In re Jacqueline Stanfill Dba Stanfill Wealth Mgmt., LLC, Case No. 3:15-bk-30233-SHB

• Decision Date: 08 July 2016
• Docket Number: Case No. 3:15-bk-30233-SHB
• Parties: In re JACQUELINE STANFILL dba STANFILL WEALTH MANAGEMENT, LLC Debtor
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

In re JACQUELINE STANFILL dba STANFILL

WEALTH MANAGEMENT, LLC Debtor

Case No. 3:15-bk-30233-SHB

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TENNESSEE

July 8, 2016

MEMORANDUM ON SECOND AMENDED MOTION TO COMPROMISE

APPEARANCES:

LITTLE & MILLIGAN, PLLC

F. Scott Milligan, Esq.

900 E. Hill Avenue

Suite 130

Knoxville, Tennessee 37915

Attorneys for W. Grey Steed, Chapter 7 Trustee

WOLFE, MCCLANE, BRIGHT, ALLEN & CARPENTER, PLLC

Gregory S. Logue, Esq.

900 S. Gay Street

Suite 900

Knoxville, Tennessee 37902

Attorneys for Cary M. Franklin, Karen A. Franklin, Ph.D, The Franklin Group, LLC, and Daniel D'All

LONG, RAGSDALE & WATERS, P.C.

Garrett P. Swartwood, Esq.

1111 Northshore Drive

Suite S-700

Knoxville, Tennessee 37919-4074

Attorneys for The Susan L. Miller Special Needs Trust, The Miller Family Trust, The Miller Survivor's Trust, and Adrienne Paige Miller

QUIST, CONE & FISHER, PLLC

Michael H. Fitzpatrick, Esq.

2121 First Tennessee Plaza

Knoxville, Tennessee 37929

Attorneys for Regina Lambert

SUZANNE H. BAUKNIGHT UNITED STATES BANKRUPTCY JUDGE

Before the Court is the Motion to Compromise, as twice amended (Compromise Motion), filed by W. Grey Steed, Chapter 7 Trustee (Trustee), seeking approval of a compromise and settlement between Debtor's bankruptcy estate and Regina Lambert. Objections have been filed by a number of creditors: Cary M. Franklin; Karen A. Franklin, Ph.D; The Franklin Group, LLC; and Daniel D'All (collectively, the Petitioning Creditors¹) and The Susan L. Miller Special Needs Trust; The Miller Family Trust; The Miller Survivor's Trust; and Adrienne Paige Miller (collectively, the Miller Family Creditors).² The issue to be decided, as defined by the parties, is whether the Compromise 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 failed to meet his burden to show that the proposed settlement is fair and equitable and in the best interest of the estate, the Court denies the Compromise Motion.

The evidentiary hearing of this contested matter was held on April 8 and May 9, 2016. The record consists of stipulations of undisputed facts submitted by the parties on April 1, 2016; sixteen exhibits admitted into evidence; and the testimony of four witnesses: Regina Lambert, W. Grey Steed, Dr. Karen Franklin, and Kelly Sweatman. 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).

I. RELEVANT PROCEDURAL HISTORY & TERMS OF THE PROPOSED

SETTLEMENT

This bankruptcy case was commenced through the filing of an Involuntary Petition on January 19, 2015, and an Order for Relief was entered on March 6, 2015. It is undisputed thatDebtor held herself out to be an investment advisor and that from 2009 or 2010 she induced her clients, many of whom were family or close friends, to fund what they believed were legitimate investments with a brokerage firm when, in fact, Debtor either lost the invested funds in other ventures personal to her, used the funds for personal living expenses, or spent the funds on herself and her family and friends as part of a lavish lifestyle. Debtor pleaded guilty to federal charges in January 2016 and was sentenced on April 4, 2016, to 108 months of imprisonment to be followed by three years of supervised release. See United States v. Stanfill, E.D. Tenn. Docket No. 3:15-cr-00108-001-RLJ-HBG, Docs. 21, 37. Debtor's sentence also included a restitution award of $8,817.434.14. Id., Doc. 37.

Upon notice and hearing on the Petitioning Creditors' motion to appoint a trustee, the Trustee was appointed and continues to serve in that capacity. As part of his duties and investigation into Debtor's affairs, the Trustee discovered that assets had been transferred from Debtor to Regina Lambert, Debtor's life partner/spouse of more than 25 years.³ The Trustee found checks payable to Ms. Lambert from Debtor or one of her companies totaling more than $150,000.00 in addition to gifts of jewelry, trips, clothing, and other items since 2011. The Trustee believes that these transfers since the beginning of 2011⁴ are fraudulent conveyances that potentially would be avoidable and recoverable for the benefit of the bankruptcy estate.

