In re Clay

Paul Clay (debtor) had an agreement with Farmers Insurance companies (the companies) to serve as an insurance agent. The agreement provided that if the agreement was terminated, the companies would pay the “contract value” to Clay. That contract value would be based on (1) the amount of service commissions paid to Clay on active policies in either the six or 12 months immediately preceding termination, (2) the number of policies in Clay’s active file, and (3) Clay’s continuous years of service as an agent immediately prior to termination. In November 1997, Clay and his wife filed a Chapter 7 bankruptcy petition. The Clays listed a purported contract value of $190,000 as an asset. The Clays also scheduled an obligation to a credit union that was secured by a lien on the contract value. Following the bankruptcy filing, Clay continued to work as an agent, and neither Clay nor the companies sought to terminate the agreement. The trustee recognized that the agreement was an executory personal-services contract that could not be assumed. However, more than 12 months after the bankruptcy filing, the bankruptcy trustee sought to have the companies turn over the contract value less the amount owed to the credit union. The trustee asserted that the agreement was the bankruptcy estate’s property. The companies resisted turnover, arguing that the contract value was not a matured debt or money owed to Clay. In considering whether to order turnover, the bankruptcy court focused on whether the agreement was the estate’s property and whether the trustee could force termination of the agreement in order to obtain the contract value.