BERNARD MARKOVITZ, Bankruptcy Judge.
James Walsh, the Chapter 7 Trustee for the above-captioned debtor (hereafter "the Trustee"), objects to the amended exemption that William Bosack, such debtor (hereafter "the Debtor"), has taken in monthly commissions that the Debtor continues to receive post-petition. The Court held a trial on the Trustee's exemption objection on April 25, 2011. The parties subsequently filed post-trial briefs.
After considering the positions of both parties, as well as the evidence produced at trial, the Court sustains the Trustee's exemption objection. However, as set forth below, the Court determines that a relatively small percentage of such commissions are attributable to the post-petition efforts of the Debtor. Such relatively small percentage, therefore, does not constitute property of the Debtor's bankruptcy estate, and may not be utilized to pay pre-petition creditors of the Debtor. The balance of such commissions constitutes bankruptcy estate property, none of which may be exempted by the Debtor and, thus, all of which may be utilized by the Trustee to pay pre-petition creditors of the Debtor.
On February 20, 2010, the Debtor and Glacial Energy of Pa, Inc. (hereafter "Glacial")
According to paragraph 4 of the Agent Agreement, Glacial is obligated to pay Residual Commissions to the Debtor even if Glacial fails to extend the Agent Agreement beyond its initial one-year term. However, such paragraph 4 also reveals that Glacial may cease paying Residual Commissions to the Debtor if the Debtor "has been terminated for cause due to material breach of th[e AgentA]greement." According to paragraph 6 of the Agent Agreement, it "may be terminated immediately by either Party at its sole option if the other Party fails to perform any material duty, obligation, covenant and agreement and such default continues longer than ten (10) days." Paragraph 1 of the Agent Agreement reflects that, among the Debtor's responsibilities under such agreement, are that the Debtor "work diligently on behalf of Customers to successfully resolve with Glacial Energy, as efficiently as possible, any disputes arising under ... [the Debtor's] Customer Contracts and any issues that may arise as part of the customer support process."
According to documentation that the Debtor testified he personally prepared just prior to trial, he successfully negotiated, executed, and submitted to Glacial seventeen (17) different customer contracts (hereafter the "Customer Contract(s)") during the period from May 20, 2010, through September 28, 2010. The Debtor testified that he executed one additional Customer Contract in January 2011.
Paragraph 7 of the Agent Agreement states that "[t]he Parties' relationship to each other in the performance of this Agreement is that of independent contractor. Nothing in this Agreement is intended to imply a joint venture, partnership, association[,] principal-Agent, ... fiduciary, or employer-employee relationship between Glacial Energy and the Debtor." In connection with the Debtor's receipt of the Residual Commissions in 2010, he received a Federal Income Tax Form 1099-MISC that reflected that (a) he earned $11,687.23 in "Nonemployee compensation" for such year, and (b) no federal income tax was withheld from such compensation.
Between July 2010 and October 2010 the Debtor, in addition to his independent contractor arrangement with Glacial, occupied a salaried employee position with Glacial, for which he earned in excess of $4,000 per month. The Debtor received a 2010 Federal Income Tax Form W-2 in connection with such employment.
The Debtor is presently employed on a full-time, 40 hour/week basis with First Choice Loan Services, Inc. (hereafter "First Choice"), where he has been so employed for the past one and one-half years. In addition to such full-time employment, the Debtor testified that he devotes between one to three hours per week to continue to service the Customer Contracts. The Debtor is a college graduate who formerly owned and operated his own mortgage brokerage business.
On October 21, 2010, the Debtor commenced the instant Chapter 7 bankruptcy case. Just weeks prior to that the Debtor
Even though the Debtor did not commence the instant case on an emergency basis, he failed to disclose any information regarding either his employment or his independent contractor arrangement with Glacial in any of his originally-filed Bankruptcy Schedules, or in response to Questions 1 and 2 in his originally-filed Statement of Financial Affairs. Despite the fact that the Debtor failed to so disclose any such information regarding income that he earned from Glacial, he (a) signed his bankruptcy petition, the declarations concerning his Bankruptcy Schedules and his Statement of Financial Affairs, and his Declaration Re: Electronic Filing of Petition, Schedules & Statements, (b) testified that he personally reviewed all of the documentation that was filed regarding his bankruptcy case, and (c) conceded that he understood that, by signing the documentation that was filed with the Court, he was thereby declaring under penalty of perjury that the information provided therein was true and accurate to the best of his knowledge.
