Hicks, Muse & Co. v. Brandt
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Opinion
USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 97-1381
IN RE: HEALTHCO INTERNATIONAL, INC.,
Debtor,
________
HICKS, MUSE & CO., INC., et al.,
Appellants,
v.
WILLIAM A. BRANDT, JR., TRUSTEE,
Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge] ___________________
____________________
Before
Stahl, Circuit Judge, _____________
Godbold* and Cyr, Senior Circuit Judges. _____________________
____________________
David L. Evans, with whom Harold B. Murphy, Daniel J. Lyne, D. ______________ _________________ _______________ __
Ethan Jeffery, Hanify & King, Mike McKool, Jr., Jeffrey A. Carter and ______________ _____________ ________________ _________________
McKool Smith were on brief for appellants ____________
David C. Cohn, with whom David B. Madoff and Cohn & Kelakos LLP _____________ _______________ ___________________
were on brief for appellee.
____________________
February 12, 1998
____________________
____________________
*Of the Eleventh Circuit, sitting by designation.
CYR, Senior Circuit Judge. The question presented on CYR, Senior Circuit Judge. ____________________
appeal is whether the bankruptcy court abused its discretion by
approving a settlement between the chapter 7 trustee for Healthco
International, Inc. and a consortium of banks ("the Bank Group")
which financed a prepetition leveraged buy-out ("LBO") of
Healthco by appellants Hicks Muse & Co., Inc. and its coinvestors
(collectively: "Hicks Muse"). We affirm.
I I
BACKGROUND BACKGROUND __________
Appellant Hicks Muse financed the 1991 LBO with a $50
million term loan and a $65 million revolving credit facility
from the Bank Group, secured by liens on all Healthco assets.
Healthco filed its chapter 11 petition in June 1993 and continued
to operate as a debtor-in-possession. Three months later an
interim trustee was appointed and the reorganization was
converted to a chapter 7 liquidation.
By the time the chapter 7 trustee ("Trustee") was
appointed approximately one month later, Healthco's assets
already were undergoing liquidation by the interim trustee,
subject to bankruptcy court approval. In the chapter 11
schedules the Healthco assets were valued at $149 million, but
were later assigned a liquidation value between $33 and $66
million.
After obtaining relief from the automatic stay, see ___
Bankruptcy Code 362, 11 U.S.C. 362, the Bank Group proceeded
to liquidate its Healthco collateral, having agreed to provide
2
the Trustee with "full, complete, and detailed accounting[s]" of
the liquidation on a monthly basis. Over the ensuing year the
Trustee lodged several complaints, with the Bank Group and the
bankruptcy court, that the promised accountings had not been
forthcoming or were deficient. Eventually the Bank Group
submitted a thirty-page accounting pursuant to court order and
provided the Trustee with thirty cartons of raw invoices
generated during the collateral liquidation process.
After declining to incur "the incredible cost . . . of
. . . go[ing] through the[se] records item by item," the Trustee
commenced an adversary proceeding against Hicks Muse and the Bank
Group, asserting two principal claims. First, since the LBO had
left Healthco insolvent, the Trustee claimed that the $115
million lien obtained by the Bank Group on the Healthco assets
constituted a voidable fraudulent transfer (hereinafter: "the
fraudulent transfer claim"). See Bankruptcy Code 544(b), 11 ___
U.S.C. 544(b). Second, the Trustee claimed that the Bank Group
had liquidated its Healthco collateral in a "commercially
unreasonable" manner, see Mass. Gen. Laws Ann. ch. 106, 9- ___
504(3) ("UCC"), which yielded only $50-60 million on assets with
an estimated value (per chapter 11 schedules) exceeding $149
million (hereinafter: "the UCC claim").
The Trustee subsequently proposed to dismiss both the
fraudulent transfer claim and the UCC claim, see Fed. R. Bankr. ___
3
P. 9019(a);1 see also Fed. R. Bankr. P. 9014 (contested matters), see also Fed. R. Bankr. P. 9014 (contested matters), ___ ____
in return for the Bank Group's agreement to pay the chapter 7 in return for the Bank Group's agreement to pay the chapter 7
estate $9 million in cash, waive roughly $1 million in allowed estate $9 million in cash, waive roughly $1 million in allowed
priority claims against the chapter 7 estate and a deficiency priority claims against the chapter 7 estate and a deficiency
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USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 97-1381
IN RE: HEALTHCO INTERNATIONAL, INC.,
Debtor,
________
HICKS, MUSE & CO., INC., et al.,
Appellants,
v.
WILLIAM A. BRANDT, JR., TRUSTEE,
Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge] ___________________
____________________
Before
Stahl, Circuit Judge, _____________
Godbold* and Cyr, Senior Circuit Judges. _____________________
____________________
David L. Evans, with whom Harold B. Murphy, Daniel J. Lyne, D. ______________ _________________ _______________ __
Ethan Jeffery, Hanify & King, Mike McKool, Jr., Jeffrey A. Carter and ______________ _____________ ________________ _________________
McKool Smith were on brief for appellants ____________
David C. Cohn, with whom David B. Madoff and Cohn & Kelakos LLP _____________ _______________ ___________________
were on brief for appellee.
____________________
February 12, 1998
____________________
____________________
*Of the Eleventh Circuit, sitting by designation.
CYR, Senior Circuit Judge. The question presented on CYR, Senior Circuit Judge. ____________________
appeal is whether the bankruptcy court abused its discretion by
approving a settlement between the chapter 7 trustee for Healthco
International, Inc. and a consortium of banks ("the Bank Group")
which financed a prepetition leveraged buy-out ("LBO") of
Healthco by appellants Hicks Muse & Co., Inc. and its coinvestors
(collectively: "Hicks Muse"). We affirm.
I I
BACKGROUND BACKGROUND __________
Appellant Hicks Muse financed the 1991 LBO with a $50
million term loan and a $65 million revolving credit facility
from the Bank Group, secured by liens on all Healthco assets.
