FILED
United States Court of Appeals
Tenth Circuit
September 14, 2010
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
In re: MARC WILLIAM DITTMAR,
Debtor.
----------------------------
LINDA S. PARKS, Trustee, No. 09-3230
Appellant.
v.
MARC WILLIAM DITTMAR,
Appellee.
_______________________________
In re: FOREST EARL DENTON;
GERMAINE ANN DENTON,
Debtors.
--------------------------
LINDA S. PARKS, Trustee,
09-3233
Appellant,
v.
FOREST EARL DENTON;
GERMAINE ANN DENTON,
Appellees.
_______________________________
In re: JOHN EARL HULSE,
Debtor.
-------------------------
LINDA S. PARKS, Trustee,
09-3234
Appellant,
v.
JOHN EARL HULSE,
Appellee.
_______________________________
In re: PATRICIA A. LITTLE,
Debtor.
--------------------------
LINDA S. PARKS, Trustee, 09-3235
Appellant,
v.
PATRICIA A. LITTLE,
Appellee.
_______________________________
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In re: RICKY A. MURPHY;
DENISE L. MURPHY,
Debtors.
---------------------------
LINDA S. PARKS, Trustee,
09-3238
Appellant,
v.
RICKY A. MURPHY;
DENISE L. MURPHY,
Appellees.
_______________________________
In re: CYNTHIA MY NGUYEN,
Debtor.
---------------------------
LINDA S. PARKS, Trustee, 09-3236
Appellant,
v.
CYNTHIA MY NGUYEN,
Appellee.
_______________________________
-3-
In re: LARRY E. LETOURNEAU;
DONNA M. LETOURNEAU,
Debtors.
-------------------------- 09-3239
LINDA S. PARKS, Trustee,
Appellant,
v.
LARRY E. LETOURNEAU; DONNA
M. LETOURNEAU,
Appellee.
_______________________________
In re: MICHAEL E. LOWE;
JACQUELINE E. FLOWERS-LOWE,
Debtors.
--------------------
CARL B. DAVIS, Trustee, 09-3237
Appellant,
v.
MICHAEL E. LOWE; JACQUELINE
E. FLOWERS-LOWE,
Appellee.
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APPEALS FROM THE UNITED STATES
BANKRUPTCY APPELLATE PANEL
(B.A.P. Nos. 08-002-KS, 08-003-KS, 08-004-KS, 08-005-KS,
08-006-KS, 08-007-KS, 08-008-KS, 08-009-KS)
Gaye B. Tibbets (Carl B. Davis, Davis & Jack, LLC, Wichita, Kansas, with her on
the briefs) Hite, Fanning & Honeyman, L.L.P., Wichita, Kansas, for Appellants.
Michael J. Studtmann, (Don W. Riley, Law Office of Don W. Riley, Wichita,
Kansas, Elaine Fleetwood, Ray Hodge & Associates, L.L.C., Wichita, Kansas,
and David Lund, Wichita, Kansas, with him on the brief) Law Offices of Michael
J. Studtmann, P.A., Wichita, Kansas, for Appellees.
Before KELLY, HOLLOWAY, and LUCERO, Circuit Judges.
KELLY, Circuit Judge.
The Appellants, bankruptcy trustees (“Trustees”), appeal from the judgment
of the bankruptcy appellate panel (“BAP”). The BAP determined that Appellees
and debtors’ (“Debtors”) stock appreciation rights were not part of Debtors’
bankruptcy estates under 11 U.S.C. § 541. A divided BAP panel affirmed the
bankruptcy court’s grant of summary judgment to Debtors, applying different
reasoning. Our jurisdiction arises under 28 U.S.C. § 158(d)(1), and we reverse.
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Background
Debtors are former employees of the Boeing Company who became
employees of Spirit AeroSystems, Inc. on June 17, 2005, when Spirit acquired
Boeing’s Wichita plant. In re Lowe, 380 B.R. 251, 252 (Bankr. D. Kan. 2007).
At the time of the sale, Debtors’ unions ratified substantially similar collective
bargaining agreements (“the CBA”) with Spirit. In re Dittmar, 410 B.R. 71, 74
n.7 (B.A.P. 10th Cir. 2009). During negotiations, Spirit proposed a 10% wage cut
for union-represented employees. Lowe, 380 B.R. at 254. As an inducement,
Spirit also offered to establish an equity participation program (“EPP”) for union-
represented employees and to contribute stock appreciation rights (“SARs”) to the
program if certain “payment events” occurred. Id. These SARs would expire in
fifteen years if no payment event occurred. 1 Aplt. App. 159. The final CBA
contained language that “[t]he parties agree to establish an [EPP]” for
“participating employees.” Lowe, 380 B.R. at 254. (emphasis added). The CBA
did not provide a detailed description of the EPP and did not define the term
“participating employees.” Id. at 257. Prior to voting on the CBA, the union
members attended a slide presentation discussing the EPP. Id. at 254. The slides
indicated that participants would be awarded options (approximately 1,000
options per employee); an option was a right to share in Payment Event profits on
one share of stock. 1 Aplt. App. 140, 147. The value of the option would be
determined upon a Payment Event with a participant ultimately receiving
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proceeds less the exercise price of the option. 1 Aplt. App. 142, 145 (“Following
a Payment Event, cash or stock will be distributed automatically. The amount
you receive will be net of the exercise price of the Option.”). The slides further
noted that “[w]e do not know when a Payment Event will take place, but [the
company] is using a five-year period in their planning. The company . . . will
want a Payment Event as soon as . . . the conditions are right for an optimal
valuation.” 1 Aplt. App. 152. The unions ratified the CBA on June 17, 2005.
