Opinion
No. 93 CV 04777
March 5, 1999
MEMORANDUM OPINION AND ORDER
Several motions are pending before the court in this protracted bankruptcy proceeding, all of which relate to a settlement agreement that has been reached between the bankruptcy trustee and the adversary defendants. The trustee, acting on behalf of the debtor, Madison Management Group, Inc., moves the court to approve the settlement agreement. The City of Denver moves the court to vacate its February 20, 1998 order that withdrew the reference from the bankruptcy court. Whitman Requardt Associates moves for leave to file its contingent proof of claim and have it deemed timely filed. Both David Abrams and the law firm of Adelman, Gettleman, Merens, Berish Carter move the court to enhance their fees. And, the Trustee has also filed a motion for a rule to show cause why the City of Denver and Travelers Insurance should not be held in contempt of court. This opinion resolves all of these issues.
Background
This bankruptcy concerns the financial demise of debtor Madison Management Group, Inc. ("Madison"). Madison is a now-insolvent company incorporated under Delaware law that was doing business in Illinois. Madison was formed as the result of a series of mergers, divestitures, and restructurings involving several other companies that began in 1983. To fully understand the facts of Madison's bankruptcy and the legal issues currently presented to the court, the court must first explain how Madison came into existence and the events that culminated in its insolvency.
In August 1983, a company called Clevepak Corporation ("Clevepak") merged with and acquired a business entity known as Interpace Corporation ("Interpace"). At the time, Interpace was in the business of manufacturing a broad range of products used in the building and construction industries. Among the many products that Interpace manufactured was pre-stressed concrete pipe used in underground sewer and sanitation systems ("Interpace pipe"). In early 1984, shortly after Clevepak acquired Interpace, Clevepak began experiencing financial troubles of its own. After exploring possible ways of raising capital to preserve the company, Clevepak's board of directors decided to sell Clevepak.
While Madison eventually bought Clevepak, the purchase was not nearly this simple; rather several other dealings first transpired that culminated in Madison's purchase of Clevepak. Initially, a company known as Great American Management and Investment, Inc. ("GAMI") teamed up with an organization called Ditri Associates, Inc. ("Ditri") and formed Madison. Once GAMI and Ditri had formed Madison, they obtained full ownership of Madison's preferred and common stock. GAMI held 80% of Madison's common stock and Ditri held the remaining 20%; as for Madison's preferred stock, GAMI owned 100% of that stock. After GAMI and Ditri had formed Madison, Madison then created the Clevepak Acquisition Corporation ("CAC") to facilitate the purchase of Clevepak. Madison contributed $20 million to CAC in exchange for full ownership of CAC's stock. CAC then merged into Clevepak, and Madison, as the sole shareholder of CAC, exchanged its shares of CAC for substantially all of Clevepak's shares. Madison therefore acquired full ownership of Clevepak. In addition to this transaction, the merger of Clevepak and Madison involved a contribution of approximately $13 million in cash from Clevepak to its former shareholders, and an $8 million payment realized from the sale of one of Clevepak's divisions.
To further facilitate Madison's acquisition of Clevepak, GAMI issued notes in the amount of $40.5 million; however, even though GAMI was the obligor on these notes, Clevepak executed a $40.5 million "clone note" to GAMI. Under this clone note, Clevepak's obligations to GAMI mirrored GAMI's $40.5 million obligation to Clevepak's former shareholders. In theory, Clevepak was to make payments under the clone note to GAMI, and GAMI was to then make its required payments to Clevepak's former shareholders under its own $40.5 million note.
After all of this wheeling and dealing was done, Clevepak had fully acquired Interpace, and Madison had fully acquired Clevepak. Madison therefore owned both Clevepak and Interpace. And, throughout all of this, GAMI and Ditri owned 100% of Madison's common and preferred stock. As a consequence of these various mergers, acquisitions, and restructurings, Clevepak incurred a debt of $112,560,000 to GAMI, evidenced by two notes — the $40.5 million "clone note" and another note in the amount of $72.06 million. Additionally, during the merger, Clevepak had sold its technical Ceramics division for $8 million and contributed $13.2 million to the deal.
GAMI and Ditri then formed another Delaware corporation called Great American Financial Group, Inc. ("GAFGI"). Of GAFGI's common stock, GAMI owned 80% and Ditri owned the other 20%. GAFGI also issued various series of preferred stock to GAMI. In addition to owning full interests in Madison and GAFGI, GAMI also owned Adams Management Group, Inc. ("Adams") and Jefferson Management Group, Inc. ("Jefferson"). After GAFGI was formed, GAMI and Ditri transferred all of the common and preferred stock of Adams, Jefferson, and Madison to GAFGI.
GAFGI was once known as Great American Industrial Group, Inc. ("GAIGI"). The court will only use "GAFGI" to refer to this entity.
GAMI and Ditri then formed yet another Delaware corporation, this one was called Eagle Industries, Inc. ("Eagle"). To make a long story short, after forming Eagle, GAMI and Ditri reorganized the business operations among Madison, Clevepak, Adams, Jefferson, Eagle and GAFGI. This reorganization included shifting various divisions from one corporation to another corporation in exchange for stock, cash, or promissory notes. A noticeable result of this continued shifting among GAMI and Ditri's corporate entities was that Madison's assets gradually decreased and its liabilities gradually increased.
