Opinion
Case No. 95-20322
February 22, 1996
DECISION ON MOTION FOR APPROVAL OF COMPROMISE AND SETTLEMENT AND MOTION TO SELL PROPERTY FREE AND CLEAR OF LIENS AND INTEREST
THESE MATTERS came before the court on the motion of Thomas M. Falcey, the chapter 11 trustee of this estate, for approval of a compromise and settlement and for authority to sell property free and clear of liens and the interest of Donald H. Albrecht. The court has considered the evidence presented, the arguments of counsel and for the reasons set forth, grants both motions.
JURISDICTION
This court has jurisdiction of these matters pursuant to 28 U.S.C. § 157 (a) and 1334. These matters are core proceedings within the meaning of § 157(b)(2)(A), (N), (O).
FACTS
Background
Rivermeadows Associates, Ltd., (PAL) is a California limited partnership which filed a chapter 11 bankruptcy in the Central District of California on January 17, 1995. On May 12, 1995 the case was transferred to the District of Wyoming. Immediately thereafter some creditors moved for the appointment of a chapter 11 trustee. After the motion was granted the United States trustee appointed Mr. Falcey.
This complex estate is involved in numerous legal disputes, including the litigation which Mr. Falcey seeks to resolve by settlement. The trustee proposes to settle two (2) lawsuits between the estate, two (2) corporations both named Rivermeadows, Inc., and Mr. Albrecht on the one hand, and Edmund Opler, Jr., Patricia Ann Opler, World's Finest Chocolates, Inc., (WFC) and two (2) Opler living trusts on the other. The trustee refers to these cases as the Opler litigation.
The substance of both cases is essentially identical, but the active litigation is taking place in the United States District Court for the District of Wyoming. The other case is pending in the United States District Court for the Northern District of Illinois. The claims and positions of the parties are described thoroughly in the trustee's motion and in an order issued by the United States District Court in Wyoming. The Edmund Opler, Jr. Living Trust v. Donald H. Albrecht, No. 93-CV-0199-B, Order on Motions for Summary Judgment at 13 (D. Wyo. May 30, 1995). Thus, this court will not discuss them at length.
The claims and counterclaims arise out of a transaction for the purchase of four lots in Teton County, Wyoming (Fish Creek lots) by the Oplers from RAL in 1987. The purchase price of $1,600,000 was paid and the lots were conveyed by warranty deed. Oplers hold record title, subject to a Notice of Lis Pendens executed jointly by PAL and Mr. Albrecht, individually, which was recorded against the lots. The disputes center around an alleged agreement between Mr. Opler and Mr. Albrecht collaterally related to the purchase.
When Mr. Falcey was appointed, the Wyoming litigation was scheduled for trial three months hence. The United States District Court had dismissed the claims against WFC, but all other matters remained for trial. Mr. Falcey employed Donald I. Schultz and Marilyn Kite of the law firm of Holland and Hart to represent the estate in the litigation.
The attorneys also represented the trustee at settlement negotiations with the Oplers. After three days of settlement discussions held in late September, a settlement agreement was reached which is now before this court for approval along with the related motion to sell property of the estate.
The debtor objected to both motions. At the hearing, the debtor moved the court for a continuance pending the future presentation of a proposed postpetition financing arrangement being procured by Mr. Albrecht. Mr. Albrecht is the general partner of the debtor. The court denied the motion.
Mr. Albrecht presented testimony and argument in opposition to the settlement. The objections fall into three basic areas. First, the debtor alleges that the settlement was negotiated by counsel without sufficient contact with and information from Mr. Albrecht and the debtor's former litigation counsel, Gerald Mason. Thus, the debtor asserts that the value of the claims against the Opler parties has been underestimated. No concrete evidence was presented to establish this allegation.
Second, the debtor contends that the settlement terms themselves are vague and will lead to future disputes with the Oplers or other parties. Last, the debtor raises speculation concerning the possible consequences to the estate from any future litigation between the Oplers and Mr. Albrecht or RAL's previous counsel. The debtor contends that future litigation could create claims by the Oplers against other parties who would then seek reimbursement from PAL. WFC has agreed to indemnify the estate for such claims, but the Oplers have not.
