579 B.R. 734
E.D. Pa.2016Background
- In April 2008 Segal (through his companies) sold two long‑term care facilities; contemporaneously the buyer executed a $1.9 million ten‑year Consulting Agreement with Segal, including $500,000 payable immediately and fixed future installments, non‑compete, survivability, and set‑off provisions.
- Segal received two $250,000 payments in May–June 2008 but performed little or no consulting work; he did not disclose those payments on his Statement of Financial Affairs when he filed Chapter 7 in August 2010.
- Segal scheduled the “possible collection of monies owed under [the] consulting agreement” as an asset (value unknown) and claimed a limited exemption; Trustee objected and the parties entered a stipulation preserving the Trustee’s right to contest any claim that the payments were post‑petition wages.
- Trustee filed a Report of No Distribution and the case was closed; three days after discharge Segal sued guarantors in District Court for breach of the Consulting and Guaranty Agreements; the District Court transferred the case to Bankruptcy Court for determination whether the Agreement was properly disclosed.
- Bankruptcy Court reopened the case, Trustee pursued an adversary declaratory judgment that any monies owed under the Consulting Agreement are estate property, moved for summary judgment, and the Bankruptcy Court granted it; District Court (this opinion) affirms.
Issues
| Issue | Plaintiff's Argument (Segal) | Defendant's Argument (Trustee) | Held |
|---|---|---|---|
| Whether post‑petition payments under the Consulting Agreement are property of the estate or post‑petition earnings excluded from the estate | Payments are compensation for future consulting / non‑compete (post‑petition earnings or personal‑services) and thus not estate property | Payments are deferred proceeds of the pre‑petition sale (not earnings) and therefore estate property | Payments are proceeds of the pre‑petition sale, not post‑petition earnings; estate property affirmed |
| Whether Consulting Agreement is a personal‑services contract that excludes proceeds from estate | Agreement requires Segal’s special services and non‑compete; thus proceeds are excluded | Agreement is not truly tied to post‑petition services and proceeds derive from pre‑petition sale; even if personal‑services, Trustee is pursuing pre‑petition breach claim | Personal‑services argument fails on the record; even if labeled personal services, Trustee seeks proceeds of pre‑petition claim, which are estate property |
| Whether Trustee abandoned the asset by issuing Report of No Distribution and closing the case | Trustee’s Report of No Distribution and closing abandoned any interest; thus Segal could sue on his own post‑discharge | Stipulation preserved Trustee’s right to contest any claim that payments were wages; reopening and later pursuit not barred | Abandonment argument waived and, substantively, the stipulation preserved Trustee’s rights; no abandonment |
| Whether Bankruptcy Court exceeded District Court referral / abused discretion in reopening the case and allowing adversary | Reopening and litigating exceeded referral scope and improperly expanded bankruptcy proceedings | Reopening was authorized under §350(b) and referral required determination of disclosure and estate interest; proceeding was core and proper | Bankruptcy Court did not exceed jurisdiction; reopening and adjudication were proper |
Key Cases Cited
- Segal v. Rochelle, 382 U.S. 375 (U.S. 1966) (tests whether post‑petition receipts are "sufficiently rooted in the prebankruptcy past" to be estate property)
- Westmoreland Human Opportunities, Inc. v. Walsh, 246 F.3d 233 (3d Cir. 2001) (§541 broadly defines property of the estate)
- Harris v. Viegelahn, 135 S. Ct. 1829 (U.S. 2015) (wages earned after filing are excluded from §541)
- Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (summary judgment burden allocations)
- In re Andrews, 80 F.3d 906 (4th Cir. 1996) (post‑petition non‑compete payments tied to sale are estate property)
- In re Ryerson, 739 F.2d 1423 (9th Cir. 1984) (post‑petition payments sufficiently rooted in pre‑petition acts may be estate property)
- Stinnett v. Laplante (In re Stinnett), 465 F.3d 309 (7th Cir. 2006) (§541(a)(6) earnings exception construed narrowly)