Opinion
Case No. 17-01568
2020-03-26
IN RE: Jerry DeWayne GADDY, Debtor.
Lee R. Benton, Birmingham, AL, for Debtor.
Lee R. Benton, Birmingham, AL, for Debtor.
ORDER APPROVING SECOND MOTION TO COMPROMISE (DOC. 146) AND DENYING MOTION TO APPROVE PURSUIT OF CLAIMS (DOC. 156)
HENRY A. CALLAWAY, CHIEF U.S. BANKRUPTCY JUDGE
This case came before the court on January 27, 2020 for an evidentiary hearing on (1) the second motion to compromise (doc. 146) filed by chapter 7 trustee Terrie Owens and the defendants ("movants" or "defendants"), including the debtor Jerry DeWayne Gaddy ("Gaddy"), in case no. 1:16-CV-00332-JB-M currently pending in the United States District Court for the Southern District of Alabama; (2) the objection (doc. 149) filed by creditor SE Property Holdings, LLC ("SEPH"); and (3) SEPH's related motion to approve pursuant of claims on behalf of the estate (doc. 156). The evidentiary hearing lasted eight hours. The court heard testimony from Jennifer Corbitt, Vice President of SEPH; the trustee Ms. Owens; and Gaddy. It admitted movants' exhibits 1-29, 31-65, 68-71 and SEPH's exhibits 1-28 (except page 3 on exhibit 7). Having carefully considered the evidence and the applicable law, the court approves the second motion to compromise and denies SEPH's motion to approve pursuit of claims. Background
In 2006 and 2008, Gaddy guaranteed two business loans by Vision Bank to Water's Edge, LLC related to a real estate project in Baldwin County, Alabama. The real estate project ultimately failed, and Water's Edge defaulted on its obligation to Vision Bank in June 2010. Vision Bank is no longer operating; it sold all of its assets in or around 2011 and SEPH now owns the two loans at issue. Corbitt testified that SEPH holds the Vision Bank "legacy assets" and that SEPH will continue in operation "however long it takes" to collect those assets.
Dan Murtaugh, Vision Bank sold to Arkansas's Centennial , Press-Register , Nov. 17, 2011, available at www.al.com/press-register-business/2011/1 l/vision_bank_sold_to_arkansass.html.
Vision Bank (later SEPH) sued Gaddy and other guarantors in October 2010 in the Circuit Court of Baldwin County, Alabama. In December 2014, the circuit court entered judgment in favor of SEPH against Gaddy and others in the amount of $9,168,468.14, although the Alabama Supreme Court later held that the judgment was not final because of one defendant's bankruptcy. See Gaddy v. SEPH , 218 So. 3d 315, 324 (Ala. 2016).
SEPH and Gaddy disagree as to whether the judgment is now final and how this affects the district court case. The finality or non-finality of the state court judgment does not affect the court's analysis related to the settlement approval. Accepting for the sake of argument SEPH's position that the judgment is final and that there is no need to litigate the finality of the judgment as part of the district court case, the court would still approve the settlement as reasonable.
In 2016, SEPH sued Gaddy, his wife, his daughter, and several family-owned business entities in the U.S. District Court for the Southern District of Alabama, case nos. 16-CV-00332 and 16-cv-00560, for a variety of fraudulent transfer and conspiracy claims under Alabama law. (See movants' exs. 43, 44). The district court consolidated both cases into case no. 16-cv-00332, and SEPH subsequently amended its complaint in that case. (See movants' exs. 45, 46).
In the district court case, SEPH alleges that from 2009 through 2014, with knowledge of Water's Edge potential and then actual default, Gaddy began transferring his property to family members and others. Neither side disputes that these transfers took place. The following is a summary of pertinent events from SEPH's district court complaints and the evidence admitted at the hearing:?
Some discovery was conducted in the district court case before it was stayed in May 2017 because of Gaddy's bankruptcy. (See, e.g. , movants' exs. 47-57; SEPH exs. 12, 22-27). The trustee was substituted as the party in interest to the district court case in June 2019. (See SEPH ex. 12). A jury trial was requested; the case is not currently set for trial. (See id. , movants' exs. 63, 64).
On May 9, 2019, the trustee and the defendants filed a motion in the bankruptcy court to approve a compromise (doc. 115) of the district court claims in the amount of $375,000. This court denied approval of that settlement because SEPH was willing to pay $400,000 to the trustee to be able to pursue the claims. (See order, doc. 134). This court (with the permission of the district court judge) ordered the trustee and the defendants to mediate the district court claims with retired Bankruptcy Judge Jack Caddell. SEPH also participated in the mediation. Although a settlement was not reached at mediation, the trustee and the defendants continued to negotiate and filed the subject motion on November 15, 2019 proposing to settle the claims in the district court case for $825,000.
SEPH and Union State Bank are the only two creditors in this chapter 7 case. SEPH has filed a claim for about $2.5 million, and Union State Bank has filed a claim for about $1.87 million. Both claims are filed as secured, but the collateral does not appear to be property of the bankruptcy estate, so without ruling upon the issue the court has considered both claims to be unsecured for purposes of this decision. Union State Bank supports the proposed settlement (see joinder, doc. 170), while SEPH opposes it.
Analysis
In deciding whether or not to approve a settlement, a bankruptcy court must consider the following factors to the extent applicable:
(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; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
In re Justice Oaks II, Ltd. , 898 F.2d 1544, 1549 (11th Cir. 1990). The court "consider[s] these factors to determine the fairness, reasonableness[,] and adequacy of a proposed settlement ...." See In re Chira , 567 F.3d 1307, 1312-13 (11th Cir. 2009) (citation and quotation marks omitted).
"In examining the relevant factors, courts have deferred to the [t]rustee's business judgment when reasonable." In re Sportsman's Link, Inc. , No. 07-10454, 2011 WL 7268047, at *11 (Bankr. S.D. Ga. Dec. 20, 2011) ; see also In re Morgan , 439 F. App'x 795, 795 (11th Cir. 2011) ; In re Able Body Temporary Servs., Inc. , No. 8:13-BR-6864-CED, 2015 WL 791281, at *4 (M.D. Fla. Feb. 25, 2015), aff'd , 632 F. App'x 602, 602 (11th Cir. 2016). While the court must not just "rubber stamp" the trustee's proposal, it also must not "substitute its own business judgment for that of the [t]rustee." See In re Harbour E. Dev., Ltd. , No. 10-20733-BKC-AJC, 2012 WL 1851015, at *1 (Bankr. S.D. Fla. May 21, 2012). It need not "hold a ‘mini-trial’ to determine the merits of each and every claim subject of a disputed settlement ... but must simply be convinced that a trustee's judgment is based upon a sound assessment of the situation." See id. (citation and quotation marks omitted); see also Brown v. Harris , No. 3:11-CV-25 CDL, 2011 WL 3473312, at *2 n.5 (M.D. Ga. Aug. 9, 2011).
The court's role "is not to decide the numerous questions of law and fact raised by [the litigation] but rather to canvass the issue[s] and see whether the settlement falls below the lowest point in the range of reasonableness." In re Pullum , 598 B.R. 489, 492-93 (Bankr. N.D. Fla. 2019) (citation, quotation marks, and brackets omitted). "The concept of the ‘range of reasonableness’ has been defined as a range which recognizes the uncertainties of law and fact in any particular case and the concomitant risks and costs necessarily inherent in taking any litigation to completion." Id. (citation, quotation marks, and ellipses omitted). The court should examine "the probable outcomes of the litigation, including its advantages and disadvantages, and make a pragmatic decision based on all equitable factors." See In re McDowell , 510 B.R. 660, 663 (Bankr. N.D. Ga. 2014). "Settlements are favored in bankruptcy and appellate courts have held that a bankruptcy court's approval of a compromise must be affirmed unless the court's determination is either (1) completely devoid of minimum evidentiary support displaying some hue of credibility, or (2) bears no rational relationship to the supportive evidentiary data." Matter of Marvelay, LLC , No. 18-69019-LRC, 2019 WL 3334706, at *6 (Bankr. N.D. Ga. July 23, 2019) (citation, quotation marks, and brackets omitted).
SEPH argues (1) that the court should have required the trustee to conduct more discovery or allowed SEPH more discovery and (2) that the Justice Oaks factors are not met. The court discusses SEPH's arguments below.
I. SEPH's request for more discovery
SEPH's argument that the settlement should not be approved without more discovery is not well-taken. It is not SEPH's role to evaluate the settlement; that is for the court. See infra, section II.A.
Jennifer Corbitt, SEPH's representative, testified that SEPH obtained some documents and appraisals on at least some of the properties at issue as part of the state court case. There was also some discovery done in the district court case before the bankruptcy was filed. Additionally, SEPH could have requested discovery under Federal Rule of Bankruptcy Procedure 2004 related to the alleged fraudulent transfers. Throughout the almost three years that this bankruptcy has been pending since April 2017, SEPH has not requested an examination (and related documents) of the debtor or any of the other defendants under Bankruptcy Rule 2004. As a creditor of the debtor's chapter 7 bankruptcy estate, SEPH is a "party in interest" under Rule 2004(a) entitled to make such a request.
If SEPH's position is that the court would not have allowed Rule 2004 discovery, that position is speculative. The court will not ex post facto decide how it would have ruled on a request that was never made.
Instead, when the court asked SEPH to outline what discovery it believed it needed to evaluate the trustee's first settlement proposal, SEPH responded with what this court considered to be essentially full litigation of the district court case through the discovery stage. (See order, doc. 125; SEPH resp. to court order, doc. 127; SEPH ex. 15); Brown v. Harris , 2011 WL 3473312, at *2 n.5 (bankruptcy judge not required "to hold a full evidentiary hearing or even a ‘mini-trial’ before a compromise can be approved[; otherwise, there would be no point in compromising, the parties might as well go ahead and try the case") (citations and quotation marks omitted). SEPH did not limit its requested discovery in opposition to the second motion but reiterated its earlier request that essentially asked for full discovery and a trial on the merits of the fraudulent transfer claims. (See SEPH opp., doc. 149, p. 14). Although it was not required to do so, the court allowed SEPH the opportunity to present evidence and extensively question witnesses (including the trustee) at an evidentiary hearing. See, e.g., In re Able Body Temporary Servs. , 2015 WL 791281, at *2 ; In re Sportsman's Link , 2011 WL 7268047, at *11. SEPH's contention that it needed more discovery does not persuade this court to deny settlement approval.
