John R. Stoebner v. Susan E. Wick ( 2002 )


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  •                      United States Court of Appeals
    FOR THE EIGHTH CIRCUIT
    _____________
    No. 01-1312MN
    _____________
    In re: Susan E. Wick,                 *
    *
    Debtor.                   *
    *
    John R. Stoebner,                     *
    * On Appeal from the
    Trustee-Appellant,        * United States District Court
    * for the District of
    v.                              * Minnesota.
    *
    *
    Susan E. Wick; Teaching Temps, Inc.; *
    Nichols Kaster & Anderson,            *
    *
    Claimants-Appellees.      *
    ___________
    Submitted: October 19, 2001
    Filed: January 9, 2002
    ___________
    Before BOWMAN, RICHARD S. ARNOLD, and HANSEN, Circuit Judges.
    ___________
    RICHARD S. ARNOLD, Circuit Judge.
    The trustee in bankruptcy appeals the District Court’s decision that Susan
    Wick, the debtor, is entitled to the entire amount of proceeds from stock options that
    were not yet vested when she filed for Chapter 7 bankruptcy. The District Court held
    that the options were fully exempted, and that, in any event, the trustee’s failure to
    object to the exemption within 30 days barred the estate from receiving the proceeds.
    We reverse. We hold that Ms. Wick exempted the options only partially. The estate
    is therefore entitled to the part of the options’ value that is the result of Ms. Wick’s
    pre-petition services, less her exemption amount. Accordingly, we remand for entry
    of judgment in favor of the trustee for $28,475.
    I.
    On July 29, 1997, Ms. Wick filed for Chapter 7 bankruptcy. On Schedule B,
    Personal Property, she listed as an asset the “[p]otential right to receive percentage
    interest in Teaching Temps, Inc. under employment agreement” and stated its current
    market value as “[u]nknown.” Ms. Wick had received this contingent stock option
    as part of the sale of her company, Teaching Temps, Inc., in March 1997 to Joseph
    Noonan. In order to receive a 24.5% share of the company’s stock, Ms. Wick was
    required to remain an employee of Teaching Temps until March 1998, one year
    following the date of the agreement.
    Ms. Wick also listed her stock options on Schedule C, Property Claimed as
    Exempt. Using the federal “wild card” or “catchall” exemption, 11 U.S.C. §
    522(d)(5), as the statutory basis, Ms. Wick listed the stock options, stating the current
    market value of the options as “unknown” and the value of her claimed exemption as
    “unknown.”
    At the meeting of creditors, the trustee in Ms. Wick’s case had the opportunity
    to question Ms. Wick about the stock options. He requested and received from her
    a copy of the employment agreement that described the options. The trustee did not
    object to the exemption at that time. On November 4, 1997, Ms. Wick received a
    discharge of her debts. She continued to work for Teaching Temps.
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    Eight months later, in July 1998, the trustee wrote to Ms. Wick, asking whether
    she was still employed with Teaching Temps and whether she had exercised her
    stock-option rights. Ms. Wick responded that she was no longer employed at
    Teaching Temps and that she had attempted to exercise her options in April 1998 but
    had been “denied.” Her veracity was later questioned by the trustee and the
    Bankruptcy Court, because while at the time of her letter she may have believed she
    had been fired and would not receive her options, she actually returned to work a few
    days later and received her stock certificates in September 1998. Thus, while Ms.
    Wick may not have lied to the trustee in her letter, she was not entirely candid and
    never informed him of the changed circumstances.
    On October 2, 1998, Ms. Wick sued Mr. Noonan and Teaching Temps in state
    court, requesting a court-ordered buyout of her company stock as authorized by
    Minnesota law. On October 23, 1998, Ms. Wick’s bankruptcy case was closed. On
    February 26, 1999, shortly before the start of the state trial, the trustee informed Ms.
    Wick and Mr. Noonan that he was asserting a claim to Ms. Wick’s stock rights.
    However, he did not participate in the trial. The state court ordered the buyout Ms.