The Settlement Agreement
The essential elements of the settlement agreement are:
1. The Oplers will convey the Fish Creek lots to RAL;
2. Both the Oplers and PAL will release and dismiss all of their respective claims and counterclaims against each other. PAL will release the lis pendens it recorded against the lots. No cash payment will be made by either side,
3. If the trustee's motion to sell the Fish Creek lots is approved, the trustee will convey, by trustee's deed, all right title and interest of the estate in the lots to the Oplers free and clear of liens and of the Notice of Lis Pendens filed by Donald H. Albrecht, individually, against the lots along with lifetime fishing rights;
4. If the motion to sell free and clear of liens and interest is not approved, the trustee will grant the Oplers a nonrecourse mortgage on the lots in the amount of their current fair market value, established at $2,000,000;
5. The agreement essentially reinstates the 1987 status quo, including the rights, obligations, and exceptions granted by the original warranty deed from PAL to the Oplers; and
6. All claims pending between the Opler parties and Donald Albrecht and the two Rivermeadows corporations will be unaffected by the settlement agreement. WFC has agreed to indemnify the estate for any third party claims against the estate which may result from that or subsequent, related litigation.
The trustee characterizes the settlement as a "walk away" agreement, subject to the obligations and rights already in effect since 1987. The obligations of PAL include road and utility improvements required by the Crescent H Guest Ranch Subdivision — First Filing in Teton County Plat No. 586. The trustee estimates the cost of this construction at approximately $30,000.
The Evidence
Most of the facts are undisputed. Mr. Falcey conducted a thorough investigation into all aspects of the claims between the Opler parties and the estate prior to reaching the settlement agreement. Mr. Falcey made his evaluation with the advice and assistance of competent, experienced counsel and through consultation with numerous other contacts.
He evaluated the cost and effect on the estate of continuing the litigation, including the likely attorney fees of at least $250,000 through the trial stage. His counsel evaluated the legitimacy and value of all the claims and considered whether the estate was likely to prevail on its claims. Counsel also considered the credibility of the witnesses for both sides when assessing the burdens of the litigation. With the advice of the estate's bankruptcy counsel, Mr. Falcey considered the impact of the ongoing litigation on his ability to propose a confirmable reorganization plan.
This estate does not have liquid assets with which to fund the Opler litigation. Even though the estate is solvent, the lack of cash is a significant factor in assessing settlement, particularly because the prospects for success on the merits are risky and long-term at best.
Through the in camera testimony, Mr. Falcey established that his counsel would have been prepared for a trial if necessary. This is in contrast to Mr. Albrecht's counsel who were not preparing for trial at that time.
Mr. Albrecht's testimony concerning his willingness to assist the trustee in trial preparation was not credible and was contradicted. Mr. Schultz made numerous, documented attempts to obtain feedback, input, and information from Mr. Albrecht, without success. Yet, there is no indication that this lack of input adversely affected the terms of settlement or the attorneys' well-supported assessment of the claims.
Mr. Schultz, an experienced litigation attorney, testified concerning the indemnification provisions about which the debtor objected. The indemnity provision with WFC was negotiated and included because it is the entity dismissed by the United States District Court with a consequent, potential claim for malicious prosecution. Mr. Schultz also opined that there is little chance the Oplers have similar claims for malicious prosecution because their case must still proceed to a trial on the merits. The debtor's concern in this regard appears to the court to be quite speculative.
Mr. Falcey is also well-informed concerning the duties and responsibilities PAL is assuming under the settlement agreement. The value set by the parties for the Fish Creek Lots, $2,000,000, is supported and reasonable. In both areas, the trustee obtained background and assistance from realtors, the Teton County Commissioners, members of the homeowners' association, Teton County planning authorities, attorneys expert in riparian and environmental matters, and his own counsel. He has had informative conversations with professionals familiar with these lots, with the real estate market in Teton County, and with the general area under development. The parties also obtained an appraisal of the property by a qualified appraiser to assist in their determination of value.
DISCUSSION
Approval of Compromise and Settlement
The bankruptcy court has broad authority to approve a compromise and settlement, and the decision is within the court's discretion. In re Del Grosso, 106 B.R. 165, 167 (Bankr. N.D. Ill. 1989). The major issue for the court's determination is whether the settlement is in the best interests of the estate, with special consideration given to the concerns of the estate's creditors. Id. Further, the interest of the creditors is paramount to the interests of the debtor (or equity holders). In re Foster Mortg. Corp., 68 F.3d 914, 917 (5th Cir. 1995), rehearing denied, (1996).
