Opinion
Case No. 10-69502
02-21-2013
In re: SAMUEL M. FODALE, Debtor.
Chapter 7
Hon. Walter Shapero
OPINION GRANTING APPROVAL OF COMPROMISE OF CLAIMS AND
THE RELATED SALE OF MINORITY OWNERSHIP INTERESTS
The matters before the Court are the Trustee's Motion for Entry of Order Authorizing Compromise of Claims and Approval of Related Sale of Minority Ownership Interests and Creditor Crown Enterprises, Inc.'s Objection thereto. The Court will also address Creditor's related Motion for Entry of an Order Granting Crown Enterprises, Inc. Standing to Investigate, Commence, and Prosecute Avoidance Actions and to Recover Transferred Property on Behalf of the Debtor's Estate.
BACKGROUND FACTS AND PROCEDURAL HISTORY
Samuel Fodale ("Debtor") filed his Chapter 7 bankruptcy petition on September 23, 2010. Charles Wells, III ("Trustee") was appointed Chapter 7 Trustee of the bankruptcy estate. Elias Majoros of Gold, Lange, and Majoros, P.C. was authorized as counsel for the Chapter 7 Trustee.
Prior to the commencement of the bankruptcy case, the Debtor was a member, along with James George, in numerous LLCs, which were involved in the business of acquiring commercial or industrial properties and leasing the properties to unrelated entities. The membership interests and the percentage of the interests owned by the Debtor that are the subject of this Motion are: (a) Amalgamated Properties, LLC (50% interest); (b) Boulevard Properties, LLC (40% interest); (c) Hitzert Properties, LLC (40% interest); (d) Manchester Sterling Heights Development Co., LLC (37.5% interest); (e) Nevada Properties, LLC (50% interest); (f) Piquette Manchester Investments, LLC (50% interest); and (g) Manchester Detroit, LLC (49% voting interest, 51% non-voting interest) (collectively referred to as "the Membership Interests"). The Debtor was responsible for identifying and negotiating the purchase of the properties, locating tenants, and supervising the leasing arrangements of the properties. Financing for the purchase or improvements of the properties was arranged by Mr. George, the James C. George Revocable Living Trust, or other entities owned by Mr. George (the "George Entities").
Between 1998 and the date of the commencement of this case, the George Entities made substantial pre-petition loans to the Debtor individually, totaling approximately $15,000,000.00, the proceeds of which he then transferred to various entities for business use. Repayment of those loans was secured by security interests in the Debtor's membership interests in the limited liability companies at issue as well as other property of the Debtor. As of the petition date, the total owing on those loans, including interest, was $7,550,081.34.
On October 9, 2003, Mr. George filed a UCC financing statement asserting a security interest in the following membership interests owned by the Debtor: (1) Portage-Manchester Investments, LLC; (2) Orlando-Manchester, LLC; (3) Piquette-Manchester Investments, LLC; (4) Hitzert Properties, LLC; (5) Nevada Properties, LLC; (6) Amalgamated Properties, LLC; (7) Oakland Highland Properties, LLC; and (8) Boulevard Properties, LLC. In that financing statement, Mr. George also asserted a security interest in "all property of the Debtor located on or at the Premises, and now owned or hereafter located at or on the Premises. . . ."
On March 10, 2008, the Debtor and Mr. George entered into a security agreement, whereby the Debtor granted to James C. George Revocable Living Trust a security interest in the following membership interests owned by the Debtor: (1) Nevada Properties, LLC; (2) PiquetteManchester Investments, LLC; (3) Hitzert Properties, LLC; (4) Amalgamated Properties, LLC; (5) Oakland Highland Properties, LLC; (6) Boulevard Properties, LLC; (7) ManchesterSterling Heights Development Company, LLC; (8) ManchesterWarren Investments, LLC, and (9) Bissel Properties, LLC. The security agreement also granted the James C. George Revocable Living Trust a security interest in "[a]ll personal property of [the Debtor] whether now owned or hereafter acquired . . . ."
