BANKRUPTCY CASE LAW:
PROPERTY OF THE BANKRUPTCY ESTATE
The following is for the exclusive use of attorneys.  This firm does not make any representations as to the accuracy or current status of any case cited herein. 

Property held for a third party: In re Harrison, (Bkrtcy.D.Kan.) July 9, 2010: Bankruptcy Estate - Certificate of deposit titled in debtor's name was impressed with a resulting trust in favor of her grandparents. A certificate of deposit (CD), though titled in the Chapter 7 debtor's name, was impressed with a resulting trust in favor of her grandparents, a Kansas bankruptcy court held. Thus, the debtor held bare legal title and no equitable interest in the CD, and it was not subject to turnover to the trustee. The debtor's grandparents provided the funds to purchase the CD, and it was titled in the debtor's name pursuant to an agreement that it would be held exclusively for the grandparents' benefit. There was no fraudulent intent, the court found, only an intent by the grandparents to place their savings beyond the reach of those who operate scams that prey upon the elderly. The debtor successfully rebutted the presumption that her grandparents intended a gift to her.

Trusts: Issues to discuss in determining whether or not trust can be accessed by bankruptcy trustee: Is the trust revocable or irrevocable.  Is the debtor the Trustee of the Trust.  If not, is there an anti-alienation clause or any clause giving the Trustee discretion on whether to make a disbursement or not.  If not, and the Trust can not be terminated, then a Chapter 7 Trustee might sell the stream of income at its current value.  A Chapter 13 Trustee would look to the value of the Debtor’s interest in the Trust for Chapter 7 reconciliation purposes.   See also: In re Pugh and In re Coumbe, 304 B.R. 378 ...A "self-settled" trust is not subject to exclusion from the property of the estate under 11 U.S.C. §541 ( c) (2). In Pugh, 274 B.R. 883 (Bankr. Ariz. 2002); A.R.S. §14-7706.

Insurance renewal commissions (book of business) In re Palmer: 167 B.R. 579, 93-10245-PHX-SSC, Adv. No. 93-1255. (Arizona 1/8/1994)

Once the bankruptcy petition was filed, the Debtor's contractual right to receive these renewal commissions became property of the bankruptcy estate. As such, the Trustee is now entitled to pursue the contractual right of the Debtor to collect the renewal commissions earned on insurance policies sold prepetition.

Several courts have had the opportunity to address this issue. Those courts which have ruled on this issue have done so after reviewing the contract between the debtor and the insurance company. Generally, the courts have held that if the contract between the debtor and the insurance company requires the debtor to perform ongoing servicing as a prerequisite to receiving the renewal commissions then, and only then, should the renewal commissions not be considered to be property of the estate. In re Kervin, 19 B.R. 190 (Bankr.S.D.Ala.1982) (Court determined that the receipt of the commissions was conditioned upon the debtor meeting performance requirements and continuing to service accounts; as such, the commissions were not property of the estate). In re Tomer, 147 B.R. 461 (S.D.Ill. 1992) and In re Froid, 109 B.R. 481 (Bankr. M.D.Fla.1989) in which the courts acknowledged that the debtors had performed services postpetition; but because those services were not a prerequisite to receiving the commissions, and the majority of the services had been performed to obtain the original policy, the renewal commissions were property of the estate.(17. On a similar issue, if a debtor receives an income tax refund postpetition, the refund will constitute property of the estate to the extent it is attributed to prepetition withholdings.  In re Rash, 22 B.R. 323 (Bankr.D.Kan.1982).)

Money in bank accounts.  ARS 33-1126(a) protects up to $150 (for each debtor) in one bank account on the day of filing the bankruptcy case.  If the debtor has issued checks, but the funds have not yet been physically paid out of their bank account prior to the filing of the bankruptcy – these funds are property of the estate and the Trustee will demand surrender of the funds.  The Debtor must reimburse the Trustee for the funds that were in the account on the date of filing, minus their exemption of $150.00.  In re Sawyer, Judge Curley 3/06 (9^th Circuit).

SLINEY v. BATTLEY (10/16/01 - No. 00-35075) (9^th Cir. Ct App) Fishing quota rights granted 18 months after a fisherman filed for bankruptcy are not property of the bankruptcy estate even if the quota was based on pre-filing fishing history. http://caselaw.lp.findlaw.com/data2/circs/9th/0035075p.pdf

CUSANO v. KLEIN (09/06/01 - No. 99-56131)(9^th Cir. Ct App)   Under 11 USC 1141(b), listing of "songrights" written for a band in a Chapter 11 schedule of assets is sufficient to designate copyrights and song royalties such that disposition of the Chapter 11 petition will vest those rights back to the debtor.  http://caselaw.lp.findlaw.com/data2/circs/9th/9956131p.pdf

