I recently answered a question posed by a fellow bankruptcy attorney, and thought you might find the discussion interesting.

Here’s an edited version of my colleague’s question:

A Chapter 7 debtor who is a real estate broker had some listings prepetition.  He opened escrow postpetition, and eventually sold the properties.  He received a $20,000 commission, none of which can be exempted.  The Trustee has demanded all the commission received.  What can be done?

Here’s my response:

Three cases that help to answer the question from different vantage points are: In re Fit zsimmons, 725 F. 2d 1208 (9th Cir. 1984), In re Ryerson, 739 F. 2d 1423 (9th Cir. 1984), and In re Wu, 173 B.R. 411 (B.A.P. 9th Cir. 1994).

I.    The Key Statutory Provision

According to 11 U.S.C. § 541(a), when a debtor files for bankruptcy protection, the act of filing the papers “creates an estate.”    The prepetition debts then become postpetition claims against that estate.

In a Chapter 7 bankruptcy, the Chapter 7 Trustee liquidates the estate to produce a dividend to the debtor’s creditors.  The debtor can exclude assets from that estate by appealing to an appropriate exemption table (Cal. Civ. Proc. Code § 704 for homeowners with equity in their principal residence, and Cal. Civ. Proc. Code § 703.140 for everyone else).  Anything the debtor cannot exempt is fair game for the Trustee to seize.

What goes into the estate?  The gist of 11 U.S.C. § 541(a) is that everything the debtor owns or has an interest in on the day of filing the bankruptcy papers, anything the debtor becomes entitled to through bequest, inheritance, devise, or through life insurance proceeds during the 180 days after the petition day, and anything that is the fruit of estate assets (e.g., interest earned on an estate asset) is part of the estate.

But § 541(a)(6) has a carve-out for income earned by the debtor for services rendered postpetition.  It is this provision that is at the heart of the answer to my colleague’s question.
Continue Reading Can The Chapter 7 Bankruptcy Trustee Seize Your Postpetition Commissions?

Multiple clocksI recently had an email exchange regarding statute of limitations tolling in bankruptcy, with a friend who is a fellow bankruptcy attorney.  My friend posed a couple of questions based on an interesting fact pattern.  Herewith I offer a slightly edited version of the exchange.

First, here is my friend’s email:

Salient Facts:   Chapter 7 case filed.  Debtor has some accounts receivable.   On the petition filing date, there are 4 months left on the Statue of Limitations to bring an action on the accounts receivable.  The Chapter 7 Trustee sold the accounts receivable to someone we’ll call, Doug.

Questions:

1.  How long does Doug have to bring suit on the accounts receivable he purchased from the Trustee?

2.  Section 108(a) gives the Trustee 2 years from the petition date to commence an action.  It also seems to extend the statute of limitations by some period, which I used to assume was the pendency of the bankruptcy case, ending when it closed.  But now that I read the language, it is not at all clear.  Section 108(a)(1) has the statement:  “[I]ncluding any suspension of such period occurring after the commencement of the case…”; What the heck does that mean?  Does there need to be a formal suspension, or is it automatic, and if so, for how long?

Before I give you my response, here is some helpful background.

I.              Statutes Of Limitations

At the risk of gross oversimplification, we can think of noncriminal law as a mechanism for resolving competing interests.  In particular, litigation is the means we use for resolving disputes without the parties resorting to duels.  If only Aaron Burr had resolved his dispute with Alexander Hamilton through litigation.

One of the goals in this process is to resolve disputes in a reasonably timely fashion, before the witnesses’ memories become distorted with the passage of time.  Therefore, the statutes under which plaintiffs bring their suits contain time windows during which the actions must be initiated.  If a plaintiff fails to take action within the relevant time window, the suit is time-barred.  The plaintiff is said to have “slept on his rights.”
Continue Reading Tolling A Statute Of Limitations In Bankruptcy