Healthco filed its chapter 11 petition in June 1993 and continued
to operate as a debtor-in-possession. Three months later an
interim trustee was appointed and the reorganization was
converted to a chapter 7 liquidation.
By the time the chapter 7 trustee ("Trustee") was
appointed approximately one month later, Healthco's assets
already were undergoing liquidation by the interim trustee,
subject to bankruptcy court approval. In the chapter 11
schedules the Healthco assets were valued at $149 million, but
were later assigned a liquidation value between $33 and $66
million.
After obtaining relief from the automatic stay, see ___
Bankruptcy Code 362, 11 U.S.C. 362, the Bank Group proceeded
to liquidate its Healthco collateral, having agreed to provide
2
the Trustee with "full, complete, and detailed accounting[s]" of
the liquidation on a monthly basis. Over the ensuing year the
Trustee lodged several complaints, with the Bank Group and the
bankruptcy court, that the promised accountings had not been
forthcoming or were deficient. Eventually the Bank Group
submitted a thirty-page accounting pursuant to court order and
provided the Trustee with thirty cartons of raw invoices
generated during the collateral liquidation process.
After declining to incur "the incredible cost . . . of
. . . go[ing] through the[se] records item by item," the Trustee
commenced an adversary proceeding against Hicks Muse and the Bank
Group, asserting two principal claims. First, since the LBO had
left Healthco insolvent, the Trustee claimed that the $115
million lien obtained by the Bank Group on the Healthco assets
constituted a voidable fraudulent transfer (hereinafter: "the
fraudulent transfer claim"). See Bankruptcy Code 544(b), 11 ___
U.S.C. 544(b). Second, the Trustee claimed that the Bank Group
had liquidated its Healthco collateral in a "commercially
unreasonable" manner, see Mass. Gen. Laws Ann. ch. 106, 9- ___
504(3) ("UCC"), which yielded only $50-60 million on assets with
an estimated value (per chapter 11 schedules) exceeding $149
million (hereinafter: "the UCC claim").
The Trustee subsequently proposed to dismiss both the
fraudulent transfer claim and the UCC claim, see Fed. R. Bankr. ___
3
P. 9019(a);1 see also Fed. R. Bankr. P. 9014 (contested matters), see also Fed. R. Bankr. P. 9014 (contested matters), ___ ____
in return for the Bank Group's agreement to pay the chapter 7 in return for the Bank Group's agreement to pay the chapter 7
estate $9 million in cash, waive roughly $1 million in allowed estate $9 million in cash, waive roughly $1 million in allowed
priority claims against the chapter 7 estate and a deficiency priority claims against the chapter 7 estate and a deficiency
claim estimated at $35 million, and assign to the Trustee any claim estimated at $35 million, and assign to the Trustee any
LBO-related claims the Bank Group might have against third LBO-related claims the Bank Group might have against third
parties, including nonsettling defendants in the adversary parties, including nonsettling defendants in the adversary
proceeding.2 The Trustee in turn agreed not to oppose the $50-60 proceeding.
million secured claim asserted by the Bank Group against the
Healthco collateral. Several codefendants, including Hicks Muse,
objected to the settlement.
At the hearing before the bankruptcy court, the Trustee
contended that the proposed $45 million settlement would serve
the "best interests" of the chapter 7 estate, see Kowal v. ___ _____
Malkemus (In re Thompson), 965 F.2d 1136, 1141 n.5, 1145 (1st ________ _______________
Cir. 1992), for two reasons. First, the Trustee pointed out that
the $45 million offer would return the chapter 7 estate ninety
percent of the $50 million estimated maximum litigated value of
the fraudulent transfer claim, without litigation risk. Second,
____________________
1Bankruptcy Rule 9019(a) provides: "On motion by the trustee 1Bankruptcy Rule 9019(a) provides: "On motion by the trustee
and after notice and a hearing, the court may approve a and after notice and a hearing, the court may approve a
compromise or settlement." compromise or settlement."
2Initially the Trustee proposed that the Bank Group assign 2Initially the Trustee proposed that the Bank Group assign
its deficiency claim to the Trustee, but the bankruptcy court its deficiency claim to the Trustee, but the bankruptcy court
disapproved the assignment as inconsistent with the Trustee's disapproved the assignment as inconsistent with the Trustee's
fiduciary obligation to unsecured creditors. The court fiduciary obligation to unsecured creditors. The court
nonetheless concluded that an outright waiver of the deficiency nonetheless concluded that an outright waiver of the deficiency
claim would be permissible. As appellants do not challenge the claim would be permissible. As appellants do not challenge the
bankruptcy court ruling in the latter respect, we do not address bankruptcy court ruling in the latter respect, we do not address
it. it.
4
the Trustee noted several factors central to his assessment that
the UCC claim, fully litigated, could generate only minimal value
for the chapter 7 estate. See infra Section II.B.1. The ___ _____
bankruptcy court approved the proposed settlement with one
pertinent modification.3
On intermediate appeal to the district court, Hicks On intermediate appeal to the district court, Hicks
Muse challenged the bankruptcy court finding that the settlement Muse challenged the bankruptcy court finding that the settlement
between the Trustee and the Bank Group had been negotiated in between the Trustee and the Bank Group had been negotiated in
"good faith." The district court ruled the "good faith" test "good faith." The district court ruled the "good faith" test
immaterial under the "best interests" standard applicable under immaterial under the "best interests" standard applicable under
Bankruptcy Rule 9019, and opined that a finding of "good faith" Bankruptcy Rule 9019, and opined that a finding of "good faith"
might be misperceived by state courts as a basis for barring might be misperceived by state courts as a basis for barring
Hicks Muse from pursuing its state-law contribution claim against Hicks Muse from pursuing its state-law contribution claim against
the Bank Group. In all other respects the bankruptcy court order the Bank Group. In all other respects the bankruptcy court order
was affirmed by the district court. was affirmed by the district court.
II II
DISCUSSION DISCUSSION __________
A. Appellate Jurisdiction A. Appellate Jurisdiction ______________________
The Trustee contends that the appeal is moot because
Hicks Muse knowingly disregarded his warning that the settlement
would be consummated promptly absent a timeous stay of the
____________________
3The court expressly refrained from determining the validity 3The court expressly refrained from determining the validity
vel non of the Bank Group's purported assignment to the Trustee vel non of the Bank Group's purported assignment to the Trustee ___ ___
of its causes of action against nonsettling codefendants. For of its causes of action against nonsettling codefendants. For
post-settlement procedural developments in this adversary post-settlement procedural developments in this adversary
proceeding, see In re Healthco Int'l, Inc., 208 B.R. 288 (Bankr. proceeding, see In re Healthco Int'l, Inc., 208 B.R. 288 (Bankr. ___________________________
D. Mass. 1997); In re Healthco, 203 B.R. 515 (Bankr. D. Mass. D. Mass. 1997); In re Healthco, 203 B.R. 515 (Bankr. D. Mass. _______________
1996); In re Healthco, 201 B.R. 19 (Bankr. D. Mass. 1996); In re 1996); In re Healthco, 201 B.R. 19 (Bankr. D. Mass. 1996); In re _______________ _____
Healthco, 195 B.R. 971 (Bankr. D. Mass. 1996). Healthco, 195 B.R. 971 (Bankr. D. Mass. 1996). ________
5
bankruptcy court order approving the settlement. As Hicks Muse
sought no stay, the Bank Group promptly disbursed $9 million to
the Trustee, from which $2.5 million has since been used to
defray professional fees. Thereafter, all claims in the
adversary proceeding against the Bank Group were dismissed with
prejudice.
1. Equitable Mootness 1. Equitable Mootness __________________
The "equitable mootness" doctrine imports both
"equitable" and "pragmatic" limitations upon our appellate
jurisdiction over bankruptcy appeals. See Institut Pasteur v. ___ _________________
Cambridge Biotech Corp. (In re Cambridge Biotech Corp.), 104 F.3d _______________________ _____________________________
489, 492 n.5 (1st Cir.), cert. denied, 117 S. Ct. 2511 (1997); _____ ______
Rochman v. Northeast Utils. Serv. Group (In re Public Serv. Co. _______ _____________________________ _______________________
of N.H.), 963 F.2d 469, 471 (1st Cir. 1992). _______
The equitable mootness test inquires whether an
unwarranted or repeated failure to request a stay enabled
developments to evolve in reliance on the bankruptcy court order
to the degree that their remediation has become impracticable or
impossible. Id. at 472. In the instant case, however, Hicks ___
Muse neither repeatedly ignored its right, nor significantly
delayed utilizing its opportunities, to seek a stay of the order
approving the Bank Group settlement. Cf. id. at 472-73 (noting ___ ___
that appellants ignored several opportunities to take
interlocutory appeals from orders denying stays during sixteen-
month period following confirmation of reorganization plan).
Nor has the Trustee met the "pragmatic" mootness test,
6
which contemplates proof that the challenged bankruptcy court
order has been implemented to the degree that meaningful
appellate relief is no longer practicable even though the
appellant may have sought a stay with all due diligence.
Instead, the Trustee relies either upon more finely focused
reorganization provisions not applicable here, see Bankruptcy ___
Code 1127(b), 11 U.S.C. 1127(b) (barring plan modification
after "substantial consummation"), or inapposite settlement
provisions pursuant to which lawsuits in nonbankruptcy courts had
already been dismissed with prejudice, or substantial
distributions had been made to parties no longer amenable to
bankruptcy court jurisdiction. Here, of course, the only
dismissal with prejudice occurred in the instant adversary
proceeding and there has been no showing that any portion of the
settlement proceeds disbursed to the Trustee, or to persons
employed by the Trustee, could not be recovered with relative
ease. See In re The Gibbons-Grable Co., 141 B.R. 614, 617 ___ ______________________________
(Bankr. N.D. Ohio 1992) (noting that interim disbursements of
compensation under Bankruptcy Code sections 330 and 331 remain
subject to reconsideration); see also In re Spillane, 884 F.2d ___ ____ ______________
642, 644 (1st Cir. 1989).
Accordingly, the equitable mootness doctrine does not
bar the present appeal.
2. Section 363(m) Mootness 2. Section 363(m) Mootness _______________________
The Trustee further contends that the appeal is mooted
by section 363(m), which states:
7
The reversal or modification on appeal of an
authorization under [ 363(b) or (c)] of a _____________ __ _
sale or lease of property [of the estate] ____ __ _____ __ ________
does not affect the validity of a sale or ____ __
lease under such authorization to an entity _____ __ __ ______
that purchased or leased such property in ____ _________ __ ______ ____ ________
good faith, whether or not such entity knew
of the pendency of the appeal, unless such
authorization and such sale or lease were ____ __ _____
stayed pending appeal.
Bankruptcy Code 363(m), 11 U.S.C. 363(m) (emphasis added).
The Trustee argues that section 363(m) applies because the claims
which were settled with the Bank Group constituted "property of
the estate," see Bankruptcy Code 541(a), 11 U.S.C. 541(a), ___
and therefore the settlement was the functional equivalent of a
"sale . . . of property" of the estate under section 363(m). The
Trustee s contention is fraught with problems.
First, it is at odds with the unambiguous language
employed in section 363(m). See Laracuente v. Chase Manhattan ___ __________ _______________
Bank, 891 F.2d 17, 22 n.2, 23 (1st Cir. 1989) (in construing ____
Bankruptcy Code, "our inquiry . . . ends where, as here, the
plain language of the statute is unambiguous"). By its very
nature a settlement resolves adversarial claims prior to their _____
definitive determination by the court. In contrast, a "sale"
effects a [t]ransfer of [ the title . . . ] [to] property for
[a] consideration . . . . Black s Law Dictionary 1200 (5th ed.
1979). The bankruptcy court below simply endorsed a settlement
negotiated by the adversaries whereby the Trustee abandoned
claims against the Bank Group in return for a prescribed
consideration.
Second, the interpretation urged by the Trustee is not
8
in step with the legislative policy animating section 363(m),
which sought to encourage optimum bids for "property of the
estate" from entities not otherwise privy to the bankruptcy
proceedings, by ensuring that orders approving such sales
promptly become final absent a timeous stay. See Mark Bell ___ __________
Furniture Warehouse, Inc. v. D.M. Reid Assocs. (In re Mark Bell _________________________ _________________ ________________
Furniture Warehouse, Inc.), 992 F.2d 7, 8 (1st Cir. 1993); ___________________________
Willemain v. Kivitz, 764 F.2d 1019, 1023 (4th Cir. 1985) _________ ______
(defining "good faith purchaser" as " one who purchases the
assets for value, in good faith, and without notice of adverse
claims ") (citation omitted); Greylock Glen Corp. v. Community ____________________ _________
Sav. Bank, 656 F.2d 1, 4 (1st Cir. 1981). By contrast, the Bank _________
Group in no sense qualified as an outside bidder eligible for the
extraordinary "finality" guaranties afforded by section 363(m).
Instead, as the defendant directly targeted by the Trustee in the
subject adversary proceeding, not only was the Bank Group the one
"bidder" at all concerned about resolving the disputed claims
asserted against it by the Trustee, but it lacked any incentive
to abandon its settlement bargain with the Trustee even absent
the extraordinary "finality" guaranties envisioned in section
363(m).
Finally, the authorities cited by the Trustee are
inapposite or inconclusive at best. See, e.g., In re Telesphere ___ ____ ________________
Communications, Inc., 179 B.R. 544 (Bankr. N.D. Ill. 1994). _____________________
Telesphere suggests no broad functional equivalence between a __________
property sale or lease and a settlement, but simply that courts
9
may consult section 363 for guidance in identifying standards for ________
such basic procedures as "notice" and "hearing," id. at 552 ___
(citing 11 U.S.C. 363(b)), particularly since no substantive
Code provision directly governs settlement approvals by the
bankruptcy court, compare Fed. R. Bankr. 9019 (prescribing _______
procedural guidance for settlements), with Fed. R. Bankr. P. 6004 ____
(prescribing distinct procedural rules for 363 sales). For
that matter, Telesphere did not so much as mention section __________
363(m), let alone endorse its wholesale importation into the
settlement arena.4
____________________
4Nevertheless, there lurks a concern, not raised here, which
may cut the other way. Prior to the Bankruptcy Code, sales of
property belonging to the estate were governed by Bankruptcy Act
70(f), 11 U.S.C. 110 (repealed), and settlements were subject
to Bankruptcy Act 27, 11 U.S.C. 50 (repealed). See 9 ___
Lawrence P. King, Collier on Bankruptcy 9019.RH, at 9019-12 ______________________
(15th ed. 1995). Former Bankruptcy Rule 919, predecessor to
Bankruptcy Rule 9019, was the procedural counterpart to
Bankruptcy Act 27, whose substantive provisions have not been
carried forward in the Bankruptcy Code. See In re Dow Corning ___ __________________
Corp., 198 B.R. 214, 244-47 (Bankr. E.D. Mich. 1996); In re _____ ______
Sparks, 190 B.R. 842, 843-44 (Bankr. N.D. Ill. 1996). Moreover, ______
the legislative history relating to the repeal of Bankruptcy Act
27 affords no insight to the intent behind this discontinuity.
Although Bankruptcy Rule 9019 purports to empower the
bankruptcy court to approve settlements, it may not abridge,
enlarge, or modify any substantive right [enacted in the Code]. ___________
28 U.S.C. 2075 (emphasis added). Thus, absent some clear Code
source for the substantive power to approve settlements, one may
question whether Congress envisioned section 363 as that source,
but see Martin v. Kane (In re A & C Properties), 784 F.2d 1377, ___ ___ ______ ____ ______________________
1381 n.4 (9th Cir. 1986) (suggesting, in dicta, that Congress may
have intended the general equitable powers prescribed in Code
105 to subsume the specific powers described in Bankruptcy Act
27), or whether the power to approve settlements is simply
inherent to the judicial forum.
As in any other case, we must consider, sua sponte if need ___ ______
be, whether we possess subject matter jurisdiction over an
appeal. See Lopez v. Unanue Casal (In re Unanue Casal), 998 F.2d ___ _____ ____________ __________________
28, 30 (1st Cir. 1993). Nonetheless, we may bypass problematic
jurisdictional questions if it appears that the appeal must in
10
B. The UCC Claim Settlement5 B. The UCC Claim Settlement ________________________
Hicks Muse maintains that the bankruptcy court abused Hicks Muse maintains that the bankruptcy court abused
its discretion in approving the UCC claim settlement absent an its discretion in approving the UCC claim settlement absent an
adequate factual foundation for determining the value of the UCC adequate factual foundation for determining the value of the UCC
claim because the Trustee never reviewed the thirty cartons of claim because the Trustee never reviewed the thirty cartons of
invoices generated by the Bank Group during its collateral invoices generated by the Bank Group during its collateral
liquidation. See supra Section I; see also, e.g., In re liquidation. See supra Section I; see also, e.g., In re ___ _____ ___ ____ ____ ______
Goldstein, 131 B.R. 367, 371 (Bankr. S.D. Ohio 1991) Goldstein, 131 B.R. 367, 371 (Bankr. S.D. Ohio 1991) _________
(disapproving settlement because trustee made no "thorough review (disapproving settlement because trustee made no "thorough review
of the underlying documents [a trust and will] and applicable of the underlying documents [a trust and will] and applicable
law"). law").
