Decker v. Scott
| Decision Date | 14 September 2021 |
| Docket Number | Civil Action 5:20-cv-00071 |
| Parties | MICHAEL W. DECKER, WINCHESTER ACCOUNTING, LLC Appellants, v. W. STEPHEN SCOTT, TRUSTEE FOR MICHAEL W. DECKER, Appellee. |
| Court | U.S. District Court — Western District of Virginia |
Michael Decker and Winchester Accounting, LLC, appeal the bankruptcy court's order on cross-motions for summary judgment that shareholder distributions in the amount of $98, 500.00 were property of the bankruptcy estate. For the following reasons the bankruptcy court's order, dated September 30, 2020 will be affirmed.
Decker is a certified public accountant. On March 30, 2017, Decker filed a voluntary bankruptcy petition under chapter 7 of the Bankruptcy Code. Prior to the petition date, Decker conducted an accounting practice in Winchester, Virginia, through Winchester Accounting and Consulting, Inc. (WAC). Debtor was the sole shareholder of stock in WAC. When Decker filed for bankruptcy, the stock became part of his bankruptcy estate. After filing for bankruptcy, Decker continued to operate his solo accounting practice through WAC.
In early August 2017, the Trustee filed a motion to sell the capital stock in WAC. At a hearing on this motion on August 16, 2017, the court orally instructed Decker to “confer with the Trustee before using any funds so the Trustee could review whether the expenditures were ordinary and necessary business expenses or profits owing to the shareholder (the estate).” (Mem. Op. at 6, Joint App'x (JA) 627.) The Trustee later abandoned his motion to sell capital stock while the underlying adversary proceeding was pending.
On August 17, 2017, Decker formed Winchester Accounting, LLC, and began operating his accounting practice through that company. Decker is the sole member and manager of Winchester Accounting. Decker transferred assets held by WAC, including funds in the WAC bank account, to Winchester Accounting, and began operating Winchester Accounting in the same location where WAC operated.
The Trustee filed an adversary proceeding seeking to recover post-petition payments of income to Decker, which the Trustee asserts to have diminished the value of the stock of WAC. Decker argues that his post-petition income was derived from his post-petition personal and professional services and is not part of the bankruptcy estate.
The bankruptcy court issued a 45-page memorandum opinion on September 30, 2020. (Dkt. No. 1-2); see In re Decker, 623 B.R. 417 (Bankr. W.D. Va. 2020). The court explained that the motions for summary judgment required the court to answer two questions:
623 B.R. at 422. The parties stipulated to numerous facts, and the court determined that the material facts are not in dispute. Id. at 424.
First, the court reasoned that bankruptcy code section 541(a)(6) does not exclude earnings from services performed prior to the petition date. This section contains an exception from property of the estate for “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.” 11 U.S.C. § 541(a)(6). The court explained that there is “an obvious temporal limitation, ” Dkt. No. 1-2 at 16, such that the earnings exception “only applies to the extent the debtor performed the services postpetition; to the extent the earnings are attributable to something other than a debtor's performance postpetition, the earnings are not excluded.” (Id. at 15.)
Second, the court explained that section 541(a)(6) does not exclude earnings from services performed prior to the petition date even if the services were performed by a shareholder of an S Corporation. Again, what matters is the timing of the performance of the services that gave rise to the earnings.
Third, the transfers the Trustee seeks to recover contain earnings from services performed prior to the commencement of the bankruptcy case. The parties agree that WAC had cash on its general ledger and in its bank account as of the petition date. Defendants also agree that WAC had accounts receivable as of the petition date. The court held, as a matter of law, that funds received by, or held by, WAC attributed to earnings from services performed prior to the commencement of the case and transferred to Decker or Winchester Accounting after the petition, are not “earnings from services performed by an individual debtor after the commencement of the case.”
Next, the court considered whether there were amounts transferred to Decker or Winchester Accounting from services performed prior to the petition date. The court found this to be undisputed. As of the petition date, WAC had in existence earnings of at least $56, 937. This was not generated from services performed after the petition.
The debtor also admits that WAC had accounts receivable of $47, 055 as of the petition date. These also represents services performed prior to the petition.
Shortly before filing for bankruptcy in March 2017, WAC purchased a new Ford truck in February 2017. WAC reported the asset (the truck) and the liability (the loan) on its balance sheet. WAC also reported the tax-deductible depreciation for the truck ($61, 708.48) as an offset to the retained earnings as of the petition date. The court reasoned, however, that although the tax deduction for depreciation is disclosed as an expense to offset the retained earnings on the WAC general ledger, the actual earnings as of the petition date were not depleted by this figure. And no one disputes that WAC's bank account balance as of the petition date, March 30, 2017, was $1, 064.69.
Thus, in sum, the amounts earned prior to the petition and held by WAC as of the petition date ($56, 937), accounts receivable ($47, 055), and cash in the bank ($1, 064.69) could not be attributed to services not yet performed.
Finally, the parties agree that when Decker filed his bankruptcy petition, his stock in WAC became property of his bankruptcy estate. Thus, the Trustee can recover the value of the stock. The Trustee alleged that the debtor caused WAC to transfer to the debtor and Winchester Accounting the proceeds, product, offspring, or profits of the stock. Debtor and Winchester Accounting argue that the Trustee has no standing to recover these transfers because they are earnings from personal services performed by an individual debtor after the petition, but this is based on an overstatement of the earnings exception, discussed above.
For these reasons, the court denied the debtor's motion for summary judgment.
The Trustee sought to recover shareholder distributions WAC made to Decker after the petition date. As the court explained above, the amounts transferred to Decker included amounts that were earnings from services performed prior to the petition. This means that the transfers were not excluded, and the court may grant judgment to the Trustee. The court proceeded to determine the amount of the judgment. Defendants failed to identify any factual issue for trial, and the Trustee identified uncontested facts and records.
The court found that there was no reasonable dispute that transfers of $32, 500 and $16, 000 ($48, 500 total) were shareholder distributions transferred after the petition date.
As explained earlier, there is no dispute that as of the petition date, at least $56, 937 were earnings in existence plus cash in the bank of $1, 064.69 and accounts receivable of $47, 055. Indeed, $7, 675 was deposited one day after the petition, and in the months after that the corporation received deposits in excess of billings, showing that accounts receivable were collected after the petition. All of this shows no reasonable dispute that the shareholder distributions of $48, 500 are “proceeds, product, offspring, rents, or profits” of the stock and as such are property of the estate under section 541(a)(6) and not excluded from the estate as earnings from services performed after the commencement of the case.
The Trustee also asserted that profits owed to the shareholder were transferred to Decker after the petition and disguised as salary. This was done in two ways. First, a lump sum shareholder distribution of $50, 000 that was later recharacterized as salary. Second, through amounts labeled as salary which exceed what Decker disclosed in his bankruptcy schedules as salary. The court agreed with the first contention, but not the second.
The court found that the “evidence is sufficiently one-sided in support of the Trustee's claim that the disbursement of $50, 000 to Mr. Decker on August 17, 2017 was a shareholder distribution recharacterized as salary.” (Dkt. No. 1-2 at 43.) Because of the “internal inconsistencies in the amounts reported as officer salary, the failure to fully account for the amounts labeled as officer salary in August 2017, and the...
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