The court considers a number of criteria when reviewing a motion to compromise a claim. American Employers' Insurance Co. v. King Resources Co., 556 F.2d 471, 475 (10th Cir. 1977). The four (4) factors generally held applicable to approval of a compromise in cases under the Bankruptcy Code incorporate most of the ten (10) criteria set out by the Tenth Circuit. The four factors are: 1) the probability of success if the claim is litigated; 2) the complexity, expense, and duration of the litigation; 3) the possible difficulty of collecting any judgment; and 4) all other factors relevant to a full and fair assessment of the proposed compromise including the views of the creditors. In re Bowman, 181 B.R. 836, 843 (Bankr. D. Md. 1995).
With regard to the manner in which the settlement was obtained, the court should consider that: 1) the settlement was not collusive; 2) the proponents have counsel experienced in similar cases; 3) there has been sufficient discovery of the claims to enable counsel to act intelligently and 4) the number of objectors or their interest is small. In re Del Grosso, 106 B.R. at 168. Application of these standards require that the court compare the terms of the settlement with the likely rewards of the litigation. In re Foster Mortg. Corp., 68 F.3d at 917.
In this case there is no evidence that the settlement was collusive. Both sides had experienced, competent counsel fully apprised of all relevant matters.
The in camera testimony and affidavit established to the court's satisfaction that counsel's advice to the trustee was based on a thorough investigation. Adverse legal effects from the proposed settlement appear to be minimal. Yet there is a very real risk that the estate will not prevail on its claims despite protracted litigation and a risk that a large judgment could be entered against the estate to the detriment of all the creditors. This is not litigation where the estate is assured of some likely recovery on its claims.
This agreement was crafted to put the estate in the best position for moving forward. The Opler litigation is complex and the claims are novel; a trial will cause a financial drain on the estate even absent a likely appeal; the risk of a significant judgment against the estate is very real; and the likelihood that the estate will prevail on its claims is questionable. The time involved in the litigation alone was a drain on the trustee's resources, preventing him from moving forward to solve the myriad of other problems with which he is confronted.
The settlement will have a positive effect on future development of the estate's real property by removing an encumbrance on the title to property which is part of the overall development. The settlement may have a positive effect on the ability of the estate to obtain future funding by restoring confidence in the estate.
The trustee's rational and pragmatic approach will demonstrate to the community and other's involved with the estate that the litigiousness of Mr. Albrecht is a thing of the past. None of these results is possible while the estate is engaged in long, contentious litigation of uncertain outcome.
The input from the homeowners' association was also beneficial to the court. Their general satisfaction with the settlement agreement is indicative of the positive effect the settlement could have on other disputes in which the estate is engaged.
The court agrees with Mr. Falcey that a settlement between Mr. Opler and Mr. Albrecht is unlikely, and this conclusion is supported by Mr. Albrecht's testimony. The Albrecht and Opler relationship is so contentious that it harms the estate, and any attempt to include Mr. Albrecht in this settlement would make resolution impossible.
Mr. Albrecht clearly has a large financial interest in this solvent estate, and a personal interest in the litigation. Yet, this court is convinced that the settlement is in the best interests of Mr. Albrecht as well. The agreement protects Mr. Albrecht's ability to resolve his differences with Mr. Opler independently. Removing the estate from the dispute also eliminates the ongoing issue of which party, the estate or Mr. Albrecht, has the duty to defend the claims and pay for the litigation. Mr. Falcey is clearly acting in the best interests of the estate and Mr. Albrecht, as anything that benefits this estate benefits Mr. Albrecht in the long run.
The debtor raised concerns about the lack of specificity in some provisions of the settlement agreement. particularly, the debtor is concerned that the documents transferring title and effectuating the provisions are not yet drafted, that the debtor should have input into the document language, and that the settlement should not be approved until the terms are defined.
The trustee asserts that the expense of drafting the documents should not be incurred until the agreement is approved, and that the basic outline of the terms is sufficiently described. The court concludes that the trustee and his counsel are aware of the issues raised by the debtor, understand the intent of the agreement, and can draft the necessary terminology to the Oplers' and the estate's mutual benefit. If the trustee wishes to obtain the input of Mr. Albrecht he may do so, but as the legal representative of the estate he is under no such obligation.
With regard to the debtor's concerns that the duties undertaken by the estate are ambiguous, the court concludes that the language is intended to and does implement the status quo as of the 1987 warranty deed. Although the cost of implementing the improvements detailed in the original plat filing remains inexact, Mr. Falcey did obtain a reasonable estimate not refuted by the debtor.
