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was converted from a chapter 11 case to a chapter 7 case, and
petitioner subsequently transferred the Vernon property to the
bankruptcy estate. On August 7, 2001, pursuant to a court order
lifting the automatic stay, Herring National Bank foreclosed on
the Vernon property. During May of 2003, the court approved an
application filed by the bankruptcy trustee to abandon remaining
property, books, and records of the bankruptcy estate on grounds
that any remaining assets were of de minimis value. On April 7,
2004, the court discharged petitioner in bankruptcy.
The Diamond Ring
During 1984, petitioner’s wholly owned S corporation, Searcy
M. Ferguson, Inc. (the corporation), purchased a 16.25-carat
diamond, which subsequently was made into a ring (the diamond
ring), presumably at the expense of the corporation. At the time
of the purchase, petitioner was married to Ms. Smith. The
divorce agreement designated the diamond ring as the separate
property of Ms. Smith.
As plaintiffs in a suit filed against Ms. Smith in Texas
State court on November 8, 1994, petitioner and the corporation
claimed, inter alia, that Ms. Smith was liable for conversion of
the diamond ring. However, the trial court granted Ms. Smith’s
motion for summary judgment with respect to the conversion
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