Moon v. Smith et al

IN THE UNITED STATES BANKRUPTCY COURT FOR THE
WESTERN DISTRICT OF MISSOURI
IN RE: 	)
)
ROBERT WILLIAM SMITH and 	) 	Case No. 04-61134
VIRGINIA DIANE SMITH, 	)
)
Debtors. 	)
)
FRED CHARLES MOON, 	) 	Adversary No. 04-6076
Chapter 7 Trustee, 	)
)
Plaintiff, 	)
)
v. 	)
)
ROBERT WILLIAM SMITH and 	)
VIRGINIA DIANE SMITH, 	)
)
and 	)
)
ROBERT SMITH INSURANCE 	)
AGENCY, INC. 	)
)
Defendants. 	)
MEMORANDUM OPINION
The Chapter 7 trustee filed this adversary proceeding seeking turnover of insurance
renewals earned prepetition and received postpetition by debtor Robert William Smith. The
trustee also asks this Court for a declaratory judgment that all future renewal service fees are
property of the estate. This is a core proceeding under 28 U.S.C. § 157(b)(2)(E) over which
the Court has jurisdiction pursuant to 28 U.S.C. § 1334(b), 157(a), and 157(b)(1). 	The
following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule
52 of the Federal Rules of Civil Procedure as made applicable to this proceeding by Rule
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7052 of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, I find
that any renewal service fees related to life insurance, universal life insurance, and annuities
received since the bankruptcy petition was filed are property of the estate and must be turned
over to the Chapter 7 trustee. Any renewal service fees related to automobile insurance,
personal umbrella insurance, health insurance, and commercial insurance require Mr. Smith’s
continuing efforts to keep the policies in effect. They, therefore, are not property of the
estate.
FACTUAL BACKGROUND
On March 14, 1996, Robert W. Smith executed an agreement with American Family
Insurance Company captioned AMERICAN FAMILY AGENT AGREEMENT entered into
separately by and between AMERICAN FAMILY MUTUAL INSURANCE COMPANY,
AMERICAN FAMILY LIFE INSURANCE COMPANY, AMERICAN STANDARD
INSURANCE COMPANY OF WISCONSIN (the Agreement). On or about January 2, 2003,
Mr. Smith formed the Robert Smith Insurance Agency, Inc. (the Agency) at a separate
address. He did not, however, assign his right to renewal service fees to the Agency. On
April 30, 2004, Mr. and Mrs. Smith filed a Chapter 7 bankruptcy petition. By that time Mr.
Smith had 1,150 outstanding policies for which he received some form of renewal service
fees. It is undisputed that he received postpetition the sum of $5,352.71 for renewal service
fees for the period ending April 30, 2004, the date of the petition. He had earned
approximately $40,000 more in renewal service fees between April 30, 2004, and November
10, 2004, the date the Chapter 7 trustee filed this adversary proceeding. The trustee claims
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111 U.S.C. § 541(a)(1).
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the insurance renewals are property of the bankruptcy estate. He seeks turnover of the funds
the defendants have already received, or alternatively, a finding that Mr. and Mrs. Smith
converted property of the estate. In addition, the trustee asks for a declaratory judgment from
this Court that all future renewals are property of the bankruptcy estate. On January 26, 2005,
this Court held a trial, which was terminated in order to allow the parties to attempt to reach
a settlement and to submit post-trial briefs. The parties were unable to reach a settlement,
however, and neither brief addressed the specific issue of whether renewal service fees
earned prepetition are property of the estate. On April 21, 2005, therefore, the trial was
resumed.
DISCUSSION
The filing of a bankruptcy petition creates an estate that is comprised of any property,
wherever located, in which a debtor holds a legal or equitable interest.
(a) The commencement of a case under section 301, 302, or 303 of this title
creates an estate. Such estate is comprised of all the following property,
wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this
section, all legal or equitable interests of the debtor in property
as of the commencement of the case.1
Since Mr. Smith held a legal interest in $5,352.71, the total of the renewal service fees that
were due him on the petition date, that account receivable became an asset of the estate.
Those funds, which were received, deposited into the account of the Agency, and later spent
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211 U.S.C. § 541(a)(6).
3173 B.R. 411 (B.A.P. 9th Cir. 1994).
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by Mr. and Mrs. Smith, must be turned over to the trustee. As to the renewal service fees due
from policies in effect on the petition date, which were or may be renewed postpetition,
however, the issue is not so simple. Section 541(a)(6) of the Code includes in the estate the
proceeds or profits from property of the estate except to the extent the proceeds or profits
result from services performed by the debtor postpetition:
(a) The commencement of a case under section 301, 302, or 303 of this title
creates as estate. Such estate is comprised of all the following property,
wherever located and by whomever held:
. . .