Lowe, 380 B.R. at 254.
Shortly after ratification of the CBA, Debtors filed their respective
bankruptcy petitions over roughly a two-month period between August and
October 2005. Dittmar, 410 B.R. at 80. On October 27, 2006, over one year after
the bankruptcy filings, Spirit memorialized the EPP in a document. Lowe, 380
B.R. at 255. The full plan document defined which employees were eligible to
participate in the EPP, as well as the SARs each eligible employee would receive
under the EPP. Id. One month later, on November 27, 2006, a payment event (an
IPO) occurred. Id. Ultimately, the SARs were worth $61,440 per employee. Id.
Participating employees received $34,556 in cash around December 6, 2006, and
1,034 shares of Spirit Class A common stock around March 15, 2007. Id. at 255-
56.
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Trustees then filed motions to compel turnover of the distributions received
from the SARs as property of the bankruptcy estate pursuant to 11 U.S.C. § 541.
After a hearing, the bankruptcy court entered an interim order denying turnover.
Dittmar, 410 B.R. at 80. After discovery, various trustees and debtors moved for
summary judgment on the turnover motions. The bankruptcy court granted
Debtors’ motion for summary judgment and denied Trustees’ motion, finding the
distributions were not property of the bankruptcy estate. Lowe, 380 B.R. at 257-
58. The bankruptcy court, relying on Kansas law, held that the CBA did not grant
Debtors an enforceable right in the distributions because it did not clearly define
which employees would have rights under the EPP. Id. at 257. The court noted
that “participating employees” was not defined until the post-petition creation of
the EPP. Id. The bankruptcy court concluded the right to the distributions was
not part of the estate because Debtors did not have a contingent future interest
until the EPP was created. Id. at 257-58.
A split panel of the BAP affirmed the bankruptcy court’s judgment but
utilized different reasoning. The panel majority determined that the bankruptcy
court erred in “(1) relying upon Kansas contract law to interpret the CBA, (2)
finding the CBA unambiguous, and (3) limiting its analysis to the plain language
of the CBA.” Dittmar, 410 B.R. at 79. However, the majority held that the
Debtors did not have an interest in the distributions until the payment event
occurred. Id. Until this time, Debtors had only a “hope, anticipation, or
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expectation” in the SARs because those distributions “were entirely dependent
upon the economic decisions of Spirit.” Id. at 77. According to the majority,
because Spirit had “discretion” over whether the payment event would occur,
Debtors had no pre-petition interest in the distributions. Id. at 78. The dissenting
member of the panel would have denied summary judgment and remanded for an
evidentiary hearing on various issues. Id. at 95.
Discussion
On appeal from a BAP decision, we review matters of law de novo and the
bankruptcy court’s factual findings for clear error. Melnor, Inc. v. Corey, 583
F.3d 1249, 1251 (10th Cir. 2009). “[W]e treat the BAP as a subordinate appellate
tribunal whose rulings are not entitled to any deference (although they certainly
may be persuasive).” Mathai v. Warren, 512 F.3d 1241, 1248 (10th Cir. 2008).
“For purposes of most bankruptcy proceedings, property interests are
created and defined by state law. Once that state law determination is made,
however, we must still look to federal bankruptcy law to resolve the extent to
which that interest is property of the estate” under § 541. Parks v. FIA Card
Servs., N.A., 550 F.3d 1251, 1255 (10th Cir. 2008) (citations and quotations
omitted); 11 U.S.C. § 541(a)(1).
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We first consider whether and to what extent Debtors have an interest in
the SARs under Kansas law. Butner v. United States, 440 U.S. 48, 55 (1979);
see, e.g., Williamson v. Hall, No. KS-08-088, 2009 WL 4456542, at *8 (B.A.P.
10th Cir. Dec. 4, 2009) (holding that “pay on death” accounts were not part of the
bankruptcy estate under § 541 because, under Kansas law, debtor had no property
interest in the accounts until the death of the owner). We then consider whether
that interest existed before Debtors filed their bankruptcy petitions. Finally, we
turn to whether the SARs are property of the bankruptcy estate under § 541.
A. Nature of Debtors’ Interest
The parties do not address whether the distribution rights at issue would be
considered a property interest under Kansas law, although Trustees generally note
that Kansas law recognizes that contingent interests are property interests. Aplt.
Br. 25; see also In re Allen Bros. Truck Lines, Inc., 329 F.2d 735, 737 (10th Cir.
1964). Our research has not uncovered any Kansas cases with similar facts. As a
result, we must predict how the Kansas Supreme Court would rule. See, e.g.,
Boehme v. U.S. Postal Serv., 343 F.3d 1260, 1264 (10th Cir. 2003). To this end,
“we are free to consider all resources available, including decisions of [Kansas]
courts, other state courts and federal courts, in addition to the general weight and
trend of authority.” Id. (internal quotation marks and citation omitted).
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Stock appreciation rights are a type of compensation that “give the holder
the right to a cash payment or stock in an amount representing the difference
between the market price and the fixed or strike price specified on the face of the
SAR.” Scholastic, Inc. v. Harris, 259 F.3d 73, 78 (2d Cir. 2001) (citing Searls v.
Glasser, 64 F.3d 1061, 1064-65 (7th Cir. 1995)); see also FASB Accounting
Standards Codification, Glossary, “Stock Appreciation Right” (2010). The SARs
at issue in this case vested upon an IPO (or other payment event), and the
distribution was the difference between the net offering price per share of the IPO
and $10 (plus an incremental amount for each year). 1 Aplt. App. 159; see also
Spirit Aerosystems Annual Report 2006 at 105 (“Upon the closing date of the
IPO, all rights to receive stock were considered vested.”).
Debtors’ interest in the SARs is similar to an employee’s interest in a stock
option plan. See, e.g., In re Carlton, 309 B.R. 67, 69-71 (Bankr. S.D. Fla. 2004).
Employees with stock options own contractual rights to purchase stock in the
future that are subject to certain limitations of use and to the possibility of
defeasance by later events. Id. at 72. Such postponed enjoyment does not
disqualify these interests as property. Id. The Carlton court held that “[t]he fact
that some of the Options had not accrued and were not exercisable as of the
[bankruptcy] petition date, but whose exercise was contingent on the Debtor’s
continued post-petition employment, is of no consequence to the issue of
ownership of the Options on the petition date.” Id. That the EPP required a
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payment event as condition precedent does not alter this analysis. See, e.g.,
Capital Health Management Group v. Hartley, 689 S.E.2d 107, 109 (Ga. Ct. App.
2009) (describing a SARs agreement where payment was contingent on the sale of
company stock).
Once Debtors satisfied the condition for being participating employees
(completing ninety days of employment for the new company), they were eligible
to participate in the EPP. These employees held contingent property rights.
While the value of the SARs before any payment event occurred may have been
de minimis, that does not mean that Debtors did not have a property interest in the
SARs. The nature of that interest and whether it is legally recognizable is a
different question than its valuation.
B. Creation of the Property Right
Trustees argue that the CBA, which was approved before Debtors filed for
bankruptcy, created the SARs rights. Aplt. Br. 19-24. Debtors counter that, if
their interest is a property interest, it was not created until the EPP was
memorialized—which did not occur until after the bankruptcy filings. Aplee. Br.
7-8. The EPP provisions in the CBA indicate that the program applies to
“participating employees,” but “participating employees” was not defined within
the CBA document. 1 Aplt. App. 161. The bankruptcy court concluded that
Debtors did not have an enforceable right until the EPP document defined which
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employees were “participating employees.” Lowe, 380 B.R. at 257-58. Taking a
different view, the BAP majority concluded that Debtors had a mere expectancy
until the payment event occurred. Dittmar, 410 B.R. at 79. We believe the key
question is whether the EPP provisions in the CBA were merely “an agreement to
agree” or whether they evidenced a binding agreement that would be formalized
at a later date. If the latter is the case, Debtors’ property rights were created at
the time the CBA was ratified.