IN RE: STERN, No. 00-56431/56526 (9th Cir. February 04, 2003)  Although a pension plan was properly included within a bankruptcy estate, the pension plan assets were exempt from distribution to debtor's creditors. (Amended opinion) http://caselaw.findlaw.com/data2/circs/9th/0056431ap.pdf

CASSEL v. KOLB, No. 01-17240 (9th Cir. March 03, 2003) A debtor's declaration of an interest in trust properties on loan applications constituted an acceptance of his contingent interest in those properties, and that contingent interest is an asset of the bankruptcy estate. ttp://caselaw.lp.findlaw.com/data2/circs/9th/0117240p.pdf

RAYMOND B. YATES, M.D., P.C. PROFIT SHARING PLAN v. HENDON, No. 02-458 (U.S.S.C March 02, 2004)    The working owner of a business may qualify as a "participant" in a pension plan covered by ERISA. If the plan covers one or more employees other than the business owner and his or her spouse, the working owner may participate on equal terms with other plan participants; such a working owner qualifies for the protections ERISA affords plan participants and is governed by the rights and remedies ERISA specifies.  Remanded with instructions regarding issue of loan repayments.    http://laws.findlaw.com/us/000/02-458.html

Hebbring v. U.S. Trustee, No. 04-16539 (9th Cir. September 11, 2006)
The Bankruptcy Code does not, per se, disallow voluntary contributions to a retirement plan as a reasonably necessary expense in calculating a debtor's disposable income, but rather requires courts to examine the totality of the debtor’s circumstances on a case-by-case basis to determine whether retirement contributions are a reasonably necessary expense for that debtor.
http://caselaw.lp.findlaw.com/data2/circs/9th/0416539p.pdf

Personal Injury – Title 28 U.S.C. Section 157(b)(5) probably does not apply to PI claims held by DR against others.  Such claims are usually considered non-core proceedings, therefore the state law is usually followed.  11 U.S.C. Section 522(d)(11) property exempted by BK estate – (FEDERAL EXEMPTIONS) the DR’s right to receive, or property that is traceable to - includes a payment, not to exceed $16,150, for personal injury, not including pain and suffering or compensation for actual pecuniary loss, of the DR or an individual of whom the DR is a dependent, or (E) payment in compensation of loss of future earning of the DR or an individual of who the DR is or was a dependent, to the extent reasonably necessary for the support of the DR and any dependant of the DR;   However, pain and suffering and actual damages are specifically not included in calculating the exemption amount. STATE EXEMPTIONS: NO PROTECTION, OTHER THAN WAGES/COMPENSATION: Kahn – portion that is wages is 75 percent exempt; legitimate business purposes, if income going to be SSI (and exempt), only protection is that portion that is determined to be future income (but still issue that the “income” is not actually “wages”);  If use the money to pay on house, then must have good business purpose in order for courts not to set aside (1 year look back in BK Court, 4 years in State Court);

Kane v. Nat'l Union Fire Ins. Co., No. 07-30611  (U.S. 5th Circuit Court of Appeals, July 14, 2008)
In a personal injury suit, summary judgment for defendants finding plaintiffs were judicially estopped based on their failure to include the personal injury action in their Chapter 7 bankruptcy schedules, as well as a denial of the trustee's motion to be substituted in that action as moot, are reversed and the case remanded where: 1) the personal injury claim became an asset of the bankruptcy estate upon filing of the Chapter 7 petition; 2) the trustee was the real party in interest and never abandoned his interest; 3) plaintiffs only stand to benefit in the event there is a surplus after all the debts of the estate are paid; and 4) a prior circuit court case did not control the outcome of this case, and the district court abused its discretion in concluding as a matter of law that it did. Read more...

NOTE TO ATTORNEYS RE Personal injury – chapter 7 The debtor may, as a practical matter, have more control over the situation than the trustee thinks.  The debtor can effectively end the litigation by refusing to cooperate.  This may not be in the debtor's best interest if either (a) the debtor can exempt a portion of the proceeds, or (b) the potential recovery is considerably greater than the claims against the estate (thus leaving the excess to the debtor).  The trustee can solve the problem of an uncooperative plaintiff by guaranteeing a portion of the proceeds to the debtor. 

As a practical matter the trustee may have made a mistake by not working things out with the debtor's existing counsel (who probably has a lien for his or her fees, as well).  In my opinion, it is best for the trustee to retain the counsel who 'has' the case, and to agree to split the recovery so that the debtor has incentive to continue with the case.

A further problem may be state law prohibitions on the assignability of personal injury causes of action.  While it is generally held that such prohibitions do not prevent the cause of action from becoming part of the BK estate, a defendant could argue in state court that the trustee, as an assignee, does not have standing to bring suit.  If a lawsuit has not been filed, can a trustee file the injury claim lawsuit in his/her representative capacity, without the debtor being a named plaintiff?  Or, in other words, can the trustee "force" the debtor to file a lawsuit?  Does the duty to cooperate under sec. 521 extend to filing a personal injury action?

