Opinion
Case No. BK-S-03-17306-BAM.
December 16, 2004
SULLIVAN, HILL, LEWIN, REZ ENGEL, A Professional Law Corporation, James P. Hill, Barton L. Jacka, Marilyn S. Scheer, San Diego, CA, Attorneys for William A. Leonard, Jr., Chapter 7 Trustee.
SHEA CARLYON, LTD. Candace C. Carlyon, Brett J. Barratt, Las Vegas, NV, Local Counsel for William A. Leonard, Jr., Chapter 7 Trustee.
Brian Sirower, Esq., Lori L. Winkelman, QUARLES BRADY STREICH LANG LLP, Phoenix, Arizona, Attorneys for Discover Financial Services, Inc.
ORDER APPROVING TRUSTEE'S COMPROMISE OF CONTROVERSY WITH DISCOVER FINANCIAL SERVICES, INC.
On December 15, 2004 at 9:30 a.m., the Motion for Approval of Compromise between William A. Leonard, Jr., the Chapter 7 trustee (the "Trustee") for the bankruptcy estate of National Audit Defense Network ("NADN" or the "Debtor") and Discover Financial Services, Inc. ("Discover") came on for hearing before this Court. The Trustee appeared by Brett J. Barratt of Shea Carlyon, Ltd. There were no other appearances. After reviewing the file and hearing the statements of counsel the Court finds:
1. Notice of the Motion to Approve Compromise of Controversy was proper and no opposition has been submitted thereto.
2. The proposed compromise between the Trustee and Discover is reasonable and in the best interests of creditors and the Debtor's estate.
3. The Trustee's compromise with Discover as more fully detailed in the parties Stipulation By and Between the Trustee and Discover Financial Services, Inc. Providing for the Allowance of Discover's Claim, Relief from the Automatic Stay to Permit Offset and Other Related Relief (the "Stipulation") should be approved.IT IS HEREBY ORDERED that the Trustee's compromise of controversy with Discover is approved on the terms and conditions more fully set forth in the parties' Stipulation, a copy of which is attached hereto. The Trustee and Discover shall promptly execute such documents and take such actions as are necessary to implement the terms of the Stipulation. The implementation of this compromise of controversy will result in the resolution of Adversary No. 04-1294.
EXHIBIT "A"
In re: Chapter 7 NATIONAL AUDIT DEFENSE NETWORK Case No. 03-17306-bam Debtor.
STIPULATION BY AND BETWEEN THE TRUSTEE AND DISCOVER FINANCIAL SERVICES, INC. PROVIDING FOR THE ALLOWANCE OF DFSI'S CLAIMS, RELIEF FROM THE AUTOMATIC STAY TO PERMIT OFFSET, AND OTHER RELATED RELIEFThis Stipulation is entered into by and between WILLIAM A. LEONARD, JR, the Chapter 7 Trustee (the "Trustee") in the above-captioned case of NATIONAL AUDIT DEFENSE NETWORK (the "Debtor" or "NADN"), and DISCOVER FINANCIAL SERVICES INC. ("DFSI"), a secured creditor and party-in-interest in the Debtor's case. Pursuant to the Stipulation, the Trustee and DFSI agree to: (i) the allowance of the prepetition and administrative claims of DFSI; (ii) the lifting and termination of the automatic stay pursuant to Bankruptcy Code § 362, and any and all other applicable stays or injunctions, to permit DFSI to set off prepetition amounts, due from DFSI to the Debtor, against DFSI's prepetition claim; (iii) payment to the Trustee of any amounts due and owing to the Debtor after the setoff of DFSI's prepetition claim; (iv) the allowance of a Chapter 11 administrative claim for postpetition amounts due to DFSI; and (v) dismissal of the Adversary Proceeding (as defined below), with prejudice.
Accordingly, DFSI and the Trustee hereby STIPULATE and AGREE as follows:
I. RECITALS.
1.1 On June 11, 2003 (the "Petition Date"), the Debtor commenced its case by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On May 27, 2004, this case was converted to a Chapter 7 proceeding and the Trustee was appointed to administer the Debtor's estate.
1.2 The Debtor and DFSI are parties to a "Merchant Services Agreement" (as amended from time to time, the "Agreement"). Pursuant to the Agreement, the Debtor because authorized to accept the Discover Card (the "Card") for the purchase of goods and services (the "Card Sale(s)") in accordance with the terms and conditions of the Agreement.
1.3 After a purchase by a customer with a Card, the Debtor forwards to DFSI the transaction data documenting the Card Sale. Under the terms' of the Agreement, DFSI is entitled to deduct certain amounts for, inter alia, the Merchant Fee (which is a percentage of Card Sales), chargebacks, returns, processing fees, and other adjustments. A "Chargeback" occurs when Cardmembers refuse to pay for items on their Card bill for reasons including disputes regarding the amount charged or the failure by the Debtor to provide the Cardmember with goods and services.
1.4 In the event of a Chargeback of a Card Sale, in order to recover the amounts already paid to the Debtor for the Card Sale in question, the Agreement permits DFSI to collect the amount of Chargebacks from amounts owed to the Debtor for subsequent Card Sales. However, if the Debtor is no longer accepting new Card Sales at the time that the Debtor owes DFSI for a Chargeback, or the Debtor otherwise refuses to repay DFSI for Chargebacks, DFSI, rather than the Debtor, bears the loss for such amounts (without prejudice to any residual claims DFSI may have against the Debtor).
