In re Brown
MEMORANDUM OPINION ON: (1) TRUSTEE’S AMENDED OBJECTION TO CLAIM NO. 137 FILED BY RACHEL BROWN, INDIVIDUALLY, AND AS NEXT OF FRIEND FOR Rlrеdacted] BROWN AND Mlredacted] BROWN: AND (2) RACHEL BROWN’S AMENDED APPLICATION FOR FAMILY ALLOWANCE AND ALLOWANCE IN LIEU OF HOMESTEAD AND EXEMPT PROPERTY
[Claim No. 137 and Doc. Nos. 1523 & 1608]
I. INTRODUCTION
This dispute, which involves both bankruptcy law and probate law, leads this Court to conclude that it has subject-matter jurisdiction to adjudicate the claim made by a debtor’s widow against assets of the debtor’s probate estate. Because the debtor’s probate estate consists solely of exempt property, the Court necessarily concludes that it has jurisdiction to order the distribution of this property to the debtor’s widow. The Court recognizes that there is ample case law holding that bankruptcy courts have no jurisdiction to adjudicate probate matters or claims against exempt property. See, e.g., In re Spiser,
Specifically, this Opinion responds to the debtor’s widow’s claim to a family allowance based on probate law. She makes this claim against both the Debtor’s Chapter 7 estate and his probate estate.
This Court makes its Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rules 7052 and 9014. To the extent that any Findings of Fact are construed as Conclusions of Law, they are adopted as such; and to the extent that any Conclusions of Law are construed as Findings of Fact, they are adopted as such. The Court reserves the right to make further findings and conclusions as it deems appropriate or as any party requests.
II. FINDINGS OF FACT
1. Before any of the legal proceedings at issue here began, Michael Glyn Brown (“the Debtor”), who was trained as a physician, was living in Houston with his wife, Rachel Brown, their two minor children, and a third child of Rachel’s. The Debtor owned a wildly successful group of hand surgery centers utilizing his patented hand surgery technique. These centers generated annual revenues in the millions of dollars for many years.
2. In August 2010, the Debtor and Rachel Brown separated. [Doc. Nо. 174, p. 163]. Rachel Brown thereafter filed for divorce in Texas state court, and the suit was styled R.B. v. M.G.B. 309th Judicial District Court of Harris County, Texas, Case No.2011-01272. The divorce proceedings were extremely acrimonious and protracted. Indeed, the Debtor and Rachel Brown had still not obtained a decree of divorce by the time that the Debtor died in November of 2013. [See Finding of Fact No. 7].
3. In 2012, the Debtor moved to Miami Beach, Florida. [Doc. No. 223, p. 63]. By the time of his death in November of 2013 [See Finding of Fact No. 7], the Debtor owned multiple, high-end vehicles, plus a yacht with a value of several hundred thousand dollars, located in Florida. [Doc. Nos. 888, 934, 968 & 969].
4. On January 23, 2013, the Debtor filed a Chapter 11 petition in the United States Bankruptcy Court for the Southern District of Florida. [Doc. No. 1].
5. On April 2, 2013, the Debtor filed an amended Schedule C claiming real property located in Miami Beach, Florida, worth over $8 million, as his homestead. [Doc. No. 223, p. 28].
6. On September 24, 2013, venue of the Debtor’s Chapter 11 case was transferred to the Southern District of Texas, where it was assigned to the undersigned judge. [Doc. No 436].
7. On November 10, 2013, the Debtor died in Florida. [Doc. No. 799]. He left behind seven wills, naming various individuals (but not his wife) as executors; however, the validity of all of these wills is questionable and no one who is namedas an executor in these wills has ever probated the will. [Courtroom Minutes, 12/04/2013, 2:30 p.m. 6 12/19/2013, 11:30 a.m.]. As of today, no probate court has assumed jurisdiction over the Debtor’s probate estate. Indeed, no probate proceeding has ever been initiated since the Debtor’s death.
8. On November 12, 2013, this Court issued an order setting a hearing pursuant tо Bankruptcy Rule 1016 to inquire if any creditor or party-in-interest wanted the case to be dismissed in the wake of the Debt- or’s death. [Doc. No. 800]. Numerous creditors and parties-in-interest appeared at this hearing and all of them (except one, who took no position) expressed the position that this bankruptcy case should not be dismissed but should proceed to allow the Trustee to administer the assets of the Debtor’s bankruptcy estate. [Doc. No 930].
9. On November 20, 2013, this Court converted the Chapter 11 case to a Chapter 7 case. [Doc. No. 905]. Ronald J. Sommers (“the Trustee”) became the trustee in this Chapter 7 case. [Courtroom Minutes, 11/21/2013, 9:00 a.m.].
10.On December 19, 2013, the Court appointed Judy Lenox (“Lenox”) to act as a personal representative for the Debtor, deceased, in this Chapter 7 case. [Doc. No. 1021], Le-nox’s role was expressly limited to a personal representative of the bankruptcy estate, not the probate estate, and her role would come to an end after she had claimed exemptions on behalf of the deceased Debtor’s probate estate and then defended those exemptions as necessary. [Courtroom Minutes, 12/04/2013, 2:30 p.m. & 12/19/2013, 11:30 a.m.]. Lenox has no authority to distribute any assets of the probate estate without first obtaining this Court’s approval.
11. On February 28, 2014, Lenox filed an Amended Schedule C claiming real property located in Houston, Texas as the Debtor’s homestead. [Doc. No. 1238].
