In Re Taronji
MEMORANDUM OF DECISION
This Chapter 7 case is before the court on the trustee’s motion for a turnover of proper
Jurisdiction
The trustee’s motion is a contested matter arising in the bankruptcy case. Ordinarily, a trustee must bring a separate adversary proceeding in order to recover disputed property of the estate, but when the property is held by the debtor, the trustee may proceed by motion.
Findings of Fact
The facts relevant to this motion are uncomplicated and undisputed. One of the debtors, Jaime Taronji, was hired by an affiliate of Tenneco, Inc. in March, 1990. At this time, Tenneco had in effect a “key employee” incentive plan (the Tenneco Inc. Key Employee Restricted Stock and Restricted Unit Plan, the “Tenneco Plan”), which was intended to encourage certain employees to “continue employment with Tenneco Companies, and to render superior performance during such employment.” (Tenneco Plan, ¶ 1.) The Plan was to be enforced according to Texas law. (Tenneco Plan, ¶ 14.)
On March 13, 1990, Taronji was given an award of 525 shares of Tenneco common stock pursuant to the Plan. Under the Plan’s terms, this award gave Taronji the right to have a stock certificate representing this number of shares registered in his name (but held by Tenneco), and generally gave him all “the rights and privileges of a shareholder ... including the right to receive dividends and the right to vote” these shares. (Tenneco Plan, ¶ 6(b).) However, the awarded shares were restricted; they could not be sold, transferred, assigned, pledged or otherwise encumbered, until the expiration or termination of a “restricted period.” Id. Tar-onji’s restricted period was set at four years. In addition to the restrictions on transfer of the stock, the plan provided that Taronji would forfeit the awarded shares unless he “continuously remained an employee of Ten-neco Companies” during the restricted period. Id.
Taronji had the option of either paying taxes on his shares at the time of the award, or of having Tenneco be considered the owner of the shares, for tax purposes, during the restricted period, and of having the taxes paid from the value of the awarded shares at the end of the restricted period. (Tenneco Plan, ¶ 6(b), (e).) Taronji chose the latter option, and so, as of March 13, 1994, the end of the restricted period, he was entitled to receive a stock certificate for the 525 shares, less a number of shares whose value was then equal to the applicable withholding tax
About a year earlier, on March 25, 1993, Taronji and his wife filed a voluntary bankruptcy case under Chapter 13 of the Bankruptcy Code. They later converted their case to one under Chapter 7, and Andrew Maxwell was appointed trustee. He filed the pending motion for turnover of the Tenneco stock awarded to Taronji, and the parties have briefed the matter, setting forth the facts outlined above.
Conclusions of Law
The general framework for deciding whether an asset is property of a debtor’s estate in bankruptcy is established by Section 541 of the Bankruptcy Code (11 U.S.C.). Three of the provisions of Section 541 are applicable to the present case.
• First, Section 541(a)(1) sets out the general rule: the commencement of a bankruptcy case creates an estate that can be liquidated to satisfy the claims of creditors. This estate is defined as including “all legal or equitable interests of the debtor in property as of the commencement of the ease.” Numerous decisions have recognized that this definition is very broad, extending, for example, both to unliquidated claims of the debtor for services rendered,
In re Moulton,
• Second, Section 541(c)(2) limits the broad scope of the general rule by providing for the enforcement of spendthrift trust provisions, 1.e., “[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptey law.”
• Finally, Section 541(a)(6) expands the scope of the general rule to include not only property interests of the debtor as of the commencement of the case, but also “[proceeds, product, offspring, rents, or profits of or from property of the estate.” However, this addition of postpetition “proceeds” to the property of the estate is subject to an exception for “earnings from services performed by an individual debtor after the commencement of the case.”
The debtors in the present case assert that the Tenneco stock falls within both the spendthrift trust exception of Section 541(c)(2) and the postpetition earnings exception of Section 541(a)(6).
Spendthrift trusts under Section 5J/,1 (c)(2). The debtors’ theory under Section 541(c)(2) is the following: (1) when they filed their case, the Tenneco stock was the res of a trust, of which Tenneco was the trustee, and Taronji the beneficiary; (2) Taronji could not transfer his beneficial interest in the trust; and (3) this restriction on transfer prevented the beneficial interest from becoming property of the estate.
Section 541(c)(2) of the Bankruptcy Code does exclude the debtor’s beneficial interest in a trust from property of the estate if applicable nonbankruptcy law would both prevent the debtor from voluntarily transferring the beneficial interest and prevent creditors from enforcing judgments against the interest. This is the teaching of
Magill v. Newman,
However, the Tenneco Plan does not create a spendthrift trust. Under Texas law, which the Plan prescribes, an “express trust” is “a fiduciary relationship with respect to property which arises as a manifestation by the settlor of an intention to create the relationship and which subjects the person holding title to the property [the trustee] to equitable duties to deal with the property for the benefit of another person [the beneficiary].”
In the present ease, the Tenneco Plan is set forth in a nine-page printed document, which bears all the hallmarks of careful legal drafting, including the choice of law clause specifying Texas law. In order for this document to have created a trust, it would have had to contain provisions declaring and defining that trust, consistent with the Texas statutes and case law. However, there are no trust provisions of any sort in the Tenneco Plan, and thus, for failure of an express declaration, the Tenneco Plan does not create a trust.