On May 21, 2008, the James C. George Revocable Living Trust filed a UCC financing statement asserting an interest in all personal property of the Debtor.
Prior to the Commencement of this case, on July 3, 2007, Crown Enterprises, Inc. ("Creditor") commenced a lawsuit against the Debtor and Fodale Group, LLC in the Macomb County Circuit Court, Case No. 07-2839-CK. In that lawsuit, the Creditor sought damages against the Debtor and Fodale Group, LLC for breach of contract, default of promissory notes, violation of the Construction Lien Act, civil conversion and statutory conversion, action on assigned judgments, unjust enrichment, fraud, and violation of the Michigan Builders Contract Fund Act. On October 5, 2009, the Creditor obtained a partial judgment against the Debtor in the amount of $1,256,300.64 associated with the breach of contract and default of promissory note claims. Although that partial judgment was not final, the Creditor was granted leave to commence collection efforts within sixty days after its entry.
In connection with that post-judgment discovery, the Creditor conducted two creditor's examinations of the Debtor; deposed the Debtor's bookkeeper; deposed Mr. George's accountant, Gary Fish; and reviewed associated documents. The Creditor also sought to depose Mr. George. On September 7, 2010, the state court judge ordered that Mr. George's deposition be taken on October 8, 2010. The Debtor filed his bankruptcy petition on September 23, 2010, thus staying the state court proceedings prior to the date of Mr. George's deposition.
In his Schedule D, the Debtor listed Mr. George and the James C. George Revocable Living Trust as creditors holding secured claims in "unknown" amounts. Neither Mr. George nor the James C. George Revocable Living Trust has filed a proof of claim in this case.
Shortly after the commencement of this case, the George Entities requested that the Trustee stipulate to lift the automatic stay with reference to the Membership Interests. The Trustee refused to do so until he could perform due diligence. The Trustee and his counsel thereafter continued with the necessary investigation and due diligence, including discussions with the Debtor and Mr. George. Trustee's counsel also met with counsel for the Creditor to discuss several issues it raised with regard to the George Entities' security interests. The Creditor also asked the Trustee to confer derivative standing to the Creditor to allow it to commence an adversary proceeding challenging the George Entities' security agreements as fraudulent transfers.
Thereafter, the Trustee and Mr. George negotiated and agreed to the subject proposed sale and settlement, under which:
(a) The George Entities would pay to the Trustee and the bankruptcy estate the sum of $50,000.00 in consideration of (i) a sale of the Membership Interests to an irrevocable "Entity Acquisition Trust" free and clear of all liens (including the tax liens held by the IRS and the State of Michigan), claims and encumbrances, except the liens of the George Entities, which will remain attached to the Membership Interests; (ii) a release of any and all claims the Trustee could have pursued on behalf of the bankruptcy estate against the George Entities and their successors; and (iii) the agreement of Mr. George and the James C. George Revocable Living Trust to not file a proof of claim or seek any distribution in this case; and
(b) The purchasing Entity Acquisition Trust would be treated as a grantor trust for federal income tax purposes. The beneficiaries of the trust would be the Debtor's wife and children. The stated rationale for such is the desire of the George Entities to insure that the Debtor will continue to manage and otherwise remain involved in the operations of the subject limited liability companies.
The referred to release encompasses any and all claims the bankruptcy estate has or might have against the George Entities, and any entities that the George Entities hold or have any interest in (collectively, the "Released Parties"), and includes but is not limited to claims relating to the nature, extent, validity and legitimacy of the loans made by the Released Parties to Fodale, the business transactions between those parties and any other acts or omissions that might create a cause of action that could have been pursued by the creditors of the debtor and Trustee that now constitute property of the bankruptcy estate. It would also release any and all such claims, whether now known or hereafter discovered, and whether now in existence or hereafter created, and it will run and inure to the benefit of all heirs and assigns of the Released Parties.
