United States District Court, Southern District of Illinois, N.D
August 15, 1967
IN THE MATTER OF MITCHELL DURHAM, BANKRUPT.
The opinion of the court was delivered by: Robert D. Morgan, District Judge.
OPINION AND ORDER
The pending issue arises on petition of a voluntary bankrupt to
review an order of the Referee in Bankruptcy dated April 17,
1967, holding the bulk of some $1,273.71 of "Separation
Allowance," otherwise becoming payable to the bankrupt upon
termination of employment subsequent to adjudication, to be the
property of the trustee under Section 70(a) of the Bankruptcy Act
(Title 11 U.S.C. § 110(a)).
The bankrupt contends that these funds, being subject to a
"spendthrift trust" provision of the union contract and being
"contingent" until paid, were not wages and did not pass to the
trustee under Section 70(a). The trustee contends that these
funds were "wages" earned under the union contract; that the
"spendthrift" provision was self-serving and void under state
law; but that even if not so, they were Section 70(a)(5)
property passing to the trustee because the employee could, at
least with the cooperation of the employer, effect a transfer
thereof to his family.
The Referee found that the basic right to receive the
separation pay was a right of action arising under the union
contract and therefore passed to the trustee under Section 70(a)
(6). He found, however, because the separation pay was earned at
the rate of $1.81 per week, and four of the weeks involved were
worked by the bankrupt subsequent to bankruptcy, that the trustee
should pay him the sum of $7.24 out of the total fund; and the
matter is here on Certificate of Review.
It is agreed by all concerned that the whole question is
whether title to this separation pay (or most of it) was in the
trustee or whether it is to be considered after-acquired property
belonging to the bankrupt.
Mitchell Durham, the bankrupt, had been employed by Armour and
Company, a Corporation, at its Peoria, Illinois, plant for
approximately 13 1/2 years. He is a member of The Amalgamated
Meat Cutters and Butcher Workmen of North America, AFL-CIO, and
the terms of his employment were specified in a Master Agreement
entered into between the union and the company. The material
provisions of that agreement in regard to separation pay are as
19.1 Separation Allowance — To Whom Paid.
Separation allowances, determined in accordance
with Section 19.3, shall be paid to employees having
one or more years of continuous service, as defined
in the vacation provisions, who are permanently
dropped from the service because of a reduction in
forces arising out of the closing of a department or
unit of the business, or as a result of technological
changes and when it is not expected that they will be
re-employed. * * *
19.2 When not paid.
Separation allowances shall not be paid:
(a) To employees with less than one year's
(b) To employees laid off in gang reductions;
except as provided in the second paragraph of Section
(c) In cases where the employee was discharged for
(d) In cases of voluntary resignation;
(e) To employees who refuse an offer of employment
by the company in another department or another unit
of its business, the location of which is reasonably
accessible to the location of the place of employment
from which the employees are being dropped from the
service, * * *.
19.3 Amount of Payment.
In order to reflect the fact that Separation Pay is
earned during periods of employment with the Company,
and is payable with respect to said past service, the
amount of Separation Pay shall be computed as
multiple equivalents of weeks of wages times years of
continuous service, in accordance with the following
schedule. Payments are to be computed on the basis of
forty (40) hours per week at the employee's regular
rate as follows:
1 through ten (10) years of continuous service: One
week's pay for each year of Continuous Service.
11 through 20, add to the computation for 10 years:
1 3/4 week's pay for each year of continuous
service above ten (10) years.
21 and over, add to the computation for 20 years: 2
weeks' pay for each year of continuous service
above twenty (20) years. * * *
19.4 Method of Payment.
The amount due under this Article shall be paid as
(1) If less than the equivalent of four weeks' pay
— in one lump sum.
(2) Amounts over a total of four weeks' pay —
weekly installments of full wages until the total
amount is exhausted. The employee, at his option, may
elect to receive such amount in a shorter period of
time or in one lump sum.
(3) In the event of death, any unpaid balance shall
be paid to the beneficiary of the Group Life
19.5 Non-Alienation of Benefits:
The Company shall not in any manner be liable for
or subject to the debts or liabilities of any
individual by reason of the existence or operation of
the separation allowance provisions. No right or
benefit at any time under the separation allowance
program shall be subject in any manner to alienation,
sale, transfer, assignment, pledge, or any
encumbrance of any kind. If the employee or former
employee shall attempt to or shall alienate, sell,
transfer, assign, pledge, or otherwise encumber
his right, benefits, or amounts payable under the
separation allowance program or any part thereof, or
if by reason of his bankruptcy or other events
happening at any time such benefits would otherwise
be received by anyone else or would not be enjoyed by
him, the Company in its discretion may terminate his
interest in any such right or benefit and hold or pay
to it, or for benefit of such person, his spouse,
children, other dependents, or any of them as the
Company may determine.
NOTICE OF PLANT CLOSING AND TECHNOLOGICAL ADJUSTMENT
25.1 Notice of Plant Closing.
The Company shall give notice in writing to both
the International and Local Union of the closing of a
plant or a division of a plant, or a major department
of a plant, at least ninety (90) calendar days prior
to such closing.
On December 19, 1966, pursuant to Section 25.1 of the
agreement, the Company posted a notice at the Peoria plant
notifying the employees of the permanent closing of operations at
the Peoria plant. A copy of this notice was sent to the union.
