The situation we will discuss involves a fire that destroyed the house of homeowners. They had fire insurance to cover their loss. They hire a contractor to rebuild their house. The contract with contractor included a document which transfers to contractor all of the homeowners’ rights to the insurance proceeds. Contractor proceeds to rebuild the house and eventually completes rebuilding. Homeowners receive $200,000 from their insurance but do not transfer the $200,000 to pay contractor. Contractor asks Godfather for help. Godfather cuts the head off homeowners’ horse and puts head on homeowners’ bed. Homeowners are unfazed. Instead of paying the $200,000 to contractor, homeowners file a Chapter 7 petition. Who owns the $200,000?

In Re Helms, the debtors’ home was destroyed by fire in October 2007. The debtors filed a claim with their insurance provider, and hired Belfor USA Group Inc. to repair and rebuild their home. Belfor and the debtor-husband executed a Work Authorization on October 31, 2007. This document included an assignment provision purporting to transfer to Belfor all of the homeowners’ right, title, and interest in insurance proceeds. Both debtors signed the “Belfor Construction Contract” on Dec. 17, 2007. In this document, Belfor agreed to furnish all labor, materials, tools, and equipment necessary to repair the debtors’ home. The debtors agreed to pay Belfor $217,981.72. In July 2008, the debtors received $266,363 from their insurance company. In August 2008, Belfor completed the restoration work. Despite receiving the money from the insurance company, the debtors paid only $96,182.57 owed to Belfor. Mr. Belfor scratched his head and said “what the f…, I am getting screwed!” and proceeded to file a lawsuit in state court against debtors.

On April 28, 2010, Belfor obtained a state court judgment against the debtor in the amount of $113,145.30. The state court found that that both debtors assigned their rights to the insurance proceeds to Belfor. Although the debtor-wife signed only the construction contract, the state court treated the two documents as a single contract. The debtors filed for Chapter 7 relief one month after the judgment was entered. What were they thinking, they could not exempt the insurance proceeds anyway. Belfor sued them and the Chapter 7 trustee seeking a declaration that the insurance proceeds were its property pursuant to a prepetition assignment. The trustee responded that the proceeds were property of the estate because the assignment was legally defective. Belfor argued that a lien avoidance order entered by the bankruptcy court early in the case established that the insurance proceeds had been assigned. In fact, that’s just what the order said, but the court said that language was a “flyer” – a conclusion extraneous to the court’s ruling added by the attorney who prepared the order. While the bankruptcy court order did not prevent the trustee from challenging the assignment, the state court judgment and it’s holding that the debtors assigned the insurance proceeds to Belfor was binding under collateral estoppels principles (matter has been previously decided in another case) as to the debtors. Hence, the trustee was precluded from arguing that the debtors did not assign their interest in the insurance proceeds. Collateral estoppels did not prevent creditors from seeking to avoid the transfer, so the trustee could proceed under Section 544.