In re Robert Dean Schooler And Tina Marie Schooler

• Decision Date: 30 September 2010
• Docket Number: Bankruptcy No. 01–51003–RLJ–7.,Adversary No. 09–05011.
• Citation: 449 B.R. 502
• Parties: In re Robert Dean SCHOOLER and Tina Marie Schooler, Debtors.United States of America by Lamesa National Bank, Plaintiffv.Liberty Mutual Surety, Defendant.
• Court: U.S. District Court — Northern District of Texas

449 B.R. 502

In re Robert Dean SCHOOLER and Tina Marie Schooler, Debtors.United States of America by Lamesa National Bank, Plaintiff

v.Liberty Mutual Surety, Defendant.

Bankruptcy No. 01–51003–RLJ–7.

Adversary No. 09–05011.

United States Bankruptcy Court, N.D. Texas, Lubbock Division.

Sept. 30, 2010.

James L. Gorsuch, James L. Gorsuch, P.C., Lubbock, TX, William Riley Nix, Jr., Sherman, TX, for Plaintiff.

Don Clark Dennis, Boerner, Dennis, & Franklin, PLLC, Lubbock, TX, for Defendant.

MEMORANDUM OPINION

ROBERT L. JONES, Bankruptcy Judge.

Trial of this adversary proceeding was held on May 28, 2010, after which the Court granted the parties' request to file post-trial briefs; upon receipt of the briefs, the Court took the matter under advisement. By this suit, the plaintiff, Lamesa National Bank (“LNB”), seeks recovery from the defendant, Liberty Mutual Surety (“Liberty Mutual”), which is the surety under the blanket bond issued to cover bankruptcy trustees serving the bankruptcy court for the Northern District of Texas. LNB, in accordance with Bankruptcy Rule 2010(b), brings this suit in the name of the United States.¹

In accordance with the Court's findings of fact and conclusions of law set forth below, the Court has determined that Liberty Mutual is obligated under the bond, but such obligation runs in favor of the bankruptcy estate, not LNB. Liberty Mutual is directed to remit the sum of $112,247.66 to the bankruptcy estate of the debtors, Robert Dean Schooler and Tina Marie Schooler.

The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b); this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). This Memorandum Opinion and Order contains the Court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052.

Statement of Facts

1. The August 21, 2001 Bankruptcy Filing, the Bond, and the Parties

Robert and Tina Schooler filed their chapter 7 bankruptcy case on August 21, 2001; immediately after the filing, the chapter 7 case trustee (the “Trustee”) was appointed. LNB is an unsecured creditor of the Schoolers; it has filed four proofs of claim in the case that, when added together, total $143,644.00.

Liberty Mutual is the surety and the Trustee is the principal on the blanket bond issued by Liberty Mutual to the United States under the names of the trustees specifically scheduled under the bond, including the Trustee. See Plaintiff's Exhibit 32. The bond provides that the Trustee, as principal, and Liberty Mutual, as surety, are “bound unto” the United States “for the payment of which well and truly to be made, ... jointly and severally, firmly by these presents. The joint and several liability is between each trustee and the surety.” Id. The bond further provides that, “as a condition to serving in the capacity as Trustee, Section 322 of the Bankruptcy Code requires that said Principal provide a surety bond for the faithful performance of [her] official duties as Trustee of the estates of ... debtors assigned to the Principal by the United States Trustee.” Id. (emphasis added). Finally, the bond states, “if said Principals shall faithfully perform their official duties and orders issued by the Court as Trustee, then this obligation shall be null and void; otherwise to remain in full force and effect.” Id. The liability to the surety is limited per case and in the aggregate to $300,000.00 and $8,000,000.00, respectively.

The Trustee is an attorney that, in addition to serving as a case trustee in chapter 7 bankruptcy cases, has a law practice that includes collection and probate work.

2. Death of Hank Gremminger and Application to Probate Gremminger Will—November 2, 2001 to November 8, 2001

Hank Gremminger (“Gremminger”), father of Tina Schooler, died on November 2, 2001, just over two months after the Schoolers' chapter 7 bankruptcy filing. Tina Schooler and her sister, Kim McWilliams, were the beneficiaries under Gremminger's will—Tina received an undivided one-half of Gremminger's estate, with the other half to be held in trust for the benefit of Kim McWilliams and her son, Timothy Chase McWilliams. See Plaintiff's Exhibit 2. Tina Schooler was named the executrix under the will. In the event she was unable to serve as executrix, John Westhoff, an attorney who was designated as the trustee of the trust for Kim McWilliams and Timothy Chase McWilliams, was named an alternate executor. Id.

Six days after Gremminger's death, on November 8, 2001, Tina Schooler filed an application to probate Gremminger's will. Id.

