Opinion
Case No. 8:10-bk-18731-MGW
03-09-2017
In re: Jacquelyn E. Smith, Debtor.
Douglas N. Menchise, Esq. Law Office of Douglas N. Menchise Attorney for the Trustee Timothy W. Gensmer, Esq. Timothy W. Gensmer, P.A. Attorney for the Debtor
Chapter 7 ORDER AND MEMORANDUM OPINION ON PROPERTY OF THE ESTATE
On April 20, 2010, an explosion on the Deepwater Horizon drilling rig caused an estimated 4.9 million barrels of oil to spill into the Gulf of Mexico. The Deepwater Horizon Economic and Property Damages Settlement Program recently offered the Debtor, a former self-employed real estate agent, $32,370.33 for prepetition and postpetition losses she suffered as a result of the oil spill. The Court must now decide whether the Debtor is entitled to keep the portion of the settlement proceeds attributable to her postpetition losses.
The Debtor concedes the settlement payment is sufficiently rooted in the Debtor's pre-bankruptcy past because it arises out of a prepetition accident. But the Debtor contends she should be able to keep the portion of the proceeds attributable to her postpetition losses as postpetition "earnings for services," which are excluded from the estate under § 541(a)(6). Because the settlement proceeds are being paid to settle a tort claim—not as "earnings for services"—the Debtor cannot exclude any portion of the settlement proceeds from the estate.
Background
The Debtor is a retired real estate agent. In 2009, the Debtor earned $33,947.70 in real estate commissions, slightly more than the previous year. By the following year, however, the Debtor's commissions had fallen off dramatically. Through the first seven months of 2010, the Debtor had earned less than $7,000 in commissions. It appears the dramatic decline in commissions forced the Debtor into chapter 7 bankruptcy in August 2010.
Doc. No. 1, Statement of Financial Affairs.
Id.
Sometime after filing for bankruptcy, the Debtor made a claim with the Deepwater Horizon Economic and Property Damages Settlement Program, which was established to compensate businesses that were harmed by the Deepwater Horizon oil spill that occurred on April 20, 2010. The Trustee was unaware the Debtor had any interest in a Deepwater Horizon oil spill claim, much less that one had been filed, until sometime in June 2016 when he was notified that the Deepwater Claims Center had offered to settle the Debtor's claim.
The proposed settlement consists of two components: a Compensation Amount ($12,948.13) and a Risk Transfer Premium Amount ($19,422.20). The Compensation Amount was calculated by comparing the actual profits from the Debtor's business during a defined post-spill period (May, June, July, and November of 2010) to the profits the business might have expected to earn during that same period. Based on the information she submitted, the Debtor's profits for the selected months in 2010 were $12,948.13 less than they were in 2009. To calculate the Risk Transfer Premium Amount, the Deepwater Claims Center applied a 1.50 multiplier to the Compensation Amount and came up with $19,422.20. So the total settlement amount was $32,370.33.
The amount of profit the debtor might have expected to earn was calculated by looking to profits she earned during the same period (May, June, July, and November) for the year before the spill.
The proposed settlement allocates all but $97.32 of the Compensation Amount to prepetition losses.
Once he was notified of the proposed settlement, the Trustee moved for Court approval of the compromise. There is no dispute the settlement is fair and equitable and in the best interest of the estate. In fact, the Debtor agrees the settlement should be approved. The issue this Court must decide is who gets the settlement proceeds—i.e., whether the settlement proceeds are property of the bankruptcy estate.
Doc. No. 51.
In re Protech Coating Servs., Inc., 479 B.R. 611, 616 (Bankr. M.D. Fla. 2012) (citing Rivercity v. Herpel (In re Jackson Brewing Co.), 624 F.2d 599, 602 (5th Cir. 1980).
Doc. No. 52 at ¶ 4.
The Debtor argues this Court should be guided by In re Powell. In Powell, the Court essentially adopted a two-step test to determine whether the debtor (as opposed the bankruptcy estate) was entitled to receive amounts due postpetition under a prepetition profit sharing agreement. The first step was to determine whether the future payment was property of the estate. To do so, the Court considered whether the debtor's right to the payments was "sufficiently rooted in the pre-bankruptcy past." The second step was to determine whether any portion of the future payment should be excluded from the estate under § 541(a)(6) as earnings from postpetition services. Although the Powell Court determined that the right to the profit-sharing payment was sufficiently rooted in the past to be included in the estate since the payment was attributable to substantial prepetition services, it nonetheless allocated a portion of the payment to earnings for postpetition services.
511 B.R. 107 (Bankr. C.D. Ill. 2014).
Id. at 111.
Id.
Id. at 116.
