545 B.R. 541
Bankr. S.D. Tex.2016Background
- Debtor filed Chapter 7 in August 2011 owning a 24.5% membership interest in API; that interest was scheduled with its value and the claimed §522(d)(5) wildcard exemption listed as “unknown.” The Chapter 7 case remained open after discharge.
- Chapter 7 trustee (Romo) investigated the API interest, pursued turnover and asserted potential claims for (a) a post-petition 7.8333% transfer to Gary Cain ($45,179.25) and (b) retention of K-1 distributions (~$49,000); Romo sought approval of a settlement allocating $100,000 to the Chapter 7 estate.
- Debtor later filed Chapter 13 (Oct. 2013). Debtor and counsel (Grissom) sued API and Tomlinsons in state court for damages based on allegedly erroneous K-1s and related harms; that state‑court suit settled for $650,000 with allocations: $100,000 to Romo, $326,914.90 to IRS (Wright), and $223,085.10 to Debtor/Wright/Grissom.
- Romo moved in Chapter 7 to approve the settlement (seeking the $100,000 carve‑out for the Chapter 7 estate). Debtor moved in Chapter 13 to approve the settlement but conditionally to disallow or redirect Romo’s $100,000 share to Chapter 13 creditors.
- The court held an evidentiary hearing, received briefs, and analyzed (1) whether the API interest and/or settlement proceeds were property of the Chapter 7 or Chapter 13 estate, and (2) which competing Rule 9019 compromise should be approved.
Issues
| Issue | Debtor's Argument | Romo's Argument | Held |
|---|---|---|---|
| Who owned the 24.5% API interest and thus had authority to release/settle it? | Debtor argued her post‑petition claims and transfer questions mean the estate had no enforceable claim and that the settlement primarily resolved Debtor’s personal (post‑petition) causes of action. | Romo contended the API interest became Chapter 7 property at filing under §541 and he had colorable claims (including on post‑petition transfers and retained distributions) allowing him to bargain for $100,000. | The court held the 24.5% interest was property of the Chapter 7 estate (subject to a small wildcard exemption), so Romo had authority over the estate’s share. |
| Are the settlement proceeds property of Chapter 7, Chapter 13, or both? | Debtor: the state‑court claims arose post‑petition and inure to Debtor/Chapter 13; settlement thus chiefly compensates Debtor’s personal claims and is not Chapter 7 proceeds. | Romo: the settlement is mixed — part proceeds from Chapter 7 property (the $100,000 carve‑out for releasing estate claims/stock) and part from Debtor’s post‑petition claims (allocated to Debtor/Chapter 13). | The court held the settlement is mixed: Romo’s $100,000 is a §541(a)(6) proceed of Chapter 7 property; other portions derive from Debtor’s post‑petition causes and inure to Chapter 13. |
| Should the court approve the Chapter 7 trustee’s Rule 9019 compromise or Debtor’s Chapter 13 compromise? | Debtor asked the court to deny Romo’s approval and to redirect the $100,000 to Chapter 13 creditors, arguing Romo lacked consideration and/or entitlement. | Romo argued approval of the Chapter 7 compromise is fair, saves litigation expense, and will allow payment of Chapter 7 creditors and closure of the estate. | Applying Fifth Circuit factors (probability of success, complexity/cost/duration, and wisdom of compromise), the court approved the Chapter 7 compromise and denied the Chapter 13 compromise. |
| May Debtor’s counsel (Grissom) be paid from Chapter 7 proceeds? | Debtor’s retention agreement contemplates contingent fees; Debtor implied counsel should be paid from settlement. | Romo did not employ Grissom; trustee’s counsel rules restrict payment from Chapter 7 estate to professionals employed under §327. | The court ordered Grissom to file a detailed fee application; flagged potential Lamie/§327 problems since Grissom was employed by Debtor not the trustee, so payment from Chapter 7 proceeds requires careful review. |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (1979) (state law determines property interests for bankruptcy §541 snapshot rule)
- Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) (trustee must timely object to vague/"unknown" exemption claims)
- Schwab v. Reilly, 560 U.S. 770 (2010) (clarifies treatment of exemption assertions and trustee objections post‑Taylor)
- Stern v. Marshall, 564 U.S. 462 (2011) (constitutional limits on bankruptcy courts' final adjudicatory power)
- In re Cajun Elec. Power Coop., 119 F.3d 349 (5th Cir. 1997) (factors governing approval of compromise under Rule 9019)
- Lamie v. United States Trustee, 540 U.S. 526 (2004) (§327 bars compensation from Chapter 7 estate to professionals not employed by trustee)