Opinion
NOT FOR PUBLICATION
ORDER ON MOTION TO SETTLE WITH MRP, ET AL.
PETER W. BOWIE, JUDGE.
Debtor filed this Chapter 11 case in order to channel his efforts and resources in pending litigation in the San Diego Superior Court known as "The Bridges" litigation. In that case, debtor's separate entity Briarwood Capital, LLC was a lead plaintiff against Lennar Homes, et al. Other litigation by or against debtor and/or Briarwood was pending in Florida and in the California courts. Upon conclusion of phase one of "The Bridges" litigation, the Superior Court rendered its decision, which was substantially adverse to Mr. Marsch and Briarwood.
In the meantime, for reasons set out on the record, the Court ordered trustees appointed for the Marsch estate, the Briarwood Capital estate, and for the Colony debtors. One of the significant factors concerned Mr. Marsch's conduct and testimony in this case and in a case in Colorado Bankruptcy Court involving MRP as the debtor.
MRP was an entity wholly owned by Mr. Marsch and the primary asset of MRP is a luxury ski villa in Avon, Colorado appraised in April 2009 at $10,000,000. Shortly thereafter, Mr. Marsch purportedly transferred his interest in MRP to Mr. Sachs and to an entity named www.DegreeFraud.com LLC. The trustee in this case, as well as Lennar and the KBR creditors contend the transfer was fraudulent, either as actual fraud or constructively fraudulent because Mr. Marsch received substantially less than reasonably equivalent value for the transfer. All assert that the transfer is avoidable. The central issues are 1) whether the estate would prevail on an avoidance claim; and 2) how much would the estate recover from the transferees. MRP is in its own Bankruptcy in Colorado, with the senior secured creditor looking to foreclose.
The trustee of this estate seeks approval of a settlement and release of all claims of the estate as against MRP, Mr. Sachs and www.DegreeFraud.com LLC. The Marsch estate would receive $375,000, plus $50,000 for compromise of claims asserted by the Colony debtors.
The trustee is between the proverbial rock and a hard place. The estate has no liquid assets with which to investigate, much less litigate claims the debtor asserts it has against anyone, whether MRP, Lennar, KBR or others. So the trustee quite reasonably seeks to resolve one of those claims, both to put it to rest and to generate a fund to draw on to perform the trustee's task of investigating and liquidating the claims of the estate against third parties, such as Lennar.
Lennar opposes the trustee's proposed settlement on several grounds, foremost of which is that Lennar asserts the claims against Sachs, www.DegreeFraud and MRP are worth significantly-more than the amount of the settlement. In support, they offer the $10 million appraisal from April 2009, as against the then-existing secured debt of approximately $6.1 million plus the consideration Mr. Marsch received at the time of the transfer, which supposedly was $850,000 or $950,000 plus credit against pre-existing debt of $500,000.
The trustee makes it clear that he does not want MRP back because more recent appraisals indicate the property's value may have dropped to $7.5 million which, while it may not defeat the fraudulent transfer claim, would provide for little or no net return. So any claim pursued would depend on the trustee establishing a value at the time of transfer and the right to recover the amount of that value, less the secured debt and the consideration Mr. Marsch received at the time. And, as already noted, the trustee has no funds with which to pursue such claims.
Lennar has responded much more broadly by proposing a plan, jointly with KBR, that promises unsecured creditors a minimum net distribution of $450,000, after administrative expenses, for the claims against MRP, Sachs and www.DegreeFraud. Lennar does not propose, directly, to buy and pursue the claim. Rather, they propose after plan confirmation appointment of a plan administrator of their choosing, who would pursue the claims against Sachs, www.DegreeFraud and MRP. If, after 6 months, the Administrator has not recovered at least $450,000 after expenses, Lennar will make up any shortfall to bring the net total available for distribution to unsecured creditors to $450,000 (it is not clear to the Court whether those funds would come from the proposed Lennar loan of $750,000, or whether they would be counted as additional loaned funds, or would be a promised contribution).
Looking just at the MRP transaction, Lennar's proposal offers more because it offers to fund the expense of litigating the claims while promising the creditors a share of at least $450,000, with the possibility of more if the net recovery after expenses exceeds that amount. If that were a stand-alone proposal by Lennar, the motion would be relatively easy to decide. But it is not a stand-alone proposition. Rather, it is bundled in the larger proposal of the joint plan for the individual Marsch chapter 11 case, the Briarwood Capital chapter 11 case, and the two pending Colony cases. At the center of the plan is a loan from Lennar of $750,000, repayable at 10% interest, which would be used by the proponents' hand-picked plan administrator to pursue Mr. Marsch, Briarwood and anyone else who might be vulnerable to claims of the bankruptcy estates, including MRP, Mr. Sachs, and www.DegreeFraud.com, LLC. While unsecured creditors of Marsch would receive pro rata distributions from the Lennar-guaranteed $450,000, under the plan Lennar would have an allowed $20 million claim and KBR a $5 million claim. Each would receive a distribution of 35% of the minimum $450,000 and the remainder of the unsecured creditors would participate in the remaining 30% of the pot. For the loan of up to $750,000 plus the guaranteed $450,000, Lennar and KBR, and their related entities would receive full and complete releases.