The bankruptcy court essentially is expected to The bankruptcy court essentially is expected to
" assess[] and balance the value of the claim[s] . . . being " assess[] and balance the value of the claim[s] . . . being
compromised against the value . . . of the compromise proposal. " compromised against the value . . . of the compromise proposal. "
Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir. 1995) (citation Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir. 1995) (citation _______ _______
omitted). It may consider, among other factors: (1) the omitted). It may consider, among other factors: (1) the
probability of success were the claim to be litigated given probability of success were the claim to be litigated given
the legal and evidentiary obstacles and the expense, the legal and evidentiary obstacles and the expense,
inconvenience and delay entailed in its litigation measured inconvenience and delay entailed in its litigation measured
against the more definitive, concrete and immediate benefits against the more definitive, concrete and immediate benefits
____________________
all events fail on the merits. See Institut Pasteur, 104 F.3d at ___ ________________
492. As this is such a case, we proceed to the merits.
5Bankruptcy court orders endorsing settlements are reviewed
for manifest abuse of discretion. See Jeffrey v. Desmond, 70 ___ _______ _______
F.3d 183, 185 (1st Cir. 1995). Moreover, "[t]he [bankruptcy]
judge . . . is not to substitute her judgment for that of the
trustee, and the trustee's judgment is to be accorded some
deference." Hill v. Burdick (In re Moorhead Corp.), 208 B.R. 87, ____ _______ ____________________
89 (B.A.P. 1st Cir. 1997). Compromises are favored in
bankruptcy. 9 Collier on Bankruptcy 9019.01, at 9019-2. _____________________
11
attending the proposed settlement, see Kowal, 965 F.2d at 1141 attending the proposed settlement, see Kowal, 965 F.2d at 1141 ___ _____
n.5, 1145 (so-called "best interests" standard); (2) a reasonable n.5, 1145 (so-called "best interests" standard); (2) a reasonable
accommodation of the creditors' views regarding the proposed accommodation of the creditors' views regarding the proposed
settlement; and (3) the experience and competence of the settlement; and (3) the experience and competence of the
fiduciary proposing the settlement. See Jeffrey, 70 F.3d at 185; fiduciary proposing the settlement. See Jeffrey, 70 F.3d at 185; ___ _______
In re Texaco, Inc., 84 B.R. 893, 902 (Bankr. S.D.N.Y. 1988) In re Texaco, Inc., 84 B.R. 893, 902 (Bankr. S.D.N.Y. 1988) ____________________
(citing Protective Committee for Indep. Stockholders of TMT (citing Protective Committee for Indep. Stockholders of TMT _________________________________________________________
Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)). Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)). ___________________ ________
12
1. "Best Interests" 1. "Best Interests" ______________
The Trustee identified several reasons for settling the
UCC claim for minimal value.6 First, the estate would face a First, the estate would face a
formidable burden in attempting to demonstrate that the Bank formidable burden in attempting to demonstrate that the Bank
Group liquidated its collateral in a "commercially unreasonable" Group liquidated its collateral in a "commercially unreasonable"
manner. Second, Hicks makes too much of the Trustee's decision manner. Second, Hicks makes too much of the Trustee's decision
to forego a costly and time-consuming lapidarian review of every to forego a costly and time-consuming lapidarian review of every
invoice generated during the collateral liquidation, especially invoice generated during the collateral liquidation, especially
since Hicks makes no suggestion that the individual invoices since Hicks makes no suggestion that the individual invoices
reflect any relevant information other than the price obtained. reflect any relevant information other than the price obtained.
Ordinarily a UCC 9-504(3) claimant must show something besides Ordinarily a UCC 9-504(3) claimant must show something besides
a low price, as by demonstrating that the collateral liquidation a low price, as by demonstrating that the collateral liquidation
was not conducted in a commercially reasonable manner. See Mass. was not conducted in a commercially reasonable manner. See Mass. _________ ___
Gen. Laws Ann. ch. 106, 9-507(2); RTC v. Carr, 13 F.3d 425, Gen. Laws Ann. ch. 106, 9-507(2); RTC v. Carr, 13 F.3d 425, ___ ____
429-30 (1st Cir. 1993) (citing Chartrand v. Newton Trust Co., 5 429-30 (1st Cir. 1993) (citing Chartrand v. Newton Trust Co., 5 _________ _________________
N.E.2d 421, 423 (Mass. 1936)); Nadler v. BayBank Merrimack N.E.2d 421, 423 (Mass. 1936)); Nadler v. BayBank Merrimack ______ __________________
Valley, N.A., 733 F.2d 182, 184 (1st Cir. 1984). Thus, absent Valley, N.A., 733 F.2d 182, 184 (1st Cir. 1984). Thus, absent ____________
extraordinary circumstances not present here, mere evidence that extraordinary circumstances not present here, mere evidence that
the Healthco collateral might have returned more than $50 million the Healthco collateral might have returned more than $50 million
in some exquisitely orchestrated liquidation did not offset the in some exquisitely orchestrated liquidation did not offset the
substantial burdens and risks which the Trustee would have substantial burdens and risks which the Trustee would have
encountered in litigating the UCC claim. encountered in litigating the UCC claim.
Furthermore, the insistence by Hicks Muse that the Furthermore, the insistence by Hicks Muse that the
____________________
6On the other hand, Hicks Muse offered no solid evidentiary
basis for second-guessing the Trustee's assessment that the
settlement recoveries would amount to 90% of the total allegedly
due the estate on the fraudulent transfer claim.
