In re Hooper
| Decision Date | 15 August 2016 |
| Docket Number | Case No. 16-30141-WRS |
| Citation | 555 B.R. 47 |
| Parties | In re John Scott Hooper, Suzette P. Hooper, Debtors |
| Court | U.S. Bankruptcy Court — Middle District of Alabama |
John D. Norris, Attorney for Debtor.
Max C. Pope Jr., Attorney for Trustee.
Walter F. McArdle, Attorney for Transamerica.
Susan S. DePaola, Trustee.
John Peek, Attorney for Personal Representatives.
This Chapter 7 bankruptcy case is before the Court on the joint motion to approve compromise filed by Chapter 7 Trustee Susan DePaola (“DePaola”) and Transamerica Advisors Life Insurance Company (“Transamerica”). (Doc. 86). The compromise would resolve a pending motion for relief from the automatic stay filed by Transamerica that DePaola has objected to. (Docs. 24 & 49). Acting sua sponte , the Court entered an order in which it expressed concern that the compromise should not be approved on the ground that Transamerica does not have a secured claim and is not entitled to relief. (Doc. 92). The Court scheduled a hearing on July 25, 2016, at which DePaola was present in person and through counsel Joy Beth Smith, Transamerica was present through counsel Charles Stewart, Debtors John Scott and Suzette Hooper (collectively, “the Debtors”) were present through counsel John Norris, and the personal representatives of the probate estates at issue were present through counsel John Peek. For the reasons set forth below, the joint motion to approve compromise is DENIED.
The following facts are taken from the parties' filings, the exhibits they have attached, and (to the extent necessary) complaints filed in adversary proceedings arising out of this case. The facts recited here are assumed to be true only for the purpose of deciding the motion to approve compromise and are not intended to have preclusive effect on any other proceedings.
In 1987 Mallett Scott Hooper (“Mallett”) purchased two life insurance policies from Transamerica1 on his life and the life of his wife, Allene Alexander Hooper (“Allene”). (Doc. 24). Mallett and Allene were the parents of Emily Hooper Brown (“Emily”), Christi Hooper (“Christi”), and Debtor John Scott Hooper (individually, “John Scott”). (Doc. 24). Pursuant to a 2003 agreement between Mallett, Allene, and their children, the proceeds from the life insurance policies were to be divided equally among Emily, Christi, and John Scott upon the deaths of Mallett and Allene. (Doc. 85, ¶ 16).
Mallett died in 2006 and Allene died in 2008. (Doc. 24). Emily and Christi were named as the personal representatives of Mallett's probate estate and John Scott was named as the personal representative of Allene's probate estate. (Doc. 85, ¶ 16). In July 2010, John Scott—who was then a licensed attorney in Montgomery, Alabama—submitted claim forms to Transamerica asserting that he was the personal representative of both estates. (Doc. 24). Transamerica apparently determined that John Scott's representation was false, and that Emily and Christi were the actual representatives of Mallett's estate. (Doc. 24). Nevertheless, Transamerica mistakenly mailed the death benefit check of approximately $84,000, payable to the “Estate of Mallett S. Hooper,” to John Scott's law office. (Doc. 24). John Scott then endorsed the check, negotiated it, and deposited the insurance proceeds into his law firm's account. (Doc. 24). The money has disappeared.
Emily and Christi, acting as the personal representatives of Mallet's probate estate, sued Transamerica, John Scott, and his law firm in the Circuit Court of Covington County, Alabama (“the Circuit Court”) in February 2014 to recover the insurance benefits. (Doc. 24). Transamerica settled with Emily and Christi for $140,000 and filed a cross-claim against John Scott and his law firm for reimbursement. . John Scott failed to respond to Transamerica's discovery, so on Transamerica's motion the Circuit Court entered default judgment against him on May 20, 2015 as to liability, with damages to be determined. (Doc. 24, Ex. C). On September 23, 2015, the Circuit Court entered a damages award of $210,000 in favor of Transamerica and against John Scott, consisting of $140,000 in compensatory damages and $70,000 in attorneys' fees. (Doc. 24, Ex. D). Transamerica properly recorded this judgment on October 19, 2015. (Doc. 24, Ex. D; Doc. 56).