The trustee's response is that the price for Lennar's proposal is too high, especially since the trustee has no resources to evaluate what the estate would be giving up. That would take an expensive assessment of the merits of the state court litigation, the possibility of success on appeal standing in the shoes of Marsch and Briarwood Capital, and the prospects of a retrial even if successful on appeal. Phase one took approximately 11 months of trial. Lennar points out on the flip side that if the settlement were approved as proposed, some portion of the proceeds would go to pay administrative expenses already incurred, and much more to the due diligence assessment the trustee urges is necessary. The net proceeds of the MRP matter would be significantly reduced, and if the trustee is unable to identify further assets to be liquidated, or even if identified could not support the cost of pursuing them, then the general unsecured creditors would receive little if any distribution, as contrasted with participation in the $450,000 guaranteed pot - in reality a $135,000 pot since the plan proponents Lennar and KBR would receive 70% as their share, leaving 30% of the $450,000 for the other general unsecured creditors.
As already noted, the trustee is between a rock and a hard place. He has no funds with which to conduct litigation or a due diligence investigation of the other claims of Marsch and Briarwood Capital to see if there is a reasonable prospect for a meaningful recovery for the benefit of creditors. Yet the trustee is quite reasonably unwilling to accept the price Lennar and KBR are offering to pay without having a much clearer picture of what the bankruptcy estate would be irrevocably giving up for the net minimum of $135,000. Lennar and KBR, in turn, say that if the settlement is approved, the $450,000 (a net $135,000) guarantee goes away, the proceeds the trustee receives will be drawn down for past and future administrative expenses, and both Lennar and KBR will press their full claims against the estates which, if successful, would capture 99% of the unsecured creditor debt, rather than the 70% they agree to accept under the plan. There would be little or no distribution for other unsecured creditors if the settlement is approved unless the trustee comes up with some as-yet unidentified new source of income for the estate.
The Court is mindful that Mr. Marsch filed the instant petition on or about February 25, 2010. Four weeks later, KBR moved for appointment of Chapter 11 trustees in all four cases, Marsch, Briarwood Capital, Colony Properties Int'l, LLC and Colony Properties Int'l II, LLC. On April 19, Lennar filed a 44 part support of KBR's application, and Marsch filed his opposition. On April 26, both KBR and Lennar filed replies to debtors' oppositions, and on April 30 debtor filed a surreply. A trustee was appointed for the Colony Properties cases, but not for Marsch and Briarwood. Then, on July 12 Lennar filed a voluminous supplemental statement in support of KBR's motion, the debtor filed an opposition and, by order entered July 19 the Court ordered trustees appointed in Marsch and Briarwood.
Since that time, as far as the record reveals, the trustee has approached Lennar to provide some sort of funding to enable the trustee to perform his statutory duties his appointment requires of him. Notwithstanding that Lennar and KBR sought the appointment of the trustee, it appears they have been financially starving him unless he would agree to an approach which included releases for them. In other words - and the Court is only drawing permissible inferences here - Lennar and KBR, to the extent they would agree to any funding at all, would not agree to its use to assess the value of any of the estate's purported claims against them. That is not a totally unreasonable position on their part, but it has effectively hamstrung the trustee from investigating much of anything.
So, for very good reason, the trustee has sought, and negotiated, a possible resolution of the MRP matter, which would yield cash to the estate with which the trustee could perform his statutory obligations to all the creditors, not just Lennar and KBR, although their claims if allowed would dwarf those of the other unsecured creditors. Now, Lennar and KBR oppose that settlement, and proffer a plan in which, as discussed, they would receive full releases for loans to the estate to fund investigation and litigation by their chosen plan administrator, in every direction but their own. Lennar asserts it has incurred over $50 million in fees and costs in "The Bridges" litigation, which it expects to be awarded by the Superior Court. Their maximum exposure under the plan is the $450,000 guarantee plus the loan of up to $750,000, repayable with interest if anything is recovered. For them, it is a very small exposure for full releases from all claims which may be asserted by the debtors' estates.
For the foregoing reasons, the Court finds and concludes that the trustee has exercised not only sound business judgment, but also a strong commitment to the integrity of the bankruptcy process in service to all the creditors of the estate, as well as to the debtors. Under the circumstances set out above, the Court finds the price of Lennar and KBR's proposed plan to be too high against the objectives of the bankruptcy process. The Court has no crystal ball and cannot foresee how the cases will end. In the near term, however, it is in the best interest of the estate that the trustee have the opportunity to examine the assets of the estate pursuant to his duties under 11 U.S.C. § 1106. Lennar's plan proposal for the MRP matter offers other creditors a relative pittance of a guaranteed net $135,000 as against the performance of statutory duties by a trustee they sought to put in place but then handcuffed with no funds.
Accordingly, the Court advises the parties that unless some agreement more preferable to all the creditors of the estate is reached between the parties and the trustee, the Court will sign an order on January 10, 2 011 authorizing the trustee to enter into the settlement on the MRP, Sachs and www.DegreeFraud.com LLC matter, on the terms noticed by the motion. Counsel for the trustee shall prepare and lodge promptly an order consistent with the foregoing, which the Court will hold until January 10, 2011 before signing and filing it if no such agreement is reached.
IT IS SO ORDERED.