Cf. Daniels v. Pecan Valley Ranch, Inc.,
Equally important, the Tenneco Plan does not employ the mechanism of a trust. As noted above, the aim of the Plan was to give key employees an interest in Tenneco stock which could not be alienated for a given period of time, and which would be forfeited if an employee voluntarily left the employ of Tenneco. In this way, the Plan encouraged the employees both to perform at high levels (thus increasing the value of their stock) and to remain employed with Tenneco (thus avoiding forfeiture of their stock). To effectuate this plan, Tenneco could have conveyed
unrestricted
shares of stock to a trustee for the benefit of the
key
employees, and then imposed spendthrift and forfeiture provisions on the employees’ beneficial interest in the stock. See
Post-petition earnings under Section Sil (a) (6). Because Taronji’s Tenneeo stock was not held in a spendthrift trust, it is necessary to consider the debtors’ major argument—that the stock was transferred to Taronji as a result of services he performed after the commencement of this case, and so is excluded from the estate under Section 541(a)(6) of the Bankruptcy Code.
A number of decisions have stated that Section 541(a)(6) generally operates to exclude from the estate postpetition earnings of an individual debtor.
See, e.g., In re Hellums,
The application of the postpetition earnings exception requires a proportional division whenever “proceeds” arise both from postpetition services of an individual debtor and from other estate assets. One pre-Code case presents a particularly clear example of the circumstances that lead to such a division. In
In re Sporleder,
[W]e hold that § 541(a)(6) excepts from the proceeds of the estate only those earnings generated by services personally performed by the individual debtor. [Debtor] is thus entitled to monies generated by his law practice only to the extent that they are attributable to personal services that he himself performs. To the extent that the law practice’s earnings are attributable not to [debtor’s] personal services but to the business’ invested capital, accounts receivable, good will, employment contracts with the firm’s staff, client relationships, fee agreements, or the like, the earnings of the law practice accrue to the estate.
In the same way, it is sometimes necessary to divide postpetition receipts into those that represent payment for prepetition services of an individual debtor and those that represent payment for postpetition services. This was the situation in
In re Ryerson,
The approach of
Sporleder, FitzSimmons,
and
Ryerson
provides the proper rule for decision in the present case. When this case was filed, Jaime Taronji had a contract right" to receive unrestricted Tenneco stock, contingent on his working for Tenneco companies until March 13, 1994. The contingency did not prevent this contract right from becoming property of the estate under
Both the trustee and the debtors resist this conclusion. The trustee argues that Taronji already owned the stock itself prior to the filing of the bankruptcy case, and that his ownership was merely subject to forfeiture in the event that he did not remain employed with Tenneco. That “condition subsequent,” the trustee contends, should not prevent the stock from becoming property of the estate. The difficulty with this argument is that the stock Taronji owned prepetition was restricted stock. The only rights it conferred on Taronji were to receive dividends and vote the stock, and even these rights were only accorded while Taronji was employed by Tenneco. The estate would not have been benefitted by assuming Taronji’s rights in this restricted stock: the dividends, to the extent that they were earned postpetition, depended on Taronji’s postpetition services, and hence would be excluded from the estate under the postpetition earnings exception. The right to vote the stock would confer no benefit whatever on the estate. What was of value to the estate was unrestricted ownership of the stock, and this was contingent on Taronji’s postpetition services.
The debtors argue that the entire value of the stock depended on Taronji’s postpetition
Conclusion
For the reasons stated above, the turnover motion of the trustee is granted in part. A separate order will be entered requiring the debtor to turn over to the trustee 75.91% of the Tenneco stock received by the debtor on March 29, 1994.
Notes
. The action is one that would have been within the summary jurisdiction of a bankruptcy court under the Bankruptcy Act of 1898, since it seeks to determine the ownership of property in the actual possession of the debtors.
Katchen v. Landy,
. Each trust agreement provided that ‘‘neither the corpus nor the income of the trust estate shall be liable for the debts of any beneficiary thereof, nor shall the same be subject to seizure by any creditor of any beneficiary under any writ or proceeding at law or in equity, and no beneficiary shall have the right or power to give, sell, assign, transfer, pledge, mortgage, or in any other manner dispose of, encumber, or anticipate his or her interest in the income or corpus of any trust estate_”
. The Texas Property Code also defines the terms usually used in describing the parties to a trust. The "settlor” is the person who creates the trust; the “trustee” is the person holding the property in trust; and the “beneficiary” is the person for
.The Uniform Commercial Code, as enacted in Texas, makes provision for notice of restrictions on the transfer of securities,
.
See In re Cooley,
. Section 552(b) of the Bankruptcy Code provides that postpetition “proceeds, product, offspring, rents, or profits” of the debtor’s property may be subject to a security interest if the security agreement and applicable nonbankruptcy law so provide. Because of the reference to state
. Even under the relatively limited view of "proceeds” taken by the Uniform Commercial Code, this would be the situation. An unperformed contract for services falls within the U.C.C. definition of an "account”: "any right to payment ... for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance.” U.C.C. § 9-106 (1992). Such "accounts” may be collateral subject to a security interest, U.C.C. §§ 9-102(a), 9-203, and "proceeds” includes "whatever is received upon the ... collection ... of collateral,” U.C.C. § 9-306(1) (1992).
. The Code's treatment of postpetition earnings can be traced to the legislation proposed by the Commission on the Bankruptcy Laws of the United States in 1973. In the notes accompanying Section 4-601 of this legislation, which defined property of the estate in a manner similar to
. The portion of the stock included in the estate is 75.91%. Taronji had to work for four years (1461 days) in order to be entitled to the stock. Of this period he worked 1109 days before filing the bankruptcy case. 1109/1461 = .7591.