The debtor seeks to have Mr. Falcey find a perfect solution to every possible contingency, and to have every issue completely addressed to the debtor's satisfaction before the agreement is approved. The court does not view such a goal as realistic. Mr. Falcey is an impartial representative of the estate. He cannot be held to an impossible standard of anticipating every potential problem, no matter how remote, and being required to address it.
The court concludes that the agreement is not an invitation to further litigation or unforeseen problems. PAL had the duties included in the settlement long before this agreement was proposed. Further, the debtor never established to the court's satisfaction how the settlement, which basically adopts the 1987 Opler/Albrecht language, was acceptable in 1987 but is now detrimental. To allow the debtor to obstruct a settlement that is obviously in the best interests of the estate on the basis of supposition is not acceptable to the court.
The trustee may rely on his qualified counsel for legal advice. Although the court must exercise independent judgment, the court may also rely on the trustee's investigation and the opinions of his counsel. In re Del Grosso, 106 B.R. at 168. From the evidence presented, the court concludes that Mr. Falcey has shown that this settlement agreement is in the best interests of the estate and equity holders, is fair and reasonable, restores confidence in the estate, outweighs any potential harm, and protects the estate from liability.
Finally, no creditor has objected. This suggests to the court that the creditors are in favor of the settlement and the benefits it will confer on the estate. See In re Shoemaker, 155 B.R. 552, 556 (Bankr. N.D. Ala. 1992). The settlement agreement will be approved.
Sale Free and Clear of Liens and Donald H. Albrecht's Interest
The estate seeks approval of a sale free and clear of liens and the interest of Mr. Albrecht's lis pendens pursuant to 11 U.S.C. § 363 (f)(4). The trustee asserts that Mr. Albrecht's interest is subject to a bona fide dispute which allows it to be removed from the record title on the Fish Creek lots.
The debtor objected to this transfer which the trustee denominates a sale. Mr. Albrecht did not object.
The trustee argues that Mr. Albrecht is the only party in interest with standing to object and because he did not, the sale must be approved. However, the court finds that this is a solvent estate in which the debtor's partners have a likely monetary interest. Therefore, the court believes that the concerns are legitimately raised and require further examination.
Most of the sale objections are intertwined with the compromise and settlement and have been previously discussed in this decision. The debtor also argued that the trustee's two motions are so intertwined that they must be considered together. On this, the court and the trustee agree with the debtor and Mr. Albrecht.
The debtor also contends that after the sale is approved, the Oplers will have one (1) year in which to proceed to close the transfer and that this time period is distant. The court concludes, however, that the purpose of the provision is to allow the Oplers time to resolve their disputes with Mr. Albrecht. Because Mr. Albrecht is the driving force behind the debtor's objection here, and the provision was inserted because of the Opler/Albrecht acrimony, the debtor's objection is at the very least somewhat suspect. Besides, no actual harm has been demonstrated.
Mr. Falcey seeks to transfer the Fish Creek lots to the Oplers free and clear of Mr. Albrecht's lis pendens, asserting that interest is subject to a bona fide dispute. Although undefined in § 363(f)(4), the term bona fide dispute appears in § 303 as well. The standard under § 303 requires the bankruptcy court to determine whether there is an objective basis for either a factual or legal dispute as to the validity of the debt. In re Octagon Roofing, 123 B.R. 583, 590 (Bankr. N.D. Ill. 1991). The court in In re Collins, 180 B.R. 447, 451 (Bankr. E.D. Va. 1995), held that a court need not resolve the dispute, but only determine its existence.
Evidence of a bona fide dispute was presented by the trustee and not refuted by the debtor. To accept the trustee's assessment of the Opler litigation is by necessity also an indication that the Albrecht claims against Oplers are disputed. The Order on Summary Judgment from the United States District Court also establishes that very real and relevant factual disputes exist between the parties to that litigation. And finally, once the lots are transferred to the estate, Mr. Albrecht has no reason to maintain a lis pendens. He is not a party to litigation with RAL.
The court concludes that the claims underlying Mr. Albrecht's filing of the lis pendens are certainly subject to a bona fide dispute. Further, the trustee has established that the conveyance of the lots to the Oplers free and clear of this interest is beneficial to the settlement agreement and hence, to the estate. The sale free and clear of Mr. Albrecht's interest will be approved.