II. The Justice Oaks factors
A. Paramount interest of creditors
SEPH, the creditor with the majority of the debt, objects to the settlement, while Union State Bank, a creditor which is owed a smaller but still substantial debt, supports the settlement. The question for the court is whether the case reflects a scenario in which "proper deference" to SEPH's views dictates rejection of the settlement. The court finds that it does not.
The court analyzes SEPH's concerns about the settlement throughout this opinion, not just in this section.
Creditor views are only one factor "in approving a settlement ... and are not controlling." See In re S.E. Banking Corp. , 314 B.R. 250, 273 (Bankr. S.D. Fla. 2004). "It is not the creditors' task to determine the fairness of a proposed settlement; it is the court's obligation to make that determination while making certain not to ignore their legitimate views or concerns." In re Vazquez , 325 B.R. 30, 37 (Bankr. S.D. Fla. 2005). Moreover,
[w]hile the trustee's obligation is to marshal assets for the benefits of creditors, that task is assumed as a fiduciary relationship to the estate itself and not as some sort of ‘hired gun.’ The trustee is not the employee or agent of the creditors; they do not have the right to direct how the trustee chooses to perform the statutory duties of the position. The trustee is in essence an independent third party charged with the responsibility of maximizing assets for the estate. A bankruptcy trustee is an officer of the court that appoints ... her. When persons perform duties in the administration of the bankruptcy estate, they act as ‘officers of the court’ and not private persons. They are held to high fiduciary standards of conduct, and these duties are owed not only to the entire creditor body but to the debtor as well.
...
Clearly, the trustee is not the ‘agent’ of the creditors. The trustee's obligation — as an officer of the court — is to maximize assets as best as possible under the circumstances, not to serve as an extension of a creditor whose other collection efforts have been forestalled. In many cases, the trustee's fiduciary duties may well require litigating a matter to conclusion; in other instances, a trustee may find that a settlement is the most effective way to expedite litigation and avoid uncertainty. And in those instances in which the trustee's comprehensive examination of the underlying facts leads to a conclusion that further litigation will lead only to diminishing returns, protracted investigation, or costly litigation with absolutely no guarantee as to the outcome, an inquiring court is to afford the trustee wide latitude.
Id. at 37-38 (citations and quotation marks omitted); see also In re Soderstrom , 477 B.R. 249, 262 (Bankr. M.D. Fla. 2012) ("When the potential augmentation of a bankruptcy estate involves protracted investigation or potentially costly litigation, with no guarantee as to the outcome, the trustee must tread cautiously, and an inquiring court must accord [the trustee] wide latitude in deciding whether to settle.") (citation, quotation marks, and brackets omitted).
The court rejects SEPH's implication that as the majority creditor it should have a "veto." See In re Vazquez , 325 B.R. at 37. "Such a ‘veto power’ would run counter to the very idea that the court's task is to independently assess the" settlement. See id. " ‘Proper deference to the creditor's reasonable views is not the same as saying that the court must defer to the creditor simply because the only creditor (or a majority of creditors) does not think the settlement is fair." See id. (citation and brackets omitted).
The court similarly rejects SEPH's complaint that the trustee settled after the mediation concluded and did not include SEPH in further settlement discussions. The mediation deadline was a date set by this court for the parties to participate in the mediation, which they did. The trustee was free to continue discussions with the defendants after the mediation; this is common practice and does not indicate that the settlement reached is unreasonable. The trustee in her fiduciary role to the estate was not required to include SEPH in those discussions or seek SEPH's "blessing" on any proposed settlement.
SEPH contends that the court should disapprove the settlement because it has offered to fund the litigation and guarantee a recovery to the estate — at some later date — of at least $825,000. (See SEPH ex. 16). However, SEPH's offer to fund the litigation under some sort of joint prosecution or similar agreement (see SEPH exs. 13, 14) does not compel disapproval of the settlement for multiple reasons.
First, both the trustee and Union State Bank are opposed to SEPH — a non-fiduciary — controlling the litigation, and the court shares their concern that SEPH would not necessarily put the interests of the estate above its own interests. See In re Vazquez , 325 B.R. at 38 ("Again, it seems contrary to the intent of the code that the trustee's role could be subverted from an independent, fiduciary capacity to one in which the trustee is compelled to pursue a course of litigation which she does not believe will prove fruitful."). If the trustee were to continue the district court litigation, she would have her own counsel and control the litigation; under SEPH's proposal, she would not be able to do so or would do so in name only. Second, SEPH's proposal contemplates that SEPH will have an allowed claim in this bankruptcy, usurping the trustee's ability and duty to object to the claim if warranted. Third, and as discussed in more detail in section C., the continuation of the district court case would likely delay the administration of this bankruptcy case for several more years.
SEPH's counsel pointed out that the trustee has not yet objected to the claim. The trustee testified, and the court's experience in chapter 7 cases confirms, that chapter 7 trustees often do not object to claims until near the end of the case.
B. Difficulty in collecting
This factor is irrelevant or neutral because collection difficulties for the trustee related to the settlement amount are not at issue. See In re Chira , 567 F.3d at 1313 ; In re Morgan , 600 B.R. 725, 733 n.8 (Bankr. N.D. Ga. 2019).
The trustee's calculations of what she may ultimately be able to collect if successful at trial are discussed below.
C. Probability of success, complexity of the litigation, and concerns of expense, inconvenience, and delay
i. The applicable law
The district court claims are brought under Alabama's Uniform Fraudulent Transfer Act (the AUFTA) for actual fraudulent transfers under Alabama Code § 8-9A-4(a) and for constructive fraudulent transfers under Alabama Code §§ 8-9A-4(c) and 8-9A-5.
To prevail under § 8-9A-4(a), the trustee would have to show that Gaddy made the subject transfer "with actual intent to hinder, delay, or defraud any creditor." The AUFTA "recites a non-exhaustive list of 11 factors that may be considered in determining actual intent ...." See SEPH v. Braswell , 255 F. Supp. 3d 1187, 1201 (S.D. Ala. 2017). "These circumstantial indicia of intent are sometimes called ‘badges of fraud.’ " Id. (citation omitted).
For constructive fraud under § 8-9A-4(c), the trustee must prove that Gaddy did not receive reasonably equivalent value in exchange for the subject transfer and either (a) was engaged or was about to engage in a business transaction for which his remaining assets were unreasonably small in relation or (b) intended to incur (or believed or reasonably should have believed that he would incur) debts beyond his ability to pay. For constructive fraud under § 8-9A-5, the trustee must prove that the claim arose before Gaddy made the subject transfer and that Gaddy either (a) made the transfer without receiving reasonably equivalent value in exchange and was insolvent when he made the transfer or became insolvent as a result of the transfer or (b) the transfer was made to an insider for an antecedent debt, he was insolvent at the time, and the insider had reasonable cause to believe that the defendant was insolvent at the time. Whether a debtor receives reasonably equivalent value for a transaction is determined from the viewpoint of the debtor's creditors. See SEPH v. Braswell , 255 F. Supp. 3d at 1198.
If the trustee succeeded on one or more of the claims, relief may include avoidance of the transfers at issue, see Ala. Code § 8-9A-7, and a "judgment for conveyance of the" transferred property under Alabama Code § 8-9A-8(b), i.e., the property would come into the estate for the trustee to administer. Alternatively, the trustee could recover against the transferees a "judgment for the value of" the transferred property under Alabama Code § 8-9A-8(b). Value would be determined as of the date of the transfer. See Ala. Code § 8-9A-8(c).
ii. General concerns
The court outlines the trustee's testimony and its own analysis of each transfer below but addresses the following general concerns as an initial matter.
First, the court is not finding that no fraudulent transfers took place. The trustee's testimony did not show that she believed that there were no fraudulent transfers — only that she believed that $825,000 was a "premium" settlement based on her analysis of the claims. As discussed below, the court finds that her analysis and the resulting settlement are both fair, reasonable, and adequate.
Second, the court gives weight to the competency and experience of both the trustee and the trustee's counsel in supporting the settlement. See, e.g., In re Lorraine Brooke Assocs., Inc. , No. 07-12641-BKC-AJC, 2007 WL 2257608, at *3 (Bankr. S.D. Fla. Aug. 2, 2007). The trustee testified, and the court is aware, that she has practiced in the bankruptcy arena since 2003, has represented chapter 7 trustees since 2008, and has served as a chapter 7 trustee in this district since 2012. During that time, she has had the opportunity to evaluate hundreds of fraudulent transfer claims; in this case, she testified that the original settlement proposal of $375,000 was a fair compromise and, again, that the $825,000 settlement is a premium reached with the defendants "to buy peace and to move on with their lives." (See mot. to approve compromise, doc. 146, pp. 11-12).
The court further finds the trustee's testimony credible that in evaluating the claims, she reviewed all of the district court pleadings and exhibits, took into account the complexity of the case and the possibility of success, including applicable defenses and any collection issues. She engaged in informal discovery with the defendants, including exchanges of documents about the underlying assets and their value (discussed in more detail in section iv. below) and examined potential liabilities such as mortgages. She hired an experienced lawyer to assist in the evaluation, C. Michael Smith, who has over 30 years of bankruptcy experience and frequently represents trustees in bankruptcy; he too recommended the settlement approval. She did not ignore the positions taken by either creditor and took their concerns into account, as well.
Third, while most of the fraudulent transfer claims are not complex as far as the elements of the claims themselves (although there are complexity of proof problems discussed herein and by the trustee), there is value in getting matters resolved. Justice Oaks contemplates consideration of delay and inconvenience, both of which weigh in favor of approving the settlement. This matter started over ten years ago in 2009 with the Water's Edge potential default, and all good things must come to an end. The court agrees with the trustee that it is reasonable to take into account the present value of money, rather than $825,000 to be received at an undetermined date if the district court case was to go forward. While there was some discussion at the hearing that SEPH might be willing to pay the money upfront, such an offer still does not solve the problem of keeping this chapter 7 case open for several years while the trustee prosecutes the case at SEPH's behest.