As it turns out, one of the products that Clevepak's predecessor Interpace (now owned by Madison) produced was inherently defective. Specifically, the pre-stressed concrete Interpace pipe that was used in underground sewer and sanitation systems was particularly susceptible to bursting. As a result of the defective pipe, several cities and municipalities that had purchased and installed Interpace pipe began to experience serious pipe bursts, incurring major property damage, and suffering millions of dollars in financial damages. Since Madison was now the owner of Interpace (through its acquisition of Clevepak), Madison was exposed to the vast legal and financial liability for a steady stream of serious pipe bursts. The total damage caused by Interpace pipe ruptures ranges somewhere between $300 and $500 million.
In an apparent effort to minimize their losses from the huge financial liability for the Interpace pipe calamities, GAMI and Ditri (the parents of Madison) began shifting large chunks of Madison's assets to their other subsidiaries, or directly to GAMI. The two individuals primarily responsible for these major financial decisions were Samuel Zell ("Zell") and Robert Lurie ("Lurie"). For the most part, Zell and Lurie successfully depleted the bulk of Madison's valuable assets and simultaneously managed to leave Madison's extensive debt and legal liability with Madison.
Eventually, the financial strain caused by Interpace pipe burst litigation and the systematic depletion of Madison's assets took its toll and forced Madison into bankruptcy. On November 8, 1991, Madison filed a voluntary petition for relief under Chapter 11 of the bankruptcy code. On January 24, 1992, the bankruptcy court appointed a limited power trustee to investigate and prosecute all causes of action that Madison may have to recover assets. In re Madison Management Group, Inc., 137 B.R. 275 (Bankr. N.D. Ill. 1992). The appointed trustee filed his preliminary report on April 3, 1992. Then, on July 17, 1992, the bankruptcy court entered an order converting Madison's Chapter 11 reorganization into a Chapter 7 liquidation.
In an effort to recover funds for distribution to Madison's creditors, the trustee filed an adversary complaint in the bankruptcy proceeding on December 31, 1992. The amended adversary complaint named GAMI, GAFGI, Zell, and Lurie as defendants (collectively "adversary defendants") and alleged various causes of action related to transactions during which Madison's assets were depleted. Specifically, the trustee's six-count amended adversary complaint alleged that the adversary defendants' actions (1) violated the Illinois Fraudulent Conveyance Act; (2) constituted a breach of fiduciary duty; (3) violated Delaware corporate law; and (4) subjected the adversary defendants to alter ego liability. Essentially, the trustee complained that the adversary defendants committed a series of fraudulent conveyances, absconded with Madison's assets, and thereby caused Madison's ultimate bankruptcy.
During the bankruptcy proceedings, the court set April 3, 1993 as the bar date beyond which creditors could not assert timely claims against Madison's bankruptcy estate. To advise creditors and potential claimants of the bar date, the trustee gathered available information about all known and potential creditors and claimants. The trustee then sent notice of the April 5, 1993 bar date to all known creditors and published notice of the bar date in the February 26, 1993 issue of USA Today and the March/April issue of Waterworld Review, a major trade journal for water, waste water, and industrial markets.
Both the bankruptcy and adversary litigations dragged on for several years. After several claims were ready for trial, the case was assigned out of the bankruptcy court and into this district court because the parties demanded a trial by jury. As part of the pretrial preparation, the court attempted to settle the adversary dispute and enlisted the assistance of its esteemed colleague, U.S. District Judge James B. Zagel. Judge Zagel contributed countless hours to negotiating a settlement of the disputed claims, and finally, the parties reached a settlement agreement.
Under the settlement agreement, the adversary defendants promised to pay the trustee an amount sufficient to pay in full all allowed claims that are entitled to distribution under section 726(a)(1) of the bankruptcy code. The adversary defendants also agreed to provide funds to enable the trustee to pay 70% of all unsecured allowed claims that were filed in the bankruptcy case on or before the date of the settlement agreement and that are entitled to distribution under section 726(a)(2) of the bankruptcy code and have not been subordinated by a final order or the terms of the settlement agreement.
The agreement further provides that the adversary defendants would pay an amount equal to 70% of all retiree claims. Additionally, the adversary defendants agreed to subordinate any claims that they or their affiliate companies have against Madison under section 510(a) of the bankruptcy code. In consideration for these promises, the trustee agreed to quitclaim to GAMI certain of Madison's properties. The trustee would also exchange mutual releases with the adversary defendants for any claims the trustee may have had against those companies or individuals. And, as a part of the settlement, the trustee and its counsel agreed to compromise and fix their fees and the adversary defendants have agreed to pay those fixed amounts.
In addition to these financial terms, the settlement agreement contains an injunction clause that:
enjoin[s] all creditors of the Debtor, whether or not such creditors have filed proofs of claim in the Bankruptcy Case, from commencing or continuing, in any manner or in any place, any action or other proceeding, whether directly, derivatively or otherwise, on account of or respecting any claims, debts, rights, causes of action or liabilities released pursuant to this agreement.
(Settlement Agreement at ¶ 7.1(b).) The claims released by the trustee against the adversary defendants include:
any and all claims and causes of action, the Trustee, the Debtor, the Estate, and the Debtor's creditors, including the Retirees and the Trustee Related Persons, ever had, now have, hereafter can, shall or may have against any of the GAMI Related Persons, whether known or unknown, arising from or related to the Debtor or the actions of any GAMI Related Person. . . .
(Settlement Agreement at ¶ 6.2.) Thus, the thrust of the injunction is to enjoin any subsequent lawsuit against the adversary defendants which arises out of a cause of action owned by the trustee. In accordance with this intent to limit the scope of the injunction only to those claims owned by the trustee, the settlement agreement also contains a provision which declares that the trustee is the sole and exclusive owner of a whole laundry list of legal claims. (See Settlement Agreement at ¶ 7.1(a).)
