ReGen Capital III, Inc. v. Official Committee of Unsecured Creditors (In Re Trism, Inc.)

282 B.R. 662, 2002 Bankr. LEXIS 978, 40 Bankr. Ct. Dec. (CRR) 35, 2002 WL 31039681

• Court: United States Bankruptcy Appellate Panel for the Eighth Circuit
• Decided: September 13, 2002
• Docket: 02-6012 WM
• Status: Published

Opinions

SCHERMER, Bankruptcy Judge.

ReGen Capital III, Inc. (“ReGen”) appeals the bankruptcy court order approving a stipulation between ReGen and Trism, Inc. and its affiliated debtors (“Missouri Debtors”) and sustaining the objection of the Official Committee of Unsecured Creditors (“Committee”) to such stipulation. We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we reverse and remand.

ISSUE

The issue on appeal is whether the bankruptcy court erred in approving a compromise pursuant to Federal Rule of Bankruptcy Procedure 9019 while sustaining an objection to such compromise. We conclude that the bankruptcy court erred in sustaining an objection to the compromise yet approving it. We remand for approval or disapproval of the compromise after analysis of its reasonableness under the four-prong test set forth in In re Flight Transp. Corp. Sec. Litig., 730 F.2d 1128, 1135-36 (8th Cir.1984), cert denied sub nom. Reavis & McGrath v. Antinore, 469 U.S. 1207, 105 S.Ct. 1169, 84 L.Ed.2d 320 (1985).

BACKGROUND

On September 16, 1999, ten of the Missouri Debtors (the “Delaware Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Delaware Bankruptcy Court”). On November 16, 1999, AT & T filed an unsecured proof of claim in the amount of $703,689.05. ReGen is the assignee of the AT & T claim. On December 9, 1999, the Delaware Bankruptcy Court entered its order confirming the Delaware Debtors’ Second Amended Plan of Reorganization which provided that non-priority unsecured claims, including the ReGen claim, were unimpaired by the Plan.

The Delaware Debtors failed to make payments on account of the ReGen claim as required by the confirmed plan. On December 13, 2000, ReGen filed a motion to compel such payments. The motion to compel and the Delaware Debtors’ objection thereto were settled pursuant to a stipulation and order approved by the Delaware Bankruptcy Court on March 20, 2001. Pursuant to the stipulation and order, the Delaware Debtors were required to make payments to ReGen. In the event the Delaware Debtors failed to make a required payment when due, the Delaware Debtors authorized ReGen to confess judgment against the Delaware Debtors for the unpaid amount of the debt plus interest and attorneys’ fees.

The Delaware Debtors made the first payment due under the stipulation but failed to make any subsequent payments. On May 2, 2001, ReGen commenced proceedings in the Superior Court of the State of Delaware in and for New Castle County (the “Delaware State Court”) for a judgment in accordance with the stipulation as a result of the Delaware Debtors’ failure to make the required payments. On June 1, 2001, the Delaware State Court entered judgment (the “Judgment”) in favor of Re-Gen and against the Delaware Debtors. Upon entry of the Judgment, ReGen registered the Judgment in those jurisdictions where assets of the Delaware Debtors were located, resulting in the creation of liens on such assets.

In addition to obtaining the Judgment, ReGen filed a motion to compel compliance with the stipulation and order (“Motion to Compel”) with the Delaware Bankruptcy Court. On October 4, 2001, the Delaware Bankruptcy Court entered an order granting the motion and directing the Delaware Debtors to pay ReGen all amounts due under the stipulation and order within three business days and to pay ReGen’s attorneys’ fees and costs associated with the motion. The Delaware Debtors failed to make such payment.

On November 13, 2001, ReGen filed a motion to hold the Delaware Debtors in contempt (the “Contempt Motion”). While such motion was pending before the Delaware Bankruptcy Court, the Missouri Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Missouri (the “Missouri Bankruptcy Court”) on December 18, 2001. The same day the Delaware Debtors filed a motion (“Rule 1014 Motion”) with the Delaware Bankruptcy Court under Federal Rule of Bankruptcy Procedure 1014(b) seeking a determination that the bankruptcy proceedings should proceed in the Missouri Bankruptcy Court. ReGen objected to such motion. A hearing on the Contempt Motion and the Rule 1014 Motion was scheduled before the Delaware Bankruptcy Court on January 4, 2002.