SEPH asserted at the hearing through witness Corbitt and its counsel that it was willing to pay the $825,000 upfront. This "upfront" provision was not contained in SEPH's court-ordered written offer filed into the record on January 3, 2020 as doc. 157 and admitted as SEPH ex. 16. Assuming for the sake of argument that this is a "firm" offer, most of the concerns outlined herein — including about SEPH's non-fiduciary status — remain.
The trustee, exercising her fiduciary role, decided that it would be better for the estate as a whole to close out the case in an expeditious manner rather than waiting on several years of litigation to conclude. See, e.g., Matter of Munford, Inc. , 97 F.3d 449, 455 (11th Cir. 1996) ("public policy strongly favors pretrial settlement in all types of litigation because such cases, depending on their complexity, can occupy a court's dockets for years on end") (citation and quotation marks omitted); In re Soderstrom , 477 B.R. 249, 254 (Bankr. M.D. Fla. 2012) ("As with most settlements, it may be possible to achieve a more favorable outcome for creditors through additional litigation. But, when the administration of an estate is burdened with costly litigation and drawn out to a pointless end, the trustee is encouraged to find alternative solutions."). She said that "time is the problem" and she does not want to "drag out" the estate. To this end, she testified, and the court concurs, that the district court case could take several years to complete and that a protracted appeal could stall resolution of this case for even more years. See, e.g., In re Harbour E. Dev., Ltd. , No. 10-20733-BKC-AJC, 2012 WL 1851015, at *6-7 (Bankr. S.D. Fla. May 21, 2012) ; In re Sportsman's Link, Inc. , No. 07-10454, 2011 WL 7268047, at *18 (Bankr. S.D. Fla. Dec. 20, 2011) ; see also In re Shoemaker , 155 B.R. 552, 556 (Bankr. N.D. Ala. 1992) ("One of the goals of the bankruptcy laws is to provide a prompt and efficient adjustment of the debtor-creditor relationship. This goal is not furthered by protracted litigation."). Fourth, while the elements of the claims themselves may not be complex, as recognized by both the trustee and this court, the discovery necessary to take these claims to trial — including multiple depositions, hiring of expert witnesses to do appraisals, written discovery, etc. — would be. It is not only a question of whether SEPH advances litigation costs but also about the time involved in taking this case to trial. SEPH implicitly recognizes this complexity in the extensive discovery it proposed to the court and for which it has advocated in attacking the trustee's position.
The trustee testified that while she did not conduct formal discovery in the district court case, she and the defendants engaged in "lots of informal discovery" and she believed she had all she needed to independently evaluate the claims and reach the settlement. The court finds this approach to be practical and a proper exercise of the trustee's fiduciary role. SEPH's argument that more formal discovery should be done does not compel a different result. See, e.g., In re Harbour E. Dev. , 2012 WL 1851015, at *2 (the question is not whether an objecting party "would have made a different decision under the same circumstances — the question is whether the [t]rustee's decision was reasonable").
Fifth, fraudulent transfer claims are rarely ripe for summary judgment. See In re Van Diepen, P.A. , 236 F. App'x 498, 504 (11th Cir. 2007) (" ‘Ordinarily, the issue of fraud is not a proper subject of a summary judgment. Fraud is a subtle thing, requiring a full explanation of the facts and circumstances of the alleged wrong to determine if they collectively constitute a fraud.’ ") (citation omitted). For the actual fraud claims, neither the court nor the trustee have overlooked that many of the badges of fraud (transfers to insiders, etc.) are present here. However, it is well-settled that actual intent "is a heavily fact-dependent question." See SEPH v. Braswell , 255 F. Supp. 3d at 1201-02 ; Int'l Mgmt. Grp., Inc. v. Bryant Bank , 274 So. 3d 1003, 1016 (Ala. Civ. App. 2018). "[P]roof of one or more of the [badges of fraud] does not compel a conclusion that a creditor is entitled to a judgment in its favor ...." See Int'l Mgmt Grp. v. Bryant Bank , 274 So. 3d at 1016. "This is in part because actual fraudulent intent requires a subjective evaluation of the debtor's motive." Id. (citation and quotation marks omitted). "Actual fraud most often is revealed through circumstantial evidence, and intent is a mental emotion, of which the external signs are the acts and declarations of the parties, taken in connection with the concomitant circumstances." Id. (citation, quotation marks, and ellipses omitted). Thus, "fraudulent transfer issues generally come down to the credibility of witnesses" and "are not well suited for summary judgment." See id. (citations, quotation marks, brackets, and ellipses omitted); see also SEPH v. Braswell , 255 F. Supp. 3d at 1201-02. There are also statute of limitations issues with some of SEPH's constructive fraud claims as outlined below.
Further, the Gaddys requested a jury trial in the district court case. In the court's experience in 32 years of private practice, a jury trial not only is much more expensive than a bench trial (or an early settlement), but also a jury will generally be more sympathetic to an individual defendant rather than a collection vehicle such as SEPH. In this respect, while a jury may award punitive damages if the trustee proved one or more of the fraudulent transfer claims, it would not be required to do so. See SEPH v. Judkins , No. 1:17-CV-00413-TM-B, 2019 WL 177981, at *8-9 (S.D. Ala. Jan. 11, 2019). The clear and convincing standard of proof for punitive damages is higher than the preponderance of the evidence standard for proving the AUFTA claims. See SEPH v. Center , No. 15-0033-WS-C, 2017 WL 3403793, at *35 (S.D. Ala. Aug. 8, 2017) (punitive damages "unavailable absent proof by clear and convincing evidence that the defendant consciously or deliberately engaged in oppression, fraud, wantonness, or malice with regard to the plaintiff") (citation and quotation marks omitted). Even if the trustee "made such a showing ..., the decision of whether or not to award punitive damages" would still be discretionary for the jury and would almost certainly require a full-blown trial. See id. While SEPH offered to guarantee a recovery in the amount of the settlement, the court has outlined the time factor above and will not repeat that again here.
Finally, SEPH argues that the trustee should have obtained independent valuations of all of the transferred properties and should not have relied on tax records. As an initial matter, the trustee testified, and the court agrees, that hiring appraisers would have depleted money from the estate. The court credits the trustee's testimony that it was not necessary to consult with realtors about the real property because she is familiar with Marengo County real estate. This testimony is consistent with the court's own knowledge of the trustee's role as the only chapter 7 trustee (absent conflicts) who handles the court's cases in its Northern Division, which includes Marengo County. This is not a case such as In re Breland , No. 16-2270-JCO, 2018 WL 1318954 (Bankr. S.D. Ala. Feb. 14, 2018) (Oldshue, J.), in which the trustee could have marketed the property. At this point and unless the trustee prevailed on the fraudulent transfer claims at trial, the property is not part of the bankruptcy estate; it was completely reasonable for the trustee to attempt to minimize costs to the estate while still gathering the information she needed to evaluate any settlement proposal through informal discovery.
The court has already outlined both its concerns and the trustee's concerns with SEPH controlling the district court litigation even if it offered to pay for the appraisals (to later be reimbursed out of any recovery).
The court acknowledges that Alabama courts have held that a tax assessment record is not admissible at trial to definitively establish the fair market value of property. See Presley v. B.I.C. Constr., Inc. , 64 So. 3d 610, 621 (Ala. Civ. App. 2009). In her capacity as a chapter 7 trustee in this court for approximately eight years (and representing trustees before that), the trustee frequently evaluates the value of assets in terms of what she could liquidate an asset for on behalf of the estate. The court finds her reliance on tax records to be analogous to an expert who is permitted under Federal Rule of Evidence 703 to rely on evidence that may not be admissible at trial in forming an opinion.
The court, the trustee, and the trustee's counsel could reasonably rely on tax records without the need for expensive appraisals to assist in evaluating the claims and to gauge the amounts that the trustee believes, in her business judgment, she could realize if certain properties ultimately came back into the estate. See, e.g., In re McDowell , 510 B.R. 660, 663 (Bankr. N.D. Ga. 2014) (court "must not rest its approval of any proposed settlement on a resolution of the ultimate factual and legal issues underlying the compromise disputes" but must "make a pragmatic decision based on all equitable factors"); Romagosa v. Thomas , No. 6:06-CV-301-ORL-19, 2006 WL 2085461, at *8 (M.D. Fla. July 25, 2006) ("The approval of a proposed settlement does not depend upon establishing as a matter of legal certainty that the subject claim ... is or is not worthless or valuable."), aff'd, In re Van Diepen , 236 F. App'x at 505. SEPH itself cited to tax records in its opposition brief (doc. 149). In short, the court is not convinced that the trustee's reliance on tax records shows that her judgment was not based on "a sound assessment of the situation[,]" See In re Harbour E. Dev. , 2012 WL 1851015, at *1, in forming her opinion of a reasonable settlement amount.
With these things in mind, the court now turns to the counts of the district court complaint as last amended (movants' ex. 45).
iii. Statute of limitations issues
SEPH filed its original complaint on June 30, 2016. All of the claims except the 2009 transfer of shares to Sharon fall within the statute of limitations for actual fraud (ten years for real property and six years for personal property) under Alabama Code § 8-9A-9. However, as discussed throughout, the "intent" element of actual fraud claims is fact-specific and generally a jury issue.
The constructive fraud claims are subject to a four-year statute for both real and personal property under § 8-9A-9. Several of the constructive fraud claims may be subject to a statute of limitations defense, as discussed in section iv. below. While the discovery rule of Alabama Code § 6-2-3 applies in fraudulent transfer cases, the issue of when SEPH discovered or should have discovered the alleged fraud will be for the jury. See SEPH v. St. Family Ltd. P'ship , No. 16-567-WS-MU, 2017 WL 1628898, at *6 (S.D. Ala. May 1, 2017) ; Int'l Mgmt. Grp. v. Bryant Bank , 274 So. 3d at 1015 n. 11. Without ruling on this issue, the court notes that most of the transfers were recorded at the time the transfer was made, which may constitute constructive notice to SEPH of the existence of those transfers and a duty to inquire further. See Int'l Mgmt. Grp. v. Bryant Bank , 274 So. 3d at 1014-15.
iv. The specific fraudulent transfer and conspiracy claims
Transfers of real property (145 Industrial Park and 179 Industrial Park) to SLG in April 2012: Count VIII
Neither the trustee nor the court are ignoring the fact that no value was paid for these transfers. But actual fraud would be difficult to prove at the summary judgment stage, and the defendants likely have a statute of limitations defense sufficient to overcome summary judgment on the constructive fraud claims since these transfers were more than four years before SEPH filed its complaint. See Ala. Code § 8-9A-9.
