Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-02276/USCOURTS-casd-3_12-cv-02276-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

In re: 

CHARLES EDWARDS, JR. and

KATHY WICKWARE,

Debtors, _______________________________

CASE NO. 12cv2276 JM(KSC)

ORDER AFFIRMING ORDER OF

THE BANKRUPTCY COURT

CHARLES EDWARDS, JR. and

KATHY WICKWARE, 

 Appellants

 Vs.

GREG A. AKERS, Chapter 7 Trustee,

 Appellee

Appellants Charles Edwards, Jr. and Kathy Wickware appeal an order of the

Bankruptcy Court requiring them to turn over certain assets to the bankruptcy estate. 

The Chapter 7 Trustee, Greg Akers (“Trustee”) opposes the appeal. Pursuant to Local

Rule 7.1(d)(1), the court finds the matters presented appropriate for resolution without

oral argument. For the reasons set forth below, the court affirms the order of the

Bankruptcy Court.

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BACKGROUND

On September 4, 2012, Bankruptcy Court Judge Laura S. Taylor ordered that

Appellants turn over to the bankruptcy estate a pro-rata portion of the bonus received

from Ms. Wickware’s employer. (ER 9). Appellants contend that the bonus is not

property of the bankruptcy estate.

On October 31, 2011, Appellants filed their voluntary Chapter 7 bankruptcy

petition. About two months later, Ms. Wickware’s employer, San Diego Gas & Electric

(“SDGE”), paid her a year-end bonus in the amount of $14,549.40. Plaintiff was

employed by SDGE throughout 2011. (ER 78).

When Debtors refused the Trustee’s request to turn over a pro rata portion of the

bonus to the estate, the Trustee moved to compel the Debtors to turn over the property

to the estate. The Bankruptcy Court found that the portion of the bonus attributable to

Ms. Wickware’s pre-filing employment belonged to the estate. The Bankruptcy Court

awarded 10/12 of the bonus to the estate, or the amount of $12,124.50.

DISCUSSION

Standard of Review

In bankruptcy appeals, legal conclusions by the bankruptcy court are reviewed

de novo, factual questions are reviewed for clear error, and mixed questions of law and

fact are reviewed de novo. See In re Chang, 163 F.3d 1138, 1140 (9th Cir. 1998); In

re Pace, 67 F.3d 187, 191 (9th Cir. 1995). “This court must accept the bankruptcy

court’s findings of fact unless upon review we are left with the definite and firm

conviction that a mistake has been committed.” In Re: Straightline Ins., Inc., 525 F.3d

870, 876 (9th Cir. 2008).

Property of the Estate

Property of a bankruptcy estate is broadly defined as consisting of “all legal or

equitable interests of the debtor in property as of the commencement of the case.” 11

U.S.C. §541(a). The main purpose of this definition is to “bring anything of value that

the debtors have into the estate.” Lyon v. Eiseman, 372 B.R. 321, 330-31 (6th Cir. BAP

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2007). Property of the estate includes contingent interests in future payments. In re

Mehlhaff, 491 B.R. 898, 903 (8th Cir. BAP 2013). Federal law determines what

property is included in the estate, while state law controls whether the debtor has a legal

or equitable interest in the property at the time the bankruptcy case is filed. In re

Westfall, 599 F.3d 498, 502 (6th Cir. 2010). 

The Appeal

In the main, Appellants argue that the payment made by SDGE to Plaintiff

pursuant to the Incentive Compensation Plan (“ICP”) constitutes a mere expectancy of

payment as of the bankruptcy commencement date, and not a contingent interest. 

Trustee, on the other hand, argues that the bonus is sufficiently tied to Ms. Wickware’s

pre-filing employment activities to constitute a contingent interest. The court

concludes that the Trustee’s argument is persuasive.

The ICP for calendar year 2011 defines an employee’s interests in a bonus in the

following manner:

PARTICIPATION

Regular full-time and part-time attorneys, management, and associate employees who meet all of the following eligibility requirements will

participate in this incentive plan for 2011.

1. An employee of the company for at least three consecutive full

months during 2011 and is an employee on December 31, 2011 or

meets other eligibility requirements as listed under section:

Employee Status Changes.

2. Participant has met minimum job expectations and performed satisfactorily, as determined by his/her supervisor in conjunction

with Human Resources.

3. Participant is not in another formal incentive plan in 2011.

(ER 66). Further, the ICP provides that all employees “will have their award prorated

for the period of participation in the plan while on the active payroll.” (ER 70).

Under the ICP, Ms. Wickware’s bonus was contingent upon working for at least

three months, remaining employed with SDGE through December 31, 2011, and

satisfactorily performing her work-related responsibilities. In the event Ms. Wickware

did not work during the entire 2011 calendar year, the amount of the bonus would be

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prorated, provided she worked for at least three months and was employed by SDGE

on December 31, 2011. The court concludes that Ms. Wickware’s interests in the bonus

were contingent ones, more than a mere expectancy of payment. See Schachter v.