Notwithstanding the motions pending in the Delaware Bankruptcy Court, the Missouri Debtors and ReGen entered into a stipulation (the “Stipulation”) subject to the approval of the Missouri Bankruptcy Court pursuant to which the parties stipulated, inter alia, that ReGen holds an allowed claim in the amount of $434,954.59 plus interest and attorneys’ fees (the “Allowed Claim”); that the Missouri Debtors acknowledge that the Allowed Claim is secured by valid liens on certain property; that upon the Stipulation becoming final and non-appealable, ReGen shall be enti-tied to payment of the full amount of the Allowed Claim from the proceeds of the anticipated sale of the Missouri Debtors’ assets to the extent of the value of its valid liens; that the Stipulation shall be served on all creditors and parties in interest and any creditor or party in interest who fails to object to the Stipulation or whose objection is overruled shall be bound by the terms of the Stipulation; that ReGen shall withdraw its objection to the Rule 1014 Motion; that ReGen shall withdraw the Contempt Motion; that ReGen shall support the Missouri Debtors’ efforts to seek approval of and consummate a sale of assets as soon as possible; and that upon the approval of the Stipulation on a final and non-appealable basis, the Missouri Debtors and their successors and assigns on the one hand and ReGen and its successors and assigns on the other hand each fully releases and discharges the other from and against any claim, right, or cause of action arising in, arising out of, or related to the Delaware bankruptcy case or the Missouri bankruptcy case that arose or accrued prior to the date of the Stipulation.

At the January 4, 2002, hearing before the Delaware Bankruptcy Court, counsel for the Debtors and for ReGen announced the terms of the Stipulation on the record. Counsel for the Committee participated in that hearing by telephone.

On January 7, 2002, the Missouri Debtors filed a motion with the Missouri Bankruptcy Court pursuant to Federal Rule of Bankruptcy Procedure 9019 (the “Rule 9019 Motion”) seeking approval of the Stipulation. A hearing on the Rule 9019 Motion was set for January 30, 2002. The Missouri Debtors also filed a motion to sell substantially all of their assets (the “Sale Motion”) which was set for hearing on January 30, 2002.

On January 28, 2002, the Committee filed an objection to the Rule 9019 Motion wherein the Committee attempted to reserve its right to object to ReGen’s claim for interest and attorneys’ fees and to object to the validity of ReGen’s hens.

On January 30, 2002, the Missouri Bankruptcy Court held a hearing on the Rule 9019 Motion and on the Sale Motion. The Missouri Bankruptcy Court orally approved the Stipulation and sustained the Committee’s objection to the Rule 9019 Motion. The Missouri Bankruptcy Court approved the Sale Motion later that same day. The Missouri Bankruptcy Court subsequently entered an order approving the Stipulation and sustaining the Committee’s objection to the extent the Stipulation attempts to bind the Committee. The order expressly provides that “neither the [Rule 9019 Motion] nor the Stipulation are binding on the Committee. Nothing in this Order shall restrict the Committee’s ability to object to the allowance, extent and priority of ReGen’s alleged judgment hens (the ‘Liens’), including the avoidability of the Liens, on certain of Debtors’ real property.” ReGen appeals this order.

STANDARD OF REVIEW

A decision to approve or disapprove a proposed settlement under Bankruptcy Rule 9019 is within the discretion of the bankruptcy judge. In re Flight Transp. Corp. Sec. Litig., 730 F.2d 1128, 1135-36 (8th Cir.1984), cert denied sub nom. Reavis & McGrath v. Antinore, 469 U.S. 1207, 105 S.Ct. 1169, 84 L.Ed.2d 320 (1985); TCF Banking & Sav. v. Leonard (In re Erickson), 82 B.R. 97, 99 (D.Minn.1987). Consequently, we review the Mis souri Bankruptcy Court’s order for an abuse of discretion. Erickson, 82 B.R. at 99. An abuse of discretion occurs if the court bases its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359 (1990).

