In an important win for debtors, the BAP for the Eighth Circuit found that, under section 541 a debtor’s post-petition bonuses were not property of her bankruptcy estate. Klein-Swanson v. Seaver (In re Klein-Swanson), No. 12-6054 (B.A.P. 8th Cir. March 22, 2013).
Debtor’s employer, IBM, offered two bonuses to its employees: the Excellence Award, and Growth Driven Profit Award. IBM determined eligibility for these awards each calendar year in a highly discretionary process under which no employee was guaranteed a bonus. Although the debtor had completed all the work leading to these bonuses prior to filing her bankruptcy petition, there was no evidence that IBM made the decision to award her the bonuses until after she filed her petition. Nonetheless, the bankruptcy court held that the bonuses were contingent interests and, therefore, part of the bankruptcy estate under section 541(a)(1).
The BAP disagreed, finding instead that at the time of the petition the debtor had no interest in the bonus payments because the decision to award them to her had not yet been made by IBM and, due to the highly discretionary nature of the decision, it was by no means certain that she would receive the awards. The court turned to state law for a determination of what property interest the debtor had in the bonuses when she filed her petition. Under Minnesota law, an employee has no property interest in discretionary bonuses prior to the exercise of the employer’s discretion to award them even though the existence of the bonuses and the debtor’s eligibility for them were both present at the time of her petition.
The BAP distinguished Segal v. Rochelle, 382 U.S. 375 (1966), in which the Court held that a “loss-carryback” tax refund received post-petition was property of the estate where the taxes had been paid before the petition and the loss occurred pre-petition but the refund itself was received post-petition. There, the Court found that the debtor’s entitlement to the refund was “rooted in the pre-bankruptcy past” and the debtor’s interest, therefore, existed at the time of the petition. The BAP also distinguished Stoebner v. Wick (In re Wick), 249 B.R. 900 (Bankr. D. Minn. 2000) aff’d, 276 F.3d 412 (8th Cir.) (contract right contingent on future employment becomes property of the estate), and Booth v. Vaughan (In re Booth), 260 B.R. 281 (B.A.P. 6th Cir. 2001) (contractual entitlement to profit-sharing funds upon continued employment part of the estate) as dealing with contractual interests in existence at the time of the petition and contingent upon certain eventualities, rather than mere hope of an award without any contractual entitlement to it.
The BAP found Drewes v. Vote (In re Vote), 276 F.3d. 1024 (8th Cir. 2002), more analogous to the case before it. In Vote, the debtor suffered crop losses prior to his bankruptcy petition but Congress did not pass the law providing benefits for such losses until after the petition. There, the debtor’s recovery under the new law did not become property of the estate because even though the loss giving rise to the benefits were pre-petition, the debtor had no interest in the benefits prior to the passage of the law providing for them.
Like the debtor in Vote, Ms. Klein-Swanson had only a hope of obtaining the bonus, rather than the actual interest held by the debtor in Segal. In finding that the bonuses were not part of the bankruptcy estate, the court declined to state a rule that in order to become property of the estate a debtor must have an “enforceable” right to the bonus. Rather, the court emphasized the distinction between a mere “hope” contingent upon the post-petition exercise of discretion and an actual right to and interest in the bonus.
Congratulations to NACBA member Barbara May for this win!
Tags: Property of Estate
