Opinion
Bankruptcy No. 01-30852, Chapter 7.
December 18, 2001
MEMORANDUM AND ORDER
Before the Court is the chapter 7 Trustee's motion for turnover filed on October 10, 2001. Pursuant to 11 U.S.C. § 542 and § 543, the Trustee seeks turnover of commission payments arising from the renewal of insurance policies written by the Debtor, Jeffrey A. Swanson, prior to his bankruptcy petition filing, but renewed after his bankruptcy petition filing ("renewal commissions"). Although the Trustee also sought turnover of all accounting records regarding the renewal commissions, at a hearing on the matter the Trustee indicated that his request for the accounting records had been met. Thus, only the renewal commissions themselves are at issue in this proceeding.
The Trustee asserts that the renewal commissions are property of the bankruptcy estate and requests that the Court issue an order directing the Debtors, Jeffrey A. Swanson and Sherry L. Swanson, and certain insurance companies for whom the Debtor has written policies to turnover all renewal commissions. The Debtors resist the motion, asserting that the renewal commissions are not property of the bankruptcy estate. In the alternative, they argue that if the renewal commissions are deemed to be property of the bankruptcy estate, that they may be exempted as wages. Additionally, the Debtors argue that the Trustee's motion should be denied as to commissions that are either subject to setoff rights or that relate to policies written post-petition. Bankers United Life Assurance Company also resists the Trustee's motion, asserting that its agency agreement with the Debtor provides for the forfeiture of any renewal commissions until the Debtor's indebtedness to them is repaid and that renewal commissions are not property of the bankruptcy estate. In its response to the Trustee's motion for turnover, Equitable Life Casualty Insurance Company ("Equitable") states that the Debtor's commissions were applied to satisfy a negative balance on his account and that upon satisfaction of the debt, it issued one check payable to the Debtor and another check payable jointly to the Debtor and the Trustee. Equitable also stated that it terminated the Debtor's agency agreement for conduct in violation of the agreement and exercised its option to make future renewal commissions nonpayable to the Debtor. The other companies from whom the Trustee sought turnover, United Security Assurance, Life Health Insurance Company of America, and American Independent Underwriters, did not respond to the Trustee's motion.
This matter came on for hearing on November 13, 2001.
FACTUAL BACKGROUND
In March 1988, Jeffrey A. Swanson ("the Debtor") began working as an independent insurance agent in North Dakota, writing primarily long-term care insurance policies. From 1988 until he filed bankruptcy, the Debtor wrote policies on behalf of several insurance companies, including Bankers United Life Assurance Company ("Bankers United"), United Security Assurance ("USA"), Life Health Insurance Company of America ("Life Health"), Equitable Life Casualty Insurance Company ("Equitable"), and American Independent Underwriters, Inc. ("AIU"). Currently, the Debtor is an agent for all of the aforementioned companies except Equitable and AIU.
For each policy written, the Debtor receives a commission from the issuing insurance company. He testified that his commission on new policies is between 27.5 and 80 percent of the insurance premium for the first year. In addition to receiving commissions on new policies, he also receives a commission when a policyholder renews his or her policy after the first year. The renewal commissions are between 9 and 17.5 percent of the premium.
To encourage renewals, he engages in what he called "servicing" which includes keeping clients informed as to changes within the insurance company, writing supplemental policies, collecting premiums, assisting policyholders with claims, and resolving policyholders coverage questions. He testified that 70 percent of his time is spent on servicing and 30 percent is spent on sales and new business. He also testified that if he did not service, the number of renewals would decrease by 50 percent within a year and that he would have no renewals within three years. However, the Debtor conceded that he will continue to receive the renewal commissions as long as the policyholders continue to renew the policies he wrote for them, that he is not required to contact the policyholders to secure the commissions, and that, in fact, his receipt of the renewal commissions is not dependent upon him doing anything. The concept of "servicing" is central to the issue presented.
