In re Dudley
| Decision Date | 19 March 2019 |
| Docket Number | CASE NO.: 16-01842-TOM11 |
| Parties | In re: STEWART R. DUDLEY, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
This matter came to be heard upon: (i) the Buffalo Rock Company and James C. Lee, III's (collectively referred to herein as "Buffalo Rock") Objection to the Debtor's Claims of Exemptions Related to Certain Life Insurance Policies (the "Exemption Objection") [Doc. No. 145]; Buffalo Rock's Update Regarding Life Insurance Policies (the "Update") [Doc. No. 993]; Stewart R. Dudley's (the "Debtor") Response to Claim Objection (the "Response") [Doc. No. 998]; Buffalo Rock's Supplemental Objection to the Debtor's Claims of Exemptions Related to Certain Life Insurance Policies based on the Preclusive Effect of the Arbitrator's Prior Final Award and Related Final Judgments (the "Supplemental Objection") [Doc. No. 1009]; the Debtor's Supplemental Response to Claim Objection (the "Supplemental Response") [Doc. No. 1015]; and Buffalo Rock's Reply Brief in Support of its Objection to the Debtor's Claims of Exemptions Related to Certain Life Insurance Policies Based on the Preclusive Effect of the Arbitrator's Final Award and Related Final Judgments (the "Supplemental Reply" and together with the Exemption Objection, the Update, the Response, the Supplemental Objection, the Supplemental Response, and the Supplemental Reply, collectively the "Life Insurance Pleadings") [Doc. No. 1021].1
The Life Insurance Pleadings were set for a final hearing (the "Final Hearing") on February 25, 2019 pursuant to the Court's Order Rescheduling Hearing (the "Hearing Order") [Doc. No. 1020]. The Final Hearing was attended by Jeffery J. Hartley, in his capacity as the Court-appointed chapter 11 trustee (the "Trustee"), Derek F. Meek and Marc P. Solomon on behalf of the Buffalo Rock Company, R. Scott Williams on behalf of the Debtor, James W. Gewin for James C. Lee, III, Suzanne A. Fleming for the Buffalo Rock Company, Robert T. Clark for Ahrian Dudley, and Jon A. Dudeck, Jr. for the Office of the United States Bankruptcy Administrator.
Upon consideration of the Exemption Objection, the Update, the Response, the Supplemental Objection, the Supplemental Response, and the Supplemental Reply, the arguments provided at the Final Hearing, the entire record in the above-styled main bankruptcy case (the "Main Case"), including all testimony and evidence offered in the Main Case on any matter or issue; the Court having jurisdiction to consider the Life Insurance Pleadings, together with any relief requested therein; notice of the Life Insurance Pleadings and the Final Hearing having been provided to the Debtor, the Trustee, and all interested parties, and it appearing that no other or further notice need be provided; the Court having determined that the relief detailed in this Order is in the best interests of the Debtor's bankruptcy estate, the Trustee, the Debtor, his creditors, and all parties in interest; upon the Life Insurance Pleadings, together with all of theother proceedings before this Court; and after due deliberation and sufficient cause appearing therefor, it is hereby ORDERED, ADJUDGED AND DECREED2 as follows:
FINDINGS OF FACT3
Based on the record and evidence before it, the Life Insurance Pleadings, the arguments provided at the Final Hearing, and the entire record in the above-styled Main Case, including all testimony and evidence offered in the Main Case on any matter or issue, the Court makes the following findings of fact:
1. On or about May 5, 2016 (the "Petition Date"), the Debtor voluntarily initiated this Case by filing for protection under Chapter 11 of 11 U.S.C. § 101, et seq. (the "Bankruptcy Code").
2. On or about May 19, 2016, the Debtor filed his Schedules of Assets and Liabilities (collectively referred to herein as the "Schedules").
3. The Debtor lists in his Schedule C (pages 15-18) that he has elected to claim certain property as exempt under Alabama law, pursuant to 11 U.S.C. § 522(b)(3).
4. Among the property that the Debtor has listed as exempt are certain insurance policies (referred to collectively herein as the "Policies"), including: (i) American General Life Insurance Company, Insurance Policy No. U10107544L (); (ii) John Hancock Life Insurance, Insurance Policy No. ORD 062156912 (U10107537L (which the Debtor listed as having a value of $1.00); (iii) American General Life Insurance Company, Insurance Policy No. U10107545L (); (iv) American General Life Insurance Company, InsurancePolicy No. U10107546L (); (v) American General Life Insurance Company, Insurance Policy No. U10107547L (); and (vi) John Hancock Life Insurance, Insurance Policy No. ORD 007746031 ().