In November and December 2010 the Debtor received Residual Commissions of, respectively, $1,301.60 and $1,201.60. Despite receiving such Residual Commissions, the Debtor at that time neither amended his Bankruptcy Schedules and Statement of Financial Affairs nor notified anyone that he had received such money. Instead, the Debtor converted such Residual Commissions to his own use.
On January 7, 2011, the Debtor's § 341 Meeting of Creditors was held. It was not until such meeting that the Debtor first disclosed to the Trustee that he had received, and would continue to receive, the Residual Commissions. The Debtor maintains that he volunteered such information regarding the Residual Commissions at such meeting, and that his failure to disclose the same earlier either in his Bankruptcy Schedules and Statement of Financial Affairs or otherwise was simply the result of an honest mistake. However, the Debtor did not volunteer such information prior to, or at the commencement of such meeting; instead, the Debtor disclosed such information only after being asked at such meeting by the Trustee whether he was receiving any income other than from his current employment with First Choice.
On January 28, 2011, the Debtor amended his Bankruptcy Schedule B to disclose that he possessed the right to receive Residual Commissions approximating $1,200 per month. No mention in such schedule is made of the Residual Commissions that he received and spent in the months of November and December 2010, or Residual Commissions of $1,015.98 that he received in January 2011. With respect to the January 2011 Residual Commissions, the Debtor spent the same (a) even though he received them after the conclusion of the § 341 Meeting, (b) without receiving permission to so spend from either the Trustee or the Court, and (c) without disclosing the amount thereof in his Bankruptcy Schedule B. The Debtor has never bothered to amend the responses to Questions 1 and 2 in his Statement of Financial Affairs to reflect his receipt of either the Residual Commissions or his employment in 2010 with Glacial. On January 28, 2011,
Beginning with February 2011 the Residual Commissions have been paid directly to the Trustee, who has then been holding them in escrow pending this Court's decision in the instant matter. The Trustee has received Residual Commissions totalling $3,526.36 for the months of February 2011—April 2011. According to the Trustee, the post-January 2011 Residual Commissions are presently the only assets that exist and that would be available to make any distribution to the Debtor's pre-petition unsecured creditors. According to the Debtor's Bankruptcy Schedules D and F, the Debtor has a total of $1,297,770 in pre-petition unsecured indebtedness.
The Debtor has elected to take the exemptions available to him under 11 U.S.C. § 522(b)(3), that is essentially Pennsylvania state exemptions and the property that he owns with his nondebtor wife as a tenant by the entirety. The Debtor maintains that he may exempt all of the Residual Commissions pursuant to 42 Pa.C.S.A. § 8127. The Trustee disagrees, contending that § 8127 does not operate to exempt the Residual Commissions. The Trustee also objects to the Debtor's exemption of the Residual Commissions on the ground that the Debtor intentionally concealed the same from the Trustee. With respect to the latter position of the Trustee, the Debtor contends that it was only by accident that he failed to disclose the Residual Commissions.
Finally, but actually as a threshold matter, the Debtor contends that, because he performed significant post-petition services on the Customer Contracts, and since such contracts could be cancelled by his customers at any time, none of the Residual Commissions constitute property of his bankruptcy estate; instead, such commissions, according to the Debtor, constitute his post-petition earnings which are shielded from his bankruptcy estate pursuant to 11 U.S.C. § 541(a)(6). The Trustee contends otherwise, arguing that, because the Residual Commissions are substantially, if not entirely, rooted in the Debtor's pre-petition activities, and since the payment of such commissions is dependent only upon his customers' continued payment for the purchase of electricity from Glacial, the entirety of such commissions constitute property of the Debtor's bankruptcy estate.
Because the issue of whether the Debtor can exempt the Residual Commissions only becomes relevant if such commissions constitute property of his bankruptcy estate, the Court shall address first whether the Residual Commissions are property of the Debtor's bankruptcy estate. The "Trustee, [essentially] as plaintiff [herein], has the burden of proof on his claim" that the Residual Commissions constitute bankruptcy estate property. In re Dunn, 436 B.R. 744, 747 (Bankr.M.D.Ga. 2010). "The preponderance of [the] evidence standard applies to this [portion of the] proceeding." Id.