In a letter to the Debtor dated October 25, 2001, Equitable notified the Debtor of its termination of the agency agreement with the Debtor for "induc[ing], directly or indirectly, Equitable policyowners to terminate or lapse their coverage. . . ." The agreement between Equitable and the Debtor provided that such activities authorized Equitable to make renewal commission nonpayable, and Equitable exercised that option.
With regard to the Debtor's agency with AIU, although it was not made completely clear by the testimony, evidently AIU and Bankers United are essentially the same company. When the Debtor entered into an agency agreement with Bankers United, he could no longer write policies on behalf of AIU, but he still receives renewal commissions from AIU.
The Debtor's agreement with each of the insurance companies provides for the vesting of the Debtor's right to receive renewal commissions. However, the agreements with AIU, Bankers United, and USA each provide that payment of vested commissions will cease if the Debtor violates the respective agreement. The agreement with Life Health provides that the renewal commissions will continue to be paid even if the agreement is terminated. Also relevant is Section 12 of the Debtor's agency agreement with Bankers United which provides:
Indebtedness — You are responsible for the payment to the company of all monies which: (i) you or your sub-agents collect on the Company's behalf (ii) are due the Company because of compensation paid to you or your sub-agents upon premiums which the Company thereafter returned; (iii) are paid to you or your sub-agents which are not due to you or your sub-agents under this Agreement. Until the Company receives all monies from you, the same shall be a debt payable on demand and for which you are liable and no commissions are payable at the Company's option to you or your sub-agents until such indebtedness is satisfied. Any indebtedness to the company or any of its affiliates or subsidiaries incurred by you shall be a first lien on any monies due or to become due under this Agreement. The Company may, at anytime, deduct from any monies due you, any such indebtedness together with interest at the legal rate and any collection costs.
If you should take or be placed into bankruptcy to the extent of any amount due the Company under this or any Agreement with the Company, no compensation shall be payable under this Agreement and such compensation shall immediately become the Company's property.
Section three of the Debtor's agency agreement with USA has a similar setoff provision, which states:
(E) Amounts Due to Us. We may, in addition to any other legal or equitable remedies, offset any amount you owe us against any commission due or to become due to you under this Agreement. Any amount due to us shall become a first lien against all amounts due to you under this Agreement. You may not offset any amount you owe us against any amount due or to become due to you, but not yet payable. Moreover, all amounts you owe to us shall be payable to you upon our demand. This provision shall survive the termination of this Agreement. In the event we have to pursue collection procedures to collect any amounts due to us, you agree to be responsible for expenses incurred, including fees of collection agencies, attorneys and court costs.
The following are the amounts of the Debtor's renewal commissions from Equitable:
June $1,333.62 July 1,866.65 August 927.53 September 551.39 TOTAL $4,679.19
The Debtor also had new business commissions from Equitable in the following amounts:
June $285.09 July .00 August 581.53 September 873.84 TOTAL $1,740.46
During June and July, the Debtor's account with Equitable had a negative balance. According to the Debtor's testimony, the commissions he received for policies that were later canceled by the policyholder were charged against his account. Subsequent renewal and new business commissions were then credited toward the negative balance. According to the June 1, 2001, statement of his account, the negative agent balance was -$5,032.41. The July 1, 2001, statement indicates a negative balance of -$1,073.74, and the August 1,2001, statement indicates a positive balance of $1,519.52. Equitable issued a check payable to the Debtor on August 9, 2001, in the amount of $1,058.43, and another check payable to the Debtor and the trustee, in care of the Debtor's attorney, in the amount of $2,070.91 on October 8, 2001.
The Court notes a discrepancy in the evidence as to the amount of the August 9, 2001, check. The Debtor testified that he received a check in the amount of $1,519.52, but Exhibit 9 includes a photocopy of the check indicating an amount of $1,058.43. The Court deems the photocopy of the check issued to the Debtor more credible.
