Opinion
Not For Publication
MEMORANDUM DECISION
Laura S. Taylor, Judge United State Bankruptcy Court.
Chapter 7 Trustee Richard M Kipperman ("Trustee") requests that this Court approve a settlement of state court litigation initiated by Debtor ECV Development, LLC ("Debtor") pre-petition, decided against Debtor on procedural grounds, and currently subject to appeal (the "State Court Action"). The Trustee alleges that the settlement benefits Debtor's chapter 7 estate (the "Estate"), as it allows the Estate to recover a cash bond paid into the Superior Court during the course of the State Court Action and ends any risk or cost to the Estate as a result of the State Court Action. Debtor objects to the settlement arguing that it fails to provide adequate benefit to the Estate and that the Trustee fails to meet his burden of proof in justifying Court approval of the settlement. In particular. Debtor argues that the Trustee can obtain the cash bond through other means, that the cash bond is not required to pay unsecured creditors in full, and that the settlement does not assure cash bond surrender. Thus, the Court must determine whether the Trustee meets his burden of proof and establishes that the settlement is fair and equitable within the meaning of controlling Ninth Circuit authority.
PROCEDURAL POSTURE
On May 29, 2008, the Trustee filed and served his Notice of Intended Action and Opportunity for Hearing (the "Notice of Intended Action") proposing to settle the State Court Action (the "Settlement"). The Notice of Intended Action advised parties as follows:
The Trustee proposes to enter into the following agreements to dismiss an appeal of an adverse judgment pending in the California Court of Appeal (4th Appellate District, Division 1) in exchange for recovering the sum of $100,000 for the estate: (1) Agreement re: Dismissal of Appeal and Concurrent Release of Monies Deposited in Lieu of Injunction Bond; and (2) Stipulation for Release of Monies Filed in Lieu of Injunction Bond. The proposed agreements are attached hereto as Exhibits "A" and "B" respectively and incorporated herein by this reference.
The Notice of Intended Action was not supported by any declaratory evidence or memorandum of points and authorities.
On June 30, 2008, Debtor timely filed and served a Request and Notice of Hearing in connection with the Notice of Intended Action and filed Debtor's Opposition (the "Opposition"). The Debtor requested that the Court deny approval of the Settlement due to Trustee's failure to advance evidence or argument indicating that the Settlement was fair and equitable as required by Martin v. Kane (In re A&C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986). The Opposition also argued that approval of the Settlement should be denied because unsecured creditors could be paid in full from funds on hand such that the release of the Cash Bond as provided for in the Settlement was unnecessary. The Opposition was supported by the Declaration of Samy S. Henein concurrently filed therewith (the "Henein Declaration").
The Trustee filed an extensive response to the Opposition (the "Trustee Reply") on July 17, 2008. The Trustee Reply for the first time, set forth the Trustee's legal and factual argument justifying approval of the Settlement. The Trustee Reply was supported by the concurrently filed declaration of John W. Sunnen (the "First Sunnen Declaration") and a Request for Judicial Notice (the "Request for Judicial Notice").
Thereafter, the Debtor filed an emergency motion to strike the Trustee Reply arguing that it was not timely. The Trustee responded to Debtor's emergency motion and requested monetary sanctions in connection therewith.
The Court heard argument on this matter on August 20, 2008. In connection therewith, the Court issued a tentative ruling finding that the Trustee's Reply, while allowed, was not timely. Notwithstanding, given the Court's review of the matter as of that date and the Court's desire to avoid the unnecessary expense entailed in recommencing the settlement approval process, the Court continued this matter to allow additional briefing by the parties and, in particular, to allow the Debtor to respond to the entirely new argument and evidence produced by the Trustee for the first time on reply.
