In re Cowin

In re: Charles Philip Cowin, Debtor.

Case No: 13-30984

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Signed: March 21, 2014

Chapter 7

MEMORANDUM OPINION REGARDING TRUSTEE'S OBJECTION TO

HOMESTEAD EXEMPTION UNDER 11 U.S.C. § 522(o) & (p)¹ AND REQUEST FOR

PROTECTION OF THE ESTATE'S INTEREST IN PROPERTY

[Doc. No. 83]

I. INTRODUCTION

The Court writes this opinion for several reasons. First, the dispute at bar involves 11 U.S.C. § 522(o)², a provision enacted by BAPCPA³ about which there is a paucity of case law, particularly as to the form of relief that should be awarded if all elements are satisfied. Second, the debtor in this case has raised three defenses as to why he did not disclose certain transactions in his Schedules, Statement of Financial Affairs (SOFA), and Monthly Operating Report (MOR): (1) he relied on his former attorneys; (2) the transactions were in the ordinary course of his business and therefore did not need to be disclosed; and (3) even if he did not make complete disclosure, he made sufficient disclosure to put his creditors on "inquiry notice" such that he cannot now be found to have intended to defraud them. These defenses are easier to plead thanto prove, and the debtors' bar needs to be aware of the hurdles their clients must overcome to prevail on these defenses.

The dispute at bar is between Ronald J. Sommers, the Chapter 7 trustee in this case (the Trustee), and Charles Philip Cowin, the debtor (the Debtor). On July 12, 2013, the Trustee filed an objection to the Debtor's homestead exemption (the Objection) [Doc. No. 83]; and on August 2, 2013, the Debtor filed a response opposing the Objection [Doc. No. 86]. This Court held a hearing on the Objection on September 4, 2013, September 11, 2013, October 1, 2013, October 18, 2013, November 20, 2013, and December 3, 2013. At the close of the hearing, the Court took the matter under advisement. On December 9, 2013, the Debtor filed a Trial Memorandum Regarding the Objection [Doc. No. 152], and on December 13, 2013, the Trustee filed his Trial Brief [Doc. No. 154].

This Court now makes the following Findings of Fact and Conclusions of Law under Federal Rule of Civil Procedure 52, as incorporated into Bankruptcy Rules 7052 and 9014. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party. For the reasons set forth herein, this Court sustains the Objection.

II. FINDINGS OF FACT

The relevant facts—as established by the pleadings, the admitted exhibits, the testimony of the witnesses, and the stipulations and admissions of the parties—are as follows:

A. Background of the Debtor

1. The Debtor received his undergraduate degree from Denison University and received an MBA degree from the University of Chicago. [Oct. 1, 2013 Tr. 39:12-13 & 40:5-6].

2. The Debtor was employed at Exxon for 29 years. [Dec. 3, 2013 Tr. 19:7-9]. He retired several years ago, and his Schedule I in this case lists his occupation as "Developer/realtor." [Sept. 11, 2013 Tr. 34:10-20].

3. The Debtor is a licensed real estate broker. [Oct. 1, 2013 Tr. 40:9]. To acquire his license, the Debtor completed the required six courses and passed the required examination. [Oct. 18, 2013 Tr. 13:9-18]. This training exposed the Debtor to the forms of contracts generally known as real estate purchase and sales agreements, and contracts for deed. [Id. at 13:19 - 14:1].

4. Prior to filing this pending Chapter 7 case, during his career as a real estate broker, the Debtor handled real estate closings. [Oct. 18, 2013 Tr. 14:11-13 & 16:2-4]. Indeed, the Debtor testified that he has "been involved in many, many real estate transactions over the years . . . . we're talking about many, many years of real estate transactions." [Dec. 3, 2013 Tr. 56:14-16 & 57:16-17]. The Debtor also understands the steps that are necessary to consummate a purchase and sale agreement for real estate. [Oct. 18, 2013 Tr. 15:12-25].

5. During the five years prior to filing this Chapter 7 case, in addition to buying and selling real estate, the Debtor developed real estate in New Mexico. [Oct. 1, 2013 Tr. 42:13-20 & 43:3-6]. The Debtor's attorney described the Debtor's business as follows: "he had a real estate kingdom, that he had a fortune in developable property in New Mexico, and interests here in Texas that if he could just get the time to ride out the economy that everything would be well." [Oct. 18, 2013 Tr. 39:24-40:3].

6. The Debtor formed numerous business entities for the specific purpose of conducting his real estate business. [Oct. 1, 2013 Tr. 48:11-18]. The names of these entities were as follows:

1. Houston Property Data Services;

2. Woodway Campton GP, Inc.;

3. Woodway Campton, Ltd.;

4. Compton Equity Partners, LP;

5. Flintshire, LLC;

6. Ute Meadows, LLC;

7. Angel Fire Land Holdings, LLC;

8. Village South Development, LLC;

9. Chartana Four, LLC; and

10. Stanwich, LLC;

[Case No. 10-34132, Doc. No. 1, pp. 61-62].

7. By May 19, 2010, the Debtor had acquired twelve real properties in order to develop them in the course of his real estate business. [Case No. 10-34132, Doc. No. 1, p. 6; Trustee's Ex. 7, p. 6; see also Oct. 1, 2013 Tr. 43:20-45:12].

