Summary
affirming bankruptcy court's decision that a settlement “as a whole was fair and equitable”
Summary of this case from In re Sabine Oil & Gas Corp.Opinion
02 Civ. 8489 (AKH)
January 31, 2003
OPINION AND ORDER DENYING APPEAL FROM BANKRUPTCY COURT'S ORDER
The Bankruptcy Court for the Southern District of New York, on August 29, 2002, approved a Mutual Release and Settlement Agreement (the "Settlement Agreement") between Enron Corporation (the "Debtor") and Dynegy, Inc., settling claims for breach of a merger agreement between the two companies. The stockholders of Enron, believing that the Settlement Agreement adversely affected them, objected. The Bankruptcy Court (Gonzalez, J.) overruled their objections, and they bring this appeal from the final order of the Bankruptcy Court. For the reasons set forth below, the appeal is denied and the order of the Bankruptcy Court approving the Settlement Agreement is affirmed.
I. Background
On November 9, 2001, Enron Corp. ("Enron"), and Dynegy Inc. ("Dynegy") entered into a Merger Agreement. Less than a month later, on November 28, 2001, Dynegy terminated the agreement, pursuant to one of its terms. Four days later, on December 2, 2001, Enron and multiple affiliated debtor entities filed for bankruptcy relief under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101-1146. Simultaneously, Enron filed an adversary proceeding against Dynegy, claiming that Dynegy breached the Merger Agreement by terminating. Later that month, on December 20, 2001, the stockholders of Enron, claiming that they were to be directly benefited by the Merger Agreement and that they were therefore third-party beneficiaries entitled to vindicate their rights, brought their own lawsuit against Dynegy in the Southern District of New York and in the Texas state courts. In my previous Opinion and Order of October 22, 2002, I upheld the stockholders' status as third-party beneficiaries, entitled to bring their own separate suit against Dynegy, and reversed the stay order of the Bankruptcy Court.
Before my Opinion and Order of October 22, 2002, on August 15, 2002, Enron and affiliated debtors executed the Settlement Agreement with Dynegy and affiliates. Pursuant to the Settlement Agreement, Dynegy was to pay Enron $88 million in settlement, and Dynegy and Enron released and discharged their respective claims against each other.
On August 29, 2002, the Bankruptcy Court held a hearing pursuant to the Debtor's motion to approve the Settlement Agreement. The Debtor and its Creditors Committee urged approval as in the best interests of the Debtor's estate. The stockholders of Enron objected, expressing concern that the release contained in the Settlement Agreement might also release their claims against Dynegy. They objected as well to a provision fixing November 28, 2001 as the date that Dynegy terminated the Merger Agreement, expressing concern that this date might adversely affect their rights as third-party beneficiaries. The Bankruptcy Court declined an explicit preservation of the Enron shareholders' claims, but expressed its opinion that the release between the parties to the Settlement did not affect the shareholders' claims to the extent that those claims were distinct from Enron's claims. The Bankruptcy Court also declined to rule whether or not the November 28, 2001 provision adversely affected the shareholders' rights, although the Debtor testified that the date was included in the Settlement Agreement in order to effect a complete release of Enron's claims against Dynegy. The Bankruptcy Court, finding that 2 the Settlement Agreement was in the best interests of the Debtors' estate, issued an Order approving the mutual release and settlement agreement between Enron and Dynegy. Appellants appeal from that final order.
II. Discussion
Rule 9019(a) of the Rules of Bankruptcy Procedure provides that "[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." A bankruptcy court may approve a settlement where the proposed settlement is "both fair and equitable and in the best interests of the estate." In re Ashford Hotels, Ltd., 235 B.R. 734, 740 (S.D.N.Y. 1999) (citing In re Liu, No. 98-5027, 1998 WL 890176, at *1 (2d Cir. Dec. 18, 1998)). In making such a determination, the bankruptcy court should apprise itself "of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated"; "should form an educated estimate of the complexity, expense, and likely duration of such litigation"; should determine "the possible difficulties of collecting on any judgment which might be obtained"; and should review "all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise." Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25 (1968). Because approval of the settlement lies within the sound discretion of the bankruptcy court, Nellis v. Shugrue, 165 B.R. 115, 123 (S.D.N.Y. 1994), its decision to approve a settlement will not be overturned "unless it is manifestly erroneous and a clear abuse of discretion." In re 47-49 Charles Street, Inc., 209 B.R. 618, 620 (S.D.N.Y. 1997).
Appellants complain that the Bankruptcy Court abused its discretion in refusing to consider if the settlement would adversely affect their claims. Although an inquiry into the 3 fairness of a settlement should include a determination of the effects of the settlement on third parties, see In re The Drexel Burnham Lambert Group, Inc., 995 F.2d 1138, 1146-47 (2d Cir. 1993); In re Medical Asset Management, 249 B.R. 659 (W.D.Pa. 2000), a bankruptcy court is not required to hold a mini-trial on the merits of the settlement. Instead, it is charged with "canvassing the issues to determine whether the settlement falls below the lowest point in the range of reasonableness." In re Interstate Cigar Co., 240 B.R. 816, 822 (E.D.N.Y. 1999). This settlement certainly does not fall below such a point: the Debtors testified that the settlement was in their best interests, as did the Creditors Committee.
With respect to whether the Settlement Agreement adversely affects the shareholders' claims, I found, in my Opinion and Order of October 22, 2002, that the claims of the Enron shareholders were separate and independent from those of Enron. I reviewed the agreement and held that, under Texas law (the law governing the Merger Agreement), the shareholders of Enron had the right to vindicate their right to the shares of Dynegy awarded to them under the Merger Agreement if they could prove that Dynegy repudiated its contract obligations under that agreement. Accordingly, I reversed the order of the Bankruptcy Court that had enjoined the Enron shareholders from suing Dynegy.
Having thus ruled, it is unnecessary for me to rule whether or not the Bankruptcy Court should have examined the effects of the Enron/Dynegy Settlement Agreement on the Enron shareholders. If, indeed, the Enron shareholders have a separate and independent claim based on Dynegy's repudiation of its obligations under the Merger Agreement, it was not necessary for the Bankruptcy Court to consider any effects of the Enron/Dynegy Settlement Agreement, for Dynegy and Enron lacked power to affect those separate and independent rights.
This is in fact how the Bankruptcy Court proceeded. At the hearing, the Bankruptcy Court opined that should the shareholders have a separate claim, that claim would not be released by the Agreement. Having come to this conclusion, the Bankruptcy Court discharged its duty to consider appellants' third-party rights. It need not have gone further to determine what, if any, effects the November 28, 2001 termination date would have on the shareholders' claims.
III. Conclusion
The Bankruptcy Court, after considering all of the necessary factors in approving the settlement, found that the Settlement Agreement as a whole was fair and equitable. See Watts v. Williams, 154 B.R. 56, 59 (S.D.Tex. 1993). The Bankruptcy Court's approval of the settlement was neither manifestly erroneous nor a clear abuse of discretion. In re 47-49 Charles Street, Inc., 209 B.R. at 620. The motion for appeal of the Bankruptcy Court's Order approving the Settlement Agreement is denied and the Order of the Bankruptcy Court is affirmed.
SO ORDERED.