In Re Michael Ray Mccombs, 06-35891-H4-7.

• Decision Date: 17 August 2010
• Docket Number: No. 06-35891-H4-7.,06-35891-H4-7.
• Citation: 436 B.R. 421
• Parties: In re Michael Ray McCOMBS, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Texas

436 B.R. 421

In re Michael Ray McCOMBS, Debtor.

No. 06-35891-H4-7.

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

Aug. 17, 2010.

COPYRIGHT MATERIAL OMITTED.

COPYRIGHT MATERIAL OMITTED.

COPYRIGHT MATERIAL OMITTED.

Jeffrey A. Shadwick, Andrews Myers Coulter & Hayes, P.C., Houston, TX, for Michael Ray McCombs.

MEMORANDUM OPINION ON TRUSTEE'S FIRST APPLICATION FOR INTERIM COMPENSATION [Docket No. 252]

JEFF BOHM, Bankruptcy Judge.

I. Introduction

The Court writes this Memorandum Opinion because it concerns an issue important to Chapter 7 trustees; namely, whether they should be denied compensation because efforts reasonably taken to generate cash for payment of unsecured claims eventually failed to produce any funds. Stated differently, should a trustee be totally denied compensation because an objecting creditor, with the benefit of 20-20 hindsight, argues that the trustee's failure to generate funds for unsecured creditors automatically merits a denial of all compensation?

In this particular Chapter 7 case, the Court must decide whether to grant the Trustee's First Application for Interim Compensation in the amount of $57,302.65. The homestead exemption of Michael Ray McCombs (the Debtor) was limited to $125,000.00 by 11 U.S.C. § 522(p). ¹ W. Steve Smith, the Chapter 7 trustee (the Trustee), sold the homestead-which was comprised of two tracts (the Homestead)-generating an amount of proceeds significantly greater than $125,000.00. The Trustee now seeks interim compensation, pursuant to Sections 326(a), 330, and 331, for the value of his services relating to the sale of the Homestead.

H.D. Smith Wholesale Drug Company (H.D.S.), a creditor in this case, contends that the Trustee should receive no compensation for his services because, after the Trustee sold the Homestead, this Court issued a judgment in Adversary Proceeding 07-03043 (the Adversary Proceeding) declaring that H.D.S.'s lien on the Homestead is valid and enforceable. ² The effect of this Court's ruling is that H.D.S.'s lien attached to all of the proceeds from the sale of the Homestead after distribution of the $125,000.00 to the Debtor and payment of all liens superior to H.D.S.'s lien. As a result, H.D.S. asserts that the Homestead was fully encumbered, and because the Trustee's efforts have generated no proceeds to pay unsecured claims, no compensation under Sections 326(a), 330, and 331 should be allowed. It is no surprise that H.D.S. adamantly opposes the Trustee's request, as any compensation paid to him will come from the proceeds to which H.D.S.'s lien has attached. ³

After consideration of the record and arguments of counsel, this Court concludes that the Trustee deserves to be compensated, although not to the extent that he requests. This Opinion explains the Court's reasoning.

The Court makes the following Findings of Fact and Conclusions of Law under Federal Rule of Civil Procedure 52, as incorporated into Federal Rule of Bankruptcy Procedure 7052, and under Federal Bankruptcy Rule 9014. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.

II. Findings of Fact

1. Less than 1215 days prior to the filing of the Debtor's Chapter 7 petition, the Debtor and his wife at the time, Alicia Atkinson McCombs (Atkinson), purchased two adjoining parcels in Katy, Harris County, Texas. The parcel located at 2402 Ivy Run Court included a house where the McCombs resided (the Ivy Run Property); it was their homestead. The adjacent parcel located at 2406 Ivy Run Court was unimproved (the Ivy Run Lot); it was also part of their homestead. [Adv. No. 07-03043, Adv. Doc. No. 72, p. 2, ¶ 1]. ⁴

2. Prior to the filing of the Debtor's petition, H.D.S. obtained a judgment against the Debtor in the amount of 8,016.46. [Adv. No. 07-03043, Adv. Doc. No. 72, p. 3, ¶ 4].

3. On June 29, 2006, H.D.S. abstracted its judgment, and on July 7, 2006, recorded its judgment lien in the Official Public Records of Real Property of Harris County, Texas. [Adv. No. 07-03043, Adv. Doc. No. 72, p. 3, ¶ 5].

4. On November 3, 2006, the Debtor filed his Chapter 7 petition (the Petition Date). [Docket No. 1].

5. On November 22, 2006, the Trustee filed his Emergency Application to Retain Broker Nunc Pro Tunc and to Sell Property “As Is” and Free and Clear of All Liens, Claims, Charges, Encumbrances and Interests (the Property Application). [Docket No. 9]. In the Property Application, the Trustee sought approval to sell the Ivy Run Property. [Docket No. 9, p. 3-4].

6. On November 29, 2006, this Court issued an order granting the Property Application, which gave the Trustee and his real estate broker employed nunc pro tunc full and exclusive authority to effectuate the sale of the Ivy Run Property. [Docket No. 17]. This order stated that “any other liens and/or encumbrances against the property shall be, and hereby are, transferred to the balance of the Sale Proceeds.” [Docket No. 17, p. 2].

