings were property of the Chapter 11 estate.

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