3. Warnings to Trustee—November 28, 2001 to February 11, 2002

As a major unsecured creditor in the Schoolers' bankruptcy case, LNB was aware of the bankruptcy estate's rights to Tina Schooler's inheritance from Gremminger. By letter dated November 28, 2001 from Riley Nix, counsel for LNB, to the Trustee, Nix stated as follows:

I have done some research regarding the bankruptcy estate's interest in Mrs. Schooler's entitlement to property under the will of Charles H. “Hank” Gremminger, Jr.... I believe that the debtors' duty to disclose their entitlement to an inheritance in their schedules and the estate's entitlement to the inheritance is clear. Rule 1007(h) of the Federal Rules of Bankruptcy Procedure places a duty on the debtors to amend their schedules within ten days of her becoming aware of her entitlement to the deceased's property. This has not been done. I think this raises some issues with regard to the debtors' entitlement to a discharge in this case. Section 541(a)(5)(A) of the Bankruptcy Code makes Mrs. Schooler's entitlement apart of the bankruptcy estate as long as the entitlement arose within 180 days of the filing of the bankruptcy. This case was filed on August 21, 2001 and Mr. Gremminger died on November 2, 2001, so I believe this requirement has clearly been met. It is, therefore, clear that the debtors must disclose information relating to the estate's assets and that the estate has an interest in the inheritance.

The most aggressive position that you, as Chapter 7 Trustee, can take in this probate is to assert that you are entitled to be executor of the probate estate.... The benefit to such action would be your having direct control over the assets and having the ability to control the timing of the activities in the probate court.

Plaintiff's Exhibit 5. The hearing on Schooler's application to admit Gremminger's will to probate was set the next day, November 29, 2001, which Nix acknowledged presented a practical problem to having the Trustee appointed as a replacement executor. He therefore suggested an alternate course of action.

Another possible way to assume the position would be to allow the probate court to appoint her, to allow letters to issue, assert that you automatically step into her shoes as the executor pursuant to sections 541(a)(1) and 541(d) of the Bankruptcy Code, and file a motion for turnover with the bankruptcy court pursuant to section 542 or 543. There may be some other ways to get to the same position (e.g., have Mrs. Schooler removed and replaced pursuant to Texas Probate Code section 222), but I think these are the most straight forward and least burdensome.

Id. Finally, Nix suggested that “some discovery should be done in order to ascertain the nature of the assets involved ... and those that will pass as the result of a non-testamentary transfer, such as certain bank accounts, insurance policies, retirement accounts, and stock or mutual fund accounts.” Id.

The next day, November 29, 2001, Nix sent a letter to John Westhoff, who was also serving as attorney for Tina Schooler in her application to probate Gremminger's will. Nix's letter warned Mr. Westhoff that Tina Schooler had not advised the Trustee of the inheritance, the inheritance passed to the bankruptcy estate, the Trustee was entitled to take control over the probate estate, and she (Tina Schooler) was accountable “to the U.S. Bankruptcy Judge for any proceeds received from this Estate or otherwise since the filing of her bankruptcy.” Plaintiff's Exhibit 24. The Trustee was sent a copy of this letter.

Tina Schooler initially took the position that she could disclaim the inheritance. See Plaintiff's Exhibit 25. (If she could disclaim the inheritance, it would arguably prevent the inheritance from passing to the bankruptcy estate and thus eliminate her requirement to file amended bankruptcy schedules disclosing the inherited assets.) The Trustee, by letter dated December 4, 2001 to Mike Calfin, the Schoolers' bankruptcy counsel, disputed this claim.

I am in receipt of your letter dated November 30, 2001 in which you indicate you believe Tina Schooler has a right to disclaim any inheritance from her father, Charles H. “Hank” Gremminger, Jr. I disagree. It is my position that any attempt to disclaim constitutes an unauthorized transfer of bankruptcy estate property subject to avoidance under 11 U.S.C. § 549.... Here, we are talking about an after-acquired interest which becomes part of the bankruptcy estate under 11 U.S.C. § 541. Since the inheritance belongs to the bankruptcy estate and not the debtor, any attempt on the part of the debtor to disclaim is ineffective.

Id. The Trustee emphasized the requirement that the Schoolers amend their schedules and expressed concern about Tina Schooler serving as executrix of her father's probate estate.

Mr. and Mrs. Schooler are required to amend their schedules to list all property to which Mrs. Schooler has become entitled as a result of her father's death. This includes not only those assets to which she became entitled under the probate estate but extends to property which may have passed to her outside of probate (bank accounts, insurance, etc.). Accordingly, please have your clients immediately amend their schedules ... I also have some concern that Mrs. Schooler may not be the [b]est person to serve as Independent Executrix of her father's probate estate. This needs to be discussed at length to determine...