Opinion
Case No. 13-10336
03-28-2014
In Re: Michiel Jakob Schuitemaker Debtor
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
___________________
Burton Perlman
United States Bankruptcy Judge
Chapter 11
Judge Burton Perlman
ORDER OVERRULING OBJECTION TO JOINT MOTION FOR
ENTRY OF AN ORDER APPROVING GLOBAL SETTLEMENT
I. Introduction.
In this individual chapter 11 bankruptcy case, controversies involving a number of parties have arisen. A global settlement by such parties has been reached. Now before the Court is a joint motion for an order approving the global settlement.
The following parties have filed the joint motion: Michiel J. Schuitemaker, the above captioned debtor and debtor in possession (the "Debtor" or "MS"); Cincinnati, Incorporated ("CI"); 7420 Kilby Leasing, LLC, a wholly owned company of the Debtor ("KL"); Christina March ("CM"); the Maximillian Albert Schuitemaker Irrevocable Trust dated December 29, 2004; the Augustine Christina Jane Schuitemaker Irrevocable Trust dated August 14, 2006; and the Bastian Victor George Schuitemaker Irrevocable Trust dated May 1, 2008 (collectively, the "Children's Trusts") and 7420 Kilby LLC ("Kilby Real Estate") (hereafter collectively, "Movants"). An objection to the joint motion has been filed by creditor, Perrin G. March, IV, as successor in interest to Perrin G. March, III (hereafter "Objector").
II. Jurisdiction.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding arising under 28 U.S.C. § 157.
III. Objector's Position.
Objector puts forth two grounds upon which he bases his objection: (1) that the motion attempts to have Objector unnecessarily pay Cincinnati Incorporated's attorney's fees before Debtor dismisses the case; and (2) it permits Debtor to team up with his soon-to-be ex-wife, Christina March, to adjudicate the rights to the $17M Note from the Objector before the state court adjudicates rights to that instrument. By way of background, Mr. March, III is now deceased, but in 1982 he created trusts for which he served as trustee, which trusts made several loans to Cincinnati, Inc. The loans totaled $17,600,000.00 and CI's repayment commitment was ultimately documented in a single note in that amount. Prior to the filing of this case, CI made payments which reduced the balance to $17,495,360.95. Objector notes that the joint motion provides that the Note be assigned to Christina March.
IV. Discussion.
The Court has concluded that the joint motion should be granted. Bases for that conclusion follow.
A. Expenses of Litigation.
The following cases are pending in state court (filed as Exhibit A to the joint motion):
EXHIBIT A
STATE COURT LITIGATION
SUMMARY
• Case No. A1109353 - This case was filed by CM on behalf of herself and CI. The defendants were MS, KL, Kilby Real Estate, Larry Prendergast and Michael Arnold (each a director of CI), and Perrin March, III. The essence of the complaint was that the defendants had worked together to breach fiduciary duties to CI by transferring its equipment and real estate outside of the company. Perrin March, III ("PM3"), additionally filed claims against MS seeking (1) his removal as trustee of the Children's Trusts due to his allegedly defrauding PM3, out of, among other things, the $17M Note; and (2) payment on about $2 million of promissory notes related to MS and CM's homes. The claims in the complaint ultimately produced a jury verdict in favor of CI against MS in the amount of $8.62 million, plus attorney's fees (which have not been determined, due to the bankruptcy filing of MS). Certain other claims against MS were either resolved or found to be without merit. The claims against KL, Kilby Real Estate, and Prendergast and Arnold, either were dismissed or resolved in favor of the defendants. Specifically, the purchase of equipment by KL form CI was upheld as valid. The claims by PM3 against MS were settled; MS agreed to resign as trustee of the Children's Trusts, and agreed to pay PM3 about $1.8 million over the course of a few years. There was an appeal outstanding which was halted by the Bankruptcy Case. This case is fully resolved by the settlement. • Case No. A1209832 - This case was filed by Perrin March, III ("PM3") against MS about three weeks after the verdict in 2011 in Case No. A1109353 above. Its basis is the same underlying fundamental facts as the 2011 case—namely, allegations that MS defrauded CI out of its equipment and real estate, plus the $17M Note. The relief sought in this case is principally the return of the equipment and real estate to CI, and the return of the $17M Note to PM3's Trust. This case has been relatively inactive, but all of the subsequent cases have been consolidated into this case. To the extent that this case sought the return of equipment to CI, that relief is effectively granted by the Settlement Agreement. To the extent that it seeks return of the real estate to CI or the return of the $17M Note to PM3's Trust, nothing in the settlement prevents him or his designated representative from