The trustee also testified that assuming she prevailed on this claim, these properties have little or no liquidation value. There are mortgages on the properties and essentially no value for the estate based on the values assigned by the tax assessor. At the time of the transfer of 145 Industrial Park, that property was mortgaged to Robertson Banking Company for approximately $175,000 with a tax appraised value of $176,160. (See movants' exs. 11-15; SEPH ex. 6). At the time of the transfer of 179 Industrial Park, that property was mortgaged to West Alabama Bank & Trust for approximately $198,000 with an appraised value of $167,560. (See movants' exs. 16-21; SEPH ex. 6).
Even if there was some value to be recovered, the trustee testified that there is a limited market for sale of commercial properties in Marengo County; in her experience, such properties are usually sold at auction or through a realtor with a 10% commission, which is consistent with what this court approves for sale of commercial properties. The court not only finds the trustee's business judgment in this respect to be reasonable but agrees with this assessment based on its own experience of approving such sales.
Transfer of 110 Barley Avenue to Elizabeth Gaddy (Gaddy's daughter) in October 2010: Count VII
The court and the trustee have taken into account that the defendants may have a valid statute of limitations defense to the constructive fraud claims; the statute of limitations under Alabama Code § 8-9A-9 is four years, the transfer took place in 2010, and suit was filed in 2016. Assuming success, the trustee testified that at the time of the transfer this property was unencumbered raw land worth about $8,000 based on the deed tax of $8.00. (See movants' ex. 31); Ala. Code § 40-22-1 (deed tax is $.50 per every $500, or $1.00 per every $1,000). Gaddy and his wife owned the property jointly, meaning the value of Gaddy's portion was only about $4,000. Gaddy testified that his daughter was moving from Fairhope, Alabama and he and his wife gave her this property to build a house on it, which is what she did. (See movants' ex. 32). The 2016 appraised property tax value of $201,380 cited by SEPH (see SEPH opp., doc. 149, p.4; SEPH ex. 5) includes the subsequently-constructed home, which did not exist at the time of the transfer.
Transfers of three Marengo County parcels to Sharon Gaddy (Gaddy's wife) in November 2009: Count VI
There is a potential statute of limitations defense to the constructive fraud claims since the transfers took place seven years prior to suit and the statute is four years. See Ala. Code § 8-9A-9. These parcels are the homeplace of Jerry and Sharon Gaddy and the surrounding land. Gaddy had only a one-half interest in the parcels at the time of the transfer. (See movants' exs. 33-36).
The trustee testified that she used the deed tax valuation of $247,000 (see movants' ex. 38), subtracted the mortgage amount of $120,000 (see movants' exs. 33-36), and then divided that number in half (for Gaddy's one-half interest); as a result, and taking into account the costs of liquidation, she believes that if she were to sell the homeplace property, she would net around $50,000 for the estate. The court does not find this analysis to be flawed or otherwise unreasonable. Further, the deed tax valuation of $247,000 is more than the valuation proffered by SEPH of $132,340. (See SEPH opp., doc. 149, pp. 3-4; SEPH ex. 4).
Transfer of Marengo County, Alabama parcels to Rembert, LLC in October 2009: Count V
As with the claims above, there is a possible statute of limitations defense to any constructive fraud claim. The trustee testified that these two parcels were co-owned by Gaddy and his brother as inherited property and they both signed the deed transferring the parcels to Rembert, LLC. (See movants' ex. 24). Rembert paid Gaddy's brother $92,000 for his one-half interest (see movants' exs. 25, 26); Gaddy would argue at trial and the evidence supports that he received a one-third interest in Rembert, LLC in exchange for transferring his one-half interest in the properties. (See mtn. to approve compromise, doc. 146, p.6).
The property tax records (movants' ex. 27; SEPH ex. 3) show the appraised value of the first parcel as approximately $290,000, but that includes a building valued at about $140,000 that was not constructed at the time of the transfer; the value of the land was listed as $150,500. The value of the second parcel was listed as $28,000. The trustee added these two amounts ($150,500 plus $28,000) and subtracted the $92,000 paid to Gaddy's brother for a total amount of $86,500. She then divided that number by three (for Gaddy's one-third interest) to value this claim at approximately $29,000. The court finds this to be a reasonable analysis given the uncertainty of recovery on this claim.
There is also an issue of intent, discussed below, in that Gaddy argues that he did not know about the Water's Edge potential default at this time.
Transfer of membership interest in Rembert, LLC to Elizabeth Gaddy in December 2011: Count III
The court concurs with the trustee's analysis that, in addition to a statute of limitations defense on any constructive fraud claim under the four-year statute of limitations, the probability of success is far from certain on this claim because Elizabeth paid Gaddy $46,000 for the transfer of the membership, tending to make this an issue of fact for the jury. (See movants' ex. 29; doc. 130, p.3); Ala. Code § 8-9A-3 (discussing "value" under the AUFTA). The value proffered by SEPH of $318,040 (see SEPH opp., doc. 149, p.3; SEPH ex. 3) for Rembert's assets includes the building that was not constructed at the time of transfer. Subtracting the building amount of $139,540 yields a value of $178,500 for the properties several years after the 2011 transfer. Dividing that number by three (for Gaddy's one-third interest) yields a value of $59,500. A jury could find that $46,000 was reasonably equivalent value in 2011. See, e.g., Wheeler Bros., Inc. v. Jones , No. 2:14-CV-1258-PGB-TFM, 2017 WL 2112349, at *3 (M.D. Ala. May 15, 2017) ("the touchstone of the reasonably equivalent value analysis is whether the parties exchanged comparable realizable commercial value") (citation and quotation marks omitted); see also Thompson Props. 119 AA 370 Ltd. v. Birmingham Hide & Tallow Co., Inc. , 897 So. 2d 248, 263 (Ala. 2004).
This is the trustee's written analysis of the claims in support of the first motion to approve compromise and she testified about this document at the hearing on the second motion to approve compromise.
Regardless, even valuing this claim at $60,000 assuming that the trustee prevailed, the court still finds the settlement to be within the range of reasonableness.
Transfers of membership interests in Gaddy Electric to Sharon Gaddy in November 2009 and December 2014: Counts I and II
SEPH contends that the trustee should have obtained Gaddy Electric's financial records, including profit and loss statements and information about the company's port-a-potty business. Gaddy Electric is a closely held family-owned business. Gaddy Electric's website, discussed at the hearing, lists Sharon and Elizabeth as managing members and Gaddy as operations manager. Gaddy testified that Gaddy Electric has approximately 50 employees and "32 or so" trucks and that most of the business's clients are "paper mill clients."
The trustee testified that in her experience family-owned businesses are difficult to market and generally have little value without the involvement of the family that owns it, i.e. , selling the business without the goodwill, reputation, and involvement of the Gaddy family would be very difficult. Although in a different context, the Eleventh Circuit — in the face of a strenuous objection by SEPH — has recognized that it is proper to evaluate the risk of critical employees (here, the Gaddys themselves) leaving a business in valuing the business. See generally In re Seaside Eng'g & Surveying, Inc. , 780 F.3d 1070 (11th Cir. 2015). The court finds the trustee's business judgment about the tenuous value of this claim to be reasonable.
There are other factors that make recovery on this claim uncertain. Two transfers are at issue: a 2009 transfer of 46% of the shares to Sharon and a 2014 transfer to Sharon of 44% of the shares. The defendants would argue at trial that the 2009 transfer took place so that Sharon (who had a 5% interest at the time) would then own a majority of company and the company would be classified as a majority-owned woman business. The court concurs with the trustee that if Gaddy was really trying to thwart SEPH (or any other creditor) at the time, he would have transferred his entire interest, not just 46%. And there is an issue of fact as to whether Gaddy knew about the letter from Vision Bank regarding the Water's Edge potential default at the time of the 2009 transfer. SEPH contends that Gaddy is lying about not receiving the letter (or reading the email attaching the letter); however, since all reasonable inferences would be resolved in the defendants' favor on summary judgment, this claim would likely go to trial. There is also likely a valid statute of limitations defense to both the actual and constructive fraud claims based on the 2009 transfer, making the likelihood of success on the claims related to that transfer low. See Ala. Code § 8-9A-9.
The same is true for the other transfers made in 2009.
The second transfer of 44% of the shares occurred in December 2014. While this transfer is more suspect than the 2009 transfer because the state court had recently ruled in SEPH's favor, there is evidence that Sharon paid $421,000 for the shares. (See movants' exs. 4-6). SEPH argues that the trustee should not have relied on the appraisal (referred to as the Aderholt appraisal in this litigation and admitted as movants' ex. 62 and SEPH ex. 27) of the shares at that value because that appraisal was prepared by Gaddy's accountant at Gaddy's request. But the court does not find the valuation to be somehow unreliable because Gaddy requested it; to the contrary, a jury could find that this evidence tends to show that Gaddy was attempting to determine an appropriate price and was not merely "gifting" the shares to his wife in an effort to avoid the state court judgment. Even so, the court is not definitively finding that the shares were worth that much but has taken into account that whether this amount constitutes reasonably equivalent value would be an issue for the jury. See, e.g., Thompson Props. v. Birmingham Hide & Tallow , 897 So. 2d at 263.
SEPH argues that the 2014 financial statement for Jerry and Sharon Gaddy (SEPH ex. 1) shows a total value of their membership interests in Gaddy Electric as $ 1.5 million. But even if a jury found that the 2014 transfer was fraudulent, the court concurs with the trustee that the Gaddy Electric shares would not be readily marketable without the Gaddys and that the value of the shares in that circumstance is highly speculative. The trustee also testified that there would be no value in Gaddy Electric's physical assets, all of which are encumbered.
