In re Boone, Case No. 3:18-bk-30150-SHB

• Decision Date: 06 November 2018
• Docket Number: Case No. 3:18-bk-30150-SHB
• Parties: In re SHARON DENISE BOONE Debtor
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

In re SHARON DENISE BOONE Debtor

Case No. 3:18-bk-30150-SHB

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TENNESSEE

November 6, 2018

Chapter 7

MEMORANDUM ON MOTION TO COMPROMISE DISPUTE

APPEARANCES:

QUIST, FITZPATRICK & JARRARD

Ryan E. Jarrard, Esq.

2121 First Tennessee Plaza

800 South Gay Street

Knoxville, Tennessee 37929

Attorneys for Michael H. Fitzpatrick, Chapter 7 Trustee

WILLIAM E. MADDOX, JR., LLC

William E. Maddox, Jr., Esq.

Post Office Box 31287

Knoxville, Tennessee 37930

Attorneys for Debtor

F. SCOTT MILLIGAN, ESQ.

Post Office Box 12266

Knoxville, Tennessee 37912

Attorney for Raymond and Doris Davis

SUZANNE H. BAUKNIGHT UNITED STATES BANKRUPTCY JUDGE

The contested matter before the Court is the Motion to Compromise Dispute ("Motion") [Doc. 58] filed by Michael H. Fitzpatrick, the Chapter 7 Trustee (the "Trustee"), on May 18, 2018, seeking approval of a compromise and settlement between Debtor's bankruptcy estate and Debtor's former spouse, Clifton Boone, Jr. ("Boone"). Objections were filed by Debtor and creditors Raymond and Doris Davis ("the Davises"), who are also Debtor's parents. [Docs. 60, 61.] The issue to be decided, as defined by the parties [Doc. 67], is whether the Trustee's Motion is reasonable under the circumstances of the case and should be approved over the objections of creditors. Because the Court finds that the Trustee has met his burden and shown that the proposed settlement is fair and equitable and in the best interest of the estate, the Court will grant the Motion and approve the settlement.

The evidentiary hearing of this contested matter was held on August 15, 2018. The record consists of joint stipulations submitted by the parties on August 6, 2018 [Doc. 67]; seven exhibits stipulated into evidence; and the testimony of the Trustee; Boone; William E. House, III; Chester Meeker; Doris Davis; and Debtor. Additionally, pursuant to Rule 201 of the Federal Rules of Evidence, the Court takes judicial notice of all documents of record in this bankruptcy case. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). This memorandum constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr. 7052, 9014(c).

I. RELEVANT PROCEDURAL HISTORY & TERMS OF THE PROPOSED

SETTLEMENT

Debtor filed this Chapter 7 bankruptcy case on January 23, 2018, at which time the Trustee was appointed and has since continued to act in that capacity. To date, claims totaling $433,881.68 have been asserted against the estate, comprised of $224,287.19 filed as secured, $15,569.04 filed as priority unsecured, and $194,025.45 filed as unsecured non-priority.

Prior to filing her bankruptcy case, Debtor and Boone commenced divorce proceedings in the Monroe County Chancery Court (the "State Court"); however, as of the petition date, no final decree or final property division had been entered by the State Court. During the course of the divorce proceedings, the State Court appointed a receiver to manage the Boones' assets, and a hearing on all matters in controversy in the divorce case was scheduled before the State Court on September 4, 2018, but was continued pending resolution of this Motion. Included within the Boones' marital property are several parcels of real property that are either owned jointly as tenants by the entireties or owned solely by Debtor but considered marital property. The three properties in dispute¹ are described as follows:

• A commercial building located at 700 Englewood Road, Madisonville, Tennessee, that is titled to the Boones jointly as tenants by the entireties and houses a laundromat (the "Laundromat"). [Doc. 67 at ¶ 5.] Debtor valued the Laundromat at $380,000.00, and BB&T holds a secured claim against this property in the amount of $148,113.47 that is solely in Debtor's name. [Id.] The Trustee, who ultimately concluded that the Laundromat has a market value of $225,000.00, proposes to transfer this property to Boone, who will be responsible for the secured obligation owed to BB&T that will be discharged as to Debtor in her bankruptcy case.

• A commercial building located at 827/866 Old Englewood Road, Madisonville, Tennessee, that is titled solely to Debtor and consists of approximately 4.76 acres and an unfinished garage-type building (the "Garage Property"). [Doc. 67 at ¶ 6.] Debtor valued the Garage Property at $220,000.00, and BB&T has a secured claim against this propertyin the amount of $76,173.72 that is solely in Debtor's name. [Id.] The Trustee valued this property at $150,000.00 and proposes to retain it in Debtor's bankruptcy estate to be sold for the benefit of creditors. After paying the BB&T debt, such a sale would result in the bankruptcy estate recovering $73,826.28 related to the sale of the Garage Property.