While the bankruptcy court construed the CBA relying only on its plain
language, interpretation of a CBA is governed by federal law. See Allis-Chalmers
Corp. v. Lueck, 471 U.S. 202, 210 (1985). In the labor context, parties frequently
reach informal or oral collective bargaining agreements that they later intend to
formalize. See, e.g., United Steelworkers of Am. v. CCI Corp., 395 F.2d 529,
531-32 (10th Cir. 1968) (“[T]he trial court was not clearly erroneous in holding
that a binding verbal contract was intended by the parties pending a written
formalization of their agreement.”). These agreements are enforceable under
federal law, even when they are not reduced to writing. See, e.g., Int’l Union,
United Mine Workers v. Big Horn Coal Co., 916 F.2d 1499, 1502 (10th Cir.1990)
(“The contract between the parties . . . need not be a written, signed collective
bargaining agreement, but may exist as any informal agreement between the
parties significant to the maintenance of labor peace between them.”); Mack
Trucks, Inc. v. Int’l Union, UAW, 856 F.2d 579, 592 (3rd Cir. 1988) (“Adoption
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of an enforceable labor contract does not depend on the reduction to writing of
the parties’ intention to be bound.”); Bobbie Brooks, Inc. v. Int’l Ladies’ Garment
Workers Union, 835 F.2d 1164, 1168 (6th Cir. 1987) (“The existence of a
collective bargaining agreement does not depend on its reduction in writing; it
can be shown by conduct manifesting an intention to abide by agreed-upon
terms.”). To determine the objective intent of the parties, courts may “look to the
surrounding circumstances, and the parties’ conduct manifesting an intention to
abide by agreed-upon terms.” Mack Trucks, 856 F.2d at 592 (internal citations
and quotation marks omitted).
We disagree with the bankruptcy court’s conclusion that the CBA is
unambiguous. Lowe, 380 B.R. at 257-58. While many of the EPP provisions are
established in the CBA document, there are at least two ambiguities. 1 First, the
“agree to establish [an EPP]” language in the CBA is susceptible to two possible
meanings: (1) it could indicate a present agreement with the understanding that
formalization of the EPP will occur in the future; or (2) it could reflect an
1
Because written CBAs are often skeletal in nature—and informal,
unwritten labor agreements constitute enforceable CBAs—we are quicker to find
ambiguity in a written CBA than we would with a traditional contract. See Big
Horn Coal, 916 F.2d at 1502; Stead Motors of Walnut Creek v. Auto. Machinists
Lodge No. 1173, 886 F.2d 1200, 1205 (9th Cir. 1989) (en banc) (“Unlike the
commercial contract, which is designed to be a comprehensive distillation of the
parties’ bargain, the collective bargaining agreement is a skeletal, interstitial
document.”).
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agreement not to be bound until the plan has been executed. In addition, the CBA
does not define the term “participating employees.”
The summary judgment record contains extrinsic evidence regarding the
parties’ intent: (1) the slides describing the EPP presented to the employees prior
to the CBA vote, 1 Aplt. App. 137-156 ; (2) the deposition testimony of Jeff
Clark, the former Director of Union Relations for Boeing and then Spirit, who
testified about negotiating the CBA, 1 Aplt. App. 28-136; and (3) the SEC S-1
Registration Statements filed before the payment event, 1 Aplt. App. 159. This
evidence is uncontroverted; both parties represented to this court at oral argument
that there are no disputed material facts.
As noted, after the bargaining units and Spirit negotiated the CBA and the
EPP, Spirit employees assisted in the preparation of a slide presentation that was
used to educate union members about the EPP prior to the CBA vote. Aplt. Br. 6;
Aplee. Br. 3. The slides indicated that the unions had “negotiated an [EPP] for
eligible employees.” 1 Aplt. App. 138. The slides described the nature of the
SARs rights, how the rights would be allocated, and which employees would be
eligible for the rights. 1 Aplt. App. 137-56. Mr. Clark testified that, “at the time
of the bargaining agreement, . . . [t]here was a description about who would be
eligible [to participate in the EPP]” and “an agreement . . . about what would
constitute [SARs].” 1 Aplt. App. 191. Before the IPO payment event, Spirit filed
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a series of S-1 Registration Statements with the SEC. Aplt. Br. 11-12; Aplee. Br.
5-6. One filing described Spirit’s obligations regarding the EPP: “As part of the
collective bargaining agreements, [Spirit] has agreed to establish a union [EPP]
pursuant to which it will grant [SARs] . . . to each eligible employee . . . .” 1
Aplt. App. 159. Spirit then memorialized the EPP on October 27, 2006. Aplt. Br.
13; Aplee. Br. 5. The written EPP document contained identical terms to those
described in the pre-vote slide presentation. Compare 1 Aplt. App. 143, 147-49,
153 with 4 Aplt. App. 916. Prior to the memorialization of the EPP, when
employees had questions about the EPP, they were referred to the pre-vote
presentation slides, which were posted online. Aplt. Br. 11; Aplee. Br. 5. This
extrinsic evidence supports Trustees’ position that the EPP terms were part of the
CBA negotiations. Debtors have not offered evidence to the contrary.
Accordingly, the evidence fully supports the contention that the CBA included a
binding agreement about the EPP rather than “an agreement to agree” on the
parameters of the EPP at some later point.
We agree with the BAP dissent that summary judgment is usually not an
appropriate vehicle for determining the parties’ intent about contract formation.
