Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Stephanie Cumings
Nov. 30 — The wife of a famous surgeon was left with a fraction of the family probate allowance she would have been entitled to under Texas law after her husband fled to Florida, filed for bankruptcy, and subsequently died under bizarre circumstances.
In a case that was complicated by the fact that the debtor left behind several dubious wills, Judge W. Eugene Davis agreed with the bankruptcy court that the debtor's wife was only entitled to the smaller family allowance because the debtor had been domiciled in Florida at his death.
The Fifth Circuit agreed that under the unusual circumstances of the case, the bankruptcy court made the right call by awarding the family allowance when it seemed like none of the wills would ever be probated.
Once a prominent Houston surgeon, Michael Brown's downfall included allegations of drug use, mental illness, and domestic abuse, according to the Houston Chronicle. The Chronicle also reported that the day before he died, Brown was slated to spend 30 days in federal prison for assaulting a flight attendant on an international flight.
Brown separated from his wife Rachel in 2010 and their divorce proceedings were “acrimonious and protracted,” according to court documents. But the couple never received a final divorce. Brown moved to Miami in 2011 while his wife and children remained in Texas.
Brown filed for Chapter 11 bankruptcy protection in Florida, which is typically used by businesses but is also available to high-wealth individuals. The debtor engaged in “significant misconduct” according to court documents, including interfering with the chief restructuring officer who was trying to reorganize the debtor's business and personal finances.
The bankruptcy case was eventually transferred to Texas, and was converted to a Chapter 7 liquidation after Brown's death.
The debtor left behind seven wills naming various executors, none of them his wife. But the wills were of questionable validity and none of them had been probated, according to the bankruptcy court.
The debtor's wife Rachel sought a “family allowance” of nearly $500,000 from the bankruptcy court, which she normally would have tried to recover from the probate court. Having concluded none of the wills were likely to ever be probated, the bankruptcy court found that it had “an obligation to act to award a family allowance that cannot or is not being resolved in state court.” The court awarded Rachel a family allowance from the debtor's “probate estate,” meaning the exempt assets the bankruptcy court would have sent to the probate court had a probate court actually taken jurisdiction.
The bankruptcy court limited the allowance to the $18,000 available under Florida law, finding that Brown had been domiciled in Florida at the time of his death. The bankruptcy court sent this proposed solution to the district court, which entered a final order authorizing the $18,000 payment.
Rachel argued on appeal to the circuit court that she was entitled to the larger family allowance permitted under Texas law. The Fifth Circuit said that the surviving spouse is only entitled to a probate allowance under Texas law if the deceased spouse is domiciled in Texas at his death.
“A person is domiciled in a [s]tate if he or she (1) resides within the [s]tate and (2) intends to remain in that [s]tate for the indefinite future,” the court said. The court found that the record supported the finding that Brown was domiciled in Florida when he died. The court noted he had lived in Florida for two years and there was no evidence he intended to move.
The court rejected Rachel's argument that the court should consider her domicile and the domicile of the children, finding this in conflict with Texas precedent. Rachel argued that some of the cases the court was relying on were decades or even centuries old, and thus no longer valid. But the court said that even the more recent cases have looked to the domicile of the deceased, and so there was “no reason to believe that the Supreme Court of Texas would jettison its longstanding rule that it is the decedent's domicile, not the survivor's domicile, which governs the survivor's eligibility for a probate allowance under Texas law.”
Finally, Rachel argued that although the decedent's domicile normally controls, it shouldn't under the unusual circumstances of this case where “the decedent moved to a foreign state shortly before his death, created his alleged domicile in violation of court orders and his surviving wife and children have consistently been domiciled in Texas since before the decedent moved away from them.”
“Texas precedent contains no indication that the Supreme Court of Texas would recognize Rachel's proposed exception to its well-settled domicile rules,” the court said. “In the absence of any such indication, we will not read such an exception into Texas law.”
The Fifth Circuit otherwise approved of the bankruptcy court's creative solution for the family allowance problem.
“Under these peculiar circumstances, we agree that the lower courts did the only practical thing they could do: pay Rachel the $18,000 out of the exempt assets,” the court said. “Because neither party objects to the lower courts' authority to do so, we will not disturb the district court's order paying the family allowance out of the probate estate.”
Rachel argued that the bankruptcy court erred in finding that her probate claims could only be paid from the “probate estate” and not the bankruptcy estate. But the circuit court said it didn't have jurisdiction to address this issue because it hadn't been reviewed by the district court.
Judges Edward C. Prado and Leslie H. Southwick joined Davis on the three judge panel.
Mynde Shaune Eisen of the Law Office of Mynde S. Eisen, Houston, and Gary Frank Cerasuolo of Smith Cerasuolo, LLP, Houston, represented Rachel Brown.
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