• A residential lot known as Lot 8, Old Citico Road, Vonore, Tennessee, that is titled to the Boones jointly as tenants by the entireties (the "Residential Lot"). [Doc. 67 at ¶ 7.] Debtor valued the Residential Lot, which is not encumbered, at $44,500.00. [Id.] The Trustee proposes to retain this property in Debtor's bankruptcy estate to be sold for the benefit of creditors. At the evidentiary hearing, the Trustee stated that he believed the Residential Lot would sell for approximately $20,000.00 to $25,000.00.

[See also Doc. 58.] The proposed settlement also incorporates $20,692.70 that was on deposit in bank accounts for the Laundromat and Debtor as of the trial date, which funds will remain in the bankruptcy estate to be paid to creditors pro rata after payment of Debtor's exemptions. [Doc. 58.] The Trustee clarified at trial that the bank account funds fluctuate based on net income from the Laundromat.

In support of the settlement, the Trustee explained that only the Garage Property is owned in fee simple because the other properties are owned as tenants by the entireties so that the estate holds only a survivorship interest in those entireties properties. Further, because the 180-day period in § 541(a)(5)(B) has passed, the estate is only guaranteed Debtor's survivorship interest even if the State Court were to award the entireties properties to Debtor as part of a property distribution. He also argued that there could be a lengthy and costly trial in the State Court to determine values and an equitable division of the properties, which litigation might result in a much smaller net recovery for the bankruptcy estate for distribution to creditors.Ultimately, the Trustee asserted that the settlement is fair and equitable because Boone is forfeiting his interest in all other marital property, including unencumbered real property as well as a sizeable sum of cash being held in the Laundromat's bank accounts, and is taking the Laundromat subject to a secured obligation owed to BB&T that is not currently being serviced. Finally, the Trustee argued that the settlement should be approved because the Davises, who are Debtor's parents and insiders, are attempting to end-run the bankruptcy court to the detriment of all other creditors by seeking stay relief to ask the State Court to divide the property and adjudicate debt allegedly owed to them by Debtor relating to funds they gave to Debtor for improvements of some of the properties. The Trustee asserted that allowing the Davises to pursue their position in the State Court could result in their unsecured claim being favored over other creditors.²

Debtor³ and the Davises, who filed unsecured claims in the aggregate amount of $113,934.30,⁴ oppose the settlement, arguing (1) that it does not divide the property fairly because the other properties do not provide the estate with a fair equivalent to the Laundromatbeing transferred to Boone and (2) that the State Court is the proper jurisdiction to determine the property distribution in the Boones' divorce. Specifically, they argued that because the State Court has wide discretion in how assets are divided pursuant to Tennessee Code Annotated § 36-4-121, the goal of which is to make "a just and equitable division of the marital estate, [which] does not necessarily mean an equal one" [Doc. 68 at 6], the State Court, rather than the Bankruptcy Court, is the proper jurisdiction to determine division of the Boones' property and debts. To that end, Debtor and the Davises filed a Joint Motion for Relief from the Automatic Stay on July 31, 2018, asking the Court to grant stay relief to allow the State Court to adjudicate the Boones' property distribution.⁵ They also argued that the value of the property proposed to be transferred to Boone is greater than the value of the property remaining in Debtor's bankruptcy estate because the most valuable asset (i.e., the Laundromat) is being transferred to him.

III. ANALYSIS

Rule 9019 authorizes approval or disapproval of compromises and settlements in bankruptcy cases. Compromises "'are favored in bankruptcy cases in order to minimize the cost of litigation to the estate and expedite its administration.'" In re W. Pointe Props., L.P., 249 B.R. 273, 282 (Bankr. E.D. Tenn. 2000) (citations omitted). "At the same time, however, it is essential that every important determination in [bankruptcy] proceedings receive the 'informed, independent judgment' of the bankruptcy court." In re McInerney, 528 B.R. 684, 687 (Bankr. E.D. Mich. 2014) (quoting Protective Comm. For Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968)). Thus, whether to approve a compromise balances on whether it is "both fair and equitable, and in the best interest of the estate." In re High TechPackaging, Inc., 397 B.R. 369, 671 (Bankr. N.D. Ohio 2008). Moreover, the determination "is within the sound discretion of the bankruptcy judge." In re W. Pointe Props., L.P., 249 B.R. at 282 (citation omitted).

To assess the fairness and equity of the proposed compromise, courts generally weigh the following factors:

(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter

...