In re Pugh

Decision Date06 March 1996
Docket NumberBankruptcy No. 91-12432-8P7. Adversary No. 95-505.
Citation195 BR 787
PartiesIn re William D. PUGH and Elizabeth Pugh, Debtor. V. John BROOK, Jr., Trustee, Plaintiff, v. William D. PUGH and Elizabeth Pugh, Defendants.
CourtU.S. Bankruptcy Court — Middle District of Florida

Allan C. Watkins, Tampa, Florida, for Plaintiff.

Buddy D. Ford, Tampa, Florida, for Defendant.

Sara Kistler, Tampa, Florida, Assistant United States Trustee.



THIS IS a Chapter 7 case and the matters under consideration are three claims set forth in a Complaint filed by V. John Brook, Jr. (Trustee) against William D. Pugh and Elizabeth Pugh (Debtors). In Count I the Trustee seeks an accounting; in Count II a turnover of funds; and in Count III the imposition of an equitable lien. The Complaint was filed on July 21, 1995, and answered in due course. After conclusion of discovery, the matter was set for trial during which the following facts were established:

At all relevant times, the Debtors owned and operated a small chicken farm in Plant City, Florida. Some time prior to seeking bankruptcy protection, Mr. Pugh was involved in an automobile accident and sustained significant injuries, for which he asserted a claim and sought to recover damages. The attorney retained by him was able to negotiate a settlement of his claim without the necessity of filing a law suit. The total amount of the settlement was $100,000.00 and after payment of fees and costs, Mr. Pugh netted $75,000.00 shortly before filing for bankruptcy. At roughly that same time, due to the Debtors' inability to service the mortgage encumbering the ranch, the lender, Sun Bank of Pasco County (Sun Bank), foreclosed and on September 17, 1991, the Circuit court entered Summary Final Judgment in favor of Sun Bank in the amount of $715,902.12. The Judgment was recorded in the Public Records of Polk County on September 19, 1991. On September 13, 1991, or 4 days prior to the entry of the Judgment, Mr. Pugh applied for two Single Premium Immediate Term Certain Annuity" contracts with face amounts of $37,500 each through Jackson National Life Insurance Company (Jackson National). The annuities were paid for with the proceeds from the personal injury settlement.

On September 27, 1991, the Debtors filed their voluntary Petition for Relief under Chapter 11 in order to prevent an impending foreclosure sale of the ranch. The Jackson Life annuities were scheduled by the Debtors and claimed as exempt with a value of $501.00. On November 4, 1991, Sun Bank sought relief from the automatic stay in order to complete its foreclosure. Not long thereafter as a result of intense negotiations, Sun Bank agreed to settle its foreclosure activities for $50,000.00 to be paid in 30 days from the date of the entry of the Order denying Sun Bank's Motion for Relief From Stay. Without this Court's authorization which is required by § 364, the Debtors borrowed $50,000.00 from the Jackson National annuities, paid Sun Bank and obtained a satisfaction of the foreclosure judgment.

On February 5, 1992, the Debtors filed a Notice of Voluntary Conversion of their case to a Chapter 7 case and on February 12, 1992, this Court entered an Order of Conversion and scheduled the 341 meeting for March 19, 1992. In due course, V. John Brook, Jr. was appointed as interim Trustee and later succeeded himself as permanent Trustee. The meeting of creditors was ultimately concluded on April 16, 1992.

The record reveals that shortly before that time on April 12, 1992, the Debtors amended their Schedules to reflect for the first time an asset described as an unliquidated breach of contract claim against Zephyr Egg Co. (Zephyr Egg). The asset was valued at zero and claimed as exempt. The trustee learned of the claim at the § 341 meeting, but no objection was filed to this newly-claimed exemption for more than two years, during which time the Debtors received their discharge.

At trial it was established that during the pendency of the Chapter 7 case the Trustee negotiated a settlement of the Trustee's interest in the Zephyr Egg lawsuit with the Debtors' attorney and the state court attorney. Regrettably, the Trustee never filed an Application to employ that attorney as special counsel for the estate, not sought leave to compromise the Zephyr Egg claim.

Specifically, the record reveals that the Trustee, by letter dated April 20, 1992, asked state court counsel what action he proposed to take with regard to the claim against Zephyr Egg. The Debtor's attorney replied that the Debtors were willing to split the pending settlement proceeds on a 70%-30% basis, with the estate to receive 70% of the recovery. The Debtors' attorney also made the following request to the Trustee: "please advise if we need to execute any sort of fee agreement on behalf of the Bankruptcy estate."

On May 25, 1992, the Trustee wrote to Debtors' attorney and confirmed the arrangement outlined above and requested Debtors' counsel to "please confirm that this is the Debtors' understanding so I can do the appropriate paperwork." In furtherance of this casual arrangement, on September 9, 1992, the trustee filed a "Report And Notice of Intention to Sell Property of the Estate." The Notice listed the sales price as "70/30 split on future settlement" of the Zephyr Egg claim. On March 19, 1993, the Trustee filed a Motion to Approve Assignment of Claims or in the Alternative to Approve Settlement of Claims designed to obtain this Court's approval of the settlement of the Zephyr Egg claim under the terms outlined above. On May 17, 1993, this Court denied the motion for improper service.

In the interim, State Court counsel for the Debtor settled the suit with Zephyr Egg and after deducting $25,000.00 as his fee plus $2,029.25 for costs, he disbursed the balance of approximately $75,000.00 to the Debtors. The Debtors used those proceeds to repay the $50,000 loan from the Jackson National annuities, to pay an accountant the sum of $2,300.00, and to pay approximately $5,359.95 to certain creditors in full satisfaction of their claims which totalled approximately $12,000.00. The Debtors also tendered to the Trustee the sum of $13,400 in the form of two checks: the first, in the amount of $3400 and the second, in the amount of $10,000 under the mistaken belief that these funds would have been sufficient to pay in full the claim of creditors who had allowed claims which had not been settled earlier by the Debtors. The Trustee did not negotiate the second check which bore the notation "in full payment" on its face.

On July 16, 1993, the Trustee filed a Motion for Order to Show Cause why the Debtors should not be held in contempt for failing to turn over the seventy percent as promised. That motion was denied for improper service, but on July 23, 1993, the Trustee filed his Amended Motion For Order to Show Cause. The Motion was granted on August 4, 1993 and a final evidentiary hearing was scheduled. In the meantime, the Trustee filed a Notice of Surplus Funds indicating that there were sufficient funds to pay all priority claims and all timely-filed and allowed claims.

On March 24, 1994, this Court entered its Order (Contempt Order) on the contempt proceeding instituted by the Amended Order to Show Cause and made the following findings and...

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