After several years of litigation before the bankruptcy court, and after the bankruptcy proceeding had been removed to this court in preparation for the jury trial, the City of Denver, Colorado ("Denver") arrived on the scene. During the 1970's, Denver had purchased and installed some defective Interpace pipe. Then, in May 1997, the Interpace pipe ruptured, causing about $17 million damage. Even though Denver's water department knew about the defective Interpace pipe as early as October 1990, Denver never filed a contingent claim in Madison's bankruptcy proceeding. Since Denver took no action until after the May 1997 pipe disaster, it missed the April 5, 1993 bar date imposed by the bankruptcy court. Denver now seeks compensation for the damages it suffered because of the bursting Interpace pipes. Most notably, Denver seeks this compensation from the solvent adversary defendants; however, if the court approves the settlement agreement, Denver will be enjoined from asserting its proposed legal claims against the adversary defendants.
Several motions and claims are now pending before the court. Specifically, (1) Denver moves this court to vacate its February 20, 1998 order withdrawing the reference of the entire bankruptcy case; (2) the trustee moves for approval of the settlement agreement; (3) the trustee also moves for a rule to show cause why Denver and Travelers Insurance should not be held in contempt; (4) David Abrams and the law firm of Adelman, Gettleman, Berish Carter both move for an enhancement for the delay in payment of their administrative claims; and (5) Whitman, Requardt Associates has filed a motion for leave to file a contingent proof of claim and have it deemed timely filed. The court will address each of these issues separately.
I. Denver's Motion to Vacate February 20, 1998 Order
Before the court can address the more critical motion to approve the settlement, the court must first resolve Denver's motion to send the entire case back to the bankruptcy court for consideration of the settlement. On February 20, 1998, after the parties indicated that the trustee and the adversary defendants had reached a settlement, the court withdrew the reference of this case from the bankruptcy court to facilitate the settlement. Denver now asks the court to vacate its order withdrawing the reference. According to Denver, the court should send this case back to bankruptcy court because not all of the creditors agreed to the withdrawal of reference. Denver also argues that the court should vacate its February 20, 1998 order because there will be more bankruptcy claims to adjudicate. The court is not persuaded by either of Denver's reasons.
Under 28 U.S.C. § 157(d), this "court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." Permissive withdrawal of the reference is proper if sufficient cause exists. In determining whether cause exists for a discretionary withdrawal of the reference, the court should consider the following factors: judicial economy, promotion of uniformity and efficiency in bankruptcy administration, convenience, conservation of debtor and creditor resources, the particular court's knowledge of the facts and the reduction of confusion and forum shopping.Vista Metals Corp. v. Metal Brokers Intern., Inc., 161 B.R. 454, 456 (E.D. Wis. 1993); In re Sevko, 143 B.R. 114, 116 (N.D. Ill. 1992).
Applying the relevant factors, the court finds the permissive withdrawal of the reference appropriate in this case. The court withdrew the reference primarily to facilitate a settlement between the trustee and the adversary defendants. A settlement of these disputes enhances the judicial economy of this court, which was otherwise faced with a lengthy jury trial over those issues. Likewise, withdrawing the reference of the entire bankruptcy case instead of just the adversary proceeding will keep all of the related issues together and therefore promote the uniformity and efficiency of the bankruptcy proceedings.
Withdrawal of the reference also conserves the parties' time and financial resources because it eliminates the potential for an intermediate appeal from the bankruptcy court to the district court. Finally, the court recognizes (as has Congress), that the bankruptcy courts are specially skilled in dealing with issues arising under Title 11 of the United States Code. Nevertheless, district courts are also fully competent in bankruptcy law and very capable of resolving disputes in this area of law. Accordingly, the court denies Denver's motion to vacate the court's February 20, 1998 order withdrawing the reference from the bankruptcy court.
II. Trustee's Motion to Approve the Settlement
The trustee now moves the court to approve the settlement agreement. According to the trustee, the settlement is in the best interests of the bankruptcy estate because it guarantees a 70% payment to most creditors and simultaneously eliminates all risks attendant to continued litigation of the claims against the adversary defendants. Several parties, however, have filed objections to the settlement.
A. The City of Denver's Objections
The most formidable objections to the trustee's motion to approve the settlement are advanced by the City of Denver. As noted, Denver suffered serious damage as the result of a ruptured Interpace pipe in May 1997. However, it appears that Denver knew as early as October 1990 that the Interpace pipes it had installed were defective and likely to rupture. In fact, Denver hosted a conference at which a number of other municipalities discussed the likelihood that their Interpace pipes would burst. Notwithstanding this knowledge of an impending disaster, Denver did not file contingent claims in Madison's bankruptcy proceeding before the April 5, 1993 bar date. Denver's only claim in this case, filed in January 1998, missed the April 5, 1993 bar date by four and a half years. Now, in an apparent attempt to recoup its losses, Denver objects to the settlement because the settlement will effectively deprive Denver of any financial recovery. Specifically, since Denver's claim is late, the bankruptcy estate will certainly not be large enough to pay Denver anything. Additionally, the injunction in the settlement agreement will preclude Denver from suing the solvent adversary defendants.
Creditor Whitman, Requardt Associates objects to the proposed settlement for the same reasons as the City of Denver. The court therefore applies the following analysis both to Denver's objections and Whitman, Requardt Associates' objections.