The Trustee takes the position that the Local Rules do not "require" that he introduce all or, indeed, any evidence and argument at the time of the Notice of Intended Action. While this is clearly the better practice, a cost benefit analysis may justify a more truncated filing in cases where an opposition is not likely and the bona fides of the proposed settlement are such that they are otherwise ascertainable by the Court. The point at which the Court and the Trustee differ somewhat substantially, however, is the Trustee's view that the Notice of Intended Action is somehow disembodied from the litigation process such that the opposition commences a contested proceeding entitling the Trustee to leisurely file opposition (i.e. 17 days thereafter) and only at this point to introduce all his evidence and legal argument. Thus, the Trustee argues, notwithstanding that he has the burden of proof and is the party proposing the Settlement, that he is entitled to introduce all evidence under a timetable which allows the objector to respond to this evidence and argument only within the very short timeframe allowed for reply. This is not a practice acceptable to this Court. As in this case, where the responsive pleading provides entirely new evidence and argument, the objecting party must be provided a meaningful opportunity to respond fully and, as the Court has provided in this case, additional briefing will be allowed. Given, however, that the Local Rule is not completely clear in this regard and, again, given that the responsive evidence ultimately provided by the Trustee was persuasive that this matter was highly probable of approval, the Court determined to allow the additional briefing, to deny the motion to strike, and to deny the sanctions request as the most equitable and cost effective method for resolving this dispute.
At the hearing on August 20, 2008, the parties agreed that an additional hearing on the matter would not be necessary and that the Court should decide this matter through Memorandum Decision after review of additional briefing and evidence provided by the parties.
On September 2, 2008, the Debtor filed its Supplemental Opposition. The Chapter 7 Trustee, thereafter, on September 9, 2008 filed a Supplemental Reply. The Trustee also concurrently filed a Declaration of L. Scott Keehn (the "Keehn Declaration"), another Declaration of John W. Sunnen (the "Second Sunnen Declaration") and a second Request for Judicial Notice (the "Second Request for Judicial Notice").
This Court, having reviewed all documents and declaratory evidence filed with this Court, and this Court, having further considered the record in this case and the arguments of counsel at the August 20, 2008 hearing, makes the following findings of fact and conclusions of law.
FACTS
On March 25, 2005 Debtor filed a Complaint in the Superior Court of the State of California for the County of Imperial and initiated case no. ECU02418 which is defined herein as the State Court Action. Henein Declaration ¶ 4. Thereafter, on June 16, 2005, Debtor filed a First Amended Complaint seeking recovery against Emerald Bay Financial, Inc. ("Emerald Bay"), Lyle Brock, Unified Mortgage Service, Inc. ("UMS"), CNA Foreclosure Services, Inc. ("CNA"), and Lenders Reconveyance, Inc. ("Lenders") (Emerald Bay, Mr. Brock, UMS, CNA and Lenders are referred to herein collectively as the "Settling Defendants") as well as numerous other defendants. Request for Judicial Notice Ex. 1. The First Amended Complaint sought recovery on twelve theories: quiet title, declaratory relief, breach of contract, fraud, negligent misrepresentation, violation of statutory duties (foreclosure), unfair competition, conspiracy to defraud, reformation, accounting, injunctive relief, and marshaling of liens. Id; Henein Declaration ¶ 4.
Early in the State Court Action, Debtor sought and obtained a temporary injunction and a preliminary injunction preventing defendants in the State Court Action from foreclosing their interests under trust deeds secured by the real property at issue in the case. First Sunnen Declaration ¶¶ 3 and 5. In connection therewith Debtor deposited a $50,000 cashiers check on May 6, 2005 and an additional sum of $50,000 on June 10, 2005 (collectively, the "Cash Bond") to meet the Superior Court's bonding requirements. Henein Declaration ¶ 6; First Sunnen Declaration ¶¶ 4-6.