continuing to pursue that relief. PM3 is now deceased. It seems that Perrin March, III's son, Perrin March, IV ("PM4"), is now a party in interest. Under the settlement, CI will assume certain indemnification obligations that may relate to these claims and because the $17M Note will be transferred to CM, MS and KL will save extensive litigation costs. • Case No. A1301453 - This case was filed by KL against CI for non-payment of rent under an equipment lease. It sought damages and return of the equipment. Resolution by the Settlement Agreement fully resolves the disputes with respect to the now known as CI Equipment, Equipment Financing Liens and the Equipment Note. This case is fully resolved by the Settlement Agreement. • Case No. A1303506 - This case was filed by PM3 against MS, KL, Kilby Real Estate, CI, and 10 John Does. It's essentially an extension of the A1209832 complaint, with KL and Kilby Real Estate and the John Does added as parties. The relief sought is essentially the same as A1209832—return of equipment and real estate to CI, return of the $17M Note to the PM3 Trust, and miscellaneous damages. As with A1209832, that relief is effectively granted by the settlement (like the return of the CI Equipment) or not prevented by the settlement (return of the $17M Note and damages). Under the settlement, CI will assume certain indemnification obligations that may relate to these claims and because the $17M Note will be transferred to CM, MS and KL will save extensive litigation costs. • Case No. A1304301 - This was filed by KL against the Bank. It essentially seeks payment from the Bank to KL for some of the unpaid rent obligation of CI under the equipment lease. Bank counterclaimed against KL, seeking repayment of the portion of the $17M Note that was paid to MS. This case is fully resolved by the Settlement Agreement. • Case No. A1306119 - This was filed by PM4 shortly after PM3's death. Again, it's essentially an extension of the prior PM3 cases—it adds CM, Alan Statman and his firm, and the Children's Trust as parties. PM4's attorney has characterized it as being nothing more than an effort to identify the John Does from A1303506. It seeks the reversal of the equipment and real estate sales, return of the $17M Note to the PM3 trust, and various other payments or damages. Under the settlement, CI will assume certain indemnification obligations that may relate to these claims and because the $17M Note will be transferred to CM, MS and KL will save extensive litigation costs. • Case No. C130552 - This is an appeal by CI of the jury verdict in favor of KL in Case No. A1109353. This appeal is fully resolved by the Settlement Agreement. • Case No. C130761 - This is an appeal by CI of Judge Myers's decision in Case No. A1209832 granting KL's motion for summary judgment regarding KL's ability to render the equipment unusable under a lease agreement with CI. This appeal is fully resolved by the Settlement Agreement. • Case No. C130778 - This is an appeal by the Bank of Judge Myers's decision in Case No. A1209832 denying Bank's motion for preliminary injunction on the issue of whether KL could be prevented from rendering the equipment unusable. This appeal is fully resolved by the Settlement Agreement.
Movants have also attached as Exhibit B a document entitled Bankruptcy Litigation Summary as follows:
EXHIBIT B
BANKRUPTCY LITIGATION SUMMARY
• Adversary Proceeding No. 13-1021 - This complaint was filed by CI against MS seeking a determination of non-dischargeability of the $8.62 million judgment entered in State Court Litigation Case No. A110935 against MS pursuant 11 U.S.C. §§ 523(a)(2), 523(a)(4) and 523(a)(6). MS filed a timely answer to the Complaint and pre-trial statements have been filed. This case is fully resolved by the Settlement Agreement. • Adversary Proceeding No. 13-1046 - This complaint was filed by Kilby Real Estate against MS seeking injunctive relief, declaratory judgment and to determine validity, extent and priority of liens. In essence, this dispute was related to the $17M Note and the Note Related Interests. Kilby Real Estate sought to prohibit MS from enforcing the $17M Note and related mortgage thereunder against the real estate owned by Kilby Real Estate and a determination of the validity of the in light of a debt subordination agreement that CI had with the Bank. MS filed a timely answer to the Complaint which also set forth affirmative defenses to the allegation and pre-trial statements have been filed. This case is fully resolved by the Settlement Agreement. • Adversary Proceeding No. 13-1048- This complaint was filed by Perrin March, III ("PM3") against MS seeking, inter alia, a determination that alleged debts to PM3, primarily in relation to the transfer of the $17M Note and equipment purchase by KL from CI, were non-dischargeable pursuant 11 U.S.C. §§ 523(a)(2) and 523(a)(6). The allegations made in this case are principally the same as alleged by PM3 in State Court Litigation Case No. A1209832. MS and