B. Background of the Debtor's Relationship With Midtown Edge, L.P.

8. Midtown Edge, L.P. (MELP) was the developer of a condominium complex located at 300 St. Joseph Parkway, Houston, Texas. [Doc. No. 83, p. 4, ¶ 15; see also Doc. No. 86, p. 2, ¶ 15].

9. Prior to March 28, 2008, the Debtor held the contractual right to purchase approximately twenty-two of the condominium units at 300 St. Joseph Parkway, Houston, Texas. [Doc. No. 83, p. 4, ¶ 15; see also Doc. No. 86, p. 2, ¶ 1; Dec. 3, 2013 Tr. 13:18-25].

10. The Debtor decided to extinguish his contractual right to purchase all but six of the condominium units in exchange for MELP giving him a promissory note for $230,000.00. [Oct. 1, 2013 Tr. 69: 3-7]. On March 28, 2008, MELP executed and delivered to the Debtor that one certain promissory note in the original principal amount of $230,000.00 (the 2008 Note). [Trustee's Ex. No. 1]. Under the terms of the 2008 Note, MELP was required to pay the balance by no later than December 31, 2008. [Id.].

11. MELP defaulted under the 2008 Note by failing to pay the balance by December 31, 2008. [Oct. 1, 2013 Tr. 69:8-15].

12. Under the terms of the 2008 Note, if MELP failed to pay the principal balance by December 31, 2008, then interest would accumulate at the per annum rate of 15%. [Trustee's Ex. No. 1, p. 1, ¶¶ 1-2]. Thus, as of January 1, 2009, interest began accruing on the 2008 Note.

13. Because MELP failed and refused, and continued to fail and refuse, to make payment under the 2008 Note, the Debtor, in August of 2009, filed suit against MELP in theDistrict Court of Harris County, Texas, 113th Judicial District (the State Court Lawsuit). [Dec. 3, 2013 Tr. 15: 13-16:1; see also Trustee's Ex. No. 2].

14. The State Court Lawsuit remained pending on the docket of the Harris County District Court for the rest of 2009 and carried over into 2010. [Dec. 3, 2013 Tr. 15: 13-16:19].

C. Background of the Debtor's First Chapter 11 Case

15. On February 24, 2010, the Debtor filed his first Chapter 11 petition, which was assigned Case No. 10-31478 (the First Chapter 11 Case). [Doc. No. 83, p. 2, ¶ 5; Doc. No. 86, p. 2, ¶ 5; Case No. 10-31478, Doc. No. 1, pp. 1-3; Trustee's Ex. No. 5, pp. 1-3].

16. On the same day that the Debtor initiated the First Chapter 11 Case, the Debtor, through his attorney, filed an incomplete set of Schedules. Specifically, the Debtor filed only Schedules A, B, D, E, and F; the Debtor did not file Schedules C, E, G, H, I, or J; nor did the Debtor file his SOFA. [Case No. 10-31478, Doc. No. 1, pp. 4-34; Doc. No. 83, pp. 2-3, ¶ 6; see also Doc. No. 86, p. 2, ¶ 6; Trustee's Ex. No. 5, pp. 4-34]. The five Schedules that were filed were not signed by the Debtor, but only by his attorney.⁴ The Debtor did, however, provide his attorney with the information contained in these Schedules, and the Debtor reviewed and approved of these Schedules prior to his attorney filing them. [Dec. 3, 2013 Tr. 9:21-10:11].

17. Schedule A represented that the Debtor had a "Fee Simple" interest in a particular condominium unit at the MELP condo complex, specifically 300 S. Joseph Pky.,#320, Houston, TX 77002 (Unit 320); that the current value of the Debtor's interest in Unit 320, without deducting any secured claim or exemption, was $240,000.00; and that the amount of the secured claim associated with Unit 320 was $0.00. [Case No. 10-31478, Doc. No. 1, p. 5; Trustee's Ex. No. 5, p. 5; Doc. No. 83, p. 3 ¶ 6; see also Doc. No. 86, p. 2, ¶ 6]. Schedule A also represented the following: "Unit 320, Contract for Deed, 300 S. Joseph Pky., #320, Houston, TX 77002." [Case No. 10-31478, Doc. No. 1, p. 5; Trustee's Ex. No. 5, p. 5; Doc. No. 83, p. 3 ¶ 6; see also Doc. No. 86, p. 2, ¶ 6]. Thus, the Debtor was representing to this Court and to his creditors that he owned Unit 320 and that he had entered into a contract for deed to sell Unit 320 to some third party. [See Oct. 1, 2013 Tr. 8:2-7, 9:9-10].⁵

18. Schedule B represented that MELP owed the Debtor the amount of $286,847.92. [Case No. 10-31478, Doc. No. 1, p. 10; Trustee's Ex. No. 5, p. 10; Doc. No. 83, p. 3, ¶ 6; see also Doc. No. 86, p. 2, ¶ 6]. The Debtor did not disclose that the 2008 Note evidenced this debt. [See Case No. 10-31478, Doc. No. 1, p. 10; Trustee's Ex. No. 5, p. 10]; rather, he described this obligation only as "Midtown Edge, LP, 4544 Post Oak Place, Suite 392, Houston, TX 77027". In addition to scheduling the debt owed by MELP, the Debtor also scheduled several other debts that were owed to him. [See Case No. 10-31478, Doc. No. 1, p. 10]. The Debtor described three

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