On June 19, 2006, the Superior Court entered judgment in favor of the Settling Defendants (the "Judgment"). Henein Declaration ¶ 5; First Sunnen Declaration ¶¶ 7 and 13; Request for Judicial Notice Ex. 2. The basis for the summary judgment was a determination by the Superior Court that the Debtor lacked standing to bring these actions. Henein Declaration ¶ 5; First Sunnen Declaration ¶¶ 7-11. The loans at issue were obtained by Olive XXIII, LLC, a California limited liability company ("Olive"). First Sunnen Declaration ¶ 7. Olive filed a chapter 11 petition in this Court in 2003 to halt then pending foreclosures. First Sunnen Declaration ¶ 8. In its schedules, Olive never identified any claims against its lenders. Id. Olive's bankruptcy was ultimately dismissed on July 8, 2004 as Olive failed to make certain adequate protection payments. Id. Apparently Olive's ability to fund adequate protection payments had been financed through At Vantage Group, an entity wholly owned by Daniel Holbrook. Id. After dismissal of its bankruptcy case, Olive transferred the subject property to At Vantage Group, which then sold the subject property to Debtor, another entity wholly owed by Daniel Holbrook. First Sunnen Declaration ¶¶ 9 and 10. As noted above, the Superior Court concluded based on these facts that Debtor lacked standing to assert the causes of action against the Settling Defendants and, having reached this determination, did not reach a related argument advanced by Settling Defendants that these claims were also barred by principals of judicial estoppel given Olive's failure to list any lender liability claims in its bankruptcy schedules. First Sunnen Declaration ¶ 11. As a result, the Superior Court entered judgment in favor of all Settling Defendants and against Debtor on the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Tenth, Eleventh and Twelfth Causes of Action in the First Amended Complaint and entered judgment in favor of Emerald Bay and Lyle Brock and against Debtor on the Eighth and Ninth Causes of Action. Request for Judicial Notice Ex. 2.
The Debtor filed a timely appeal from entry of this Judgment. First Sunnen Declaration ¶14. The appeal is now stayed pending resolution of matters in this bankruptcy case. First Sunnen Declaration ¶ 17.
Debtor filed a voluntary chapter 11 petition in this Court on January 8, 2007. Docket No. 1; Second Sunnen Declaration ¶ 19. By Order entered August 21, 2007, this Court converted Debtor's chapter 11 case to a case under chapter 7, and Trustee was appointed. Docket No. 102; Second Sunnen Declaration ¶ 19.
It is undisputed that, the Cash Bond remains on deposit with the Clerk of the Superior Court and constitutes an asset of the Estate.
Apparently, following the Judgment, the relevant parties foreclosed their interests in the real property that was the subject of the quiet title and declaratory relief causes of action in the State Court Action. Supplemental Opposition 5:6-7. The Court reasonably concludes those causes of action are moot, and that the State Court Action defendants not named in the "lender liability claims" have no continuing interest in the Appeal.
While this factual assertion is not supported by a declaration, it is not disputed by the Trustee.
After his appointment, the Trustee, in the exercise of his fiduciary duty to creditors of the Estate, evaluated this litigation. The Trustee also engaged in settlement negotiations which resulted in the execution and delivery of the Agreement Re: Dismissal of Appeal and Concurrent Release of Monies Deposited in Lieu of Injunction Bond between the Trustee and the Settling Defendants (the "Settlement Agreement"). The terms of the Settlement are in most relevant detail as follows:
1. The parties will cause the Cash Bond to be released to the Trustee for the benefit of the Estate. In order to aid this release the Settling Defendants will execute and deliver a Stipulation for Release of Monies Filed in Lieu of Injunction Bond. Settlement Agreement section 1.1.
2. Within 5 business days of receiving payment of the cash bond, the Trustee will dismiss the Appeal with prejudice. Settlement Agreement section 1.2. (emphasis added)
3. The mutual releases contained in the Settlement Agreement have no force and effect until the date on which the Appeal is dismissed. Settlement Agreement section 4.1.
Although, once the Appeal is dismissed, the mutual releases will relate back to the date of execution and delivery of the Settlement Agreement.
Thus, the Settlement Agreement clearly provides that the Appeal will not be dismissed and that the releases in the Settlement Agreement will not be effective unless and until the Trustee receives the Cash Bond.
