In re Gouge, Case No: 07-34839 (Bankr. S.D. Tex. 1/30/2008)

• Decision Date: 30 January 2008
• Docket Number: Case No: 07-34839.
• Parties: IN RE: ERNEST FRANK GOUGE, CHAPTER 7, Debtor(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

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IN RE: ERNEST FRANK GOUGE, CHAPTER 7, Debtor(s).

Case No: 07-34839.

United States Bankruptcy Court, S.D. Texas, Houston Division.

January 30, 2008.

MEMORANDUM OPINION CONCERNING ORDER SUSTAINING OBJECTION TO CLAIM OF EXEMPTION

WESLEY STEEN, Bankruptcy Judge.

Creditor Brickland Homes, Inc., was the beneficiary of a turnover order issued by a Texas state court for part of the proceeds from a lawsuit that Debtor had filed against Reliant. When the lawsuit settled and Debtor received his part of the settlement proceeds, Debtor used the proceeds to fund an annuity rather than paying part of the proceeds over to Brickland. Brickland objects to the Debtor's claimed exemption of the annuity. By separate order issued this date, the objection is sustained to the extent of the judgment owed to Brickland.

I. FINDINGS OF FACT

On January 29, 2008, the Court held a hearing on the objection to exemption (docket # 15) filed by Brickland Homes, Inc. ("Brickland"). Ernest Gouge ("Debtor") appeared in court, but did not testify. Evidence consists of the transcript of Debtor's Rule 2004 examination and Brickland's Exhibits 1 through 28 (which include excerpts from the deposition of Paul Simpson, Debtor's attorney in state court litigation). Following that hearing, the Court makes the following findings of fact consisting of a chronology, followed by analysis of the chronology.

A. CHRONOLOGY

                  DATE                       EVENT                                   REFERENCE
                  2002     "Reliant Lawsuit" filed. (Debtor and others sued         Cause # 2002-08521
                           Reliant Energy Services). Debtor's contingent fee        151st
                           counsel in Reliant suit was McGinnis, Lockridge,         Judicial
                           & Kilgore ("MLK")                                        District Court
                  2003     "Brickland Lawsuit" filed. Suit by Brickland             Cause # 2003-09769
                           Homes against Debtor. Debtor not represented by          61st
                           counsel.                                                 Judicial
                                                                                    District Court
                 3/29/04   Brickland obtained default judgment against Debtor       Exhibit 1
                           in Brickland Lawsuit
                 4/2004    Brickland attempted to intervene in Reliant              Exhibit 10
                           Lawsuit, essentially trying to seize any proceeds
                           due Debtor
                10/29/04   Brickland obtained turnover order requiring Debtor       Exhibit 2
                           to execute an assignment of sufficient proceeds of
                

                           Reliant Lawsuit to satisfy Brickland's default
                           judgment against Debtor
                11/1/04    Letter from Brickland's counsel asking Debtor to         Exhibit 14
                           execute assignment of Reliant suit proceeds to
                           effect turnover. No persuasive evidence was
                           introduced concerning whether MLK received this
                           communication
                11/12/04   Debtor's response to 11/1 letter from Brickland; the     Exhibit 15
                           letter ignores demand for assignment; it offers to
                           settle $86,000 judgment for $25,000. There is no
                           evidence in the record that there was any response
                           to this offer or any follow-up on the request for
                           assignment of suit proceeds
                  9/05     Debtor had conference with bankruptcy counsel.           Exhibit 7
                 7/11/06   Debtor underwent surgery, suffered complications,        Debtor's
                           and spent some time in a medically-induced coma.         deposition
                 2/20/07   Rule 11 agreement (documented some time later) to        Exhibit 16,
                           settle the Reliant Lawsuit for $500,000; Debtor          page 25, lines
                           participated in settlement discussions.                  16-22
                                                                                    Exhibit 23
                 2/23/07    • Reliant paid settlement proceeds to MLK.              • Exhibit 23
                            • MLK obtained Cashier's check to transmit              • Exhibit 3
                              settlement proceeds to Debtor.
                 March or  Debtor conferred with bankruptcy counsel.                Exhibit 24
                  April
                  2007
                 3/16/07   Debtor inquired of MLK "whether an annuity               Exhibit 20.
                           would be subject to . . . a creditor getting an annuity  Transcript
                           or what the status of an annuity was." Debtor's          page 78 line 1
                           counsel for Reliant case replied that he did not         through page
                           know.                                                    79 line 17.
                 3/20/07   Brickland counsel wrote to MLK seeking                   Exhibit 4 and
                           information on Reliant Lawsuit settlement. Copy          letter from
                           sent by fax to wrong fax number.                         Brickland
                                                                                    counsel dated
                                                                                    1/30/08
                 3/20/07   MLK and Debtor exchange emails about                     Exhibit 17
                           settlement; Debtor had no difficulty understanding
                           and communicating.
                3/26/07    MLK counsel has no record of receipt of fax copy         Exhibit 6.
                           of letter on 3/20. MLK acknowledges receipt of
                           that letter by mail on 3/26.
                3/28/07     • MLK responded to Brickland counsel that (1)           • Exhibit 6
                              MLK no longer represented Debtor, and (2)
                              settlement is confidential.
                