PM3 entered into an agreed order in the Bankruptcy Case allowing State Court Litigation Case No. A1209832 to proceed (Bankr. Case Doc. No. 96). By agreement of the parties, to avoid duplicative litigation, this case has been stayed pending resolution of the State Court Litigation Case No. A1209832 (Adv. Proc. Doc. No. 11). Under the settlement, CI will assume certain indemnification obligations that may relate to these claims and because the $17M Note will be transferred to CM and the equipment transferred to CI, MS and KL will save extensive litigation costs. • Adversary Proceeding No. 13-1056- This complaint was filed by CM as successor trustee of the Children's Trusts against MS seeking a determination of (I) non-dischargability of indebtedness pursuant 11 U.S.C. §§ 523(a)(2), 523(a)(4) and 523(a)(6) of Claim Nos. 12, 13 and 14, (ii) a claim for equitable relief and (iii) joinder in a declaratory judgment action by CI. MS filed a timely answer to the Complaint which also set forth affirmative defenses to the allegation and pre-trial statements have been filed. This case is fully resolved by the Settlement Agreement. • Adversary Proceeding No. 13-1057- This complaint was filed by CI against MS and KL seeking declaratory judgment, injunctive relief, determination of dischargeabilty of indebtedness as to Claim No. 10 under 11 U.S.C. §§ 523, substantive consolidation of KL with the Debtor, and determination that the MS Employment Agreement was void. This case essentially involves that same dispute as to the $17M Note and the equipment purchased by KL from CI that was part of State Court Litigation Case No. A1109353. MS and KL filed timely answers to the Complaint which also set forth affirmative defenses to the allegation and pre-trial statements have been filed. MS also filed a counter claim agsint CI in relation to the MS Employment Agreement seeking an order requiring CI to pay-over the funds MS deemed owing thereunder. This case is fully resolved by the Settlement Agreement. • Adversary Proceeding No. 13-1071- This complaint was filed by Perrin G. March, IV, Perrin G. March IV, Trustee of the Perrin G. March III Irrevocable Trust for the Benefit of Perrin G. March IV (son of PM3) seeking, among other things, a determination of non-dischargeability as to alleged debt arising from the $17M Note and the equipment sold by CI to KL. Essentially, this complaint is a mirror of Adversary Proceeding No. 13-1048 filed by now deceased PM3. MS and PM3 entered into an agreed order in the Bankruptcy Case allowing State Court Litigation Case No. A1209832 to proceed (Bankr. Case Doc. No. 96). By agreement of the parties, to avoid duplicative litigation, this case has been stayed pending resolution of the State Court Litigation Case No. A1209832 (Adv. Proc. Doc. No. 5). Under the settlement, CI will assume certain indemnification obligations that may relate to these claims and because the $17M Note will be transferred to CM and the equipment transferred to CI, MS and KL will save extensive litigation costs.
Settlement of the many pieces of litigation pending in this Court and the three divisions (civil, appeal, and domestic relations) of the Hamilton County Court of Common Pleas involving the Movants will result in very substantial savings in attorney's fees and costs of litigation. In sum, the motion, if approved, will resolve six of the nine cases before the Hamilton County Court of Common Pleas, including all three cases currently on appeal; four of the seven adversary proceedings before this Court; and the Debtor and CM's long-lasting and heavily contested divorce proceeding. This consideration weighs heavily with the Court as a ground for granting the motion.
B. Objector's Liability for Fees.
The Objector's contention that granting the joint motion will make him liable for paying CI's attorney's fees is based on a provision in the motion permitting CI, using derivative standing assigned by the Debtor, to pursue potential avoidance actions against Objector for payments received from the Debtor that may constitute preferential transfers under 11 U.S.C. § 547. If successful in a § 547 action, the net proceeds of such recovery would become property of the Debtor's bankruptcy estate. As the party pursuing the § 547 action via its assigned derivative standing, CI would then be entitled to payment of its legal fees and other expenses associated with pursuing such action for the benefit of the bankruptcy estate. But reasoning that such recovery would necessarily be used to pay attorney fees in fallacious, for such a recovery can be used for any purpose deemed appropriate by the trustee. Administrative expense requests such as this are allowable for any professional seeking reimbursement of reasonable fees and expenses for work done that is in the best interests of the bankruptcy estate, upon application and approval of this Court. See generally 11 U.S.C. §§ 327, 328; Fed. R. Bankr. P. 2016(a), 7054. Objector's objection on this ground is without merit.
