In re Brookes

In re BRANDON LEA BROOKES, Debtor

Case No. 16-10614-JNF

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS

October 25, 2018

Chapter 7

MEMORANDUM

I. INTRODUCTION

The matter before the Court is Trustee's Motion to Approve Stipulation of Settlement (the "Settlement Motion"). Pursuant to the Settlement Motion, the Trustee seeks approval of a settlement agreement between herself and Cameron Brookes ("C. Brookes") pursuant to Fed. R. Bankr. P. 9019. Stewart Title Guaranty Company ("Stewart Title") filed an Objection to the Settlement Motion. The Court heard the matter on September 7, 2018 and directed the parties to file briefs. The Trustee and Stewart Title have complied with the Court's order.

None of the interested parties requested an evidentiary hearing, and the material facts necessary to determine the issue of whether to approve the settlement are not in dispute. Accordingly, the Court finds and rules as follows.

II. BACKGROUND¹

Brandon Lea Brookes (the "Debtor") commenced a Chapter 7 case on February 25, 2016. Debora Casey was appointed the Chapter 7 Trustee one day later.

Prior to the commencement of his bankruptcy case, on or about November 30, 1998, the Debtor purchased a Second-to-Die life insurance policy (the "Policy") from Western Reserve Life Assurance Co. of Ohio. The Debtor was the applicant and is the owner of the Policy. The Debtor disclosed his interest in the Policy on his Schedules and declared his interest in "Life Insurance" in the sum of $2,928.48 as exempt under 11 U.S.C. § 522(d)(7) and (d)(8).² The insured persons were the Debtor's father and mother, WilliamH. and Barbara M. Keltner. The cash benefit provided under the Policy upon the death of both insureds is $500,000, less any outstanding loan amount.

Barbara Keltner died in 2009. William Keltner is 83 years old and, according to the Trustee, suffers from Alzheimer's disease. The parties did not provide any other information about Mr. Keltner's health or actuarial information about his life expectancy. They did not submit a copy of the Policy.

At the time the Policy was purchased, and at all relevant times thereafter, the Debtor was the one hundred percent (100%) beneficiary of the Policy. The Debtor borrowed against the cash surrender value of the Policy. The outstanding amount of the loan is estimated to be approximately $50,000.³

On or about March 10, 2014, the Debtor changed the one hundred percent (100%) beneficial interest in the Policy to his then and current spouse, C. Brookes (the "Transfer"). Prior to the Transfer, the Debtor had experienced significant financial difficulties. The Debtor was an attorney licensed to practice law in the Commonwealth of Massachusetts. Stewart Title obtained a judgment against him in 2012 for an amount in excess of $1,000,000. The Debtor also was a principal in other business ventures, including Green Stop Energy Corporate Solutions, a solar energy enterprise, which also encountered financial difficulties prior to the Transfer.

On or about February 23, 2018, the Trustee filed a three-count adversary proceeding against C. Brookes seeking avoidance of the change in the beneficial interest as a fraudulent transfer and recovery of that interest for the benefit of the bankruptcy estate as a fraudulent transfer under 11 U.S.C. §§ 548(a)(1), (a)(2), 550, 551 and 544 and Mass. Gen. Laws ch. 109A, §§6, 8. The Defendant filed an answer denying the Trustee's allegations and asserting affirmative defenses. The Trustee and C. Brookes are now seeking to settle that adversary proceeding. The Trustee in an Affidavit submitted with her brief represented that she estimates the net value of the beneficial interest to be no more than $115,000.

Stewart Title also filed an adversary proceeding against the Debtor seeking an exception to the discharge of its judgment. On February 2, 2017, the Court entered a judgment declaring that the indebtedness owed to Stewart Title in connection with the Judgment issued by the Suffolk County Superior Court in the amount of $728,352.65, plus statutory interest, was excepted from discharge pursuant to 11 U.S.C. § 523(a)(3)(B).⁴

III. THE SETTLEMENT AGREEMENT

The Trustee and C. Brookes engaged in negotiations to resolve the adversary proceeding. As a result of the negotiations, the Trustee and C. Brookes entered into the Agreement, which provides for the following:

. . . In full and final settlement of this action, the Defendant will cause to be delivered to the Trustee the sum of Forty Thousand Dollars ($40,000.00) (the "Settlement Amount") on or before July 31, 2018 (the "Maturity Date"). The Settlement Amount shall constitute an asset of the Estate, free and clear of all liens, claims, encumbrances, interests, and claims of exemption. Said payment is a compromise of a disputed claim and is not to be construed as an admission of liability of the Defendant.

