Cage v. Smith (In re Smith)

• Decision Date: 10 June 2014
• Docket Number: Adversary No. 14–03115.,Bankruptcy No. 12–32096.
• Citation: 521 B.R. 767
• Parties: In re Cody W. SMITH, Debtor. Lowell T. Cage, Trustee, Plaintiff, v. Cody W. Smith and Tracy G. Smith, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

521 B.R. 767

In re Cody W. SMITH, Debtor.Lowell T. Cage, Trustee, Plaintiff,

v.Cody W. Smith and Tracy G. Smith, Defendants.

Bankruptcy No. 12–32096.

Adversary No. 14–03115.

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

Signed June 10, 2014.

Timothy L. Wentworth, Cage, Hill & Niehaus, LLP, Houston, TX, for Plaintiff.

Alan Sanford Gerger, Dunn Neal et al., Houston, TX, for Defendants.

MEMORANDUM OPINION REGARDING: (1) GREEN BANK, N.A.'S MOTION TO BE JOINED AS A PARTY IN THE CHAPTER 7 TRUSTEE'S TURNOVER ADVERSARY PROCEEDING; AND (2) GREEN BANK, N.A.'S SUPPLEMENT AND AMENDMENT TO ITS MOTION TO BE JOINED AS A PARTY IN THE CHAPTER 7 TRUSTEE'S TURNOVER ADVERSARY PROCEEDING

[Adv. Docs. No. 5 & 15]

JEFF BOHM, Chief Judge.

I. Introduction

Lowell T. Cage, the Chapter 7 trustee in this case (the Trustee), has filed suit against Cody W. Smith (the Debtor) and his wife seeking a determination that certain proceeds in their possession are property of the estate under 11 U.S.C. § 541¹ and to recover these proceeds under § 542.² Not surprisingly, the Debtor and his wife vigorously oppose the relief sought by the Trustee. Green Bank, N.A. (Green Bank), the largest unsecured creditor in this case, wants to join in this lawsuit as a party-plaintiff. The Trustee supports Green Bank's request, no doubt because Green Bank would be willing to share in the expenses of discovery and trial preparation. The Debtor and wife oppose Green Bank's request to intervene. While it makes good economic sense for the Trustee to support Green Bank's request, this Court concludes that Green Bank may not intervene and that the Trustee must “go it alone.” This opinion sets forth the reasons why the Court makes this ruling.

The Court makes the following Findings of Fact and Conclusions of Law under Federal Rule of Civil Procedure 52, as incorporated into by Federal Rules of Bankruptcy Procedure 7052 and 9014. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.

II. Procedural and Factual Background

1. The Debtor filed his voluntary Chapter 7 petition on March 20, 2012 (the Petition Date). [Doc. No. 1]. On the Petition Date, the Trustee was appointed to administer this Chapter 7 estate.

2. On April 3, 2012, the Debtor filed his Schedules A, B, C, D, E, F, G, H, I, and J. [Doc. No. 16]. Schedule A represented that the Debtor owned real property located at 3419 Locke Lane, Houston, Texas 77027 (the Property). [ Id. at p. 3]. On Schedule C, the Debtor claimed the Property exempt as his homestead under applicable Texas law. [ Id. at p. 16].

3. On May 29, 2012, the initial meeting of creditors was held, and the Trustee was able to conclude the meeting of creditors. [ See Docket sheet entry for 05/29/2012].

4. The deadline to file objections to any exemptions claimed by the Debtor was June 28, 2012. [Finding of Fact No. 3 & Fed. R. Bankr.P. 4003]. No timely objection to the Debtor's homestead exemption was filed. [ See Docket sheet; Adv. Doc. No. 1, p. 2, ¶ 4].

5. On June 21, 2013, the Debtor and Tracy G. Smith—the Debtor's wife—sold the Property, and after payment of mortgage, taxes, and other closing costs, they received proceeds in excess of $700,000.00. [Adv. Doc. No. 5, p. 3, ¶ 5; Adv. Doc. No. 14, p. 1, ¶ 5].

6. After the sale of the Property, the Debtor did not amend his Schedules to reflect the receipt of the sale proceeds. [ See Docket sheet].

7. On April 4, 2014, the Trustee filed a Motion for Turnover and Request for Expedited Hearing (the Motion for Turnover), requesting that this Court order the Debtor to turn over the proceeds from the sale of the Property. [Doc. No. 262]. In the Motion for Turnover, the Trustee—citing the Fifth Circuit's recent opinion in Vieglahn [ Viegelahn ] v. Frost (In re Frost), 744 F.3d 384 (5th Cir.2014)—asserts that because the Debtor and Ms. Smith did not reinvest the proceeds from the sale of the Property within six months, the proceeds lost their exempt status and are therefore property of the estate which should be turned over to the Trustee.³ [ Id. at p. 2, ¶¶ 4–5].

8. On April 9, 2014, the Debtor filed a Motion to Convert Motion into Adversary Proceeding, Response to Request for Expedited Consideration, Motion to Interplead Funds, Motion to Continue Hearing and for Scheduling Order. [Doc. No. 266]. In this pleading, the Debtor, among other things, requested that this Court convert the Motion for Turnover to an adversary proceeding and approve an interpleader of the homestead proceeds. [ Id. at p. 3].