The Trustee filed a Motion for Entry of an Order Authorizing Compromise of Claims and Approval of Related Sale of Minority Ownership Interests ("Settlement Motion"). In that Motion, the Trustee stated the following with regard to his investigation:
7. The Trustee has obtained and reviewed a substantial amount of financial documentation related to the Debtor's LLC interests in which the George Entities are co-members. These documents include LLC operating agreements, bank statements and check ledgers, general ledgers, tax returns, balance sheets, profit/loss statements, and security/perfection documents. The Trustee's analysis of the LLCs and the Debtor's membership interests in the LLCs has disclosed the following facts:
a. Except for Amalgamated Properties, LLC and Boulevard Properties, LLC, the subject LLCs and the property in those LLCs are subject to substantial secured obligations in favor of commercial lenders who provided financing for the purchase of the properties. Given the value of these properties, as established by SEV information provided to the Trustee, and the Trustee's own knowledge of the commercial real estate market, the properties owned by the LLCs (most of which are presently vacant), have substantial negative equity, and are not likely to have positive equity at any time in the future. Because the properties of the LLCs have negative equity, there is no value attributable to the membership interests.
b. The Trustee has reviewed the operating agreements for the LLCs and all of the agreements contain language restricting transfer of the Membership Interests. The Trustee believes that even if he were able to avoid the transfer restrictions, it is unlikely anyone (other than existing members) would have an interest in purchasing the Membership Interests for the reasons expressed in subparagraph a. above.
c. Even if the Membership Interests had value, they are subject to security interests for prepetition pledges made by the Debtor to James
George or related entities for prepetition loans. The Trustee has investigated these pledge agreements and the perfection of the same, and does not believe the liens are avoidable. The bankruptcy estate's Membership Interests, along with all other assets held by the Debtor, are further encumbered by Notices of Federal Tax Liens held by the Internal Revenue Service for unpaid tax, penalties, and interest in the amount of $1,521,166.88. The Trustee's Investigation has determined that except possibly with regard to the Debtor's membership interest in Manchester - Sterling Heights Development Company, LLC, the Notice of Federal Tax liens are subordinate to the senior liens held by the George Entities based upon the timing of perfection of the security interests. The existence of federal tax liens also restricts the transfer of the Membership Interests outside of bankruptcy.8. As indicated above, any claims against the George Entities and the Released Parties which may or did derive from the George Entities' transactions with the Debtor are now property of the bankruptcy estate, and can be pursued only by the Trustee, on behalf of the bankruptcy estate.
9. The Trustee has investigated the bankruptcy estate's potential claims against the George Entities and the Released Parties. The Trustee has investigated the nature, extent, validity, and legitimacy of the loans made by the George Entities to the Debtor, the transactions between the parties, and any other acts or omissions that might create a cause of action that could be pursued by the bankruptcy estate. The Trustee does not believe that the bankruptcy estate holds any valid claims against the George Entities or any other of the Released Parties.
10. The Released Parties do not believe that any claims against them exist which can be pursued by the trustee. Notwithstanding, the Released Parties do not wish any potential claims to be abandoned by the Trustee. The Trustee has also determined that there is value to the bankruptcy estate in resolving any issues created by the potential attachment of the IRS tax liens to the Membership Interests, and issues relating to the priority of such liens, vis-à-vis the liens of the George Entities.