12. On March 6, 2014, Lenox filed an Amended Schedule C claiming as exempt property: (1). $45,000 in lieu of a homestead, (2) $60,000 in lieu of exempt personal property, (3) two “Interest in Education” IRAs valued at $37,080 each, and (4) an IRA account at JP Turner & Co. valued at $319,080. [Doc. No. 1262], The change to the “in lieu of’ designation was made because there was no equity in the Houston real property that Lenox had previously designated as the Debtor’s homestead. [Doc. No. 1928, p. 4]. The Trustee objected to the exemption of $45,000 in lieu of a homestead and to the IRA account at JP Turner & Co. [Doc. No. 1411], The Court thereafter sustained the Trustee’s objection. [Doc. No. 1878]. Thus, the only liquid assets currently in the Debtor’s probate estate are the $60,000 in lieu of exempt personal property. [Stipulation by parties at the hearing held on October 16, 2014]. After this Court appointed Lenox to act as the personal representative of the Debtor, deceased, in this Chapter 7 case, the Trustee, with this Court’s approval, transferred $60,000 out of the bankruptcy estate to Lenox. [Doc. Nos. 1930 & 2035]. Lenox has no authority to distribute all or any portion of this$60,000 without first obtaining this Court’s approval.
13. On March 10, 2014, Rachel Brown filed a proof of claim, with the amount “as of Date Case Filed” listed as $571,080 and the “Basis for Claim” listed as “Family Allowance Administrative Claim — Based on Probate.” [Claim No. 137]. On the proof of claim form, the Applicant designated the claim as a “[d]omestic support obligation[ ] under 11 U.S.C. § 507(a)(1)(A) or (a)(1)(B).” [Claim No. 137], The Trustee filed an objection to Claim No. 137 on March 31, 2014 [Doc. No. 1411], which he amended on April 29, 2014, [Doc. No. 1523] (“POC Objection”).
14. On April 29, 2014, Rachel Brown (hereinafter referred to as the “Applicant”)2 filed an Aрplication for Family Allowance and Allowance in Lieu of Homestead and Exempt Property [Doc. No. 1526], which she amended on May 14, 2014 [Doc. No. 1608] (“Application for Family Allowance” or “Application”). The Application separates the $571,080 claim into a $496,080 claim for a family allowance under Texas Estates Code § 353.101, a $45,000 claim for an allowance in lieu of homestead under Texas Estates Code § 353.053, and a $30,000 claim for an allowance in lieu of exempt personal property under Texas Estates Code § 353.053.3 [Doc. No. 1608]. The Applicant expressly asserts in the Application that her claim should be paid out of the bankruptcy estate and the probate estate, and, if necessary, out of the bankruptcy estates of various business entities associated with the Debtor. [Doc. No. 1608, ¶ 32] (“The family allowance is to be paid out of the assets of the estate, both exempt and non-exempt. Additionally, the Trustee should be able to use the assets from the special purpose bankruptcies .... ”). She does not state whether the claims should be paid first out of the bankruptcy estate and next out of the probate estate, or vice versa.
15. On May 20, 2014, the Trustee objected to the Application for Family Allowance. [Doc. No. 1639] (“Trustee’s Objection”). On June 3, 2014, the Applicant filed a brief in support of the Application [Doc. No. 1692] and the Trustee filed a reply brief on the same day [Doc. No. 1693].
16. On June 4 and July 9, 2014, the Court held a simultaneous hearing on the POC Objection and the Application for Family Allowance. The Applicant presented a household budget of $41,340 per month in support of her family allowance claim, which included expenses for house payments; utilities; housekeeping, lawn care and extermination services; health insurance; medical expenses; groceries and household items; private school tuition and tutoring; entertainment; gym fees; clothing; pet care; and transportation. At the close of the hearing, the Court took the matter under advisement.
III. CREDIBILITY OF WITNESSES
Four witnesses testified at the hearing: (1) the Trustee; (2) the Applicant; (3) Jessica Khurana, a jewelry appraiser, and (4) Jimmy Williamson, the Applicant’s malpractice attorney, who is prosecuting a suit for Applicant against her former attorneys in the divorce proceeding. The Court finds that these witnesses gave credible testimony and the Court gives substantial weight to their testimony. However, for the most part, the only relevant and material testimony came from the Applicant, who testified about her household budget. {See Finding of Fact No. 16].
IV. CONCLUSIONS OF LAW
A. Summary of this Court’s Rulings
Before the Court are the filings related to the Applicant’s Claim No. 137 and the Application for Family Allowance, both of which request $571,080 for a family allowance, an allowance in lieu of homestead, and an allowance in lieu of exempt property under Texas probate law. [Claim No. 137 and Doc. Nos. 1523 & 1608]. The Applicant does not seek to recover more than $571,080, and she does not state, one way or the other, whether the $571,080 should come from the probate estate or the bankruptcy estate. [Finding of Fact No. 14]. As there is only $60,000 available in the Debtor’s probate estate with which to potentially pay the Applicant’s claims, [Finding of Fact No. 12], bankruptcy estate assets would necessarily be required to pay her claims in full. Her position is that she is entitled, as a matter of law, to recover from either or both of these estates.
This Court concludes that Claim No. 137 must be denied in its entirety because it is not cognizable against the Debtor’s bankruptcy estate, which is a separate pool of assets from the Debtor’s probate estate. This Court also concludes that the portion of the Application seeking payment from the bankruptcy estate must be denied. This Court further concludes that it has jurisdiction to adjudicate the Application for Family Allowance out of assets of the Debtor’s probate estate. The Debtor’s probate estate consists solely of property exempted out of the bankruptcy estate, which in this case is exclusively personal property. Because the Debtor was domiciled in Florida at the time of his death, Florida law, not Texas law, governs the succession of his personal property. Under Florida law, the family allowance for a surviving spouse is limited to $18,000. Florida law, unlike Texas law, does not provide for allowances in lieu of exemptions. This Court will thus enter a final order denying all of the Applicant’s claims against the Debtor’s Chapter 7 estate; and will submit a proposed order to the District Court recommending that the Applicant receive a payment of $18,000 frоm the Debtor’s probate estate.