On February 14, 1967, Mitchell Durham was adjudicated a
bankrupt in this Court, and on March 3, 1967, Jerry T. Stafford
was elected Trustee. On that same day said Trustee filed a
petition asking that Armour and Company be ordered to pay to him
all separation pay to become due the bankrupt because of the
closing of the Peoria plant.
The Peoria plant of Armour and Company was closed on March 19,
1967, and Mitchell Durham was permanently dropped from the employ
of the company due to the closing. Durham had been offered
employment in the San Francisco, California, plant of Armour and
Company but refused to accept it. He also indicated that he
wanted his separation pay in a lump sum rather than in weekly
Armour and Company, pursuant to an order of the Referee, paid
to the Trustee the amount of $1,273.71, representing the net
amount of the separation pay due Durham after tax withholdings
and authorized deductions. The Trustee is holding these funds
pending a decision in this matter. There is no indication that
the Company sought to exercise the discretion reserved to it
under the final sentence of Section 19.5 of the union contract.
The precise issue here presented has not been found in prior
published decisions. Its resolution appears to rest in the terms
of the union contract. Section 70(a) of the Bankruptcy Act (Title
11 U.S.C. § 110(a)) clearly vests in the trustee broadly
specified types of property of the bankrupt (except that which is
exempt) as of the date of filing of the petition, including in
subdivision (5) "rights of action, which prior to the filing of
the petition he could by any means have transferred or which
might have been levied upon and sold under judicial process
against him * * *" (with certain specified exceptions which don't
appear to be applicable) and in subdivision (6) "rights of action
arising upon contracts * * *".
The general rule on earnings, as stated in Collier on
Bankruptcy, Volume 4, Page 1286, is:
"A trustee in bankruptcy takes title to all wages,
fees and commissions earned and accrued prior to
bankruptcy, or that relate to services already
performed, even though they may be paid subsequent
thereto. He succeeds to the right to collect such
sums as are due, if not paid. * * *"
The theory of the Bankruptcy Act quite clearly is that the
bankrupt should have the ownership of all future earnings,
unfettered from the claims of creditors. However, moneys earned
prior to bankruptcy should go to the Trustee for the benefit of
the bankrupt's creditors. This philosophy was expressed
by the Supreme Court of the United States in Segal v. Rochelle,
382 U.S. 375
, 86 S.Ct. 511, 15 L.Ed.2d 428 (1965). In that case,
the bankrupt had paid substantial income taxes in the years 1959
and 1960. In 1961, he suffered losses and was adjudicated a
bankrupt on September 27, 1961. The Supreme Court held that the
bankrupt's loss carryback refund claim passed to the Trustee in
Bankruptcy, even though the right to claim the refund did not
accrue until January 1, 1962, and even though this right could
have been entirely defeated by the earnings of the bankrupt
subsequent to bankruptcy. The Court felt that the right to a
refund was related to the bankrupt's past rather than his future.
The Court stated on page 379, 86 S.Ct. on page 515, in construing
Section 70 of the Bankruptcy Act, as follows:
"* * * To this end the term `property' has been
construed most generously and an interest is not
outside its reach because it is novel or contingent
or because enjoyment must be postponed. * * *
"However, limitations on the term do grow out of
other purposes of the Act; one purpose which is
highly prominent and relevant in this case is to
leave the bankrupt free after the date of his
petition to accumulate new wealth in the future.
Accordingly, future wages of the bankrupt do not
constitute `property' at the time of bankruptcy nor,
analogously, does an intended bequest to him or a
promised gift — even though state law might permit
all of these to be alienated in advance. E.g., In re
Coleman, 2 Cir., 87 F.2d 753; see 4 Collier,
Bankruptcy 70.09, 70.27 (14th ed. 1962). Turning to
the loss carryback refund claim in this case, we
believe it is sufficiently rooted in the
pre-bankruptcy past and so little entangled with the
bankrupts' ability to make an unencumbered fresh
start that it should be regarded as `property' under
"Temporarily, two key elements pointing toward
realization of a refund existed at the time these
bankruptcy petitions were filed: taxes had been paid
on net income within the past three years, and the
year of bankruptcy at that point exhibited a net
operating loss. The Segals stress in this Court that
under the statutory scheme no refund could be claimed
from the Government until the end of the year, but as
cases already cited indicate, postponed enjoyment
does not disqualify an interest as `property'."
The bankrupt here would distinguish the Segal case on the
grounds that the tax refund there was not contingent at the time
of bankruptcy and that there was no "spendthrift" protection
surrounding it. It seems clear, however, that neither ground
conflicts with the fundamental rationale of the Segal case.
Neither contingency nor postponed enjoyment prevent a right
arising out of contract from being considered property under
Section 70 of the Bankruptcy Act. The contingency here did not
occur and there was no attempted exercise of the employer's
reserved right under the union contract to "terminate" the
bankrupt's interest upon bankruptcy. Section 19.3 of the union
contract makes crystal clear that the fund was "earned during
periods of employment" and was not something arbitrary in amount
which came into being after bankruptcy. Except for the small
portion arising from work after bankruptcy, as the Referee found,
this fund of separation pay seems clearly rooted in the
pre-bankruptcy past and has nothing more to do with his ability
to make an unencumbered fresh start than would any other property
over his exemptions which he might prefer to keep from his
Accordingly, the order of the Referee in Bankruptcy, dated
April 17, 1967, here under review, is in all respects sustained,
and it is so ordered upon the filing hereof.
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