Dittmar, 410 B.R. at 93-94. However, Debtors must raise more than some
metaphysical doubt about whether the EPP terms were agreed on during the CBA
negotiations given Trustees’ proof on the issue. See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 251-52 (1986). While intent is usually a question of fact, the
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evidence supporting contract formation is uncontroverted, and the parties agree
that there are no disputed material facts. Under such circumstances, remand for
an evidentiary hearing is not warranted, and Trustees are entitled to judgment on
this point.
C. Property of the Bankruptcy Estate Under § 541
Under federal law, the bankruptcy estate includes, with enumerated
exceptions, “all legal or equitable interests of the debtor in property as of the
commencement of the case.” 11 U.S.C. § 541(a)(1). We have pointed out that
the scope of § 541 is broad and should be generously construed, and that an
interest may be property of the estate even if it is “novel or contingent.” Parks,
550 F.3d at 1255 (internal quotation marks omitted); United States v. Rauer, 963
F.2d 1332, 1337 (10th Cir. 1992) (quoting United States v. Cardall, 855 F.2d 656,
678 (10th Cir. 1989), for the proposition that § 541 is broadly construed “to
include all property interests, whether reachable by state-law creditors or not, and
whether vested or contingent”); see also In re Barowsky, 946 F.2d 1516, 1518
(10th Cir. 1991) (discussing Congress’s affirmative adoption of Segal v. Rochelle,
382 U.S. 375 (1966), in adopting § 541). Another circuit has likewise noted,
“When a bankruptcy petition is filed, virtually all property of the debtor at that
time becomes property of estate. . . . [E]very conceivable interest of the debtor,
future, nonpossessory, contingent, speculative, and derivative, is within reach of
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11 U.S.C. § 541.” In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993) (citations and
quotation marks omitted). Even contingent interests that may or may not vest for
years at the time of their creation are not necessarily excluded. In re Yeary, 55
F.3d 504, 505, 508-09 (10th Cir. 1995) (bankruptcy estate includes property
subject to a creditor’s security interest created years before the bankruptcy
petition was filed).
Adopting the BAP majority’s reasoning, Debtors argue that their interests
were merely “the hope, anticipation, or expectation that in the event of a
[payment] event, they would receive a share of the profits” because their interests
were entirely dependent upon the economic decisions of Spirit. Aplee. Br. 12-13.
This suggests that a contingent interest cannot become property of the bankruptcy
estate unless the contingency is entirely in the control of the interest holder. Such
a rule amounts to nothing more than a statement that virtually no contingent
interest can be property of the bankruptcy estate—a position that clearly conflicts
with our precedent. As discussed above, Debtors’ interest in the SARs is similar
to an employee’s interest in stock options. As long as the employee had a legal
interest in the options prior to filing for bankruptcy, the options are sufficiently
rooted in the pre-bankruptcy past to become part of the bankruptcy estate. In re
Allen, 226 B.R. 857, 865 (Bankr. N.D. Ill. 1998). That vesting of the options is
contingent on a term of employment—a condition that is not exclusively within
the employees’ control—does not remove this pre-petition interest from the
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bankruptcy estate. See, e.g., In re Wick, 276 F.3d 412, 415 (8th Cir. 2002)
(noting that unvested options contingent on continued employment are property of
the estate because contingencies—even those that require additional post-petition
services or those that may defeat the right to enjoyment of the property—do not
bar a property interest from becoming part of the estate.). Like stock options, the
fact that the SARs are contingent on post-petition events does not mean that
Debtors’ interest in them is not rooted in the pre-bankruptcy past.
Neither the parties nor the courts below found any cases with similar facts.
Instead they rely on contingent employee benefits cases where a program entitling
the debtor to payment is in existence before the debtor files for bankruptcy and
the eventual payment to the debtor is contingent on several factors, e.g.,
employment for a certain amount of time or profitability of the company. These
cases help illustrate when a contingent interest is rooted in the pre-bankruptcy past
and when the interest is so speculative that it was a mere expectancy at the time
the bankruptcy petition was filed.
One line of cases concludes that contingent interests are property of the
bankruptcy estate even if the rights do not accrue or are uncertain until a date after
the bankruptcy filing. See Booth v. Vaughn, 260 B.R. 281 (B.A.P. 6th Cir. 2001);
In re Edmonds, 273 B.R. 527 (Bankr. E.D. Mich. 2000), aff’d, 263 B.R. 828 (E.D.
Mich. 2001). The Booth court applied a broad reading of § 541. There, the CBA
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provided that hourly workers would receive a profit-sharing payout at the end of
the year if (1) the employer made a profit and (2) the employee was employed
through year end. 260 B.R. at 284. Mr. Booth filed for bankruptcy before a profit
was realized and before the end of the year. Id. at 290. The court determined that
the right to the bonus was a contingent interest that was property of the estate.
