Opinion
Case No. 12-00026-PB11
08-13-2013
In re DAVID M. ANDERSON, Debtor.
WRITTEN DECISION - NOT FOR PUBLICATION
ORDER ON DEBTOR'S MOTION TO
APPROVE AMENDED SETTLEMENT
WITH SZABO ESTATE
Debtor David Anderson and the late George Szabo were the sole members of two limited liability companies, 10B Investment, LLC and Stoneridge Development, LLC. Both entities borrowed money from Mile High Banks which they used to acquire and develop real estate. 10B and Stoneridge gave Mile High notes secured by trust deeds on the properties. Debtor and Mr. Szabo executed personal guaranties of payment of the debt
Mile High sued to recover on the notes and the guaranties. Mr. Anderson and Mr. Szabo were named as defendants. While the matter was pending in the Colorado state court, Mr. Anderson filed the instant chapter 11 case, giving rise to the automatic stay. Mile High's case proceeded to judgment against the non- debtor defendants. On May 25, 2012, a final judgment was entered in the total amount of $4,720,640.00.
Following entry of judgment, Mile High and the Szabo probate estate negotiated a settlement pursuant to which the Szabo estate paid $2,500,000.00 to Mile High in full satisfaction of the judgment and underlying debt. The parties structured the settlement as an assignment of the debt to the Szabo estate.
Previously, the Debtor and Szabo had sought approval of a settlement agreement which provided that the Anderson estate would pay the Szabo estate $900,000 in cash and provide an allowed general unsecured claim of $325,000. In addition, mutual releases would be exchanged between the parties. The Court denied the motion, citing concerns about the imbalance in treatment of the Szabo estate's claim and Victoria Place's potential claim for $12 million.
Debtor and the Szabo estate now seek approval of an amended settlement agreement. Under the new deal, the Szabo estate would get an unsecured claim for $1,250,000.00 (half of the $2,500,000.00 Szabo spent to resolve the Mile High claims). No payment would currently be made on the claim. However, the settlement agreement also provides that the 10B and Stoneridge properties would be sold, with the net proceeds going to the Szabo estate, up to $2,500,000.00. The Szabo claim in the bankruptcy estate would be decreased by 50% of those net proceeds.
DISCUSSION
The amended settlement agreement is an improvement over the original. However, it still suffers from the infirmity of shuffling potential assets of the bankruptcy estate to the Szabo estate, and away from the other unsecured creditors, with no clear corresponding benefit to the estate.
A proponent of a settlement agreement has the burden of persuading the court that the compromise is fair and equitable. In re A&C Properties, 784 F.2d 1377, 1381 (9th Cir. 1986). At the very least, this requires a showing that to the extent the estate is giving something up, it is receiving something in return. It seems clear that the Szabo estate is entitled to a contribution claim against the bankruptcy estate for half of the payment Szabo made to Mile High on their joint obligation. Thus, there is nothing objectionable to the extent the amended settlement agreement grants an unsecured claim to Szabo for $1,250,000.00.
The problem for Movants, is that under the amended settlement agreement the Szabo estate gets more. The agreement provides that the 10B and Stoneridge properties are to be sold. As explained above, Debtor and the Szabo estate have equal interests in the entities which own the properties. Accordingly, both estates have an equal claim to the net proceeds of a sale of the properties. However, under the terms of the amended settlement agreement, the proceeds are not to be divided equally between the Debtor and Szabo estate. Rather, the proceeds, after costs and liens and encumbrances, are to be paid to the Szabo estate up to $2,500,000.00. Only then, any remaining proceeds are divided equally between Debtor and the Szabo estate. The agreement does provide that the Szabo estate is reduced by 50% of the proceeds received. However, this is not as favorable to the estate as if the proceeds were equally divided. That is, the other unsecured creditors of the bankruptcy estate would be better off if Debtor's share of the proceeds were turned over to the Debtor, and all unsecured creditors, including the Szabo estate, were paid pro rata. Accordingly, under the terms of the amended settlement agreement, the estate is giving up a right to its share of the proceeds, with no comparable corresponding benefit.
Movants suggest that the bankruptcy estate benefits under the settlement agreement because the Szabo estate is waiving its right to seek payment of the full amount of Mile High's claim, as an assignee of Mile High. It is true that generally speaking, an assignee of a claim may assert the full amount of the claim even if, as in this case, the claim is acquired at a discount. However, that does not appear to be the case where the assignee is a fiduciary of the debtor, as in the case at hand. In In re Basil Street Partners, LLC, 2012 WL 6101914 (Bankr.M.D.Fla. 2012), the court held that where a co-guarantor was assigned the underlying obligation and the guaranties, his recovery against the co-guarantor was limited to their share of the amount actually paid for the claims. Id. at 17. The Basil Street case was based upon Florida law. However, Movants have provided no authority which would suggest a different result under California or Colorado law. Thus, Movants have failed to convince the Court that the Szabo estate is entitled to anything more than an unsecured claim for contribution in the amount of $1,250,000.00. To the extent the amended settlement agreement gives the Szabo estate more, such as first dibs on the net proceeds of the properties, it is not fair and equitable.
For those reasons, the Court denies the motion for approval of the amended settlement agreement.
IT IS SO ORDERED.
_________________
PETER W. BOWIE, Chief Judge
United States Bankruptcy Court