In re Allen, Bankruptcy No. 97 B 00858

• Decision Date: 10 November 1998
• Docket Number: Bankruptcy No. 97 B 00858,Adversary No. 98 A 00699.
• Citation: 226 BR 857
• Parties: In re Fletcher ALLEN, Debtor. Fletcher ALLEN, Plaintiff and Counter-Defendant, v. Phillip LEVEY, not individually but solely in his capacity as Trustee, Defendant and Counter-Plaintiff.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

226 B.R. 857 (1998)

In re Fletcher ALLEN, DebtorFletcher ALLEN, Plaintiff and Counter-Defendant, v.Phillip LEVEY, not individually but solely in his capacity as Trustee, Defendant and Counter-Plaintiff.

Bankruptcy No. 97 B 00858, Adversary No. 98 A 00699.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

November 10, 1998.

COPYRIGHT MATERIAL OMITTED

Drew M. Dillworth, Jamie L. Zukosky, Raleigh Helms & Finke, Chicago, IL, for Plaintiff.

Max Chill, Steven R. Radtke, Chill, Chill & Radtke, Chicago, IL, for Defendant.

MEMORANDUM OPINION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary case relates to a bankruptcy proceeding filed by Fletcher E. Allen("Debtor" or "Allen") under Chapter 7 of the Bankruptcy Code,11 U.S.C. § 101 et seq.Allen has filed a Complaint against the Trustee, requesting the Court to adjudge and declare that none of several stock options granted to Allen by his employer, Amoco Corporation("Amoco") are property of the bankruptcy estate.The Complaint pleads two counts.Count I concerns options that were exercisable prior to the date Debtor filed his bankruptcy petition.Count II concerns options that were not exercisable as of the filing date but have since become exercisable.

The Trustee filed a two-count counterclaim.Count I of the Counterclaim seeks Declaratory Judgment finding that all of the stock options are property of the estate.Count II requests that the Court order the Debtor to turn over all of the options to the Trustee.

This matter comes before the Court on Allen's motion for summary judgment on Counts I and II of his Complaint and on the Trustee's cross-motion for summary judgment on Counts I and II of his counterclaim.For reasons set forth below, the Trustee's Motion for Summary Judgment will be entirely allowed, while Plaintiff's Motion for Summary Judgment will be entirely denied.

Jurisdiction lies under 28 U.S.C. § 1334, and core jurisdiction exists under 28 U.S.C. § 157(b)(2)(E).This matter is before the Court pursuant to 28 U.S.C. § 157andLocal GeneralRule 2.33(A) of the United States District Court for the Northern District of Illinois.Venue lies under 28 U.S.C. § 1409.

Uncontested Facts

The parties submitted a Joint Stipulation of Uncontested Facts.This statement of uncontested facts has been compiled from both the Stipulation and the Debtor's schedules for description of his creditors in bankruptcy.

On March 28, 1995, Amoco Corporation("Amoco") and the Debtor, then employed as its Business Development Manager, entered into a Stock Option Agreement ("1995 Agreement") wherein Amoco granted Allen the right to purchase all or any part of an aggregate of 1,400 shares of the company's common stock at a price of $62.6875 per share.Amoco made this grant under provisions of the 1991 Incentive Program of Amoco Corporation and Its Participating Subsidiaries.Allen received this grant in addition to his 1995 salary of $125,000.

Under the 1995 Agreement, one-half the total number of options granted (i.e., 700 options) became exercisable in whole or in part on March 28, 1996(one year from the date of the 1995 Agreement), as long as Allen remained continuously in the employ of Amoco or of a participating subsidiary.(This group of options will be referred to as the "First Group.")The second half became exercisable on March 28, 1997(two years from date of the 1995 Agreement) and under the same conditions.(This group of options will be referred to as the "Second Group.")Options in the First and Second Groups will remain exercisable until March 28, 2005, or until Allen's employment terminates for reasons other than death, retirement, or total disability.If Allen's employment with Amoco terminates for any other reason before he exercises his option rights, the unexercised option rights will also terminate.

On March 26, 1996, Amoco and the Debtor entered into a second Stock Option Agreement ("1996 Agreement") wherein Amoco granted Allen the right to purchase all or any part of an additional aggregate 1400 shares of the company's common stock at a price of $73.2500 per share.Allen received this grant in addition to his 1996 salary of $133,200.

The 1996 Agreement was subject to the same terms as the 1995 Agreement, except that the first 700 options under the 1996 Agreement ("Third Group") became exercisable on March 26, 1997 and the second 700 options ("Fourth Group") became exercisable on March 26, 1998.These options will remain exercisable until March 26, 2006 or until Allen's employment terminates for reasons other than death, retirement, or total disability.

