Opinion
Case No. 3:16-bk-3416-PMG
06-23-2017
In re: Network F.O.B., Inc., Debtor.
Chapter 7 ORDER ON TRUSTEE'S MOTION FOR ORDER (I) APPROVING SETTLEMENT AGREEMENT WITH CSNK WORKING CAPITAL FINANCE CORP., (II) AUTHORIZING SALE OF ESTATE ASSETS, (III) MODIFYING THE AUTOMATIC STAY, AND (IV) ENJOINING CLAIMS TO RECEIVABLES
THIS CASE came before the Court for an evidentiary hearing to consider the Trustee's Motion for Order (I) Approving Settlement Agreement with CSNK Working Capital Finance Corp., (II) Authorizing Sale of Estate Assets, (III) Modifying the Automatic Stay, and (IV) Enjoining Claims to Receivables. (Doc. 113). The Petitioning Creditors and Baxter Bailey & Associates, Inc. filed written Objections to the Settlement Agreement. (Docs. 126, 136).
In order to approve a settlement proposed by a Chapter 7 Trustee, the Court should determine that the settlement is fair, reasonable, and in the bankruptcy estate's interest.
In this case, the Trustee entered a Settlement with CSNK Working Capital Finance Corp., d/b/a Bay View Funding (Bay View). The Settlement generally provides (1) for the Trustee to sell the estate's interest in the Debtor's prepetition receivables to Bay View for a purchase price of at least $200,000.00, and (2) for the entry of a Bar Order enjoining motor carriers that contracted with the Debtor from attempting to collect the receivables from the Debtor's customers.
The Settlement is fair, reasonable, and in the estate's interest because Bay View holds a perfected security interest in virtually all of the Debtor's assets, including the Debtor's receivables, and because the estate would be exposed to substantial costs and uncertain benefits if it litigates disputed issues with the carriers. The disputed issues include (1) whether the Debtor held a portion of the receivables in trust for the contracting motor carriers, and (2) whether the carriers had waived their right to seek payment for their transportation services from the Debtor's customers. Because the Settlement is fair and reasonable, the Trustee's Motion should be granted, and the Settlement should be approved.
I. The bankruptcy case
The Debtor, Network, F.O.B., Inc., was engaged in the business of arranging for the shipment of its customers' goods to the shipment's place of destination. In arranging for the shipments, the Debtor separately contracted with motor carriers (the Carriers) for the transportation of the goods.
The Debtor ceased its operations in July of 2016.
On September 8, 2016, Steelman Transportation, Inc., Ohio Transport Corp., Match Factor, Inc., Group One, Inc., Regional Expedited Transport, Inc., Vertex Enterprises, LLC, and Credit Express, Inc. filed an Involuntary Chapter 7 Petition against the Debtor. (Doc. 1). The Petitioning Creditors are Carriers that had contracted with the Debtor, but were not paid for their services.
On February 7, 2017, the Debtor filed a Consent to Order for Relief, and an Order for Relief was entered in the Chapter 7 case on February 8, 2017. (Docs. 61, 62).
II. Bay View
Bay View is a secured creditor of the Debtor, and holds a perfected security interest in virtually all of the Debtor's assets, including the Debtor's receivables.
Bay View's lien on the Debtor's assets is documented by a (1) Loan and Security Agreement dated September 25, 2015, (2) a UCC Financing Statement dated September 30, 2015, (3) a Loan Servicing Agreement dated November 12, 2015, (4) a Forbearance Agreement dated May 6, 2016, (5) a Factoring Agreement dated May 6, 2016, (6) an Assignment and Consent Agreement dated May 24, 2016, (7) a UCC-3 Assignment of Financing Statement dated May 24, 2016, and (8) a UCC Financing Statement dated May 20, 2016. (Trustee's Exhibits 3 through 10).