9. On April 10, 2014, this Court held a hearing on the Motion for Turnover. The Court held that the Motion for Turnover would be converted to an adversary proceeding and ordered the Trustee to file the complaint by April 14, 2014. The hearing was continued to April 30, 2014.

10. On April 11, 2014, the Trustee commenced an adversary proceeding and filed his Complaint for Turnover against the Debtor and Ms. Smith (the Complaint). [Adv. Doc. No. 1]. The Complaint essentially restates all of the allegations set forth in the Motion for Turnover.

11. On April 11, 2014, the Court issued an Order on the Debtor's Motion to Interplead directing the Debtor to deposit into the Registry of the Court the sum of $700,349.09. [Doc. No. 273].

12. On April 14, 2014, the Debtor and Ms. Smith deposited into the Registry of the Court the sum of $700,469.97.⁴ [ See Docket sheet entry for 04/14/2014].

13. On April 25, 2014, Green Bank filed a Motion to be Joined as a Party in the Chapter 7 Trustee's Turnover Adversary Proceeding (the Motion to Join). [Adv. Doc. No. 5]. In the Motion to Join, Green Bank asserts that it should be allowed to join as a plaintiff in the adversary proceeding against the Debtor and Ms. Smith (collectively, the Defendants) pursuant to Rule 20, which is incorporated by Bankruptcy Rule 7020. [ Id. at p. 4, ¶¶ 7–8].

14. Green Bank is the holder of a large unsecured claim against the Debtor. ⁵ [Adv. Doc. No. 5, p. 3, ¶ 3; Adv. Doc. No. 14, p. 1, ¶ 3]. Green Bank's claim arises from the Debtor's unconditional guaranty regarding certain loans between Green Bank and ValArco, LLC, a limited liability company of which the Debtor is the Chief Executive Officer. [Adv. Doc. No. 5, p. 3, ¶ 3; Adv. Doc. No. 14, p. 1, ¶ 3].

15. The Trustee and Green Bank argue that the Debtor did not use the sale proceeds to purchase another homestead within six months of the sale of the Property, and that therefore these proceeds are non-exempt. [Adv. Doc. No. 1, p. 2, ¶ 6; Adv. Doc. No. 5, p. 3, ¶ 5]. Conversely, the Defendants contend that all of these proceeds are exempt. [Adv. Doc. No. 17].

16. On April 30, 2014, the Court held a hearing on the Motion to Join. Counsel for Green Bank, counsel for the Trustee, counsel for the Debtor, and the Debtor appeared. The Court continued the hearing to May 20, 2014.

17. On May 12, 2014, the Defendants filed a response opposing the Motion to Join. [Adv. Doc. No. 14].

18. On May 14, 2014, Green Bank filed a Supplement and Amendment to the Motion to Join (the Amended Motion to Join). [Adv. Doc. No. 15]. In the Amended Motion to Join, Green Bank seeks to intervene in this adversary proceeding under Rule 24, which is incorporated by Bankruptcy Rule 7024, in addition to its previous request under Rule 20. [ Id. at pp. 1–2, ¶ 1]. Specifically, Green Bank seeks to intervene as a matter of right under Rule 24(a)(2) and permissively under Rule 24(b)(1)(B). [ Id. at pp. 2–6, ¶¶ 2–11].

19. On May 19, 2014, the Defendants filed a response opposing the Amended Motion to Join. [Adv. Doc. No. 16].

20. On May 20, 2014, the Court held a hearing on the Amended Motion to Join. Counsel for Green Bank, counsel for the Trustee, counsel for the Debtor, and the Debtor appeared. No party adduced any testimony or introduced any exhibits. Rather, counsel for all parties simply made oral arguments. The Trustee's counsel informed the Court that the Trustee supports the Amended Motion to Join. At the close of the hearing, the Court took the matter under advisement.

III. Conclusions of Law

A. Jurisdiction, Venue, and Constitutional Authority to Enter Final Orders

1. Jurisdiction

The Court has jurisdiction over this dispute pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This particular dispute over whether Green Bank can join as a party-plaintiff is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) because it affects the administration of this Chapter 7 estate.

2. Venue

Venue is proper pursuant to 28 U.S.C. § 1409.

3. Constitutional Authority to Enter a Final Order

Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), sets forth certain limitations on the constitutional authority of bankruptcy courts to enter final orders. This Court must therefore determine whether it has constitutional authority to enter a final order in the dispute at bar.

The threshold question is whether the denial of a motion to intervene is an appealable final order that requires this Court to do a Stern analysis. This Court concludes that entering an order denying the relief sought by Green Bank is a final order. See, e.g., Lucas v. McKeithen, 102 F.3d 171, 173 (5th Cir.1996) (“The denial of a motion to intervene as of right is an appealable final order under 28 U.S.C. § 1291.”); Edwards v. City of Houston, 78 F.3d 983, 992 (5th Cir.1996) (“When determining the appealability of orders denying permissive intervention, however, this Circuit operates under an ‘anomalous rule,’ in that we have only provisional jurisdiction to determine whether the district court erroneously denied such motions.”). Therefore, this Court must analyze whether it has constitutional authority to enter a final order denying the Amended Motion to Join.

In Stern,...