United States Court of Appeals,
Fifth Circuit.
No. 94-10862
Summary Calendar.
In the Matter of Douglas M. KEMP, Debtor.
AFFILIATED COMPUTER SYSTEMS, INC., d/b/a ACS Investors, Inc.,
Appellant,
v.
Daniel J. SHERMAN, Trustee for Douglas M. Kemp, Debtor, Appellee.
May 18, 1995.
Appeal from the United States District Court for the Northern
District of Texas.
Before DUHÉ, WIENER and STEWART, Circuit Judges.
PER CURIAM:
Defendant-Appellant Affiliated Computer Systems, Inc. (ACS)
appeals from a judgment of the district court, affirming a holding
of the bankruptcy court that $50,000 in ACS's possession was
property of the bankruptcy estate of the debtor, Douglas M. Kemp,
a former employee of ACS, as of the date of Kemp's filing for
bankruptcy, and thus was subject to turnover to Kemp's trustee,
Plaintiff-Appellee Daniel J. Sherman (the Trustee). Concluding as
a matter of law that the money was not held in escrow and that it
was property in which Kemp had an ownership interest at the time
that he declared bankruptcy, we affirm the district court's ruling.
I
FACTS AND PROCEEDINGS
Kemp was employed by ACS in 1989 as its Vice President for
1
Corporate Development. His compensation consisted of a salary plus
commissions earned from Kemp's efforts in arranging acquisitions of
other companies by ACS. The employment agreement between Kemp and
ACS, setting out the schedule of percentages to be used in
determining Kemp's commissions, provided that the amount of
commission paid to Kemp could nevertheless vary from the commission
calculated under the schedule if the facts of a particular
transaction justified deviation. Under the agreement, Darwin
Deason, the CEO of ACS, was required to approve any deviation from
the commission schedule.
In November 1989, Kemp assisted in ACS's acquisition of OBS
Companies, Inc. (OBS), and Deason authorized the payment of
$170,000 to Kemp as his total net commission on that transaction.
The next month, Atkinson Associates, Inc. (Atkinson) sued ACS,
seeking recovery of commissions allegedly due to Atkinson from ACS
in connection with the OBS acquisition. Atkinson claimed that Kemp
had orally committed ACS to pay a 2% commission to Atkinson for its
services in connection with the OBS acquisition.
In a subsequent transaction wholly unrelated to OBS or
Atkinson, Kemp assisted ACS in acquiring a substantial interest in
Dataplex, Inc. (Dataplex) in January 1990. Deason authorized the
payment of $200,000 to Kemp as his commission on the Dataplex
transaction but, in addition to standard withholdings, ACS retained
$50,000 of this amount pending the settlement or adjudication of
the Atkinson lawsuit. Kemp signed ACS's letter of April 3, 1990,
which informed him that ACS had authorized a $200,000 commission on
2
the Dataplex transaction and was withholding $50,000 of that amount
until the results of the Atkinson lawsuit were determined.
More than three months later, on June 11, 1990, Kemp filed a
voluntary petition under Chapter 7 of the Bankruptcy Code. After
Sherman was appointed trustee for Kemp's bankruptcy estate, he
instituted an adversary proceeding in bankruptcy court, seeking a
turnover of the $50,000 from ACS. The bankruptcy court, trying the
case on stipulated facts, found that the $50,000 was property of
the estate at the time that Kemp filed for bankruptcy, and the
court entered an order for turnover of those funds to the Trustee.
On appeal, the district court affirmed the judgment of the
bankruptcy court, finding that (1) the Trustee had satisfied his
burden of proving that the $50,000 was property of the bankruptcy
estate, and (2) ACS had failed to establish that those funds were
not subject to turnover. ACS timely appealed the district court's
ruling.
II
ANALYSIS
We review a bankruptcy court's findings of fact under the
clearly erroneous standard, which calls for reversal only if,
considering all the evidence, we are left with the definite and
firm conviction that a mistake has been made.1 When the district
court has affirmed the bankruptcy court's findings, our review for
1
See Haber Oil Co. v. Swinehart, 12 F.3d 426, 434 (5th
Cir.1994); In re Young, 995 F.2d 547, 548 (5th Cir.1993).