Generally, the financing transaction began as a line of credit in 2015, and was later converted to a factoring arrangement in May of 2016. Under the Factoring Agreement, the Debtor "absolutely sold" all of its interest in eligible receivables to Bay View in exchange for an Advance Percentage of the face amount of the receivables, as calculated in the Agreement. (Trustee's Exhibit 7, ¶ 2.3). The UCC Financing Statements filed by Bay View covered "all Assets now owned or hereafter acquired" by the Debtor. (See Trustee's Exhibits 9, 10).
Bay View asserts that its lien secures obligations owed by the Debtor in the amount of $2,433,617.37 as of April 10, 2017.
The Chapter 7 Trustee testified that he reviewed Bay View's claim, and determined that Bay View holds a perfected, unavoidable security interest in the Debtor's assets.
III. The Settlement
On April 20, 2017, the Chapter 7 Trustee entered a Settlement Agreement with Bay View. (Trustee's Exhibit 1). The Settlement Agreement includes the following terms:
1. Bay View will have an allowed secured claim in the amount of $2,433,617.37, but will not participate in any distribution from the estate. (¶ 2).
2. The prepetition receivables generated by the Debtor include (1) the sum of $950,068.00 collected and escrowed post-petition by Bay View pursuant to Court
Order, and (2) the sum of $1,753,722.00 in uncollected receivables, all of which are more than 180 days past due. The Trustee will sell the estate's interest in the receivables to Bay View for a purchase price of at least $200,000.00. (¶ 3).On April 20, 2017, the Trustee filed a Motion for an Order approving the Settlement Agreement pursuant to §105(a) and §363(f)(4) of the Bankruptcy Code, and Rule 9019 of the Federal Rules of Bankruptcy Procedure. (Doc. 113).
3. Bay View asserts an administrative claim against the estate for post-petition advances made to the Debtor in the amount of $163,446.43. Bay View will waive and not seek payment of its administrative expense claim in the bankruptcy case. (¶ 7).
4. The Settlement is conditioned on the entry of an Order "barring all Carriers from making claims against Shippers, Consignees, Bay View, or the Receivables." (¶ 11). Generally, the Bar Order enjoins the Carriers that contracted with the Debtor from interfering with Bay View's efforts to collect the receivables under the Settlement.
IV. Standard for approval of a settlement
Rule 9019(a) provides that "[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." F.R.Bankr.P. 9019(a).
To approve a compromise under Rule 9019, a Court should determine whether the proposed settlement is "fair, reasonable, and in the interest of the estate." In re Harbour East Development, Ltd., 2012 WL 1851015, at 5 (Bankr. S.D. Fla.)(quoting In re Marvel Entertainment Group, Inc., 222 B.R. 243, 249 (D. Del. 1998)). Under this standard, the settlement should be approved as long as it does not "fall below the lowest point in the range of reasonableness." In re Able Body Temporary Services, Inc., 2015 WL 791281, at 2 (M.D. Fla.)(quoting In re Martin, 490 F.3d 1272, 1275 (11 Cir. 2007)).
In determining whether a settlement falls within the range of reasonableness, Courts typically look to the factors set forth in In re Justice Oaks II, Ltd., 898 F.2d 1544, 1549 (11 Cir. 1990). The factors are "(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; [and] (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises."
The factors outlined in Justice Oaks involve an evaluation of any potential litigation among the parties, but reviewing Courts are not required to determine the merits of the contested claims. In re Soderstrom, 477 B.R. 249, 252 (Bankr. M.D. Fla. 2012). In evaluating the probability of success in any such litigation, for example, the Court's role is only to survey the issues to evaluate whether the settlement reached by the Trustee is within the range of reasonableness. In re Harbour East Development, Ltd., 2012 WL 1851015, at 6.