(6) Proceeds, product, offspring, rents, or profits of or from
property of the estate, except such as are earnings from services
performed by an individual debtor after the commencement of
the case.2
On the petition date, the right to receive renewal service fees, if the policies are renewed,
constitutes property of the estate. The issue then is whether such renewals represent
“earnings from services performed by an individual debtor after the commencement of the
case.”
In Towers v. Wu (In re Wu),3 the debtor sold life insurance and annuity policies. The
bankruptcy court held that the renewal commissions represented earnings from post petition
services of the debtor, which were not property of the estate. In reversing and remanding,
however, the Bankruptcy Appellate Panel for the Ninth Circuit concluded that the issue was
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4Id. at 414-415.
5See, e.g., Yoppolo v. Golde (In re Golde), 253 B.R. 843, 845 (Bankr. N.D. Ohio); In re
Blackerby, 208 B.R. 136, 143 (Bankr. E.D. Penn. 1997); Towers v. Wu (In re Wu), 173 B.R. 411,
416 (B.A.P. 9 th Cir. 1994); Movitz v. Palmer (In re Palmer), 167 B.R. 579, 585 (Bankr. D. Ariz.
1994).
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the extent to which the commissions are attributable to postpetition services provided by the
debtor.4
Some cases hold that the issue is whether the debtor is obligated, under his contract
with the insurance company, to provide ongoing services in order to be entitled to the
renewal service fees.5 Here, Mr. Smith is not, but that alone should not be determinative. The
issue is whether, in the absence of Mr. Smith providing services on a continuing basis, the
policies would be renewed. At the resumed trial, Mr. Smith testified that he performs little
service to life insurance policy holders. He stated that once the policy is written, there are
rarely any changes other than changes of beneficiary and change of ownership. While he
sometimes performs those services, American Family often does so as well. In other words,
once a customer purchases a life insurance policy, the decision to continue that policy each
year is not dependent on any services provided by the agent.
Mr. Smith testified, however, that automobile insurance policy holders require
constant attention. Customers must renew this insurance each year. They must contact the
Agency if they purchase a new car, if they are involved in an accident, if their child reaches
driving age, if anyone in the family is cited for driving under the influence of alcohol, if they
decide to refinance the car, if they have questions regarding the cost to insure a car they are
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considering buying, and if they disagree with the values proposed by the adjustor assigned
to them. Likewise, with homeowners insurance, the Agency must write the policy, follow up
if the homeowner decides to refinance the home, evaluate each home on a regular basis to
update the replacement value, and visit each property on a regular basis to check for vicious
animals, needed general repairs, or a lack of owner pride. Homeowners contact the agency
if they add a security system, a swimming pool, or a fence, and the policy must be adjusted
accordingly. The agency is responsible for determining if American Family will continue
coverage, increase coverage, decrease coverage, or cancel a homeowner’s policy. Mr. Smith
also testified that he must issue certificates of insurance to his commercial policy holders
each year because they must provide these same certificates to their contractors. The
commercial policyholder must perform an audit each term to determine if their insurance
needs are adequately covered, and the Agency assists with that audit.
Thus, the issue of whether insurance renewals are property of the estate depends upon
the type of insurance involved. Mr. Smith candidly testified that he need do little work to
retain renewal service fees for life insurance. To the extent, therefore, that any postpetition
renewal service fees received by Mr. Smith result from life or universal life annuity policies
in force as of the date of the petition, such renewal service fees are property of the estate. To
the extent the funds have been received and spent by the defendants, the trustee is entitled
to a judgment in that amount against them. The trustee is also entitled to an Order directing
the insurance companies involved to pay future renewal service fees on such policies to him.
As to the other lines of insurance, however, Mr. Smith’s personal services are, as a
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6Mr. Smith employed one full-time and one part-time employee on the petition date. He
testified, however, that he now employs only the full-time employee.
7Compare, In re Parsons, 262 B.R. 475, 481 (B.A.P. 8th Cir. 2001), affirmed, 280 F.3d
1185 (8th Cir. 2002) (holding that where real estate commissions were earned due to the efforts
of a “team,” including the debtor, the entire commission would not be attributable to the efforts
of the debtor).
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practical matter, necessary if the policy is to be renewed. Without his services, customers
would take their business elsewhere. And, while he does have one full-time employee who
sometimes deals with the customers,6 it is due to his efforts and relationship with the
customers that the renewal service fees are earned.7
Within ten days, the parties should submit, consistent with this Memorandum
Opinion, either an Order directing judgment in favor of the trustee and against the defendants
in an agreed amount, or separate proposed Orders. Such Order should also contain
appropriate instructions to the insurance companies as to the future renewal service fees.
An Order in accordance with this Memorandum Opinion will be entered.
/s/ Arthur B. Federman
Bankruptcy Judge
Date: April 27, 2005
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