In re Mullican

• Decision Date: 30 September 2008
• Docket Number: Adversary No. 07-4150.,Bankruptcy No. 05-44423.
• Parties: In re Horace MULLICAN and Tamara Mullican, Debtors. Christopher J. Moser, Trustee, Plaintiff, v. Horace Mullican, Tamara Mullican and A.G. Edwards & Sons, Inc., Defendants.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Texas

Page 389

417 B.R. 389

In re Horace MULLICAN and Tamara Mullican, Debtors Christopher J. Moser, Trustee, Plaintiff, v. Horace Mullican, Tamara Mullican and A.G. Edwards & Sons, Inc., Defendants.

Bankruptcy No. 05-44423.

Adversary No. 07-4150.

United States Bankruptcy Court, E.D. Texas, Sherman Division.

September 30, 2008.

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Timothy A. York, Quilling Selander Cummiskey & Lownds PC, Dallas, TX, for Plaintiff.

Robert E. Barron, Nederland, TX, for Defendants.

MEMORANDUM OPINION

BRENDA T. RHOADES, Bankruptcy Judge.

On December 14, 2007, this Court conducted a trial on the "Second Amended Complaint" (the "Complaint") filed by Christopher J. Moser, Trustee (the "Trustee") against Horace and Tamara Mullican (collectively, the "Debtors "). The Trustee seeks a judgment (i) declaring certain property to be property of the estate, (ii) declaring that the disputed property is not exempt from the claims of the Debtors' creditors, (iii) requiring the Debtors to turnover the disputed property to the Trustee, (iv) finding that the Debtors violated the automatic stay and made unauthorized transfers of estate property post-petition, and (v) denying the Debtors a discharge in bankruptcy pursuant to 11 U.S.C. § 727(a)(2)(B), (3), (4)(A), (4)(D) and (5). The Court exercises its core jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(b)(2) and 1334. This Memorandum Opinion embodies the Court's findings of fact and conclusions of law. See FED. R. BANKR.P. 7052.¹

RELEVANT BACKGROUND²

On August 19, 2005 (the "Petition Date"), the Debtors filed a petition for relief under Chapter 13 of the Title 11 of the United States Code (the "Bankruptcy Code").³ The Debtors' unsecured debt consisted primarily of $119,000 in charges placed on nine credit cards. The Debtors did not own any real property, and their only secured creditor was Texas Credit Union, which had a purchase money security interest in their 2001 Chevrolet van.

Horace graduated from college in 1980. After graduating from college, Horace worked as a bank auditor for a few years, then as a bank examiner for the Office of the Comptroller for the Currency for seven years, and then for various private banks. He obtained a job with Countrywide Home Loans ("Countrywide") in 2001, where he earned approximately $138,000 per year in salary and commissions. Horace's salary at Countrywide was nearly three times what he had made in any of his previous jobs.

Horace was laid off from Countrywide in January 2004. Horace was employed as a mortgage loan consultant for Highland Capital Living as of the Petition Date, and his gross monthly salary was $2,500. Tamara had recently obtained a job as a secretary for Furniture Marketing Group, and her gross monthly salary was $2,340 as of the Petition Date.

The Debtors have two minor children. The youngest, who was six at the time of trial, is autistic. Horace testified that the medical condition of his youngest child has hampered his wife's ability to work outside the home. At the time of trial, his wife was studying to become a paralegal.

On February 16, 2006, the Debtors amended their bankruptcy schedules to reflect a change in their employment status. As of that date, Horace had obtained more lucrative employment with the Small Business Administration/Office of Disaster Assistance, where he earned a gross monthly salary of $4,460 and estimated monthly overtime of $618, for a total gross monthly income from wages of $5,078. Tamara was unemployed as of February 16, 2006.

The Court entered an order confirming the Debtors' Chapter 13 Plan (the "Plan") on February 23, 2006. Under the Plan, the Debtors were to make monthly payments of $325 to the Chapter 13 trustee for 57 months, for a total payment of $18,525 to their creditors. Nearly this entire amount went to pay the administrative claim of Debtors' bankruptcy attorney and the secured claim of Texas Credit Union. The projected dividend to the Debtors' unsecured creditors was 1.04% — that is, unsecured creditors had allowed claims against the Debtors for credit and consumer debt in the amount of $104,482.11, and the Debtors planned to pay a total of $1,091.49 to their unsecured creditors on a pro rata basis over 57 months.

Some time prior to the Petition Date, Horace was named by his mother, Anita W. Mullican, as the beneficiary of her Individual Retirement Account (the "IRA") in the event of her death. Anita had established the IRA at A.G. Edwards & Sons, Inc. ("A.G. Edwards"). On the Petition Date, Horace was also the sole beneficiary of Anita's Last Will and Testament (the "Will").

