In re Augé

• Decision Date: 30 September 2016
• Docket Number: No. 14-10443 t11,14-10443 t11
• Citation: 559 B.R. 223
• Parties: In re: Wayne Kenneth Augé, II, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

559 B.R. 223

In re: Wayne Kenneth Augé, II, Debtor.

No. 14-10443 t11

United States Bankruptcy Court, D. New Mexico.

Signed September 30, 2016

Bonnie P. Bassan, Daniel J. Behles, Arin Elizabeth Berkson, George M. Moore, Moore, Berkson, Bassan & Behles, P.C., Albuquerque, NM, for Debtor.

MEMORANDUM OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

The chapter 7 trustee seeks approval of a settlement he reached with the estate's primary creditor. The proposed settlement allows the creditor's claim at $2,050,000 and contains broad mutual releases, including a release of all claims against the debtor personally. This latter term is important because an undetermined portion of the claim is nondischargeable. The debtor objected, arguing that he owes the creditor substantially less than $2,050,000. The Court has reviewed the settlement terms and the legal issues involved and finds that, given the somewhat unusual circumstances of this case, the settlement is reasonable and should be approved.

I. FACTS¹

For the purposes of ruling on the settlement motion, the Court finds:²

Northern New Mexico Orthopaedic Center, Inc. (“NNMOC”) is a New Mexico corporation formed in 1988 by the debtor, Dr. Wayne K. Augé. NNMOC provided medical services and was headquartered in Santa Fe, New Mexico. It is no longer operating.

During the relevant time, NNMOC had four shareholders: Augé, Dr. Brent Bair, Dr. Steven Jones, and Dr. Sanford Schulhofer. Augé was the President and Treasurer of NNMOC until February 1, 2008, when Bair was elected President and Augé was elected Treasurer/Secretary.

All the shareholders signed employment agreements with NNMOC. They also signed shareholder agreements with each other and with NNMOC. Augé prepared the documents. Augé represented to Bair, Jones, and Schulhofer that their employment agreements were similar to his, except his agreement did not have a noncompete provision and could only be terminated for cause. In fact, Augé's employment agreement also had substantially better deferred compensation terms.

Augé was in charge of calculating the shareholder bonuses due under the employment agreements. Judge Ortiz found that Augé paid himself improper bonuses of $173,187.54,³ between August 2007 and December 31, 2008, and $199,233.83 in 2009. Augé did not tell the other shareholders about the overpayments and made efforts to conceal them.

According to Judge Ortiz, Augé was overpaid $185,424.89 in 2010. It is not clear whether the overpayments were of the same character as those in 2007-2009.

In late 2009 or early 2010, Augé proposed to take a leave of absence and prepared a draft agreement. From the ensuing discussions Jones, Bair, and Schulhofer learned about Augé's enhanced deferred compensation package. The parties never came to terms on a leave of absence.

Augé resigned from NNMOC effective December 30, 2010. Bair, Jones, Schulhofer, and NNMOC sued Augé in New Mexico's First Judicial District Court on January 14, 2011, Case No. D–101–CV–2011–00192. They alleged that Augé engaged in fraud, breach of fiduciary duty, embezzlement, and other wrongful conduct.

Judge Ortiz tried the action in February, 2012. On March 14, 2012, he entered detailed Findings of Fact, Conclusions of Law and Judgment (the “Findings and Conclusions”). Judge Ortiz found, inter alia, that Augé defrauded Bair, Jones, and Schulhofer by concealing and misrepresenting his enhanced deferred compensation terms. Judge Ortiz entered a judgment against Augé and in favor of NNMOC for $600,757.81 in compensatory damages,⁴ $1,000,000 in punitive damages; pre- and post-judgment interest at 15% on “all amounts awarded to Plaintiffs;” and attorney's fees and costs in an amount to be determined. Augé appealed the judgment.

On February 14, 2014, Augé filed this chapter 11 case. NNMOC brought a nondischargeability adversary proceeding three months later. On April 22, 2015, the Court entered a partial summary judgment in the adversary proceeding, ruling that $372,421.37 of the state court judgment was nondischargeable under § 523(a)(4) (embezzlement), including interest accruing at 15% from the date the state court complaint was filed. The Court found that fact issues prevented entry of summary judgment on the nondischargeable character of the remaining judgment amount.

Two other adversary proceedings remain pending: one filed by NNMOC for injunctive relief and to impose a constructive trust, and the other filed by the Trustee seeking to avoid NNMOC's liens pursuant to § 544.

