In re: Zamora-Quezada, M.D. - 2017 Bankr. LEXIS 2208
Monday, August 7, 2017
Debtor filed a Motion to Convert its Chapter 7 to a Chapter 11 over the protests of the chapter 7 trustee and a judgment creditor. Upon consideration of Debtor’s Motion, the Court found that Debtor transferred significant assets prior to filing for bankruptcy thereby removing the possibility of rehabilitation. Further, the Court found that the Debtor acted in bad faith conduct prior to and during the course of its bankruptcy and is therefore ineligible to be a chapter 11 debtor. Accordingly, the Motion to Convert was denied.
On May 14, 2016, a bus traveling to the Kickapoo Lucky Eagle Casino was involved in a tragic accident that resulted in multiple passenger deaths and numerous injuries. The Debtor in this case operated the bus that was involved in the accident and maintained an insurance policy that provided coverage for liability and property damage. In this opinion, the Court resolves cross motions for summary judgment wherein the chapter 7 trustee and certain pre-petition creditors seek a ruling declaring whether proceeds of a liability policy owned by the Debtor are property of the bankruptcy estate. Further, the same pre-petition creditors filed two separate motions: a motion for abstention and a motion to dismiss under Fed. R. Civ. P. 12(b)(1). In determining the pending legal issue, the Court looks to Fifth Circuit case law and the provisions of 11 U.S.C. § 541. The leading case on debtor-owned insurance policies and the inclusion of their proceeds in the bankruptcy estate, In re Edgeworth, requires courts to consider whether the debtor can make a legally cognizable claim against the insurance policy. The Edgeworth court also notes that a “secondary impact,” or policy proceeds exhaustion, may affect the outcome of whether insurance policy proceeds can be included in the bankruptcy estate. The Court distills that the holding in Edgeworth, which survives subsequent decisions on this issue, provides for the inclusion of debtor-owned policy proceeds when there is a secondary impact or exhaustion of the proceeds. In the instant case, it is undisputed that the insurance policy owned by the Debtor is insufficient to cover all outstanding claims and, as such, triggers Edgeworth’s secondary impact exception. In determining the other issues, the Court found that it was not required to abstain nor should it exercise its discretion to do so under 28 U.S.C. § 1334 as it had subject matter jurisdiction. In conclusion, the Court granted the motion for summary judgment filed by the chapter 7 trustee and denied all motions filed by the pre-petition creditors.
The Court entertained two matters in the main bankruptcy case and the associated adversary proceeding: Petitioning Creditors’ Verified Emergency Motion to Enjoin, Pursuant to 11 U.S.C. § 105, and Rule 7065, BRP, the Dissipation of Assets by the Debtor and its Insurers Made Outside the Ordinary Course of its Operations (the “Motion”) and Petitioning Creditors’ “Motion for Temporary Restraining Order and for Preliminary Declaratory and/or Injunctive Relief and Memorandum of Law in Support (the “Adversary Motion”). The Motion sought to temporarily enjoin OGA Charters, LLC’s (“OGA”) liability insurance carrier, New York Marine and General Insurance Company (the “Insurance Company”), from finalizing any settlements on OGA’s liability stemming from an accident that occurred on May 14, 2016, until the Court could determine whether the Petitioning Creditors satisfy the requirements of 11 U.S.C. § 303. The Adversary Motion sought substantially similar relief to the Motion, but also requested declaratory relief. The Court, in evaluating the requirements of standing, found that the Petitioning Creditors had standing because the Petitioning Creditors provisionally demonstrated that they satisfied the requirements of § 303(b)(1). The Court analyzed the four required elements to issue a preliminary injunction and found that Petitioning Creditors satisfied the elements, because the preliminary injunction is essentially an extension of the 11 U.S.C. §362 stay on the Insurance Company’s liability policy. Therefore, the Court GRANTED the Motion. Further, as the relief requested in the Adversary Motion was substantially the same as the Motion, with the exception of the declaratory relief, the Court GRANTED the preliminary injunction sought in the Adversary Motion and DENIED the declaratory relief sought because it is not ripe.
Chapter 7 Trustee filed the instant adversary seeking turnover of proceeds from a post-petition sale of the Debtor’s homestead, which is a matter of first impression for this Court. This Court considered the Trustee’s Motion for Summary Judgment and heard arguments by the parties at a hearing conducted December 16, 2015. The facts of the case are that the Debtor filed for chapter 7 bankruptcy and claimed his homestead, at the time of filing, as exempt under Tex. Prop. Code § 41.001. There were no objections to the debtor’s claimed homestead exemption by any party in interest. After filing his petition, Debtor sought and received permission to sell the homestead and received the proceeds net of his former spouse’s share. The Debtor partially reinvested the proceeds into new property on which he intended to build a homestead, but did not completely reinvest his proceeds into a new Texas homestead. The Texas Property Code provides a six-month timeframe for the owner of a homestead to reinvest the proceeds from the sale of a homestead and violating that provision results in the loss of exemption on the proceeds. Trustee sought turnover of the remaining proceeds based on the argument that the remaining proceeds lost their exemption due to the Debtor’s failure to reinvest them into a new Texas homestead within the statutory timeframe. The Fifth Circuit and several bankruptcy courts throughout Texas have addressed this issue in both chapter 7 and chapter 13 bankruptcy cases. The foremost decisions by the Fifth Circuit on this issue are In re Frost and In re Zibman. There is a quartet of decisions by Texas Bankruptcy Courts addressing this issue: In re Smith, In re Reed, In re D’Avila, and In re DeBerry. This Court, in addressing the matter at bar, analyzed those cases before determining that the core holding of In re Frost is factually distinguishable from the instant chapter 7 case and thus does not apply. This Court reached that decision by analyzing the fact that the debtor’s homestead in Frost, while properly exempted, remained property of the estate by operation of the chapter 13 plan and 11 U.S.C. § 1327 and thus the outcome of In re Frost was reasoned to be by virtue of 11 U.S.C. §§ 541(a)(6), (a)(7), or 11 U.S.C. § 1306. This fact is distinguishable in a chapter 7 bankruptcy where no such provision has the same operational effect. Furthermore, the Fifth Circuit decisions on this issue in a chapter 7 bankruptcy were also factually distinguishable, as they did not involve the post-petition sale of a homestead properly exempted, without objection, under Texas law. In concluding that In re Frost did not apply in the instant case, this Court was compelled to determine that the Trustee did not meet his burden under the summary judgment standard. This Court then took up summary judgment, sua sponte, for the Debtor, as permitted by Fed. R. Civ. P. 56(f) and Fed. R. Bankr. P. 7065, and concluded that the Debtor had met his burden and was entitled to judgment as a matter of law. Accordingly, the Trustee’s Motion for Summary Judgment was DENIED and summary judgment was GRANTED for the Debtor.
Before this Court was a set of competing chapter 7 and chapter 13 cases involving the same debtor. The trustee to the chapter 7 case owned a percentage of stock in a business and a set of potential claims related to that property. Meanwhile, the debtor accrued causes of action post-petition for personal injury, related to that same business, which entered into the chapter 13 estate. The chapter 7 trustee, the debtor, and parties related to the business all agreed to settle under one unified agreement, where the trustee would release the stock and his claims, debtor would release her claims, and the business would disburse $650,000, $100,000 of which was provisioned for the chapter 7 trustee. The chapter 7 trustee and the debtor (in the chapter 13 case) then each filed a motion to compromise, but the debtor’s motion sought to disallow and intercept the chapter 7 portion. This Court concluded that the settlement was partially property of both the chapter 7 and 13 estates, with each entity having brought its own independent consideration to the agreement. This Court therefore concluded that the fairest compromise, the chapter 7’s, should be GRANTED, because it allowed the chapter 7 estate to reap the benefit of its consideration. Accordingly, this Court also DENIED the chapter 13 motion to compromise. This Court additionally concluded that the mixed chapter 7 and 13 property nature of the settlement would affect the debtor’s attorney’s ability to collect contingency fees over the entirety of the $650,000 in gross proceeds.
Chapter 7 Trustee filed a Motion for Approval of Compromise and Settlement Agreement (“Compromise”) on October 5, 2015. The Compromise sought approval for a settlement that the Joint Debtor had accepted in a multi-district litigation class action lawsuit, which included the payment of attorney’s fees and expenses to an unemployed professional. This Court heard arguments on December 16, 2015 and conditionally approved the Compromise with leave for the unemployed professional to file an application for employment on a nunc pro tunc basis that was compliant with the local rules. The unemployed professional filed such an application (“Application to Employ”) on January 8, 2016, [ECF No. 57], and an Application for Allowance of Trustee’s Special Counsel’s Fees And Expenses (“Fee Application”), [ECF No. 58], the same day. In reviewing the Application to Employ, this Court found significant deficiencies and non-compliance with not only the Local Rules for the Southern District of Texas, but also this Court’s own procedures. The standard for nunc pro tunc employment requires explanations on multiple facets of the employment and its impact to the estate, and should be approved only “under rare or exceptional circumstances.” This Court held that the Application to Employ was procedurally deficient and must be DENIED. As such, the Fee Application was mooted and STRICKEN.
Creditor Plaintiff filed an adversary against Debtor Defendant, asking this Court to deny the discharge of debts in the main bankruptcy case under either §§ 523 or 727, for Debtors’s alleged intentional disposition of secured purchase money property. Thereafter, Creditor filed a Motion to Dismiss. This Court determined that the Motion had the character of a settlement agreement, by virtue of being tied to a stipulation and reaffirmation agreements purporting to reaffirm the debt in the allegedly disposed furniture, and should therefore be analyzed under the approval standards for settlements and compromises. In disapproving the Motion to Dismiss, this Court found that it was not fair, equitable, and in the best interests of the estate, because: (1) It was questionable whether Plaintiff would have succeeded in its claim; (2) the contemplated trial was not likely to be complex or burdensome to the estate, and; (3) the compromise served the interest of only one creditor and also appeared to be coercive.