3
clear error is strict.2 Our review of conclusions of law is de
novo.3
ACS asserts that the Trustee has no right to turnover of the
$50,000, insisting that those funds were held in escrow as a
contingency and that Kemp did not have a vested interest in the
funds at the time he filed for bankruptcy. ACS argues
alternatively that, as it had discretionary authority to increase
or decrease Kemp's commission as calculated from the schedule, Kemp
did not have any interest in the $50,000 at the time he filed for
bankruptcy because ACS had not yet released this money to him.
After examining the transactions related to the $50,000 at issue,
we conclude that neither of ACS's contentions has merit.
Section 541(a)(1)4 states that the filing of a bankruptcy
petition creates an estate comprising "all legal or equitable
interests of the debtor in property as of the commencement of the
case."5 The scope of property rights and interests included in a
bankruptcy estate is very broad: The conditional, future,
speculative, or equitable nature of an interest does not prevent it
from being property of the bankruptcy estate.6 Under Section
2
See In re Texas Gen. Petroleum Corp., 40 F.3d 763, 767 (5th
Cir.1994).
3
See In re Allison, 960 F.2d 481, 483 (5th Cir.1992).
4
Unless otherwise indicated, all statutory citations refer
to the United States Bankruptcy Code, 11 U.S.C. § 101-1330
(1992).
5
11 U.S.C. § 541(a)(1).
6
See Haber Oil Co. v. Swinehart, 12 F.3d 426, 435 (5th
Cir.1994); Louisiana World Exposition v. Federal Ins. Co., 858
4
542(a), property of the estate that is in the possession of another
at the time of filing must be turned over on proper demand by the
debtor-in-possession or trustee.7 Our inquiry in the instant case,
therefore, is whether the $50,000 in question—clearly being
possessed by another (ACS) at the time that Kemp filed for
bankruptcy—constituted property of the estate, subjecting it to
turnover from ACS to the Trustee.
In opposing turnover of the $50,000, ACS relies on several
cases in which bankruptcy courts have found that money held in an
escrow account was not property of the debtor's estate. All of
those cases, however, involved true escrow accounts that were
created by bona fide, legally valid escrow agreements.8 In
determining whether the funds in question were property of the
F.2d 233, 245 (5th Cir.1988); Georgia Pac. Corp. v. Sigma Serv.
Corp., 713 F.2d 962, 967-68 (5th Cir.1983) (finding that even if
funds were subject to constructive trust or other equitable lien,
they constituted property of estate to be turned over to
debtor-in-possession subject to bankruptcy court's power to
recognize suppliers' equitable interest); In re Anders, 151 B.R.
543, 545 (Bankr.D.Nev.1993); In re Anderson, 128 B.R. 850, 853
(D.R.I.1991).
7
11 U.S.C. § 542(a) states, "an entity ... in possession,
custody, or control, ... of property that the trustee may use,
sell, or lease under section 363 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."
8
See, e.g., In re Dolphin Titan Int'l Inc., 93 B.R. 508, 512
(Bankr.S.D.Tex.1988) (agreement created assurance fund in which
debtor had no claim or interest until all prior claims were paid
in full, so that fund was not property of estate); In re Palm
Beach Heights Dev. & Sales Corp., 52 B.R. 181, 182-83
(Bankr.S.D.Fla.1985) (escrow fund agreement provided that fund's
purpose was to assure completion of road and drainage
improvements, so debtor had no interest until obligations were
complete).
5
debtors' estates, the bankruptcy courts in those cases looked to
the nature and circumstances of the underlying escrow agreements.9
Our examination of the instant record leads us to conclude that
there was no true escrow agreement between Kemp and ACS.
We look to state law—here Texas—to determine whether an
escrow agreement existed: The answer to that question determines
the parties' respective rights to the $50,000 held by ACS.10 Under
Texas law, an escrow is created only when the parties come to a
clear and definite agreement directing that the funds be deposited
with a third party and specifying the terms and conditions on which
the third party is required to deliver the funds.11 In the instant
case no clear and definite escrow agreement existed between Kemp
9
See In re All Chemical Isotope Enrichment, Inc., 127 B.R.