. . . The Defendant has executed a copy of the Agreement for Judgment. . . . The executed Agreement for Judgment shall be held in escrow by the Trustee.

. . . In the event that the Defendant fails to pay the Settlement Amount on or before the Maturity Date, the Trustee, at her sole option, shall have the right to release the Agreement for Judgment from escrow and record and enforce it. In the event that the Defendant delivers the Settlement Amount in good funds on or before the Maturity Date, the Trustee shall release the Agreement for Judgment from escrow and deliver it to the Defendant, marked Paid.

. . . Upon full payment of the Settlement Amount and upon entry of a final, nonappealable order approving the Settlement Agreement, the Trustee will dismiss the Adversary Proceeding with prejudice and without costs.

. . . Upon entry of a final, nonappealable order approving the Settlement Agreement, and upon receipt of the Settlement Amount in good funds, the Trustee on behalf of the Debtor's bankruptcy Estate and the Debtor's creditors, thereby (i) remises, releases and forever discharges the Defendant from all debts, demands, actions, causes of action, suits, accounts, covenants, contracts, agreements, damages, and any and all claims, demands, and liabilities, in law or equity, which the Trustee has or ever had from the beginning of the world through the date of this SettlementAgreement, and (ii) releases any and all claims against, or interest in, the Policy or the proceeds thereof.

. . . Upon entry of a final, nonappealable order approving the Settlement Agreement, the Defendant releases any and all claims she may have against the Trustee or the Estate.

Settlement Motion, ¶¶15-20.

IV. POSITIONS OF THE PARTIES

A. The Trustee

In support of approval of the Settlement Motion, the Trustee stated: "The nominal amount of the death benefit of the Policy is $500,000. The Trustee believes that, based upon expressions of interest she has received, the value of the death benefit is in the range of $150,000 to $200,000, subject to potential reduction for the balance of the loan against the Policy. She added: "The amount of the settlement is approximately one-half of what the Trustee believes might be recovered if the Policy were liquidated. Prior to accessing this value, however, the Trustee would have to overcome several hurdles."

In her Affidavit, filed after the hearing held on September 7, 2018, the Trustee represented that on or about August 18, 2017, Partnership Liquidities Investors, LLC made a written offer to purchase the beneficial interest in the Policy for the sum of $165,000, but that the offer expressly did not include any agreement to assume any loans or liabilities associated with the Policy and was contingent upon the successful prosecution of the adversary proceeding against C. Brookes. In addition, she stated that she had received an offer from JM Partners for $75,000 which was subject to reduction forany fees, loans, and penalties and was also contingent upon the successful prosecution of the adversary proceeding.

The Trustee also disclosed in her Affidavit that she had contacted Melville Capital, a broker in life insurance policies and learned that the beneficial interest might have a value of $150,000 to $200,000 without taking into account any reductions for fees, loans, penalties, or the successful prosecution of the adversary proceeding against C. Brookes. The Trustee learned that the brokerage commission "might be in the range of 18%." Thus, the Trustee reassessed her belief as to the value of the death benefit, estimating the net value of the beneficial interest would be no more than $115,000. She concluded that, given the costs of monetizing the beneficial interest, "$40,000 is fair, reasonable, and in the best interests of the bankruptcy estate." The Trustee also stated in her Affidavit that Stewart Title had not made an offer to the estate to purchase the estate's claims for relief against C. Brookes that are set forth in the adversary proceeding.

The Trustee revealed that secured and priority tax claims were approximately $10,000 and unsecured claims totaled approximately $1,750,000, adding that during the pendency of any litigation the Policy is at risk of lapse through nonpayment of premiums.

The Trustee raised several substantive legal issues that factored in her decisions to compromise the claims against C Brookes, stating:

The Defendant [C. Brookes] has also asserted substantive grounds to challenge the avoidability of the Transfer. The Defendant has alleged that the Policy is exempt and that the beneficial interest is inseparable from the Policy itself. The Defendant further alleges that the beneficial interest is an expectancy interest as to which the Trustee may not recover. Each of these issues would need to be briefed without certainty as to result.

The Trustee distinguished the case of Woodson v. Fireman's Fund Ins. Co. (In re Woodson), 839 F.2d 610 (9th Cir. 1988), a case in which the court determined that § 522(d)(7) exempts only the Debtor's rights to the life insurance contract itself and not...