Memorandum of Decision Re: Life Insurance Commisions

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re PHILIP and ANGELINA LEDERER,                                                                                               No. 92-10962      Debtors. _____________________________/ JEFFRY LOCKE, Trustee,      Plaintiff,    v.                                                                                                                                                   A.P. No. 93-1297 PHILIP LEDERER,      Defendant. ______________________________/
Memorandum of Decision
     Chapter 7 debtor and defendant Philip Lederer was an insurance agent until February, 1992, when he became disabled. Since he was unable to continue servicing his clients, he agreed to refer them to another salesman who would service them for no compensation provided that he would be entitled to 65% and Lederer 35% of any commissions on new policies he sold to Lederer's clients. Shortly thereafter, Lederer filed his bankruptcy petition.      In this adversary proceeding, the Chapter 7 trustee claims that the estate is entitled to the $24,850.00 in "renewal commissions" due to Lederer on account of policies sold by Lederer before bankruptcy and renewed after the bankruptcy. He also claims a right to all of Lederer's 35% on policies sold by the other salesman after bankruptcy.      Section 541(a)(6) of the Bankruptcy Code excludes from the bankruptcy estate earning from services performed by the debtor after the bankruptcy. The issues raised here have been troublesome to many bankruptcy courts because of the difficulty in determining whether postpetition renewal commissions required postpetition work. Some policies are renewed only because the salesman was constantly available to answer a policy holder's questions and deal with any problems. Other policies are renewed with no effort whatsoever. Not surprisingly, the courts have pretty much split over the issue, with the debtor prevailing when the court found significant postpetition servicing by the debtor (In re Hodgson, 54 B.R. 688 (Bkrtcy.W.D.Wis.1985); In re Kervin, 19 B.R. 190 (Bkrtcy. S.D.Ala.1982)) and losing when the court found no postpetition servicing (In re Bluman, 125 B.R, 359 (Bkrtcy.E.D.N.Y.1991); In re Froid, 109 B.R. 481 (Bkrtcy.M.D.Fla.1989)).      Although it may not be fair, it appears that the debtor's disability precludes the debtor from claiming the renewal commissions. If he had remained an active salesman after bankruptcy, the court would have probably followed Hodgson and Kervin. However, the language of section 541(a)(6) excludes from the estate only earnings resulting from the postpetition services of the debtor. Here, the postpetition services were provided by another salesman as the result of a prepetition contract. Since the court can find no flaw in the reasoning of the courts in Bluman and Froid, it will follow them even though the result seems harsh.      However, the court will not go so far as to require the debtor to turn over his 35% share of commissions on postpetition policies sold by the second salesman to his former clients. Such earnings, unlike renewal commissions, are not sufficiently "rooted in the prebankruptcy past" to justify the estate's claim to them, as no right to a commission (or even a potential commission, as with a renewal commission) existed when Lederer filed his bankruptcy petition and the second salesman needed Lederer's continuing good will and cooperation to generate the income. See In re Zahneis, 78 B.R. 504 (Bkrtcy.S.D.Ohio 1987).      In addition, Lederer's disability insurance policy was issued by one of his employers and provided that any income he derived from commissions could be deducted from his disability benefits. It accordingly reduced his postpetition disability benefits by $4,897.00. Since it is only a matter of semantics whether the disability benefits or the commission was reduced, and since the debtor's disability benefits are exempt, the amount due to the estate must be reduced by this amount.      For the foregoing reasons, the trustee shall have judgment against Lederer in the amount of $19,971.00 plus costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for plaintiff shall submit an appropriate form of judgment forthwith.

Dated: June 6, 1994                                                                                                   _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy