516 F.3d 301 (5th Cir. 2008), 06-10874, In re McLain

Docket Nº:06-10874.
Citation:516 F.3d 301
Party Name:In the Matter of Michael McLAIN, Debtor. Michael McLain; Lori Fuentes; Gil McLain, Jr., Appellees, v. Robert Newhouse, as Trustee for the Bankruptcy Estate of Michael McLain, Appellant.
Case Date:February 01, 2008
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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516 F.3d 301 (5th Cir. 2008)

In the Matter of Michael McLAIN, Debtor.

Michael McLain; Lori Fuentes; Gil McLain, Jr., Appellees,

v.

Robert Newhouse, as Trustee for the Bankruptcy Estate of Michael McLain, Appellant.

No. 06-10874.

United States Court of Appeals, Fifth Circuit

Feb. 1, 2008

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Gregory Richardson Ave (argued), Walters, Balido & Crain, Steven W. Thornton, McCorkle, Westerberg & Thornton, Robert Anthony Montserrat, Dallas, TX, for Appellees.

Larry A. Levick, Gabrielle Alicia Hamm (argued), Gerard, Singer & Levick, Addison, TX, for Appellant.

Appeal from the United States District Court for the Northern District of Texas .

Before DeMOSS, DENNIS and OWEN, Circuit Judges.

DENNIS, Circuit Judge:

This bankruptcy appeal raises the novel issue of whether the use of undisclosed, pre-petition bankruptcy funds to make the first premium payment on a term life insurance policy renders all or some of the policy proceeds part of the bankruptcy estate. The bankruptcy court held that the use of such funds in this case does not render the policy proceeds part of the bankruptcy estate. On appeal the district court did not address this issue. Instead, the district court held that the bankruptcy trustee failed to set forth any authenticated evidence establishing the existence of undisclosed, pre-petition bankruptcy funds in this case. Thus, the district court affirmed the decision of the bankruptcy court, albeit on other grounds. For the reasons stated herein, we reverse the decisions of the district and bankruptcy courts and remand this matter for proceedings consistent with this opinion.

I. BACKGROUND

The appellant in this case is Robert Newhouse, Trustee for the Bankruptcy Estate of Michael McLain ("Newhouse"). The Appellees are Michael McLain, the Debtor ("McLain"), and his siblings, Lori Fuentes and Gil McLain, Jr.

From January 1, 2001 through April 15, 2002, Brandi McLain, the wife of Michael McLain, received her paychecks by direct deposit from her employer. Sometime between April 15, 2002 and May 1, 2002, the McLains cancelled direct deposit, began closing their bank accounts, and decided to operate solely on a cash basis for the admitted purpose of concealing their cash in anticipation of filing for bankruptcy. To that end, from April 25, 2002 through April 29, 2002, they withdrew by ATM the sum of $885 from their checking account and closed the account. On May 1, 2002, according to Newhouse, Brandi McLain received a paycheck in the amount of $1,640. Thus, as of May 1, 2002, according to Newhouse, the McLains had approximately $2,525 ($1640 +$885) cash on hand, which was not disclosed on their sworn schedules when they filed for Chapter 7 bankruptcy two days later on May 3, 2002. McLain disputes this factual scenario. According to him, there is no evidence that his wife received a paycheck on May 1, 2002. Moreover, according to him, he paid his bankruptcy attorney $1,100 in cash on April 29, 2002 as compensation for filing and handling the bankruptcy petition. Accordingly, McLain maintains, there was no meaningful cash on hand at the time the bankruptcy petition was filed and thus, nothing to disclose.

On May 7, 2002, McLain's father, Gill McLain, Sr., applied for a $1.2 million life insurance policy (the "Policy") naming his son, McLain, as the sole owner and beneficiary. On June 11, 2002, West Coast Life Insurance ("WCL") issued the Policy. On

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June 14, 2002, the McLains appeared at their creditors' meeting but did not disclose that McLain was now the owner and beneficiary of a term life insurance policy. On July 11, 2002, McLain paid the first premium payment on the Policy in the amount of $1,774.97 via two money orders. On August 26, 2002, the McLains were discharged from bankruptcy. McLain continued to make four post-discharge quarterly premium payments on the Policy, each in the amount of $1,774.97. On July 29, 2003, the death benefit became immediately payable upon the shooting death of his father. McLain was a suspect in his father's death and thus, WCL and McLain's siblings challenged his entitlement to the proceeds under the Texas Slayer Statute. See Tex. Prob. Code § 41(d); Tex. Ins. Code § 1103.152(c).1 On January 8, 2004, WCL filed a complaint asking the district court to accept the Policy proceeds on its behalf and release it from the underlying case. The litigation between McLain and his siblings eventually settled, the terms of which are confidential.

On December 27, 2004, Newhouse filed a motion to reopen the McLains' bankruptcy case, which was officially reopened on January 25, 2005. At issue was whether McLain's alleged use of undisclosed pre-petition cash, i.e., funds that belong to the bankruptcy estate, to make the first premium payment on the Policy renders the Policy proceeds part of the bankruptcy estate. On November 7, 2005, McLain filed a motion for summary judgment, to dismiss, to close the bankruptcy case, and for the distribution of funds held by the clerk of court. In his motion, McLain argued that the first premium payment of the Policy was made solely with post-petition cash from his wife's paychecks, i.e., funds that did not belong to the bankruptcy estate. On December 5, 2005, the bankruptcy court granted summary judgment in McLain's favor. The bankruptcy court agreed that there was an issue of material fact as to whether McLain used undisclosed pre-petition cash to make the first premium payment on the Policy. Nonetheless, the bankruptcy court held that the use of such funds did not, as a matter of law, render the Policy proceeds part of the bankruptcy estate. On December 5, 2005, Newhouse filed a timely notice of appeal to the district court.

On July 11, 2006, the district court affirmed the decision of the bankruptcy court, albeit on other grounds. The district court reasoned that Newhouse failed to raise a genuine issue of material fact as to whether McLain used undisclosed pre-petition funds to make the first premium payment on the Policy. Specifically, the district court held that Newhouse failed to set forth any authenticated evidence that the McLains had any meaningful cash on hand as of the petition date. According to the district court, the only piece of evidence to support the fact that the McLains had any meaningful cash as of that date, a

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disputed ledger sheet that purports to detail various financial transactions by the McLains during the months of May, June, and July of 2002, was never authenticated as a complete financial record for these months and thus, inadmissible. Thus, the district court never addressed the legal issue of whether the use of undisclosed pre-petition funds to make the first premium payment on a life insurance policy renders the policy proceeds part of the bankruptcy estate. Newhouse filed this timely notice of appeal.

II. LEGAL STANDARD

We review the bankruptcy court's decision under the same standards as the district court: conclusions of law and mixed law and fact questions are reviewed de novo, while findings of fact are reviewed for clear error. See Plunk v. Yaquinto (In re Plunk), 481 F.3d 302, 305 (5th Cir. 2007); EOP-Colonnade of Dallas Ltd. P'ship v. Faulkner (In re Stonebridge Techs., Inc.), 430 F.3d 260, 265 (5th Cir. 2005). A party is entitled to summary judgment only if "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). On a motion for summary judgment, the court must view the facts in the light most favorable to the non-moving party and draw all reasonable inferences in its favor. See Hockman v. Westward Commc'ns, L.L.C., 407 F.3d 317, 325 (5th Cir. 2004). In reviewing the evidence, the court must therefore "refrain from making credibility determinations or weighing the evidence." Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007).

III. ANALYSIS

A. Evidentiary Issue

The district court concluded that Newhouse failed to raise an issue of material fact as to whether the McLains had any meaningful cash on hand as of the petition date. In doing so, the district court held that the only piece of evidence supporting Newhouse's argument, a ledger sheet, was unauthenticated and thus, inadmissible. The district court agreed that there was an issue of material fact as to whether Brandi McLain received a paycheck on May 1, 2002, two days before the McLains filed bankruptcy. Nonetheless, McLain continues to maintain that there is no evidence that his wife received a paycheck on May 1, 2002. The evidence, however, when construed in a light most favorable to Newhouse suggests otherwise. First, it is undisputed that Brandi McLain was paid on a semi-monthly basis and according to a spreadsheet prepared by McLain himself, she was usually paid on the first and fifteenth of each month.2Moreover, McLain specifically testified that his wife received three paychecks in May of 2002. According to the spreadsheet, whenever Brandi McLain received three paychecks in a single month, she always received the first paycheck on the first day of the month.3 In fact, over the

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course of two years, she almost always received a paycheck on either the first day of the month or the day before. Given this evidence, a reasonable jury could easily infer that Brandi McLain received a paycheck on May 1, 2002, especially in the absence of any evidence to the contrary. Thus, a reasonable jury could easily infer that the McLains had at least $1640 cash on hand as of May 1, 2002.4

Nonetheless, the...

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