These numbers do not "add up." For example, as of June 1, 2001, the Debtor's account had a negative balance of -$5,032.41. In June, he had renewal commissions in the amount of $1,333.62 and new business commissions in the amount of $285.09, totaling $1,618.71. Thus, crediting his total June commissions against his negative balance (-$5,032.41 + $1,618.71) results in a negative balance of -$3,413.70. Yet, the July 1, 2001, statement indicates a negative balance of -$1,073.74, not -$3,413.70. Because the parties did not offer evidence either explaining or questioning Equitable's accounting, however, the Court takes the ending balances of the account in Exhibits 9 and 13 as correct.
The following are the amounts of the Debtor's renewal commissions from AIU:
May $1,623.78 June 1,627.63 July 1,101.14 August 1,101.95 September 1,508.21 TOTAL $6,962.71
The Debtor had AIU send the Internal Revenue Service $1,000.00 of his renewal commissions in both May and June. Thus, in May the Debtor received a check from MU for $623.78, and in June he received a check for $627.63. He received the full amount of his renewal commissions in July, August, and September.
The Debtor received a check in the amount of $258.75 in June and another check in the amount of $241.20 in July for renewal commissions from Life Health.
The Debtor currently has negative account balance with Bankers United. The statements of the Debtor's account with Bankers United indicate that as of May 23, 2001, the balance on the account was -$3,107.63. Bankers United has offset the Debtor's initial and renewal commissions against the negative balance. As of October 23,2001, the balance was -$1,138.46.
The Debtor also currently has a negative account balance with USA. Like Bankers United, USA has offset the Debtor's initial and renewal commissions against the negative balance. As of October 1, 2001, the balance on his account with USA was -$3,816.07.
DISCUSSION A. Property of the Estate
The Trustee moved for turnover of the renewal commissions pursuant to 11 U.S.C. § 542 and § 543. Section 542(a) provides in relevant part:
[A]n entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
Pursuant to section 363, the trustee may use, sell, or lease property of the estate. 11 U.S.C. § 363(b)(1). Thus, the issue before the Court is whether the renewal commissions constitute property of the estate.
Property of the estate includes "[a]ll legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The scope of section 541(a)(1) is very broad and includes property of all descriptions, tangible and intangible. See generally Ramsay v. Dowden (In re Central Arkansas Broad. Co.), 68 F.3d 213 (8th Cir. 1995). Under section 541(a)(6), the estate consists of "[p]roceeds product, offspring, rents and 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." 11 U.S.C. § 541(a)(6) (emphasis added); see Parsons v. Union Planters Bank (In re Parsons), 262 B.R. 475 (B.A.P. 8th Cir. 2001) (real estate commissions earned prepetition but paid postpetition were property of the estate notwithstanding that the debtor had to perform certain services postpetition). The Debtors and Bankers United argue that the renewal commissions fall within the exception provided in section 541(a)(6) and therefore are not property of the estate. Specifically, they argue that servicing the policies was necessary to receive the renewal commissions because without servicing, policyholders would not renew their policies. The Debtors also contend that complying with the terms of the various agency agreements by maintaining records, collecting premiums, and the like, created "substantial post-petition obligations."
"Property interests are created and defined by state law." Parsons, 262 B.R. at 478 (citations omitted). Under North Dakota law, an insurance agents right to renewal commissions depends upon the agent's employment contract, and the agent has the right to such commissions only if the contract expressly and specifically provides therefor. Stockmen's Ins. Agency, Inc. v. Guarantee Reserve Life Ins. Co., 217 N.W.2d 455, 460 (N.D. 1974), cert. denied 419 U.S. 869 (1974). In this case, each of the Debtor's agency agreements with the various insurance companies provides that the Debtor has a vested interest in renewal commissions.