At the outset, the Court holds that any Residual Commission that the Debtor has received or will receive respective of
With respect to those Customer Contracts that were executed pre-petition (which the Court understands to number 17 in all and which the Court will hereafter refer to as "the 17 Customer Contracts"), the Court holds first that, if, as the Trustee argues, the payment of the Residual Commissions respective thereof (hereafter "the 17 Contract Residual Commissions") is dependent only upon the Debtor's customers' continued payment for the purchase of electricity from Glacial, then the entirety of such commissions constitute bankruptcy estate property. That is because (a) "commissions earned wholly prepetition, but paid postpetition, become in their entirety property of the [bankruptcy] estate," In re Golde, 253 B.R. 843, 846 (Bankr.N.D.Ohio 2000), and (b) commissions are earned wholly prepetition if "all the work necessary to earn the commission has occurred prepetition," Id.; see also In re Carey, 150 B.R. 196, 199 (Bankr.N.D. Ohio 1992) (plan funds were earned wholly pre-petition and, thus, constituted bankruptcy estate property because the "[d]ebtor [therein] need not perform any further services to be entitled to payment of at least some of these funds").
Having so held, however, the Court next holds that payment of the 17 Contract Residual Commissions, rather than being entirely dependent upon the Debtor's customers' continued payment for the purchase of electricity from Glacial, is instead also partly dependent upon the Debtor's future performance of services regarding the 17 Customer Contracts. The Court so holds because, as set forth above, according to the Agent Agreement, (a) Glacial may cease paying Residual Commissions to the Debtor if he is terminated for cause due to a material breach of such agreement, (b) Glacial may terminate such agreement immediately at its sole option if the Debtor fails to perform any material duty, obligation, or covenant of such agreement and such default continues for longer than ten days, and (c) one such material duty or obligation of the Debtor under such agreement is that he work on behalf of his customers to successfully resolve with Glacial Energy any disputes that might arise under the Customer Contracts, as well as any issues that may arise as part of the customer support process. Therefore, the 17 Contract Residual Commissions have both a pre-petition component and a post-petition component. Consequently, "the postpetition earnings exception contained in § 541(a)(6) is at least to a certain extent applicable to ... [such] commissions." Golde, 253 B.R. at 847.
Id. (citations omitted); see also In re Bagen, 186 B.R. 824, 828 (Bankr.S.D.N.Y. 1995) (citing similar line of cases). The Golde court then turned to the decision in In re Wu for a description of how the second line of cases deals with commissions that have both a pre-petition component and a post-petition component. The Wu court held that:
In re Wu, 173 B.R. 411, 414-15 (9th Cir. BAP 1994) (internal quotations and citations omitted) (quoted in Golde, 253 B.R. at 848).
This Court determines that the approach set forth in Wu is the appropriate one for dealing with commissions that have both a pre-petition component and a post-petition component and, thus, the Court adopts such approach. This Court finds that the approach in Wu is appropriate for precisely the reasons that the Golde court also adopted such approach, to wit:
Golde, 253 B.R. at 848 (citations omitted); see also Bagen, 186 B.R. at 829 (holding in a fashion identical to the decisions in Wu and Golde).
Having adopted the apportionment method of dealing with commissions that have both a pre-petition component and a post-petition component, the Court must next apportion the 17 Contract Residual Commissions between their pre-petition and post-petition components. "[M]aking any apportionment [is] by its very nature speculative," Golde, 253 B.R. at 848, "and an apportionment may be difficult in some cases," In re Malloy, 2 B.R. 674, 676-77 (Bankr.M.D.Fla.1980). However, the Court finds a fair and reasonable apportionment of the 17 Contract Residual Commissions to be that 93% thereof is attributable to the Debtor's pre-petition services and 7% thereof is allocable to his post-petition services. The Court arrives at such apportionment, in part, because (a) it finds that the 17 Contract Residual Commissions'
Therefore, 93% of any of the 17 Contract Residual Commissions constitutes bankruptcy estate property. The remaining 7% thereof constitutes post-petition income of the Debtor that is shielded from his bankruptcy estate pursuant to § 541(a)(6).
Having determined that 93% of any of the 17 Contract Residual Commissions constitutes bankruptcy estate property, the Court must next ascertain whether the Debtor can exempt all or some portion of the same. For the reasons set forth below, the Court holds that the Debtor cannot exempt any portion of such 93% of the 17 Contract Residual Commissions.
First, the sole vehicle by which the Debtor attempts to exempt that portion of the 17 Contract Residual Commissions that is bankruptcy estate property is 42 Pa.C.S.A. § 8127. The portion of § 8127 that is pertinent to the instant matter provides that "[t]he wages, salaries and commissions of individuals shall while in the hands of the employer be exempt from any attachment, execution or other process." 42 Pa.C.S.A. § 8127(a) (Purdon's 2011). Such statutory provision, by its express terms, only applies if and when funds owed to an individual are held by such individual's employer. Therefore, and as a corollary of the preceding point, such statutory provision will not apply if and when funds owed to an individual are held by someone other than such individual's employer. Based upon the foregoing, and as a matter of law, such statutory provision has no application when an individual works for another as an independent contractor because, in such event, the person or entity for whom such individual works is not, indeed cannot be, such individual's employer. See Houston-Starr Company v. Davenport, 227 Pa.Super. 186, 324 A.2d 495, 496 (1974); Huck-Gerhardt Co., Inc. v. Davies, 134 Pa.Super. 430, 3 A.2d 963, 965-66 (1939).