The Creditor filed an Objection to the Trustee's Settlement Motion. In its Objection, the Creditor argues that the Settlement Motion should not be approved because the Trustee did not conduct an adequate investigation with regard to, among other things, the values of the membership interests to be sold and the claims and security interests purportedly held by the George Entities. The Creditor further argues that the sale is not being proposed in good faith. On the same date it filed its Objection to the Trustee's Settlement Motion, the Creditor filed a Motion for Entry of an Order Granting Crown Enterprises, Inc. Standing to Investigate, Commence, and Prosecute Avoidance Actions and to Recover Transferred Property on Behalf of the Debtor's Estate ("Standing Motion"), a Motion for Entry of an Order Scheduling an Evidentiary Hearing and Permitting Discovery in Connection with its Objection to the Trustee's Settlement Motion, and an adversary proceeding against Mr. George, Adv. Pro. No. 11-05487, seeking subordination of Mr. George's claim or interest. The Trustee filed Objections to both of the Creditor's Motions.
The Court held hearings on the Trustee's Settlement Motion and the Creditor's Motions, setting a limited evidentiary hearing with regard to the Trustee's Settlement Motion and deferring the Creditor's Motions pending the outcome of that evidentiary hearing. The limited evidentiary hearing was held over the course of several days, during which the Creditor made a number of its own offers to purchase the Membership Interests and any claims the estate may have against Mr. George, which the Trustee rejected. Also during that time, Mr. George increased the amount he would pay to the Trustee under the proposed Settlement Agreement from $50,000 to $60,000 to help defer the costs associated with gaining approval of the settlement. At the conclusion of that hearing, the Court took the matter under advisement.
DISCUSSION
The proposed sale of the Membership Interests is governed by 11 U.S.C. § 363(b)(1), which states: "The trustee, after notice and a hearing, may sell, use or lease, other than in the ordinary course of business, property of the estate." Pursuant to 11 U.S.C. § 363(f), the property at issue may be sold free and clear of any interest in such property of an entity other than the estate only if "(4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest." "[T]here must be some articulated business justification . . . for using, selling, or leasing property out of the ordinary course of business before a bankruptcy judge may order such disposition under section 363(b)." Stephens Indus., Inc. v. McClung, 789 F.2d 386, 389 (6th Cir. 1986) (quoting In re Lionel Corporation, 722 F.2d 1063, 1070 (2d Cir.1983)). The Court must "expressly find from the evidence presented before [it] at the hearing a good business reason to grant such an application." Id.
To be also noted are the propositions that "[a] trustee in bankruptcy has the authority to seek a settlement of claims available to the debtor, but any proposed settlement is subject to the approval of the bankruptcy court, which enjoys 'significant discretion.'" In re MQVP, Inc., 477 F. App'x 310, 312-13 (6th Cir. 2012) (citing Fed. R. Bankr. P. 9019(a); In re Rankin, 438 Fed. Appx. 420, 426 (6th Cir.2011)). "The very purpose of such a compromise agreement 'is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims.'" Id. (quoting In re Bard, 49 Fed. Appx. 528, 530 (6th Cir.2002) (quoting In re A & C Props., 784 F.2d 1377, 1380-81 (9th Cir.1986))).
When determining whether to approve a proposed settlement, the bankruptcy court may not rubber stamp the agreement or merely rely upon the trustee's word that the settlement is reasonable. Reynolds v. C.I.R., 861 F.2d 469, 473 (6th Cir. 1988). Rather, "the bankruptcy court is charged with an affirmative obligation to apprise itself of the underlying facts and to make an independent judgment as to whether the compromise is fair and equitable." Id. The Supreme Court has set forth the general factors to be considered by the bankruptcy judge in determining whether a proposed settlement is fair and equitable:In re MQVP, Inc., 477 F. App'x 310, 312-13 (6th Cir. 2012) (quoting Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25, 88 S. Ct. 1157, 20 L.Ed.2d 1 (1968)).
There can be no informed and independent judgment as to whether a proposed compromise is fair and equitable until the bankruptcy judge has apprised himself of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated. Further, the judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any
judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Basic to this process in every instance, of course, is the need to compare the terms of the compromise with the likely rewards of litigation.