The Trustee and Ms. Lambert's attorney entered into negotiations for a proposal through which Ms. Lambert would repay the bankruptcy estate in settlement of the Trustee's potential fraudulent conveyance claims. After the Trustee filed his initial Motion to Compromise [Doc. 132], the Petitioning Creditors filed a limited objection to the proposed settlement for thepurpose of seeking additional information and an examination of Ms. Lambert [Doc. 141],⁵ and the Miller Family Creditors moved for an examination under Federal Rule of Bankruptcy Procedure 2004 [Doc. 144], the scope of which Ms. Lambert opposed.

The parties later agreed to a protective order allowing the Rule 2004 examination along with inspection of financial records and information relative to the proposed settlement. [Doc. 155.] Ms. Lambert's Rule 2004 examination was conducted in November 2015, and on January 22, 2016, the Trustee filed his Amended Motion to Compromise. [Doc. 181.] The Objecting Creditors renewed their objections [Docs. 190, 191], and the Court set the matter for an evidentiary hearing [Doc. 196]. The Trustee continued to negotiate with Ms. Lambert and, on March 31, 2016, submitted a Second Amended Motion to Compromise. [Doc. 205.]

Although no single document of record sets forth in full the proposed terms of the settlement, the parties agreed at the evidentiary hearing to the accuracy of the following recitation of terms as compiled by the Court from the Trustee's motion and two amendments:

• Ms. Lambert will retain a number of personal property items consisting of items over which ownership allegedly⁶ is not disputed. The Trustee represents that the personalty to be retained is not valued at more than the $10,000 personal property exemption available to Ms. Lambert under Tennessee law. [Doc. 181, ¶ 7.]

• Ms. Lambert will retain her 2012 Jeep Wrangler automobile. [Id. ¶ 7.]

• The marital residence will be sold with the consent of Ms. Lambert, and the estate will receive all but $5,000.00 of the net sale proceeds, which will be paid to Ms.Lambert, the Trustee treating the payment to Ms. Lambert as a homestead exemption under Tennessee law. [Id. ¶ 8.]

• Ms. Lambert will pay to the Trustee a portion of legal fees earned by her in Supreme Court litigation concluded in 2015.⁷ Ms. Lambert will retain $10,000.00 from the fee award, and the amount to be paid to the Trustee will be calculated as half of the remainder net of income taxes owed by Ms. Lambert on the fees. [Id. ¶ 10.]

• Ms. Lambert will forego any right to seek return of jewelry with significant value that was seized⁸ by the United States in connection with criminal proceedings against Debtor. [Id. ¶ 7.]

• Ms. Lambert agrees to a minimum recovery by the Trustee in the amount of $100,000.00 (the Minimum Recovery). [Doc. 205, ¶ 5.] Ms. Lambert, however, is to receive a credit against the Minimum Recovery from the as-yet-unknown amounts to be recovered by the Trustee for the sale of the marital residence and the legal fee award. In addition, the Trustee proposes to give Ms. Lambert credit against the Minimum Recovery for "liquidation of personal property that is hers individually and/or joint personal property with the debtor when contents of the [marital residence] are sold."⁹ [Id. ¶ 7.] Finally, Ms. Lambert is also to receive credit for anyamounts that might eventually be paid by the United States to victims of Debtor as a result of the sale of the forfeited jewelry to which Ms. Lambert has waived any right to challenge the forfeiture. [Id. ¶ 7.]

• Finally, although not contained in the Compromise Motion itself, a letter agreement signed by Ms. Lambert and the Trustee sets out the deadline for payment of the Minimum Recovery as follows:

If liquidation of all assets contemplated [by the settlement as outlined above] should not equal $100,000.00 on or before March 1, 2018, then Ms. Lambert shall pay such difference to the trustee within 30 days, i.e., March 31, 2018. If the gross proceeds from the liquidation of the marital home, personal property, jewelry of Ms. Lambert (9 of 11 pieces seized) and the receipt of the fees being sought in the marriage equality litigation case payable to the estate or victims of the debtor's actions under the terms of this agreement equal or exceed $100,000.00, then no further payment shall be owed by Ms. Lambert whatsoever. The $100,000.00 base figure is not the maximum, but only the minimum sum which is contemplated will be received by the estate under this agreement.

[Trial Ex. 8.]

To date, there are claims asserted against the estate in excess of $9,700,000.00. The Trustee has received $59,104.28 through the liquidation of Debtor's one-half interest in a partnership and $6,127.14 from the sale of Debtor's office furnishings.¹⁰ The Trustee attempted to sell the Stone Mill Drive residence, which had been listed for $1,399,000.00, encumbered by a mortgage on which is owing $933,000.00, and subject to payment of real property taxes in the approximate amount of $94,000.00. Since the trial of this matter, because no offers werereceived on the house, the Trustee has obtained Court approval to auction the house and personal property, such auction to be held on August 11, 2016. [Docs. 223, 225.] The estimated value of Debtor's interest in the personal property and contents of the home is less than $50,000.00.

III. RELEVANT FACTS

Ms. Lambert testified that she and Debtor have been in a relationship since 1988. In the late 1990s to the early 2000s, Debtor owned an American Express franchise. In about 2004, Debtor set up her own business, Stanfill Wealth Management, to provide...