DISCUSSION

In exercising its discretion to approve a proposed settlement under Bankruptcy Rule 9019, a court must weigh four factors bearing on the reasonableness of the settlement: (1) the likelihood of success in the litigation; (2) the difficulties, if any, in collection matters; (3) the complexity of the litigation and the attendant expense, inconvenience, and delay; and (4) the paramount interest of the creditors and a proper deference to their reasonable views. Flight Transp., 730 F.2d at 1135; Erickson, 82 B.R. at 99. Once the bankruptcy court has determined and weighed such factors, it must either approve or refuse to approve the proposed settlement. An abuse of discretion occurs when the court does not determine and weigh these factors and either approve or reject the proposed settlement.

A review of the transcript and order indicates that the Missouri Bankruptcy Court failed to address the four factors. Instead, the hearing focused on an interpretation of the Stipulation wherein the court determined that the Committee was not bound by language which purported to bless the secured claim asserted by ReGen and insulate ReGen from potential preference exposure. Such a determination may in fact be necessary if the Stipulation is approved and its interpretation is disputed in the future.¹ However, the court’s role in evaluating a motion to approve a settlement is limited to determining whether the proposed settlement is reasonable under the circumstances after a review of the relevant factors.²

When considering contested motions, the court must determine the facts relevant to the legal inquiry, consider the motion and any objections, and must rule on the objections, either sustaining them, in which case the motion must be denied, or overruling the objections, in which ease the motion can be granted. A court cannot sustain an objection and simultaneously grant a motion to approve a settlement. In so doing, the court changes the essential terms of the proposed settlement and violates the purpose and spirit of Federal Rule of Bankruptcy Procedure 9019 or decides issues not necessary to the approval or disapproval of the settlement.

Pursuant to Federal Rule of Bankruptcy Procedure 9019, the court may approve a settlement on motion by the trustee or debtor-in-possession after notice and a hearing. Notice must be given to creditors, the United States Trustee, the debtor, indenture trustees, and any other party as the court may direct. Fed. R.Bankr.P. 9019(a). When considering a proposed settlement, deference must be given to the reasoned opinions of creditors. Flight Transp., 730 F.2d at 1135; Erickson, 82 B.R. at 99. One of the reasons that notice and court approval are required is to prevent a debtor from binding the estate to the terms of a compromise without court approval after input from creditors and parties in interest.

By entering into the Stipulation for the allowance of its claim, ReGen undoubtedly believed that such Stipulation would be binding on creditors in the same manner as a court order allowing a claim. Consequently, notice to creditors was necessary before the Stipulation could have such an effect. This Stipulation may be meaningless to ReGen if the creditors are not bound by its terms and can essentially step into the Missouri Debtors’ shoes to challenge the very concessions made by the Missouri Debtors to induce ReGen to settle.³

Compromise is a normal part of the reorganization process. In re Apex Oil Co., 92 B.R. 847, 866 (Bankr.E.D.Mo.1988). Compromise is favored by the law. Erickson, 82 B.R. at 100; Apex, 92 B.R. at 867. A major purpose of compromise is to avoid the expense, burdens, and uncertainty associated with litigation. Apex, 92 B.R. at 866. If creditors are not bound by the Stipulation, the estate may still incur the expense of the Committee pursuing litigation with ReGen, the Missouri Debtors may still be burdened with discovery and other time-consuming tasks associated with litigation which detract from the Missouri Debtors’ ability to focus on reorganizing their businesses, and the outcome of the dispute is uncertain. In this instance, certain benefits to the estate of settlement may be lost if creditors are not bound. That issue is for another day, however. The Stipulation must be approved or disapproved as presented, and the Missouri Bankruptcy Court must evaluate all factors, including whether the settlement eliminates costs of litigation, in making its determination.