When considering a trustee's motion to compromise, the Court must consider four factors:
(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.In re Bard, 49 F. App'x 528, 530 (6th Cir. 2002) (quoting Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir.1929)). With regard to that four-factor test, the Sixth Circuit Court of Appeals stated:
Though Bard is an unpublished opinion, we have continued to apply its four-factor test when considering challenges to proposed settlement agreements in bankruptcy cases. See Lyndon Prop. Ins. Co. v. Katz, 196 Fed. Appx. 383, 387 (6th Cir. 2006); see also Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir. 1988) (setting forth three-part test similar to that articulated in Bard). Importantly, however, "[a] bankruptcy judge need not hold a mini-trial or write an extensive opinion every time he approves or disapproves a settlement. The judge need only apprise himself of the relevant facts and law so that he can make an informed and intelligent decision, and set out the reasons for his decision." Fishell, 47 F.3d at –––– (quoting In re Am. Corp., 841 F.2d 159, 163 (7th Cir. 1987)). Finally, bankruptcy courts and district courts in this jurisdiction generally accord some deference to the trustee's decision to settle a claim. See In re Media Cent., Inc., 190 B.R. 316, 321 (E.D.Tenn.1994) (citing Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir. 1988)); In re Smithey, No. 10-30310, 2011 WL 3102308, at *6-7 (Bankr. N.D. Ohio, July 25, 2011); In re Engman, 331 B.R. 277, 298-99 (Bankr. W.D. Mich. 2005); In re West Pointe Props. L.P., 249 B.R. 273, 281 (Bankr. E.D. Tenn. 2000).In re MQVP, Inc., 477 F. App'x 310, 313 (6th Cir. 2012).
At the evidentiary hearing on this matter, Mr. Majoros, the attorney for the Trustee, testified about the investigation he undertook and the due diligence he performed in connection with the Settlement Motion, saying that:
(1) he attended a § 341 Meeting of Creditors, at which he examined the Debtor under oath regarding his financial affairs;
(2) he demanded turnover of the Debtor's financial records, including all of his tax returns, bank statements, and financial documents relating all of the business entities the Debtor had an interest in;
(3) he contacted the Debtor, Mr. George, and counsel for Mr. George and obtained documentation related the loans Mr. George made to the Debtor, including promissory notes, financing statements, security agreements, records of monies actually lent, proof of those loans, records relating to loan repayments, and a compilation of the balance owed on the loans as of the petition date;
(4) he demanded and obtained financial records regarding the financial condition and ownership of the seven subject limited liability companies, including copies of the entities' bank statements, tax returns, general ledgers, financial statements, income statements, and balance sheets;
(5) he conducted a meeting with the Debtor and his counsel and meetings with Mr. George's attorneys, including the attorneys that prepared the loan documents regarding the loans to the Debtor and the documents relating to the perfection of Mr. Georges interest in the Debtor's interests in the seven subject limited liability companies;
(6) he obtained and reviewed records relating to the commercial properties owned by the limited liability companies and consulted a real estate agent specializing in commercial property in Detroit to determine the approximate value of those commercial properties;
(7) he conducted a meeting with counsel for the Creditor to discuss the background of the Creditor's purported claims against the Debtor and the theory of the claims Creditor asserts it has against Mr. George; and
(8) he negotiated the terms of the Settlement Agreement and filed the pending Settlement Motion.
As a result of that investigation, the Trustee determined that, on a combined basis, there was a negative book value on the seven limited liability companies totaling approximately $4,300,000. On a stand-alone basis, except for Amalgamated Properties, LLC and Manchester- Detroit, LLC, all of the limited liability companies have negative book value. Amalgamated Properties, LLC has little to no debt on its balance sheet and has a land contract receivable totaling $1,083,000. Manchester-Detroit, LLC has some, but not significant book value.
