The U.S. Bankruptcy Appellate Panel for the Eighth Circuit March 22 held that bonus payments received post-petition by a Chapter 7 debtor from her employer are not property of the debtor's bankruptcy estate (Seaver v. Klein-Swanson (In re Klein-Swanson), B.A.P. 8th Cir., No. 12-6054, 3/22/13).
Reversing the decision of the bankruptcy court, Judge Barry S. Schermer also reversed (1) the revocation of the debtor's discharge under Bankruptcy Code Section 727(d)(2), (2) the avoidance of the transfer of the bonus funds under Section 549, (3) the recovery of those funds under Section 550, and (4) the granting of the trustee's motion for costs under Federal Rule of Bankruptcy Procedure 7054(b).
According to the BAP, the decision whether to make the award payments was completely within the debtor's employer's control. As of the petition date, the debtor had nothing more than a hope that she would receive the award payments from her employer, the panel said. To consider the payment to be property of her estate simply because it related to her prepetition employment would be to give the bankruptcy estate more than the debtor had on the petition date, the panel said.
Further, the BAP found that the debtor had no right to or interest in her employer bonuses on the petition date.
Debtors Michelle Ann Klein-Swanson and her husband Scott Lawrence Swanson filed for Chapter 7 protection on Jan. 19, 2009. In April 2009, an order was entered granting them a Chapter 7 discharge.
Debtor Michelle had been employed by International Business Machines (IBM) since 1996, and was employed by IBM on the petition date. In October 2007, the debtor changed her position at IBM to become the Client Executive for Oracle Alliance.
On the petition date, the debtor was eligible to receive bonuses under two IBM programs: the Excellence Award; and the Growth Driven Profit (GDP) program. IBM determines bonuses on a calendar year.
The Excellence Award is a quarterly bonus program in which each quarter, IBM allocated funds for Excellence Awards to work teams. The team supervisor then is charged with deciding how much, if any, of the Excellence Award funds for her team would go to each member based on each member's performance during the quarter. The decision to make the award is entirely within IBM's discretion and no member of the team is guaranteed an Excellence Award.
The debtor's supervisor announced the awards after the close of the calendar year, and through the regular payroll process. IBM paid the bonuses about 60 days after the close of the quarter. In February 2009, the debtor receives an Excellence Award post-petition in the amount of $8,000 for work she had performed during the fourth calendar quarter of 2008.
In March 2009, the debtor also received a GDP bonus payment of $16,072 for the year 2008. IBM based GDP bonus payments on the “personal business commitment” of an employee and IBM's year-over-year profit and growth. Typically, IBM paid these bonuses about 60 days after the January announcement of its operating results from the year. Like the Excellence Award, the decision whether to make a GDP program payment was in the complete discretion of IBM.
Prior to her filing for Chapter 7 protection, the debtor had completed all tasks within her control toward obtaining an award under either of the bonus programs. Both awards, however, were within the complete discretion of IBM and IBM had the right to decide it would not make any award to the debtor under either program.
The debtor did not disclose her eligibility for or any interest in the Excellence Award or a GDP bonus in her bankruptcy schedules or Statement of Financial Affairs. Although the debtor was notified that she would receive, and had already been paid the $8,000 Excellence Award by the time of her Section 341 meeting of creditors, she did not bring this to the attention of the trustee.
After the Section 341 meeting, the debtor received the GDP bonus. After the meeting, the debtor told the trustee about receiving the Excellence Award for the fourth quarter of 2008, but she did not mention the GDP bonus to the trustee.
The trustee brought an adversary proceeding against the debtor, asserting five counts including conversion, state law civil theft, and avoidance and recovery under Sections 549 and 550 based on the debtor's alleged post-petition transfer of the IBM bonuses to herself. The trustee also sought revocation of the debtor's discharge under Section 727(d)(2).
The bankruptcy court granted a partial summary judgment, holding that the bonuses were contingent interests, received for work completed prepetition and, thus, property of the bankruptcy estate.
The district court concluded that the bonuses in the amount of $24,072 received post-petition by the debtor were property of the bankruptcy estate and remanded the case to the bankruptcy court on the avoidance and recovery counts of the adversary proceeding.
Subsequently, the bankruptcy court issued a single document entering judgment against the debtor under the avoidance and recovery counts, and granting a motion by the trustee for costs under Federal Rule of Bankruptcy Procedure 7054(b).