On September 16, 2014, the New Mexico Court of Appeals affirmed the state court judgment, except that it remanded the compensatory damages award for recalculation. The remand relates to how NNMOC's accounting expert calculated the bonus money Jones was entitled to receive after he became a shareholder. From what the Court can tell, the expert may have included in his calculations revenue generated by Jones before he became a shareholder. Per the employment agreement, such an inclusion would have been improper. Augé testified that, due to the slow-paying nature of Medicare, Medicaid, and private insurance, it takes months to collect billed fees. Thus, when the expert calculated the bonuses due to Jones, he might have used a revenue figure that was too high. The Court of Appeals determined there was not enough evidence to affirm Judge Ortiz's compensatory damage award in this respect:

We affirm the district court's finding as to calculation of the damages in all respects except for the calculation and allocation of non-shareholder employee revenue generated by Jones before he became an NNMOC shareholder. We remand for recalculation of this amount.

(the “Jones Remand”).

The New Mexico Supreme Court denied Augé's petition for certiorari.

The Court appointed a chapter 11 trustee on May 19, 2015, and converted the case to chapter 7 two months later. The chapter 11 trustee stayed on as the chapter 7 trustee. The estate will likely be solvent, especially if the settlement is approved.

NNMOC filed an amended proof of claim on August 19, 2015 for $3,386,864.37. The claim includes, inter alia, about $600,000 in post-petition attorney fees and 15% interest on all amounts, including fees and costs.

Since the petition date NNMOC has received three payments: $566,096 on March 20, 2015; $23,982 on or about April 3, 2015; and $500,000 on March 26, 2016. The first payment was available on June 26, 2014, but payment was delayed by NNMOC's (ultimately unsuccessful) challenge to Augé's homestead exemption.

The Trustee and NNMOC hired an experienced commercial mediator to mediate a settlement of their disputes. On April 21, 2016, after a full day of mediation, the parties arrived at a proposed settlement with the following terms:

• NNMOC's claim would be allowed at $2,050,000;

• $372,421.37 of that amount would bear interest at 15%; the balance would bear interest at .12%;

• All litigation between the Trustee and NNMOC in state court and bankruptcy court would be settled;

• Augé would not be able to pursue his objection to NNMOC's claim;

• Each party would bear its own attorney fees;• The Trustee would release all estate claims against NNMOC, Jones, Bair, and Schulhoffer;

• NNMOC, Bair, Jones, and Schulhoffer would release all claims against the estate and Augé, other than NNMOC's allowed $2,050,000 claim.

If the settlement were not approved, Augé projects that NNMOC's allowed claim would be between $1,225,000 and $1,915,000, depending on the outcome of the Jones Remand. NNMOC projects its claim would be at least $2,900,000, with interest at 15% until paid.

II. DISCUSSION

A. Standard for Approving a Rule 9019 Settlement.

A proposed settlement must be fair, equitable, and in the best interests of the estate. In re Rich Global, LLC, 652 Fed.Appx. 625, 631 (10th Cir. 2016) ; In re American Reserve Corp., 841 F.2d 159, 161 (7th Cir.1987) (collecting cases). It need not represent the best possible outcome. Tri–State Financial, LLC v. Lovald, 525 F.3d 649, 654 (8th Cir. 2008). Rather, “the court need only determine that the settlement does not fall below the lowest point in the range of reasonableness.” Id. See also Rich Global, 652 Fed.Appx. at 631 ; In re Brutsche, 500 B.R. 62, 71 (Bankr D.N.M. 2013). In assessing the reasonableness of the settlement, the court must consider: “(1) the probable success of the underlying litigation on the merits; (2) the possible difficulty in collection of a judgment; (3) the complexity and expense of the litigation; (4) and the interests of creditors in deference to their reasonable views.” In re Kopexa Realty Venture Co., 213 B.R. 1020, 1022 (10th Cir. BAP 1997) ; In re Edwards, 1992 WL 84354, *3 (10th Cir. 1992) (listing the same factors).

The decision to approve a settlement must be “an informed one based upon an objective evaluation of developed facts.” Reiss v. Hagmann, 881 F.2d 890, 892 (10th Cir. 1989). However, the Court is not required to conduct a “mini-trial” on the issues, nor does it need to decide the disputed legal or factual questions. Brutsche , 500 B.R. at 71 ; Rich Global, LLC, 652 Fed.Appx. at 631. If the outcome of litigation is uncertain, compromise may be an appropriate solution. In re Endoscopy Center of Southern Nevada, LLC, 451 B.R. 527, 551 (Bankr. D. Nev. 2011).

B. Post-Petition Interest on NNMOC's Allowed Claim.

One significant issue affecting NNMOC's claim amount is whether post-petition interest accrues at the federal rate (.12%) or the judgment rate (15%). The case has been pending for about two and a half years, so the higher rate would increase NNMOC's claim by at least $400,000.

Section 726(a)(5)⁵ allows post-petition interest on unsecured claims in solvent bankruptcy cases. It provides, in relevant part:

(a) Except as provided in section 510 of this title, property of the estate shall be distributed—

(5) fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this

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