In re Knight

• Court: U.S. Bankruptcy Court — Southern District of Mississippi
• Writing for the Court: Katharine M. Samson, United States Bankruptcy Judge
• Citation: 653 B.R. 782
• Docket Number: Case No. 15-50011-KMS
• Decision Date: 07 August 2023
• Parties: IN RE: Benny R. KNIGHT Sr., Debtor

653 B.R. 782

IN RE: Benny R. KNIGHT Sr., Debtor

Case No. 15-50011-KMS

United States Bankruptcy Court, S.D. Mississippi

Signed August 7, 2023

Patrick A. Sheehan, Ocean Springs, MS, for Debtor.

OPINION AND ORDER OVERRULING OBJECTION TO EXEMPTIONS

Katharine M. Samson, United States Bankruptcy Judge

This matter is before the Court on the Objection to Exemptions by Ellen Knight, widow of E. Harold Knight, and by Harold's heirs and other persons with an interest in Harold's real estate or assets, ECF No. 83, with response by Debtor Benny R. Knight Sr., ECF No. 86. Harold, who was Benny's brother, had filed the initial objection. See ECF No. 24. The administratrix of Harold's estate ("Harold's Estate" or "Estate") has now been substituted as the proper party in interest, Harold having died two years ago. See ECF No. 124. The parties agree that the Objection will be decided on briefs and stipulated facts. ECF No. 100. This proceeding is core under 28 U.S.C. § 157(b)(2)(B).

The Objection is the latest salvo in a decades-long sibling feud. Benny and Harold owned and operated a business together "for a number of years," until Benny had a "physical altercation" with Harold's two sons. Joint Statement of Undisputed Facts ("Stipulated Facts"), ECF No. 108 at 1, ¶¶ 4-5. Benny fired Harold, and "litigation ensued." Id. at 2, ¶ 6.

It is now some twenty-four years since the fight; thirteen years since Harold won a related judgment against Benny for approximately $1.75 million in a Mississippi chancery court; seven years since this Court held nondischargeable the $1.25 million that had survived on appeal; four years since the same chancery court ruled in a second lawsuit that Benny fraudulently transferred homestead property to his wife, Amy Knight, to keep Harold from collecting on the first judgment; and six months since the chancery court made the fraudulent transfer ruling final.

In this chapter 7 case, Benny seeks to claim homestead and "wildcard" exemptions¹ in the real property that the chancery court held he fraudulently transferred: 3309 Milstead Road, Gautier, Mississippi ("Homestead Property" or "Property"). Harold's Estate objects, arguing that at the time of the Petition, Benny did not own the Property, whether because the chancery court divested him of ownership or because he had conveyed title to Amy prepetition.

The Estate's argument fails. The Property is subject to both the homestead exemption and the wildcard exemption, and the Objection is overruled.

FACTS²

I. Chancery Court

In September 2010, Benny and Amy each quitclaimed their interest in the Homestead Property to Amy. Quitclaim Deed, ECF No. 110-3. This transfer occurred approximately two months after the Chancery Court of Jackson County, Mississippi, ("Chancery Court") issued findings of fact, conclusions of law, and a preliminary judgment that Benny had breached his fiduciary duties to Harold as minority shareholder and violated the wrongful termination clause of Harold's employment contract. See Prelim. J., ECF No. 110-2 at 10, 12. The final judgment ("Chancery Judgment I") was rendered some months later. See ECF No. 110-4 at 2.

Approximately four years later, Benny filed this bankruptcy case, in which only one proof of claim was filed: Harold's, for a judgment lien of $1,775,223.75. Cls. Reg.; Cl. No. 1-1 at 1. Based on the factual findings supporting Chancery Judgment I, this Court held the lien nondischargeable in the amount of Chancery Judgment I that had been affirmed on appeal, which was $1,254,319. See Knight v. Knight (In re Knight), Adv. No. 15-06011-KMS, Summ. J., Adv. ECF No. 30 at 8, 10 (Bankr. S.D. Miss. Mar. 23, 2016) (citing Knights' Piping, Inc. v. Knight, 123 So. 3d 451, 460 (Miss. Ct. App. 2012)).

Approximately one year after Chancery Judgment I, Harold filed his second chancery court action ("Fraudulent Transfer Action"), against Benny, Amy, and an LLC to which Benny and Amy had allegedly transferred their interests in some riverfront property. See Am. Compl., ECF No. 34-4 at 5, ¶ 16. As to the Homestead Property, the Fraudulent Transfer Action alleged that the transfer "was done without the payment of adequate consideration and with the intent to hinder, delay or defraud Harold Knight from collecting on his claims and judgment against Benny" in Harold's first chancery action. Id. at 8, ¶ 28. Harold later filed a Second Amended Complaint, adding defendants and alleging more fraudulent transfers. See ECF No. 114.