Denver first argues that the court does not have jurisdiction to enter the proposed permanent injunction prohibiting future lawsuits against the nondebtor adversary defendants. Although Denver couches its argument in terms of the court's "jurisdiction," Denver most likely intends to argue that the court does not have the "power" to enforce the proposed permanent injunction. Although the notions of jurisdiction and power are distinct, the court must have both the jurisdiction and the power to enter the proposed injunction.See generally, In the Matter of Energy Cooperative, Inc., 886 F.2d 921, 929 (7th Cir. 1989); In re American Hardwood, Inc., 885 F.2d 621, 624 (9th Cir. 1989); William L. Norton, Jr., 1 Norton Bankruptcy Law and Practice § 4:1[A] (2d ed.). Because the court must have both the jurisdiction and the power to enforce the proposed injunction, the court will address both concepts.
The term "jurisdiction" refers to "the court's authority to entertain an action between the parties before it." American Hardwood, 885 F.2d at 624; see also The Matter of Zale Corp., 62 F.3d 746,751 (5th Cir. 1995). Here, the trustee wants to use the proposed injunction to prohibit future lawsuits by claimants directly against the adversary defendants. Since the injunction seeks to enjoin potential future litigation between the adversary defendants and claimants such as Denver, the court must determine whether it would have jurisdiction over that future litigation because that future litigation is the subject of the injunction. At the heart of this jurisdictional issue is whether those future lawsuits have a strong enough connection to the original bankruptcy.
Under 28 U.S.C. § 1334(b), which confers jurisdiction on this court, "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Apparently interpreting the plain language of § 1334(b), the Seventh Circuit has established three categories of bankruptcy jurisdiction, any one of which will satisfy the statutory requirement. This court may appropriately exercise bankruptcy jurisdiction over any case (1) "related to" a bankruptcy; (2) "arising under" title 11; or (3) "arising in" a case under title 11. See In the Matter of Fedpak Sys., Inc., 80 F.3d 207, 213 (7th Cir. 1996);Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 161-62 (7th Cir. 1994); see also Celotex Corp. v. Edwards, 514 U.S. 300, 307-08 (1995).
The Seventh Circuit has held that a case is "related to" a bankruptcy if "its resolution `affects the amount of property available for distribution or the allocation of property among the creditors.'" Home Ins. Co. v. Cooper Cooper, Ltd., 889 F.2d 746, 749 (7th Cir. 1989) (quoting In re Xonics, 813 F.2d 127, 131 (7th Cir. 1987)). Applying that test to this case, it becomes clear that the court has jurisdiction over any future disputes between Denver and the adversary defendants.
Under the terms of the settlement, the adversary defendants have agreed to contribute millions of dollars to Madison's bankruptcy estate to pay creditors and claimants. The adversary defendants will, however, contribute this money only if other claimants (such as Denver) are enjoined from pursuing claims directly against the adversary defendants in the future. Without this protection from future claims, it is likely that the trustee would not recover any money from the adversary defendants. Any possibility of future litigation pitting Denver against the adversary defendants concerning the adversary defendants' role in Madison's bankruptcy will therefore affect the amount of money available for distribution to Madison's creditors. Accordingly, even the prospect of future litigation between the adversary defendants and other Madison creditors could take a substantial toll on the amount of money available to pay Madison's unpaid creditors. The court therefore finds that it has jurisdiction over future litigation between the adversary defendants and claimants to Madison's bankruptcy because that litigation is related to Madison's bankruptcy.
The immediate impact of future litigation on the amount of money available for distribution is not, however, the court's only source of jurisdiction over future lawsuits against the adversary defendants. Rather, it is well established that "the district court . . . shall have exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of [the bankruptcy], and of property of the estate." 28 U.S.C. § 1334(e); In the Matter of Energy Cooperative, Inc. 886 F.2d 921, 929 (7th Cir. 1989). Included among the bankruptcy estate's exclusive property is its right to pursue legal actions against parties that have harmed Madison. Energy Cooperative, 886 F.2d at 929. In this case, the trustee's claims against the adversary defendants are the property of the bankruptcy estate and any future lawsuits that claimants such as Denver may initiate against the adversary defendants are purely derivative of the estate's causes of action. Accordingly, because those legal claims are the property of the bankruptcy estate, this court has jurisdiction to enjoin future lawsuits by Denver and other claimants that are based on the estate's property. See Energy Cooperative, 886 F.2d at 929-930.
Although Denver admits that the injunction is narrowly tailored to preclude only those suits that the bankruptcy estate owns, (see Denver's Objections to Proposed Settlement at ¶ 19; "The foregoing provisions make it clear that the proposed injunction extends to any cause of action owned by the Trustee"), Denver disputes that the bankruptcy estate is the exclusive owner of the claims that Denver seeks to assert against the adversary defendants.
Because Madison is a Delaware corporation, Delaware law must determine the estate's ownership of its claims against the adversary defendants. See United National Records, Inc. v. MCA Inc., 616 F. Supp. 1429, 1431 (N.D. Ill. 1985); see also St. Paul Fire Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir. 1989). Under Delaware law, the bankruptcy estate is the exclusive owner of all of the claims that Denver seeks to assert against the adversary defendants. See Murray v. Miner, 876 F. Supp. 512, 516 (S.D.N.Y. 1995) (applying Delaware law); see also Steinberg v. Buczynski, 40 F.3d 890, 892 (7th Cir. 1994); In the Matter of Energy Cooperative, Inc., 886 F.2d 921, 929-30 (7th Cir. 1989); Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1343-44 (7th Cir. 1987). Accordingly, because the claims that the injunction seeks to preclude are the exclusive property of the bankruptcy estate, the court has jurisdiction to enter the injunction.
