Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: May 17, 2007
Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Maureen A. Tighe, Bankruptcy Judge, Presiding. Bk. No. SV 04-12773-MT. (jointly administered with SV 04-13842-MT and SV 04-15449-MT).
Before: BRANDT, PAPPAS and MARKELL, [ Bankruptcy Judges.
Hon. Bruce A. Markell, U.S. Bankruptcy Judge for the District of Nevada, sitting by designation.
MEMORANDUM
The chapter 7 trustee of three related bankruptcy estates moved to compromise the claim of Howell, a creditor of one of the estates. In the compromise Howell agreed to reduce his claim in exchange for an allowed secured claim secured by ancient artifacts owned by any of the three estates. The bankruptcy court approved the compromise over the objection of Venable, an unsecured creditor of one of the other estates. This appeal ensued.
Absent contrary indication, all " Code, " chapter and section references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 prior to its amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23, as the case from which this appeal arises was filed before its effective date (generally 17 October 2005).
Concluding the bankruptcy court did not abuse its discretion in its evidentiary ruling or in approving the compromise, we AFFIRM.
I. FACTS
Phillip J. Greco and Jane A. Fisher (jointly, " Greco") filed a joint chapter 11 petition on 19 April 2004. On Schedule B they listed " Ancient Artifacts from Expeditions in Asia" (" Artifacts") with a value of $10 million, located in Kuala Lumpur, New Jersey, Los Angeles, Las Vegas, and Tampa.
Two companies controlled by Greco filed chapter 11 petitions shortly thereafter: Stallion USA, LLC (" SUSA") filed 23 April 2004 in the Bankruptcy Court for the Middle District of Florida. On Greco's motion, venue was transferred to the Bankruptcy Court for the Central District of California on 27 July 2004 (04-15449). Stallion Recoveries, Ltd. (" SRL"), a Samoan corporation, filed in the Bankruptcy Court for the Central District of California on 2 June 2004 (04-13842). The Artifacts were also listed on SRL's schedules, with the notation, " [t]hese assets are intermingled with the assets of DIP Phillip Greco, Jane Fisher, and Stallion USA LLC. They are listed here, however, for purposes of notice." SUSA's schedules are not in the excerpts of record; apparently SUSA never filed schedules. See Transcript, 20 September 2006 (" Transcript"), page 37.
The Greco case was converted to chapter 7 on 7 July 2004, and David K. Gottlieb (" the Trustee") was appointed chapter 7 trustee. Shortly thereafter, by stipulation, the SUSA and SRL cases were also converted, to be jointly administered by the Trustee.
Greco International, Inc., claimed an ownership interest in the Artifacts based on a pre-petition transfer from SUSA to it. The Trustee commenced an adversary proceeding against Greco International and others to determine the validity of the transfer and whether it could be avoided as a fraudulent conveyance. The bankruptcy court ruled that there was no valid transfer and found that " [t]he Artifacts are property of one or more of the bankruptcy estates of Phillip J. Greco and Jane A. Fisher, Stallion Recoveries, Ltd. and Stallion USA LLC." Judgment, Case No. 05- 01066-MT.
Dr. Howard L. Howell, creditor of the SUSA estate, moved for relief from stay on 25 March 2005, seeking to foreclose on his perfected security interest in the Artifacts owned by SUSA. He claimed a prepetition amount owing of $456,912.43 ($370,000 plus interest, fees, and costs). The security agreements and financing statements referred to the collateral as inventory, accounts, general intangibles, contract rights, and proceeds. Howell claimed there was no equity in the Artifacts comprising his collateral, based on the declaration of appraiser Lark Mason, who valued the items stored in the Gateway Warehouse in New Jersey between $125,000 and $250,000.
Trustee thereafter moved for approval of a stipulation with Howell settling the amount of his claim and the avoidability of his security interests. Gateway Warehouse and Appellant objected. Gateway claimed a warehouseman's lien on the Artifacts for post-petition storage fees exceeding $180,000. Trustee ultimately withdrew his motion.
On 15 August 2006, the Trustee again moved for approval of a stipulation with Howell, providing:
Howell is deemed to have an allowed secured claim against SUSA of $300,000, deemed secured by a lien on any Artifacts that are property of the combined estates, as well as accounts, general intangibles, and notes receivable that were SUSA's property as of 23 April 2004, and proceeds thereof;
Trustee will use reasonable efforts to determine which Artifacts are estate assets, and to dispose of those Artifacts;
Upon sale of the Artifacts, the costs of sale (subject to certain dollar limitations) and Gateway Warehouse claim shall be paid in full prior to any payment on Howell's claim;
Remaining sale proceeds are to be distributed as follows:
a. The difference (if any) between Costs of Disposition and $100,000 shall be split 50/50 between Howell and Trustee;
b. Any remaining proceeds will go to Howell until his claim has been reduced to $150,000;
c. Thereafter, any remaining proceeds will be split 50/50 between Howell and Trustee until the Howell secured claim is paid in full; and
d. Any remaining proceeds shall go to the Trustee for the benefit of the bankruptcy estates;
Howell will be deemed to have an allowed unsecured claim of $156,912.43 plus any unpaid amount of his secured claim; and
Howell shall withdraw his pending motion for relief from stay.
Stipulation, 15 August 2006.
Appellant Jesse S. Venable, an unsecured creditor of the Greco and SRL estates, objected. Specifically, he opposed the provision granting Howell a lien on the Artifacts. After hearing arguments of the parties and the U.S. Trustee, the bankruptcy court approved the compromise. Transcript, pages 61-64; Order Approving Stipulation . .., 20 September 2006. Venable timely appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334 and § 157(b)(1) and (b)(2)(A) and (O), and we do under 28 U.S.C. § 158(c).
III. ISSUES
Whether the bankruptcy court abused its discretion:
A. in admitting an unofficial § 341 meeting transcript; or B. in approving the trustee's motion to compromise.
IV. STANDARDS OF REVIEW
We review the bankruptcy court's evidentiary rulings for abuse of discretion. To reverse an evidentiary ruling, we must conclude both that there was an abuse of discretion and that the error was prejudicial. Latman v. Burdette, 366 F.3d 774, 786 (9th Cir. 2004).
Likewise, we review a bankruptcy court's order approving a trustee's proposed compromise for abuse of discretion. In re A & C Properties, 784 F.2d 1377, 1380 (9th Cir. 1986); In re Mickey Thompson Entm't Group, Inc., 292 B.R. 415, 420 (9th Cir. BAP 2003).
A bankruptcy court necessarily abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990). We may reverse for abuse of discretion only when we have a definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached. S.E.C. v. Coldicutt, 258 F.3d 939, 941 (9th Cir. 2001); In re Black, 222 B.R. 896, 899 (9th Cir. BAP 1998).
We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. In re Lawson, 122 F.3d 1237, 1240 (9th Cir. 1997). " A finding is 'clearly erroneous' when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." U.S. v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). If two views of the evidence are possible, the trial judge's choice between them cannot be clearly erroneous. Anderson v. Bessemer City, 470 U.S. 564, 573-575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
V. DISCUSSION
A. Admission of § 341 Meeting Testimony
Trustee filed an unofficial transcript, prepared by his office, of Phillip Greco's § 341(a) meeting of creditors, conducted on 23 September 2004, in response to Venable's argument that Howell did not have a valid security interest in the Artifacts because they were not " inventory." He filed the transcript to show that there was evidence that the Artifacts were held for sale in the ordinary course of Greco's businesses, demonstrating that the issue was in dispute.
The bankruptcy court overruled Venable's objection to the admission of the transcript, ruling that it could be admitted for purposes of evaluating the proposed settlement, but not for the truth of any statements contained therein. Transcript, pages 51-52.
On appeal, Venable argues that: (1) the transcript is hearsay; (2) it is not official; (3) it is incomplete; (4) Mr. Greco's testimony was not subject to cross-examination; and (5) no foundation was established regarding the creation of the transcript.
The transcript is not hearsay. See FRE 801(c) (defining " hearsay" as " a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.") Further, the transcript was authenticated by the declaration of Howard Weg, the Trustee's counsel, who indicated that he had attended the § 341 examination. None of the other objections has any relevance in a settlement motion.
Nor does Venable explain how he was prejudiced by the admission of the transcript: the Trustee submitted other evidence that the Artifacts could be inventory, including Venable's own complaint filed against Greco and SRL in the U.S. District Court for the Central District of California in 2002, wherein he alleged that he had been promised 50% of the profits from the sale of the Artifacts, and civil minutes entered in the same case prohibiting the sale, assignment, or transfer of the Artifacts.
And, of course, prejudice is a necessary predicate for reversal of an evidentiary ruling. Latman, 366 F.3d at 786. The court did not abuse its discretion in admitting the transcript.
B. Compromise
The party proposing a compromise has the burden of persuading the bankruptcy court that it is fair and equitable:
In determining the fairness, reasonableness and adequacy of a proposed settlement agreement, the court must consider:
(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.
A & C Properties, 784 F.2d at 1381 (citations omitted).
1. Trustee's Conflict of Interest?
Venable interprets the settlement as encumbering property of the Greco and Stallion Recoveries estates to secure a debt of SUSA. He argues that the settlement created an actual conflict for the Trustee warranting the appointment of separate trustees pursuant to Rule 2009(d). That rule provides: " On a showing that creditors or equity security holders of the different estates will be prejudiced by conflicts of interest of a common trustee who has been elected or appointed, the court shall order the selection of separate trustees for estates being jointly administered." (Emphasis added.) But appellant brought no motion under that rule.
The Trustee submitted a declaration with his motion to approve the compromise, stating that he had considered how he would have handled the matter had he been sole trustee for either of the other estates. He concluded:
Looking solely at the interests of the [Greco and SRL] estates, I simply would not want to expose the estate[s] to the time, risks, and expense of litigation with Dr. Howell . . . when I could enter into a stipulation that resolves the disputes, reduces Dr. Howell's secured claim, eliminates all interest on that claim, facilitates a disposition of the Estate Artifacts by providing for the payment of the Costs of Disposition without the necessity and uncertainty of surcharge litigation, and even provides for recoveries to the Estates before Dr. Howell's claim is fully paid.
Declaration of [the Trustee], 5 August 2005, paragraph 20. The bankruptcy judge, acknowledging that the issue was intermingled with the fairness of the settlement, considered whether there was a conflict or prejudice to any of the estates as a result of being administered by a single trustee.
The court concluded that there was no conflict, and no prejudice, because the evidence showed that there were complex unresolved issues - the ownership and value of the Artifacts, whether they were inventory, whether the transfer to Howell was fraudulent - which would be very expensive, time-consuming, and difficult to litigate, at least in part because witnesses with pertinent information were no longer available. The record is not clear on this latter point, but it appears Greco and/or other witnesses had absconded with some of the Artifacts. See Transcript, pages 39-40. Further, there were no funds in any of the estates to pay for the litigation. The court concluded that, were the estates administered by different trustees, those trustees would each be looking for a reasonable way to get the assets sold and " split the difference." Transcript, page 40. The proposed compromise does just that.
The court found that no creditor would clearly be prejudiced by the settlement. That one creditor might fare better under one scenario than another did not lead to the conclusion that the settlement was prejudicial:
I think the scenario you want to play out is that Mr. Venable gets the Trustee and his counsel to pursue lengthy, complex, speculative litigation at their own expense for the benefit of your client, and that is not required of a Trustee. That is simply above and beyond the Trustee's fiduciary duty to balance all the interests of all the creditors and the debtor . . . . [T]he only prejudice you've identified is that your client didn't get to get the Trustee to do a litigation your client thought needed to be done.
