Phillips et al

Filing 11

ORDER AFFIRMING Bankruptcy court order in full. Case terminated on 6/15/2011.(Signed by Judge Gray H. Miller) Parties notified.(rkonieczny)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE :
JOE B. PHILLIPS, et al.,
Debtors/Appellants.
v.
FIRST NATIONAL INSURANCE COMPANY OF
AMERICA ,
Appellee.

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CIVIL ACTION H-10-3632

ADVERSARY CASE NO . 10-03075

O RDER
Before the court is Joe B. Phillips’ and Dorothy J. Phillips’ appeal from the bankruptcy
court’s order denying their motion to quash and for protective order. After considering the briefs
of the parties, the record on appeal, and the applicable law, the bankruptcy court’s order is
AFFIRMED.
I. BACKGROUND
Travelers Casualty and Surety Company of America (“Travelers”) issued ten surety bonds
on behalf of Joe B. Phillips (“Phillips”), who was appointed guardian of various veterans’ estates
by probate courts in the State of Texas. Phillips resigned as guardian of those estates after
discrepancies were noted in the guardianship accounts. Claims were ultimately filed against Phillips
by the new trustees appointed to the estates, and Phillips and his wife filed a voluntary petition in
bankruptcy on October 7, 2009.
On February 16, 2010, Travelers filed an adversary proceeding in the bankruptcy court
seeking to have the debts arising from the surety bonds declared nondischargeable. On June 24,
2010, while the adversary proceeding was pending, Phillips and his wife were indicted on charges

of conspiracy, misappropriation by a fiduciary, and tax fraud for actions taken during the
guardianships. Dkt. 8 at 24. Travelers filed a motion to compel depositions. Dkt. 2-3. Appellants
filed a motion to quash and for a protective order wherein they argued that the adversary proceeding
should be stayed pending the resolution of the criminal charges pending against them. Dkt. 2-5. On
September 24, 2010, after a hearing on the motions, Judge Bohm granted Traveler’s motion in part,
denied appellants’ motion, and directed that appellants immediately sit for their depositions in the
courthouse. Dkts. 2-6, 2-7. Appellants’ depositions were conducted, and appellants were permitted
to, and did, invoke their privilege against self-incrimination during those depositions. Appellants
then filed this appeal and assert that the bankruptcy court erred in directing that their depositions
proceed, and they also argue that the bankruptcy proceedings should be stayed pending the resolution
of the criminal charges pending against them.1
II. ANALYSIS
1.

Legal Standard

A district court has jurisdiction over a bankruptcy appeal under 28 U.S.C. § 158(a)(1), and
in reviewing the findings of a bankruptcy court, a district court acts in an appellate capacity. See
Perry v. Dearing, 345 F.3d 303, 308-09 (5th Cir. 2003). The burden is on the appellant to show that
a finding of fact made by a bankruptcy court is clearly in error. See Perry, 345 F.3d at 309; Butler
Aviation Int’l, Inc. v. Whyte, 6 F.3d 1119, 1127–28 (5th Cir. 1993); see also FED . R. BANKR. P. 8013
(“Findings of fact . . . shall not be set aside unless clearly erroneous . . . .”). A finding of fact is

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On January 18, 2011, appellants and Travelers entered into an agreed judgment in the
bankruptcy proceeding providing that the surety bond debts at issue are non-dischargeable. A
hearing on damages is set for November, 2011. Dkt. 10 ¶ 23.
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clearly erroneous when, even in the presence of evidence to support it, the reviewing court is left
with a “definite and firm conviction” that the bankruptcy court has made an error. See Carol v.
Quinlivan, 434 F.3d 314, 318 (5th Cir. 2005). A bankruptcy court’s conclusions of law are reviewed
de novo. See Perry, 345 F.3d at 309; Southmark Corp. v. Coopers & Lybrand, 163 F.3d 925, 928
(5th Cir. 1999).
Here, however, appellants challenge the bankruptcy court’s denial of a motion to quash, and
specifically the denial of the motion to stay proceedings.
2.