Conclusions of Law
Even assuming the two-step analysis in Powell applies here, the Debtor still would not be entitled to any of the settlement proceeds. Under her reading of Powell, the Debtor concedes the first step in the analysis. In other words, the Debtor acknowledges that the right to the payment on the Deepwater Horizon claim is sufficiently rooted in the pre-bankruptcy past because the Deepwater Horizon oil spill, which led to the Debtor's losses, occurred prepetition. Because the right to payment is sufficiently rooted in the past, it is therefore property of the estate.
Doc. No. 60 at ¶ 8.
The Debtor instead focuses on the second step in Powell—i.e., how to allocate the proposed settlement proceeds between prepetition and postpetition losses. According to the Debtor, the Deepwater Horizon claims administrator used the period from May 1, 2010 through December 31, 2010 to determine the Debtor's losses. That period consists of 245 days. The Debtor filed for bankruptcy on August 2, 2010. So 94 of the 245 days (or 38.37%) were prepetition, while the remaining 151 days (or 61.63%) were postpetition. Because 61.63% of the period for calculating the Debtor's losses came after the petition date, the Debtor claims she is entitled to that portion of the settlement proceeds.
Id. at ¶¶ 6-8. The Trustee takes a different view. The Trustee points out that the Deepwater Horizon claims administrator allocated the Debtor's losses by month, and only $97.32 was allocated to losses occurring after the petition date. Doc. No. 61 at ¶ 5; Doc. No. 61-1. The Trustee applied the 1.5 Risk Transfer Premium to the $97.32 to come up with total postpetition losses of $242.78. Doc. No. 61 at ¶ 5.
But there is one flaw in the Debtor's analysis: The Powell court only allocated the profit-sharing payments between prepetition and postpetition services in that case because the profit-sharing payments were "earnings for services" under § 541(a)(6). Section 541(a)(6) expressly provides that property of the estate does not include postpetition "earnings from services." Unlike in Powell, the settlement proceeds at issue here are not "earnings for services."
To be sure, the settlement proceeds are to some extent calculated based on the Debtor's earnings. Specifically, the Deepwater Horizon claims administrator compared the Debtor's post-spill profits for a defined period against the profits the Debtor might have expected to earn to come up with the Compensation Amount and then applied a multiplier to the decrease in net profits to come up with the Risk Transfer Premium amount to account for future lost profits. But the fact that the settlement payment is calculated based on the Debtor's lost earnings (really lost profits) does not change the fact that it is still a settlement payment—not earnings for services.
Judge Paskay's decision in In re Powers is instructive on this point. In Powers, the debtor, a former long-time employee of Tropicana Products Company, claimed $962 per week he was receiving from Tropicana was exempt "unemployment compensation or benefits payable under a pension plan of Tropicana Products on account of the Debtor's age and length of service." In actuality, the payment was due under a settlement whereby Tropicana agreed to pay the debtor his $962 weekly severance pay (along with a $23,625 bonus) in exchange for a release from any claims the debtor may have had against Tropicana. Although the agreement referred to the payment as wages, Judge Paskay ruled that the $962 weekly payment was not a pension benefit given on account of length of service, which would be exempt under Bankruptcy Code § 522, because the totality of the agreement reflected that the payment was for settlement of potential tort claims.
98 B.R. 577 (Bankr. M.D. Fla. 1989).
Id. at 578.
Id. at 578-79.
Id.
Here, the totality of the settlement agreement reflects that the proposed settlement payment is likewise being given to settle a tort claim. For starters, the settlement program was created as a part of a settlement of a class action lawsuit seeking damages for economic damages caused by the Deepwater Horizon oil spill. Moreover, as in Powers, the proposed settlement here specifically conditions payment of the $32,370.33 on the Debtor executing a release. Because the proposed settlement amount is for settlement of a tort claim—not as payment for "earnings from services"—there is no basis to exclude any portion of it from the estate.
Conclusion
The Court is sympathetic to the Debtor's plea that she needs the settlement proceeds to survive. But having rightly conceded that the settlement payment is sufficiently rooted in her pre-bankruptcy past, the Debtor is unable to provide any basis for excluding the settlement payment from the estate. So the Court concludes the Debtor is not entitled to keep any of the settlement proceeds. Accordingly, it is
ORDERED:
1. The Trustee's motion to approve the compromise is GRANTED.
Doc. No. 51.
2. The Debtor's objection to the propose compromise is OVERRULED. The bankruptcy estate is entitled to keep the entire $32,370.33 in settlement proceeds.
Doc. No. 52. --------
DATED: March 9, 2017. /s/ Michael G. Williamson
Michael G. Williamson
Chief United States Bankruptcy Judge Attorney Douglas Menchise is directed to serve a copy of this order on interested parties who are non-CM/ECF users and file a proof of service within 3 days of entry of the order. Douglas N. Menchise, Esq.
Law Office of Douglas N. Menchise
Attorney for the Trustee Timothy W. Gensmer, Esq.
Timothy W. Gensmer, P.A.
Attorney for the Debtor