Citigroup, Inc., 47 Cal.46th 610, 618 (2009) (“Incentive compensation, such as bonuses

and profit-sharing plans, also constitute wages.”); In re Edmonds, 363 F.R. 828m 831

(E.D. Mich. 2001) (profit-sharing payment “sufficiently rooted in the prebankruptcy

past so as to be included as property of the bankruptcy estate under §541(a)”). 

Appellants argue that In re Edmonds is not sufficiently analogous to the present

case because the profit-sharing plan at issue there arose from a contract entered into

between Ford Co. and the United Auto Workers Union whereas the ICP states, in its

entirety,

Participation in one plan year does not constitute the right to participate in succeeding plan years. This plan does not constitute a contract of

employment or guarantee of an incentive award payment and cannot be

relied on as such. (ER 66).

Appellants also highlight another portion of the ICP giving SDGE “the discretion and

authority to interpret, amend or modify the plan; to grant incentive awards; as well as

to terminate, increase or decrease any incentive award opportunity during the

performance period; and to reduce or eliminate any incentive awards that would

otherwise be payable at the end of the performance period.” (ER 70). In light of the

ICP provisions identified above, Appellants contend that Ms. Wickware did not have

any contingent interest in the payment to a bonus, only a mere expectancy that a bonus

may be paid. The court rejects the argument that the bonus was not a contingent

interest. The bonus payment was conditioned upon three primary contingencies: (1)

Ms. Wickware’s continuing to work for SDGE through the end of calendar year 2011;

(2) satisfactory job performance; and (3) the ICP plan continuing in existence. These

are conditions precedent to payment - capable of precise proof, as the bankruptcy court

so found. See In re Yonikus, 996 F.2d 866 (7th Cir. 1993) (every conceivable interest

of debtor, future, nonpossessory, contingent, speculative and derivative, is within the

reach of 11 U.S.C. §541(a)).

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The court concludes that authorities such as In re Jess, 169 F.3d 1204, 1207 (9th

Cir. 1999) provide guidance on the nature of the contingent payment at issue and the

apportionment of the payment between pre-petition and post-petition activities. There,

the debtor, an attorney, argued that the attorney’s fees he received after filing for

Chapter 11 bankruptcy did not belong to the bankruptcy estate. The debtor worked on

the contingency fee case both pre-petition and post-petition, ultimately earning a

substantial fee post-petition. After a hearing before the bankruptcy court, the debtor

was ordered to turn over 78% of the fee to the estate, as this amount represented the

portion of the fee attributable to pre-petition performance. The Ninth Circuit affirmed,

noting that if “some postpetition services are necessary [to earning income], then courts

must determine the extent to which the payments are attributable to the postpetition

services and the extent to which the payments are attributable to prepetition services.

That portion of the payments allocable to postpetition services will not be property of

the estate.” Id. at 1208 (quoting In re Wu, 173 B.R. 411, 414–15 (9th Cir. BAP 1994)). 

The court notes that Appellants’ position is not without some legal support. In

In re Palmer, 57 B.R. 332 (Bankr. W.D. Va. 1986), the bankruptcy court determined

that the bonus received by the debtor post-petition was not property of the estate. The

bonus plan at issue provided:

The bonus is not a gift, and does not happen automatically. The bonus is

paid at the discretion of the Company. It is a sharing of the results of

efficient operation on the basis of the contribution of each person to the success of the Company for that year.

The court noted that the debtor was required to perform substantial post-petition work,

eligibility depended on continued employment, and most importantly, debtor “was not

entitled to receive the bonus until the Chief Executive Officer of Lincoln Electric made

such a determination.” Id. at 335. The court rejected apportionment of the bonus

because the debtor “did not become entitled to the amount until many months later (six

months).” The court determined that the timing of the payment was dispositive. The

court notes that this approach runs contrary to Ninth Circuit authority which held that

where “some postpetition services are necessary [to earning income], then courts must

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determine the extent to which the payments are attributable to the postpetition services

and the extent to which the payments are attributable to prepetition services. That

portion of the payments allocable to postpetition services will not be property of the

estate.” In re Jess, 169 F.3d 1204. Accordingly, the court declines to follow those

authorities which do not apportion a bonus that is firmly rooted in pre-petition activity.

In sum, the court affirms the Bankruptcy Court’s order finding that 10/12 of the

bonus belongs to the estate. The Clerk of Court is instructed to close the file. 

IT IS SO ORDERED.

DATED: August 19, 2013

 

JEFFREY T. MILLER

United States District Judge

cc: All parties

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