Analysis

The court first addresses appellants’ arguments with respect to the bankruptcy court’s
decision to deny the motion for protective order and, in effect, force them to invoke the Fifth
Amendment privilege against self-incrimination during their depositions. Appellants argue that they
were faced with the “Hobson’s choice” of either invoking their right to remain silent to avoid selfincrimination, or suffering the effects of having an adverse inference drawn against them in the
bankruptcy court. The Fifth Amendment, however, protects an individual from self-incrimination
in the context of a criminal proceeding–no person “shall be compelled in any criminal case to be a
witness against himself.” U.S. CONST . AMEND . V. There is no error, however, in drawing an adverse
inference against a civil litigant for invoking the right to remain silent, because the prohibition
simply does not apply. Indeed, a “bankruptcy court [is] entitled to draw an adverse inference from
[a debtor’s] assertion of his Fifth Amendment rights and refusal to testify . . . .” In re Powers, 261
Fed. App’x 719, 723 (5th Cir. 2008). Here, the bankruptcy court’s actions were entirely consistent
with the Constitution because appellants were not compelled to actually testify and, accordingly,

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there is no danger that their testimony will be used against them in a criminal proceeding. The
bankruptcy court’s order in this respect is, therefore, AFFIRMED.
Appellants also argue that a stay of their bankruptcy proceedings was appropriate in this case,
and that the bankruptcy court abused its discretion in denying a stay. The issue of a stay pending the
outcome of parallel criminal proceedings was addressed persuasively in In re Piperi:
5. Although there is no constitutional mandate for a stay of civil proceedings
pending the outcome of criminal proceedings, a court may, in its discretion, decide
to stay civil proceedings, postpone civil discovery, or impose protective orders and
conditions in the interests of justice, either at the request of the prosecution or at the
request of the defendant. SEC v. Dresser Industries, Inc., 628 F.2d 1368, 1372
(D.C.Cir. en banc); cert. denied, 449 U.S. 993, 101 S.Ct. 529, 66 L.Ed.2d 289 (1980).
6. A complete stay of a pending civil action until the outcome of related
criminal proceedings is an extraordinary remedy. Weil v. Markowitz, 829 F.2d 166,
174 (D.C.Cir. 1987).
7. The Debtor voluntarily sought the protection of the bankruptcy court.
The Bankruptcy Code gives debtors access to relief not obtainable outside
bankruptcy: a discharge of debts. The adversary proceedings brought under § 523
and § 727 of the Bankruptcy Code seek to deny the debtor's discharge or except debts
from discharge. The debtor cannot use the bankruptcy court to broaden the
benefits afforded to an accused by the Fifth Amendment. To do so would allow
the debtor to use the Fifth Amendment as a shield, while impermissibly using
the Bankruptcy Code as a sword with which to take unfair advantage of
creditors. See, e.g., In re Oot, 112 B.R. 497, 501 (Bankr. N.D. N.Y. 1989).
137 B.R. 644, 646-647 (Bkrtcy. S.D. Tex. 1991) (Clark, J.) (emphasis added).
Here, there is no compelling argument for granting the extraordinary remedy of staying the
bankruptcy proceedings. Appellants retain their right to avoid incriminating themselves during the
pending, parallel criminal proceedings, and nothing the bankruptcy court has done will interfere with
their ability to exercise their privilege against self-incrimination. Appellants filed the bankruptcy
proceeding seeking affirmative relief in the nature of a discharge of their debts. The bankruptcy
court is not compelled to bide its time simply because the same underlying transaction led first to
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appellants seeking bankruptcy protection, and, second, to an indictment by a grand jury. The
bankruptcy court did not abuse its discretion in denying the motion to stay proceedings.
CONCLUSION
The bankruptcy court correctly ruled that Mr. and Mrs. Phillips may not avoid discovery in
their bankruptcy adversary proceeding on the basis that criminal charges are pending against them.
Further, the bankruptcy court correctly required plaintiffs to attend their depositions, but permitted
them to assert their Fifth Amendment privilege against self-incrimination. Finally, there is no
justification for taking the extraordinary step of imposing a stay of the bankruptcy proceedings.
Accordingly, the bankruptcy court’s order is adopted in full and is AFFIRMED.
It is so ORDERED.
Signed at Houston, Texas on June 15, 2011.

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Gray H. Miller
United States District Judge

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