OPINION
The bankruptcy court granted the Trustee’s motion for turnover of a pro rata portion of a postpetition profit sharing payment that the Debtor received from his employer. On appeal, the Debtor argues that because he filed his bankruptcy petition before his employer calculated its profits at the end of the year, he had no legal or equitable interest in the profit sharing when he filed and therefore no part of the payment is property of the estate.
The Panel concludes that when the Debtor filed bankruptcy, his interest in his employer’s profit sharing plan did come within the broad concept of property of the estate found in 11 U.S.C. § 541(a)(1). The Panel so concludes because the Debtor’s interest in the profit sharing payment was sufficiently rooted in his prepetition employment, even though that interest was contingent and therefore unenforceable when he filed bankruptcy. The Panel also rejects the Debtor’s contention that whatever interest he had in his employer’s profit sharing was held in a trust and is thus not property of the estate under 11 U.S.C. § 541(c)(2). Accordingly, the order of the Bankruptcy Court is AFFIRMED.
I. ISSUES ON APPEAL
The first issue on appeal is whether the Debtor had any interest in his employer’s profit sharing when he filed his bankruptcy petition. The second issue is whether that interest was held in a benefiсial trust.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the BAP. A final order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ ‘ends the litigation on the merits and leaves nothing for the court
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to do but execute the judgment.’ ”
Midland Asphalt Corp. v. United States,
Conclusions of law are reviewed de novo.
See Nicholson v. Isaacman (In re Isaacman),
III. FACTS
On September 17, 1999, Douglas Booth filed a chapter 7 bankruptcy petition. When he filed his bankruptcy petition, Booth was employed by DaimlerChrysler Corporation, which has a profit sharing program pursuant to its collective bargaining agreement with the United Auto Workers Union. To receive a profit sharing payment under this program, Daimler-Chrysler must have profits for a given year and an еmployee must be employed by DaimlerChrysler at the end of the year. Further, the program provides that the funds are non-assignable until they are distributed.
On December 7, 1999, the Trustee filed a “Motion for Turnover” of “any Bonus or Profit Sharing check received from the Debtor’s Employer for 1999, upon receipt.” Booth objected to the Trustee’s motion, arguing that when his petition was filed, he had no interest in any profit sharing and that if he had any interest, it was in the form of a beneficial interest in a trust.
On March 3, 2000, Booth received a profit sharing payment from Daimler-Chrysler in the amount of $4,866.51.
On June 20, 2000, the bankruptcy court entered its Memorandum Opinion and Decision holding that the pro rata part of the Debtor’s profit sharing that related to his prepetition earnings was property of the bankruptcy estate. This appeal followed.
IV. DISCUSSION
A. The Debtor’s interest in the profit sharing payment is property of the еstate to the extent that it is based upon prepetition employment.
The Debtor first argues that based on two factors, he had no legal or equitable interest in the profit sharing when he filed his bankruptcy petition. First, his employer had not yet declared a profit for the year. Second, his employment could have been terminated before the end of the year. The issue, therefore, is whether these contingencies compеl the conclusion that under § 541(a)(1), the bankruptcy estate has no interest in the profit sharing.
The analysis begins with the applicable statutory provision.
United States v. Ron Pair Enters.,
Section 541 of the Bankruptcy Code defines property of the bankruptcy estate as follows:
(a) The commencement of a case under section 301, 302 or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located аnd by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
11 U.S.C. § 541(a)(1).
According to the legislative history, the purpose of § 541(a) is to “bring anything of value that the debtors have into *285 the estate.” H.R. Rep. No. 95-595, at 176 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6136.
The determination as to whether a debtor’s interest in property is property of the bankruptcy estate is a question of federal law. Howеver, state law generally controls the question of whether the debt- or has an interest in property.
See Butner v. United States,
Under Ohio law, “[a] contingent interest is one in which there is no present fixed right of either present or future enjoyment; but in which a fixed right will arise in the future under certain specified contingencies.”
Cleveland Trust Co. v. McQuade,
Significantly, under Ohio law, a contingent interest is fully alienable and may be attached by creditors.
Moore v. Foresman,
The United States Supreme Court came to the same conclusion in a case decided under the Bankruptcy Act. The Supreme Court stated, “[T]he term ‘property’ has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.”
Segal v. Rochelle,
Similarly, in applying the Bankruptcy Code of 1978, the courts have, across a wide variety of circumstances, almost uniformly adhered to the view that contingent interests are property of the estate under § 541(a)(1). In each of the following circumstances, the debtor’s contingent interest was held to be property of the estate:
A debtor’s contingent right to a postpe-tition employment termination payment under a prepetition employment agreement.
Ran v. Ryerson (In re Ryerson),
A debtor’s contingent interest in an earned income tax credit, even when the petition is filed before the end of the tax year.
