Opinion
Case No. 02-80866-RGM, Proc. No. 02-8089
April 17, 2003
MEMORANDUM OPINION
This case is before the court on the motion of The Mandell Law Firm ("Mandell") to alter or amend the opinion and order of this court dated March 7, 2003, which disapproved a proposed settlement between Mandell and the debtor.
Briefly, Mandell filed a five count complaint against Jose Pizzini, the debtor. One count alleged that the debtor's obligation to the law firm was nondischargeable under § 523(a)(2)(A) of the Bankruptcy Code. Four counts alleged that the debtor was not entitled to a discharge under various provisions of § 727(a). The settlement proposed that the § 727 counts be dismissed and that Mandell's debt be declared nondischargeable. A novel feature of the settlement also proposed that the debt of Mandell's colleague and counsel in this case, Pepper Hamilton, LLP, also be declared nondischargeable. Pepper Hamilton did not file a complaint seeking such a determination and there is, therefore, no basis for such a determination. The court refused to approve the settlement, finding that it was tainted. Memorandum Opinion (Docket Entry 33). A settlement of a § 727 complaint is tainted when the benefits of the settlement — which should inure to all creditors — are misdirected to an individual creditor. Bank One, Crawfordsville, NA v. Smith (In re Smith), 207 B.R. 177, 178 (Bankr.N.D.Ind. 1997); Migoscha, S.A. v. Meffert (In re Meffert), 232 B.R. 71 (Bankr.S.D.N.Y. 1998).
Mandell, still represented by Pepper Hamilton, seeks to save that portion of the proposed settlement that declares the Mandell debt nondischargeable. It does not seek to alter or amend the order relating to the disapproval of the Pepper Hamilton portion. It raises several issues. First, it suggests that counsel was under the impression from the colloquy that while the Pepper Hamilton portion would be disallowed, the Mandell portion would be approved. A court is not restricted by the parameters of a colloquy in deciding a matter. Until an order is entered disposing of a matter, it remains in the breast of the court for further consideration of the law and the facts. In those instances where a colloquy may unfairly prejudice counsel, the remedy is further oral argument. Here, counsel was not prejudiced. He had a full opportunity to argue all aspects of the settlement at the hearing on the approval of the settlement. In any event, he has fully briefed the matter in his motion to alter or amend and has not requested further oral argument.
That is in distinction to merely seeking a second bite at the apple.
Mandell next asserts that this court misunderstood and misapplied Hass v. Hass (In re Hass), 273 B.R. 45 (Bankr.S.D.N.Y. 2002). Mandell asserts that Hass approved a settlement that followed the same pattern as that proposed by it and that this court made "no attempt to distinguish the result or the analysis in Haas, and there is no way to do so." Memorandum to Alter or Amend at 4 (Docket Entry 36). In Haas, the debtor's former wife filed a complaint objecting to the debtor's discharge and to the dischargeability of her claims. The chapter 7 trustee also filed a complaint objecting to the debtor's discharge. The debtor and his former wife agreed to settle their complaint by holding that the former wife's claims were nondischargeable and dismissing the discharge objection. The trustee objected, asserting that the settlement involved a prohibited quid pro quo, that is, that the former wife's claims were being determined to be nondischargeable in return for the dismissal of the discharge complaint. The court carefully developed the state of the law concerning settlement of § 727 complaints particularly in light of circuit precedent in State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300 (2nd Cir. 1996). The trustee's position was that the proposed settlement was "an almost perfect, classic example of the impermissible quid pro quo." Hass, 273 B.R. at 52. The trustee was advocating an almost per se prohibition of settlement of discharge objections. After a very thoughtful discussion, the bankruptcy court rejected the trustee's position. The court stated the essence of its ruling:
Unlike this case, the former wife's attorney's claim, if there was one, was not also proposed to be declared nondischargeable.
Before permitting any settlement connected with the dismissal or withdrawal of Section 727(a) claims, a bankruptcy court must be satisfied that the action is not a sham effort by the creditor-plaintiff to receive payment solely for himself on account of a Section 727(a) claim that is representative in nature.
Hass at 57. It then went on to note Russo v. Nicolosi (In re Nicolosi), 86 B.R. 882 (Bankr.W.D.La. 1988) and Meffert where settlements were not approved. There was no substantive discussion of the underlying complaint or the merits of the complaints in Hass. The court was satisfied that the settlement was proper. The presence of the trustee's independent discharge complaint added to the court's satisfaction. The case should not be read, however, to give blanket approval to all settlements where there are both § 523 and § 727 counts and an independent discharge complaint filed by the trustee. The settlement must still be reviewed and the court satisfied that there is no impropriety.
This court shares Judge Hardin's concerns and adopted a similar approach. While it is true that in both cases there is an independent discharge complaint pending, that is about the extent of the similarity. Judge Hardin found no impropriety in the settlement in Hass. Here, the impropriety is embarrassing. There is no basis for Pepper Hamilton's claim to be determined nondischargeable. They did not file a complaint and are time barred. See Meffert, 232 B.R. at 72.