The Notice of Intended Action approving the Settlement was served on all creditors. Docket No. 139. Only Debtor has objected to the Notice of Intended Action.
DISCUSSION
In order for a bankruptcy court to confirm a compromise of controversy, the Court must find that the compromise is fair and equitable. A&C Properties, 784 F.2d at 1381. In making this determination, the Ninth Circuit requires that the Court consider, among other factors specific to the case, the following: (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; and (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises. Id., citing In re Flight Transportation Corporation Securities Litigation, 730 F.2d 1128, 1135 (8th Cir. 1984). The Trustee, as the party proposing the compromise, bears the burden of proof in establishing that the settlement he advances is fair and equitable and should be approved. A&C Properties, 784 F.2d at 1381. After evaluating this case under the specific factors set forth in A&C Properties, the Court concludes that this Settlement should be approved.
1. The Uncertain Probability Of Success Favors The Settlement.
The Superior Court determined that Debtor lacks standing to bring claims against the Settling Defendants. Neither party has supplied this Court with copies of the appellate briefs or with complete information underlying the Superior Court's conclusion. However, general principals of comity and respect for the Courts of the State of California require that this Court assume, in the absence of evidence indicating to the contrary, that the Superior Court's conclusion was not frivolous.
Further, the information this Court does have strongly supports the conclusion that the Superior Courts' determination was well grounded in fact and law. Debtor was not the party receiving any of the loans in question. Instead, the evidence before the Court indicates that all the Debtor acquired was ownership of the real property encumbered by deeds of trust securing these loans. Under these facts, the Court concludes that there is no evidence of clear factual error in the Superior Court's ruling. Thus, given the existence of a not unreasonable judgment against the Debtor by another court, this Court is well justified in concluding that it is not highly probable that the Debtor will be successful in the Appeal.
Moreover, even if the Judgment were overturned on this procedural ground, yet another procedural hurdle must be vaulted. The failure of the original borrower, Olive, to list any lender liability causes of action in its bankruptcy schedules - causes of action which by necessity must have existed at the time of Olive's bankruptcy filing - is extremely troubling to this Court and would justify additional procedural arguments by the Settling Defendants.
Only after winning on appeal in an effort already lost at the trial court level and then surmounting yet another procedural argument would the Trustee be in a position to commence litigation on the merits. At that time, the Trustee would be forced to prosecute numerous claims on theories that the Court concludes, after review of the Second Amended Complaint, are numerous and complex. The Trustee's burden would be increased by the passage of time since the acts complained of are alleged to have occurred and the fact that Debtor was not a first hand participant in this process. The Trustee would almost certainly carry this heavy load into a jury trial on the merits as the State Court Action includes causes of action, such as fraud, which in all likelihood cannot be resolved by a summary adjudication. Based on these facts, the Court finds that the Trustee has met his burden of showing that the probability of success in this case is at best uncertain and that this factor favors settlement.
2. Collection Difficulty Is A Neutral Factor.
The Trustee does not advance evidence regarding the solvency of the Settling Defendants. Thus, the Court concludes that there will be no unusual barriers to collection. This factor is neutral at best for the Trustee.
3. Complexity Of Litigation/Inconvenience And Delay Weigh Heavily In Favor Of The Settlement.
As discussed above in connection with the probability of success, this litigation is complex and, in the event that it can be advanced beyond the appeal phase, will be expensive. Thus, any recovery would need to substantially exceed $100,000.00 and be collectible to improve upon the Settlement. There is no evidence that this is the case. Further, the Debtor has provided no indication that contingent fee counsel is available to limit costs.
As a result, this Court must conclude that without the Settlement this litigation must continue through an appeal, face yet another significant administrative threat, then go forward through expensive and time consuming litigation on the merits and undoubtedly languish in more years of appeal prior to any recovery. Thus, the Court reasonably concludes that the attorneys' fees incurred in this endeavor would be significant. The Court also determines that the delay in creditor payout based on a litigation recovery - in the less than probable event that one is available - would be long. The Trustee has met his burden of establishing that this factor favors approval of the Settlement.