After reviewing the current property tax statements, looking at the assessed values, consulting with the real estate agent regarding values, and determining which properties were currently leased, the Trustee and his counsel determined that the fair market values of the properties owned by the limited liability companies were significantly less than the total amount of Mr. George's secured claim. Moreover, the Debtor's Membership Interests in those limited liability companies, as well as all other assets held by the Debtor, are further encumbered by the Notices of Federal Tax Liens held by the Internal Revenue Service. Additionally, the Trustee determined that there was an extremely limited chance of selling the Membership Interests to a non-member given the transfer restrictions included in the operating agreements of the seven limited liability companies. Those transfer restrictions provide, generally, that any transferee would not become a Member and shall not have a vote in company matters, but the transferee shall have the right to distributions to which the Member was otherwise entitled and would be subject to the Capital Contributions.
If this Settlement Agreement is approved, the Internal Revenue Service would receive, after the payment of administrative expenses, the remainder of the $60,000.00 proceeds. The amount of administrative expenses is currently unclear. Under the terms of the Settlement Agreement, the transfer of the Membership Interests to the Entity Acquisition Trustee would be free and clear of any liens, including the tax liens held by the Internal Revenue Service, other than those held by the George Entities. The United States of America, on behalf of its agency, the Internal Revenue Service, withdrew its initial Response to the Settlement Motion and it concurs with the Trustee's Motion for Entry of Order Authorizing Compromise of Claims and Approval of Related Sale of Minority Ownership Interests.
The Amalgamated Properties, LLC Operating Agreement provides as follows:
Permitted Dispositions. Subject to the provisions of this Article, a Member may assign such Member's membership interest in the Company in whole or in part. The assignment of a membership interest does not itself entitle the assignee to participate in the management and affairs of the Company or to become a Member. Such assignee is only entitled to receive, to the extent assigned, the distributions the assigning Member would otherwise be entitled to.
The Creditor argues that the Trustee did not complete an adequate investigation with regard to the values of the minority membership interests in the seven liability companies or the values of the properties owned by the entities. The Creditor insists that the Trustee and his counsel should have attempted to market the minority membership interests, despite the transfer restrictions, and should have had formal written appraisals done with regard to the commercial properties owned by the entities. The Creditor also argues that it has articulated possible viable claims against Mr. George on behalf of the estate and that it is ready to prosecute those claims if granted standing. The Creditor argues that the loans Mr. George made to the Debtor were actually equity contributions to the entities owned by the Debtor and Mr. George and that the security interests held by the George Entities are invalid.
The Court finds that the Trustee's investigation was adequate with regard to the values of the minority membership interests in the entities and the values of the commercial properties owned by the entities. As noted, under the terms of this Settlement Agreement, Mr. George will pay $60,000 to the estate in exchange for a transfer of the Membership Interests, which have significant negative equity, to the Entity Acquisition Trust and a release of the estates claims against the George Entities. Those settlement funds will be used to pay administrative costs and the remainder will be turned over to the Internal Revenue Service; no funds will be paid to any unsecured creditors. Given the value of these entities, the amount of the claims against them, the fact that it is unlikely that the entities could be successfully marketed, and the fact that there would likely be additional significant litigation if this sale is not approved and the Trustee instead sought approval of a sale to the Creditor, the Court must conclude that the Trustee's investigation and conclusion is both appropriate and sufficient.
After meeting with the Creditor and investigating the nature, extent, validity, and legitimacy of the loans made by Mr. George to the Debtor, the Trustee and his counsel concluded that (a) there were no viable causes of action on behalf of the estate against Mr. George, his trust, or any entities he owns; (b) the money was actually lent by Mr. George to the Debtor, Mr. George has properly perfected his security interest in the seven limited liability companies, and Mr. George has a secured claim of approximately $7,500,000; and (c) despite the fact, as noted, that the Settlement Agreement includes an extremely broad release of any and all claims against the George Entities, there were no viable claims against the George Entities and, thus, the unknowns were not significant and the broadness of the release was not therefore a particular concern or impediment to what is otherwise an appropriate settlement. The Trustee also indicated that, although he did not spend thousands of dollars or hours searching for any possible claims against the George Entities, after balancing what he found in his own investigation (which was reasonable and sufficiently thorough) and what the Creditor asserted, he did not believe that there were any viable claims against the George Entities.