Baer v. Jones (In re
Montgomery),
A debtor’s interest in her husband’s separately titled property that was contingent on the outcome of their pending divorce easе.
In re Greer,
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A debtor’s contingent claim against a third party.
Borock v. Mathis (In re Clipper Int’l Corp.),
Under the former Bankruptcy Act a contingent interest in personal property passed to the case trustee only if it was capable of being assigned or was subject to execution, seizure, or sequestration. 4A Collier on Bankruptcy ¶ 70.37 at 453 (14th ed.1978). That requirement no longer exists under the Bankruptcy Code. Id., ¶ 541.08[1] (15th ed.1984). By including all legal interests without exception, Congress indicated its intention to include all legally recоgnizable interests although they may be contingent and not subject to possession until some future time.
A debtor’s right to receive property, contingent on surviving others.
Neuton v. Danning (In re Neuton),
A debtor’s contingent interest in an earnest money deposit in an escrow account
Turner v. Burton (In re
Turner),
An attorney debtor’s right to legal fees under a contingent fee agreement with a client.
Turner v. Avery,
A debtor’s contract right to commissions attributable to insurance policies sold pre-petition, but pаid postpetition, whether or not vested or contingent upon future services.
Williams v. Tomer (In re
Tomer),
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The debtor’s right to a refund of a deposit made pursuant to a residential life use fee agreement, contingent on the debt- or moving out of the residence before a stated time.
In re Thompson,
A debtor’s interest in a stock option that is contingent on postpetition employment.
Stoebner v. Wick (In re
Wick),
A debtor’s future interest in lottery winnings.
In re Keim,
This review of the cases demonstrates two significant points. First, the array of circumstanсes in which the cases have held that a contingent interest is property of the estate is extensive. Second, the uniformity of the results in these cases is compelling. As a result, the Panel must conclude that the contingencies upon which the Debtor relies in arguing that his profit sharing is not property of the estate are indistinguishable from the contingencies in the many cases in which the property interest was held to be property of the еstate.
The Debtor relies on
DeMarco v. Ohio Decorative Prods., Inc.,
However, determining whether DeMar-co is persuasive is not a straightforward endeavor. As demonstrated below, the opinion is subject to interpretation. The Panel concludes that the proper interpretation of DeMarco is consistent with the nearly unanimous line of cases holding that a contingent property interest is property of the estate and therefore this interpretation is persuasive. On the other hand, the alternative interpretation proposed by the Debtor is inconsistent with the case law and must be rejected as unpersuasive.
In DeMarco, four years after filing a Chapter 7 bankruptcy, the plaintiff was terminated from his position as a sales *288 representative. Later he filed a civil suit against his employer for post-termination sales commissions based on an alleged agreement with his employer calling for the payment of “life-of-the-part” sales commissions. The employer responded that the plaintiff lacked standing because any such commissions were property of the plaintiffs bankruptcy estate and only the bankruptcy trustee had standing to sue.
Initially, the court of appeals observed, “Under the expansive construction courts have given the term, there can be little doubt that rights to post-termination funds, no matter what their designation (e.g., contract value, commissions), qualify as ‘property’ for purposes of the bankruptcy code.”
DeMarco,
In this case, the Debtor relies on the following statement in DeMarco in support of his position:
The crucial inquiry, instead, is when those property interests came into existence .... [A] future interest will not become a § 541 property right until it has, in effect, vested; or put another way, until the conditions that go to the creation of the right have been satisfied.
...
[T]he debtor’s property right here did not accrue until after a bankruptcy petition had been filed. Only after being terminated would DeMarco then become entitled to post-termination commissions, and even then, whether such funds would actually be forthcoming was far from a certainty.
DeMarco,
The Debtor argues that this language means that only vested rights become property of the estate. Thus, the Debtor contends that because his right to a profit sharing payment had not vested when he filed bankruptcy, it did nоt become property of the estate. The difficulty with this interpretation of
DeMarco
is that it cannot be reconciled with the Supreme Court’s decision in
Segal v. Rochelle
and the extensive body of case law reviewed above that holds otherwise. Moreover, the Debtor’s interpretation is also inconsistent with the two specific cases on which
DeMarco
relied.
Rau v. Ryerson (In re Ryerson),
In
Ryerson,
before filing for bankruptcy, the debtor and his employer entered into an agreement that upon terminatiоn, the employer could at its option pay the debtor “contract value” based on sales commissions if certain conditions were met. Four years later, the debtor filed bankruptcy. Nine months after that, his employment was terminated. The court determined that the debtor’s right to payment of the contract value was property of the bankruptcy estate, at least to the extent that the contract value related to prepetition services. The basis of this result was the accepted premise, “By including all legal interests without exception, Congress indicated its intention to include all legally recognizable interests although they may be contingent and not subject to possession until some future time.”
