2011 WL 7113705
Bankr. D. Colo.2011Background
- Debtor served as President of two closely-held bakeries, owning substantial stock and receiving both wages and distributions as compensation.
- Boards controlled by non-debtor Congers; Debtor’s compensation tied to company profits rather than fixed salary.
- In 2008 and 2009, Debtor received substantial post-petition Distributions and wages; taxes not withheld from Distributions.
- Debtor filed Chapter 11 in 2008; in 2010 converted to Chapter 7 due to loss of major contract with 7-Eleven.
- DIP accounts held Compensation, Escrow funds, and an Exempt account; Trustee seeks turnover of post-petition funds and to classify assets as non-exempt.
- Debtor claimed post-petition Earnings as exempt under § 541(a)(6) and § 1115(a); dispute centers on estate interests after conversion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are Distributions earnings excluded from estate? | Evans: earnings exclude under § 541(a)(6) despite status as distributions. | Trustee: Distributions are estate property under § 1115(a) as post-petition earnings. | Distributions were earnings; entire amount deemed earnings by the court. |
| Do post-petition earnings become estate property under § 1115(a) and revert on conversion? | Evans: earnings stay with debtor on conversion per § 348(a). | Trustee: § 1115(a) brings earnings into estate; § 348(a) may not revert them. | Post-petition earnings became estate property under § 1115(a) and do not fully revert on Chapter 7 conversion; adjustments made. |
| Who bears burden of proving Earnings Exception allocation? | Evans: Debtor bears burden to show earnings are due to personal services. | Trustee: Trustee bears initial burden; must prove allocation between services and enterprise value. | Trustee carried initial burden; failure to allocate led to ruling in Debtor’s favor on earnings. |
Key Cases Cited
- In re FitzSimmons, 725 F.2d 1208 (9th Cir. 1984) (earnings exclude only those from debtor's personal services; enterprise value may stay estate)
- In re Cooley, 87 B.R. 432 (Bankr.S.D.Tex. 1988) (broader view of 'earnings' beyond personal services for closely-held businesses)
- Lybrook, 951 F.2d 136 (7th Cir. 1991) (estate treatment of post-petition property upon Chapter 13 to Chapter 7 conversion)
- In re Hochman, 963 F.2d 1347 (10th Cir. 1992) (post-petition property determination after conversion; supports debtors' position on asset dates)
- In re Bobroff, 766 F.2d 797 (3d Cir. 1985) (policy favoring debtor repayment plans; conversion treatment)
- Horton, 130 B.R. 326 (Bankr.D.Colo. 1991) (discussion of Chapter 13 earnings inclusion)