4 Paramount Interest Of Creditors/Deference To Their Reasonable Views Favor Settlement.
In this case no creditor objects to the Settlement. The only objecting party is the Debtor who, in effect, requests that the Trustee be compelled to either roll the dice himself or provide the dice to the Debtor without any obligation on the Debtor's part to indemnify the Estate from the consequences thereof including, but not limited to, the potential loss of the Cash Bond through claims and/or litigation expense. The Court finds that the Trustee has met his burden of proof on this factor and that it favors approval of the Settlement.
5. Case Specific Considerations Also Favor Settlement.
The arguments of the Debtor, in brief, are that the Settlement may not accomplish release of the Cash Bond yet provides releases, that the Settlement is unnecessary to obtain release of the Cash Bond, and that the Cash Bond is not needed to assure full payment to unsecured creditors. These arguments fail to justify disapproval of the Settlement.
First, the Settlement Agreement is clear. Until the Cash Bond is released the Appeal is not dismissed and the releases of the Settling Defendants are not effective. The Court carefully reviewed the Settlement Agreement and believes that it clearly evidences that the Settlement was well thought out and well documented such that the Estate's leverage is not lost prior to release of the Cash Bond.
Further, given the foreclosures conceded by Debtor, the abandonment of the liens by the Trustee (Docket No. 124 and 127), and the evidence that only one of the Settling Defendants actively benefitted from the Cash Bond (See Second Sunnen Declaration ¶¶ 4-9), the risk of opposition to Cash Bond release appears virtually non-existent.
Second, the Debtor argues that the Cash Bond can be released even without the Settlement. The Debtor makes a credible argument in this area in that the Cash Bond was posted to stop foreclosure, and, those foreclosures having occurred, a petition to the Superior Court may result in release of the Cash Bond. The problems with the Debtor's argument, however, are two-fold. First, while California Code of Civil Procedure Section 995.430 provides that a bond remains in force and effect until the earliest of certain events including: "the purpose for which the bond was given is satisfied or the purposes abandoned without any liability having deemed incurred . . ." the Debtor's argument fails to fully address all requirements of that subsection. True, the purpose for which the Cash Bond was given has been satisfied. However, there is no evidence that the parties for whose benefit the Cash Bond was provided, including, apparently, primarily or exclusively one of the Settling Defendants, conceded that they have not incurred liability as a result of the delay in foreclosure rights. Arguably, claims against the Cash Bond including, but not limited to, claims for any decline in value of the property at issue or and on other theories could still be made.
Second Sunnen Declaration ¶¶ 3-9.
The Court acknowledges, however, that the Trustee has not provided evidence in this regard. To some extent this is understandable - the Trustee obviously does not want to make arguments for other parties. However, the Court can reasonably assume that some risk exists in this area, albeit perhaps minimal.
Second, the Debtor ignores the fact that there is a cost to obtaining recovery of the Cash Bond if not done through a consensual agreement that is undoubtedly higher than that entailed in the Settlement. In short, the Trustee would have to petition the Superior Court and there is a possibility of objection. Thus, the Cash Bond cannot, as Debtor suggests, be released in its entirety with no effort and no cost to the Trustee; there is a possibility of claims which could reduce the amount of the Cash Bond, and there is the certainty that there will be some attendant costs and delay in the process. Under these circumstances, the Court does not agree with the Debtor that the Cash Bond can be obtained without any effort or cost on the part of the Trustee outside the Settlement.
