In Re: WebSci Tech

• Court: Court of Appeals for the Third Circuit
• Decided: May 16, 2007
• Docket: 06-2226
• Status: Unpublished

Opinion

Opinions of the United 2007 Decisions States Court of Appeals for the Third Circuit

5-16-2007

In Re: WebSci Tech Precedential or Non-Precedential: Non-Precedential

Docket No. 06-2226

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UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

No. 06-2226

IN RE: WEBSCI TECHNOLOGIES, INC., Debtor

Ramkrishna S. Tare, Appellant

On Appeal from the United States District Court for the District of New Jersey D.C. Civil Action Nos. 03-cv-05444, 04-cv-03657, 04-cv-03658 & 04-cv-03659 (Honorable William H. Walls)

Submitted Pursuant to Third Circuit LAR 34.1(a) May 11, 2007 Before: SCIRICA, Chief Judge, FUENTES and SMITH, Circuit Judges.

(Filed: May 16, 2007)

OPINION OF THE COURT

PER CURIAM.

Ramkrishna Tare, the former president, chief executive officer and sole

shareholder of WebSci Technologies, Inc. (“WebSci”), appeals from the District Court’s

orders denying his motions to supplement the record and for reconsideration of the denial,

and affirming the Bankruptcy Court’s approval of a settlement between the WebSci estate and Fleet National Bank (“Fleet”), confirmation of Fleet’s proposed liquidation plan and

related matters. For the reasons that follow, we will affirm.

This case involves Chapter 11 Bankruptcy proceedings voluntarily initiated by

WebSci. In September 2000, WebSci obtained a $5 million line of credit from Fleet’s

predecessor-in-interest, Summit Bank. According to Fleet, by early 2001, the credit line

was drawn down and the loan was in default. In October of that year, Fleet initiated an

action against both WebSci and Tare in the Superior Court of New Jersey, seeking

judgment for the unpaid principal and interest, enforcement of Fleet’s security interest,

and appointment of a receiver. The Superior Court entered partial summary judgment in

favor of Fleet and set a hearing for Monday, July 29, 2002 to determine the amount due.

See Docket No. C-228-01 (N.J. Super. Ct. Ch. Div.). On Friday, July 26, 2002, WebSci

filed a Chapter 11 bankruptcy petition and also initiated an action in the United States

District Court for the District of New Jersey against Fleet’s corporate parent, FleetBoston

Financial Corp (“FleetBoston”). See Civ. No. 02-cv-03598 (D.N.J.). On November 13,

2002, Tare personally filed a pro se complaint against FleetBoston and individual

members of the Board of Directors. See Civ. No. 02-cv-05459 (D.N.J.). The actions,

which alleged that FleetBoston committed various antitrust, RICO, and related violations

in connection with the loan, were consolidated and administratively dismissed pending

completion of the bankruptcy proceedings and related appeals.

On July 28, 2003, the Trustee for the WebSci estate filed a motion for court

approval of a settlement between WebSci and Fleet pursuant to Rule 9019 of the Federal

2 Rules of Bankruptcy Procedure. The settlement provided carve-outs from Fleet’s cash

collateral for partial payment of the WebSci estate’s unsecured creditors and full payment

of all professional and administrative fees approved by the Bankruptcy Court. In

exchange, the settlement allowed Fleet’s proof of claim in the amount of $5,908,144.54

and provided Fleet with a release and assignment of all claims that WebSci had asserted

or could have asserted against it, with the exception of those claims which had already

been asserted in the District Court action, and those claims vested in Tare personally. In

support of the motion, the Trustee filed a detailed certification describing his business

decision to settle the claims. Following the Bankruptcy Court’s August 25, 2003 hearing,

the Trustee filed a supplemental certification clarifying which claims were included in the

settlement and which were not. The hearing was continued on September 26, 2003, at

which time the Bankruptcy Court heard further argument from all parties and issued an

oral decision approving the settlement.

On September 19, 2003, Fleet filed its Plan of Liquidation (“Liquidation Plan”)

and Disclosure Statement. The Disclosure Statement fully described the nature of Tare’s

alleged claims and defenses, informed creditors of the status of the parties’ disputes, and

explained how the WebSci estate would be administered. An Amended Disclosure

Statement was filed on November 5, 2003, and approved by a Bankruptcy Court order

dated December 12, 2003. Tare then filed a motion to reconsider the approval of the

Disclosure Statement, which the Bankruptcy Court denied.

