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Eighth Circuit BAP Rules Work Bonuses Not Part of Debtors Bankruptcy Estate - Seaver v. Klein-Swanson

April 3, 2013

Vincent Howard and our San Bernardino consumer bankruptcy attorneys were pleased to see a Bankruptcy Appellate Panel ruling that left the bankruptcy filer with more disposable income. In Seaver v. Klein-Swanson, the BAP for the Eighth U.S. Circuit Court of Appeals reversed a Minnesota bankruptcy court's ruling that Michelle Klein-Swanson must turn over bonuses received from her employer. Klein-Swanson and her husband filed for Chapter 7 bankruptcy in 2009 and received a discharge three months later. However, when the trustee discovered that she had received bonuses, he successfully revoked her discharge, recovered the funds and moved for costs. The BAP reversed those decisions, saying Klein-Swanson had no interest in the funds when she filed her bankruptcy.

On the date of her bankruptcy petition, Klein-Swanson was eligible for two bonus programs from her employer, but had not been notified that she would receive either bonus. She did receive one bonus prior to her meeting of creditors, but did not disclose it, although she mentioned a prior bonus after that meeting. After the discharge, the trustee reopened the bankruptcy and brought an adversary proceeding, alleging in relevant part avoidance, recovery and revocation of discharge. The bankruptcy court granted summary judgment on those claims, finding that the bonuses were property of the bankruptcy estate because they were payment for prepetition work. A district court dismissed two other state-law claims. Klein-Swanson appealed.

The Bankruptcy Appellate Panel reversed, saying Klein-Swanson had no interest in the bonuses at the time of her petition. The trustee argued that Klein-Swanson had a contingent interest in the bonuses--their payment was contingent on her employer's discretion, but dependent on work she'd already done by the time of the petition. But the Eighth BAP disagreed, saying that any contingent interest Klein-Swanson had was an interest in nothing, because her employer had absolute discretion to decide whether to pay the bonus, and did so after the petition. The panel distinguished the case from others in which the debtor had a contractual or legal right to a payment; in this case, Klein-Swanson had only "a hope" of payment. Indeed, Klein-Swanson cited to cases about her exact situation--where an employer retained discretion to decide on a bonus. Thus, it reversed the bankruptcy court in all respects.

Vincent Howard and our Orange County personal bankruptcy lawyers are pleased by this decision. Legal issues aside, it seems clear that debtors like Klein-Swanson ought to have some notice if their possible future bonuses must be part of the bankruptcy estate. We agree with the Eighth Circuit BAP that without any sort of firm commitment from the employer, the debtor should not be expected to claim a bonus that she might get at the employer's discretion. That's particularly important because the trustee in this case was very punitive--he sued Klein-Swanson for civil theft as well as to recover the money and revoke her discharge. That's a very strong reaction to what is apparently a disputed legal issue. At Howard Law, P.C., we recommend that our clients disclose all possible income to us so our Moreno Valley individual bankruptcy attorneys can determine whether any of it could turn into a problem later.

If you are considering bankruptcy as a way to handle overwhelming debt, don't wait to call Vincent Howard and the team at Howard Law. You can reach us through our website or call 1-800-872-5925.

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