1.5 Payment of amounts owed by DFSI to the Debtor under the Agreement is subject to the rights of DFSI to recoup or otherwise setoff against amounts which are or hereafter become due and owing by the Debtor to DFSI, including, without limitation. Merchant Fees owing under the Agreement and both contingent and fixed claims for Chargebacks, adjustments, refunds, and attorneys' fees and costs.
1.6 In connection with the Agreement, on or about December 17, 1999, the Debtor and DFSI entered into the "Reserve Agreement", as amended from time to time (the "Reserve Agreement").
1.7 Among other things, the Reserve Agreement provides for the establishment of an account at Greenwood Trust Company, nka Discover Bank ("Discover Bank"). Pursuant to the terms of the Reserve Agreement, the Debtor established an account at Discover Bank to accure the payment of all amounts due under the terms of the Agreement (the "Reserve Account"). DFSI holds a valid and perfected security interest in the Reserve Account to secure all amounts due under the Agreement.
1.8 As of September 30, 2004, the Reserve Account currently had a balance of $133,006.63 (together with any accrued interest thereon, the "Reserve Balance"). In addition, DFSI has withheld settlement of $30,008.95 on account of prepetition sales (the "Prepetition Unsettled Sales").
1.9 DFSI has incurred both prepetition and postpetition Chargebacks arising from billing disputes submitted by Cardmembers who have disputed the charges related to the purchase with a Card.
1.10 DFSI holds a prepetition claim in the amount of $28,822.80 against the Debtor for charges arising under the Agreement in connection with prepetition transactions (the "Prepetition Claim").
1.11 As of October 18, 2004, DFSI also holds a postpetition administrative claim in the amount of $107,638.60 for charges arising under the Agreement in connection with postpetition transactions (the "Administrative Claim").
1.12 On or about September 23, 2004, the Trustee filed its "Trustee's Complaint For An Accounting And Turnover Pursuant To 11 U.S.C. § 542 " (the "Complaint"), initiating adversary proceedings 04-1294 (the "Adversary Proceeding"). In the Complaint, the Trustee requests the turnover of certain funds to the Trustee and an accounting by DFSI. DFSI has alleged that it is properly retaining funds in the Reserve Account and otherwise withholding settlement to preserve its offset rights.
1.13 The Trustee has entered into this Stipulation in his considered business judgment and asserts that this Stipulation is in the best Interest of Debtor's estate. Through this Stipulation, the Trustee will acknowledge, and ask the Court to allow, the Prepetition Claim and the Administrative Claim of DFSI, permit DFSI to offset its Prepetition Claim against amounts otherwise due to the Debtor, and require DFSI to pay over the balance as a recovery for the benefit of the Debtor's estate. In addition, this Stipulation will resolve the Adversary Proceeding and avoid further costs to the estate.
1.14 Under the circumstances, the Trustee asserts that this Stipulation is in the best interest of the estate and should be approved in accordance with its terms.
II. OPERATIVE PROVISIONS.
2.1 The parties expressly incorporate the foregoing Recitals into these Operative Provisions without any difference or distinction between the two (2) segments of this Stipulation as though fully set forth herein as part of this Stipulation.
2.2 This Stipulation will become effective upon entry of an order of the Court approving this Stipulation (the "Approval Date").
2.3 Effective upon the Approval Date, the following claims of DFSI will be deemed fully allowed claims: (i) the Prepetition Claim in the amount of $28,822.80; and (ii) the Administrative Claim which have priority pursuant to Bankruptcy Code §§ 503(b) and 507(a) as a Chapter 11 allowed administrative expense in the amount of $107,638.60.
2.4 Effective upon the Approval Date, all stays and injunctions, including, without limitation, the automatic stay pursuant to Bankruptcy Code $362, shall be, and hereby are, vacated and annulled to permit DFSI to take any action necessary to offset against the Reserve Account and the Prepetition Unsettled Sales, but only to the extent necessary to satisfy the Prepetition Claim. In this regard, Discover Bank shall be authorized to honor the instructions of DFSI with respect to the Reserve Account. Within ten (10) days after the Approval Date, and after the offset, DFSI shall turnover the remaining funds in the Reserve Account and the Prepetition Unsettled Sales to the Trustee in the amount of at least $134,192.78, and the Trustee shall file the appropriate pleadings to dismiss the Adversary Proceeding, with prejudice.
2.5 Except to the extent of the duties, obligations and allowed claims described herein, on the Approval Date, the Trustee and DFSI expressly mutually release and forever discharge one another, and their respective affiliates, subsidiaries, shareholders, directors, officers, employees, agents, attorneys, and their heirs, personal representatives, successors and assigns, from and all liability from any claims, defenses, demands, liabilities and obligations, damages, actions, causes of action, setoffs, recoupments, costs and expenses (including, without limitation, attorney's fees), known or unknown, past or present, fixed or contingent, liquidated or unliquidated, arising from or in connection with the Agreement, the Adversary Proceeding, and/or this Chapter 7 case.
2.6 This Stipulation will be presented for approval by the Court in the Debtor's Chapter 7 case. Notice of this Stipulation will be given as required by applicable law. When the Stipulation is approved and implemented, it will govern and control all dealings between the Debtor and DFSI with respect to the respective claims and rights of the parties.
2.7 This Stipulation is the product of negotiations between the parties and is not to be interpreted more strongly in favor of one party or the other in the interpretation and enforcement thereof.
2.8 This Stipulation may be executed in any number of counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same Stipulation.
2.9 This Stipulation and the Order approving the Stipulation shall be binding upon any successors or assigns of the parties hereto.
2.10 The Court shall retain jurisdiction to enforce each of the terms of this Stipulation and the Order approving this Stipulation.