Mandell presented the settlement as an integrated settlement. Now Mandell seeks to salvage whatever it can, particularly, the nondischargeability portion of its claim. The court is not willing to do this. The purpose of the analysis was to determine whether the settlement was tainted and whether the taint could be limited to a portion of the proposed settlement — the Pepper Hamilton portion. After considering the matter, the court concluded that all portions of the settlement were tainted and that the settlement could not be severed. The court concluded that the best way to eliminate the taint was to deny the motion in total, consolidate the § 727 complaints of the U.S. Trustee and Mandell and defer the discharge complaint until after the § 727 complaint has been determined. This will sever the link between the taint and the settlement and conserve the resources of the parties and the court. In the event that the § 727 complaint is not sustained, Mandell will have the opportunity to proceed with its complaint. At that time, if the parties are inclined to settle the matter, the settlement would be on an entirely different footing. As long as a proposed settlement is independent of the discharge complaint — that no agreement is made today that would affect the outcome of the discharge complaint — such a settlement would probably be approved.
Mandell argues that its portion of the settlement agreement is not tainted. It asserts that the court was in error with respect to the guarantee. It asserts that the guarantee was made in January 2001, not January 2002; that it was made more than a year before Pizzini filed bankruptcy and not just a month before he filed. The court used the date in the complaint which Mandell now says was a typographical error. Mandell asserts that the guarantee is part of the proposed trial exhibits and reflects the correct date. The proposed trial exhibits were not consulted. They were not made a part of the settlement motion. In any event, Mandell now abandons the guarantee argument, noting that it could not have relied on it to perform additional legal services because it closed its doors and stopped providing legal services before the guarantee was executed. The allegations were put in the complaint, Mandell now says, because they were relevant to Pepper Hamilton's reliance. Mandell suggests that the complaint was prepared in anticipation of both Mandell and Pepper Hamilton being joint plaintiffs. When Pepper Hamilton's committee did not timely approve the suit, Pepper Hamilton's name was removed as a plaintiff as were other allegations such as the amount of Pepper Hamilton's claim, but the now superfluous guarantee allegations were not removed. No explanation of the spotty editing was offered.
Apparently, the Mandell lawyers moved to Pepper Hamilton about January 1, 2001. The exact date has not been set out in the pleadings.
One allegation of fraud remains, however. Mandell asserts that it was aware in 1999 that Pizzini's company had defrauded its creditors by engaging in a pattern of misrepresenting its accounts receivables. It asserts that Pizzini represented that his company, Direct Press Modern Litho, Inc., stopped the fraudulent practice when it had not. In fact, this representation is alleged to have been made several times during 1999 and 2000. Mandell asserts that had it known the truth, it would have withdrawn from further representation. Consequently, it would not have provided further legal services and its bill would have been paid in full. Maybe so. But then the issue is whether Mandell justifiably relied on the representation. That comes down to what Mandell knew and when it knew it. The lawyers may not have been justified in relying solely on Pizzini's representations in these circumstances. The allegation that the representation was repeated suggests that Mandell had some reason to inquire a second and third time.
The point, though, is not whether the issue is fairly disputed, but rather, whether the settlement diverts a benefit that should benefit all creditors to only one. The court viewed the settlement as an integrated whole and found no support for the Pepper Hamilton portion. In weighing the relative strengths of the discharge allegations and the dischargeability allegations, the court concluded that both had merit, although the discharge allegations appeared to have more merit than the now abandoned guarantee allegations. Since all the allegations that have not now been abandoned have merit, it is difficult to understand why all the benefit should be directed to the dischargeability allegations and none to the discharge allegations. Mandell asserts that "The parties, with assistance of counsel, are in the best position to know the probable outcome of the litigation and best able to evaluate the risks and rewards of continued litigation." Memorandum at 6. It remains their responsibility, however, to present facts to the court so that the court can make that determination. The parties may not usurp the court's function. The court considers the creditor body. Obviously, the settlement proposed did not.
Mandell raises another argument. It argues that the debtor is not going to actually make a payment but that only a judgment will be entered. It further suggests that the judgment is valueless because Pizzini will retire and have social security as his sole income. Obviously, Mandell believes that a judgment is worth something. Otherwise, it would have abandoned this matter long ago. Perhaps the value derives from Mandell's allegation that Pizzini has concealed his income. Whatever the value of the dischargeability settlement, some value is attributable to the discharge allegations and the creditor body is not benefitting from that value.
Mandell presented an integrated settlement that proved to be tainted. The court declined to sever the settlement into its various components and established a mechanism by which the taint could be purged. The motion to approve the settlement was denied and nothing presented in the motion to alter or amend convinces the court that the settlement motion should have been granted in part and denied in part. Such a ruling would not have purged the taint from the settlement.
The motion to alter or amend will be denied.