Central District Consumer Bankruptcy Attorney's Association

Dear Steve,
Three cases that may be helpful are In re Fitzsimmons, 725 F. 2d 1208 (9th Cir. 1984), In re Ryerson, 739 F. 2d 1423 (9th Cir. 1984), and In re Wu, 173 B.R. 411 (B.A.P. 9th Cir. 1994).
In Fitzsimmons the debtor, a sole practitioner attorney, filed a Chapter 11. Prior to filing the debtor had a contingency-fee case pending on which he did postpetition work. For reasons not mentioned, the Court appointed a Chapter 11 Trustee. The Bankruptcy Court entered an order requiring the debtor to remit all of the proceeds from the case to the Trustee. The Debtor appealed, claiming that the portion of the proceeds that were attributable to postpetition services performed fell under the language in 11 U.S.C. ed by an individual debtor after the commencement of the case." (Emphasis added) The B.A.P. reversed the Bankruptcy Court and the Trustee appealed. The Ninth Circuit held:
The Bankruptcy Appellate Panel reversed the decision of the Bankruptcy Court "insofar as it holds that post-bankruptcy earnings from services performed by an individual debtor are property of the estate in a Chapter 11 case." . . . The decision of the Bankruptcy Appellate Panel is affirmed.
In re Fitzsimmons, 725 F. 2d at 1212 (emphasis added).
The key here is that earnings from services actually performed postpetition are not property of the estate except, of course, in a Chapter 13 because of 1306(a)(2) and must be distinguished from "Proceeds, product, offspring, rents, or profits of or from property of the estate . . ." Thus, a court must determine which portion of the income is from services performed postpetition (to which the debtor is entitled), and which is merely offspring of assets already in the estate.
See also In re Ryerson, 739 F. 2d 1423 (9th Cir. 1984) (Chapter 7 debtor's termination commissions must be bifurcated into prepetition and postpetition service compensation).
In Wu the Chapter 7 debtor was an insurance agent who had sold policies prepetition. She was entitled to policy renewal commissions for those policy holders who renewed their coverage. The Chapter 7 Trustee demanded turnover of all the money. In its summary of the relevant facts, the B.A.P. stated:
[T]he bankruptcy court determined that the renewal commissions were not property of the estate because the payment of the commissions depended upon postpetition services by the debtor and the commission payment structure adopted by the Career Agent Agreement reflects that the renewal commissions are allocated to services performed postpetition.
In re Wu, 173 B.R. at 413.
In addressing the Trustee's claim to all of the money, the B.A.P. held:
This all or nothing approach is inconsistent with FitzSimmons and Ryerson, which, in evaluating earnings having both a prepetition and a postpetition component, caution us to determine the extent to which the earnings are attributable to prepetition property or prepetition services. The proper analysis under Ryerson and FitzSimmons is to first determine whether any postpetition services are necessary to obtaining the payments at issue. If not, the payments are entirely "rooted in the pre-bankruptcy past", Ryerson, 739 F.2d at 1426, and the payments will be included in the estate. If some postpetition services are necessary, then courts must determine the extent to which the payments are attributable to the postpetition services and the extent to which the payments are attributable to prepetition services. That portion of the payments allocable to postpetition services will not be property of the estate. That portion of the payments allocable to prepetition services or property will be property of the estate.
In re Wu, 173 B.R. at 414-15.
In sum, your burden is to establish the portion of the commissions that are attributable to postpetition services performed by your client because that is the portion that belongs to your client. If the only thing that existed prepetition was the listing, then your client clearly had to perform postpetition services to get the commissions. While your client has poor records, he must have some dated documents showing that the escrow opened postpetition. Does his employer have records that can be used to establish that the house hadn't been shown to anyone prepetition? You may have to use a real estate broker as an expert witness to testify to the services an agent must perform to sell a house. If the house hadn't been shown prepetition, then none of those services were performed prepetition.
Finally, try negotiating with the Trustee. Let the Trustee know about the holdings in Fitzsimmons, Ryerson, and Wu, and point out that any litigation will squander at least some of the money. Why not agree to an apportionment without litigation? While your client might not be too thrilled about giving up any of the money, he may need a reality check: litigation is expensive.
Good luck,
Nick
Nicholas Gebelt
Nicholas Gebelt, Ph.D., J.D.
Attorney at Law
Certified Bankruptcy Law Specialist
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