In re Lott

In Re: Carol Lott, Debtor.

Bankruptcy Case No. 17-40412-JMM

UNITED STATES BANKRUPTCY COURT DISTRICT OF IDAHO

July 19, 2018

MEMORANDUM OF DECISION

Appearances:

Ryan E. Farnsworth, AVERY LAW, Idaho Falls, Idaho, Attorney for Debtor.

Thomas Daniel Smith, SERVICE & SPINNER, Pocatello, Idaho, Attorney for chapter 7 Trustee.

Introduction

In this case, the chapter 7¹ trustee, R. Sam Hopkins ("Trustee"), objects to the claim of exemption in certain future residual income of the debtor, Carol Lott ("Debtor"). Dkt. No. 34. Debtor responded to the objection. Dkt. No. 38. The Court thereafter conducted an evidentiary hearing on the matter on April 18, 2018, after which the parties submitted closing briefs. Dkt. Nos. 42, 47, and 50. Trustee's objection was then deemed under advisement.

After considering the briefing, exhibits, and oral argument presented, as well as the applicable law, the Court issues the following decision which resolves the motion. Fed. R. Bankr. P. 7052; 9014.

Facts

Debtor is employed selling insurance policies for American Family Life Assurance Company ("AFLAC"). This has been her employment for approximately five and a half years, after entering into an Associate's Agreement ("Agreement") with AFLAC on December 10, 2012. Ex. 200. Pursuant to the Agreement, when Debtor sells a new policy and the policyholder pays premiums during his/her first-year of coverage, Debtor receives a first-year commission. Id. at p. 9, ¶¶ 5.1- 5.2. She may choose to receive the first-year commission in one of two ways: she may receive the entire first-year commission in advance ("first-year advance"), or she may choose monthly commission payments ("first-year paid-as-earned"). Id. at ¶ 5.8. Debtor testified that she prefers to receive first-year advances, as it gives her a larger monthly income. However, if the policyholder elects to cancel the policy during that first year, then AFLAC deducts the unearned portion of the first-year advance from her check in the month the policy is terminated. Id. at ¶ 5.8.

If the policy is renewed after the first year, Debtor then receives monthly renewal commissions beginning in the thirteenth month after the effective date of the policy, and for all subsequent months that premiums are paid on that policy. Id. at p. 9, ¶¶ 5.1- 5.2. After AFLAC makes any necessary deductions, including for stock purchases as well asfor insurance, it then issues Debtor a monthly check that reflects her first-year commissions as well as renewal commissions, along with any bonuses she may have earned. Ex. 201 at pp. 4-d, 5-d, 6-d, 7-d, 8-d, 13, 19, 26, 33, 40, 47.

In order to receive the renewal commissions due, Debtor must comply with the terms of the Agreement and meet certain minimum requirements found therein. Id. at ¶¶ 5.2, 7.1. One of the requirements is that Debtor must have either $750 in annualized new policy premiums during the month, or she must have at least $10,000 worth of annualized new policy premiums for the calendar year. Id. at ¶¶ 6.1, 6.1.1, 6.1.4, 7.1. Debtor's commission statements indicate that, during the relevant time period,² she always exceeded the $10,000 sales threshold, except in January 2018, as explained below. Ex. 201; Dkt. No. 8.

Debtor testified that her business model involves selling new policies as well as supporting existing policies and clients through answering questions, helping to process claims, and maintaining contact and friendships. She frequently makes trips to visit clients at their offices, often bringing treats with her. She testified that without this continuing contact with clients, there would be significantly fewer renewals and correspondingly fewer renewal commissions. She offered anecdotal evidence that her renewal commissions are increased by as much as 50% due to her retention efforts.

Debtor filed her chapter 7 petition on May 11, 2017. Dkt. No. 1. As shown in the table below, her commission statements demonstrate that from May 2017 - March 2018, she received $5,577.04 in net first-year advances, and $227.59 in net first-year paid-as-earned commissions for pre-petition policy sales. Finally, during those months, Debtor received $7,007.01 in net renewal commissions from pre-petition policies.