B. Analysis of the POC Objection
i. Jurisdiction, Venue, and Constitutional Authority
This Court has jurisdiction over the POC Objection pursuant to 28 U.S.C. §§ 1334(a) and 157(a) because objections to proofs of claim are matters “arising in” bankruptcy. The POC Objection is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (“matters concerning the administration of the estate”); (b)(2)(B)(“allowance or disal-lowance of claims against the estate ... ”), and (b)(2)(0) (“other proceedings affecting ... adjustment of the debtor-creditor ...
ii. Claim 137 must be denied because it is a claim against the probate estate, not the bankruptcy estate.
Claim No. 137 must be denied because it is not a claim against the bankruptcy estate, but rather against the Debtor’s probate estate.
The death of a debtor results in two entirely separate estates: the bankruptcy estate and the probate estate. In re Lucio,
The claims allowance process in bankruptcy provides for the orderly allocation of property of the bankruptcy estate. Specifically, in a case under Chapter 7, such as the case at bar, the claims allowance process provides for distribution of a debtor’s bankruptcy estate, in order of priority, to claimants who have submitted a proof of claim under Section 501 to the extent allowed under Section 502. 11 U.S.C. § 726. Section 502 provides generally that claims shall be allowed unless challenged. Id. § 502(a). However, if an objection is raised to a claim, the bankruptcy court shall determine the amount of the claim as of the petition date and shall generally allow it “except to the extent that ... such claim is unenforceable against the debtor аnd property of the debtor, under any agreement or applicable law.” Id. § 502(b)(1). Section 348 of the
Here, Claim No. 137, since it is based in probate, arose when the Debtor died — after the order for relief in the Debtor’s Chapter 11 bankruptcy, but before the case was converted to a Chapter 7 under Section 1112. [Findings of Fact Nos. 4, 7, 9]. Therefore, this Court finds that Claim No. 137 should be treated as a prepetition claim under Section 348(d). However, Claim No. 137 is only allowable to the extent it is enforceable under applicable law. Id. § 502(b)(1). The Applicant, in her Claim No. 137, expressly states in Section 2 (requiring her to state the basis for the claim) that the claim is based on probate law. [Finding of Fact No. 13]. As discussed infra, this Court holds that Florida law controls the issue of any probate allowances owed to Applicant. The applicable Florida law only provides for an allowance to be paid from the decedent’s probate estate. See Fla. Stat. Ann. § 732.403 (providing that “if the decedent was domiciled in Florida at the time of death, the surviving spouse and the decedent’s lineal heirs ... are entitled to a reasonable allowance in money out of the estate....”) (emphasis added); Id. § 731. 201(14) (defining “estate,” as used in Florida’s probate code, as “property of a decedent that is the subject of administration”). The Applicant cites no support for an obligation enforceable against the Debtor’s bankruptcy estate.
Under applicable law, therefore, Claim No. 137 is only enforceable against the Debtor’s probate estate, which is entirely separate from his bankruptcy estate. See Fla. Stat. Ann. § 731.201(14), 732.403. Thus, Claim No. 137 is not enforceable against the Debtor’s bankruptcy estate. The claims allowance process in Chapter 7 provides for distribution out of only a debt- or’s bankruptcy estate. See 11 U.S.C. § 726(a) (setting forth the order in which claims shall be distributed from “property of the estate”). Therefore, as a proof of claim submitted under Section 501, Claim No. 137 must be denied under Section 502 in its entirety as unenforceable against the assets distributed through the claims allowance process — the Debtor’s bankruptcy estate.
The Applicant’s assertion that Claim No. 137 should be treated as a domestic support obligation (DSO) does not change this result. [Finding of Fact No. 13]. Indeed, Claim No. 137 does not meet the definition of DSO provided in the Bankruptcy Code. See 11 U.S.C. § 101(14A). The Bankruptcy Code defines “domestic support obligation” as:
a debt that accrues before, on, or after the date of the order for relief in a case under this title ... that is—
(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child ..., without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
Id. Here, the family allowance provided by Florida probate law meets three of the four statutory DSO requirements, but is not “subject to establishment ... by reason of applicable provisions of ... an order of a court of record” or any other agreement or determination. Section 101(14A)(C) of the Bankruptcy Code expressly requires a creditor submitting a DSO claim to refer to provisions of an agreement, decree, court order, or governmental determination of the debt. The Applicant does not reference any of these in regard to Claim 137, and therefore Claim 137 does not meet the definition of a DSO claim. The Applicant’s reference to statutory provisions is simply insufficient under the plain language of Section 101(14A)(C) to establish a DSO. To establish a DSO for the requested allowances, the Applicant would have needed to obtain an order from a court of record, which she has not done.
For all of these reasons, this Court concludes that the POC Objection should be sustained in its entirety and that Claim No. 137 should be completely disallowed.
C. Analysis of the Application for Family Allowance
i. Jurisdiction, Venue, and Constitutional Authority
The Applicant requests that the family allowance and allowances in lieu of exempt property be paid from both the Debtor’s probate estate and the Debtor’s bankruptcy estate. [Finding of Fact No. 14]. There is no question that this Court has jurisdiction to determine whether funds from the Debtor’s Chapter 7 estate can be used to pay the allowance requested by the Applicant, and that this Court has the constitutional authority to enter a final order regarding its ruling. See, e.g., In re 1701 Commerce, LLC,
There is a question, however, whether this Court has jurisdiction to adjudicate, and constitutional authority to enter a final order granting, the requested allowance from the Debtor’s probate estate. For the foregoing reasons, this Court concludes that it has jurisdiction to adjudicate the issue, but not the constitutional authority
Venue is proper pursuant to 28 U.S.C. § 1408(1).
a. This Court has jurisdiction to adjudicate the Applicant’s claims against the Debtor’s probate estate.
This Court has a “duty to raise sua sponte the question of federal subject matter jurisdiction over this action.” Christoff v. Bergeron Indus., Inc.,
i) 28 U.S.C. § 1334(e)(1) grants this Court in rem jurisdiction over “all the property ... of the debtor.”
As the Supreme Court has emphasized, “[bankruptcy jurisdiction at its core, is in rem.” Cent. Va. Cmty. Coll. v. Katz,
That the initial res includes exempt property is no accident, but was a deliberate legislative change to clarify that bankruptcy courts have jurisdiction over exempt property — at least to the extent necessary to set it aside. See H.R.Rep. No. 95-595, at 368 (1978).
The original statutory definition of the bankruptcy estate specifically excluded exempt property. Bankruptcy Act of 1898, ch. 541, § 70, 30 Stat. 544, 565-66 (“The trustee of the estate of a bankrupt ... shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt....”) (emphasis added). Consequently, in 1903 the Supreme Court held that bankruptcy courts did not have jurisdiction to determine whether a debtor had waived exemptions, because property that was “generally exempted” had never been part of the bankruptcy court’s res. Lock
Notwithstanding the Supreme Court’s decision in Lockwood, courts have long recognized bankruptcy jurisdiction over exempt assets at least to the extent of determining what property qualifies as exempt and setting that property aside. See, e.g., Kronstadt v. Citizens & S. Nat. Bank of Savannah,
It is in this context that Congress changed the definition as part of the Bankruptcy Reform Act of 1978, clarifying the scope of bankruptcy court jurisdiction over exempt property. Pub. L. 95-598, 92 Stat. 2683 (1978) (the Bankruptcy Reform Act). The legislative history indicates that the expanded definition was intended to overrule Lockwood to the extent it held bankruptcy courts did not have jurisdiction to determine and set aside exempt property:
Paragraph (1) [of Section 541] has the effect of overruling Lockwood v. Exchange Bank, because it includes as property of the estate all property of the debtor, even that needed for a fresh start. After the property comes into the estate, then the debtor is permitted to exempt it under proposed 11 U.S.C. 522 and the Court will have jurisdiction to determine what property may be exempted and what remains as property of the estate.
H.R.Rep. No. 95-595, at 368 (1978) (citation omitted). However, the expanded definition of property of the estate could be, and has been, interpreted as an even greater expansion of bankruptcy court jurisdiction over еxempt property. See In re Gagnard,
[E]ven though exempt property is initially considered as property of the estate, when the exemption is upheld, it becomes property of the debtor.... However, this does not mean that the Bankruptcy Court no longer has jurisdiction .... [T]he Court has jurisdiction over any type of proceeding under Title 11 and over the property of the debtor. This Court has found no indication that Congress intended the Court to lose jurisdiction over property held to be exempt, but instead finds every indication that the Court maintains jurisdiction.
Id. However, it is not at all clear that the Bankruptcy Reform Act overruled Fifth Circuit precedent that bankruptcy courts do not have jurisdiction over exempt property once it has been set aside. See Novak,
In sum, as the Fifth Circuit noted in 1950, defining the “precise extent” of bankruptcy courts’ in rem jurisdiction over exempt assets may be a “fruitless, if indeed not impossible” exercise. Leiter,
ii) While initially restricting bankruptcy court jurisdiction over exempt assets, the Supreme Court expressly held that bankruptcy courts should order payment of family allowances out of the bankruptcy estate.
To address the Application fully, this Court must consider not only the scope of its jurisdiction over exempt property, but relevant authorities on how to proceed when a debtor dies in bankruptcy. A mere twelve years after it restrictively interpreted bankruptcy court jurisdiction over exempt assets in Lockwood, the Supreme Court addressed this very issue in Hull v. Dicks,
With the Bankruptcy Reform Act of 1978, the specific provision on which the Hull court relied was deleted from the Bankruptcy Code. The legislative history makes clear that the deletion of this provision was not intended to effect substantive change, but states that “Bankruptcy Act § 8 ... has been deleted as unnecessary.” H.R.Rep. No. 95-595, at 368 (1978); S.Rep. No. 95-989, at 83 (1978). However, it is this very paragraph of legislative history that recognizes the distinction between a debtor’s bankruptcy estate and a debtor’s probate estate discussed supra:
Once the estate is created, no interests in property of the estate remain in the debtor. Consequently, if the debtor dies during the case, only property exempted from property of the estate or acquired by the debtor after the commencement of the case and not included as property of the estate will be available to the representative of the debtor’s probate estate. The bankruptcy proceeding will continue in rem with respect to property of the estate.... ”
Id. The issue of the death of a debtor is also currently addressed in Bankruptcy Rule 1016, which reads:
Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer’s debt adjustment, or individual’s debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so faras possible, as though the death or incompetency had not occurred.
Fed. R. Bankr.P. 1016.
Thus, this Court is faced with the difficult task of determining how much the Supreme Court’s holding that bаnkruptcy courts should pay family allowances out of the bankruptcy estate has changed in wake of the subsequent case law and legislative reforms. This Court concludes that to the extent Hull requires bankruptcy courts to pay family allowances out of bankruptcy estate assets, it has been overruled, but to the extent it requires bankruptcy courts to pay family allowances as part of setting aside a debtor’s exempt assets, it must be followed. In this Court’s view, the key to this conclusion is the bankruptcy court’s in rem jurisdiction to determine and set aside exempt assets from the bankruptcy estate.
Both Section 8 of the Bankruptcy Act, which controlled when the Supreme Court in Hull held that a bankruptcy court could grant a family allowance out of bankruptcy assets, and current Bankruptcy Rule 1016 express the intention that a deceased debt- or’s bankruptcy estate be administered, as much as possible, as if the debtor were still alive.
When a debtor dies, the bankruptcy court, in acting as much as possible as though the debtor had not died, must still “set aside” the exempt property to the appropriate recipients. Even the most limited interpretations of in rem bankruptcy court jurisdiction under the old, narrower definition of property of the estate do not hold that bankruptcy courts lack jurisdiction to determine and set aside exempt assets. See Novak,
Though this Court’s jurisdiction over exempt assets after they have been set aside is arguable, as long as this Court is in possession of these assets, it is — like the court in Kronstadt — within its jurisdiction to set aside the exempt property to someone besides the Debtor with good reason. Since this probate estate property is within this Court’s jurisdiction, this Court finds that Hull v. Dicks and the legislative histo
iii) The Fifth Circuit has held that a bankruptcy court may allocate a deceased debtor’s probate assets that are separate from the bankruptcy estate.
Furthermore, the Fifth Circuit has specifically recognized the jurisdiction of bankruptcy courts to allocate property of a deceased debtor’s probate estate. See Matter of Querner,
In the instant case, the bankruptcy court clearly had jurisdiction over matters affecting the deceased debtor’s estate while the Chapter 13 case was proceeding. The court had discretion under Bankruptcy Rule 1016 to continue the Chapter 13 case after the death of the debtor, and it had exclusive jurisdiction over the debtor’s property during the pendency of these proceedings. Because ongoing disputes during the active reorganization of the debtor’s estate could concеivably have affected the handling and administration of the bankruptcy estate, the court’s initial appointment of an intermediary to resolve disputes over the disposition of the deceased debtor’s assets was “related to” the Chapter 13 case.
Id. at 1201. Granted, this language is dicta, but it is very strong dicta that this Court finds persuasive in analyzing the dispute at hand..
In the case at bar, there is no question that the Debtor’s Chapter 7 case remains open. Under Quemer, this fact alone provides the basis for this Court to exercise jurisdiction over the Debtor’s probate estate. That this Court can exercise jurisdiction over the Debtor’s probate estate is even more compelling when the facts in Quemer are compared to the facts here. In Quemer, the dispute adjudicated by the bankruptcy court (which the Fifth Circuit would have approved if the bankruptcy case had not already been closed) was between one non-debtor (the deceased debtor’s daughter) and another non-debtor (the deceased debtor’s son). Here, the dispute is between the Trustee (who is administering the Chapter 7 estate of the deceased Debtor) and the Applicant (who is the widow of the Debtor). Surely, if the Fifth Circuit has no problem with the bankruptcy court exercising jurisdiction to adjudicate a dispute over division of probate assets between the deceased debtor’s children, the Fifth Circuit would approve of this Court adjudicating the dispute at bar between the Trustee and the Debtor’s widow.
iv) The Fifth Circuit has held that bankruptcy courts are obligated to grant family allowances not being resolved in probate court.
Quemer illustrates the considerations that are relevant to close questions of bankruptcy court jurisdiction over probate
In Seiden, the Fifth Circuit addressed the question of whether a bankruptcy court could distribute a family allowance to the widow of a part-owner of a corporate debtor, even assuming her state court judgment for the allowance was invalid. The majority left no doubt that the bankruptcy court had jurisdiction to grant the allowance, despite the dissent’s point that it “must be set aside out of the estate of the deceased husband.” Id. at 905 (Russell, J., dissenting). The majority reasoned that the inherent equitable powers of the bankruptcy court allowed it to determine and order distribution of the family allowance under the applicable state law, declaring that “[ejquity never does things by halves, and neither does bankruptcy.” Id. at 901. Indeed, the Fifth Circuit left no doubt that the bankruptcy court was obligated to act, proclaiming: “It would be unconscionable for a court of bankruptcy, upon the death of the husband, to take possession of all his assets without setting aside his exempt property to those entitled to it, and without allowing the widow a year’s support, in accordance with state law.” Id.
According to the Seiden court, the immediacy of the family allowance request triggered the bankruptcy court’s equitable jurisdiction:
The trustee m bankruptcy need not await the action of probate proceedings, which have not been and may never be instituted; nor must he file a bill in the nature of interpleader in some other court to dispose of a res in the legal custody of the court that appointed him.... The bankruptcy court will not interfere with the settlement of an estate, except to aid the jurisdiction of a probate court in a matter where its powers are inadequate; but no probate proceedings are pending in the state of decedent’s residence, and none is necessary or even possible under the admitted facts. To warrant such proceedings, there must be an estate to administer within the jurisdiction of the court. Where ground for equitable interposition is established, a court of equity will in innumerable instances take jurisdiction of controversies .involving decedents’ estates and the rights of creditors.
Id. at 903. Id. The Fifth Circuit left no doubt that the bankruptcy court could and should grant the allowance, declaring: “If the intervention of a bankruptcy proceeding prevents appropriate action by the state court having jurisdiction, then the bankruptcy court, which exercises equitable jurisdiction, should act, and do that which ought to have been done.” Id. at 901 (emphasis added).
Like the bankruptcy court in Seiden, this Court has an obligation to act to award a family allowance that cannot or is not being resolved in state court. In Seid
In sum, applicable Fifth Circuit case law, expressly addressing when a bankruptcy court has jurisdiction over a probate estate, in addition to the language of 28 U.S.C. § 1334(e)(1) — and the case law interpreting this provision — lead this Court to conclude that it has subject matter jurisdiction over the Debtor’s probate estate. The question now is whether the Trustee’s specific objections to jurisdiction have any merit.
v) The Trustee’s two objections to this Court’s jurisdiction are unavailing.
The Trustee raises two specific objections to this Court’s jurisdiction over the Debtor’s probate estate, neither of which are availing: (1) Texas Estates Code § 502.001, or alternаtively, Florida Statute § 26.012(2)(b), grants exclusive jurisdiction of the Debtor’s probate estate to state courts; and (2) granting a family allowance falls within the judicially created “probate exception” to federal jurisdiction.
1. To the extent state law restrict this Court’s jurisdiction, it is preempted by federal bankruptcy law.
The Trustee’s first argument fails because state jurisdictional statutes are preempted to the extent they conflict with federal jurisdictional statutes. See Chicago Title & Trust Co. v. Forty-One Thirty-Six Wilcox Bldg. Corp.,
Finally, the “probate exception” to federal jurisdiction does not apply in this case. The “probate exception” is based on a now-contested view of the scope of jurisdiction of the English Court of Chancery at the time the Judiciary Act was passed in 1789. See Marshall,
[W]e comprehend the ‘interference’ language in Markham as essentially a reiteration of the general principle that, when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res. Thus, the probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court. But it does not bar federal courts from adjudicating matters outside those con-fínes and otherwise within federal jurisdiction.
Id. at 311-12,
In the case at bar, this Court is neither probating nor annulling a will. There is no state probate court (in either Texas or Florida) that has custody of the Debtor’s probate assets: no one who is named as an executor in the questionable myriad wills of the Debtor has ever probated the will [Finding of Fact No. 7], and therefore there is no pending probate proceeding at this time. Indeed, because no one named as an executor in any of the Debtor’s numerous wills has had the gumption to probate any of these wills, it is ■ highly likely that none of these individuals will ever initiate a probate proceeding. Thus, it is this Court, and only this Court, that has had custody of the probate assets. Under these circumstances, and given the narrow parameters of the probate exception recently articulated in Marshall and Curtis, the probate exception does not divest this Court of jurisdiction; in fact, this Court has the responsibility of adjudicating whether assets from the Debtor’s probate estate can be used to pay the Applicant to the extent allowed by applicable law. See Seiden,
b. Does this Court have the constitutional authority to enter a final order on the Application for Family Allowance?
Here, because the Application for Family Allowance asserts a right to the claimed
i)This Court has constitutional authority to enter a final order on the Application’s claim against the Debt- or’s bankruptcy estate.
For the same reasons this Court has constitutional authority to enter a final order on the POC Objection, see Section B.i. supra, this Court concludes it has constitutional authority to enter a final order on the Application for Family Allowance to the extent that it asserts a claim against the Debtor’s bankruptcy estate. Determining whether the Application’s claim against the bankruptcy estate is allowable is a “core” proceeding under 28 U.S.C. § 157(b)(2)(B) (“allowance or disallowance of claims against the estate ... ”). Furthermore, Stem itself establishes Section 157(b)(2)(B) proceedings as quintessentially within a bankruptcy court’s constitutional authority, such that the question of whether a bankruptcy court has constitutional authority over other proceedings may depend on whether they “would necessarily be resolved in the claims allowance process.” Stern,
ii) This Court does not have constitutional authority to enter a final order on the Application’s claim against the Debtor’s probate estate.
By contrast, to the extent the Application asserts a claim against the Debt- or’s probate estate, it is not рart of the bankruptcy claims allowance process. Therefore, determination of whether this Court has constitutional authority to enter a final order over the Applicant’s claim against the Debtor’s probate estate requires a closer look at the limits of bankruptcy courts’ constitutional authority.
The debate over the extent of bankruptcy courts’ constitutional authority to enter final judgments and orders has a storied past. Before the Bankruptcy Reform Act of 1978, bankruptcy referees could enter final judgments and orders on “matters within the traditional ‘summary jurisdiction’ of bankruptcy courts,” that is, “claims involving ‘property in the actual or constructive possession of the [bankruptcy] court.’ ” Executive Benefits Ins. Agency v. Arkison, — U.S. -,
[A] matter of public rights must at a minimum arise between the government and others. In contrast, the liability of one individual to another under the law as defined, is a matter of private rights. Our precedents clearly establish that only controversies in the former category may be removed from Art. Ill courts and delegated to legislative courts or administrative agencies for their determination.
Id. at 69-70,
While bankruptcy courts might have constitutional authority to enter final orders on the “restructuring of debtor-creditor relations” in bankruptcy, which “may well be a public right,” the Marathon court held that Article III courts could not delegate them constitutional duty to adjudicate “state-created private rights.” Id. at 71,
Congress responded to Marathon by enacting 28 U.S.C. § 157, which distinguishes between “core” and “related to” bankruptcy proceedings, and provides that bankruptcy courts have constitutional authority to enter final orders and judgments on the former, but can only make recommendations to district courts on the latter. Executive Benefits,
Since Stem, the Fifth Circuit has provided some guidance on which proceedings “would necessarily be resolved in the claims allowance.” See In re Frazin,
Thus, to determine whether this Court has constitutional authority to enter a final order on the Applicant’s claim against the Debtor’s probate estate, the Court must ask: (1) whether the dispute is a “core” proceeding under the statute that authorizes this Court to enter a final order?; and (2) Even if the dispute is “core” under the statute, is it the type of core proceeding on which Stem prohibits bankruptcy courts from entering a final order?
1. The Applicant’s claim against the Debtor’s probate estate is not a “core” proceeding.
The statutory scheme created by Congress in 28 U.S.C. § 157 divides all proceedings within bankruptcy court jurisdiction into “two categories: ‘core’ and ‘non-core’ proceedings.” Executive Benefits,
Here, the Applicant’s claim against the Debtor’s probate estate does not fit into any of the categories enumerated in Section 157(b)(2). The closest category into which the Applicant’s claim could fit would be Section 157(b)(2)(0) “other proceedings affecting the ... adjustment of the debtor-creditor ... relationship,” because the Applicant is simultaneously asserting a position as a creditor of the bankruptcy estate. However, this Court has determined that the Applicant is not a creditor of the bankruptcy estate. Moreover, the determination of whether the Applicant is a creditor of the bankruptcy estate is not affected by whether she has a valid claim against the Debtor’s probate estate. Therefore, this Court concludes that the proceeding involving the Applicant’s claim against the probate estate does not affect the debtor-creditor relationship.
Moreover, the Applicant’s claim did not otherwise “arise under” or “arise in” the Debtor’s bankruptcy case. Indeed, the Applicant’s claim against the prоbate estate is wholly based on state law and seeks assets that are not part of the bankruptcy estate.
For all of these reasons, this Court concludes that the Applicant’s claim against the Debtor’s probate estate is not a core proceeding. Consequently, under 28 U.S.C. § 157(c)(1), the undersigned bankruptcy judge will not enter a final order as to the Applicant’s claim against the Debt- or’s probate estate, but will instead issue proposed findings of fact and conclusions of law to the District Court, together with
2. Even if the Applicant’s claim against the Debtor’s probate estate were a “core” proceeding, this Court would not have constitutional authority under Stern to enter a final order on the Applicant’s claim against the probate estate.
Alternatively, even if the Applicant’s claim against the Debtor’s probate estate were a “core” proceeding over which this Court had statutory authority to enter a final order, this Court would not have constitutional authority under Stem to enter a final order.
The Applicant’s claim against the Debt- or’s probate estate, like the counterclaim in Stem or the DTPA claim in Frazin, is a “state law action independent of the federal bankruptcy law”; therefore, this Court does not have constitutional authority over it as an action that “stems from the bankruptcy itself’ — in contrast to the Applicant’s claim against the Debtor’s bankruptcy estate.
Consequently, it is necessary to consider whether the Applicant’s claim against the probate estate is “necessarily resolvable” by a ruling on the Applicant’s claim against the bankruptcy estate. This Court concludes that it is not. As with the DTPA claims in Frazin, the resolution of the Applicant’s claim against the probate estate would require several legal determinations that are not necessary to resolve the Applicant’s claim against the bankruptcy estate. To determine whether the Applicant’s claim against the bankruptcy estate is allowable, all this Court must determine is that bankruptcy estate assets may not be used to pay a claim that is only legally enforceable against probate estate assets. By contrast, to determine whether the Applicant’s claim against the probate estate is allowable, this Court — acting in lieu of the state probate court — -must consider whether the Applicant has proven her eligibility for allowances under the applicable statutory probate provisions. Acting as a state court to adjudicate solely state law matters is undoubtedly outside the realm of “public rights” encompassed by the relationship between a debtor and the federal government. Stern,
ii. Florida law applies to the Debtor’s probate estate.
In analyzing the Applicant’s request for the Debtor’s probate estate as
Federal courts exercising diversity jurisdiction apply the law of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co.,
“Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” ... It would be anomalous to have the same property interest governed by the laws of one state in federal diversity proceedings and by the laws of another state where a federal court is sitting in bankruptcy.
Id. at 206 (quoting Butner v. United States,
Under Texas law, the choice of law that applies to testamentary successions depends on whether the property at issue is real property or personal property. Haga v. Thomas,
The domicile rule for personalty applies to a widow’s family allowance, which comes out of the general assets of the probate estate. See Hopkins v. Wright,
iii. Under Florida law, the Applicant is entitled to a maximum family allowance of $18,000, and to no allowance in lieu of exempt property.
Having determined that Florida probate law applies to the Application for Family Allowance, the Court turns to the applicable provisions of the Florida Probate Code. Florida Probate Code § 732.403 governs family allowances. It is reproduced here in relevant part:
In addition to protected homestead and statutory entitlements, if the decedent was domiciled in Florida at the time of death, the surviving spouse and the decedent’s lineal heirs the decedent was supporting or was obligated to support are entitled to a reasonable allowance in money out of the estate for their maintenance during administration. The court may order this allowance to be paid as a lump sum or in periodic installments. The alloivance shall not exceed a total of $18,000.
Fla. Stat. Ann. § 732.403 (West 2014) (emphasis added). Applying the Florida law to the Application for Family Allowance, this Court first notes that the maximum amount of an allowance the Applicant could receive is $18,000. The Applicant requests $496,080 as a family allowance for one year, based on a monthly budget of $41,340. [Findings of Fact Nos. 14 & 16]. The Applicant credibly testified to the necessity of the items on the budget: house payments, utilities, housekeeping, lawn care, extermination services, health insurance, medical expenses, groceries, household items, private school tuition, tutoring, entertainment, gym fees, clothing, pet care, and transportation. [Finding of Fact No. 16]. After considering the Applicant’s testimony, and given the $18,000 ceiling imposed by Florida law, this Court finds that $18,000 is a reasonable amount for the maintenance of the Applicant and her children until the Debtor’s probate estate is administered in full.