Other issues: If the trustee employs the debtor's PI counsel as "special counsel" to represent the estate in pursing the injury claim, can that attorney also continue to represent the debtor?  Does the trustee really have a legal interest in the claim itself, giving him/her the right to control prosecution of the claim, or does the trustee only have an equitable interest in the proceeds of the lawsuit?     

The Trustee "owns" the entire claim and not just the proceeds.  The Trustee can file the action in their representative capacity without the debtor's permission.  The assignability issue has been resolved in most circuits including the Ninth.  See, Sierra Switchboard.  Unless there is some dispute to "settle," the Trustee can't "give" anything to the debtor to elicit their cooperation.  It would violate absolute priority and no court would approve the compromise.  But, in California (and I'm sure other states), there are exemptions that are dependent upon the debtor's "needs."  In such a situation, it is very common for the parties to resolve the split under the guise of a compromise of the disputed exemption claim.  At that point, the debtor has the continuing financial interest to fully cooperate and both sides receive what they are entitled to.

IN RE RODEO CANON DEV. CORP., No. 02-56999, 02-57203 (9th Cir. March 30, 2004) Nonbankrupt partner is entitled to disgorgement of the proceeds of the sale of the property, pending the outcome of the property ownership dispute. http://caselaw.lp.findlaw.com/data2/circs/9th/0256999p.pdf

WAGES VS ACCOUNTS RECEIVABLE:

The issue of wages versus accounts receivable: the difference may lie in whether the debtor has an inalienable right to receive the payments even if he never lifts a finger in the future.  If he has that right, then there may be a good argument that it should be something akin to receivables.  Conversely, if he still must perform some function in the future in order to get the money, then it can be argued that what he receives in the future is wages with the 75% exemption.  In an insurance agent example, are the future commissions guaranteed no matter what?  Or must the agent still take future action to make sure the money comes in?  Or, for that matter, are there other contingencies in play (e.g. policy cancellations, etc.)?  Then there is the question of whether or not taxes are being withheld from the income.  If they are, that militates toward wages. 

"Wages" is not defined in the Bankruptcy Code.  Its definition from the Arizona Revised Statutes is as follows: 23-622. Wages A. "Wages" means all remuneration for services from whatever source, including commissions, bonuses and fringe benefits and the cash value of all remuneration in any medium other than cash. 
(dealing with commissions) In re Roetman, 405 B.R. 336 (Bankr. Ariz. 2009); Warfield v. Alaniz, 2008 WL 700160 (D. Ariz. 2008); contra In re Osworth , 234 B.R. 497 (9^th Cir. BAP 1999).

Commissions vs wages:
In re Roetman, 405 B.R. 336 (Bankr. Ariz. 2009 HAINES)  The Trustee objects to the debtor's claimed exemption of pre-petition real estate commissions under Arizona Revised "Statute ("A.R.S.") § 33-1131. The Trustee argues that commissions paid to an independent contractor do not qualify as "earnings" because the exemption statute requires an "employer-employee" relationship. This court does not interpret A.R.S. § 33-1131 to require an "employer-employee" relationship in order for commissions to qualify as earnings, so the Trustees' objection is denied and the debtor's exemption claim is sustained.

In re Pruss, 235 B.R. 430, at 433 (8^th Cir. BAP 1999) vacated following the dismissal of the bankruptcy case, 22 ( F.3d 1197 (8^th Cir. 2000).When dealing with the issue of an attorney’s accounts receivable, the 8^th Circuit Bankruptcy Appellate Panel ruled: 'This court agrees and finds that when an attorney performs legal services, the fees generated constitute "earnings" from the attorney's personal services. As such, the portion of the fees associated with the attorney's personal labor fall squarely within the statutory definition of "earnings" in Neb.Rev.Stat. § 25-1558. Labeling the Debtor's earnings as "accounts receivable" rather than "accrued compensation" does not change the essential fact that these funds constitute compensation earned by the Debtor for rendering personal services. Indeed, every wage earner and salaried employee whose compensation is paid in arrears holds an account receivable; yet, the existence of such a receivable does not change the character of the compensation from earnings to some other category of income."

  BACK TO BANKRUPTCY CASE LAW Index

OPINION SUMMARIES ARCHIVE FindLaw archives case law summaries of opinion issued since September 2000 by the U.S. Supreme Court, all thirteen Federal Circuit Courts, the California Supreme Court, the California Appellate Courts, and the New York Court of Appeals.  http://caselaw.lp.findlaw.com/casesummary/index.html