In re Presto

• Decision Date: 05 October 2007
• Docket Number: No. 06-33618.,06-33618.
• Citation: 376 B.R. 554
• Parties: In re Kevin PRESTO, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Texas

376 B.R. 554

In re Kevin PRESTO, Debtor.

No. 06-33618.

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

October 5, 2007.

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David Nathan Ziegler, Attorney at Law, Houston, TX, Michael G. Colvard, Martin & Drought, P.C., San Antonio, TX, for Debtor.

David Nathan Ziegler, Attorney at Law, Houston, TX, Steven Douglas Shurn, Hughes Watters and Askanase, Houston, TX, for trustee.

Nancy Lynne Holley, U.S. Trustee, Houston, TX, for U.S. Trustee.

MEMORANDUM OPINION ON OFFICIAL EMPLOYMENT-RELATED ISSUES COMMITTEE OF ENRON CORP.'S OBJECTIONS TO DEBTOR'S CLAIM OF THE HOMESTEAD EXEMPTION

[Docket Nos. 25 and 107]

JEFF BOHM, Bankruptcy Judge.

I. Introduction

Kevin Presto (the Debtor) was a vicepresident at Enron North America Corporation prior to the monumental collapse and eventual bankruptcy of its parent company, Enron Corporation (Enron).¹ Several weeks before Enron filed its Chapter 11 case, the Debtor was among a number of Enron insiders who received lucrative bonus payments.² The Debtor's bonus was $2 million.

On December 2, 2001, Enron filed its Chapter 11 petition in the Southern District of New York, case no. 01-16034. The Official Employment-Related Issues Committee of Enron Corp. (the Committee) was created in the Enron bankruptcy case and assigned the right to prosecute avoidance actions against the recipients of these bonus payments. On December 9, 2005, the bonus payments were held to be fraudulent transfers, and a $2 million judgment was entered against the Debtor and in favor of the Committee (the Judgment).

During the four years it took for the Committee to obtain the Judgment, the Debtor spent or lost the entire $2 million bonus, which resulted in the filing of this Chapter 7 case on July 31, 2006.³ Currently, the only significant asset remaining in the Debtor's estate is his homestead, which is worth over $500,000.00. On October 27, 2006, the Committee filed its Objection to Debtor's Claim of the Homestead Exemption [Docket No. 25], and subsequently the Committee filed its Supplemental Objection to Debtor's Claim of the Homestead Exemption [Docket No. 107] (collectively, the Objection).⁴ The Objection presents three different objections under 11 U.S.C. § 522(o), (p), and (q), respectively⁵ — all of which are new provisions added to the Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).⁶ As the objecting party, the Committee bears the ultimate burden of establishing that the Debtor's claimed homestead exemption is improper. Fed. R. Bankr.P. 4003(c); In re Hill, 310 B.R. 294, 296 (Bankr.W.D.La.2004). The Committee must establish that the exemption is improper by a preponderance of the evidence. In re Park, 246 B.R. 837, 840 (Bankr.E.D.Tex.2000).

Between April 4, 2007 and June 21, 2007, the Court held a total of eight hearings related to the Objection.⁷ For the reasons set forth in this Memorandum Opinion, the Committee's Objection is sustained in part and overruled in part. A corresponding Order will be entered on the docket simultaneously with the entry of this Memorandum Opinion.

II. Jurisdiction and Venue

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. §§ 157(b)(2)(A), (B), and (0). This contested matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (B), and (0). Venue is proper pursuant to 28 U.S.C. § 1408(1).

III. Standing⁸

The Debtor argues that the Committee lacks standing to file this Objection because it was merely assigned the right to prosecute and recover a judgment against the Debtor in the Enron bankruptcy case, but was never actually assigned the Judgment itself and therefore is not a creditor of the Debtor. The Court finds that the Committee has standing for two reasons: (1) the Debtor's argument misconstrues the requirements of standing to file an objection to exemption; and (2) the Debtor is estopped from denying that the Committee is the holder of the claim based on the Judgment.

First, the argument by Debtor's counsel implies that a party only has standing to file an objection to exemption if it is a creditor of the estate. While it is true that every creditor has standing to object, it is incorrect to say that a party must be a creditor to object to a claimed exemption. Bankruptcy Rule 4003(b) states that any "party in interest may file an objection" to a debtor's list of exempt property. Although it is used `several times throughout the Code, the phrase "party in interest" is not a defined term. The Fifth Circuit has broadly interpreted "party in interest" to include "any other person with a sufficient stake in [the] outcome of a proceeding so as to require representation." Int'l Transactions, Ltd. v. Embotelladora Agral Regiomontana, 347 F.3d 589, 595 (5th Cir.2003) (citing In re Am. Appliance, 272 B.R. 587 (Bankr. D.N.J.2002)). The Judgment is by far the Debtor's single largest unsecured debt, and the Committee is the eventual recipient of any proceeds recovered from that ,claim through the terms of the Enron Plan. Thus, the Court finds that the Committee is a party in interest and therefore has standing to file this Objection.⁹