Transcript, page 43.
Venable has not demonstrated that these findings were clearly erroneous, and thus has not shown a prejudicial conflict of interest.
2. Fair and Equitable?
The bankruptcy court found:
o The settlement requires Howell to give up some of his claims;
o There are numerous unsettled issues that would be complex and expensive to litigate: ownership and value of the artifacts, whether they are inventory, and whether Howell's security interest can be avoided as a fraudulent transfer; The settlement preserves the possibility of something coming into the estate, while litigation could completely deplete all three estates;
o The settlement appears to be the only way to get an auctioneer to sell the Artifacts, and the only way to monetize the assets is to get the right person to sell them when there is no money in the estate; and
o The settlement is not newly encumbering assets of the Greco and Recoveries estates; rather it is recognizing the fact that Howell may have a valid lien in Artifacts owned by them. The liens are given in exchange for some chance of recovery. There is no evidence of any chance of recovery otherwise.
Transcript, pages 61-63.
The undisputed evidence submitted by Trustee supports the bankruptcy court's conclusions. His declaration in support of the motion indicated that the value of the Artifacts is uncertain, with estimates ranging from $125,000 to several million dollars. Further, he stated that it took him over a year to find a qualified auctioneer willing to agree to a " compensation structure appropriate for the Estates' cash situation" and indicated that if that auctioneer were employed and the sale approved, the first auction could take place in 120 days.
In addition, Trustee stated that, in evaluating the settlement, he considered the expense and difficulty in obtaining evidence of ownership and value of the Artifacts, and proving a fraudulent transfer, given the fact that witnesses were no longer available. Considerations he cited in favor of approving the settlement included a reduction in Howell's claim, facilitation of a sale of the Artifacts, and the fact that the settlement was structured so as to provide payment to the estates before full payment of Howell's claim, all without the expenditure of time or money for litigation.
Venable argues that the settlement was not fair and equitable because the record is devoid of evidence that the Artifacts are inventory, and thus Howell had no likelihood of success in prevailing on the relief from stay motion (and presumably on any dispute over whether his claim is secured). But Trustee did submit evidence that the Artifacts were inventory: the unofficial § 341 meeting transcript wherein Greco testified that the artifacts were held for sale; Venable's own district court complaint against SRL and Greco alleging that Greco promised Venable 50% of the profits realized by Stallion from the sale of recovered artifacts, and civil minutes entered in 2004 in the same district court action that prohibited sale, transfer, or assignment of the artifacts. The bankruptcy court's determination that the compromise was the only way to realize anything for the creditors was not clearly erroneous, nor was the bankruptcy court's finding that there was no prejudice in a single trustee administering the three estates. Transcript, pages 61-64 and 42.
Viewing the evidence in light of the A & C Properties factors, we cannot conclude that the bankruptcy court abused its discretion in approving the settlement. The probability of success in litigation was uncertain, given the absence of key witnesses; the issues were complex, and litigation would be expensive and would further delay administration of cases pending since 2004. Regarding the paramount interests of creditors, the bankruptcy court correctly concluded that the settlement likely provides more benefit to creditors generally than the pursuit of difficult litigation which would primarily benefit one creditor. The record contains no evidence as to the fourth A & C factor, difficulties in collection, but its pertinence in this context is conjectural: without the settlement, the Trustee would have no funds with which to obtain, much less collect, a judgment.
VI. CONCLUSION
The bankruptcy court did not abuse its discretion in admitting the § 341 transcript, as there was no prejudice.
Nor did the bankruptcy court abuse its discretion in approving the trustee's motion to compromise.
Accordingly, we AFFIRM.
All " Rule" references are to the Federal Rules of Bankruptcy Procedure, and all " FRCP" references are to the Federal Rules of Civil Procedure. " FRE" references are to the Federal Rules of Evidence.