829, 837 (Bankr.E.D.Tenn.1991) (money placed in fund by party
other than debtor was not property of estate, as escrow agreement
specified that debtor was not entitled to fund until it acquired
ownership of equipment); In re Cedar Rapids Meats, Inc., 121
B.R. 562, 567-70 (Bankr.N.D.Iowa 1990) (fund was not property of
estate, as escrow agreement revealed that purpose of fund
deposited by debtor was to assure debtor completed its obligation
to pay worker's compensation claims accrued). See also In re
Keene Corp., 162 B.R. 935, 943 (Bankr.S.D.N.Y.1994) (finding that
under New York law, debtor retains legal title of funds placed in
escrow, grantee has equitable title, and titles merge when
contingency in escrow agreement occurs).
10
See Butner v. United States, 440 U.S. 48, 54-56, 99 S.Ct.
914, 918, 59 L.Ed.2d 136 (1979) ("Property interests are created
and defined by state law. Unless some federal interest requires
a different result, there is no reason why such interests should
be analyzed differently simply because an interested party is
involved in a bankruptcy proceeding."); Haber Oil Co. v.
Swinehart, 12 F.3d 426, 435 (5th Cir.1994) (substantive nature of
property rights held by a bankrupt and its creditors is defined
by state law).
11
See Johnson v. Freytag, 338 S.W.2d 257, 262
(Tex.Civ.App.—1960); Tanner v. Imle, 253 S.W. 665, 669-70
(Tex.Civ.App.—1923).
6
and ACS. Consequently, ACS's reliance on "escrow funds" cases is
misplaced.
The documents purporting to explain ACS's reason for
withholding the $50,000 portion of Kemp's Dataplex commission say
nothing other than that ACS was retaining that money pending
settlement or adjudication of the Atkinson lawsuit. As the
bankruptcy court observed, these documents specify absolutely no
terms or conditions that must be fulfilled before the funds may be
delivered to ACS or Kemp or anyone else. More importantly, there
is no evidence of any agreement specifying how the fund would be
applied upon resolution of the Atkinson lawsuit, whether by
settlement or judgment. Kemp's signature on ACS's letter of April
3, 1990, which advised him that $50,000 of his earned commission
was being withheld, did not somehow convert that withholding into
an escrow agreement. Kemp did not affirmatively deposit his
$50,000 with a neutral third party (or even with ACS for that
matter); ACS just withheld it from him and kept the money in its
own account, thereby acting as both stakeholder and claimant. That
ACS (and Kemp, mirroring ACS) labeled the withholding as a
"contingency" and as an "escrow fund" in various writings does not
change the essential nature of the money as property in which Kemp
had an ownership interest, regardless of whether his ownership
might have been subject to divestment in the future if the outcome
of the Atkinson lawsuit were to prove unfavorable to ACS.
Agreeing with the finding that here no escrow agreement was
created between Kemp and ACS, we concur in the bankruptcy court's
7
observation that the Eighth Circuit's ruling in In re Newcomb,12 a
leading case holding that monies held in a particular escrow fund
were not property of the debtor's estate, is not applicable to the
instant case. The Newcomb court, applying Missouri law, held that
a valid escrow agreement between a debtor and a judgment creditor
gave each of them a contingent interest in the escrowed funds: the
debtor had a contingent right to the funds if the judgment should
be reversed and the judgment creditor had a contingent right to the
funds if the judgment should be affirmed.13 Prior to the Newcomb
debtor's bankruptcy filing, the judgment in question was affirmed;
therefore, the debtor no longer had any interest in the escrowed
funds at the time the debtor filed for bankruptcy protection.
Consequently, the court reasoned, the funds could not be deemed to
be property of the debtor's bankruptcy estate, so that fulfillment
of the express condition of the escrow (affirmance of the judgment)
did not result in an avoidable transfer of property of the estate.14
In contrast, our Texas law analysis of the escrow agreement in
In re Missionary Baptist Foundation of America, Inc.15, led us to
conclude that the escrowed funds were property of the debtor's
estate at the time of bankruptcy. Under the express provisions of
the escrow agreement in Missionary, the debtor was required to keep
an escrow account for capital expenditures on two nursing homes
12
744 F.2d 621 (8th Cir.1984).
13
See id. at 625-27.
14
See id.
