Can the Chapter 7 Trustee Take Employment Bonuses?

The short answer is maybe.   It depends on your company’s written bonus program documents.   Post-petition employment bonuses are not property of estate where it is completely discretionary; In re Lapi, 2005 WL 3199022 (Bankr. S. D. Fl.); Sharp v. Dery, 253 B.R. 204 (E. D. Mich. 2000) (same); In re Palmer, 57 B.R. 332 (Bankr. W.D. Va. 1986).  

Recently, the BAP for the U.S. Court of Appeals, Eighth Circuit, decided that employment bonuses distributed to a debtor shortly after the debtor filed for chapter 7 bankruptcy could not be considered part of her bankruptcy case.   In that case, Seaver v. Klein-Swanson, No. 12-6054 (8th Cir.BAP March 22, 2013), the debtor filed chapter 7 bankruptcy on January 19, 2009.   On the date of filing, she was eligible for both a quarterly Excellence Award bonus and an annual Growth Driven Profit Award bonus.

The key was that her employer’s bonus program documents stated that no employee earns or otherwise becomes entitled to payment, or any portion of a payment, under the GDP program prior to payment by the employer.  after the close of the calendar year for the GDP Award.  Subsequently, the Chapter 7 Trustee learned that the debtor had received $24,072.00 after the filing of bankruptcy and asked the bankruptcy court to revoke the debtor’s discharge of debts due to her failure to list the possible bonuses in her original bankruptcy papers.  The bankruptcy court granted the trustee’s request.

The debtor appealed, and the appeals court reversed the bankruptcy court on all counts.  The appeals court held that under employer’s bonus program documents, the debtor had possessed no ownership interest, whether contingent or otherwise, in either bonus, until actual payment of the bonus by the employer.  Although some employer bonus plans give the employee a vested interest in a bonus once employee goals are met, this program specifically stated otherwise.

Accordingly, the appeals court ruled that the debtor’s chapter 7 discharge should be granted, and also that she could keep all $24,072.00 in bonuses.  The court also observed that the entire litigation could have been avoided if the debtor had disclosed her contingent interest to receive the bonuses in her originally filed bankruptcy papers.

Please be aware that in cases where the bonus plan language gives the employee a vested right to payment of a bonus even before it is paid, and a chapter 7 case is filed before receipt of such funds, the result in such cases would likely be different. 

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