The Creditor also argues that the structure of this settlement and the accompanying release were agreed to by the Trustee and Mr. George in bad faith. In this regard, the Creditor specifically points to (1) the fact that the Debtor will continue to have some beneficial interest in the entities if this sale is approved because his wife and children are the beneficiaries of the Entity Acquisition Trust; (2) the fact that the Trustee's counsel did not approach the Creditor about purchasing the Membership Interests prior to filing the present Settlement Motion; and (3) the fact that the Trustee has declined to accept the Creditor's offer to separately purchase the Membership Interests and any claims the estate may have against Mr. George at a higher price than that offered by Mr. George.
As noted, the Creditor made several offers to purchase the Membership Interests and to purchase the claims it believes the bankruptcy estate has against the George Entities. The Creditor's most current offer was to separately purchase the Membership Interests for $65,000.00 and to purchase the potential claims the bankruptcy estate has against Mr. George for $5,000.00. The Trustee has rejected all of the Creditor's offers because the Creditor refused to make the offer non-contingent on approval by the Court (i.e.: the estate would be entitled to keep the $70,000 even if the settlement is not approved by the Court) and the difference in the amount offered was not significant enough to defray the additional litigation costs likely to be expended in seeking approval of that offer over Mr. George's inevitable objections.
The Trustee wanted to insure that the Creditor was not merely making an offer to purchase the Membership Interests and claims against the George Entities in an attempt to coerce a settlement offer from Mr. George, after which the Creditor would withdraw its offer to the Trustee. The Trustee was also concerned that the Creditor would attempt to withdraw its offer in the midst of what the Trustee expected to be an extensive and costly settlement approval process (since Mr. George has indicated that he would object to the approval of any such offer by the Creditor), leaving the estate without any chance of receiving any additional offers to purchase the Membership Interests and without any chance of receiving any funds therefrom to benefit the estate.
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The Creditor argues that its offer is stronger than Mr. George's offer because it is offering a higher purchase price and it is not seeking a release. With regard to those arguments, (1) Mr. Majoros and Mr. George testified that the reason the Membership Interests are being transferred to the Entity Acquisition Trust, the beneficiaries thereof being the Debtor's wife and children, is to insure that the Debtor continues to provide his services to those entities; (2) the Trustee indicated that he intended to use the pending Settlement Motion as the starting point for possibly bringing out any additional offers from other parties; he was sure that approval of any offer made by the Creditor would be met with costly and lengthy litigation initiated by Mr. George; and, for that and other reasons, he believed the offer made by Mr. George to be the most beneficial offer to the estate; and (3) the Trustee did not accept the Creditor's various offers because he did not believe them on balance to be more beneficial to the estate due to the fact that there would be additional costly and lengthy litigation in seeking Court approval of any sale to or settlement agreement with the Creditor, the outcome of which was unsure. The costs associated with litigating the approval of some sale/settlement agreement between the Trustee and the Creditor, and Mr. George's inevitable objections thereto, would likely eliminate any possible benefit to the bankruptcy estate given the relatively small amounts being offered for these Membership Interests. The Trustee testified that the offer made by Mr. George is superior to that made by the Creditor because, even if the entities were sold to the Creditor, Mr. George will assert his security interests in the entities and will be entitled to the funds from the sale of the Membership Interests to any third party.