Meanwhile, Transamerica had filed claims in the probate estates of both Mallett and Allene, and the Circuit Court had removed the probate cases from the probate court and stayed distribution of assets in the estates. (Doc. 24, Ex. B). On September 30, 2015, the Circuit Court ordered the personal representative in Allene's probate case2 that any distribution due John Scott from her estate should be applied to Transamerica's judgment. (Doc. 24, Ex. E). Transamerica moved for a similar order in Mallett's probate case, but the Circuit Court has not issued one. (Doc. 24).
The Debtors filed Chapter 13 bankruptcy on January 18, 2016,3 but converted to Chapter 7 on April 1 after Transamerica and the Chapter 13 trustee objected to their plan. (Docs. 1 & 29). Transamerica had moved for relief from the automatic stay in March to recover the distributions due John Scott in Mallett's and Allene's probate estates. (Docs. 21 & 24). Transamerica asserts that it is entitled to relief on three grounds: (1) this Court lacks jurisdiction over the distributions under the probate exception to federal jurisdiction, (2) the distributions are not property of the Debtors' bankruptcy estate because of Transamerica's judgment lien, and (3) Transamerica lacks adequate protection. (Doc. 24). Alternatively, Transamerica asks the Court to order the trustee (now DePaola) to abandon the distributions as burdensome or of inconsequential value to the estate. (Doc. 24).
After the Debtors converted to Chapter 7, new trustee DePaola objected to Transamerica's motion for relief. (Doc. 49). She asserts that the probate exception to jurisdiction is inapplicable, that the distributions are property of the estate because Transamerica's judgment lien does not attach to them, that as an unsecured creditor Transamerica is not entitled to adequate protection, and that the distributions are neither burdensome nor inconsequential to the bankruptcy estate. (Doc. 49). The Court scheduled an evidentiary hearing on Transamerica's motion for July 25, 2016. (Doc. 58).
On July 5, 2016, DePaola and Transamerica filed a joint motion to approve compromise. (Doc. 86). Under the proposed compromise, DePaola and Transamerica would each receive half of the distribution due John Scott from Mallett's probate estate, and DePaola would abandon any interest in Allene's probate estate. (Doc. 86). The motion advises that there is $108,197.32 in Mallett's probate estate that is ripe for distribution in equal shares to Emily, Christi, and John Scott. (Doc. 86). Three days later, this Court, acting sua sponte , expressed skepticism that Transamerica has a secured claim and suggested that the compromise should be disallowed. (Doc. 92). The Court instructed the parties to explain at the July 25 evidentiary hearing why the compromise should be approved; i.e. , “that there is reason to believe Transamerica's claim is superior to [DePaola]'s interest in the estates of [John Scott]'s parents.” (Doc. 92).
At the July 25 hearing counsel for DePaola explained that Allene's probate estate had three parcels of real estate in Covington County that were minimal in value, and that John Scott was due approximately $35,000 from Mallett's probate estate. It is her position that the compromise should be approved because even if the Court sustains her objection to the motion for relief, she will still have to litigate an adversary proceeding to determine the extent of Transamerica's lien and will have to litigate the claim Transamerica filed in probate court. DePaola also expressed concern regarding the effect of the Circuit Court's order to the personal representative of Allene's probate estate to pay John Scott's share of the distributions to Transamerica. For its part, Transamerica supports the compromise and argues that the Court lacks the power to exercise jurisdiction over the distributions under the probate exception. It also argued that under the equities of the case it should be entitled to recover insurance benefits that it had to pay twice.
The Court has jurisdiction over the Debtors' bankruptcy case and the pending motions pursuant to 28 U.S.C. §§ 1334(a) and 157(b), and the District Court's General Order of Reference dated April 25, 1985. The motion to approve compromise is a core proceeding under 28 U.S.C. § 157(b)(2)(A), and the underlying motion for relief from the automatic stay is a core proceeding under 28 U.S.C. § 157(b)(2)(G). The Court “may issue any order ... that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code, which can include, “sua sponte, taking any action or making any determination necessary or appropriate ... to prevent an abuse of process.” 11 U.S.C. § 105(a). That includes the discretion to disallow a compromise that is not in the best interest of the bankruptcy estate.
The Court will first consider Transamerica's argument that the Court lacks authority to issue any orders with respect to the distributions in Mallett's and Allene's probate estates on the grounds that they fall within the probate exception to federal subject-matter jurisdiction. A creation of common law, “the probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent's estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court.” Marshall v. Marshall , ...
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