    Wick requested, valuing her 24.5% share of Teaching Temps at $97,200. The trustee
    petitioned to re-open the bankruptcy case and demanded turnover of the $97,200 (the
    value of Ms. Wick’s stock) minus the $3,925 exemption.
    The Bankruptcy Court held a hearing to determine the parties’ rights in the
    proceeds of the options. Stoebner v. Wick (In re Wick), 
    249 B.R. 900
    (Bankr. D.
    Minn. 2000). It recognized that the closing of a bankruptcy case normally results in
    a technical abandonment to the debtor of all unadministered property under § 554(c),
    but found that when a debtor gives a trustee false or incomplete information about an
    asset, the abandonment is revocable. Neither party contests this ruling. With regard
    to the options, the Court found that Ms. Wick’s use of “unknown” for the exemption
    amount on her schedule should be construed against her, and that, on the facts of this
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    case, Ms. Wick intended to exempt the stock options only partially, to the extent of
    the remaining dollar amount allowed by law.
    The Bankruptcy Court cited cases holding that if an asset appreciates post-
    petition, the estate, rather than the debtor, is entitled to that appreciation. However,
    because the options were only one-third into their vesting period (four months of the
    one-year period) when Ms. Wick filed for bankruptcy, the Court held that the estate’s
    interest was limited to one-third of the option’s overall value minus Ms. Wick’s
    $3,925 exemption. The Court ruled that Ms. Wick was entitled solely to the
    remaining two-thirds of the options’ value because she had worked for eight months
    post-petition to complete the vesting period, and the Bankruptcy Code excludes post-
    petition earnings from the services of an individual debtor from the bankruptcy estate
    under 11 U.S.C. § 541(a)(6). Therefore, the Bankruptcy Court ordered that the
    trustee receive $28,475 of the $97,200 at issue. In so doing, it rejected the argument
    that Taylor v. Freeland & Kronz, 
    503 U.S. 638
    (1992), barred any judgment in the
    trustee’s favor because he failed to object within the 30-day limit provided by Federal
    Rule of Bankruptcy Procedure 4003(b). The Bankruptcy Court distinguished Taylor
    in several ways and held it inapplicable.
    On appeal, the District Court reversed. Stoebner v. Wick (In re Wick), 
    256 B.R. 618
    (D. Minn. 2001). The Court held that Ms. Wick had exempted the entire
    asset. It began by valuing the options on the day of filing at $4,863, using trial
    evidence introduced by Ms. Wick’s expert witness. Then, it limited the estate to a
    one-third interest ($1,605)1 in the $4,863 because the bankruptcy was filed one-third
    of the way into the one-year vesting period. Because Ms. Wick’s available exemption
    value ($3,925) exceeded the estate’s one-third interest ($1,605), the Court held that
    1
    We calculate that one-third of $4,863 is $1,621, not $1,605 as Ms. Wick’s
    counsel argued and both courts found. Since the figure does not affect our analysis,
    for simplicity’s sake we use the $1,605 figure in this opinion.
    -4-
    the asset was fully exempted, “fell out” of the estate, and vested wholly in the debtor.
    Additionally, the Court held that Taylor barred the trustee from challenging the value
    of the exemption beyond the 30-day deadline. Accordingly, the Court ordered that
    Ms. Wick receive the entire amount of the cash value of the stock, $97,200.
    II.
    The trustee appeals, arguing that the Bankruptcy Court correctly determined
    the parties’ relative interests. He contends that the estate was entitled to all the
    appreciation on one-third of the options, less Ms. Wick’s exemption. He also argues
    that Taylor does not apply to the facts of this case. Our standard of review is the
    same as that of the District Court. We review factual findings for clear error and legal
    conclusions de novo. Northwest Vill. Ltd. v. Franke (In re Westpointe, L.P.), 
    241 F.3d 1005
    , 1007 (8th Cir. 2001). We conclude that the trustee is right. The
    Bankruptcy Court properly granted the estate one-third of the options’ appreciated
    value, minus the debtor’s exemption.
    The parties agree that upon filing Ms. Wick’s options became property of her
    bankruptcy estate. 11 U.S.C. § 541(a)(1) ("[A]ll legal or equitable interests of the
    debtor in property as of the commencement of the case” are in the estate). The fact
    that the options were unvested and contingent on Ms. Wick’s continued employment
    does not alter the fact that they were property of the estate. See Allen v. Levey (In
    re Allen), 
    226 B.R. 857
    , 865-66 (Bankr. N.D. Ill. 1998) (“A contingency is no bar to
    property interest becoming property of the bankruptcy estate, even if the contingency
    requires additional post-petition services, and even if the right to enjoyment of the
    property may be defeated.”).
    Section 522 of the Bankruptcy Code allows debtors to exempt property from
    the estate, subject to certain limitations. Ms. Wick sought to exempt her stock
    options and listed the options on her exemption schedule. She listed “unknown” as
    -5-
    the current market value of the options. This designation was presumably designed
    to reflect the fact that contingent, unvested options are not easy to value. Under the
    federal exemption scheme applicable to her case, Ms. Wick had available to her the
    “wildcard” exemption of 11 U.S.C. § 522(d)(5) that allows a debtor to claim as
    exempt an interest in any property, up to a dollar limit. The parties agree that Ms.
    Wick had $3,925 left for her use after exempting other property. They disagree,
    however, on whether Ms. Wick intended to exempt the asset in full or in part.
    We believe the Bankruptcy Court correctly determined that the options were
    partially exempted. The facts suggest that Ms. Wick, her counsel, and the trustee
    understood that the options were only partially exempt. The trustee requested a copy
    of the employment agreement and followed up on whether Ms. Wick’s options had
    vested. These actions were logical only if he believed the estate had an ongoing
    interest in the options. Then, the trustee took Ms. Wick’s assurance that her options
    were denied at face value. In her response to the trustee, Ms. Wick did not question
    the trustee’s follow-up on the options, which suggests that she too understood that the
    options were only partially exempt. Further, Ms. Wick’s counsel acknowledged in
    a July 22, 1999, letter to the trustee that the estate had at least some, if a minimal,
    interest in the options. In re 
    Wick, 249 B.R. at 907
    . (“[I]t is our position . . . that we
    have claimed the majority of [the options] as exempt.”)
    We reject Ms. Wick’s contention that listing “unknown” as the current market
    value of the exemptions is sufficient as a matter of law to make an asset fully exempt.
    Indeed, it may signal nothing more than that the asset has not been valued or that the
    debtor is unsure of how to come up with an accurate market value. While it is true
    the trustee did not object to Ms. Wick’s exemption, this does not mean that the asset
    was fully exempted. Here, when a specific dollar figure given by statute limited the
    amount of the exemption, and the trustee did not forsake an interest in the options,
    either through inadvertence or misjudgment, listing “unknown” does not, by itself,
    -6-
    render the options fully exempt. Ms. Wick exempted only up to $3,925 of the value
    of the options, not the entire asset.
    Having determined that the options were only partially exempted, we must
    decide how to divide the proceeds from the options between Ms. Wick and the estate.
    The options greatly appreciated in value when they vested and were liquidated by
    court order. As a result, $97,200 is at issue between the parties. In this case,
    determining whether the estate or the debtor is entitled to the appreciation on options
    is complicated by 11 U.S.C. § 541(a)(6). This provision excludes from property of
    the estate “earnings from services performed by an individual debtor after the
    commencement of the case.” Therefore, the estate’s interest is limited to the pro rata
    portion of the proceeds that are related to the debtor’s pre-petition services. 
    Allen, 226 B.R. at 867
    . An individual debtor is entitled to any appreciation that results from
    post-petition services. 11 U.S.C. § 541(a)(6).
    The Bankruptcy Court used the date when Ms. Wick filed bankruptcy to divide
    the appreciation between pre- and post-petition earnings. In other words, the Court
    gave the estate the pro rata portion of the options that corresponds to the percentage
    of the vesting period that had passed before Ms. Wick filed bankruptcy. We agree
    with this approach. The terms of the stock-option agreement required Ms. Wick to
    work for one year following the agreement in order for the options to vest. At the time
    of filing, she had worked for four months. The estate is entitled to the benefit from
    this pre-petition labor. Since four months is one-third of the one-year vesting period,
    the estate is entitled to one-third of the final, appreciated value of the stock, less the
    exempted amount. (One-third of $97,200 is $32,400. Ms. Wick’s exemption of
    $3,925 is subtracted from the $32,400, leaving $28,745 as the estate’s interest.)
    Judgment should enter in favor of the trustee in the amount of $28,745.
    Ms. Wick is entitled to the rest of the proceeds from the appreciated stock
    options. She completed the vesting period when she continued to work for eight
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    months after filing for bankruptcy. Eight months is two-thirds of the one-year vesting
    period, and so she may retain this pro rata portion of the appreciation, which is the
    result of her post-petition services. Therefore, Ms. Wick receives the benefit of her
    post-petition labor, as mandated by 11 U.S.C. § 541(a)(6).
    III.
    The parties have argued vigorously over the effect of the Supreme Court’s
    decision in Taylor v. Freeland & Kronz, 
    503 U.S. 638
    (1992), on this case. In Taylor,
    the debtor listed a lawsuit with “unknown” value on her exemption schedule. 
    Id. at 640.
    The debtor told the trustee that she estimated she might win $90,000 in the suit.
    
    Id. The trustee
    did not object, despite the fact that the debtor had only a small
    exemption amount available and was claiming the entire asset exempt. 
    Id. at 642.
    Taylor stated that he doubted that the lawsuit would have value, saying it might be
    a “nullity.” 
    Id. at 641.
    When the debtor was awarded $110,000 in her lawsuit, the
    trustee demanded that the debtor turn over the money. 
    Id. The Supreme
    Court held
    that the trustee’s failure to object, when he could have made a valid objection if he
    had acted promptly, prevented him from later challenging the validity of the
    exemption. 
    Id. at 642.
    In this case, we are not confronted with a trustee who believed the asset was
    worthless. The trustee in Ms. Wick’s case consistently expressed an interest in the
    asset. Further, Ms. Wick listed a valid statutory basis for her asset, § 522(d)(5), and
    had sufficient exemption value left to exempt the options partially. The Bankruptcy
    Court was correct–the trustee had no basis to object to Ms. Wick’s claimed
    exemption. While such an objection perhaps would have led to an earlier resolution
    of the parties’ interests, the estate is not barred from recovery because no timely
    objection was made.
    -8-
    The District Court found Taylor to be controlling authority. Because we hold
    that the asset was only partially exempted, our application of Taylor differs. We do
    not think that the Bankruptcy Code and Rules oblige a trustee to object every time a
    debtor partially exempts an asset in order to preserve the estate’s interest. Since
    exemptions are routinely smaller than the assets they are designed to protect (for
    example, with homes), objections would multiply greatly if Taylor were read so
    broadly. Further, in these situations, the judge would have nothing to determine after
    the objections, except that the debtor is exempting the asset to the extent the Code
    allows–a result that is clear from the face of the exemption schedule and § 522. In
    Taylor, the Court found that the debtor “in fact claimed the full amount as exempt”
    but did not have a right to exempt more than a small portion of the 
    asset. 503 U.S. at 642
    . The Court went on to note specifically that the trustee “as a result, apparently
    could have made a valid objection under § 522(l) and Rule 4003 if he had acted
    promptly.” 
    Id. This case
    is distinguishable, and we therefore hold that Taylor does
    not bar the estate’s interest.
    The judgment of the District Court is reversed. We remand for entry of an
    order affirming the judgment of the Bankruptcy Court.
    A true copy.
    Attest:
    CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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