Several courts have had the opportunity to address whether postpetition renewal commissions are property of the estate. To determine this question, these courts have generally focused on the rights and obligations of the debtor pursuant to the employment agreement and on whether the receipt of the commissions was dependent upon the performance of postpetition services. Towers v. Wu (In re Wu), 173 B.R. 411, 414 (B.A.P. 9th Cir. 1994); see Wicheff v. Baumgart (In re Wicheff), 215 B.R. 839, 841-42 (B.A.P. 6th Cir. 1998) (concluding that renewal commissions received postpetition are property of the estate if all of the actions to earn the commissions are completed prepetition); In re Kervin, 19 B.R. 190 (Bankr. S.D. Ala. 1982) (concluding that renewal commissions were not property of the estate because receipt of the renewal commissions was conditioned upon the debtor meeting performance requirements, servicing existing policies, and generating new business);see also Parsons, 262 B.R. at 478 (concluding that real estate commissions earned prepetition but paid postpetition were property of the estate because all of the acts necessary to earn the commission took place prepetition). In Kleinfeld v. F.D.I.C. (In re Froid), 109 B.R. 481 (Bankr. M.D. Fla. 1989), the debtor was entitled to be paid renewal commissions under his contract regardless of whether he remained an agent of the insurance company. However, the court in Froid also considered when the debtor performed "the bulk of the work" and concluded:
Although the Debtor's personal service to his clientele postpetition has helped to make him a success in the industry, it is clear that the bulk of the work to develop the relationships with these clients was performed prepetition. Further, the renewal commissions would still be paid even if the Debtor terminated his relationship with [the insurance company]. There is no evidence that any policyholder would actually cancel his policy if the Debtor ceased servicing the policy and another agent took up the reins. Renewal commissions which are not conditioned on future services, will be deemed property of the estate.
Froid, 109 B.R. at 483.
In In re Bluman, 125 B.R. 359 (Bankr. E.D.N.Y. 1991), the debtor proffered an argument much like that of the Debtors and Bankers United in this case. He asserted that although the renewal commissions he earned were partly the result of prepetition activities, that he continued to work for his commissions postpetition. Bluman, 125 B.R. at 365. He argued that "if he were to cease and desist from continuing these activities, the accounts would dry up." Id. The bankruptcy court was not persuaded and held that the renewal commissions were property of the estate:
As the renewals to the Debtor are not conditioned on future services and in fact the acts of the Debtor necessary to earn these payments are rooted in the prebankruptcy past, this Court finds that the commissions are not earnings from services of the Debtor and are therefore part of the estate.
Id. at 366. The court in Williams v. Tomer (In re Tomer), 147 B.R. 461, 470 (S.D. Ill. 1992), was similarly unpersuaded by the debtor's argument that his right to renewal commissions depended upon his continued efforts and involvement in managing his subagents and in maintaining good relations with the policyholders after the policy was signed. The court concluded:
There is no doubt that the contracts provide for many services to be performed by Mr. Tomer to maintain good relations with the policyholders. But in order to meet the test of exclusion under § 541(a)(6), the "earnings" must accrue, or be the result of, or attributable to, services performed by the debtor after the bankruptcy filing. In this case, the debtor's entitlement is clearly rooted in the pre-bankruptcy period when the policies are issued. The Court agrees with the reasoning of the Bankruptcy Court that any postpetition personal services rendered by the debtor certainly enhances the value of the prepetition policies. But, a review of the contract provisions shows that contrary to the debtor's argument, his entitlement to commissions is not contingent upon the performance of subsequent services.
(Tomer), 147 B.R. at 472 (citations omitted). In Movitz v. Palmer (In re Palmer), 167 B.R. 579, 586 (Bankr. D. Ariz. 1994), in response to the debtor's testimony that the insurance business is competitive and vested renewal commissions can be maximized if the contracts are serviced, the bankruptcy court stated: "While it is true that the servicing of the life insurance policies may result in increased renewals, such service only affects the value of the right received by the bankruptcy estate."
In the instant case, the Debtor conceded that he will continue to receive the renewal commissions as long as the policyholders continue to renew the policies he wrote for them and that he is not required to contact the policyholders to secure the commissions. Moreover, the Debtor conceded that his receipt of the renewal commissions is not dependent upon him doing anything, although later in his testimony he backpedaled and attempted to qualify his earlier concession by stating that servicing was necessary to receive the renewal commissions. Although the agreements with MU, Bankers United, and USA each provide that payment of vested commissions will cease if the Debtor violates the respective agreement, this fact does not condition payment of the renewal commissions on future services. Rather, it conditions payment on the non-occurrence of certain acts that would violate the agreements. Also, any obligation the Debtor has to maintain records and collect premiums has no effect on whether policyholders renew their policies, and at most constitutes a slight contingency, insufficient to take the earnings from renewal commissions beyond the scope of property of the estate. See In re Golde, 253 B.R. 843, 848 (Bankr. N.D. Ohio 2000) (stating that merely because a debtor has to perform a postpetition service to receive payments for prepetition services, does not thereby mean that such property is excludable from the estate). The Court is satisfied that the renewal commissions were vested prepetition, that they were not conditioned on future services, and thus, that they are property of the estate.
In his reply brief, the Debtors posit for the first time that if the Court deems the renewal commissions property of the estate that they should be exempt as wages. As this issue is not properly before the Court, it will not be addressed in the context of the Trustee's turnover motion.
B. Extent of Trustee's Recovery
1. Bankers United
Bankers United contends that its agency agreement with the Debtor voids the Debtor's rights to possession of any of the renewal commissions as of the date he filed for bankruptcy because he owed Bankers United funds as of that date. In response, the Trustee contends that pursuant to 11 U.S.C. § 541(c)(1)(B), an interest of the Debtor in property becomes the property of the estate notwithstanding any provision in an agreement that is conditioned upon the commencement of a bankruptcy case when such agreement effects a forfeiture, and that Bankers United attempts to effect a forfeiture in this case.
The Bankruptcy Code invalidates contracts or law that would preclude a debtor's interest in property from being transferred to the estate solely because the debtor is insolvent or filed for protection under title 11. As cited by the Trustee, section 541(c)(1)(B) invalidates restrictions on transfers that exist due to the debtor's insolvency as follows:
(c)(1) Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law — (B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor's interest in property.
This section thus provides that property of the debtor becomes property of the estate despite any agreement (1) which is conditioned upon the debtor's insolvency or commencement of a bankruptcy case and (2) which would effect a forfeiture of the debtor's interest in the property.
Section 12 of the agreement between the Debtor and Bankers United provides:
Indebtedness — You are responsible for the payment to the company of all monies which: (i) you or your sub-agents collect on the Company's behalf (ii) are due the Company because of compensation paid to you or your sub-agents upon premiums which the Company thereafter returned; (iii) are paid to you or your sub-agents which are not due to you or your sub-agents under this Agreement. Until the Company receives all monies from you, the same shall be a debt payable on demand and for which you are liable and no commissions are payable at the Company's option to you or your sub-agents until such indebtedness is satisfied. Any indebtedness to the company or any of its affiliates or subsidiaries incurred by you shall be a first lien on any monies due or to become due under this Agreement. The Company may, at anytime, deduct from any monies due you, any such indebtedness together with interest at the legal rate and any collection costs.
If you should take or be placed into bankruptcy to the extent of any amount due the Company under this or any Agreement with the Company, no compensation shall be payable under this Agreement and such compensation shall immediately become the Company's property.
It is not by virtue of the event of the bankruptcy filing that Bankers United is seeking recovery of the outstanding indebtedness owed by the Debtor. Rather, Bankers United had the contractual right to offset the amounts owed by the Debtor irrespective of a bankruptcy filing, and from the Debtor's testimony, it was the practice of the insurance companies to do so, even prior to the bankruptcy filing. Because the Debtors' filing their bankruptcy petition was not the event that triggered Bankers United's offset of the Debtor's commission against his negative balance, it cannot be said that the offset agreement was conditioned upon the Debtor's insolvency or commencement of a bankruptcy case. As such, section 541(c)(1)(B) does not invalidate the offset provision of the Debtor's agency agreement. Bankers United may offset the amount of the Debtor's indebtedness, and the Trustee is entitled to turnover of future renewal commissions to the extent that they exceed the amount of the Debtor's indebtedness to Bankers United.