Finally, the Debtor argues that the Trustee need not incur the cost and burden of litigation, that the Trustee should simply pay creditor claims with funds already in hand and abandon the litigation and, presumably, the Cash Bond proceeds, to the Debtor. This argument fails to recognize several realities in this case. First, there is a disagreement regarding the amount of unsecured claims. The Court has reviewed the claims docket and the information supplied by the various parties and remains uncertain as to the exact amount of unsecured claims properly payable in this case. For example, numerous claims were filed by the Imperial County Tax Collector. The Trustee argues that these claims are now "unsecured" as a result of foreclosure. However, the Court believes it more likely that these claims, while properly unsecured as to the Debtor, remain secured by the real property at issue and some or all of them may have already been paid as a result of third party sales of the real property at issue. Other issues exist. However, what is clear, is that there is a body of unsecured claims whose payment would be benefitted by a turnover of the Cash Bond.
The Court may take judicial notice of the records in the bankruptcy case. See, Fed. R. Evid. 201(c).
This fact is undoubtedly true because what is discussed by neither party is the obvious fact that there are administrative expenses in this case. For example, the Trustee is entitled to Trustee's fees. The Court reviewed the docket and found no evidence that Trustee's fees have been paid in any amount. Similarly, the Court assumes that there are other administrative expenses, including attorneys' fees for Mr. Keehn and his firm in connection with this chapter 7 case. A review of the docket indicates that chapter 7 administrative expenses have not been paid. Finally, there may be chapter 11 administrative expenses that are unpaid and properly payable. See Docket No. 115. All these administrative expenses must be paid prior to any money going to unsecured creditors. See, 11 U.S.C. § 507(a)(2).
Thus, while the Court cannot conclude with mathematical precision the correct unsecured claims amount, the Court can readily conclude that the small amount currently available in this case is wholly insufficient to pay all administrative and unsecured claims and that prompt release of the Cash Bond will aid greatly in maximizing creditor recovery in this case.
6. Debtor Has Not Elected To Overbid.
Finally, the Debtor was given an opportunity in this case to put its money where its mouth is. In Michael Goodwin v. Mickey Thompson Entertainment Group, Inc. (In re Mickey Thompson Entertainment Group, Inc.), 292 B.R. 415 (9th Cir. BAP 2003), the Bankruptcy Appellate Panel for the Ninth Circuit considered a settlement between a bankruptcy estate and defendants in litigation. The Mickey Thompson trustee indicated his willingness to settle the claim for $40,000 and brought a motion seeking approval of the settlement under Federal Rule of Bankruptcy Procedure 9019. In response a creditor argued that the settlement amount was insufficient and suggested that a third party was willing to buy the claims for $45,000. In connection with the hearing on the matter, the objecting creditor sweetened the offer by also offering the estate 15% of future recoveries. Notwithstanding these offers, and notwithstanding some stated willingness on the part of the trustee to consider overbids, the Mickey Thompson trustee continued to support the initial settlement which was ultimately approved by the Court.
In Mickey Thompson the litigation at issue was a fraudulent transfer action. 292 B.R. at 417.
The Bankruptcy Appellate Panel subsequently reversed, finding that the court was compelled to consider the overbid since it could not otherwise conclude that the settlement was in the "best interest of creditors" and fair and reasonable as required in connection with approval of a settlement. Mickey Thompson, 292 B.R. at 421-422. The Panel found that in such a circumstance a settlement is in essence a sale of potential claims to the settling parties. Mickey Thompson, 292 B.R. at 421.
Based on this example, the Court invited the Debtor to overbid and guaranty the Estate a recovery greater than that available in connection with the Settlement. Obviously, such a recovery would require that the Debtor provide a realistically obtainable guaranty that the Estate receive more than $100,000.00, that the Estate receive compensation for delay in recovery, and that the Estate be protected from all litigation costs and risk. The papers filed by the Debtor are entirely silent on this issue. The Debtor provides no overbid, no sharing proposal, and no indemnification proposal of any type. The Debtor requests the benefits of this litigation, if any, but has offered no risk protection or benefit to the Estate in exchange. As a result, the Settlement is clearly the more desirable option from the perspective of creditors.
CONCLUSION
The Court concludes that the Trustee has carried his burden, that the Debtor has failed to present a better alternative, and that the Settlement should be approved. The Chapter 7 Trustee is ordered to submit an appropriate order so providing promptly.