Similarly, in Edmonds, the CBA provided that Ford employees would receive a
profit-sharing payout at the end of the year if (1) Ford made a profit and (2) the
employee was employed at the end of the year. 263 B.R. at 829. Mr. Edmonds
filed for bankruptcy on December 15. Id. Noting that “plaintiff had worked all
but a few of the days necessary to become entitled to his profit sharing,” the court
held that “the profit sharing payment is sufficiently rooted in the pre-bankruptcy
past [to be] property of the estate under § 541(a).” Id. at 831. Thus, contingencies
like continued employment and company profit do not transform the employee’s
interest into a mere expectancy that is excluded from the bankruptcy estate when
the interest is rooted in the pre-bankruptcy past.
The BAP majority cited a second line of cases where employee bonuses
were excluded from the bankruptcy estate. See In re Chappo, 257 B.R. 852 (E.D.
Mich. 2001); Sharp v. Dery, 253 B.R. 204 (E.D. Mich. 2000); Vogel v. Palmer, 57
B.R. 332 (Bankr. W.D. Va. 1986). In Vogel, Mr. Palmer was entitled to receive a
bonus if (1) he was employed on a date almost six months after the filing of his
bankruptcy petition, (2) he performed his job satisfactorily, and most importantly,
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(3) the company’s chief executive officer determined Mr. Palmer was entitled to a
bonus. 57 B.R. at 333. Because the award of the bonus was purely discretionary,
the court held that Mr. Palmer’s interest was “nothing more than a potential . . . of
receiving an award.” Id. at 335-36. In Sharp, Mr. Sharp was eligible for a bonus
if he was employed in good standing when the company issued the bonus checks.
253 B.R. at 206. The timing of any bonus checks was at the employer’s sole
discretion, and the employer had the right to amend, suspend, or terminate the
bonus plan at any time. Id. Mr. Sharp filed for bankruptcy on December 21 and
received his bonus in February. Id. The court noted that under Michigan law, a
worker does not have an enforceable right in bonus dividends before payment. Id.
at 208. The court concluded that on the date he filed for bankruptcy, Mr. Sharp
had no legal interest in the bonus check he later received on February 22 because
his employer “could have decided not to pay any bonus at all under the terms of
the bonus plan itself.” Id. at 207-08. Finally, Chappo presents similar facts and
an identical outcome. 257 B.R. at 852-55. Citing Sharp and Vogel, the court
noted that the bonus plan contained “dispositive characteristic[s]”: (1) the plan
provided that the “Board of Directors at any time may terminate . . . or modify the
Plan or suspend any of its provisions . . .” and (2) the bonus plan committee could
“determine in its sole discretion not to make an Award to a particular Participant
or group of Participants or to all Participants for any Plan Year.” Id. at 854. At
bottom, this line of cases suggests that an employer’s promise to pay a bonus is
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not enforceable where the employer reserves the right to withhold payment at its
discretion. Thus, the employee had no right to the bonus at the time the
bankruptcy petition was filed. Accordingly, the employee’s interest in the bonus
was a mere expectancy and should not be part of the bankruptcy estate.
We believe the SARs created by the CBA are more akin to the contingent
pre-petition property rights described in the former line of cases than the mere
expectancies based on discretionary bonuses described in the latter. Spirit had a
contractual obligation to make payments if the IPO occurred. This obligation
existed before Debtors filed for bankruptcy. 2 Debtors’ interest in the SARs are
sufficiently rooted in the pre-bankruptcy past. The SARs are properly part of the
bankruptcy estate under § 541.
REVERSED.
2
The record suggests that some of the debtors filed for bankruptcy before
they had completed the ninety days of employment required to become
participating employees. See, e.g., 4 Aplt. App. 887. Trustees correctly note that
this does not prevent these debtors’ interest in the SARs from becoming property
of the bankruptcy estate, 4 Aplt. App. 967. See, e.g., DeNadai v. Preferred
Capital Markets, Inc., 272 B.R. 21, 30-31 (D. Mass. 2001) (holding that unvested
stock options, subject to the contingency of debtor’s future employment, are
property of the bankruptcy estate). However, absent these debtors’ continued
employment after they filed for bankruptcy, they would not have become
participating employees. Accordingly, the bankruptcy court may need to
apportion the SARs between such debtors and their bankruptcy estates. See, e.g.,
id. at 33-35 (“[R]ecognizing that the contingency upon which the exercisability of
the options depends is continued employment of the debtor, courts have . . .
consistently distributed the options on a pro rata basis so that only that percentage
of the options that were earned pre-petition are brought within the bankruptcy
estate.”).
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Parks v. Dittmar, 09-3230 et al.
HOLLOWAY, Circuit Judge, dissenting:
I respectfully dissent. I would affirm the judgment of the bankruptcy court.
The Debtors’ interests in the stock appreciation rights (SARs) were too uncertain
to be included within their bankruptcy estates.
Background.