                            • MLK sent letter to Debtor with information            • Exhibit 7
                              about bankruptcy counsel.
                 3/28/07   Debtor applied to purchase annuity and paid the          Exhibit 5
                           premium with his entire share of the Reliant
                           Lawsuit settlement proceeds, $300,000. The
                           annuity is American National Insurance Company
                           Policy Number 14544724 (the "Annuity").
                 4/29/07    • Brickland sought contempt citation against            • Exhibit 25
                              Debtor for failure to turn over Reliant Lawsuit
                              settlement proceeds as required by turnover
                              order.
                            • Hearing set for 7/29/07.                              • Exhibit 26
                 7/24/07   Debtor filed bankruptcy petition & filed suggestion      Case doc. #1
                           of bankruptcy in Brickland Lawsuit.                      Exhibit # 27
                

B. ANALYSIS OF FACT ALLEGATIONS OF THE PLEADINGS

1. Brickland's Objection to Exemption

Brickland's objection is focused on a constructive trust theory. That is, Brickland argues that the annuity is not exempt because the funds used to purchase it were held by Debtor in constructive trust for Brickland at the time of the purchase. Not until it's pretrial memorandum of authorities (docket # 35) does Brickland argue that Texas Insurance Code § 1108.053 disqualifies the exempt status of the annuity. Nevertheless, that issue is implied and subsumed within the facts and transactions alleged in the objection to exemption. And Debtor's counsel clearly tried and argued that issue at the hearing. Therefore the Court considers both arguments at issue. That is, the Court considers the issues in this contested matter to be (i) whether application of Texas Insurance Code § 1108.053 denies the Annuity an exemption from creditors' claims, and (ii) if the Annuity was purchased in fraud of Brickland, whether the Annuity is held in constructive trust.

2. Debtor's Response to the Objection to Exemption

Debtor did not file a memorandum of authorities as required by the Court's case management order (docket # 28, paragraph 3.) Nevertheless, Debtor's counsel's closing argument clearly demonstrates that Debtor defended the objection on the same two legal questions. Debtor's defense to Brickland's first legal theory is that the principles of constructive trust do not apply. Debtor's defense to Brickland's second legal theory is that Debtor was ill and lost any memory of the Brickland judgment and turnover order. Therefore, Debtor's counsel argues, Debtor could not have acted to hinder, defraud, or delay creditors or in fraud of creditors' rights.

3. Debtor's Illness

Debtor did not testify and did not offer any evidence at the hearing. The only evidence in the record regarding Debtor's illness is the transcript of Debtor's Oral Deposition taken August 29, 2007.¹ The testimony about Debtor's illness is mostly in response to questions about Debtor's alleged malpractice action that is listed as an asset in his bankruptcy case.

In his deposition, Debtor testified that he had "spots" on his lung, and that he underwent a medical procedure July 11, 2006, to remove part of his lung. Debtor testified that the physician failed properly to suture the lung, causing loss of blood into the chest cavity and a collapse of both lungs. This allegedly caused Debtor to lapse into a coma for some unspecified period of time. The evidence does not give a date when the coma terminated or any information concerning Debtor's current conditions or limitations. Debtor used a cannula in the courtroom, and the deposition contains some reference to Debtor using a wheelchair in the March 2007 timeframe.

4. Debtor's Memory

Debtor makes several references to loss of memory. But there is no medical evidence concerning the extent of memory loss, if any. There is also no evidence in the record of the dates that Debtor was in a coma² and whether memory has been partially or wholly restored (or when that restoration might have happened, if it did). In short, Debtor's testimony makes vague statements about a coma and about memory loss, but those statements are not convincing. There are several factors that imply less memory loss than Debtor alleges.

First, Debtor's counsel in the Reliant Lawsuit testified in their Rule 2004 examination that they conferred and exchanged emails with Debtor in February 2007, when the Reliant Lawsuit was settled. They believed that Debtor understood the proceedings and issues and participated, apparently as a client...