The Fraudulent Transfer Action was pending when Benny filed this bankruptcy case. On Harold's motion for abstention or for relief from the automatic stay, ECF No. 34, this Court entered the parties' agreed order modifying and lifting the stay to permit the Fraudulent Transfer Action "and associated relief as requested therein" to go forward in the Chancery Court. Order, ECF No. 48 at 1. That "associated relief" constituted money damages, attorney's fees and costs, a judgment invalidating and setting aside the transfers, disgorgement of monies obtained from the transfers, an accounting, and the establishment of a constructive trust. See ECF No. 34-4 at 11. The Second Amended Complaint requested the same relief. See ECF No. 114 at 13.

Approximately four years after the stay was lifted, the Chancery Court issued an order granting Harold's motion for partial summary judgment against Amy as to the Homestead Property and holding that Benny's conveyance to her was fraudulent and therefore void ("Partial Summary Judgment Order").³ See ECF No. 109-1 at 1, 8. The court also ordered that Harold had "superior right, interest, possession and ownership ahead of the interests of [Amy and Benny]," subject to further order as to Amy, and that Benny had "no right of possession of the home, personal and real property." Id. at 9. The court further ordered that the Homestead Property be sold "to satisfy the Judgment of E. Harold Knight.," id., meaning Chancery Judgment I, which the court knew had been held nondischargeable, id. at 4 ("As to Harold's judgment against Benny, the [Bankruptcy] Court held that Benny could not discharge the amount of $1,254,319.00 in his Chapter 7 bankruptcy."). The court ordered that Amy receive the first $50,000 of sale proceeds, with the balance "[to] be applied to the Judgment balance plus interest and less any credits for payment of Harold Knight," with Benny due any amount left over. Id. at 9-10. Finally, the Partial Summary Judgment Order stripped Benny of any exemption in the Homestead Property. Id. at 8-9, 10.

But under the Mississippi Rules of Civil Procedure, the Partial Summary Judgment Order was not "a final decree," Miss. R. Civ. P. 54(a). The Chancery Court had adjudicated Harold's summary judgment motion against only Amy and only in part. ECF 109-1 at 1 ("[T]he other remaining aspects of the Plaintiffs' Amended Motion for Summary Judgment shall be continued until further Order of this Court."). Consequently, the Partial Summary Judgment Order did not terminate the litigation. See Miss. R. Civ. P. 54(b) (providing that an order "shall not terminate the action as to any of the claims or parties" if it adjudicates "fewer than all of the claims or the rights and liabilities of fewer than all the parties"); see also Rigdon v. Miss. Farm Bureau Fed'n, 22 So. 3d 321, 325 (Miss. Ct. App. 2009) (finding that order "adjudicat[ing] all claims against all defendants" was a final judgment).

Mississippi preclusion law requires a final judgment in the first action. Vaughn v. Monticello Ins. Co., 838 So. 2d 983, 986 (Miss. Ct. App. 2001). And it is Mississippi preclusion law that determines how the Chancery Court's rulings affect this proceeding. See discussion infra Law, Part I, Section B. So this Court told the parties that the Objection, which by then had been briefed, would be held in abeyance pending their submission of either a judgment or a stipulation that would obviate the need for a judgment. ECF No. 130 (status conf.).

Several months after the status conference, the parties submitted the Order Amending and Finalizing Judgment ("Chancery Judgment II"), ECF No. 136. Chancery Judgment II decreed that all issues before the Chancery Court had been fully resolved and that Chancery Judgment II was a final judgment. Id. at 2. Chancery Judgment II also amended the Partial Summary Judgment Order to strike the provisions stripping Benny of his homestead exemption, id. at 1, instead "defer[ring] to the United States Bankruptcy Court to decide the issue," id. at 2. As to all other provisions, the Partial Summary Judgment Order would "remain[ ] in full force and effect." Id. at 1.

II. Objections to Exemptions

The Estate's Objection is not the first challenge to Benny's exemptions. Harold objected early in the case to the exemptions Benny initially claimed. In his first Schedule A, Benny valued the Homestead Property at $300,000 and claimed in it an "equitable interest" pending his divorce, ECF No. 10 at 3, Amy holding title by virtue of the 2010 quit claim deed. In his first Schedule C, Benny claimed a homestead exemption of $75,000 and a wildcard exemption of $50,000, also based on an equitable interest. ECF No. 10 at 7 (superseded by Am. Sch. C, ECF No. 28, correcting typographical error). Harold objected that Benny could not claim a homestead exemption in property he did not own, attaching a 2012 title opinion certifying that Amy held title. ECF Nos. 24 at 2, 24-2 at 2.

Harold's objection was held in abeyance pending Benny's divorce proceedings. ECF Nos. 35, 44. Nearly six years passed, and although Benny was still not divorced, the Chancery Court had issued the Partial Summary Judgment Order. Status Rep., ECF No. 75 at 1.

Benny filed an amended Schedule A ("Current Schedule A"), ECF No. 79, and a second amended Schedule C ("Current Schedule C"), ECF No. 80. Current Schedule A values the Homestead Property at $400,000 and lists Benny as sole owner. ECF No. 79 at 4. Current Schedule C claims the same $125,000 total...