A court’s role in evaluating a proposed settlement under Rule 9019 is to determine if the settlement is in the best interest of the estate. The Missouri Bankruptcy Court must accept or reject the settlement as presented. It cannot bind ReGen to the obligations of its bargain by approving the Stipulation while eviscerating the benefits negotiated by ReGen by sustaining an objection thereto.

The Committee argues that this appeal is moot because ReGen has already performed its end of the bargain — it withdrew the Contempt Motion, withdrew its objection to the Rule 1014 Motion which was thereafter granted by the Delaware Bankruptcy Court, and it supported the Missouri Debtors’ Sale Motion which was approved by the Missouri Bankruptcy Court. We disagree. ReGen seeks an order overruling the Committee’s objection and granting the Rule 9019 Motion. We are remanding this matter for a ruling either sustaining the Committee’s objection and denying the Rule 9019 Motion or overruling the objection and granting the Rule 9019 Motion. The very relief sought by ReGen is possible. Therefore, the appeal is not moot. Nonetheless, the Committee is free to argue on remand that the Rule 9019 Motion is moot.

The Committee also argues that the Stipulation was entered into by the Missouri Debtors in their capacity as “debtors” and not as “debtors-in-possession” notwithstanding the fact that the Stipulation was signed by “Attorneys for Debtors and Debtors in Possession.” We reject this argument. Where no trustee has been appointed in a Chapter 11 case, the debtor acts as a debtor-in-possession when exercising the rights and powers and performing the duties which would otherwise fall within the province of a trustee. 11 U.S.C. § 1107(a).⁴ The debtor-in-possession’s powers and duties include the obligation to review and object to claims and to prosecute avoidance actions if a purpose would be served thereby. The Missouri Debtors’ authority to enter into the Stipulation was derived from their capacity as debtors-in-possession.

CONCLUSION

The Missouri Bankruptcy Court erred in approving the settlement under Federal Rule of Bankruptcy Procedure 9019 while sustaining the Committee’s objection thereto. The Court must evaluate the reasonableness of the proposed settlement, taking into consideration the reasonable views of the creditors, and either approve or disapprove the presented settlement. Accordingly we remand this matter to the Missouri Bankruptcy Court to apply the four-prong test and either overrule the objection and approve the Stipulation or sustain the objection and deny the motion seeking approval.

1 . Whether the Committee may use an avoiding power under Chapter 5 of the Bankruptcy Code with respect to the allowed claim of ReGen was not before the Court at the hearing to approve the Stipulation and is a question for another day.

2 . According to the dissent, the Missouri Bankruptcy Court was not faced with the task of approving or rejecting the Stipulation under Federal Rule of Bankruptcy Procedure 9019(a) because no one disputed its reasonableness under the four-prong test set forth in Flight Transportation. In the dissent’s view, the order merely interpreted the language of the Stipulation and found that the Committee was not bound by its terms. We disagree. We view the order as both approving the Stipulation and separately ordering that it not bind the Committee. The language from the transcript cited and emphasized by the dissent on page 671 supports our conclusion. We believe the order was inappropriate to the extent it went beyond the task at hand — the approval or disapproval of the Stipulation.

3 . What debtor would not promise an adversary the sun and the moon and the stars (or at least the allowance of its claim) in the form of a settlement in order to obtain a strategic advantage if it knew that its creditors would not be bound and that they can, and undoubtedly will, pursue the very remedy being abandoned by the debtor? Of course, any proposed settlement must still be reasonable to obtain court approval; yet how unreasonable for the estate as a whole is a settlement which provides the debtor with an advantage while allowing the estate, through the creditors, to avoid the price promised by the debtor to obtain' the advantage? Adversaries have no incentive to compromise under such a scenario.

4 . Indeed, the Supreme Court has stated that "it is sensible to view the debtor-in-possession as the same 'entity' which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have done absent the bankruptcy filing." NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528, 104 S.Ct. 1188, 1197, 79 L.Ed.2d 482 (1984).