13
Trustee review every invoice in the thirty cartons delivered by Trustee review every invoice in the thirty cartons delivered by
the Bank Group is predicated on the mistaken notion that the the Bank Group is predicated on the mistaken notion that the
Trustee or the bankruptcy court was obliged to fix the value of Trustee or the bankruptcy court was obliged to fix the value of
the UCC claim with near mathematical precision before it could be the UCC claim with near mathematical precision before it could be
settled. See Kowal, 965 F.2d at 1145 ("[A] chapter 7 trustee . . settled. See Kowal, 965 F.2d at 1145 ("[A] chapter 7 trustee . . ___ _____
. realistically cannot be required to demonstrate to the . realistically cannot be required to demonstrate to the
satisfaction of every individual creditor and the debtor, or to satisfaction of every individual creditor and the debtor, or to
any compelling degree of certitude, that the settlement benefit any compelling degree of certitude, that the settlement benefit
to the chapter 7 estate and the value of the settled claim to the chapter 7 estate and the value of the settled claim
comprise a matched set."). Among other practical considerations comprise a matched set."). Among other practical considerations
overlooked under this approach is the reality that many, if not overlooked under this approach is the reality that many, if not
most, claims settled in bankruptcy proceedings are not amenable most, claims settled in bankruptcy proceedings are not amenable
either to ready or exact valuation in the abstract. In re Energy either to ready or exact valuation in the abstract. In re Energy ____________
Coop., 886 F.2d 921, 929 (7th Cir. 1989) (" [A]n exact judicial Coop., 886 F.2d 921, 929 (7th Cir. 1989) (" [A]n exact judicial _____
determination of the values in issue would defeat the purpose of determination of the values in issue would defeat the purpose of
compromising the claim. ") (citation omitted); In re Lee Way compromising the claim. ") (citation omitted); In re Lee Way _______________
Holding Co., 120 B.R. 881, 897 (Bankr. S.D. Ohio 1990) (noting Holding Co., 120 B.R. 881, 897 (Bankr. S.D. Ohio 1990) (noting ___________
that settling party need only have "[f]amiliarity with a case, that settling party need only have "[f]amiliarity with a case,
its factual patterns, legal theories, and evidence," and need not its factual patterns, legal theories, and evidence," and need not
be "so familiar with the case as to be prepared for trial"). be "so familiar with the case as to be prepared for trial").
Thus, "th[e] responsibility of the bankruptcy judge, and ours on Thus, "th[e] responsibility of the bankruptcy judge, and ours on
review, is not to decide the numerous questions of law and fact review, is not to decide the numerous questions of law and fact
raised by appellants but rather to canvass the issues and see raised by appellants but rather to canvass the issues and see
whether the settlement 'fall[s] below the lowest point in the whether the settlement 'fall[s] below the lowest point in the
range of reasonableness. " Cosoff v. Rodman (In re W.T. Grant range of reasonableness. " Cosoff v. Rodman (In re W.T. Grant ______ ______ _________________
Co.), 699 F.2d 599, 608 (2d Cir. 1983) (citation omitted); see In Co.), 699 F.2d 599, 608 (2d Cir. 1983) (citation omitted); see In ___ ___ __
14
re Energy Coop., 886 F.2d at 929.7 re Energy Coop., 886 F.2d at 929. _______________
The evidence on sale-price insufficiency was highly The evidence on sale-price insufficiency was highly
suspect as well. The original complaint valued the UCC claim at suspect as well. The original complaint valued the UCC claim at
$99 million or more (i.e., $149 million minimum asset value, less $99 million or more (i.e., $149 million minimum asset value, less ____
$50 million in sale proceeds generated to date). The Trustee $50 million in sale proceeds generated to date). The Trustee
quite reasonably attributed its overestimation to aggressive quite reasonably attributed its overestimation to aggressive
pleading typical of plaintiffs generally at early stages in the pleading typical of plaintiffs generally at early stages in the
proceedings. Moreover, it is often a practical necessity for proceedings. Moreover, it is often a practical necessity for
fiduciaries and claimants in bankruptcy proceedings to utilize fiduciaries and claimants in bankruptcy proceedings to utilize
the inflated asset values listed in the debtor's schedules as a the inflated asset values listed in the debtor's schedules as a
main source for their valuation estimates prior to any main source for their valuation estimates prior to any
opportunity to conduct discovery, see Fed. R. Bankr. P. 7026 opportunity to conduct discovery, see Fed. R. Bankr. P. 7026 ___
(discovery) & 7015 (permitting post-discovery amendments to (discovery) & 7015 (permitting post-discovery amendments to
complaints in adversary proceedings). See Associates Commercial complaints in adversary proceedings). See Associates Commercial ___ _____________________
Corp. v. A & A Transp., Inc. (In re A & A Transp., Inc.), 10 B.R. Corp. v. A & A Transp., Inc. (In re A & A Transp., Inc.), 10 B.R. _____ ___________________ _________________________
867, 868-69 (Bankr. D. Mass. 1981) ("[A]lthough the Debtor signs 867, 868-69 (Bankr. D. Mass. 1981) ("[A]lthough the Debtor signs
the schedules under oath, the values listed therein are only the schedules under oath, the values listed therein are only
reasonable estimates, and very often the person charged with reasonable estimates, and very often the person charged with
preparing the schedules has little or no knowledge about the preparing the schedules has little or no knowledge about the
value of certain types of property listed therein."). Fairly value of certain types of property listed therein."). Fairly
early on, in fact, the Trustee uncovered evidence that the $149 early on, in fact, the Trustee uncovered evidence that the $149
million valuation estimate was grossly excessive. million valuation estimate was grossly excessive.
____________________
7We reject the contention that the bankruptcy court
necessarily considered the UCC claim valueless. Since the
evidence did not compel a finding that $45 million was the
minimum needed to settle the fraudulent transfer claim, see supra ___ _____
note 6, some unidentified portion of the settlement sum may have
reflected a reasonable discounting of the UCC claim.
