Opinion
Case No. 98-38685-T, Chapter 7, Adv. Proc. No. 99-3020-T.
March 20, 2001.
MEMORANDUM OPINION
Hearing was held December 6, 2000, on the motion of the chapter 7 trustee, Harry Shaia, for approval of a compromise and settlement of the adversary proceeding styled above pursuant to terms of a release and settlement agreement dated October 25, 2000. At the conclusion of the hearing, the court took the matter under advisement to review the objection filed by Mr. Lacy Smith. For the reasons set forth in this memorandum opinion, the court will grant the trustee's motion.
Position of the Parties .
I. Plaintiff: Chapter 7 Trustee .
The trustee seeks court approval of the compromise and settlement he proposes under the legal authority afforded under Federal Rule of Bankruptcy Procedure 9019(a). The trustee recommends that the compromise and settlement as proposed is in the best interests of the estate.
Further, counsel for the trustee asserted that the cost of litigation for this complex case is not warranted based on the amounts the estate has on deposit to utilize in funding the settlement.
At hearing, counsel for the trustee explained that the five counts in the amended complaint relating to recovering payment for back rent, compensation, surrender charge, retirement and pension monies, voluntary and fraudulent conveyances, self-dealing, and breach of fiduciary duty amounted to a total claim of approximately $65,000.00. At present, counsel for the trustee retains the monies recovered in his trust account and pending court approval of the trustee's motion for compromise and settlement, intends to disburse those funds in accordance with the parties' agreement.
In response to Smith's objection, counsel for the trustee opined that Smith's proof of claim would not be entitled to payment of interest unless the trustee were able to pay out 100% of the claims of all other creditors. The trustee further proposed that it was highly unlikely that a 100% payout could be achieved. Finally, counsel for the trustee requested that if the court were not inclined to approve the settlement as proposed, that Smith as the objecting party be required to post a litigation bond to ensure recovery to the estate in the event that Smith did not prevail at trial, as well as to commit to minimizing future expenses associated with litigation for the benefit of the estate.
By previous counsel Leslie D. Campell, Jr., Esq., Smith filed a proof of claim in the amount of $25,000.00 plus interest and costs (totaling $31,199.49 at the time of filing) on May 24, 1999. Counsel for Smith designated the October 3, 1996 judgment of the Hanover County Circuit Court in his favor in the amount of $25,000.00, as the basis for his proof of claim.
II. Defendant: T. Christopher Lyddan .
Counsel for defendant T. Christopher Lyddan appeared at the hearing to communicate Lyddan's support of the compromise and settlement as proposed, and to explain that Lyddan's interest in the proceedings was his claim for salary/ compensation against Three Rivers Woods (TRW). Counsel proffered that the basis of Lyddan's support of the trustee's motion was what he considered to be the reasonableness of the settlement amount. Therefore, counsel for Lyddan and the other defendants endorsed the trustee's proposed order approving the compromise.
III. Creditor: Mr. Lacy Smith .
After proper notice of the trustee's motion, only one creditor of TRW, Smith, objected to the compromise and settlement as proposed and filed a response to the trustee's motion and a memorandum in opposition to the compromise on December 1, 2000. Counsel for Smith also appeared at the hearing to speak to the nature and extent of Smith's objection.
In essence, according to counsel for Smith, he objects to the trustee's settlement for mainly quantitative reasons, as Smith believes he could achieve a more favorable recovery if the matter proceeded to trial and he prevailed. In response to the court's request for evidence to support the proposition that a more favorable recovery could be achieved by proceeding to trial, counsel for Smith explained that there are other accounts receivable that could be utilized to fund repayment to Smith beyond the compensation set forth in the proposed settlement terms.
As was explained at hearing, Smith posits that Lyddan shut down the corporation to avoid paying compensation and claims to him. Smith maintains that Lyddan was a fiduciary of the corporation and while in that role, misdirected accounts receivable as well as other funds and assets of the corporation for Lyddan's personal gain. Additionally, in support of his assertion of misappropriation of funds, Lyddan points to the disappearance of assets, funds, and receivables in the operating statements prepared for the last four months of the corporation's existence.