On the other hand, in Bruneau, the court determined that severance payments to a debtor based on her postpetition election to participate in an employer’s “enhanced exit” program were not property of the bankruptcy estate because, under the Segal test, the payments were not sufficiently rooted in the debtor’s prepetition past. Before the debtor filed her bankruptcy petition, her employer offered her a one-time option to terminate her employment on a specific date and receive a severance package. The debtor exercised the option one week after filing for bankruptcy. The court determined that the purpose of the severance payments to the debtor was to substitute for future income:
The Program payments are clearly intended as enhanced severance benefits offered generally to sustain employees while they seek other jobs. The debtor was faced with the choices of remaining employed at the Hartford and trust that the Hartford would not terminate her; accept the Program’s enhanced benefits to sustain her while she sought employment; or chance being discharged within a short period with substantially fewer benefits compared to those under the Program.
Bruneau,
Thus, the two cases on which DeMarco relied, Ryerson and Bruneau, agree on the test for property of the estate when the property is a contingent right. Both adopt and apply the rule that when the contingent right is based on the debtor’s prepetition activities, it is property of the estate. The key distinction on which Ryerson and Bruneau turned was whether the contingent right wаs based on pre-petition circumstances. If the court in Ryerson required vesting for the interest to be property of the estate, as the Debtor here argues, the court would have found that the payments were not property of the estate because the debtor’s employment had not yet been terminated when the bankruptcy was filed and the contract right was not vested. Similarly, if the Bruneau court required vesting, none of its extended discussion regarding the purpose of the severance payments would have been necessary, because there too, the contract right had not vested upon bankruptcy.
Nothing in
DeMarco
explicitly or implicitly rejects the test adopted and applied in
Ryerson
and
Bruneau.
Indeed, as noted above, the court of appeals quoted with approval the statement in
Ryerson
that a contingent interest can be property of the estate.
DeMarco,
Finally, the Debtor also relies on
Sharp v. Dery,
There is a fundamental problem with Sharp. Focusing on whether the debtor had an “enforceable” contract right when the petition was filed would exclude all contingent interests from the bankruptcy estate, because by definition, a contingent interest is not “enforceable” until the contingency is met. The approach in Sharp is thus inconsistent with the broad concept of property of the estate in § 541(a)(1) and with the extensive case law, reviewed above, holding that a contingent interest can be property of the estate. Section 541 neither states nor implies any requirement that the debtor must have an enforceable interest in property for that interest to become property of the bankruptcy estate. Accordingly, the Panel rejects the reasoning and result of Sharp.
The Panel agrees with the bankruptcy court thаt in the present case, the Debtor’s profit sharing payment was sufficiently rooted in his prepetition past to be included in property of his bankruptcy estate under § 541(a).
The bankruptcy court prorated the profit sharing so that only that portion of the profit sharing that related to the Debtor’s prepetition employment became property of the estate. This is entirely appropriate when only part of the pаyment is based upon prepetition conduct.
See Jess v. Carey (In re
Jess),
B. The Debtor’s interest in the profit sharing payment was not held in a beneficial trust containing a restriction on transfer enforceable under nonbankruptcy law.
The Debtor’s alternative argument is that his interest in the profit sharing program is excluded from property of the estate pursuant to § 541(c)(2). That section provides, “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” 11 U.S.C. § 541(c)(2). The Debtor argues that the collective bargaining agreement restricts the transfer of profit sharing payments until after they are distributed by the employer and that if the employer was holding money on his behalf, a constructive trust was created.
The Sixth Circuit recently held, “An inquiry under § 541(e)(2) normally has three parts: First, does the debtor have a beneficial interest in a trust? Second, is there a restriction on the transfer of that interest? Third, is the restriction enforceable under nonbankruptcy law?”
Taunt v. General Ret. Sys. of the City of Detroit (In re
Wilcox),
Under Ohio law, an express trust requires: (1) “an explicit declaration of trust, or circumstances whiсh show beyond a reasonable doubt that a trust was
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intended to be created”; (2) “an intention to create a trust”; and (3) “an actual conveyance of ... property ... to [a] trustee[.]”
Ulmer v. Fulton,
Further, under Ohio law, a constructive trust is defined as follows:
A constructive trust is a trust created by operation of law against the holder of a legal right to property which that person should not, in equity and good conscience, hold or enjoy; it is a relationship associated with property subjecting the title holder to an equitable duty tо convey it to another because otherwise the title holder would be unjustly enriched.
Belfance v. Bushey (In re Bushey),
V. CONCLUSION
The bankruptcy court’s decision finding that a prorated share of the profit sharing is property of the bankruptcy estate is AFFIRMED.