15
At a hearing conducted during the chapter 11 At a hearing conducted during the chapter 11
proceedings, Healthco personnel pegged the likely collateral proceedings, Healthco personnel pegged the likely collateral
liquidation value at between $33 and 66 million, which quite liquidation value at between $33 and 66 million, which quite
accurately presaged the $50-60 million ultimately generated in accurately presaged the $50-60 million ultimately generated in
sale proceeds. See In re Tennessee Chem. Co., 143 B.R. 468, 475 sale proceeds. See In re Tennessee Chem. Co., 143 B.R. 468, 475 ___ _________________________
(Bankr. E.D. Tenn. 1992) ("[T]he usual assumption [is] that going (Bankr. E.D. Tenn. 1992) ("[T]he usual assumption [is] that going
concern value is greater than forced sale, liquidation, or concern value is greater than forced sale, liquidation, or
salvage value."). Furthermore, for some time Healthco had salvage value."). Furthermore, for some time Healthco had
utilized a deficient inventory control system which may well have utilized a deficient inventory control system which may well have
caused gross overstatements in its 1993 inventories. caused gross overstatements in its 1993 inventories.
Yet more importantly, however, Healthco was the largest Yet more importantly, however, Healthco was the largest
distributor of dental supplies in the United States, with distributor of dental supplies in the United States, with
extensive worldwide markets. Its huge market share and the extensive worldwide markets. Its huge market share and the
necessity that its inventories virtually be "dumped" on the necessity that its inventories virtually be "dumped" on the
market reasonably could be expected to cause significantly market reasonably could be expected to cause significantly
depressed prices. Moreover, many Healthco accounts receivable depressed prices. Moreover, many Healthco accounts receivable
were in serious dispute and unlikely to attract substantial were in serious dispute and unlikely to attract substantial
offers from third parties. See, e.g., Brown v. Riley & Power offers from third parties. See, e.g., Brown v. Riley & Power ___ ____ _____ ______________
Mgt., Inc. (In re Omni Mech. Contractors, Inc.), 114 B.R. 518, Mgt., Inc. (In re Omni Mech. Contractors, Inc.), 114 B.R. 518, __________ ___________________________________
522 (Bankr. E.D. Tenn. 1990) ("The value of accounts receivable 522 (Bankr. E.D. Tenn. 1990) ("The value of accounts receivable
may be discounted for uncollectible and disputed debts."). Hicks may be discounted for uncollectible and disputed debts."). Hicks
Musecitesnorecordevidencewhichwouldunderminetheseconsiderations.8 Musecitesnorecordevidencewhichwouldunderminetheseconsiderations.
____________________
8As the Healthco collateral liquidation was exceptional in
these important respects, the Trustee supportably concluded that
the decision by the Bank Group not to obtain a liquidation-value
appraisal prior to its collateral liquidation was not
unreasonable, or at the very least that the trier of fact at
trial could have found it excusable.
16
Finally, the Trustee reasonably concluded that even if Finally, the Trustee reasonably concluded that even if
the sale proceeds obtained by the Bank Group were shown to have the sale proceeds obtained by the Bank Group were shown to have
been low, it was most unlikely that it could have been been low, it was most unlikely that it could have been
demonstrated that the collateral liquidation had been conducted demonstrated that the collateral liquidation had been conducted
in a commercially unreasonable manner, given that it had begun in in a commercially unreasonable manner, given that it had begun in
1993 on terms and conditions approved by the bankruptcy court. 1993 on terms and conditions approved by the bankruptcy court. __ _____ ___ __________ ________ __ ___ __________ _____
Although close bankruptcy court oversight did not necessarily Although close bankruptcy court oversight did not necessarily
rule out a claim that the Bank Group unilaterally and rule out a claim that the Bank Group unilaterally and
"unreasonably" exceeded or disregarded the terms and conditions "unreasonably" exceeded or disregarded the terms and conditions
of the collateral liquidation, Hicks Muse cites no record of the collateral liquidation, Hicks Muse cites no record
evidence that the Bank Group did so. Accordingly, we conclude evidence that the Bank Group did so. Accordingly, we conclude
that the "best interests" factor favored the settlement. that the "best interests" factor favored the settlement.
2. Creditor Views 2. Creditor Views ______________
The unsecured creditors committee strongly supported
the proposed settlement, as did the overwhelming majority of
individual unsecured creditors. See Lee Way Holding Co., 120 ___ ____________________
B.R. at 904 (noting importance of creditors committee support for
settlement). The only objections came from some noncreditors and
nonsettling creditors who were codefendants in the adversary
proceeding. Hicks Muse counters that creditors committee support
for the original settlement proposal must be discounted because
the settlement underwent modification before gaining bankruptcy
court approval. Be that as it may, there is no indication that
any creditor withdrew its consent based on the de minimis __ _______
modifications subsequently made by the bankruptcy court, none of
whichdetracted from the overall reasonableness of the compromise.
17
3. The Trustee's Competence and Experience 3. The Trustee's Competence and Experience _______________________________________
Other than by implication, through reliance on the
Trustee's reasonable decision not to review the thirty cartons of
individual invoices, see supra Section II.B.1., Hicks Muse has ___ _____
not questioned the Trustee's professional competence or
experience. Absent such a challenge, this factor provided
further support for the settlement. See Hill v. Burdick (In re ___ ____ _______ _____
Moorhead Corp.), 208 B.R. 87, 89 (B.A.P. 1st Cir. 1997). ______________
We therefore conclude that Hicks Muse has not
demonstrated a manifest abuse of discretion by the bankruptcy
court.