Denver cites Zerand-Bernal, 23 F.3d 159, in support of its argument that the court does not have jurisdiction to enjoin future litigation. The court finds the Zerand-Bernal case factually distinguishable from this case and therefore rejects Denver's argument. In Zerand-Bernal, the debtor had sold all of its assets along with a court order that purported to "enjoin . . . any products liabilities claims arising prior to the Closing or relating to sales made by Debtor prior to the Closing." Zerand-Bernal, 23 F.3d at 161. Years after the sale, a worker injured his hand in a machine sold by the debtor during the bankruptcy. Id. The worker sued the purchaser of the debtor's assets in Pennsylvania under a theory of successor liability. Id. In response to this lawsuit in Pennsylvania, the purchaser of the assets filed an adversary complaint in the bankruptcy court in Illinois where the debtor had filed bankruptcy. Id. In its adversary complaint, the purchaser of the assets sought to enforce the injunction prohibiting products liabilities suits arising from sales made before the closing of the sale, but the bankruptcy court, the district court, and the Seventh Circuit all held that the court did not have jurisdiction over the adversary proceeding. Id. at 161, 164.
In affirming the lower courts, the Seventh Circuit defined "related to" jurisdiction by stating:
The reference to cases "related to" bankruptcy cases is primarily intended to encompass tort, contract, and other legal claims by and against the debtor, claims that, were it not for bankruptcy, would be ordinary stand-alone lawsuits between the debtor and others but that section 1334(b) allows to be forced into bankruptcy court so that all claims by and against the debtor can be determined in the same forum. In re Xonics, 813 F.2d 127, 131 (7th Cir. 1987). A secondary purpose is to force into the bankruptcy court suits to which the debtor need not be a party but which may affect the amount of property in the bankrupt estate. Id.; National Tax Credit Partners, L.P. v. Havlik, 20 F.3d 705, 709 (7th Cir. 1994); In re Turner, 724 F.2d 338, 341 (2d Cir. 1983) (Friendly, J.). Once they are shoehorned into the bankruptcy court on the authority of section 1334(b), such suits can then be stayed by authority of section 105 of the Bankruptcy Code, 11 U.S.C. § 105, which complements the automatic stay provision of section 362 of the Code (applicable to suits against the debtor) by permitting the bankruptcy court to "issue any order . . . that is necessary or appropriate to carry out the provisions of this title." In re Energy Co-op, Inc., 886 F.2d 921, 929 (7th Cir. 1989); In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir. 1991); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1002-03 (4th Cir. 1986).Zerand-Bernal, 23 F.3d at 161-62. The court found that the bankruptcy court did not have "related to" jurisdiction over the products liability suit because it was "neither a claim by nor against the debtor" and could not "possibly affect the amount of property available for distribution to [the debtor's] creditors." Id. at 162.
In contrast, this case does not concern the sale of assets, but rather involves adversary defendants that are willing to contribute up to $45 million to the bankruptcy estate in exchange for a release of the trustee's claims. The adversary defendants, however, are willing to make this voluntary contribution only on the condition that they are protected from future lawsuits by creditors seeking full compensation for their losses instead of the limited relief afforded by bankruptcy law. Without the adversary defendants' contribution under the settlement agreement, it is likely that the estate will never recover any money from the adversary defendants. Thus, unlike Zerand-Bernal, the dispute in this case will affect the amount available for distribution to creditors. Accordingly, the court finds jurisdiction appropriate because this dispute is "related to" Madison's bankruptcy under 28 U.S.C. § 1334(b).
Having found jurisdiction over the case, we must now determine whether the court has the "power" to issue the permanent injunction in the proposed settlement agreement. The court need look no further than In the Matter of Energy Cooperative Incorporated, 886 F.2d 921 (7th Cir. 1989) to conclude that the court does have the power under 11 U.S.C. § 105 to enter the proposed injunction. As the Seventh Circuit pointed out in Energy Cooperative,
Under [section 105] the court has the authority to enjoin actions which threaten the integrity of the bankrupt's estate. In re Davis, 730 F.2d 176, 184 (2d Cir. 1984). The power of the court under this provision also includes the power to issue an injunction enjoining third parties from pursuing actions which are the exclusive property of the debtor estate and are dismissed pursuant to a settlement agreement. See MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988) (affirming district court's order approving settlement between debtor and insurers and enjoining all future suits against insurers relating to settled policies); In re All American of Ashburn, Inc., 805 F.2d 1515, 1517 (11th Cir. 1986) (affirming permanent injunction issued pursuant to a "settlement agreement [which] provided as a condition precedent to its effectiveness that the bankruptcy court enjoin any pending suit against [the other party to the settlement] to the extent that such suit asserted claims of [the debtor estate]").
Energy Cooperative, 886 F.2d at 929-30. Accordingly, because the injunction will preclude creditors from asserting claims that are the exclusive property of the bankruptcy estate, the court has the power to enter the injunction. Id. at 930.
Similarly, in cases such as this one, where jurisdiction is also based on the non-debtor's substantial and voluntary contribution to the bankruptcy estate, many courts have held that section 105 gives the court the power to enter a permanent injunction. See, e.g., In re the Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 292-93 (2d Cir. 1992); In re A.H. Robbins Co., Inc., 880 F.2d 694, 701-02 (4th Cir. 1989); In re Master Mortgage Inv. Fund., Inc., 168 B.R. 930, 934-36 (Bankr. W.D. Mo. 1994); Unarco Bloomington Factory Workers v. UNR Indus., Inc., 124 B.R. 268, 277-79 (N.D. Ill. 1990). The court finds the reasoning employed by these courts persuasive and applicable to this case. The adversary defendants are willing to contribute up to $45 million to the bankruptcy estate. Without the injunction, the settlement would fail and the creditors would face a serious risk of not recovering any money from the adversary defendants. Under the facts of this case, section 105 of the bankruptcy code gives the court the power to enter the permanent injunction because the injunction precludes "lawsuits which threaten the integrity of the bankruptcy estate." Energy Cooperative, 886 F.2d at 929.