Almost all the relevant facts are noted in the majority opinion, and I will
only mention facts that seem most critical to me. As noted in the majority
opinion, the SARs at issue here were given for a fifteen year term (Maj. op. at 6),
while Spirit told the eligible employees, including Debtors, that it was “using a
five-year period” in planning, which implied that Spirit believed it likely that a
“payment event” would probably occur within five years, if it were to occur.
The bankruptcy judge found that Spirit had absolute discretion whether to
“sell, merge, or publicly offer stock,” which were the three ways that a “payment
event” could occur. Parks v. Dittmar (In re Dittmar), 410 B.R. 71, 77-78 (B.A.P.
10th Cir. 2009) (quoting Bankruptcy Court’s interim order). And there was a
further contingency that applied to any of these three possible routes to issuance of
the SARs: the “payment event” would first have to result in at least a fifteen per
cent “annual profit” to “the initial equity investors.” 1
1
It is unclear whether these terms were defined, but Debtors have not
contended that these terms are ambiguous.
The framework for the analysis.
The majority opinion outlines three-steps for the analysis: first, whether the
Debtors have a property interest in the SARs under Kansas law; second, whether
the interest existed at the time the Debtors filed their petitions; and third, whether
the property interests are property of the bankruptcy estate under 11 U.S.C. § 541.
Maj. op. at 10. This seems to be correct, but applying the approach in this context
presents a real challenge.
Were the interests recognized as property under state law?
On the first question – whether the benefits are an “interest in property”
under Kansas law – we have previously held that as a general rule contingent
interests are property in Kansas. Kirby v. United States (In re Allen Bros. Truck
Lines, Inc.), 329 F.2d 735, 737 (10th Cir. 1964). The property in that case was a
contractual right. The bankrupt, a trucking company, had agreed to sell its
certificate of convenience and necessity to another, with part of the consideration
having been paid at the time of the agreement and the remainder to be paid upon
approval of the transfer by the state agency with authority over the matter.
Bankruptcy was declared before the sale had been completed. And before the
bankruptcy petition was filed, the IRS had notified the buyer of the certificate that
it claimed a tax lien on the payment contingently owed to the trucking company.
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The bankruptcy trustee challenged the tax lien, arguing that there was no
“property” to which the lien could attach.
On appeal, we held in favor of the IRS. The parties did not dispute that the
certificate itself was property under Kansas law. The bankruptcy trustee,
however, argued that because the contested balance of the payment for the
certificate was not due until approval by the state agency had been obtained, there
was no present property right in that balance. That contention was rejected. The
court found no authority on the nature of the rights between the parties to this
transaction, but held that “whatever the exact nature of those rights, they at least
constitute a contingent liability, and under the law of Kansas, unmatured and
contingent liabilities are subject to garnishment.” 329 F.2d at 737.
Accordingly, I agree with the majority that the SARs at issue here are
property rights under state law.
Did the Debtors have rights when they filed their petitions?
I agree with the majority that the evidence showed that the property
interests came into existence with the execution of the collective bargaining
agreements and thus were in existence when the Debtors filed their petitions.
Were the Debtors’ interests property of their bankruptcy estates?
The third and pivotal issue is whether the Debtors’ property interests in the
SARs became property of the bankruptcy estates. Analysis here must begin with
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the extremely broad language used by the Supreme Court and Congress to describe
property of the estate. In a case under the Bankruptcy Act, the Court said that the
bankruptcy estate includes “everything of value the bankrupt may possess . . .
when he files his petition” and that an interest is not excluded “because it is novel
or contingent or because enjoyment must be postponed.” Segal v. Rochelle, 382
U.S. 375, 379 (1966). Our court and others have noted that Congress, in passing
the Bankruptcy Code, specifically endorsed this language, so it remains valid. See
Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516, 1518 (10th Cir. 1991).
As the majority opinion discusses, courts nevertheless have found that some
property interests are too remote and speculative to be included in the bankruptcy
estate. Significantly, the SARs in this case were subject to multiple contingencies
and potentially to a very long period of uncertainty.
As the majority opinion notes, no cases have been cited or found that deal
with facts closely analogous to those we deal with here. We are further hindered
by the lack of analytical guidance offered by the cases. There does not appear to
be even a framework to guide us as we contemplate the inherently inexact process
of trying to determine what level of uncertainty must be present for a property
interest to be outside the scope of section 541(a)(1), a scope that all agree is quite
broad indeed.
As the dissenting judge on the BAP noted, while the
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general principles governing property of the estate under § 541
generate little controversy, their application varies widely, especially
regarding contingent property interests. . . . . [T]he varying analyses
make it difficult to cull any settled, functional rule for determining
when a contingent interest is property of the estate. At best, the case
law can be said to exist on a continuum. At one end are contingent
property interests that were clearly created and rooted in a debtor's
pre-bankruptcy past, such as a prepetition contract that will result in
the debtor receiving payments postpetition. At the other end of the
spectrum are interests so amorphous, so speculative, or subject to so
many contingencies, that courts deem them to be “mere
expectancies,” rather than existing property interests. Most interests
fall in between these two extremes, and often have a mix of
characteristics that make it very difficult to ascertain whether the
interest has crossed the line from “mere expectancy” to contingent
property interest within the scope of § 541.
