Opinion
ORDER ON MOTION TO APPROVE SETTLEMENT
PETER W. BOWIE, Chief Judge United States Bankruptcy Court
This matter came on regularly for hearing on the motion of the trustee to approve the proposed settlement with defendant/counterclaimants Gaines and Abney. The Waltz Family Limited Partnership opposes.
The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a non-core "related to" proceeding under 28 U.S.C. § 157(c).
Discussion
The gist of the trustee's motion to approve is that the trustee is persuaded that Gaines and Abney could not satisfy any judgment assuming the trustee were to prevail. Meanwhile, the estate would be required to expend significant sums to not only pursue its claims but also to defend the complex counterclaims. The estate cannot afford to do so. So the structure of the settlement is essentially a stand-still agreement which provides that the estate's claims against Gaines and Abney will be dismissed, the balance of the litigation will be remanded to the state court from whence it came, and Gaines and Abney agree that their claims against the estate will be subordinated to all non-insider unsecured creditors and become an issue only if the estate recovers funds sufficient to reach their level of distribution. If that were to happen, the estate would be able to assert its claims against Gaines and Abney by way of set-off.
The Waltz Family Limited Partnership counters with the argument that the settlement is really no settlement because resolution of the disputes is just deferred, not concluded, and the trustee is giving up the estate's right to pursue Gaines and Abney on the estate's claims. Moreover, the estate is also giving up the right to object to the portions of Gaines and Abney's claims that relate to the sale of the La Mesa and Hillcrest facilities.
The Court has grappled with the arguments advanced by both sides. On the one hand, the Waltz Family Limited partnership is superficially correct in pointing to the illusion of a settlement when resolution is really just postponed. On the other hand, the trustee has made a business judgment - as he is obliged to do - that pursuing the estate's claims against Gaines and Abbey will only cost the estate, not produce a recovery from impecunious defendants. At the same time, the estate faces substantial costs in defending against the claims of Gaines and Abney, which serves no purpose at least until sufficient monies have been brought into the estate that those claims would otherwise be in line to receive a distribution. Moreover, other unsecured creditors of the estate benefit if they are not insiders because Gaines and Abney have agreed as part of the settlement to subordinate their claims to non-insider unsecured creditors, instead of participating pro rata with them in any distribution.
In other words, the settlement is, in effect, an agreement to preserve the claims between the estate and Gaines and Abney to fight another day, but only if the estate somehow recovers adequate resources to pay all non-insider unsecured creditors and have enough left over that is worth fighting over. In this Court's view that is a wise judgment call by the trustee, and is slightly enhanced by the reciprocal releases which have the effect of defining the parameters of the claims that are preserved by the agreement.
Conclusion
For the foregoing reasons, the Court is satisfied that the settlement agreement urged by the trustee meets the objectives of Rule 9019, Fed.R.B.P., as well as the instructions of In re A & C Properties, 784 F.3d 1377 (9th Cir. 1986). Therefore, the settlement between the trustee and Gaines and Abney is approved unless the District Court, upon timely de novo review, holds otherwise.
IT IS SO ORDERED.