Gaddy's payment of $293,945,51 to Gaddy Electric in December 2014: Count IV
Gaddy has a defense that this amount was actually due and owing to Gaddy Electric on account of a loan made from Gaddy Electric to Gaddy in October 2014. (See movants' exs. 40-42). Again, SEPH believes that it could prevail on this claim if it went to trial, but that is not a given and there is nonetheless a jury issue. But even valuing this claim at its full amount, the court still does not find that the $825,000 settlement falls below the lowest range of reasonableness.
Conspiracy claim: Count IX
The success of this claim would depend on the success of the other claims outlined above.
SEPH has not provided any genuine alternative analysis or stated its own view of a reasonable settlement value, other than to claim ignorance of the "real" amount of the claims because it never obtained its own property appraisals and financial records for Gaddy Electric. This is despite the facts that SEPH (1) brought the fraudulent transfer claims in the first place, and (2) could have requested a Rule 2004 examination at any point (including in the 2½ years the bankruptcy was pending before this settlement motion) to obtain information. SEPH refuses to give even a ballpark figure of what it contends the fraudulent transfer and conspiracy claims are worth; instead, it simply argues that they are worth more than what has been proposed and that the litigation should proceed as it desires. SEPH contends the trustee should fully (or almost fully) litigate the claims — hire expert appraisers, take depositions, engage in extensive written discovery, issue subpoenas, etc. — before even entertaining settlement. (See, e.g. , SEPH exs. 13, 14). But SEPH's argument that it would do things differently if it were in control does not mean that the proposed settlement fails to meet the Justice Oaks factors or is otherwise unreasonable.
SEPH's opposition brief, cited herein, does include some numbers, but those numbers do not take into account any mortgages or other factors, such as whether buildings existed on land at the time of the transfer.
To be clear, the trustee and the court are not saying that there was no bad conduct here — only that a settlement of $825,000 is reasonable in light of the circumstances, including defenses that would likely result in the district court case going to trial and the uncertainty of what a jury would do. Although there is a possibility that the trustee could recover more, that is not the standard. As demonstrated above, the court has taken SEPH's views into account and is not merely rubber stamping the trustee's proposal but has made its own independent review of the evidence and argument before it in light of the Justice Oaks factors. In sum, the court finds that the trustee's analysis of the claims and the settlement is reasonable under the circumstances and that the proposed settlement exceeds the likely net recovery to the estate if she were successful at trial. The court also finds that the settlement is fair and, at the very least, does not fall below the lowest point in a range of reasonableness.
Conclusion
To the extent the court has not specifically addressed any of the parties' arguments, it has considered them and determined that they would not alter the result. The court therefore grants the second motion to approve compromise. Because the court is granting that motion, the court denies SEPH's motion to pursue claims as moot.
ATTACHMENT
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
SE PROPERTY HOLDINGS, LLC, Appellant,
v. GADDY ELECTRIC & PLUMBING, LLC, et al. , Appellees.
CIVIL ACTION 1:20-00201-KD-N
ORDER
This matter is before the Court on Plaintiff SE Property Holdings, LLC's Motion for Stay Pending Appeal (Doc. 12); Trustee Terrie Owens' Response in Opposition (Doc. 18); Creditor Union State Banks' Response in Opposition (Doc. 19); and Defendants' Response in Opposition (Doc. 20). Also before the Court is Plaintiff SE Property Holdings, LLC's brief on appeal (Doc. 9); Trustee Terrie Owens' brief in opposition (Doc. 14); Creditor Union State Bank's brief in opposition (Doc. 15); Defendants' brief in opposition (Doc. 17); and Plaintiff SE Property Holdings, LLC's response (Doc. 21).
I. Background
In 2006 and 2008, debtor/defendant Jerry DeWayne Gaddy (Defendant Gaddy) and others guaranteed two business loans by Vision Bank to Water's Edge, LLC related to a real estate project in Baldwin County, Alabama. (Doc. 3 at 6; Doc. 4-70 at 17-26, 29-38). In June 2010, Water's Edge defaulted on its obligation to Vision Bank. (Doc. 4-71 at 57-60). Vision Bank demanded payment upon default from Defendant Gaddy and the other guarantors. (Id. ).
Vision Bank sold all of its assets around 2011 and is no longer in operation. (Doc. 3 at 7). Vision Bank sold the two loans at issue to Plaintiff SE Property Holdings, LLC (SEPH). (Id.; Doc. 4-72 at 2). In October 2010, Vision Bank (later SEPH) sued Water's Edge, LLC and the loan guarantors in Baldwin County Circuit Court. (Doc. 4-72 at 7; Doc. 7 at 118-19, 188). The Circuit Court entered judgment in favor of SEPH, against Defendant Gaddy and the others in the amount of $9,168,468.14. (Doc. 4-71 at 61-62).
Thereafter, in 2016, SEPH sued Defendant Gaddy, his wife, his daughter, and several family-owned business entities in the United States District Court for the Southern District of Alabama (1:16-cv-00332-JB-M and 2:16-cv-00560-KD-B) alleging numerous Alabama fraudulent transfer and conspiracy claims. SEPH's allegations against Gaddy span from 2009 through 2014; SEPH contends that Gaddy transferred property to his family and others with knowledge of Water Edge's potential, and later actual, default. (Doc. 9 at 12). SEPH outlined the alleged fraudulent transfers as follows:
These two case have since been consolidated with 1:16-00332-JB-M as the lead case. In April 2017, SEPH amended its complaint. (1:16-00332-JB-M, Doc. 47).
a. On or about December 15, 2014, days before SEPH obtained a judgment against Gaddy on his guaranty, Gaddy transferred 41% of the interest in Gaddy Electric to Sharon Gaddy, his wife. Despite the transfer, Gaddy remained operations manager of Gaddy Electric and used the entity to pay for personal expenses (Doc. 4-12, PageID. 1589-90; Doc. 9, PagelD 1349);
b. On or about November 2, 2009, Gaddy transferred 46% of the interest in Gaddy Electric to Sharon Gaddy. (Doc. 4-12, PageID.1590);
c. On or about December 23, 2014, six days after SEPH obtained its judgment against Gaddy and less than ten days after transferring his interest in Gaddy Electric, Gaddy transferred $293,945.51 to Gaddy Electric (Doc. 4-12, PageID.1591);
d. In October 16, 2009, two weeks after SEPH threatened the Water's Edge
guarantors with suit in the event of default, Gaddy transferred two parcels of real property in Marengo County, Alabama to Rembert, which was not formed until October 30, 2009. (Doc. 4-12, PageID.1591-92);
e. Gaddy transferred his membership interest in Rembert to Rice, his daughter (Doc. 4-12, PageID. 1591-92);
f. On November 20, 2009, Gaddy transferred three parcels of property located in Marengo County, Alabama to Sharon Gaddy. (Doc. 4-12, PageID.1592-93.) These parcels make up the Gaddy's homestead. (Doc.7, PageID. 1234-36);
g. On October 4, 2010, a week after SEPH sued Gaddy in the Water's Edge litigation, Gaddy transferred to Rice a 7.41-acre parcel of property in Marengo County, Alabama. (Doc. 4-12, PageID. 1593-94); and
h. On April 18, 2012, while the Water's Edge litigation was pending, Gaddy transferred two parcels of real property in Marengo County, Alabama, containing industrial property, to SLG Properties, which Sharon Gaddy formed in February 2012. (Doc. 4-12, PageID. 1594-95.)
(Doc. 9 at 12-14). And see (Doc. 3 at 8 (organizing the pertinent events from SEPH's district court complaint into a chronological table)).
Gaddy filed his Chapter 7 petition on April 26, 2017, staying the district court case. (Doc. 3 at 49). In June 2019, Trustee Terrie Owens (Trustee) became the party in interest in the district court case. (Doc. 3 at 9; Doc. 4-12 at 9). On May 9, 2019, the Trustee and Defendants filed a joint motion in the Bankruptcy Court to approve a compromise. (Doc. 3 at 318; Doc. 3 at 9). This first compromise sought to release the district court claims against the Estate for $375,000. (Doc. 3 at 321). SEPH filed an objection to the first compromise on June 5, 2019. (Doc. 3 at 329). Following additional briefing, the Bankruptcy Court denied approval of the first compromise because SEPH was willing to pay $400,000 to the Trustee in order to pursue the claims. (Doc. 3 at 436-37).
Subsequently, on November 15, 2019, the Trustee and Defendants filed the subject motion to approve a compromise that would settle the district court case for $825,000. (Doc. 3 at 443). SEPH filed its objection to the second compromise. (Doc. 3 at 460). Creditor Union State Bank (USB), the only other creditor in this case, supported the second compromise. (Doc. 3 at 537).
The Bankruptcy Court held an evidentiary hearing on January 27, 2020 that lasted eight hours. (Doc. 3 at 6). During this hearing, the Bankruptcy Court heard testimony from SEPH's Vice President, Jennifer Corbitt, the Trustee, and Gaddy. Thereafter, the Bankruptcy Court entered an order, thoroughly analyzing the applicable law and the evidence before it, and approved the second motion to compromise.
On March 31, 2020, SEPH filed a notice of appeal of the compromise order. (Doc. 3 at 575). On April 22, 2020 SEPH moved the Bankruptcy Court for a stay of the compromise order pending appeal. (Doc. 12-1). The Bankruptcy Court denied SEPH's motion for stay on May 7, 2020. (Doc. 12-2). Thereafter, SEPH filed a motion for stay in this Court pending resolution of the appeal. (Doc. 12).
