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Not All Property Acquired Post-Petition is Safe from Creditors

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By:  Ben Reeves

Although property obtained by a debtor after filing for bankruptcy is usually safe from creditors, a recent case from the Ninth Circuit Bankruptcy Appellate Panel allowed a Chapter 7 Trustee to sell real property obtained by the debtors post-petition.

In In re Jones, a debtor’s grandmother signed and recorded a “Beneficiary Deed” that transferred certain real property to the debtor effective upon the grandmother’s death.  A year and a half after the grandmother recorded the deed, the debtor filed for bankruptcy.  Three days after he filed for bankruptcy, the grandmother passed away.

The Chapter 7 Trustee attempted to sell the inherited property, but the debtor objected.  The debtor argued that the real property was not “property of the estate” under 11 U.S.C. § 541(a)(5), because only property that is obtained by “bequest, devise, or inheritance” within 180 days of the petition date becomes property of the estate.  The debtor contended that the “Beneficiary Deed” was not a bequest, devise, or inheritance and thus not property of the estate.  The bankruptcy court rejected this argument, instead determining that the “Beneficiary Deed” created a contingent interest that was property of the estate under the broad language of 11 U.S.C. § 541(a)(1).  Thus, the bankruptcy court approved the Chapter 7 Trustee’s sale of the real property.  The Bankruptcy Appellate Panel affirmed.

Two aspects of the case are noteworthy.  First, it appears to be the first case discussing the legal effect of a “Beneficiary Deed” under Arizona law and, in dicta, compared the deed to the creation of a testamentary trust (which does become property of the estate upon the filing of a bankruptcy petition).  Second, the opinion provides a reminder that the bankruptcy estate is interpreted very broadly, and will generally include all interests in property, including future, contingent interests that may vest during the pendency of the bankruptcy case.