Parks v. Dittmar (In re Dittmar), 410 B.R. 71, 84-85 (B.A.P. 10th Cir. 2009)
(Brown, J. dissenting) (footnotes omitted).
One clear principle that should undergird our analysis is that the facts must
be considered as of the date that the Debtors filed their petitions. The bankruptcy
estate comprises “all legal or equitable interests of the debtor in property as of the
commencement of the case.” 11 U.S.C. § 541(a)(1). The trustee “succeeds only to
the title and rights in property that the debtor had at the time she filed the
bankruptcy petition.” Weinman v. Graves (In re Graves), 609 F.3d 1153, *2 (10th
Cir. 2010) (quoting In re Sanders, 969 F.2d 591, 593 (7th Cir. 1992)). A second
overriding policy is “that bankruptcy cases be handled in a speedy and expeditious
manner.” Turney v. FDIC, 18 F.3d 865, 869 (10th Cir. 1994) (quoting 2 Collier on
Bankruptcy, ¶ 102.02 (15th ed. 1993)).
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The majority finds that cases involving annual employee bonuses have the
most similar context and therefore provide some guidance for our task. Maj. op. at
19-22. 2 As discussed in the majority opinion, a single factor appears to
distinguish at least some of the cases holding that an employee bonus is property
of the employee’s bankruptcy estate from those holding the bonus is not property
of the estate. That factor is whether the employer had discretion to withhold a
bonus, even when all conditions attached to the bonus by that particular employer
were satisfied.
The majority apparently accepts the reasoning of the courts which hold that
employer discretion whether to grant an annual bonus or not may be decisive. The
majority apparently concludes, however, that although discretion whether to award
a benefit results in the benefit being outside the bankruptcy estate, discretion to
control the conditions that activate the awarding of the benefit does not. I find the
distinction unconvincing.
If employer discretion is to be the controlling factor, then I see no reason
why the discretion vested in the employer here – which was absolute discretion to
create or eschew creating the conditions that would lead to Debtors eventually
receiving tangible benefits – should be an exception to such a rule. Moreover, this
2
More specifically, all the cases cited and discussed in this part of the
majority opinion involve bonuses that had not been paid at the time bankruptcy
proceedings were commenced but which had, at least arguably and at least
partially, been earned at that time.
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case can and should be decided without adopting the rule that employer discretion
is controlling, as was done in the employee bonus cases cited by the BAP such as
Vogel v. Palmer (In re Palmer), 57 B.R. 332 (Bankr. W.D. Va. 1986).
In this case, the employer not only had discretion whether to initiate any
“payment event” and thus activate its obligation to create the SARs, but its
obligation was further conditioned on an arbitrary factor that the event first had to
create at least fifteen percent annual profit for the initial investors. Further, and
quite significant in my view, the employer here, unlike in the cases discussed by
the majority and cited by the parties, retained the power to postpone its decision
for up to fifteen years. Given the majority’s apparent agreement with cases that
hold that employer discretion either to pay or to withhold an annual bonus results
in the benefit being outside the bankruptcy estate, one would expect that the
benefit in this case, with its multiple contingencies and prolonged period of
latency, would be an a fortiori case in which the SARs are outside the bankruptcy
estates.
It is not necessary for this panel to endorse the holdings of those courts that
have held that employer discretion to pay or withhold an annual bonus to an
employee results in the bonus being outside the bankruptcy estate. Here we have
not just that one factor, but the additional contingency that the event over which
the employer had control must have occurred with certain results (realization by
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the “investor group” of at least a fifteen per cent annual profit). Further, unlike
the facts in the employee bonus cases discussed in the majority opinion, we also
deal with a context in which the potential benefit was not certain to become
payable, if at all, within a few months of the bankruptcy filing but potentially
anytime within the following fifteen years.
Viewing these Debtors’ property rights in the SARs at the time of the
commencement of their cases, and mindful of the policy mandating expeditious
handling of the estates, I conclude that the SARs were properly held by both
courts below to be outside the bankruptcy estates and so not subject to turnover to
the Trustees.
Conclusion.
It is challenging to find the demarcation between contingent property
interests that are properly included in the estate of a bankrupt and those that are so
extremely novel or contingent that they are not so included. I conclude and would
hold that the SARs at issue here were not part of the Debtors’ estates because at
the critical time that the petitions were filed by the Debtors, the interests were
subject to multiple contingencies, including the likelihood that they would remain
only contingent interests for some years post-petition. I therefore respectfully
dissent.
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