II. Standard of Review
In a bankruptcy case, the district court functions as an appellate court. In re Sublett, 895 F.2d 1381, 1383-1384 (11th Cir. 1990). See also In re Nilhan Fin., LLC, 614 B.R. 379,383 (M.D. Fla. 2020) (citing Varsity Carpet Servs., Inc. v. Richardson (In re Colortex Indus., Inc.), 19 F.3d 1371, 1374 (11th Cir. 1994). In this capacity, [t]his Court reviews the Bankruptcy Court's legal conclusions de novo but must accept the Bankruptcy Court's factual findings unless they are clearly erroneous." Id. (citing In re JLJ Inc., 988 F.2d 1112, 1116 (11th Cir. 1993) ). And see In re Piazza, 719 F.3d 1253, 1260 (11th Cir. 2013) ("In a bankruptcy appeal, we sit as the second court of review of the bankruptcy court's judgment. Like the district court, we review a bankruptcy court's findings of fact for clear error and its conclusions of law de novo.") (citations omitted); In re Toledo, 170 F.3d 1340, 1342 (11th Cir. 1999) (same). "The factual findings of the bankruptcy court are not clearly erroneous unless, in light of all of the evidence, we are left with the definite and firm conviction that a mistake has been made." In re Whigham, 770 Fed.Appx. 540, 543-44 (11th Cir. 2019) (citation omitted). And see In re International Pharm. & Discount II, Inc., 443 F.3d 767, 770 (11th Cir. 2005) ("[t]he bankruptcy court's findings of fact are not clearly erroneous unless, in light of all the evidence, we are left with the definite and firm conviction that a mistake has been made[ ]").
"Discretionary determinations, [however,] including the approval of settlements of compromises, are reviewed for abuse of discretion." Brophy v. Salkin, 550 B.R. 595, 599 (S.D. Fla. 2015). See In re Superior Homes & Investments, LLC, 521 Fed.Appx. 895, 898 (11th Cir. 2013) ("we review a bankruptcy court's approval of a settlement agreement for abuse of discretion.") (citing Christo v. Padgett, 223 F.3d 1324, 1335 (11th Cir. 2000) ); In re Simmonds, 2010 WL 2976769, *1 (S.D. Fla. July 20, 2010) (accord); United States v. Hartog, Trustee for Bankruptcy Estate of Exporther Bonded Corp., 597 B.R. 673, 678 (S.D. Fla. 2019) (same). "An abuse of discretion occurs if the judge fails to apply the proper legal standard or to follow proper procedures in making the determination, or bases an award upon findings of fact that are clearly erroneous." In re Red Carpet Corp. of Panama City Beach, 902 F.2d 883, 890 (11th Cir. 1990) ; In re Air Safety Intern., L.C., 336 B.R. 843, 852 (S.D. Fla. 2005) (accord). "Bankruptcy court decisions on enforcing settlement agreements are accorded deference because bankruptcy courts are often in the best position to determine whether a settlement is fair and equitable." In re Air Safety Intern., L.C., 336 B.R. at 852 (citing In re Purofied Down Prods. Corp., 150 B.R. 519, 522 (S.D.N.Y. 1993) ). In reviewing a bankruptcy court decision, the district court should note that the bankruptcy court had only to "canvass the issues and see whether the settlement ‘falls below the lowest point in the range of reasonableness.’ " In re Southeast Banking Corp., 314 B.R. 250, 272 (Bankr. S.D. Fla. 2004) (citations omitted). And see In re Martin, 490 F.3d 1272, 1275 (11th Cir. 2007) ("the bankruptcy court did not err in approving the settlement agreement because it did not fall below the lowest point in a range of reasonableness."). The reviewing court may affirm the Bankruptcy Court's decision on any basis supported by the record. Big Top Koolers. Inc. v. Circus-Man Snacks, Inc., 528 F.3d 839, 844 (11th Cir. 2008).
IV. Discussion
1. The Justice Oaks Factors
"Bankruptcy Rule 9019 provides that after conducting a hearing on notice to creditors, the Bankruptcy Court may approve a compromise or settlement." In re Arrow Air, Inc., 85 B.R. 886, 890 (Bankr. S.D. Fla. 1988). And as discussed supra , "[i]t has long been the law that approval of a settlement in a bankruptcy proceeding is within the sound discretion of the Court, and will not be disturbed or modified on appeal unless approval or disapproval is an abuse of discretion." Id. at 890-91.
"A bankruptcy court should only approve a settlement when it is fair and reasonable and equitable and in the best interests of the state." In re Vazquez, 325 B.R. 30, 35-36 (Bankr. S.D. Fla. 2005) (citing Connecticut Gen. Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortgage Corp.), 68 F.3d 914, 917 (5th Cir. 1995) ). A bankruptcy court must consider the four factors outlined in Wallis v. Justice Oaks II, Ltd., 898 F.2d 1544, 1549 (11th Cir. 1990) to make this determination. These factors are: 1) the probability of success in the litigation; 2) the difficulties, if any, to be encountered in the matter of collection; 3) the complexity, expense, inconvenience, and delay of the litigation involved; and 4) the paramount interest of the creditors and the proper deference to their reasonable views. Justice Oaks, 898 F.2d at 1549.
"While a bankruptcy court's decision to approve a settlement is reviewed under the abuse of discretion standard, ‘the bankruptcy judge must actually exercise his discretion. He may not simply accept the trustee's word that the settlement is reasonable.’ " In re Simmonds, 2010 WL 2976769, *3 (S.D. Fla. July 20, 2010) (citing In re American Reserve Corp., 841 F.2d 159, 162 (7th Cir. 1987) ). The bankruptcy judge must be informed of all relevant facts and information necessary to form an independent judgment as to whether the settlement is fair and reasonable under the circumstances. Protective Committee for Indep. Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). See e.g., In re Vazquez, 325 B.R. at 36 (the bankruptcy judge must independently evaluate the fairness and reasonableness of a settlement); In re Arrow Air, Inc., 85 B.R. at 886 (accord). And, "[a] bankruptcy court is not obligated to actually rule on the merits of the various claims ‘only the probability of succeeding on those claims.’ " In re Van Diepen, P.A., 236 F. App' x 498, 503 (11th Cir. 2007) (quoting In re Justice Oaks, 898 F.2d at 1549 ). "A bankruptcy court does not abuse its discretion in approving a settlement agreement unless the settlement agreement falls below the lowest point in the range of reasonableness." United States v. Hartog, Trustee for Bankruptcy Estate of Exporther Bonded Corp., 597 B.R. 673, 678 (S.D. Fla. 2019) (citing In re Morgan, 2011 WL 13185742, *4 (S.D. Fla. Feb. 15, 2011) ). And see In re Pullum, 598 B.R. 489, 492-93 (Bankr. N.D. Fla. 2019) (explaining that the bankruptcy court's role "is not to decide the numerous questions of law and fact raise by [the litigation] but rather to canvass the issue[s] and see whether the settlement falls below the lowest point of reasonableness."). Moreover, "[s]ettlements are favored in bankruptcy and appellate courts have held that a bankruptcy court's approval of a compromise must be affirmed unless the court's determination is either (1) completely devoid of minimum evidentiary support displaying some hue of credibility, or (2) bears no rational relationship to the supportive evidentiary date." Matter of Marvelay, LLC, 2019 WL 3334706, *6 (Bankr. N.D. Ga. July 23, 2019). And see In re Harbour East Development, Ltd., 2012 WL 1851015, *5 (Bankr. S.D. Fla. 2012) ("Compromises are favored in bankruptcy, especially were protracted litigation can erode the value of the estate and delay administration of the case to the detriment of all creditors.").
" ‘The [Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968) ] rule does not require the bankruptcy judge to hold a full evidentiary hearing or even a ‘mini-trial’ before a compromise can be approved... Otherwise, there would be no point in compromising; the parties might as well go ahead and try the case... Instead, the obligation of the court is to canvass the issues and see whether the settlement falls below the lowest point in the range of reasonableness.’ " See Brown v. Harris, 2011 WL 3473312, *2, n.5 (M.D. Ga. Aug. 9, 2011) (citing Collier on Bankruptcy ¶ 9019.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (internal citations omitted)).
A review of the record indicates the Bankruptcy Court thoroughly considered each of the Justice Oaks factors. The Bankruptcy Court also gave "weight to the competency and experience of both the trustee and trustee's counsel in supporting the settlement." (Doc. 3 at 18). The Bankruptcy Court did not "simply accept the trustee's word that the settlement is reasonable.’ " In re Simmonds, 2010 WL 2976769, *3 (S.D. Fla. July 20, 2010) (citing In re American Reserve Corp., 841 F.2d 159, 162 (7th Cir. 1987) ). Rather, the Bankruptcy Court assessed the Trustee's evaluations, her credibility, her thoroughness, and her experience in addition to independently reviewing the information before it. The Bankruptcy Court found the Trustee's business judgment reasonable; it also found the settlement reasonable. For the reasons discussed herein, the Court finds that the Bankruptcy Court did not abuse its discretion.
a. The probability of success in the litigation
First, as to the probability of success in the litigation, the Bankruptcy Court considered each of the district court claims and applicable defenses. Ultimately, the Bankruptcy Court concluded that the settlement amount likely exceeded the potential recovery if successful at trial.
The district court claims are brought pursuant to Alabama's Uniform Fraudulent Transfer Act (AUFTA) for actual fraud (Ala. Code § 8-9A-(l)) and constructive fraud ( Ala. Code § 8-9-4(c) ). The Bankruptcy Court noted that Defendants had potential statute of limitation defenses to several of the constructive fraud claims. See Ala. Code § 8-9A-9 (constructive fraud claims however have a four-year statute of limitations for real and personal property). And, while the actual fraud claims might be timely, these claims are not likely to be resolved on summary judgment because the "intent" element of actual fraud claims is fact-specific and typically a jury question. (Doc. 3 at 24). And see Ala. Code § 8-9A-9 (ten-year statute of limitations for real property and six-year statute of limitations for personal property). The Trustee testified to the value of the different transfers, several of which had little value because of large mortgage encumbrances or because of Defendant Gaddy's only partial interests in the property. (Id. at 25-33). For example, the 145 Industrial Park property was mortgaged for $175,000 with a tax appraisal of $176, 160 at the time of transfer. (Id. at 25). And, the transfer of Defendant Gaddy's interest in 110 Barley avenue to his daughter was valued at $4,000, because Defendant Gaddy owned the property jointly with his wife. (Id. ).