15
792 F.2d 502 (5th Cir.1986).
8
funded for as long as the debtor remained liable on a loan related
to the debtor's purchase of the nursing homes.16 After the debtor
declared bankruptcy, its trustee transferred the mortgaged
properties to another entity. All parties to the transfer,
including the original lender on the loan, released the debtor from
its loan obligations and expressly reserved to the debtor its
rights to the escrowed funds. We noted that when the debtor was no
longer liable for loan payments, its related duty under the escrow
agreement to keep funding the escrow account ceased.17
The Missionary escrow's implicit contingency was that the
debtor could not claim the escrowed funds if the debtor remained
liable on the loan. As the debtor was released from its loan
obligations, the escrow's contingency—continuing liability on the
loan—ceased to exist prior to the debtor's filing for bankruptcy,
removing the impediment to the debtor's ownership and right to
possession of the funds remaining in escrow and leading us to
conclude that the escrow funds were property of the debtor's
estate.18 We distinguished the circumstances in Newcomb and similar
16
See id. at 505-06.
17
See id. at 506.
18
See id. In finding that the funds were property of the
estate, we relied on In re Flannery, 51 B.R. 697 (Bankr.S.D.Ohio
1985). The Flannery court held that an assignment right placed
in escrow by the debtor was part of the debtor's bankruptcy
estate. The escrow agreement in Flannery provided that in the
event of a default on a partnership loan, the debtor would assign
all his interest in the partnership to his partner. As no
default occurred prior to the time of the bankruptcy filing,
resulting in an unfulfilled contingency, the court held that the
assignment right became part of the bankruptcy estate when the
debtor filed for bankruptcy. See id. at 699-700.
9
cases, observing that the escrow contingencies divesting the debtor
of any interest in those cases were fulfilled prior to the
bankruptcy filings, so that the escrowed funds could not properly
be included in the estates.19
Even if we were to assume arguendo that Kemp's assent to
ACS's withholding of the $50,000 could somehow be deemed to have
created an escrow agreement, we would still be persuaded by our
decision in Missionary that the $50,000 was property of Kemp's
estate. For the putative escrow's contingency—resolution of the
Atkinson lawsuit—had not been fulfilled at the time that Kemp filed
for bankruptcy protection.20
We also reject ACS's alternative argument—clearly hindsight
rationalization—that it was exercising its discretionary authority
to set the amount of Kemp's total commission in derogation of the
percentage schedule when ACS "deducted" the $50,000 from the total
amount due. ACS's unilateral action in withholding the $50,000 for
its own assurance pending the outcome of the Atkinson lawsuit did
not affect the status of those funds as Kemp's pre-petition earned
income; neither did that action by ACS magically transmogrify
Kemp's ownership interest in his earnings into a contingency.
Again, the OBS transaction, which generated the Atkinson lawsuit,
and the Dataplex transaction, which generated the commission from
19
See id. at 504-06.
20
C.f. In re Keene Corp., 162 B.R. 935, 943
(Bankr.S.D.N.Y.1994) (finding that debtor was divested of legal
title to escrow funds securing judgments that became final prior
to bankruptcy filing, so that funds were not property of estate,
as debtor then had neither legal or equitable interest).
10
which ACS retained the $50,000, were wholly separate and unrelated.
As the bankruptcy court recognized, the relevant ACS documents
reflect that Kemp's total commission of $200,000 was
unconditionally earned when the Dataplex transaction closed, and
that the $200,000 sum included the $50,000 which ACS elected to
withhold pending resolution of the Atkinson lawsuit. Pursuant to
Kemp's employment agreement, Deason validly authorized the whole
$200,000 amount, and it was subsequently paid to Kemp net of taxes,
advance draws, and the subject $50,000. The discretionary
authority that ACS could have exercised in determining the amount
of Kemp's commission is therefore irrelevant; clear beyond cavil
are the facts that ACS contemporaneously set Kemp's Dataplex
commission at $200,000 and recognized that the $50,000 portion at
issue was part of his acknowledged earnings.
As a general rule bankruptcy estates enjoy the same rights
that the debtor held immediately prior to the filing of
bankruptcy.21 Here, just before he filed for bankruptcy, Kemp had
a property right in all commissions that he had earned, but not yet
received, including the $50,000 that ACS had withheld from his
Dataplex commission. Nothing in the record reflects that ACS's de
facto retainage from the validly earned compensation of its
employee was subject de jure to permanent retention by ACS upon the
future unfavorable settlement or adjudication of the Atkinson
lawsuit. More importantly, once Kemp filed for bankruptcy, the
21
See Bank of Marin v. England, 385 U.S. 99, 100-02, 87
S.Ct. 274, 276, 17 L.Ed.2d 197 (1966); In re N.S. Garrott &
Sons, 772 F.2d 462, 466-67 (8th Cir.1985).