Where the disputed claims might involve costly litigation and no guaranty of success for the estate, the Trustee should be granted "wide latitude" in deciding whether to settle. In re Soderstrom, 477 B.R. at 252. In other words, the Justice Oaks factors are considerations to use in balancing the cost of litigating the contested claims against the cost of settlement. In re Harbour East Development, Ltd., 2012 WL 1851015, at 6. If the Trustee determines that the settlement is justified by the costs and risks of litigation, the Court should respect the Trustee's business judgment. In re Soderstrom, 477 B.R. at 254. Ultimately, "the question is whether the Trustee's decision was reasonable." In re Harbour East Development, 2012 WL 1851015, at 2.
V. Contested claims
In this case, the Carriers assert that the Settlement is not reasonable because it does not account for their interest in the Debtor's receivables, or for their right to payment from the Debtor's customers under general transportation principles. Specifically, the Carriers assert that they would likely prevail on two contested issues.
A. Freight forwarder v. freight broker
First, the Carriers contend that the Debtor operated as a freight broker, rather than a freight forwarder as claimed by the Debtor. According to the Carriers, the difference is significant because a freight broker acts "merely as a conduit for collecting the freight charges for the benefit of the motor carriers." Consequently, the Carriers contend that any freight charges collected by the Debtor or Bay View in this case are held in trust for the Carriers, are not subject to Bay View's lien, and are not property of the bankruptcy estate. (Doc. 126, ¶¶ 4, 7(c); Doc. 136, pp. 5, 15).
The Carriers rely on the following evidence to support their claim that the Debtor was a freight broker:
1. A Transportation Broker Agreement dated April 14, 2015, between the Debtor and Craft Brew Alliance, Inc. (Baxter Bailey's Exhibit 1). The Debtor is identified in the Agreement as a broker registered with the Federal Motor Carrier Safety Administration. Craft Brew Alliance is identified as a Shipper that sought to use the Debtor's services for the transportation of its products.Based on this evidence, the Carriers assert that the Debtor was a freight broker, that the Debtor held all collected freight charges in trust for the Carriers, and that the freight charges are not subject to Bay View's lien or to administration by the Trustee as property of the Chapter 7 estate.
2. Information maintained by the Federal Motor Carrier Safety Administration, which refers to the Debtor as a "broker" when noting the revocation of the Debtor's license. (Trustee's Exhibit 14, p. 4).
3. The testimony of the Debtor's Chief Financial Officer that the Debtor did not use a warehouse, loading equipment, or trucks in the operation of its business. According to the Carriers, the testimony shows that the Debtor did not satisfy the definition of a freight forwarder found at 49 U.S.C. §13102(8), because it could not have managed any shipments of freight as provided in that section.
The Trustee, on the other hand, contends that the Debtor was a freight forwarder, and that the prepetition freight charges owed by its customers constitute receivables that are property of the estate under §541 of the Bankruptcy Code. (Doc. 142, pp. 5-10). The Trustee relies on the following evidence to support his contention that the Debtor was a freight forwarder:
1. A form Transportation Contract with the Debtor's logo in the heading, which identifies the Debtor as a "surface freight forwarder under Permit FF-1941." (Trustee's Exhibit 11). The second party to the form Contract is identified as a Carrier, and the form Contract states that it sets forth the terms under which the Debtor "will tender freight to Carrier for transportation." The Debtor's Chief Financial Officer testified that the form was the Debtor's standard transportation contract with the Carriers that it used for the shipment of its customers' products.Additionally, the Chapter 7 Trustee testified that he investigated the issue of whether the Debtor was a freight forwarder or a freight broker, and determined that it was a freight forwarder. According to the Trustee, he did not locate any documentation to support the Carriers' claim that the freight charges were held in trust, and all but one of the Carriers' claims showed that the Debtor was a freight forwarder.
2. The testimony of the Debtor's Chief Financial Officer that the Debtor had operated solely as a freight forwarder and not a broker, that the Debtor had a freight forwarder license, and that the Debtor deposited all of its customer payments into a single account, without segregating any portion of the payments for the Carriers.