Month

Net First-Year

Paid-as-Earned3

Net First-Year

Advances4

Net Renewal5

Net to Debtor6

May 2017

54.32

555.63

644.75

868.99

June 2017

4.36

713.25

605.31

962.15

July 2017

15.75

721.22

600.04

976.24

Aug. 2017

13.70

286.17

604.34

496.85

Sept. 2017

20.91

709.84

758.03

1,128.01

Oct. 2017

29.41*

-43.45

616.23

251.56

Nov. 2017

53.29

221.64

396.76

629.45

Dec. 2017

-8.81*

1,299.917

719.29

1,492.74

Jan. 2018

37.67*

257.83

576.04

585.91

Feb. 2018

1.90*

462.07

713.18

924.52

Mar. 2018

5.09*

392.93

773.04

913.84

Totals

227.59

5,577.04

7,007.01

9,230.26

Initially, in her schedules, Debtor claimed the future residual income from AFLAC, valued at $1,500, exempt under Idaho Code § 11-605(11). Dkt. No. 1. Trustee did not object to that claim of exemption, and thus it will be allowed. See Taylor v. Freeland & Kronz, 503 U.S. 638, 643-44 (1992) (a bankruptcy trustee cannot contest a claim of exemption beyond the 30-day objection period under Rule 4003(b)). On March 1, 2018, Debtor amended schedule C to declare the portion she owned to be $4,449.96, and claimed 75% of it exempt under Idaho Code § 11-207. Dkt. No. 31. Trustee thereafter filed an objection. Dkt. No. 34.

Arguments

Trustee objects to Debtor's claim of exemption in certain of the post-petition AFLAC commissions. He argues that Debtor's future residual income from AFLAC renewal commissions as well as first-year commissions which were paid-as-earned for pre-petition policy sales are included in Debtor's bankruptcy estate, because Debtor did not have to perform any personal services to earn them.

Debtor argues that her renewal commissions are as high as they are as a direct result of the work she puts in. And as such, she concedes that while the June renewal commissions were likely the result of her pre-petition efforts, she contends that as each month goes by, less and less of the commission is the result of pre-petition work, and more of it is the direct result of her ongoing, post-petition personal work in servicing those accounts and maintaining those client relationships. Therefore, she argues that those renewal commissions are exempt.

Analysis and Disposition

The Court will first consider whether the respective commissions are property of Debtor's bankruptcy estate, and if so, whether they are exempt.

1. Property of the bankruptcy estate

Pursuant to the Code, the bankruptcy estate created by the filing of a petition includes "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1). The estate also includes all "[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." § 541(a)(6).

Even though a debtor's pre-petition earnings may be subject to a post-petition contingency, those earnings may still be estate property. Recently, the Ninth Circuit Bankruptcy Appellate Panel held that "any contingent interest of the debtor sufficiently rooted in the pre-bankruptcy past is estate property, even if the contingency is not satisfied until after the bankruptcy is filed." Anderson v. Rainsdon (In re Anderson), 572 B.R. 743, 747 (9th Cir. BAP 2017).

In In re Anderson, this Court held that commissions paid to the debtors post-petition for sales contracts entered into pre-petition were rooted in the pre-bankruptcy past and thus were property of the estate and subject to turnover. 558 B.R. 369, 374 (Bankr. D. Idaho 2016), aff'd 572 B.R. 743 (9th Cir. BAP 2017). The BAP held that, "[w]here the debtor receives a commission post-petition, but essentially fulfilled all of hisobligations for that commission pre-petition, the commission will be deemed property of the estate." In re Anderson, 572 B.R. at 748 (quoting Tully v. Taxel (In re Tully), 202 B.R. 481, 483 (9th Cir. BAP 1996)). In other words, "a debtor's commission is property of the estate 'if all the acts of the debtor necessary to earn it are rooted in the pre-bankruptcy past.'" Tully, 202 B.R. at 483 (quoting In re Sloan, 32 B.R. 607, 611 (Bankr. E.D.N.Y. 1983)) (citing Segal v. Rochelle, 382 U.S. 375, 380 (1966)).

In the event the debtor's services required to earn the fees were performed both before and after the bankruptcy filing, the estate is entitled to recover the portion of the payment attributed to pre-petition services, even though the payment is not made until after the bankruptcy filing. Jess v. Carey (In re Jess), 169 F.3d 1204, 1207 (9th Cir. 1999) (discussing trustee's entitlement to debtor-attorney's contingent fees for cases settled after bankruptcy). In In re Anderson, a division of the commissions between pre- and post-petition efforts might have been made, however the debtor submitted no evidence from which the Court could determine such apportionment. In re Anderson, 558 B.R. at 375; 572 B.R. at 749.

There is case law guiding this Court on how to determine whether Debtor's post-petition commissions are estate property. In Towers v. Wu (In re Wu), the debtor was an insurance agent who, like Debtor here, received commissions on first-year and renewal premiums. Id. 173 B.R. 411, 412-13 (9th Cir. BAP 1994). The trustee in that case filed an adversary proceeding in which he sought to avoid the payment of the renewal commissions and recover the value of those payments, and the issue was whether thosecommissions were property of the bankruptcy estate, or subject to the post-petition earnings exception found in §541(a)(6). The BAP analyzed the commissions in this manner:

[t]he proper analysis . . . is to first determine whether any postpetition services are necessary to obtaining the payments at issue. If not, the

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