3 Fleet followed the filing of its Liquidation Plan with a January 27, 2004

memorandum of law setting forth the reasons why the plan should be confirmed pursuant

to 11 U.S.C. §§ 1123 and 1129. On February 26, 2004 and March 22, 2004, the

Bankruptcy Court conducted a confirmation hearing on the Liquidation Plan. During the

course of the proceedings, Tare moved to strike the evaluation of Precision E-Consulting,

which had been retained to secure and preserve the software on WebSci’s computers,

regarding the market value of the software. He also sought to strike the testimony of the

Trustee, accusing him of having committed perjury and misconduct in his testimony and

seeking sanctions against him. On April 12, 2004, the Bankruptcy Court confirmed the

Liquidation Plan from the bench and, two weeks later, denied Tare’s motions to strike and

for sanctions. The order of confirmation was entered on May 18, 2004.

Tare appealed to the District Court, raising concerns regarding the settlement, the

Liquidation Plan and the Disclosure Statement, among other things. The District Court

held a hearing on December 19, 2005 and affirmed the rulings of the Bankruptcy Court in

an oral opinion on December 20, 2005, followed by a written order dated December 21,

2005. Tare then filed a motion for reconsideration, which was denied on March 31, 2006.

Tare now appeals.

The District Court had appellate jurisdiction under 28 U.S.C. § 158(a) and we have

jurisdiction under 28 U.S.C. § 158(d) and 28 U.S.C. § 1291. “Exercising the same

standard of review as the district court, [w]e review the bankruptcy court’s legal

determinations de novo, its factual findings for clear error and its exercise of discretion

4 for abuse thereof.” Reconstituted Comm. of Unsecured Creditors of the United

Healthcare Sys., Inc., v. State of N.J. Dept. of Labor (In re United Healthcare Sys., Inc.),

396 F.3d 247, 249 (3d Cir. 2005) (internal quotation marks and citations omitted).

Tare first challenges the District Court’s order affirming the Bankruptcy Court’s

approval of a Rule 9019 settlement between Fleet and the WebSci estate, arguing that the

settlement impermissibly pre-approved a plan of liquidation and rendered the rest of the

bankruptcy proceedings irrelevant by transferring to Fleet all of WebSci’s claims and

rights. He further claims that the factors articulated in Myers v. Martin (In re Martin), 91

F.3d 389 (3d Cir. 1996), are not applicable because the settlement falls outside the scope

of Rule 9019, but that if they are applicable, the settlement does not satisfy the Martin

factors due to the transfer of all claims and rights of the estate for no consideration.

We disagree. The settlement plainly falls within the purview of Federal Rule of

Bankruptcy Procedure 9019(a), which provides: “On motion by the trustee and after

notice and a hearing, the court may approve a compromise or settlement. Notice shall be

given to creditors, the United States trustee, the debtor, and indenture trustees as provided

in Rule 2002 and to any other entity as the court may direct.”

The Bankruptcy Court summarized the settlement as follows:

The Trustee in the terms of the settlement stated that he had entered into the agreement with the bank whereby the debtor’s alleged setoffs and counterclaims – that is WebSci, the debtor, alleged setoff and counterclaims would be settled by, among other things, the bank funding a plan of orderly liquidation and that the bank had agreed to provide sufficient funds to satisfy all allowed administrative obligations, all allowed priority claims, if any, and a dividend to unsecured creditors in an amount up to 50 percent of

5 the total of allowed claims which would be computed at 25 percent of allowed claims payable from the proceeds, if any, of disposition of WebSci’s interest in Ensiva software, and other intellectual property, and 25 percent, but in no event to exceed the sum of $50,000 of the total of allowed claims payable from the remainder of the liquidation of WebSci’s assets.

In reviewing the terms of the settlement, the Bankruptcy Court deferred to the Trustee’s

conclusion that, even if WebSci’s state court claims had merit, the quantum of damages

they would garner would at no time exceed the principal amount due to Fleet, which at

that time was in excess of $5 million. The Court concluded that the Trustee had properly

exercised his business judgment in concluding that the settlement would be in the best

interest of the estate in light of his conclusions that the litigation claims would require a

substantial investment of time and energy by the Trustee, that the estate did not have

sufficient funds to support the litigation, and that without the settlement, it is unlikely the

creditors would receive any dividend, or at last not as much as they would receive with

the settlement.