5. In its various pleadings Buffalo Rock notes that Buffalo Rock and the Debtor were involved in prepetition arbitration (the "Arbitration") which dealt with, among other things, the parties' rights and obligations with respect to the American General Life Insurance Policies listed in paragraph 4 above (referred to herein as the "Outstanding Policies"). Following a two week evidentiary hearing, the Arbitrator issued an Interim Award (the "Award") on February 25, 2016. Based on Judgments later entered by the State Court, it is clear that the Arbitrator held that an express trust existed over the Outstanding Policies and their cash values in favor of Buffalo Rock pursuant to the Memorandum of Understanding ("MOU") that Dudley entered into nearly two decades prior to the Arbitration.
6. Additionally, in the Judgment entered by the Jefferson County Circuit Court, Judge Vance held there was a resulting express trust over the Outstanding Policies:
4. It is hereby ORDERED, ADJUSGED and DECREED that an express trust is declared upon the Policies, and Stewart R. Dudley is permanently enjoined from taking any action with respect to the Polices, including, but not limited to making any policy changes, (except change a beneficiary subject to the Arbitration Award), taking any policy loans, making any withdrawals on the Policies, taking any action to deplete or reduce the cash value of the Policies, pledging, selling, encumbering or assigning the Polices or any proceeds thereof, making any full or partial surrender of the Policies, changing the ownership of the Polices, or taking any action of any kind or nature which would in any way change the character, benefits or terms of the Polices.
7. Buffalo Rock also notes in its pleadings that the Arbitrator also made numerous findings regarding the Debtor's inconsistent treatment of the Policies with regard to tax liabilityto the IRS and with regard to the Arbitration proceedings. Specifically, Buffalo Rock notes that the Arbitrator found that "Dudley took the position that he did not owe any taxes as a result of the distribution of the 419 Plan policies to him because he had an obligation to repay the premiums, plus $10 million.", and that the Debtor's position with the IRS was "consistent with the Company's reporting" and "consistent with [Dudley's tax counsel's] statement to the IRS that the repayment obligation was a current obligation by Dudley."
8. Following the entry of the Award, the Honorable Judge Robert S. Vance entered two Judgments against the Debtor (collectively, the "Judgments") on April 5, 2016 in the case of James C. Lee, III et al. v. Stewart R. Dudley et al. in the Circuit Court of Jefferson County Alabama at CV-2011-900773 and in the case of Buffalo Rock Company v. Stewart R. Dudley in the Circuit Court of Jefferson County, Alabama at CV-2011-900461 (collectively the "Judge Vance Cases"). The Judgments, among other things, confirmed the Award in the Judge Vance Cases and, specific to this matter, the Judgments confirmed that the Debtor was liable to Buffalo Rock to repay $29,879,147.11 from the proceeds of the Policies, and that an express trust was declared on the Policies.
9. Following the Debtor's chapter 11 petition, Buffalo Rock filed its Motion for Relief from the Automatic Stay in Order to Complete Pending Arbitration and State Court Litigation Against Stewart Ray Dudley (the "Initial Stay Relief Motion") on May 13, 2016 in which Buffalo Rock sought, among other things, an order lifting the stay to allow the Arbitrator to enter a final award on the only two remaining issues in the Arbitration (the amount of attorney's fees and costs due to Buffalo Rock, and an award of damages to James C. Lee, III for the Debtor's failure to provide an accounting). See Doc. No. 20.
10. The Initial Stay Relief Motion was granted in part and denied in part on June 21, 2016 pursuant to that certain Order Granting, in Part, and Denying, in Part, Buffalo Rock Company's and James C. Lee, III's Motion for Relief from the Automatic Stay in Order to Complete Pending Arbitration and State Court Litigation Against Stewart Ray Dudley (the "Initial Stay Relief Order") in which the Court allowed the Arbitrator to finalize awards on the only remaining issues in the Arbitration and to allow the Arbitration awards to be filed in the state court lawsuits. See Doc. No. 90.
11. In compliance with the Initial Stay Relief Order, the Arbitrator entered his Final Award (the "Final Award" and together with the Award, the "Arbitration Awards") on or about August 12, 2016. The Final Award reconfirmed the Award and stated that "[a]ll substantive claims and damages were ruled on in the Interim Award, which continues in effect." See Final Award, p. 2. The Final Award was filed in the state court lawsuits on...
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