Second, the Court finds that the Debtor is judicially estopped from denying that the claim arising from the Judgment belongs to the Committee. In re Sissom, 366 B.R. 677, 697 (Bankr.S.D.Tex.2007) (citing Larson v. Groos Bank, N.A., 204 B.R. 500, 501 (W.D.Tex.1996); Jacobson v. Ornsby (In re Jacobson), No. 04-51572, 2006 WL 2796672, at *17, 2006 U.S. Dist. LEXIS 70433, at *54 (W.D.Tex. Sept. 26, 2006)). On March 28, 2007, the Committee filed a proof of claim against the Debtor's estate. [Claim No. 5.] The Debtor did not file an objection to the Committee's claim. The Debtor filed a Schedule F on three different occasions — the original Schedule F on July 31, 2006 [Docket No. 1, p. 20], an amended Schedule F on October 13, 2006 [Docket No. 20], and a second amended Schedule F on December 7, 2006. [Docket No. 59.] In each of these three Schedules, the Debtor listed the Committee as the name of the creditor holding the Judgment. The Schedules do not try to qualify the debt by indicating either that it is disputed or including such language as "on behalf of Enron Corp." Thus, the first time that the Debtor asserted that the debt was not owed to the Committee was in his motion for summary judgment. Accordingly, the Court finds that the Debtor is judicially estopped from denying that the Committee holds a valid claim based on the Judgment.

IV. The Committee's Objection under 11 U.S.C. § 522(o)

A. Introduction

Shortly before filing his Chapter 7 petition, the Debtor sold his previous homestead and purchased his current homestead. Since the Debtor moved to a less expensive home, this transaction left the Debtor, with over $150,000.00 in cash. The Committee's Objection under § 522(o) is premised on the theory that the Debtor intentionally spent these proceeds on improvements to his current homestead prior to filing bankruptcy in order to prevent the Committee from reaching these funds as a creditor in the impending bankruptcy.¹⁰

During the two-month period that hearings were held on the Committee's Objection, this Court issued a lengthy opinion regarding § 522(o). In re Sissom, 366 B.R. 677 (Bankr.S.D.Tex.2007). On the record, the Court made counsel for the Debtor and the Committee aware of the Sissom opinion. The parties were encouraged by the Court to structure the presentation of their cases in chief and their closing arguments to parallel the analysis of § 522(o) in Sissom. Accordingly, the Court adopts the discussion of § 522(o) found in Sissom and applies it to the case at bar.

B. Findings of Fact

The facts relevant to the Committee's Objection under § 522(o) are as follows:

1. In January 2005, the Debtor paid attorney David Ziegler (Ziegler) a $35,000.00 retainer. Ziegler represented the Debtor in filing his Chapter 7 petition.

2. On December 5, 2005, the Judgment in the avoidance action was entered against the Debtor in the amount of $2 million. [Comm. Ex. 3-C.1 and 3-C.3] From this time up until shortly before the Debtor filed bankruptcy, the Committee and the Debtor were engaged in settlement negotiations.

3. On May 18, 2006, the Debtor sold his previous homestead, located at 5410 Morning Breeze, Houston, TX 77041 (the Morning Breeze Property), for $1,390,664.21. [Comm. Ex. 64.] After payment of liens on this property, the Debtor received $675,222.06. [Id.]

4. Also on May 18, 2006, the Debtor purchased his current homestead, located at 11939 Royal Rose Drive, Houston, TX 77082 (the Royal Rose Property), for $521,800.00. The Debtor paid the entire $521,800.00 purchase price out of the proceeds from the sale of the Morning Breeze Property.

5. On June 21, 2006, Ziegler and the Debtor had a telephone conversation about the possibility of the Debtor filing bankruptcy in the near future. Ziegler created three pages of handwritten notes during this conversation (the Ziegler Notes). [Comm. Ex. 3-A.11, pp. 29-31.]¹¹

6. The Ziegler Notes read, in pertinent part, as follows:

"8,000 — Shutter

22,000 — Closets/Built Ins

15,000 — wood floors, paint, HVAC

90,000 — pool (30k prepaid)

25,000 — furn./TVs

. . .

(20k left) — Summer camps, seaworld

. . .

Paper Trail

. . .

Prior to filing — accept 20k or file.

. . .

Have pool paid & completed before filing"

[Comm. Ex. 3-A.11, pp. 29-30.]

7. On July 7, 2006, the Debtor made a final offer of $20,000.00 to settle the Committee's $2 million judgment.

8. In July 2006, the Debtor spent more than $2,000.00 on a trip to SeaWorld with his children, which included $1,550.00 for three nights in a resort hotel.

9. On July 31, 2006, the Debtor filed his Chapter 7 petition. [Docket No. 1....