This Court has endorsed the use of settlement in administering a bankruptcy estate,

noting that “it is an unusual case in which there is not some litigation that is settled

between the representative of the estate and an adverse party.” In re Martin, 91 F.3d at

393. We review the Bankruptcy Court’s approval of a settlement for abuse of discretion,

considering whether and how the Bankruptcy Court balanced four criteria: “(1) the

probability of success in litigation; (2) the likely difficulties in collection; (3) the

complexity of the litigation involved, and the expense, inconvenience and delay

necessarily attending it; and (4) the paramount interest of the creditors.” Id.; see also In

6 re Nutraquest, Inc., 434 F.3d 639, 644 (3d Cir. 2006). The Bankruptcy Court plainly

considered all of these factors in reaching its decision, and concluded that settlement of

the estate’s claims against Fleet was in the best interests of the estate. We cannot

conclude that this was an abuse of its discretion.

Tare next argues that the Bankruptcy Court erred in concluding that the Trustee

had not violated its order permitting the Trustee to retain Precision E-Consulting

(“Precision”) only for the purpose of securing WebSci’s intellectual property and not for

the purpose of providing an expert opinion on its value and/or marketability. Tare relies

heavily on the fact that at the January 27, 2004 hearing on the Trustee’s motion to retain

Precision, the Bankruptcy Court stated: “what’s before the Court is the request to secure

and preserve all proprietary information, intellectual property maintained on the computer

system prior to the auction sale. . . . not valuation or assessing marketability and not

marketing the intellectual property except by further application . . . .” A reading of the

entire transcript, however, reveals that the Bankruptcy Court was concerned with issues

of compensation for services rendered by Precision and not with its qualifications to

perform services outside of the scope of the Court’s order. We agree with the Bankruptcy

Court that this is not a ground for striking the report from being introduced into evidence,

but rather, if anything, might be relevant to the ability of Precision to be compensated for

those services which exceeded the scope of the order.

Tare’s next argument is related to the cancellation of his WebSci shares. In the

context of his Chapter 7 personal bankruptcy proceedings, the Bankruptcy Court entered

7 an order approving the abandonment by the Trustee of his interest in 100% of the WebSci

capital stock, despite an offer by Fleet to pay $25,000 to Tare’s estate in exchange for

those shares. In its Liquidation Plan in WebSci’s Chapter 11 proceedings, Fleet proposed

that Tare, as the sole WebSci equity holder, would receive no distribution under the Plan,

and that all outstanding capital stock of WebSci would be extinguished and deemed

cancelled. Tare argued to the Bankruptcy Court, and argues again on appeal, that the

Court’s order in his Chapter 7 proceedings should have precluded the cancellation of his

shares in the context of the Chapter 11 proceedings under the principles of res judicata.

In reviewing Fleet’s proposed liquidation plan, the Bankruptcy Court noted that

while extinguishment of capital stock is not required as a part of a liquidation plan, it is

permitted so long as it is deemed to be fair and equitable and proposed in good faith. See

11 U.S.C. §§ 1129(a)(3), (b)(2). After considering Tare’s objections, the Court held that

the cancellation of WebSci’s shares under the plan was appropriate in light of the absolute

priority rule, that it did not contravene the plain language of the Rule 9019 settlement,

that it was proposed in good faith, and that it was not barred by the Court’s prior order in

Tare’s Chapter 7 proceedings. We agree with the Bankruptcy Court’s analysis,

particularly in light of the absolute priority rule, which requires that senior classes receive

full compensation for their claims before other classes can participate. Because Tare, as a

shareholder, would have been junior to all other claimants, he could not have retained the

stock or any rights arising from its ownership. See 11 U.S.C. § 1129(b)(2)(B)(ii);

Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988); In re Resorts Int’l, 145

8 B.R. 412, 483 (Bankr. D.N.J. 1990) (explaining that implicit in the absolute priority rule

is that stockholders cannot participate in a reorganization plan unless it is established that

the debtor is insolvent).

Next Tare alleges that the Bankruptcy Court relied on an erroneous liquidation

analysis in determining the value of the estate; specifically, in not including his legal

claims against Fleet as assets of the estate, and in assigning no value to WebSci’s

intellectual property or its overseas offices. First Tare claims that “it is undisputed that

[the Trustee] had valued just the claims against Fleet to have a value of up to the claims

asserted by Fleet against the estate (approx. $5 Million).” This statement misrepresents

the Trustee’s testimony, which was that he did not believe that the estate recovery would

exceed its debt of over $5 million to Fleet. In any event, this testimony was in reference

to those claims which were settled pursuant to the Rule 9019 settlement, and accordingly,

would not come into play in the liquidation analysis.