C. Other Settlement Terms C. Other Settlement Terms ______________________
1. Assignment Clause 1. Assignment Clause _________________
Next, Hicks Muse contests a settlement modification
which deferred any determination regarding the enforceability of
certain causes of action against nonsettling defendants,
including Hicks Muse, which the Bank Group assigned to the
Trustee. Hicks Muse contends that the bankruptcy court had no
choice but to strike this modification because it lacked the
power to approve the assignment. See Caplin v. Marine Midland ___ ______ ______________
Grace Trust Co. of N.Y., 406 U.S. 416, 434 (1972) (holding that ________________________
trustee lacked standing to sue in behalf of individual creditors
of estate); Williams v. California First Bank, 859 F.2d 664, 666- ________ _____________________
67 (9th Cir. 1988) (applying Caplin ban even though creditor ______
purportedly assigned its claim to trustee).
We need not address the Caplin question on which the ______
18
Hicks Muse contention is predicated. Unlike a settlement
agreement wherein the estate abandons an enforceable right, the
assignment by the Bank Group conferred a benefit upon the chapter
7 estate. As the bankruptcy court acted well within its
discretion in determining that the benefit conferred by the
settlement served the "best interests" of the chapter 7 estate
without regard to whether the Trustee realized additional benefit
from the subject assignment, nothing more was required.9
2. Potential Contribution Claims 2. Potential Contribution Claims _____________________________
Finally, Hicks Muse faults the bankruptcy court
finding that the Trustee and the Bank Group negotiated the
settlement in "good faith." It characterizes the finding as
immaterial to the Rule 9019(a) "best interests of the estate
standard and worries that the Bank Group may misuse the finding
should Hicks Muse later seek contribution, since state law
normally bars nonsettling defendants from asserting claims for
____________________
9Hicks Muse cites no apposite authority for its view that
the bankruptcy court had to determine the enforceability vel non ___ ___
of the assignment before approving the settlement agreement under
Rule 9019(a), particularly since the Caplin-Williams issue ______ ________
remained unripe for adjudication unless and until the Trustee
were to assert an assigned claim against Hicks Muse.
Furthermore, though we need not resolve the matter, it seems
unlikely that Hicks Muse could demonstrate cognizable injury.
The Bank Group (and its putative assignee) would have had to
assert in the adversary proceeding, see Fed. R. Bankr. P. 7013 ___
whatever LBO-related claims it held against Hicks Muse.
Whereas the Trustee notes that he elected not to assert any
derivative claim against Hicks Muse at trial in the adversary
proceeding. See Mai Systs. Corp. v. C.U. Techs., Inc. (In re Mai ___ ________________ _________________ _________
Systs. Corp.), 178 B.R. 50, 55 (Bankr. D. Del. 1995) (res _____________ ___
judicata normally bars subsequent litigation of claim which could ________
have been litigated in earlier contested matter or adversary
proceeding).
19
contribution against codefendants who have settled with the
plaintiff in "good faith." See, e.g., Mass. Gen. Laws Ann. ch. ___ ____
231B, 4 (Contribution Among Tortfeasors Act).
The district court attempted to accommodate the Hicks
Muse concern by amending the settlement order so as to reserve
the question whether the bankruptcy court's "good faith" finding
would be entitled to preclusive effect in any subsequent state-
law contribution action. Although we concur in the district
court's action, we think Hicks Muse was entitled to a
determination that the interpretation feared by Hicks Muse is
precluded by the settlement order.
The "best interests" standard under Bankruptcy Rule
9019 contemplates a determination by the bankruptcy court as to
whether the proposed settlement was negotiated in good faith.
See, e.g., In re Kuhns, 101 B.R. 243, 246-47 (Bankr. D. Mont. ___ ____ ____________
1989) (disapproving "bad faith" settlement). Although the "good
faith" finding by the bankruptcy court below was expressed in
general terms, without mentioning contribution, elsewhere the
court explicitly provided that the legal effect of the settlement
order on contribution claims was to be governed by
"[n]onbankruptcy law."
Moreover, there is considerable question whether the
bankruptcy court possessed the power to make a "good faith"
finding preempting future contribution claims by nonsettling
parties in these circumstances. Compare, e.g., Feld v. Zale _______ ____ ____ ____
Corp. (In re Zale Corp.), 62 F.3d 746, 752-54 (5th Cir. 1995) _____ ___________________
20
(holding that bankruptcy court approving settlement lacked
jurisdiction to resolve claims between nondebtors), with Munford ____ _______
v. Munford, Inc. (In re Munford, Inc.), 97 F.3d 449, 455 (11th _____________ ____________________
Cir. 1996) (holding that Bankruptcy Code 105 may empower
bankruptcy court to bar future contribution claims by nonsettling
defendants). In all events, since the Trustee did not request
extraordinary equitable relief under Bankruptcy Code 105, cf. ___
supra Section II.C.1 (bankruptcy court need not determine _____
enforceability of settlement terms which pose no detriment to
chapter 7 estate), we need not resolve this question. Absent any
clear indication that future contribution claims were foreclosed,
we conclude that the bankruptcy court discussed "good faith"
simply as another factor in its "best interests" analysis, see In ___ __
re Kuhns, 101 B.R. at 246-47, rather than with a view to barring ________
or otherwise affecting future contribution claims.
Accordingly, should Hicks Muse subsequently assert a
state-law contribution claim against the Bank Group, it is to be
governed by the applicable state law. If the applicable state
law were to comport with the "good faith" standard under
Bankruptcy Rule 9019, the Bank Group might prevail on its
contention that the settlement order collaterally estops Hicks
Muse from relitigating the factual issue as to whether the
settlement between the Trustee and the Bankruptcy Group was
negotiated in good faith. As there may be no necessary
equivalence between Bankruptcy Rule 9019 and applicable
nonbankruptcy contribution law regarding the governing "good
21
faith" standard, we venture no opinion.
Affirmed. Affirmed. ________
22
Hicks, Muse & Co. v. Brandt, (1st Cir. 1998).
Hicks, Muse & Co. v. Brandt (Hicks, Muse & Co. v. Brandt) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.
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