Understanding Bankruptcy 2/22/18

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Question: Can bonuses paid to debtor after Chapter 7 filing be taken by bankruptcy trustee?

Answer:The Bankruptcy Appellate Panel for the U.S. Court of Appeals, 8th Circuit, ruled that employment bonuses paid to a debtor shortly after she filed for chapter 7 bankruptcy could not be considered part of her bankruptcy case. The court’s ruling allowed the debtor to keep $24,072.00 in bonuses, and it reversed a lower court’s order revoking her bankruptcy discharge for failing to list the bonuses in her bankruptcy papers.

In this case, Seaver v. Klein-Swanson, No. 12-6054 (8th Cir.BAP March 22, 2013), the debtor filed Chapter 7 bankruptcy on Jan. 19, 2009. She was a long-time employee of IBM. On the date of filing, she was eligible for both a quarterly Excellence Award bonus and an annual Growth Driven Profit Award bonus, for the last quarter of 2008 and also for the calendar year 2008.

IBM’s bonus program documents stated that “[n]o employee earns or otherwise becomes entitled to payment, or any portion of a payment, under the GDP program prior to payment by IBM.” The IBM bonus program documents stated that this restriction applied to both bonus programs. Bonuses were usually announced and then paid by IBM about sixty days after the close of the quarter for the Excellence Award, and about sixty days after the close of the calendar year for the GDP Award.

IBM paid the debtor an $8,000 Excellence Award bonus, for the last quarter of 2008, after the Chapter 7 was filed but prior to the creditors meeting with the trustee. IBM also paid the debtor a $16,072 GDP bonus, for the year 2008, a few weeks later, after the creditors meeting. Neither of these bonuses were listed in the debtor’s bankruptcy papers, and she did not inform the trustee that IBM had paid her the $8,000.00 bonus prior to the creditors meeting. After the meeting, the debtor did have some correspondence with the trustee about the $8,000 bonus, but she never mentioned receiving the GDP bonus.

Upon learning more about the bonuses, the Chapter 7 trustee asked the bankruptcy court to order turnover of the $24,072.00 received by the debtor, as well as fees and costs. The trustee also asked the bankruptcy court to revoke the debtor’s discharge of debts due to her failure to list the possible bonuses in her original bankruptcy papers. The bankruptcy court granted the trustee’s request.

The debtor appealed, and the appeals court reversed the bankruptcy court on all counts. The appeals court held that under IBM’s bonus program documents, the debtor had possessed no ownership interest, whether contingent or otherwise, in either bonus, until actual payment of the bonus by IBM. Although some employer bonus plans give the employee a vested interest in a bonus once employee goals are met, the IBM program specifically stated otherwise.

IBM’s bonus program stated that IBM had the absolute discretion to make or not make a bonus award, and the employee had no right to a bonus until it was paid. Here, the bonuses were both paid after the chapter 7 was filed. Therefore, the bonuses became the property of the debtor after the filing. The appeals court noted that under bankruptcy code section 541, property received by the debtor after the filing date is excluded from a Chapter 7 case, as part of the debtor’s fresh start.

Accordingly, the appeals court ruled that the debtor’s Chapter 7 discharge should be granted, and also that she could keep the $24,072 in bonuses. The court also observed that the entire litigation could have been avoided if the debtor had simply listed her possible right to receive the bonuses in her originally filed bankruptcy papers.

It should be noted that in cases where bonus plan language gives the employee a vested right to payment of a bonus even before it is paid, and a Chapter 7 case is filed before receipt of such a bonus, the result in such cases would likely be different.

Next Week’s Question: Should I reaffirm my mortgage after filing for bankruptcy?

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