With respect to the valuation of the intellectual property, the Bankruptcy Court

relied on the expert report of Precision E-Consulting, which Tare cites favorably in his

brief. According to the report, WebSci’s product would require a significant investment

of time and money (between $1-2 million) to make it marketable and would require “at

least twice as much to take the product to market.” Because neither Tare nor the Trustee

had been able to find a buyer for the software, and because it could not be marketed in its

current state, the Liquidation Plan assigned no value to the software. With respect to the

value of the overseas offices, the Bankruptcy Court found that because no documentation

9 or verification of the existence or contents of these offices had been presented to the

Court, it was appropriate for Fleet not to assign a monetary value to these offices. Based

on the evidence presented to the Bankruptcy Court, we cannot conclude that its findings

were clearly erroneous, nor can we overturn its valuation of the estate.

In addition to his appeal of the Bankruptcy Court’s rulings, Tare also challenges

the District Court’s denial of his motions to supplement the record and for reconsideration

of the denial. In September 2005, nine months after briefing in the appeal closed, Tare

filed a motion in the District Court to supplement the record on appeal, making various

allegations of fraud and concealment regarding the former Chapter 7 Trustee appointed in

Tare’s personal bankruptcy case, the Chapter 11 Trustee appointed in WebSci’s

bankruptcy case, and the Chapter 11 Trustee’s attorney. The District Court held that it

could not consider new evidence that was not part of the factual record before the

Bankruptcy Court. See Fed. R. Bankr. P. 8006 (“The record on appeal shall include the

items so designated by the parties, the notice of appeal, the judgment, order, or decree

appealed from, and any opinion, findings of fact, and conclusions of law of the court.”).

The Court further held that, because Appellant was unable to demonstrate that the

evidence he sought to supplement the record with could not have been discovered during

the bankruptcy proceedings, it could not grant his motion to supplement the record. See

Bohus v. Beloff, 950 F.2d 919, 930 (3d Cir. 1991) (applying “newly discovered

evidence” standard of Rule 60(b)(2)).

10 Tare alleges that the District Court erred in ignoring the conflicts raised in his

motion to supplement the record and in holding that Tare had not exercised due diligence

in discovering the conflicts. For the latter point, he relies on Burtch v. Gantz (In re

Mushroom Transp. Co.), 382 F.3d 325 (3d Cir. 2004), for the proposition that he could

not have been expected to discover these conflicts given their fraudulent concealment by

fiduciaries. He further argues that, in reviewing his motion for reconsideration, the

District Court for the first time considered the merits of all of the concealed conflicts

without separating the newly discovered conflicts from those presented earlier. Neither

of these arguments is availing. Our decision in Mushroom relied in part on the fact that

the lawyer-client relationship “entails such a presumptive level of trust in the fiduciary by

the principal that it may take a ‘smoking gun’ to excite searching inquiry on the

principal’s part into its fiduciary’s behavior.” 382 F.3d at 343. The record amply reflects

that no such relationship existed between Tare and the Trustee. Furthermore, Tare avers

that he discovered the alleged conflicts by reviewing publicly available dockets and court

filings. There is no reason these conflicts could not have been discovered during the

pendency of the Bankruptcy Court proceedings. See Bohus, 950 F.2d at 930. With

respect to his criticism of the District Court’s analysis of his claims of conflict, the

District Court clearly concluded that, with respect to those conflicts, which were

presented to the Bankruptcy Court, Tare had not demonstrated that they were conflicts

barred under the Bankruptcy Rules, and with respect to those that were not raised in the

11 Bankruptcy Court, Tare could not raise them for the first time on appeal. We find no

error in the District Court’s treatment of these claims.1

Having considered all of the arguments raised by Tare in his lengthy appeal and

reply briefs, we conclude that neither the Bankruptcy Court nor the District Court erred,

and accordingly, we will affirm.

1 We note that Tare previously sought removal of the Chapter 11 Trustee, alleging that he suffered from various actual and potential conflicts of interest. We affirmed the District Court’s affirmance of the Bankruptcy Court’s denial of Tare’s motion on November 18, 2003. See C.A. No. 03-1887 (3d Cir. 2003).