The U.S. Bankruptcy Court for the District of Colorado issued its opinion in In re Evans on Wednesday, March 23, 2011.
Debtor, the former president of two closely-held corporations, filed an individual Chapter 11 petition and later converted his case to Chapter 7. After conversion, the Chapter 7 Trustee sought to include in the Chapter 7 estate distributions Debtor received from the corporations postpetition, but pre-conversion. The Court concluded that Debtor had adequately demonstrated at trial that the distributions constituted “earnings” excluded from the estate under § 541(a)(6). The Chapter 7 Trustee, who bore the ultimate burden of persuasion, failed to demonstrate that any portion of the distributions were attributable to the “enterprise value” of the corporations’ assets rather than the Debtor’s services. The Court further concluded that, although an individual Chapter 11 debtor’s postpetition earnings are included in the estate under § 1115(a), those postpetition earnings revert to the Debtor upon conversion to Chapter 7 pursuant to § 348(f). The Court acknowledged that, by its terms, § 348(f) applies only to conversion from Chapter 13 to Chapter 7. Nevertheless, the Court concluded that the primary policy behind § 348(f)–to avoid penalizing debtors who first attempt a repayment plan–applied equally in cases which convert from Chapter 11 to Chapter 7.