Denver also argues that the proposed injunction violates 11 U.S.C. § 524(e), which prohibits the court from discharging non-debtors from their debts. The court rejects this argument because it is contrary to the Seventh Circuit's interpretation of § 524(e). See In the Matter of Specialty Equip. Co., Inc., 3 F.3d 1043, 1045-47 (7th Cir. 1993).
Denver argues that even if this court has the jurisdiction and power to enter the proposed injunction, that doing so would violate the due process rights of claimants who own Interpace pipes that will burst in the future. Denver asserts that since the trustee failed to give notice to those contingent claimants of the injunction, that the injunction violates their due process rights. Denver also contends that the trustee should have filed and served an adversary proceeding against Denver as required by Bankruptcy Rule 7001(7). According to Denver, without taking these steps, the injunction will violate the due process clause of the Constitution.
Because Denver has known about the problems with Interpace pipes since 1990 and has filed a claim in the bankruptcy proceeding, Denver does not have standing to make this argument. On this basis alone, Denver's due process argument fails. However, assuming Denver does have standing to assert unknown claimants' rights, the court finds Denver's arguments without merit. Contrary to Denver's position, there is no requirement that parties settling a pending adversary proceeding must initiate another adversary proceeding to have the settlement confirmed. Denver has cited no authority to support this argument and the court is unaware of any such rule.
Similarly, there is no requirement that every possible future claimant be notified of a settlement almost six years after the bankruptcy bar date. Rather, due process only requires the trustee to make a reasonable effort to notify all interested parties of the bankruptcy and settlement. See, e.g., Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306 (1950). Or as Rule 23 terms it, the "best notice practicable" under the under the circumstances. Here, the trustee sent notice of the bankruptcy and settlement to all known interested parties. The Trustee also published notice of the bar date in the USA Today and a widely-read trade journal. Due process requires no more. Accordingly, the court finds that even if Denver had standing to assert the argument, entering the injunction in this case will not violate due process.
The court also points out that Bankruptcy Rule 9019(a) only requires notice to "creditors, the U.S. trustee, the debtor, and indenture trustees as provided in Rule 2002 and . . . any other entity as the court may direct." Rule 9019(a) does not, as Denver argues, require that notice be sent to all possible and unknown claimants. The court therefore rejects Denver's argument.
Before the court can approve the proposed injunction, the court must first find that the prerequisites for such an injunction have been met. Unlike other injunctions, the court need not find the traditional elements of a permanent injunction. Rather, in the bankruptcy context, the court "`can enjoin proceedings in other courts when it is satisfied that such proceedings would defeat or otherwise impair its jurisdiction over the case before it. In other words, the court does not need to demonstrate an inadequate remedy at law or irreparable harm.'" Fisher v. Apostolou, 155 F.3d 876, 882 (7th Cir. 1998) (quoting In re L S Indus., Inc., 989 F.2d 929, 932 (7th Cir. 1993)). The court finds that allowing suits against the adversary defendants would defeat the court's jurisdiction over the legal claims that are the exclusive property of the bankruptcy estate. Similarly, lawsuits against the adversary defendants would impair the court's ability to approve the settlement agreement. Consequently, the court concludes that the prerequisites for an injunction have been satisfied.
B. Retirees' Committee Objections
The Retirees' Committee first objects to the settlement because it was not a party to the agreement. This argument fails because, as a creditor of the bankruptcy estate, the Retirees' Committee had no legal right to be a party to the settlement. In any event, the Retirees' Committee did participate in the mediation process with Judge Zagel and advocated an approach of paying the retirees that was different from the approach eventually built into the settlement. The fact that the settling parties, with Judge Zagel's guidance, did not adopt the Committee's suggested approach, does not justify a rejection of the agreement.
The Committee next asserts that the settlement improperly ignores the allowed class claim. This argument may be technically correct; however, it causes no harm to the members of the class. The settlement agreement simply treats the members of the uncertified class as individuals rather than as class members. Nothing in the structure of the settlement deprives the individual retirees of rights that they would enjoy if they were treated as a class. Under the agreement, any retiree who files a claim will be paid. Accordingly, the court finds that the settlement agreement does not unfairly prejudice the members of the uncertified class.
The Committee also argues that the retirees were not afforded adequate notice of the settlement. The court finds this argument without merit because the retirees received notice of the settlement both from the trustee and from the Retiree Committee.
The Committee next contends that the proposed treatment of the individual retirees' claims is both different and more burdensome than the treatment of other unsecured creditors. The Committee may be technically correct that they are treated differently, but again, the retirees suffer no harm from the different treatment. Just like all other unsecured creditors, the retirees will collect 70% of their claims. And while their claims may be calculated in a slightly different manner, this distinction was designed to benefit the retirees rather than to harm them. By calculating the retirees' claims differently, the trustee simply chose a less burdensome and less arbitrary method of calculating the value of their claims.