3. The testimony of the Debtor's Chief Financial Officer that the Debtor's financing arrangement with Bay View was based on the Debtor's status as a freight forwarder, and that the loan amount was based on the full value of the receivables, without deduction of the freight charges owed to the Carriers.
The definition of "broker" and the definition of "freight forwarder" are found at 49 U.S.C. §13102. Both definitions include a primary component based on how the entity holds itself out to other parties. See Saacke North America, LLC v. Landstar Carrier Services, Inc., 2013 WL 7121197, at7 (W.D.N.C.)(A company's status is determined by how it holds itself out to the world.); and Nipponkoa Insurance Company, Ltd. v. C.H. Robinson Worldwide, Inc., 2011 WL 671747, at 4 (S.D.N.Y.).
In this case, the Carriers assert that the Debtor was not a freight forwarder within the meaning of the statutory definition. The Debtor is identified as a freight forwarder, however, in its standard Transportation Contract with the Carriers. (Trustee's Exhibit 11). In other words, the Debtor expressly represented to the Carriers in each separate transaction that it was a freight forwarder. Consequently, the Carriers were placed on notice when they entered the Transportation Contracts that the Debtor was holding itself out as a freight forwarder.
As discussed above, in evaluating a settlement under Rule 9019 of the Federal Rules of Bankruptcy Procedure, the Court's role is to survey the disputed issues to determine whether the settlement is within the range of reasonableness. In re Harbour East Development, Ltd., 2012 WL 1851015, at 6. In this case, the record includes (1) the Debtor's standard Transportation Contract, in which the Debtor is identified to the Carriers as a freight forwarder, and (2) the testimony of the Debtor's Chief Financial Officer that the Debtor was a licensed freight forwarder and that the full value of the Debtor's receivables was treated as the Debtor's property.
Based on the evidence, the Court finds that the Trustee could reasonably conclude that the Debtor was a freight forwarder, that the freight charges were not held in trust for the Carriers, and that the Settlement is a reasonable compromise of the claims against the estate.
B. Carriers' right to collect from customers
Second, the Carriers contend that they have an independent right under general transportation law to seek payment of any unpaid freight charges from the shippers who send the goods. (Doc. 136, pp. 11-14)(citing National Shipping Company of Saudi Arabia v. Omni Lines, Inc., 106 F.3d 1544, 1546-47 (11 Cir. 1997), among other cases, for the principle that "the shipper is liable unless released by the carrier."). According to the Carriers, "the shippers remain independently liable to the motor carriers regardless of whether they paid the freight charges to Network or Bay View." (Doc. 136, p. 5).
The principle cited by the Carriers is important in this case because the proposed Settlement is conditioned on the entry of a Bar Order enjoining the Carriers from attempting to collect the unpaid freight charges from the Debtor's customers.
"When determining whether to enter a bar order against nonsettling defendants, the court must make a reasoned determination that the bar order is fair and equitable." In re Munford, Inc., 97 F.3d 449, 455 (11 Cir. 1996). Relevant considerations in the determination include the interrelatedness of the claims that the settlement enjoins, the likelihood that the nonsettling parties will prevail on the barred claim, the complexity of the litigation, and the likelihood that the settling parties' resources will be depleted. In re Munford, Inc., 97 F.3d at 455.
In this case, the Court finds that the Bar Order in the proposed Settlement is fair and equitable for two primary reasons.
First, the Debtor's standard Transportation Contract with the Carriers incorporated its "Carrier Terms and Conditions," and the Carriers represented in the Contract that they had read and agreed to be bound by the Terms and Conditions. (Trustee's Exhibit 11). Paragraph 5 of the Terms and Conditions provided:
5. Carrier Invoicing. Carrier agrees to look solely to Network for the payment of its compensation hereunder, and under no circumstances shall Carrier seek payment directly from the shipper or consignee. Any violation of this billing condition shall result in the forfeiture of fifty (50%) percent of the freight charges on the shipment incorrectly billed.(Trustee's Exhibit 11, Terms and Conditions, ¶ 5)(Emphasis supplied). Based on this provision, the Trustee asserts that the Carriers contractually waived their right to seek payment of any freight charges from the Debtor's customers, and that the Bar Order is only enforcing the agreement that the Carriers had already made. See Baxter Bailey Investments, Inc. v. Mars Petcare US, Inc., 2012 WL 1965612, at 5 (W.D. Tenn.)(A carrier could not pursue a shipper for unpaid freight charges, where the carrier had agreed that its sole recourse in the event of nonpayment was against a transportation broker.).