Counsel proffered that Smith was originally owed $25,000.00 by the corporation, but that amount is now more than $30,000.00 because of accrued interest. Counsel for Smith also responded to the request by the trustee for posting a bond of $22,500.00 in the event of litigation by explaining that his client was unwilling to accommodate the request.
Findings of Fact .
The bankruptcy court must make its findings of fact sufficiently detailed so that the reviewing court, if called upon has an adequate record to establish that the proper factors were considered in evaluating the proffered compromise and that an informed judgment was made.
See La Salle Nat'l Bank v. Holland (In re American Reserve Corp.), 841 F.2d 159 (7th Cir. 1987). In accordance with this directive, set forth below is a detailed recitation of the factual and procedural history of this case.
I. Procedural History .
On December 19, 1997, plaintiff/creditor Smith filed a petition with the Circuit Court of Hanover County, Virginia, to set aside transfers or conveyances under Code of Virginia § 55-80 and for personal judgment. Smith named debtor TRW, G.L. Forest Products, T. Christopher Lyddan, Lyddan Enterprises, Inc., and Forest News, Inc. as defendants in the state court suit.
Defendant Lyddan has an ownership interest in TRW, Forest Products, Lyddan Enterprises, and Forest News. Smith brought the suit to avoid one or more prepetition asset transfers of TRW that he claimed to be fraudulent transfers under Code of Virginia § 55-80, to recover compensatory damages for alleged intentional torts and fiduciary duty breaches by Lyddan and one of more of his affiliated companies and punitive damages for the alleged tortious conduct by one or more of the named defendants in the state enforcement suit. Lyddan filed an answer in the state court suit on January 8, 1998.
On November 20, 1998, TRW filed a petition for relief under chapter 7. Harry Shaia, Jr. was appointed interim chapter 7 trustee on November 24, 1998. Subsequently, on December 31, 1998, TRW's chapter 7 case was dismissed by an order entered on the same date. The dismissal order was ultimately vacated by an order of this court entered on February 5, 1999.
On February 19, 1999, defendants Forest Products, Lyddan, Lyddan Enterprise and Forest News filed petitions to remove the pending state court enforcement action to bankruptcy court once TRW had filed its chapter 7 petition. On March 4, 1999, the defendants' removal petitions were granted.
Smith filed a motion for order dismissing the petition or terminating the automatic stay on March 1, 1999. Smith's motion objected to the removal of the state court enforcement suit to this court based on the prepetition corporation dissolution of TRW and the claim that TRW's bankruptcy case was allegedly a subterfuge to avoid addressing the proper resolution of the financial relationship between Smith, Lyddan and the other named defendants. On April 13, 1999, the trustee filed a response in opposition to Smith's motion to dismiss and alternatively to terminate the automatic stay, seeking to have Smith's motion denied or deferred until the trustee had an opportunity to complete his evaluation of the material provided by various parties in interest at the § 341 meeting of creditors, as well as to make a determination of what course of action to recommend be taken to collect on any claims of the estate. Hearing was held on May 12, 1999, on Smith's motion for an order dismissing the petition or terminating the automatic stay. At hearing on the motion for an order dismissing the petition or terminating the automatic stay, Smith's counsel announced his agreement with counsel for the trustee to withdraw the motion.
Subsequently, on June 2, 1999, the court entered an order that disposed of Smith's motion to dismiss the petition, by acknowledging the withdrawal of the motion by counsel without prejudice.
On October 7, 1999, the trustee moved (1) for substitution as a party defendant in the removed state enforcement action in the place of TRW; (2) for realignment in the removed state enforcement action as a party plaintiff; (3) for leave to file an amended complaint in the removed state enforcement action; (4) for approval of the removal of the state enforcement action; and (5) for treatment of the removed state enforcement action as an adversary proceeding. Hearing was held on October 27, 1999, at which, counsel announced that the matter was settled by granting the trustee's motion. The trustee's motion was granted by order of this court entered on October 27, 1999. Subsequently, an amended complaint was filed on November 24, 1999, seeking to recover monies from defendants. Then, on December 17, 1999, defendants filed an answer and the case was set for trial on August 3, 2000.
II. Facts Surrounding Trustee's Motion for Compromise and Settlement .
On or before July 11, 2000, the parties agreed to reach a settlement. On November 9, 2000, counsel for the trustee filed a motion for compromise and settlement of the adversary proceeding under Rule 9019 along with a memorandum in support of motion with an exhibit setting forth the terms and provisions of settlement.
Under the proposed release and settlement agreement dated October 25, 2000, defendants Mr. Lyddan, LEI, and Forest News, as required by the terms of settlement, tendered funds in the total amount of $22,500.00 to the trustee or trustee's counsel contemporaneous with the execution of the agreement; this payment represents full settlement of all claims. Under the agreement, the funds are to be held in escrow by the trustee or his counsel pending disposition of the court on the motion to approve the compromise and settlement. As a result, the trustee agreed to dismiss the amended complaint with prejudice, as well as to release, acquit, and discharge the defendants, their affiliated companies, subsidiaries, successors, assigns, and respective past, present and future officers, directors, employees, and agents from any and all claims, demands, causes of action, and liability arising out of the claims in the amended complaint.
In response to the trustee's motion to compromise, Smith filed by counsel an untimely response to the trustee's motion for approval of compromise and settlement along with a memorandum in support on December 1, 2000. In his response, Smith moved for the court to deny the trustee's motion. Smith objected specifically to the trustee's motion because it allegedly ". . . failed to include missing accounts receivable of [TRW] . . ."; the "[a]ssets unaccounted for significantly exceed the debt owed Smith;" "settlement as proposed will compensate Smith for only one third of the debt owed Smith after deducting for the excellent work performed by the Trustee and his counsel . . ."; and "[t]rial of this matter would pay Smith's debt in full as well as compensate Trustee and his counsel." Additionally, Smith objected generally to the trustee's motion on the basis that it was purportedly ". . . not in the best interests of Smith." Discussion and Conclusions of Law.
At the hearing on December 6, 2000, counsel for the trustee highlighted that Smith's objection was filed slightly out of time but that counsel for the trustee would not oppose the objection on that ground alone.
I. Procedural Requirements .
Settlement and compromise matters are brought to the court by motion, followed by notice and hearing. See FED.R.BANKR.P. 9019(a) and 2002(a)(3). Specifically, Rule 9019(a) provides that notice is to be sent to all creditors, the U.S. Trustee, debtor, any indenture trustee, and other entities as directed. Rule 2002(a)(3) provides for twenty days notice by mail of the hearing on approval of a compromise or settlement unless the court directs otherwise. Notice is to state that if any party objects to the motion for approval of compromise or settlement, a written objection must be filed and served and a contested matter is initiated under Rule 9014.
In accordance with Rules 9019(a) and 2002(a)(3), counsel for the trustee properly noticed the motion by setting forth the November 29, 2000, deadline for filing objections. Here, Smith objects to the trustee's motion.
II. Standard of Review: Abuse of Discretion .
The decision of the bankruptcy judge as to the approval of a proffered compromise rests within the judge's own sound discretion. See In re Sapphire S.S. Lines, Inc., 339 F. Supp. 119 (S.D.N.Y. 1972); In re Ira Haupt Co., 252 F. Supp. 339 (S.D.N.Y. 1966).
Not surprisingly, compromises are favored in bankruptcy courts. As discussed above, under Rule 9019, after notice and hearing, the court may approve a compromise and settlement motion of the parties or trustee. See In re Frye, 216 B.R. 166, 170 (Bankr.E.D.Va. 1997). Because of the permissive language in Rule 9019 (i.e., the court "may" approve), the decision to approve a proposed settlement remains entirely within the realm of the court's sound discretion.
See Marandas v. Bishop (In re Sassalos), 160 B.R. 646, 653 (D.Or. 1993).
See In re Frye, 216 B.R. at 174; see also St. Paul Fire Marine Ins. v. Vaughn, 779 F.2d 1003, 1010 (4th Cir. 1985); In re Bates, 211 B.R. 338, 343 (Bankr.D.Minn. 1997). Thus, once approved by the court, the compromise is conclusive on the parties in interest and creditors of the estate and may be set aside only in instances of abuse of discretion. See Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Servs., Inc.), 762 F.2d 185 (2d Cir. 1985).
III. Four-Part Analysis for Determining Whether to Approve a Compromise .
There are numerous opinions that highlight the standards for courts to apply in determining whether to approve a proffered settlement or compromise motion. See 10 Collier on Bankruptcy 6 9019.02 (Lawrence P. King ed., 15th ed. rev. 2000); see, e.g., Committee of Unsecured Creditors of Interstate Cigar Co. v. Interstate Cigar Distrib. (In re Interstate Cigar Co.), 240 B.R. 816 (Bankr.E.D.N.Y. 1999); In re Telesphere Communications, Inc., 179 B.R. 544 (Bankr.N.D.Ill. 1994); In re Best Products Co., 168 B.R. 35 (Bankr.S.D.N.Y. 1994); In re Egolf, 102 B.R. 706 (Bankr.N.D.Ind. 1989);Iannacone v. Foothill Capital Corp. (In re Hancock-Nelson Mercantile Co.), 95 B.R. 982 (Bankr.D.Minn. 1989); In re Bell Beckwith, 93 B.R. 569 (Bankr.N.D.Ohio 1988).
For instance, in the landmark United States Supreme Court case,Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, the Court offered guidance to bankruptcy courts considering whether to approve a proffered compromise by directing courts to apprise themselves of all facts necessary to make an intelligent and objective opinion of the probability of ultimate success in the event of litigation.See TMT, 390 U.S. 414 (1968). Further, in TMT, the Court instructed bankruptcy judges to form educated estimates of the (1) complexity; (2) expense; (3) likely duration of litigation; (4) possible difficulties in collecting on any judgment that might be obtained; and (5) all other factors relevant to a full and fair assessment of the compromise proposed.See id. at 424.
As a result of the TMT case, most circuits have adopted a uniform standard under which bankruptcy courts should be governed in conducting hearings to consider motions proposing compromise or settlement. See, e.g., American Can Co. v. Herpel (In re Jackson Brewing Co.), 624 F.2d 605, 607 (5th Cir. 1980); Drexel Burnham Lambert Inc. v. Flight Transp. Corp. (In re Flight Transp. Corp. Sec. Litig.), 730 F.2d 1128 (8th Cir. 1984),cert. denied sub nom. Reavis McGrath v. Antinore, 469 U.S. 1207 (1985); Martin v. Kane (In re A C Properties), 784 F.2d 1377 (9th Cir. 1986), cert. denied sub nom. Martin v. Robinson, 479 U.S. 854 (1986). Most courts adopt some variation of the following four-part analysis:
Unfortunately, the Fourth Circuit has not followed suit with the other federal circuits in publishing a body of case law relating to the analysis required for approval of compromise and settlement motions.
(1) consideration of the probability of success in litigation;
(2) consideration of the difficulties, if any, to be encountered in collection;
(3) consideration of the complexity of the litigation involved, and the expense, inconvenience and delay necessarily associated with that litigation; and
(4) consideration of the paramount interest of the creditors and a proper deference to their reasonable views.
See In re Jackson Brewing Co., 624 F.2d at 607.
