In re Pinson, Case No. 05-38800-H3-7 (Bankr. S.D. Tex. 11/2/2007), Case No. 05-38800-H3-7.

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IN RE ADOLPHUS D. PINSON, Debtor,

Case No. 05-38800-H3-7.

United States Bankruptcy Court, S.D. Texas, Houston Division.

November 2, 2007.

MEMORANDUM OPINION

LETITIA CLARK, Bankruptcy Judge.

The court has held a hearing on the "Motion to Approve Settlement" (Docket No. 67) filed by Mark Crampton. The following are the Findings of Fact and Conclusions of Law of the court. A separate Judgment will be entered granting the motion. To the extent any of the Findings of Fact are considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law are considered Findings of Fact, they are adopted as such.

Findings of Fact

Adolphus D. Pinson ("Debtor") filed a voluntary petition under Chapter 13 of the Bankruptcy Code on June 6, 2005. The case was converted to a case under Chapter 7 of the Bankruptcy Code on April 12, 2007. Joseph M. Hill is the Chapter 7 Trustee.

In the instant motion, Mark Crampton, an attorney hired postpetition by Debtor, seeks approval of a mediated settlement of claims filed by Debtor against his insurance company with respect to "water intrusion and subsequent mold infestation and contamination" which damaged Debtor's home during 2002. The motion is opposed by Debtor and by the Chapter 7 Trustee.

On August 29, 2005, Debtor filed amended schedule B. Debtor's assets, as listed in amended schedule B, did not include any claims for damage to his home. (Docket No. 13). Debtor did not list a potential claim in his original statement of financial affairs. (Docket No. 1).

On October 11, 2005, one day prior to a scheduled hearing on confirmation of Debtor's plan, Debtor amended the statement of financial affairs to list the pending suit against Debtor's insurance company, USAA.

On October 12, 2005, the court held a confirmation hearing on Debtor's Chapter 13 plan. At the hearing, the court required, in order to satisfy the confirmation standards, that the plan be amended to provide that any proceeds payable to Debtor in any settlement of Debtor's suit be dedicated to payment of claims until unsecured creditors were paid in full.

The amended plan, which was filed October 26, 2005, provided in pertinent part that the property of the estate would vest in Debtor upon Debtor's receiving a discharge or the dismissal of the case, and that "[p]ursuant to an agreement between the debtor and trustee, the debtor will pay all secured claims upon receiving insurance settlement 100%."¹ (Docket No. 21). The amended plan was confirmed, by order entered November 3, 2005 (Docket No. 23).

On April 5, 2006, Debtor, Debtor's wife, Crampton, and a representative of USAA mediated Debtor's disputes with USAA. A "Mediation Agreement," providing for settlement of the disputes among the parties, was signed by Crampton, Debtor, Debtor's wife, counsel for USAA, and a representative of USAA.

On April 12, 2006, an application to employ Crampton, to represent Debtor with respect to the claims, was filed.² In the initial application to employ, Crampton asserted that Debtor had engaged Crampton as counsel on July 18, 2005, and that Crampton had filed suit in state court, on behalf of Debtor, against USAA. (Docket No. 25). The application was denied, for the reason that the proposed agreement appeared to give Crampton the power to veto a settlement. (Docket No. 26).

On May 22, 2006, an amended application³ to employ Crampton was filed. The amended application provided for Crampton to represent Debtor on a 40 percent contingent fee basis. The employment agreement attached to the amended application provides that Debtor grants Crampton a lien on the proceeds of the cause of action as security for the payment of attorney fees. (Docket No. 28). The amended application was granted, without a hearing, by order entered June 12, 2006 (Docket No. 32). In the amended application, Crampton asserted that Debtor and Crampton had amended their contract on or about May 19, 2006.

Crampton did not disclose, when filing either the initial application or the amended application, that the mediation had already taken place, and that he had negotiated a settlement of the matter.

On April 12, 2007, Debtor filed a notice of voluntary conversion of the instant case to a case under Chapter 7 of the Bankruptcy Code. (Docket No. 50).

On April 24, 2007, Debtor filed amended schedules. Debtor's schedules did not include a listing of the damage claims. (Docket No. 51).

On June 21, 2007, Debtor again amended the schedules. In the amended schedule B filed June 21, 2007, Debtor listed as an asset "Proceeds from lawsuit," with a value of $25,000. Debtor claimed those proceeds as exempt. (Docket No. 58). Neither Trustee nor any other party in interest has objected to Debtor's exemptions.

On August 23, 2007, Crampton filed the instant motion. In the motion, Crampton asserts the Mediation Agreement provides for USAA to pay $75,000, of which $31,500 was to be paid to Crampton, $25,000 to Debtors for the contents of their home, and $18,500 to Debtors for their mortgage. The Mediation Agreement provided that Debtors' attorney (identified in the agreement as Crampton) was responsible for obtaining approval from the bankruptcy court.

In the instant motion, Crampton seeks approval of the settlement. Crampton argues that the settlement is justified, because a certified question of law was pending before the Texas Supreme Court at the time of the mediation, and the ultimate ruling on the certified question likely would have resulted in summary judgment being granted against Debtor on the claims.⁴

The Chapter 7 Trustee opposes the instant settlement. In his response, the Trustee argues that, on advice of his special counsel, Trustee believes that Debtor's claims against USAA can be distinguished from those in Fiess, and that Debtor and his wife were pressured to accept the settlement.

At the hearing on the instant motion, the parties raised arguments related to the potential effect of the proposed settlement on claims which remain pending against contractors who performed the remediation of Debtor's home. Counsel for Trustee stated that counsel representing the contractors have asserted as a defense that Debtor was not in privity with the contractors, and Trustee thus argues that approval of the proposed settlement with USAA (which Trustee's counsel argues may have been in privity with the contractors) could conceivably cut off the rights of Debtor and the estate to pursue remedies against the contractors. Crampton argued that he believes Debtor hired the contractors directly, and thus the privity argument asserted by the contractors would fail.

Debtor testified at the hearing on the instant motion that he was dissatisfied with the proposed settlement, and expressed dissatisfaction with his contractors. However, the court notes that Debtor signed the Mediation Agreement.

Conclusions of Law

The commencement of a chapter 13 case creates an estate, comprised, with exceptions not pertinent to the instant case, of all legal or equitable interests of the Debtor in property. 11 U.S.C. § 541(a).

In Chapter 13, a debtor has, exclusive of the rights of the Chapter 13 trustee, the rights and powers of a trustee under inter alia, Section 363(b) of the Bankruptcy Code. 11 U.S.C. § 1303. These included the right to seek to employ Crampton.

Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor. 11 U.S.C. § 1327(a).

In the instant case, the confirmed plan provided that the property of the bankruptcy estate was to be vested in Debtor upon the discharge or dismissal of the case. The court concludes that the causes of action against USAA and the contractors remained property of the bankruptcy estate at the time the case was converted to Chapter 7.

This determination does not end the inquiry. The court must now address the question of what effect...