2. USA
For the same reasons stated with regard to Bankers United, USA may offset the amount of the Debtor's indebtedness, and the Trustee is entitled to turnover of future renewal commissions to the extent that they exceed the amount of the Debtor's indebtedness to USA.
3. Equitable
On October 25, 2001, Equitable exercised its contractual option to make renewal commissions nonpayable upon the Debtor's violation of the agency agreement. Equitable issued checks for the commissions due and owing prior to the termination of the agreement. Because the Debtor is not entitled to future renewal commissions from Equitable, neither is the Trustee.
4. AIU
The Trustee is entitled to turnover of future renewal commissions to the extent that they exceed the amount of the Debtor's indebtedness to MU.
5. Life Health
The Trustee is entitled to turnover of future renewal commissions to the extent that they exceed the amount of the Debtor's indebtedness to Life Health.
6. The Debtors
The Trustee is entitled to all initial and renewal commissions paid them postpetition (from and after May 3, 2001) on policies written prepetition. These include $4,962.71 from MU and $499.95 from Life Health. The amount the Trustee is entitled to from the renewal commissions from Equitable is somewhat problematic. It is impossible to reconcile the amounts indicated as new business and renewal commissions on the statements with the month-end totals reflected in the statements and the amounts of the checks issued by Equitable. It can be deduced, however, that the Debtor had a negative balance with Equitable until some uncertain time in July because the July 1, 2001, statement indicates a negative balance of -$1,073.74 and the August 1, 2001, statement indicates a positive balance of $1,519.52. It can be concluded, without question, that the Trustee is entitled to the entire amount of the renewal commissions from August and September because the Debtor was actually paid these amounts, i.e., the Debtor was no longer indebted to Equitable. These renewal commissions total $1,478.92. Furthermore, the Debtor only received renewal commissions, and no new business commissions, in July. Accordingly, the remainder of the renewal commissions from July, after offsetting the $1,073.74 indebtedness, is subject to turnover. This amount is $405.18. The total amount subject to turnover is therefore $1,884.10.
$623.78 + 627.63+ + 1,101.14 + 1,101.95 + 1,508.21.
$258.75 + 241.20.
$927.53 + 551.39.
$1,478.92 + 405.18.
CONCLUSION
Based on the foregoing, the Trustee's motion for turnover pursuant to section 542 is granted. As such, it is unnecessary to reach the merits of the trustee's section 543 argument.
The Debtors, Jeffrey A. Swanson and Sherry L. Swanson, shall turnover to the Trustee all initial and renewal commissions paid them postpetition (from and after May 3, 2001) on policies written prepetition. The Court calculates the sum of said commissions as $7,346.76. This sum is comprised of $4,962.71 the Debtor received from MU, $499.95 the Debtor received from Life Health, and $1,884.10 the Debtor received from Equitable.
Bankers United Life Assurance Company shall turnover to the Trustee all initial and renewal commissions due and owing Jeffrey A. Swanson, and those accruing in the future, for policies written prepetition less any deduction to offset the amount of his account indebtedness.
United Security Assurance shall turnover to the Trustee all initial and renewal commissions due and owing Jeffrey A. Swanson, and those accruing in the future, for policies written prepetition less any deduction to offset the amount of his account indebtedness.
Life Health Insurance Company of America shall turnover to the Trustee all initial and renewal commissions due and owing Jeffrey A. Swanson, and those accruing in the future, for policies written prepetition.
American Independent Underwriters shall turnover to the Trustee all initial and renewal commissions due and owing Jeffrey A. Swanson, and those accruing in the future, for policies written prepetition.
All other relief is denied.
SO ORDERED.