Unfortunately for the Debtor, the Court finds, and quite comfortably, that the Debtor's capacity is that of an independent contractor when he sells Customer Contracts and thereby earns Residual Commissions. Paragraph 7 of the Agent Agreement clearly states as much, as well as that Glacial is not the Debtor's employer if and when the Debtor sells Customer Contracts and earns Residual Commissions. The tax treatment that the Debtor and Glacial accorded to such arrangement
Second, debtors in bankruptcy, as a matter of law, will be barred from claiming bankruptcy estate property as exempt if they are found, by a preponderance of the evidence, to have intentionally concealed or failed to disclose bankruptcy estate property, see In re Nicholson, 435 B.R. 622, 631-34 (9th Cir. BAP 2010); In re Rolland, 317 B.R. 402, 414-15 (Bankr. C.D.Cal.2004); In re Jones, 446 B.R. 466, 474 (Bankr.D.Kan.2011); In re Varney, 449 B.R. 411, 418 (Bankr.D.Idaho 2011); In re Wood, 291 B.R. 219, 226 (1st Cir.BAP 2003).
The Court finds that the Debtor so intentionally concealed and/or failed to disclose, rather than simply forgot about, the 17 Contract Residual Commissions for several reasons. First, the Court does not believe that the Debtor innocently forgot about such commissions when he failed to originally disclose them in his bankruptcy schedules that were filed on October 21, 2010, because, as the Court understands it, he was then receiving such commissions and had been for a period of time leading up to October 2010. Second, the Court finds it hard to believe that the Debtor would have also honestly forgot to disclose on October 21, 2010, any information regarding his employment with Glacial, especially given that such employment was terminated just weeks before October 21, 2010. Third, the Court cannot accept that, for the entire period between October 21, 2010, and January 7, 2011, the Debtor just innocently forgot about such commissions and his right to continue to receive them, particularly since at the same time he was spending such commissions that he received for the months of November and December 2010. Fourth, the Court cannot find that it was an innocent oversight on the Debtor's part when, for the entirety of such period, he failed either to amend his bankruptcy schedules or to notify the
Finally, the Court is simply taken aback by the fact that (a) the Debtor, after having finally divulged to the Trustee the existence of the 17 Contract Residual Commissions on January 7, 2011, nevertheless proceeded subsequently, without any permission, to spend such commission that he received for the month of January 2011, (b) he would not have voluntarily paid back—or at least offered to pay back—to the bankruptcy estate all of such commissions that he received and then spent post-petition, to then be held in escrow pending the outcome of the instant matter, and (c) he has not yet amended the responses to Questions 1 and 2 in his Statement of Financial Affairs to reflect his receipt of either the Residual Commissions or his employment in 2010 with Glacial.
For all of the foregoing reasons, the Debtor's exemption of the Residual Commissions that constitute bankruptcy estate property, that is 93% of any of the 17 Contract Residual Commissions, is denied; therefore, the Trustee's objection to such exemption is sustained.
For all of the foregoing reasons, the Court sustains in part and overrules in part the Trustee's exemption objection.
In particular, any Residual Commission that the Debtor has received or will receive respective of the January 2011 Customer Contract cannot constitute property of his bankruptcy estate. As well, 7% of any of the 17 Contract Residual Commissions does not constitute bankruptcy estate property. With respect to the property just mentioned that has been determined not to constitute bankruptcy estate property, the Trustee's exemption objection is necessarily overruled.
However, the remaining 93% of any of the 17 Contract Residual Commissions constitutes bankruptcy estate property, for which property the Trustee's exemption objection is sustained, that is the Debtor cannot exempt such property. Furthermore, because 93% of the $2,503.20 worth of Residual Commissions that the Debtor received in, and retained from, November and December 2010 constitutes bankruptcy estate property which the Debtor has unjustifiably converted to his own use, the Debtor shall be directed to immediately deliver to the Trustee cash equal to $2,327.98. Likewise, the Debtor shall be directed to immediately hand over to the Trustee cash equal to 93% of that portion of the $1,015.98 in Residual Commissions that he received in, and retained from, January 2011, that is not attributable to the January 2011 Customer Contract.