The bankruptcy court acknowledged that while the discovery rule of Alabama Code § 6-2-3 applies to fraudulent transfer cases, a jury would decide when SEPH discovered or should have discovered the alleged fraud. (Doc. 3 at 24). Moreover, "[w]ithout ruling on the issue, the [bankruptcy] court notes that most of the transfers were recorded at the time the transfer was made, which may constitute constructive notice to SEPH of the existence of those transfers and a duty to inquire further." (Id. (citing Int'l Mgmt. Grp. v. Bryant Bank, 274 So.3d 1003, 1014-15 (Ala. 2018) (collecting cases that held recordation of transfers of the mortgage constitute constructive notice of the existence of said transfers))). Because of this, the Defendants could potentially assert a statute of limitations defense to the constructive fraud claims.
The Bankruptcy Court considered the Trustee's calculations and found her valuations of the transfers and properties at issue reasonable. (Id. at 25-32). And, the Bankruptcy Court highlighted that recovery on many of the district court claims is uncertain because of the numerous fact-issues that a jury would be left to decide. (Id. ). After considering SEPH's views, the Trustee's testimony, and the claims independently, the Bankruptcy Court determined that a $825,000 definite settlement was reasonable, particularly given the uncertainty of what a jury would decide if the claims proceeded to trial. (Id. at 25-33). The Bankruptcy Court continued that "the proposed settlement amount exceeds the likely net recovery to the estate if...successful at trial." (Id. at 33).
SEPH addresses this factor together with the third factor. (Doc. 9 at 54). SEPH contends the Bankruptcy Court should not have emphasized the desire to avoid delay when the Trustee herself contributed to delaying the district court case by waiting two years to move to be substituted in the district court case. (Doc. 9 at 55). And, per SEPH, the Bankruptcy Court did not give enough weight to its offer to advance litigation costs so that the only burden on the Estate would be the "passage of time." (Id. at 56). Lastly, SEPH asserts approving the settlement went against the "basic purposes of the Bankruptcy Code" because it was an "unreasonable and unproven settlement of fraudulent transfer claims [which] allow[ed] debtors who are anything but honest and unfortunate to use the bankruptcy system to bless their fraud." (Id. at 57).
The Bankruptcy Court addressed each of these arguments in its order. First, the Bankruptcy Court stated its order was "not [a] finding that no fraudulent transfers took place." (Doc. 3 at 17). The Bankruptcy Court instead emphasized the time value of money, the benefits in avoiding delay, and the public policy favoring certain and prompt settlements. Moreover, the Bankruptcy Court explained that the passage of time is a significant consideration especially when the amount to be recovered in litigation (if any) is speculative. (Id. at 19). The Bankruptcy Court also reviewed the Trustee's calculations and reasoning, in addition to conducting its own independent review as discussed above. The Bankruptcy Court considered each of SEPH's arguments (which it reiterates on appeal) and concluded the settlement was equitable and reasonable. As discussed infra, the benefits of certainty now, the time value of money, and the public policy favoring settlement supported approving the settlement here. The Court agrees with the Bankruptcy Court's evaluation of the probability of success and concludes that the first Justice Oaks factor supports the Bankruptcy Court's decision to approve the settlement agreement. The Court finds no abuse of discretion.
b. The difficulties, if any, to be encountered in the matter of collection
As to factor two, the difficulties, if any, to be encountered in the matter of collection, the Bankruptcy Court concluded "collection difficulties for the trustee related to the settlement amount are not at issue." (Doc. 3 at 16). The Bankruptcy Court discussed what the Trustee could recover at trial if successful in analyzing the first factor. (Id. at 26-33). It reasoned that the amount recoverable after fully litigating the claims is speculative. Moreover, the Trustee testified, and the Bankruptcy Court agreed, that even if successful, "the settlement amount exceeds the likely net recovery to the [E]state." (Doc. 3 at 33).
SEPH contends the Bankruptcy Court was incorrect in its assessment of this factor because the proper inquiry is not the difficulty in collecting settlement but instead the difficulty in collecting a judgment against the Defendants. (Doc. 9 at 47). SEPH does acknowledge that the Bankruptcy Court separately analyzed how much could be collected if a judgment was obtained. (Doc. 9 at 47). From there, SEPH continues that the Bankruptcy Court improperly deferred to the Trustee's valuations and opinions. (Id. ). "Particularly, the Bankruptcy Court deferred to the Trustee's conclusions regarding a number of these claims even though the Trustee failed to obtain nonbiased information regarding the claims." (Id. ).
The Bankruptcy Court analyzed each transfer at issue in the district court case, analyzed the difficulties litigation would pose, and estimated the value of the transfers in the context in the of the settlement. SEPH's arguments on appeal are similar to the arguments in made in its opposition to settlement; the Bankruptcy Court addressed SEPH's contentions in its order approving the settlement. (Doc. 3 at 31-32). Moreover, while SEPH quarreled with the Trustee's valuations but it did not "provide[ ] any genuine alternative analysis or state[ ] its own view of a reasonable settlement value, other than to claim ignorance of the ‘real’ amount of the claims because it never obtained its own property appraisals and financial records for Gaddy Electric." (Doc. 3 at 32). SEPH's argued in its opposition to the settlement and again on appeal that the Trustee's valuations were understated and she should have engaged in more thorough discovery before entertaining settlement. (Doc. 9 at 51). That SEPH would do things differently than the Trustee or that more could be recovered if litigated fully is not the proper inquiry. The question is not whether an objecting party "would have made a different decision under the same circumstances—the question is whether the [t]rustee's decision was reasonable." In re Harbour East Development. Ltd., 2012 WL 1851015, *5 (S.D. Fla. May 21, 2012). And, "[a] bankruptcy court is not obligated to actually rule on the merits of the various claims ‘only the probability of succeeding on those claims.’ " In re Van Diepen, P.A., 236 Fed.Appx. 498, 503 (11th Cir. 2007). The Bankruptcy Court's inquiry focused on the probability of success in litigation, taking into account the costs and hurdles associated with litigation, as well as the Trustee's testimony and basis for her testimony. Ultimately, it concluded that the settlement was fair and reasonable because collecting a judgment is uncertain and would likely be less than the settlement amount. The Court finds no abuse of discretion in the Bankruptcy Court's review and determination.
SEPH estimated property values based on additions to real property added after the alleged fraudulent transfers. SEPH also argued that the Trustee and bankruptcy court erred by considering the encumbrances on property at the time of transfer instead of getting new appraisals that show the current balances of mortgages. The Trustee retorts that if the transfers were avoided, the value added to the Estate would be determined at the time of transfer. Alabama Code Sections 8-9A-8(b) and 8(c) state judgment for a voided transfer is determined at the time of transfer, "subject to adjustment as the equities may require." SEPH has not explained why an "adjustment as the equities may require" justifies estimating the value of the alleged fraudulent transfers at a time later than the time of transfer. As such, the Trustee's valuations are reasonable.
c. The complexity, expense, inconvenience, and delay of the litigation involved
For factor three— the complexity, expense, inconvenience, and delay of the litigation involved— the Bankruptcy Court explained that "while most of the fraudulent transfer claims are not complex as far as the elements of the claims are concerned..., there is value in getting matters resolved." (Doc. 3 at 18). The Bankruptcy Court noted that its approval of the settlement was not a finding that no fraudulent transfers occurred. (Id. at 17). Instead, the Bankruptcy Court, found the settlement to be a fair, reasonable, and adequate alternative to costly and prolonged litigation. (Id. ).
The Bankruptcy Court initially noted that it gave "weight to the competency and experience of both the [T]rustee and [T]rustee's counsel in supporting the settlement." (Id. at 18). The Trustee has evaluated "hundreds of fraudulent transfer" claims" during her career as a bankruptcy attorney. (Id. ). In evaluating the claims here, the Trustee considered the district court record, applicable defenses and collection issues as well as engaging in informal discovery to determine asset values and liabilities. (Id. ). The Trustee also hired another experienced bankruptcy attorney to assist her. (Id. ).
Moreover, the Trustee used tax records to gauge the value of the assets at issue in the district court claims. (Id. at 22). SEPH also took issue with the Trustee's use of tax records and contended that the Trustee should have obtained independent appraisals of the transferred properties at issue instead. (Id. ). SEPH pointed out that tax records are not admissible at trial to definitively establish the fair market value of property so the Trustee's reliance on tax records was misplaced. (Id. at 23). The Bankruptcy Court noted the Trustee's use of tax records was akin "to an expert who is permitted under Federal Rule of Evidence 703 to rely on evidence that may not be admissible at trial in forming an opinion." (Id. ). The Trustee testified, and the Bankruptcy Court agreed, that hiring independent appraisers would have taken money from the Estate; the Trustee relied on the tax records in an effort to minimize costs while gathering the information needed to make an informed decision. (Id. ). Both the Trustee and her counsel recommended settlement approval. (Id. at 18). The Bankruptcy Court found the Trustee reasonably exercised her business judgment in recommending settlement approval.