In this case, the Court therefore concludes that on balance the proposed sale of the Membership Interests is in the best interest of the estate and that the Trustee has exercised the appropriate business judgment in making his recommendation to sell the Membership Interests to the Entity Acquisition Trust and to enter into the Settlement Agreement. "[T]he obligation of the court is to canvas the issues and see whether the settlement 'falls below the lowest point in the range of reasonableness.'" In re Dow Corning, 192 B.R. 415, 421 (Bankr. E.D. Mich. 1996) (quoting Drexel Burnham Lambert, 134 B.R. 493, 497 (Bankr. S.D. N.Y. 1991)). Using this standard, the Court is constrained to conclude that this settlement does not fall below the lowest range of reasonableness. The noted differences in results between the proposed settlement and that which might be obtained, if and only if, the Trustee or the Creditor (if granted standing) prevails in litigation against Mr. George, are simply not substantial enough outweigh the potential and various outcomes, the time, and the significant costs associated therewith. In the practical Chapter 7 world, the Trustee's obligation to timely liquidate assets and distribute the proceeds to the creditors requires a measure of judicial deference, within limits, to a Trustee's decision to settle controversies and to timely obtain the best practical results attainable for all creditors, not just the objecting ones. What is sought here is within those limits.
CONCLUSION
Accordingly, the Trustee's Settlement Motion is granted and the Settlement Agreement is approved. The Trustee shall prepare and present an appropriate order.
As a result of the Court's approval of the Settlement Agreement and the fact that the estate has released any claims against Mr. George under the terms thereof, the Creditor's Motion for Entry of an Order Granting Crown Enterprises, Inc. Standing to Investigate, Commence, and Prosecute Avoidance Actions and to Recover Transferred Property on Behalf of the Debtor's Estate and Motion for Entry of an Order Scheduling an Evidentiary Hearing and Permitting Discovery in Connection with its Objection to the Trustee's Settlement Motion are rendered moot.
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Walter Shapero
United States Bankruptcy Judge
The Boulevard Properties, LLC, Hitzert Properties, LLC, Manchester-Sterling Heights Development Co., LLC, Nevada Properties, LLC, Piquette-Manchester Investments, LLC, and Manchester-Detroit, LLC Operating Agreements all include the same provision, which provides:
Lifetime Transfers.
(a) Except as set forth in [the section relating to a Transfer to a Trust] below, no Member may Transfer or otherwise dispose of all or any part of his or its Membership Interest in the Company without the prior written consent of a Majority in Interest of the Members. Any such Transfer or attempt to do so in violation of this provision shall be null and void and shall not be effective to transfer any rights of a Member to the proposed Transferee whatsoever.
Transfers as a Result of Involuntary Withdrawal or Claims by Creditors and Others.
In the event of any Involuntary Withdrawal or in the event that any Member's Membership Interest in this Company is Transferred by attachment, seizure, levy, transferred through divorce or Transferred or awarded by judicial decree or judgment though the order of any bankruptcy court, other court, or any procedure for the benefit of creditors, or Transferred through any other kind, nature, or sort of creditor claim, or through any other procedure or method which is not specifically authorized by this Agreement and/or approved by the procedures set forth in this Agreement, then in such event:
(a) the Member who is the subject of the Involuntary Withdrawal or other event described herein (the "Withdrawing Member") shall be deemed to have assigned his Membership Allocations to the estate, trust or legal successor of the Withdrawing Member or the Transferee in any other transaction described herein;
(b) such estate, trust or other successor or Transferee shall be merely an assignee of the Member's Membership Allocations, shall not become a Member, and shall have the right to distributions to which the Member was otherwise entitled, but such successor or Transferee shall not be a Member and shall be without a vote in any Company matters and shall be subject to the Capital Contributions provisions of this Agreement.
(c) The Withdrawing Member and such legal successor or Transferee shall thereupon forfeit the Withdrawing Member's Membership Rights, and the voting rights of the Voting Members shall be determined as though the interest of the Withdrawing Member were no longer outstanding (unless such successor or Transferee is admitted as a Member in accordance with this Agreement); and
(d) Unless otherwise agreed by the Company, the Withdrawing Member shall not be relieved from any pre-existing contractual or payment obligation of the Company which are maintained in force following the Involuntary Withdrawal.