Court Rejects "Sufficiently Rooted" Test

In In re Brown, Case No. 18-81242 (Bankr. C.D. Ill. May 9, 2019), Judge Perkins of the Central District of Illinois, concluded that property of the estate did not include that portion of a debtor's annual bonus payable after the petition date that was related to prepetition employment. In the Brown case, the debtor filed a chapter 7 case on August 17, 2018 and was due to receive a bonus from Caterpillar in 2019 pursuant to a Short Term Incentive Plan (the "STIP"). The STIP bonus was calculated based upon work performed during 2018. The trustee argued 62.7% of the STIP bonus was property of the estate because “62.7% of the bonus is rooted in the pre-bankruptcy past." Id.

In ruling against the trustee, Judge Perkins rejected the "sufficiently rooted" test (discussed below) and concluded the STIP bonus was not estate property because the debtor did not have a pre-petition property interest in the bonus as a matter of Illinois law. Citing the seminal Whiting Pools, 462 U.S. 198 (1983), Judge Perkins first pointed out that Section 541 does not expand the rights of the debtor and instead the trustee succeeds to no greater rights than those held by the debtor on the petition date. Judge Perkins then noted that "uncertainty may arise when a property interest has its origins in the prepetition time frame but isn’t obtainable by the debtor until after bankruptcy, subject to the postpetition occurrence of one or more contingencies."

After recognizing the distinction between the occurrence of a contingency and the existence of an expectancy, Judge Perkins analyzed whether the "sufficiently rooted" test -- which gained currency from a Bankruptcy Act case known as Segal v. Rochelle, 382 U.S. 375 (1966) (addressing whether tax refund was property of bankruptcy estate) -- survived enactment of Section 541. Under the "sufficiently rooted" test, bankruptcy courts routinely determined whether a property right was "sufficiently rooted" in prepetition events as to make it a prepetition property interest, even when payable post-petition. Classic examples of such property interests include tax refunds, sales commissions and, of course, employment bonuses. Under the "sufficiently rooted" test, the STIP bonus probably would have been property of the estate because 62.7% of the amount related to prepetition employment services.

Noting, among other authorities, that the Fifth Circuit expressly held that "the sufficiently rooted" test did not survive the enactment of Section 541 (citing In re Burgess, 438 F.3d 493, 498-99 (5th Cir. 2006)), and that the Seventh Circuit has expressed skepticism about the usefulness of the “sufficiently rooted” test even in the context of tax refunds (citing In re Meyers, 616 F.3d 626 (7th Cir. 2010)), Judge Perkins reasoned that "[i]f applicable state law provides that a potential property interest of a debtor was merely an expectancy as of the petition date, the expectancy is properly excluded from the estate without regard to whether the interest may be said to be “rooted” in the debtor’s pre-bankruptcy past."

Judge Perkins then analyzed Illinois law to determine whether a bonus plan created a right, subject to a condition, or merely an expectancy; ultimately concluding that "where an employer reserves the absolute discretion not to award a future bonus, the bonus is treated under Illinois law as an expectancy, not a present property interest." From that premise, Judge Perkins had little difficulty concluding that the contract language determining the debtor's entitlement to a bonus from Caterpillar "makes the bonus discretionary and disclaims any obligation to pay" and thus creates "only a bare expectancy interest. [Accordingly], [t]he Trustee takes no present property interest in any future STIP payments and no part of it can become property of the estate." In the penultimate part of his analysis, Judge Perkins concluded that "[t]o consider the bonus to be property of the estate simply because it related to [the debtor's] prepetition employment would be to give the bankruptcy estate more than the Debtor had on the petition date [and thus] the Debtor’s expectancy interest in the 2018 STIP bonus is not a legal or equitable interest in property as of the commencement of the case under section 541(a)(1) and is not an asset of her estate subject to the Trustee’s administration." Id.

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