Section 541(a)(1) defines property of a debtor's bankruptcy estate broadly to include generally “all legal or equitable interests of the debtor in property as of the commencement of the case,” the BAP explained. Also included in the definition of “property of the estate” are “(6) [p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case” and “(7) [a]ny interest in property that the estate acquires after the commencement of the case,” the BAP said. The party seeking to include property in the estate bears the burden of showing that the item is property of the estate, the panel said.
According to the BAP, the legislative history of the 1978 Bankruptcy Code makes it clear that despite the broad scope of Section 541, it is not intended to extend the debtor's rights against others more than they exist at the commencement of the case. Further, property interests are created and defined by state law, the BAP said.
The trustee argued that at the commencement of the debtor's bankruptcy case, the debtor had a contingent interest in the IBM Excellence Award and GDP bonus, rendering such payments property of the debtor's estate. According to the trustee, the estate had a contingent interest in the bonuses because the debtor's receipt of such bonuses came from the debtor's prepetition services and IBM bonus programs that were in place prepetition. The trustee also noted that the debtor was eligible for the bonuses on the petition date.
Relying on Segal v. Rochelle, 382 U.S. 375 (1966), and Stoebner v. Wick (In re Wick), 276 F.3d 412 (8th Cir. 2002), aff'g 249 B.R. 900 (Bankr. D. Minn. 2000), the trustee contended that the IBM bonuses were property of the estate.
The BAP rejected the trustee's argument, concluding that as of the petition date, the debtor had no interest, contingent or otherwise, in the payments from IBM because IBM had the absolute discretion to decide that it would not make an award to the debtor under either of its programs. IBM did not exercise its discretion to award the bonuses until post-petition, the BAP noted, and the debtor had nothing more than a “hope or expectation” that she would receive the payments. The awards were made post-petition, the panel said, and they rightfully belong to the debtor. The BAP noted that the trustee has shown no basis for the proposition that the debtor had a legal or equitable interest in the bonuses as of the petition date.
The BAP rejected the trustee's reliance on Segal v. Rochelle, in which the Supreme Court held that a tax refund loss-carryback claim was included in property of the debtors' estates where the losses occurred prepetition and the taxes for the carry back years had been paid, but the refund could not be claimed until post-petition under the applicable tax laws. Distinguishing the case from this case, the BAP noted that the Segal debtors had an “existing interest” in a tax refund on the petition date. Further, the panel pointed out that the tax laws were set and all that was left for the debtors to do was to make the claim. In contrast, the decision whether to make the award payments was completely within IBM's control, the BAP said, and as of the petition date, the debtor had nothing more than a hope that she would receive the award payments from IBM. “To consider the payment to be property of her estate simply because it related to her prepetition employment would be to give the bankruptcy estate more than the Debtor had on the petition date,” the panel said.
The panel also said the trustee's reliance on Wick was misplaced. On the petition date, Ms. Wick had an interest in property--a contract right to receive stock in the company contingent upon Ms. Wick completing one year of employment, the panel noted. In contrast to this case, the debtor here had nothing more than a hope that she would receive the bonus payments from IBM. IBM, the BAP noted, had complete discretion to decide that the debtor would receive nothing. “Wick does not stand for the proposition that the Debtor held an interest that was property of her estate,” the BAP said.
According to the trustee, the “entire value” of the award payments is property of the debtor's estate under Section 541(a)(6) and (7) because the bonuses are compensation for prepetition services that were paid post-petition and, therefore, are included in the estate in their entirety and cannot be excluded from the estate as earnings for post-petition services of the debtor. The BAP rejected this argument, saying that “[b]ecause the Debtor had no interest in the Excellence Award and the GDP program payment on the petition date, the money she received from IBM postpetition under these programs would not come into the estate under § 541(a)(6), and it is of no consequence whether they would be excluded as earnings from services performed by the Debtor postpetition under that section.”
Finally, the BAP reversed the bankruptcy court's decision under Section 727(d)(2), 549, and 550 and Rule 7054(b) since the trustee is no longer the prevailing party and the award of costs is not appropriate. In addition, there was no transfer under Section 549, the BAP said, so Section 550 does not apply.
Judges Arthur B. Federman, and Charles L. Nail Jr. joined the opinion.
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