7. The Trustee's counsel certified that a true and correct copy of the Property Application was served on the persons identified by the Debtor as a comprehensive list of his creditors. [Docket No. 9, p. 6]. Thus, H.D.S., having been listed on Schedule F, was notified of the Property Application and chose not to object thereto.

8. On December 12, 2006, the closing of the sale of the Ivy Run Property took place. After satisfying the undisputed liens on the Ivy Run Property and paying closing costs, 8,849.03 remained available for payment of other claims. [Adv. No. 07-03043, Adv. Doc. No. 72, p. 4, ¶ 12]. H.D.S.'s judgment lien was not paid out of these sale proceeds because the Trustee took the position that H.D.S.'s judgment lien was unenforceable and invalid. [Adv. No. 07-03043, Adv. Doc. No. 72, p. 7] [Tape Recording, 05/13/2010 Hearing at 5:01:22 p.m.]. Accordingly, the Trustee deposited the 8,849.03 into an account pending resolution as to whether H.D.S.'s judgment lien was valid and enforceable. [Adv. No. 07-03043, Adv. Doc. No. 72, ¶¶ 10 & 12].

9. On January 11, 2007, Atkinson filed a Motion to Reconsider the Order Granting the Property Application (the Motion to Reconsider). [Docket No. 34].

10. On January 31, 2007, H.D.S. filed a Response to the Motion to Reconsider (the Response). [Docket No. 43]. In the Response, H.D.S. represented to the Court that it approved of the sale because: (a) it stated that “as the sale of Ivy Run has already closed, Atkinson is essentially requesting the court to ‘undo’ a completed transaction.” [Docket No. 43, p. 3, ¶ 38]; and (b) in the prayer paragraph, H.D.S. specifically requested that this Court deny the relief requested in the Motion to Reconsider. [Docket No. 43, p. 5]. Thus, H.D.S.'s Response had the effect of endorsing the actions taken by the Trustee to effectuate the sale of the Ivy Run Property.

11. On February 9, 2007, H.D.S.-knowing that 8,849.03 remained from the sale of the Ivy Run Property for distribution-filed the Adversary Proceeding to determine the extent, validity and priority of its judgment lien on the Ivy Run Property and the Ivy Run Lot. [Adv. No. 07-03043, Adv. Doc. No. 1]. H.D.S. sought a

declaratory judgment from this Court that its judgment lien of 8,016.46 is valid so that its lien would attach to the entire 8,849.03, thereby requiring the Trustee to distribute all of these funds to H.D.S. The Trustee filed an answer to H.D.S.'s complaint on March 1, 2007. [Adv. No. 07-03043, Adv. Doc. No. 9].

12. On February 22, 2007, the Trustee filed his Emergency Application to Retain Broker Nunc Pro Tunc and to Sell Lot “As Is” and Free and Clear of All Liens, Claims, Charges, Encumbrances and Interests (the Lot Application). [Docket No. 70]. In the Lot Application, the Trustee sought approval to sell the Ivy Run Lot.

13. On February 23, 2007, this Court issued an order granting the Lot Application, which gave the Trustee and his real estate broker full and exclusive authority to effectuate the sale of the Ivy Run Lot. [Docket No. 76]. This order stated that “any other liens and/or encumbrances against the 2406 Ivy Run Lot shall be, and hereby are, transferred to the balance of the Sale Proceeds.” [Docket No. 76, p. 2].

14. The Trustee's counsel certified that a true and correct copy of the Lot Application was served on H.D.S.'s counsel, Barbara Hargis and Joe Tolbert. [Docket No. 70, p. 7-8]. Thus, H.D.S., through its counsel of record, was notified of the Lot Application. H.D.S. chose not to object to the Lot Application.

15. Eventually, the closing of the sale of the Ivy Run Lot took place. Once again, H.D.S.'s judgment lien was not paid out of these sale proceeds because the Trustee took the position that H.D.S.'s judgment lien was unenforceable and invalid. Accordingly, the proceeds were deposited into an account pending resolution as to whether H.D.S.'s judgment lien is enforceable and valid.

16. On May 22, 2007, the Trustee filed his Objection to the Debtor's Amended Claim of Exemptions. [Docket No. 121]. The Trustee objected to the Debtor's amended Schedule C “to the extent that Debtor seeks to claim, on behalf of his non-debtor spouse or their community estate, an exemption over and above the statutory limitation.” [Docket No. 121, p. 2, ¶ 3].

17. On May 23, 2007, H.D.S. filed its First Amended Objection to the Debtor's Amended Claim of Exemptions, objecting to the Debtor's claim of exemptions on the Ivy Run Property and the Ivy Run Lot. [Docket No. 122]. H.D.S. asserted that the Debtor and Atkinson (his non-debtor, former spouse) together were limited to an exemption of 5,000.00. [Docket No. 122, p. 2-3, ¶¶ 2, 6].

18. The parties thereafter negotiated a settlement, which was memorialized through an Agreed Order that was signed by

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