Matter of Kemp

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