Anita was alive as of the Petition Date. The Debtors did not disclose any beneficial interest relating to the IRA or the Will in their original bankruptcy schedules, and, at trial, they disputed that they were aware of the existence of any such interest. The only property claimed by the Debtors as exempt in their original Schedule C (Property Claimed as Exempt) was a 1997 GMC Silverado, a 2001 Chevrolet van, and a computer.

After the Petition Date, the Debtors used a credit card belonging to Anita without prior approval from this Court. They also made payments on Anita's credit card while their bankruptcy case was pending. The payments were not disclosed in the Debtors' bankruptcy schedules or in their confirmed Plan.

Horace's mother died on October 24, 2006, leaving the entirety of her estate to Horace. Her estate included her home, two vehicles, funds in two checking accounts totaling approximately $14,000, and the cash value of a life insurance policy in the amount of $986.49. Horace also became the trust beneficiary of his mother's IRA (the "Inherited IRA"), which held a balance of approximately $162,000. At trial, Horace testified that he contacted his bankruptcy attorney after his mother's death and that he believed the Inherited IRA and his inheritance under his mother's Will were not property of the bankruptcy estate.

In November 2006, Horace listed his mother's home for sale. On December 1, 2006, Horace executed an IRA Adoption Agreement with respect to his Inherited IRA. At the time he executed the IRA Adoption Agreement, Horace withdrew $6,000 from the Inherited IRA.⁴ A.G. Edwards withheld 15% of this amount, or $900, for income tax purposes. In January 2007, Horace withdrew an additional $11,900 from the Inherited IRA, and 15%, or $1,785, was withheld by A.G. Edwards for income tax purposes.

During December 2006, January 2007, and February 2007, the Debtors purchased new furniture, jewelry, a laptop computer, and a desktop computer for their children, among other things. Their banking and credit records reflect that they threw a birthday party for their youngest child, and they took a family vacation that spring. They also used a portion of the money they received from the Inherited IRA and the Will to pay off the charges they had placed on the credit card that Horace's mother had allowed them to use.

With respect to his mother's home, Horace testified that he spent approximately $5,000 preparing the home for sale. Horace sold the home on February 16, 2007 for approximately $110,000. After satisfying the mortgage on the home, the Debtors received approximately $20,000 in cash as a result of the sale. The Debtors also retained all funds in Anita's checking accounts (approximately $14,000), the cash value of the life insurance policy (approximately $1,000), and one of his mother's vehicles (a 2005 Kia Amante) for their own use.

On March 16, 2007, Horace received notice from his employer that he would be laid off from his job effective March 31, 2007. On April 18, 2007, the Debtors filed a Notice of Conversion to Chapter 7. The Debtors filed amended bankruptcy schedules on the same date in which, among other things, they denied that the Inherited IRA was property of the estate but, as a precaution, claimed the Inherited IRA as their exempt property in their amended Schedule C. The only income listed on the Debtors' Schedule I (Current Income of Individual Debtor(s)), as amended, was a "family contribution" of $1,576 per month and "IRA withdrawal(s)" of $1,700 per month. The Debtors did not include the Kia Amante in their bankruptcy schedules but stated their intention to surrender the 2001 Chevrolet van to Texas Credit Union.

Horace received approximately $1,500 for his accrued time off when he lost his job with the Small Business Administration in March 2007. In addition, the Debtors were anticipating a tax refund of approximately $700 from the Internal Revenue Service when they filed the Notice of Conversion. Two days after filing the Notice of Conversion, on April 20, 2007, Horace withdrew $5,000 from the Inherited IRA at A.G. Edwards.

The Court entered an order converting the Debtors' case to Chapter 7 on April 23, 2007 (the "Conversion Date"). On the same day, coincidently, Horace was re-hired on a month-to-month basis by the Small Business Administration. Horace was to be paid at the same salary grade level he had previously received.

Horace and Tamara both attended the meeting of creditors in their converted bankruptcy case. At the meeting, Horace and Tamara testified under oath that all of their assets were listed on their schedules. That statement was false. Horace also falsely testified that his inheritance consisted of only his mother's home and the Inherited IRA. He disclosed the sale of the home to the Chapter 7 trustee, but falsely stated that he had received only $15,000. He further stated that he had "taken a little" of the money out of the Inherited IRA for expenses while he was laid off. Horace's statements regarding his withdrawals from the Inherited IRA were, at best, misleading. The Chapter 7 trustee requested copies of the Debtors' bank statements and a copy of Anita's Will. The Debtors, however, failed to produce all of the requested bank statements until after the Chapter 7 tr...