Specific to Eastern District of Virginia and Richmond Division, the basic criteria for consideration of a motion to approve a compromise and settlement was outlined in the 1995 decision of this court, In re Austin.See 186 B.R. 397 (Bankr.E.D.Va. 1995). In Austin, the following four-part test was slightly modified from the factors outlined by the Fifth Circuit in the Jackson Brewing Co. case: "[1] the probability of the trustee's success in any ensuing litigation; [2] any collection difficulties; [3] the complexity, time and expense of the litigation; and [4] the interests of creditors with proper deference to their reasonable views." See In re Austin, 186 B.R. at 400.
IV. Considerations of the Compromise Proposed: Reasonableness, Fairness, Equity and Best Interests of the Estate .
The purpose of a hearing on a proposed settlement for which court approval is sought is not to decide issues of law or fact raised by objecting parties but rather to identify and clarify litigation issues, so the court can make an informed decision on the reasonableness of the proposed settlement. See In re Bell Beckwith, 93 B.R. at 574-75. The court's fundamental determination is ". . . whether the settlement falls 'below the lowest point in the range of reasonableness.'" In re Austin, 186 B.R. at 400 (citations omitted). In essence, a compromise or settlement will mostly likely gain approval if it is both "fair and equitable," as well as representative of the best interests of the estate as a whole. Connecticut General Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortgage Corp.), 68 F.3d 914, 917 (5th Cir. 1995);see also In re St. Paul Fire Marine Ins. Co. v. Vaughn (In re Vaughn), 779 F.2d at 1010; In re McNallen, 197 B.R. 215, 221 (Bankr.E.D.Va. 1995); In re Austin, 186 B.R. at 400.
TMT, 390 U.S. at 424.
However, by no means is a bankruptcy judge required to conduct a full evidentiary hearing or mini-trial on the compromise motion before court approval can be reached. See DePoister v. Mary M. Holloway Found., 36 F.3d 582 (7th Cir. 1994); see also In re Drexel Burnham Lambert Group, Inc., 134 B.R. 493 (Bankr.S.D.N.Y. 1991). Rather, the proponents or movants of settlement and compromise proposals bear the burden of proof and have the burden of persuasion to establish that the settlement is both reasonable and in the best interests of the estate. See In re Frye, 216 B.R. at 174. However, the test is not whether the trustee would have prevailed at trial. See In re Austin, 186 at 400.
In addition, bankruptcy courts may give weight to the opinions of the trustee in determining the relative reasonableness of a proposed settlement and compromise. See In re Bell Beckwith, 93 B.R. at 574.
V. Conclusion .
The trustee has adequately met his burden of proof and persuasion as proponent of the motion for court approval of compromise and settlement. See In re Austin, 186 B.R. at 400-01.
The trustee's investigation has been extensive, which is even acknowledged by Smith's counsel.
In addition, litigation of these complex issues with numerous entities involved would be lengthy and costly. See id.
The court is unpersuaded by Smith's objection. His counsel presented little to no evidence at hearing to substantiate arguments that the settlement amount was too low and that additional accounts receivable existed to fund a higher settlement amount. Even if the court accepts Smith's rationale, there would be less assets available in the estate for distribution to all other creditors after the expenses involved in litigating a full trial, as opposed to adopting the present settlement. It is uncertain if Smith himself would fully recover after a full trial. What Smith seeks by urging the court to allow the matter to proceed to trial is a private benefit.
However, the paramount interest of the court is the protection of all of the estate's creditors. A single objecting creditor should not be allowed to pursue an objection and private benefit at the expense of the general creditor body. The trustee owes a primary duty to the unsecured creditors, who favor and will benefit from the proposed settlement. See In re Krizmanich, 139 B.R. 456, 459 (Bankr.N.D.Ind. 1992).
Because the court finds that the settlement and compromise as proposed is in the best interests of the estate, reasonable, fair, equitable, and in compliance with the statutory and case law requirements, the court concurs with the recommendation of the trustee and will grant his motion.
A separate order will be entered.