11
possibility of divestment evaporated ipso facto by virtue of the
automatic stay: The $50,000 in which he had an ownership interest
constituted part of the bankrupt estate under § 541(a), and the
money was subject to turnover under § 542(a).
As the resolution of the Atkinson lawsuit occurred after
Kemp's filing, it had no post hoc effect on the inclusion of the
$50,000 in the bankrupt estate. Kemp's bankruptcy filing created
an estate as of that date, and Kemp was no longer possessed of any
authority to transfer or otherwise deal with property of that
estate. As a result, Kemp's post-petition action of executing a
letter agreement on December 17, 1990, purporting to release the
$50,000 to ACS after ACS settled with Atkinson, was void as a
matter of law and has no bearing on the instant action. Indeed,
when—more than six months after the bankruptcy filing—Kemp thus
attempted to "authorize" ACS to apply the $50,000 to the Atkinson
lawsuit settlement, those monies had long since become part of the
estate. Kemp had no legal power to transfer the funds; in fact,
his effort to do so was a technical violation of the automatic stay
affecting all estate property.22
22
See 11 U.S.C. § 362(a)(3) (automatic stay bars act to
obtain possession of property of estate); 11 U.S.C. § 362(a)(6)
(automatic stay prohibits any act to recover a pre-petition claim
against debtor). A trustee may also avoid any unauthorized
transfer of property of the estate that occurs after filing. See
11 U.S.C. § 549(a)(1), (a)(2)(B). See also In re Shapiro, 124
B.R. 974, 980-82 (Bankr.E.D.Pa.1991) (escrow funds were property
of debtor's estate, as debtor's post-petition withdrawal of his
dispute with creditors was either violative of automatic stay or
avoidable as post-petition transfer); In re Cabrillo, 101 B.R.
443, 446-47 (Bankr.E.D.Pa.1989) (any attempted setoff by creditor
against certificate of deposit that assertedly served as
collateral for debtor's loan would have violated automatic stay
12
In withholding a portion of its employee's rightfully earned
commission, ACS appears to have been trying to avoid the need to
file a lawsuit against Kemp (or to implead him in the Atkinson
suit) for indemnity or contribution in the event ACS was ultimately
found liable to Atkinson. But ACS was at most a potential
unsecured creditor of Kemp's as a result of his purported civil
misdeed vis-à-vis Atkinson in the OBS transaction, completely
unrelated to the Dataplex transaction which generated the
commission here at issue. Obvious to us is the fact that ACS did
not factor in the possibility of Kemp's bankruptcy when it
appropriated his $50,000. And ACS never bothered to file a proof
of claim in Kemp's bankruptcy proceedings once they were commenced.
ACS failed either to have Kemp place his $50,000 in a legally valid
escrow account or to file a claim against Kemp to recover
indemnification or contribution for its potential losses from the
Atkinson lawsuit. Therefore ACS cannot now bootstrap some
innominate security position in the contested funds by
mischaracterizing the legal nature of its withholding, i.e., by
claiming that Kemp's ownership interest in the $50,000 was somehow
a "contingent interest," held in escrow, which could not be
property of the estate at the time of his bankruptcy filing.23
if creditor did not first obtain relief from stay).
23
In contending that the district court erroneously shifted
the burden of proof to it, ACS argues that the doctrine of setoff
is inapplicable because 1) as Kemp never had any interest in the
$50,000, he had no claim that could be set off against ACS and 2)
as the Trustee failed to prove that the $50,000 was property of
the estate to begin with, the burden of proof never shifted to
ACS. ACS's assertions are unavailing given our disposition of
13
III
CONCLUSION
We agree with the bankruptcy court's holding that the $50,000
withheld by ACS from Kemp's earned commission was, at the time of
Kemp's filing, property of the bankruptcy estate and was thus
required to be turned over to Trustee pursuant to 11 U.S.C. §
542(a). Accordingly, the district court's affirmance of the
bankruptcy court's judgment is
AFFIRMED.
the instant case, and we reject its contention that the burden of
proof was erroneously shifted. Moreover, the issue whether ACS
proved a right of setoff was not raised in the bankruptcy court,
which tried the instant case on stipulated facts, and therefore
was not appealed to the district court. Thus we need not, and
therefore do not, address that issue.
14