To address the Applicant’s request for a $45,000 allowance in lieu of homestead and a $80,000 allowance in lieu of exempt personal property, this Court looks to the applicable Florida law on exempt property available to a decedent’s surviving family. Florida Statute 732.402 provides, in relevant part, that:
(1) If a decedent was domiciled in this state at the time of death, the surviving spouse, or, if there is no surviving spouse, the children of the decedеnt shall have the right to a share of the estate of the decedent as provided in this section, to be designated “exempt property.”
(2) Exempt property shall consist of:
(a) Household furniture, furnishings, and appliances in the decedent’s usual place of abode up to a net value of $20,000 as of the date of death.
(b) Two motor vehicles ...
(c) All qualified tuition programs authorized by s. 529 of the Internal Revenue Code of 1986 ...
(d)All benefits paid pursuant to s. 112.1915 [death benefits for teachers and school administrators].
Fla. Stat. Ann. § 732.402 (West 2014). In contrast to Texas law, there is no provision of Florida law that provides for allowances “in lieu of’ tangible exempt property — i.e. cash allowances in lieu of real property (such as a homestead) or personal property (such as vehicles or furniture). Therefore, the Applicant’s requests for allowances in lieu of homestead and in lieu of exempt personal property are denied.
Y. CONCLUSION
This Court’s acceptance of the Applicant’s argument that it has jurisdiction over this dispute is a pyrrhic victory. The Applicant requests $571,080 [Finding of Fact No. 14], but this Court must entirely disallow all of her claims against the Debt- or’s bankruptcy estate and can only recommend awarding her the paltry sum of $18,000 from the Debtor’s probate estate— the maximum allowable amount under Florida law. The Court is not enamored with this result, as the Applicant has undergone several years of hostile divorce proceedings with the Debtor while raising three minor children. [Finding of Fact No. 2]. But, this Court will not disregard the applicable Florida statute. The Florida Legislature has pаssed a statute that unambiguously places a ceiling of $18,000
This Court will issue two orders consistent with this Memorandum Opinion. One order will be a final order, entered on the docket that: (1) sustains in its entirety the POC Objection; and (2) denies that portion of the Application requesting that the Applicant’s claims be paid with assets of the Debtor’s Chapter 7 estate. Thus, this final order will bar any use of assets of the Debtor’s bankruptcy estate to pay any of the claims. The second order will be a proposed order to the District Court recommending that the portion of the Application requesting that the claims be paid with assets of the probate estate be granted in part and denied in part: namely, that the Applicant receive payment from the Debtor’s probate estate, but only to the extent of $18,000.
Notes
. The Applicant also claims that a family allowance could be paid out of the bankruptcies of special purpose entities related to the debt- or’s individual bankruptcy, [Finding of Fact No. 14]; this Court disagrees and will not allow assets from those bankruptcy estates to be used to pay the Applicаnt’s claims for the same reasons that this Court will not allow the assets of the debtor’s individual bankruptcy estate to be used to pay her claims.
. Rachel Brown remarried on August 1, 2014 and is now Rachel Bagwell.
. This Court’s ruling on the Applicant's claims against the bankruptcy estate are separate and distinct from this Court's rulings on Lenox's claimed exemptions, as those exemptions were not claimed by the Applicant but were claimed on behalf of the deceased Debt- or. This Opinion, by contrast, resolves which of the assets exempted out of the bankruptcy estate to the probate estate of the deceased Debtor may be subsequently passed along to the Applicant and her minor children.
. “Although we have declined to read § 157(b)(2)(0) broadly, see Wood,
. As distinguished from the pre-2005 law, under which property of the estate for an individual in a Chapter 11 case did not include any property that the debtor acquired post-petition. See In re Lively,
. For example, if the Applicant had in fact obtained an order from a probate court, granting her "maintenance” or "support” that fits within the definition of a DSO, then she would have satisfied the requirement of Section 101(14A)(C)(ii). Unfortunately, no probate proceeding has ever been initiated since the Debtor's death for the Applicant to be able to obtain such an order. [Finding of Fact 7].
. In the Southern District of Texas, General Order No. 2012-6 is thе order of referral that automatically refers cases to the bankruptcy court.
. In fact, after the Debtor died, this Court issued an order setting a hearing requesting all creditors and parties-in-interest to appear and inform the Court whether they wanted the Debtor's case to be dismissed or to be continued. [Finding of Fact No. 8]. At the hearing, numerous creditors and parties-in-interest appeared (including the Applicant), and all of them (except one, who took no position) expressed the position that this bankruptcy case should not be dismissed but should proceed to allow the Trustee to continue to fulfill his duties in this bankruptcy case. [Finding of Fact No. 8],
. The Fifth Circuit elaborated: "Therefore, although the husband is not in bankruptcy, all of his assets are, and no state court can acquire jurisdiction of them. The law never requires the doing of an idle thing, and what a hard proceeding it would be for a bankruptcy court to distribute the physical assets of a corporation, without hearing interested parties [such as the widow] because some probate court had not set aside to them a stock certificate that was speedily being rendered worthless by the omnivorous jurisdiction of bankruptcy.... In these circumstances, a court of equity [i.e. the bankruptcy court] will pierce the corporate veil, and administer the state law with even-handed justice.” Id. at 903 (emphasis added).
. As noted in the Introduction of this Opinion, this Memorandum Opinion will be submitted to the District Court as the proposed findings of fact and conclusions of law relating to the undersigned bankruptcy judge’s recommendation to the District Court for granting, in part, the relief requested by the Applicant that her claim be paid from the Debtor’s probate estate.
. This Court rejects the Trustee's argument that the "during administration” language of Section 732.403 means the provision cannot provide relief until "administration of the probate estate has begun.” [Doc. No. 1639, p. 10]. This statutory language is directed at the purpose of the allowance and not at the time-line for disbursement. The Court interprets