The Committee also aks the court to reject the settlement because it has not reached an agreement with the trustee and adversary defendants concerning: (1) the creation of accurate lists of the retirees showing their eligibility and the proposed treatment of their claims; (2) the details and description of the specific treatment of their claims; and (3) the reimbursement for past, present and future costs and expenses of the Retirees' Committee, including its professionals. Each of these arguments fails. Although the trustee may not have completely finalized the lists and specific procedures by which the retirees will be paid, this does not justify rejecting the settlement at this time. While the trustee's lists and procedures may not be 100% completed, this will not deprive any retirees of their rights under the agreement to collect. As for the reimbursement of the Retirees' Committee and its professionals, the court rejects this argument because the bankruptcy court's order clearly stated that they are not entitled to compensation from the bankruptcy estate. The court finds all of the Committee's objections either without merit or insufficient grounds upon which to reject the proposed settlement. Accordingly, the court denies the Committee's motion to stay the hearing on the proposed settlement.
The Committee also summarily lists four reserved objections. These objections either repeat the Committee's other objections or duplicate objections raised by Denver. The court finds each of these without merit for reasons already stated in this opinion.
C. Travelers Insurance's Objections
Under the terms of the proposed settlement agreement, Travelers Property Casualty Insurance Company ("Travelers") is in much the same position as the City of Denver. That is, Travelers stands to get nothing from the Chapter 7 liquidation because it filed its claim against Madison well after the April 5, 1993 bankruptcy bar date. Travelers now objects to the settlement; however, the basis of Travelers' objection is not clear. Travelers' written objection consists of only five sentences, most of which simply state facts of the case and the consequences to Travelers if the court approves the settlement. To the extent that Travelers objects because the "Settlement Agreement does not address how Travelers' claim will be treated," Travelers is incorrect. As the adversary defendants point out, the settlement agreement requires that Travelers' claim be treated as a "disputed claim." Unless Travelers' claim becomes an "allowed claim," the adversary defendants are not obligated to satisfy the claim. If Travelers' claim does become an "allowed claim," then it will be paid provided the other requirements of the agreement have been satisfied. Thus, to the extent that the court understands Travelers' "objection," the court finds it without merit.
D. Appropriateness of the Settlement Agreement
Having determined that the objections do not require the court to reject the proposed settlement agreement, the court must next evaluate the proposed settlement as a whole. A judge "may approve a settlement in a liquidation proceeding if the settlement is in the estate's best interests." In re American Reserve Corp., 841 F.2d 159, 161 (7th Cir. 1987). When asked to approve a bankruptcy settlement, the court may not "simply accept the trustee's word that the settlement is reasonable, nor may he simply `rubber stamp' the Trustee's proposal. The . . . judge must apprise himself of all facts necessary to evaluate the settlement and make an `informed and independent judgment' about the settlement." Energy Cooperative, 886 F.2d at 924-25 (citation omitted). When determining whether a settlement is in the best interests of the estate, the court must make:
a comparison of the settlement's terms with the litigation's probable costs and probable benefits. Among the factors the bankruptcy judge should consider in his analysis are the litigation's probability of success, the litigation's complexity, and the litigation's attendant expense, inconvenience, and delay (including the possibility that disapproving the settlement will cause wasting of assets). See In re A C Properties, 784 F.2d 1377, 1381 (9th Cir. 1986); In re Blair, 538 F.2d 849, 851 (9th Cir. 1976); cf. McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 427 (7th Cir. 1977) (noting similar factors to consider in approving a settlement in a class action). The bankruptcy judge should also consider the creditors' objections to the settlement; however, the creditors' views are not controlling. In re A C Properties, 784 F.2d at 1382.American Reserve Corp., 841 F.2d at 161-62.
Having reviewed this protracted case in its entirety, as well as the proposed settlement, the court finds that the settlement is in the estate's best interests. The issues in this case have been very complex and the number of parties involved have made it a difficult case to manage. Under the agreement, GAMI will pay all allowed claims under section 507 of the bankruptcy code in full. GAMI will also provide sufficient funds to pay 70% of all unsecured allowed claims entitled to distribution under section 726(a)(2) of the bankruptcy code. GAMI will also pay 70% of all retiree claims. The settlement also calls for the subordination of several claims filed in the bankruptcy case.
The alternative to this settlement is litigation. The outcome of that litigation is uncertain and continued litigation of these claims will impose enormous costs to the estate and continue to delay the distribution of the estate's funds. Without this settlement, there is a real chance that the estate will nothing to distribute because the estate's only assets are its legal claims against the adversary defendants. On the other hand, even if the estate were able to recover from the adversary defendants after litigating, that recovery would come only after continued expense to the estate's already dwindling assets.
In sum, the settlement guarantees a fair and reasonable distribution to all creditors of the estate holding allowed claims without the risks and delays attendant to continued litigation. Based on the facts of this case, the court finds that the settlement is in the best interests of the estate. The court therefore grants the Trustee's motion to approve the proposed settlement agreement.
III. Whitman Requardt's Motion to Have Claim Deemed Timely
Whitman, Requardt Associates ("Whitman") moves the court for leave to file a contingent proof of claim and have it deemed timely filed. Presumably, Whitman seeks this order for the same reasons the City of Denver objects to the proposed settlement — because under the settlement, Whitman stands to get nothing from the bankruptcy estate since its claims are late. Whitman argues that it is entitled to have its tardy claim deemed timely because it had no notice of the underlying bankruptcy proceeding and settlement bar.
The undisputed facts of this case, however, contradict Whitman's assertion that it had no way of knowing about the underlying bankruptcy proceeding. As the trustee points out (and Whitman admits), Whitman was involved with Interpace pipes as early as 1975. Specifically, Whitman designed the pipe system and used Interpace pipes in the system. Whitman knew of the New Jersey pipe rupture in July 1988, and of the lawsuit arising out of that rupture in February 1993 — two months before the bar date. Additionally, the Trustee published notice of the bar date.