C. Assignment of the $17 Million Note.
Objector's contention that his position with relation to the claim on the note will be prejudiced if the settlement is approved is without foundation. The joint motion does provide that title to the note is transferred from the Debtor to CM but this does not prejudice Objector. This claim is unaffected except that the defendant in his state court lawsuit is CM, not Debtor. There is no reason to believe that Objector's ability to recover on his contention regarding ownership of the note will be affected in any way. In fact, the Movants' Exhibit A above explicitly states that "[t]o the extent that [the settlement] seeks return of the . . . $17M Note to PM3's Trust, nothing in the settlement prevents him or his designated representative from continuing to pursue that relief.
D. Other Grounds.
Furthermore, an examiner was appointed in this chapter 11 case pursuant to 11 U.S.C. § 1102 and was tasked with investigating:
(a) any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of any of the business controlled by the Debtor (including entities controlled by Debtor) pre-petition or post-petition, including without limitation his transfer of assets owned by such entities; (b) the existence and value of claims by the estate of the Debtor against the Debtor's accountants, financial advisors, investment bankers, financial institutions, attorneys or transferees of assets; and (c) general pre-petition transfers or encumbrances by the Debtor of his personal assets.On February 18, 2014, the examiner filed his Final Report. In his report, the examiner states that he has been informed that the Movants have reached a global settlement and have filed a motion for an entry of an order approving it. The report then concludes: "[t]he examiner has reviewed and supports the global settlement as fair and reasonable." (Doc. No. 195, p. 2). The Court takes note of this statement in reaching its conclusion in granting the motion.
IV. Legal Analysis.
In reviewing proposed settlements, courts should consider:
• the probability of success in the litigation;In re Bard, 49 Fed. App'x 528, 530 (6th Cir. 2002) (collecting cases); In re Swallen's, Inc., 210 B.R. 128 (Bankr. S.D. Ohio 1997).
• the difficulties, if any, to be encountered in the matter of collection;
• the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and
• the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
In considering these factors, a court is "charged with an affirmative obligation to apprise itself of all the facts necessary to evaluate the settlement and make an informed and independent judgment as to whether the compromise is fair and equitable." Id. Bankruptcy courts enjoy "significant discretion" in approving settlements. In re MQVP, Inc., 477 Fed. App'x 310, 312 (6th Cir. 2012) (citing Fed. R. Bankr. P. 9019(a); In re Rankin, 438 Fed. App'x 420, 426 (6th Cir. 2011)). In exercising this discretion, the Court is mindful that "[t] purpose of a compromise agreement is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims. . . . The law favors compromise and not litigation for its own sake." In re Fishell, 47 F.3d 1168 (6th Cir. 1995) (citing In re A & C Properties, 784 F.2d 1377, 1380-81 (9th Cir.), cert. denied, 479 U.S. 854 (1986)).
Having considered all the facts and circumstances present before it, the Court finds the proposed settlement to be fair and equitable. The settlement resolves the majority of litigation involved in this case, both before this Court and in the Hamilton County Court of Common Pleas. The cases resolved by the settlement involve, among other things, complex issues of corporate and commercial law, a long and contentious divorce, and a number of adversary proceedings before this Court which present numerous factual and legal issues. These cases have already drawn a significant amount of the parties' time and, presumably, a very significant expense in attorney's fees. Further, the proposed settlement not only provides a large sum of money that would not have otherwise been available to the estate, it limits the amount CI's judgment to a pro rata distribution. This results in a two-fold increase in the distribution to other creditors: first, by way of the funds not otherwise available and second, by way of an increased distribution resulting from CI taking less than it may have otherwise been entitled to.
V. Conclusion.
Having found the Objector's arguments to be without merit, and the settlement proposed in the motion to be fair and equitable, the Objection is hereby OVERRULED. The Court will enter an order granting the Motion contemporaneously herewith.
IT IS SO ORDERED. Copies to: Default List Susan M. Argo, Esq. Robert A. Goering, Esq. Stephen D. Lerner, Esq. Donald W. Mallory, Esq. Richard D. Nelson, Esq. John A. Schuh, Esq. Mary Anne Wilsbacher, Esq.