As to delay, the Bankruptcy Court considered that this matter began over ten years ago with the Water's edge default and litigation could extend for many years into the future. (Id. at 19). The Bankruptcy Court noted that the elements of the district court claims may not be complex, but litigation nonetheless would require extensive discovery that would both take substantial time and would be costly. (Id. at 19-20). The Defendants also requested a jury trial; another factor that would extend the district court litigation. (Id. at 21). Additionally, fraudulent transfer claims typically are not resolved on summary judgment, further extending resolution of these claims. (Id. at 20-21). In considering the impact of a delay on the Estate, the Bankruptcy Court and Trustee emphasized the time value of money and that public policy favors settlement to drawn out litigation. (Id. at 19). The Trustee determined that it would be advantageous for the Estate to expeditiously close out the district court case instead of burdening the Estate with costly litigation, "drawn out to a pointless end." (Id. ). The Bankruptcy Court found this position reasonable, highlighting that "[o]ne of the goals of the bankruptcy laws is to provide a prompt and efficient adjustment of the debtor-creditor relationship. This goal is not furthered by protracted litigation." (Id. (citing In re Shoemaker, 155 B.R. 552, 556 (Bankr. N.D. Ala. 1992) ). Based on these considerations, the Bankruptcy Court found the settlement equitable and reasonable. This Court holds that the Bankruptcy Court adequately took into account the time and expense of litigation; the Trustee faced the possibility of costly and protracted litigation over the district court claims.
d. The paramount interest of the creditors and the proper deference to their reasonable views
Last, the fourth Justice Oaks factor considers the paramount interest of the creditors and the proper deference to their reasonable views. The Bankruptcy Court explained that this is a case with only two creditors—SEPH and USB. USB did not object to the settlement; but SEPH, the majority creditor did. The Bankruptcy Court pointed out that the creditors interest is only a part of its consideration in deciding whether to approve a settlement. And, while the bankruptcy judge must consider the reasonable views of the creditors, "no case holds that creditors have an absolute ‘veto power’ over approval of a settlement. Instead, they speak to ‘proper deference’ to their ‘reasonable views.’ " In re Vazquez, 325 B.R. at 37 (citing Foster Mortgage, 68 F.3d at 917 ). As one court explained:
In that regard, it should be noted that Such a "veto power" would run counter to the very idea that the court's task is to independently assess the proposed compromise. "Proper deference to [the creditor's] reasonable views" is not the same as saying that the court must defer to the creditor simply because the only creditor (or a majority of creditors) does not think the settlement is fair. It is not the creditors' task to determine the fairness of a proposed settlement; it is the court's obligation to make that determination while making certain not to ignore their legitimate views or concerns.
In re Vazquez, 325 B.R. at 37 (internal citations omitted). A Trustee is not an agent of the creditors; a Trustee is an officer of the court whose job it is to maximize assets for the Estate. Id. at 37-38. The Trustee, in her fiduciary capacity, may decide it is in the Estate's best interest to litigate matters to completion. Id. In other circumstances though, the Trustee's investigation of the facts and relevant law might lead her to conclude settlement is the best option to "expedite litigation and avoid uncertainty." Id.
Here, the Bankruptcy Court considered the creditors views and determined that even though SEPH opposed the settlement, deference to the creditors did not mean that SEPH got to single-handedly veto the settlement. (Doc. 3 at 13-14). And, the Bankruptcy Court noted that USB, the only other creditor, supported the settlement. (Id. at 13). In sum, SEPH's contention in opposing the settlement, which it reiterated on appeal, was that its opposition to settlement was reasonable and therefore should be afforded deference. (Doc. 9 at 43-44). SEPH's alternative to settlement involved an offer to advance discovery costs, to help fund the litigation and to buy out USB if it were allowed to litigate the district court claims on behalf of the Estate. (Id. ). But, USB opposed being bought out. Additionally, the Bankruptcy Court, the Trustee, and USB each voiced concern about SEPH, a non-fiduciary, advancing its own interests over that of the Estates if it were allowed to litigate the claims. (Doc. 3 at 15). The Bankruptcy Court also discussed the interest of creditors in receiving money now versus at some unspecified date in the future if the claims were to be litigated fully. Lastly, the Bankruptcy Court explained that under SEPH's proposal, "SEPH will have an allowed claim in this bankruptcy, usurping the trustee's ability and duty to object to the claim if warranted.[ ]" (Doc. 3 at 15). "Proper deference to the creditor's reasonable views is not the same as saying that the court must defer to the creditor simply because the only creditor (or the majority of creditors) does not think the settlement is fair." In re Vazquez, 325 B.R. at 37. The record supports that settlement was in the best interest of the creditors because drawn-out litigation, with success being uncertain, would serve only to diminish the Estate's assets.
SEPH argues that USB "offered little to no explanation as to why" it did not want SEPH to buy it out other than "merely asserting it did not wish to ‘have any dealings with SEPH concerning Union State Bank's claim.’ " (Doc. 9 at 43). According to SEPH, USB "would have been just as well off under SEPH's alternate proposal as it is under the second compromise." (Id. ).
SEPH argues that it has "repeatedly stuck its neck out for the benefit of both itself and Union State Bank." But, it was reasonable for the Bankruptcy Court to raise concern that a non-fiduciary, as compared to a Trustee who is an agent of the court, might not place the Estate's interests over that of its own.
Thus, it is evident from the record that the Bankruptcy Court carefully considered each of the Justice Oaks factors in approving the settlement. Therefore, the Court does not find that the Bankruptcy Court abused its discretion.
2. Trustee's Business Judgment
The Bankruptcy Court reasonably examined that the Trustee exercised sound business judgment after evaluating the strengths and weaknesses of the potential claims, the time and expenses associated with litigating the district court claims, and the likelihood of success if the claims were litigated. "The decision of a [t]rustee in Bankruptcy to enter a settlement is made within his or her business judgment." In re Simmonds, 2010 WL 2976769, *3 (S.D. Fla. July 20, 2010). " ‘Compromises are generally approved [if the Bankruptcy Court finds that] they meet the business judgment of the trustee.’ " Id. (quoting Indian Motorcycle Co. Inc., 289 B. R. 269, 282-83 (1st Cir. 2003) ). SEPH does not dispute this rule but instead contends the Bankruptcy Court merely rubber stamped the Trustee's decision without conducting a meaningful, independent review the settlement and the Trustee's means of arriving at such settlement. (Doc. 9 at 59). See e.g., In re Simmonds, 2010 WL 2976769 at *3 (finding the Bankruptcy Court did not rubber stamp the trustee's decision because it mindfully considered the Justice Oaks factors).
It is important to note that:
the trustee is not the "agent" of the creditors. The trustee's obligation—as an officer of the court—is to maximize assets as best as possible under the circumstances, not to serve as an extension of a creditor whose other collection efforts have been forestalled. In many cases, the trustee's fiduciary duties may well require litigating a matter to conclusion; in other instances, a trustee may find that a settlement is the most effective way to expedite litigation and avoid
uncertainty. And in those instances in which the trustee's comprehensive examination of the underlying facts leads to a conclusion that further litigation will lead only to diminishing returns, protracted investigation, or costly litigation with absolutely "no guarantee as to the outcome," an inquiring court is to afford the trustee "wide latitude."
In re Vazquez, 325 B.R. at 38 (internal citations omitted).
Before the Court is a Trustee who has conducted an extensive review of the possible claims against the debtors. The Trustee believes that $825,000.00 represents a true "premium" settlement, especially in light of the speculative, protracted alternative of litigating the district court claims. The Trustee reviewed the legal issues surrounding the various claims which indicated that the Trustee is unlikely to receive a larger amount through litigation. Though the Trustee did not conduct the extensive discovery SEPH thought was needed, the Trustee did conduct a meaningful and thorough investigation. In choosing to conduct informal discovery, the Trustee sought to minimize costs to the Estate while obtaining the necessary information needed to fully evaluate the claims. The Trustee highlighted the prompt disbursements of distributions from the Estate without additional litigation expenses as well as the ability of the Defendants to pay the settlement now. (Doc. 14 at 18). The Trustee considered the potential for a change in financial abilities in the future. (Id. ). Specifically, the Trustee pointed out that it considered SEPH's parent company's statement that SEPH is "liquidating its loan portfolio and winding down" which calls into question SEPH's future financial abilities. (Id. at 18, n.4). Thus, the Trustee's "comprehensive examination of the underlying facts [led] to a conclusion that further litigation [would] lead only to diminishing returns, protracted investigation, or costly litigation with absolutely "no guarantee as to the outcome[.]" In re Vazquez, 325 B.R. at 38. The Bankruptcy Court considered the Trustee's testimony, independently evaluated the fairness of the settlement and approved the settlement. The Court finds no abuse of discretion.
3. Contested Discovery
SEPH argues the Bankruptcy Court abused its discretion by denying its request for contested matter discovery. (Doc. 9 at 61). SEPH requested additional discovery pursuant to Bankruptcy Rule 9014 in order to analyze property valuations to see if the settlement amount was proper. (Id. at 63). SEPH asserts Bankruptcy Rule 9014 was the proper vehicle for discovery, not Bankruptcy Rule 2004.
The Bankruptcy Court asked SEPH to "outline what discovery it believed it needed to evaluate the trustee's first settlement proposal" to which SEPH responded with what the Bankruptcy Court "considered to be essentially full litigation of the district court case through the discovery stage." (Doc. 3 at 12). SEPH "reiterated its earlier request that essentially asked for full discovery and a trial on the merits of the fraudulent transfer claims" in its opposition to the second motion. (Id. ). The Bankruptcy Court held an evidentiary hearing during with SEPH was allowed to "extensively question witnesses (including the trustee)." The Bankruptcy Court is not required to hold a mini-trial to approve a settlement agreement; to require such would render settlement pointless. Brown v. Harris, 2011 WL 3473312, *2, n.5 (M.D. Ga. Aug. 9, 2011). An evidentiary hearing is also not required. In re Laing, 2007 WL 4482263, *3 (M.D. Fla. Dec. 17, 2007). The Bankruptcy Court did not abuse its discretion in denying SEPH's motion for contested discovery.
V. Conclusion
For the reasons discussed herein, SEPH's appeal is DENIED , the Bankruptcy Court's approval of the Settlement is affirmed. Accordingly, SEPH's motion for a stay is moot. (Doc. 12).
Nevertheless, SEPH's motion for a stay was due to be denied. The Bankruptcy Court denied SEPH's first motion for a stay. (Doc. 12-1; Doc. 12-2). Thus, the Bankruptcy Court's denial of the stay is reviewed by this Court for abuse of discretion. See e.g., In re Forest Oaks, 2010 WL 1904340, *2 (S.D. Ala. May 10, 2010) ; In re Land Ventures for 2, 2010 WL 4176121, *1 (M.D. Ala. Oct. 18, 2010) (accord). Granting a stay pending an appeal is "an exceptional response granted only upon a showing of four factors: 1) that the movant is likely to prevail on the merits; 2) that absent a stay the movant will suffer irreparable damage; 3) that the adverse party will suffer no substantial harm from the issuance of the stay; and 4) that the public interest is served by issuing the stay." Garcia-Mir v. Meese, 781 F.2d 1450, 1453 (11th Cir. 1986). Upon a careful review of the record, this Court holds that the Bankruptcy Court did not abuse its discretion in denying the motion to stay.
DONE and ORDERED this the 20th day of August 2020.