Based on the facts in this record, the court concludes that Whitman had ample reason to know about or investigate Madison's bankruptcy proceeding and file a claim before the bar date. Whitman purchased Interpace pipe and knew about the pipe rupture. Whitman should therefore have known that it faced potential liability in connection with the pipe burst. Consequently, the court denies Whitman's motion for leave to file a contingent proof of claim and have it deemed timely filed.
IV. Motions for Enhancement of Fees
In addition to filing their respective motions for enhancement of their fees, both Adelman and Abrams filed "limited objections" to the settlement agreement. Those limited objections solely addressed the issue of their requested fee enhancement. The court therefore applies its analysis and conclusions both to the motions and objections.
Creditors, Adelman, Gettleman, Merens, Berish Carter ("Adelman") and David Abrams ("Abrams") have both filed motions for enhancement of their fees for services they rendered to the bankruptcy estate. Adelman and Abrams both request the court to enhance their fees because they have had to wait several years before collecting their fees from the estate. Both the trustee and the adversary defendants oppose the requested fee enhancements.
An order entered by Judge Sonderby during the bankruptcy proceedings authorizes the estate to pay Adelman $144,248.44 and Abrams $20,392.00 in fees. Adelman and Abrams now ask the court to increase those amounts by using their current hourly billing rates instead of applying the 1993 hourly billing rates used by Judge Sonderby. Alternatively, Adelman asks the court to apply the fee multiplier imposed on the Trustee's attorney's fees. The court denies both requests.
Although there is authority to support Adelman's and Abrams' requests, the court finds that the requested enhancements are not necessary in this case. Awarding Adelman and Abrams the fees established by Judge Sonderby will reasonably compensate them for their services. The hourly rates used by Judge Sonderby remain competitive and fair hourly rates for the services that Adelman and Abrams provided. Although Adelman and Abrams did have to wait several years to collect their fees, this waiting period alone does not justify increasing hourly rates to their current amounts. As the court noted inIn re Energy Cooperative, Inc., 95 B.R. 961, 966 (Bankr. N.D. Ill. 1988), such an award "would constitute an unnecessary burden of the estate." Moreover, in contrast to the cases cited by Adelman and Abrams, these professionals have not been actively involved in this litigation for many years, nor has the likelihood of them collecting their fees ever been at risk. Under these facts, the court concludes that Adelman and Abrams should not have their fees increased by their current billing rates or by using the fee multiplier. The court therefore denies Adelman and Abrams' motions for fee enhancements.
The court notes that Adelman and Abrams could have requested a fee enhancement based on the interest that they would have earned on their fees if those fees had been paid years ago. Indeed, this method of fee enhancement was explicitly mentioned and approved in the cases Adelman and Abrams cited. Adelman and Abrams did not, however, request this type of a fee enhancement and so the court does not address this issue. Nevertheless, even if Adelman and Abrams would have requested an interest-based enhancement of their fees, the court would have denied the request.
The trustee primarily objects to the fee enhancement because the settlement is based on a limited fund of money to distribute to the claimants and any enhancement will necessarily affect the amount need for distribution and therefore endanger the settlement. The possibility that a fee enhancement will destroy this settlement is an additional factor that the court has considered in denying Adelman's and Abram's request for increased fees. In sum, while the court sympathizes with Adelman and Abrams for having to wait so long to collect their fees, the court will not jeopardize the settlement to ensure that Adelman and Abrams are paid top dollar for their services.
V. Trustee's Motion for Rule to Show Cause
After the trustee moved the court to approve the proposed settlement agreement, the City of Denver and Travelers Insurance filed a lawsuit in Colorado State Court against the adversary defendants alleging the identical claims that the trustee asserted in the adversary bankruptcy case. According to the trustee, this move constituted a flagrant violation of this court's jurisdiction over the case and warrants a finding of contempt. Denver and Travelers Insurance, on the other hand, contend that they acted within their rights under the Bankruptcy Code by initiating the lawsuit in Colorado.
The court denies the trustee's motion for a rule to show cause. The key dispute between the trustee and Denver and Travelers is whether the court has the jurisdiction and power to enjoin Denver's claims against the adversary defendants (in this or any other court). Until the date of this ruling, the parties hotly disagreed over that issue, and justifiably so. As the court explained, the jurisdictional dispute at the heart of this case is a fact sensitive inquiry, and other courts confronting similar issues have reached conflicting decisions. Therefore, until now, whether this court has the jurisdiction and authority to enjoin suits like that Denver and Travelers filed in Colorado was far from clear. Because of this uncertainty, Denver's and Travelers filing of the lawsuit in Colorado did not, as the trustee suggests, ignore an order of this court. Rather, their conduct merely constituted a litigation strategy based on their hope that the court might not approve the settlement agreement. If, after this ruling and approval of the settlement containing the injunction, Denver and Travelers file a lawsuit against the adversary defendants, then the trustee will have a solid foundation to move for contempt. Denver's and Travelers' previous conduct, while questionable in nature, does not demonstrate contempt for this court.
Conclusion
For the foregoing reasons, the court: (1) denies Denver's motion to vacate the order of February 20, 1998 withdrawing the reference [doc. 36-1]; (2) grants the trustee's motion for approval of the settlement agreement [doc. 33-1]; (3) denies Whitman's motion for leave to file a contingent proof of claim and have it deemed timely filed [doc. 48-1]; (4) denies Abrams' motion for an enhancement of fees [doc. 62-1]; (5) denies Adelman's motion for an enhancement of fees [doc. 63-1]; and (6) denies the trustee's motion for rule to show cause [doc. 79-1].