Second, if the Bar Order is not entered, the Debtor's customers may be required to pay the freight charges to Bay View, and may also be required to pay the same freight charges to the Carriers.
In In re Eleets Transportation Company, Inc., Case No. 3:12-bk-8151-JAF, the debtors had been engaged in the freight transportation business. In that case, the Court recognized the concern of the shippers that they might be exposed to double liability if they paid the freight charges to the trustee, and the carriers later demanded payment from them of the same charges. The Court also recognized that the shippers were withholding payment of the freight charges from the trustee based on their fear of double liability. (Case No. 3:12-bk-8151-JAF, Doc. 360, pp. 7-15). To address the shippers' concerns and to avoid further stalemate between the parties, the Court approved a compromise similar to the Settlement in this case. Significantly, the settlement in Eleets was approved with the carriers' consent, and contained a Bar Order prohibiting the carriers from seeking payment of the freight charges from the debtor's customers. (Case No. 3:12-bk-8151-JAF, Doc. 360, pp. 17-18).
In summary, the proposed Settlement in this case includes a Bar Order enjoining the Carriers from attempting to collect the unpaid freight charges from the Debtor's customers, and the Court must determine whether the Bar Order is fair and equitable. In making the determination, the Court has considered (1) the Carriers' representation in the Transportation Contracts that they would not seek payment of the freight charges from the shippers, and (2) the concern that shippers might face double liability if the Carriers are not enjoined from demanding payment from them.
For these reasons, the Court finds that the Bar Order proposed in the Settlement Agreement is fair and equitable within the meaning of the Eleventh Circuit's decision in Munford.
VI. Conclusion
In order to approve a settlement proposed by a Chapter 7 Trustee under Rule 9019 of the Federal Rules of Bankruptcy Procedure, the Court should determine that the settlement is fair, reasonable, and in the bankruptcy estate's interest.
In this case, the Trustee entered a Settlement with Bay View. The Settlement generally provides (1) for the Trustee to sell the estate's interest in the Debtor's prepetition receivables to Bay View for a purchase price of at least $200,000.00, and (2) for the entry of a Bar Order enjoining Carriers that contracted with the Debtor from attempting to collect any portion of the receivables from the Debtor's customers.
The Settlement is fair, reasonable, and in the estate's interest because Bay View holds a perfected security interest in virtually all of the Debtor's assets, including the Debtor's receivables, and because the estate would be exposed to substantial costs and uncertain benefits if it litigates disputed issues with the Carriers. The disputed issues include (1) whether the Debtor held a portion of the receivables in trust for the Carriers, and (2) whether the Carriers had waived their right to seek payment for their transportation services from the Debtor's customers. Consequently, the Trustee's Motion to Approve the Settlement should be granted, and the Settlement should be approved.
Accordingly:
IT IS ORDERED that:
1. The Trustee's Motion for Order (I) Approving Settlement Agreement with CSNK Working Capital Finance Corp., (II) Authorizing Sale of Estate Assets, (III) Modifying the Automatic Stay, and (IV) Enjoining Claims to Receivables is granted.
2. Within fourteen (14) days of this Order, counsel for the Trustee may submit a proposed Order approving the Settlement in a form substantially similar to the proposed Order attached to the Motion.
DATED this 23 day of June, 2017.
BY THE COURT
Paul M. Glenn
PAUL M. GLENN
United States Bankruptcy Judge