Allen remains employed by Amoco, has not retired, and is not disabled.

On January 10, 1997, Allen filed his Petition for relief under Chapter 7 of the Bankruptcy Code.The List of Creditors and claims scheduled in that Petition listed the following:

           Creditor                       Claim & Security            Claim Amount
                Citicorp Mortgage                Mortgage secured by Debtor's home     $243,500.00
                Dr. Sharon Durfee                Medical bills                             $320.00
                General Electric Capital Corp.   Guaranty                            $2,140,864.00
                Heidelburg Eastern, Inc.         Guaranty of Viking Ent. Prtg. Pres        Unknown
                MNC Credit Corporation           Guaranty                             $281,000.00
                Warren Hansen                    Contribution on Guaranty                Unknown
                

Prior to the bankruptcy Petition filing date, the First Group of options was exercisable.The value of the stock options at any point in time is the amount of profit to be realized by effecting purchase at the price granted in the Agreements after the options are exercisable and their sale at market price.The value of the First Group on the Petition date can be computed by subtracting the option price per share ($62.6875) from the January 10, 1997 closing price of Amoco Corporation common stock ($85.00), then multiplying the difference by the number of options in the First Group (700).Thus, on January 10, 1997, value of the First Group was $15,487.50 ($85 less $62.875 × 700).Allen could have realized this profit on or before January 10, 1997 simply by exercising his rights to the First Group of options.

The Second Group became exercisable on March 28, 1997, 77 days after the bankruptcy filing.The Third Group became exercisable on March 26, 1997, 75 days after filing.The Fourth Group became exercisable on March 26, 1998, 440 days after filing.

On April 29, 1998, Amoco common stock split 2-1.Giving effect to the stock split so as not to dilute Debtor's rights now that all relevant time requirements have expired, Debtor is entitled to exercise the following options to purchase 5,600 shares of Amoco stock:

1) 2,800 shares at a purchase price of $31.3438 per share under the 1995 Agreement; and

2) 2,800 shares at a purchase price of $36.625 per share under the 1996 Agreement.

To date, Allen has not exercised any of the options, though he is still in Amoco's employ and all his options are now exercisable.

The current value of options in the First and Second Groups can be computed by subtracting the option price ($31.3438) from the November 3, 1998, market price ($58.00), then multiplying the difference by the number of options (2,800).Thus, the combined value of the First and Second Groups on November 3, 1998, was $74,637.36 ($58.00 less $31.3438 × 2,800).The value of the Third and Fourth Groups on November 3, 1998, can be computed by subtracting the option price ($36.625) from the market price ($58.00), then multiplying by the number of shares (2,800).Thus, the value of the Third and Fourth Groups on November 3, 1998, was $59,850 ($56.75 less $36.625 × 2,800).

The total value of options in all four groups was $134,487.36 on November 3, 1998($74,637.36 + $59,850) less any broker fees or commissions that might be due.This figure represents the profitable spread between the option prices and the market price, and not the value of the Amoco shares themselves, which would be $324,800 (5,600 × $58.00).

Arguments of the Parties

Allen makes two arguments.First, he argues that the First Group of options, exercisable when he filed his petition, is not property of the estate simply because he has never before or since exercised any of the options and would thus forfeit them should he leave Amoco's employ.He reasons that, because his continued employment with Amoco is a condition precedent to exercising of the options, they therefore represent a form of his potential post-bankruptcy earnings.He invokes 11 U.S.C. § 541(a)(6), which excludes from property of a Chapter 7 estate earnings from services performed by an individual debtor after filing of the case.

Allen next argues that the Second, Third, and Fourth of the option groups, were unexercisable when the bankruptcy was filed, were not his property at all at that time, and are therefore not now property of the estate.He points out that exercise of those options was at that time contingent upon his continued employment.He reasons that the Second, Third, and Fourth option groups therefore represent remuneration for continued, post-petition services rendered and should be classified as post-petition earnings, again invoking 11 U.S.C. § 541(a)(6) in support of this second argument.

Allen makes one additional argument in his Memorandum filed in support of his Motion for Summary Judgment(not in the Motion itself or in the Complaint).He argues that, even if the First Group is property of the estate, any increase in value from the date of filing to the present is a result of postpetition services and should be excluded from property of the estate under 11 U.S.C. § 541(a)(6).

In support of his Counterclaim, the Chapter 7Trustee makes the point under 11 U.S.C. § 541(a)(1) that property of the Chapter 7 estate is comprised of all legal and equitable interests of the...