American Reserve Corp., In re

• Decision Date: 30 December 1987
• Docket Number: No. 87-1347,87-1347
• Citation: 841 F.2d 159
• Parties: Bankr. L. Rep. P 72,224 In re AMERICAN RESERVE CORPORATION, Debtor. LaSALLE NATIONAL BANK, The Bank of California, and Triumph Investment Trust, Ltd., Appellants, v. J. William HOLLAND, Chapter 7 Trustee for the Estate of American Reserve Corporation, and Wallace J. Stenhouse, Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 159

841 F.2d 159

Bankr. L. Rep. P 72,224

In re AMERICAN RESERVE CORPORATION, Debtor LaSALLE NATIONAL BANK, The Bank of California, and Triumph Investment Trust, Ltd., Appellants, v. J. William HOLLAND, Chapter 7 Trustee for the Estate of American Reserve Corporation, and Wallace J Stenhouse, Appellees.

No. 87-1347.

United States Court of Appeals Seventh Circuit.

Argued Sept. 25, 1987.

Decided Dec. 30, 1987.

William P. Smith, Chapman & Cutler, Chicago, Ill., for appellants.

Cynthia L. Pope, Ross & Hardies, Chicago, Ill., for appellees.

Before FLAUM and MANION, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

MANION, Circuit Judge.

Appellants, who are creditors of the bankrupt, American Reserve Corporation (ARC), appeal the district court's judgment affirming the bankruptcy court's approval of the trustee's settlement of a claim by ARC's former chief executive officer. Because the bankruptcy judge's findings are not adequate to allow us to review the settlement, we reverse and remand for further findings.

I.

In April, 1980, ARC filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Secs. 1101-1174. During the reorganization, ARC retained its assets and its top management. On November 16, 1981, ARC's reorganization proceeding was converted to a liquidation proceeding under Chapter 7, 11 U.S.C. Secs. 701-766. On November 20, 1981, the bankruptcy court appointed a trustee for the bankruptcy estate.

ARC filed a Final Report and Account of Debtor-In-Possession in May, 1982, and an amended Final Report in October, 1982. Both the report and amended report listed a debt of $79,350 for the employment services of Wallace J. Stenhouse, ARC's former chief executive officer. The $79,350 included $69,800 for accrued severance pay, $6,350 for accrued vacation pay, and $3,200 for services Stenhouse allegedly rendered for ARC between November 16, 1981 (the date the reorganization was converted to a liquidation) and November 20, 1981 (the date the bankruptcy court appointed the trustee). Stenhouse maintained in his filings in the bankruptcy court that his claim was payable as an estate administrative expense. See 11 U.S.C. Sec. 503(b)(1)(A). As an administrative expense, Stenhouse's claim would have priority over unsecured claims. 11 U.S.C. Sec. 507(a).

The trustee initially objected to Stenhouse's demands. The appellants (who collectively held claims for more than 90% of ARC's uncontested, unsubordinated debt), and the State of Illinois (which is not a party to this appeal) also objected to Stenhouse's demands. Stenhouse's claim remained pending, and the parties disputed the claim for almost three years.

In December, 1985, the trustee and Stenhouse agreed to settle the claim. The settlement provided that Stenhouse receive $5,000; in exchange, Stenhouse agreed to release the wage, severance pay, and vacation pay claims against the estate. The settlement did not affect any claim the trustee or any creditor might have against Stenhouse. On February 20, 1986, the bankruptcy court heard testimony from the trustee and arguments from the attorneys for the trustee, Stenhouse, the appellants, and the State of Illinois. Over the appellants' and the State of Illinois' objections, the court approved the settlement, finding that the settlement was in the estate's and the creditors' best interests. The court made no other findings of fact or conclusions of law. On appeal, the district court affirmed the bankruptcy court.

II.

A bankruptcy judge may approve a settlement in a liquidation proceeding if the settlement is in the estate's best interests. In re A & C Properties, 784 F.2d 1377, 1380, 1382 (9th Cir.), cert. denied, Martin v. Robinson, --- U.S. ----, 107 S.Ct. 189, 93 L.Ed.2d 122 (1986); In re Blair, 538 F.2d 849, 852 (9th Cir.1976); In re Patel, 43 B.R. 500, 505 (N.D.Ill.1984); In re Central Ice Cream Co., 59 B.R. 476, 487 (Bankr.N.D.Ill.1985). Central to the bankruptcy judge's determination is a comparison of the settlement's terms with the litigation's probable costs and probable benefits. Among the factors the bankruptcy judge should consider in his analysis are the litigation's probability of success, the litigation's complexity, and the litigation's attendant expense, inconvenience, and delay (including the possibility that disapproving the settlement will cause wasting of assets). See In re A & C Properties, 784 F.2d at 1381; In re Blair, 538 F.2d at 851; cf. McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 427 (7th Cir.1977) (noting similar factors to consider in approving a settlement in a class action). The bankruptcy judge should also consider the creditors' objections to the settlement; however, the creditors' views are not controlling. In re A & C Properties, 784 F.2d at 1382.

The appellants insist that a bankruptcy judge may approve a settlement only if it is "fair and equitable." "Fair and equitable" is a term of art that means that " 'senior interests are entitled to full priority over junior ones.' " In re AWECO, Inc., 725 F.2d 293, 298 (5th Cir.) (citation omitted), cert. denied, 469 U.S. 880, 105 S.Ct. 244, 83 L.Ed.2d 182 (1984). In a settlement context, "fair and equitable" means that the settlement reasonably accords with the competing interests' relative priorities.

Any distinction between the "best interests of the estate" and the "fair and equitable" standards is of little consequence. The cases appellants cite for the "fair and equitable" standard considered the factors we have noted above. See, e.g., Protective Committee for Independent Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1 (1968); In re A & C Properties, 784 F.2d at 1381. Moreover, in comparing the settlement's terms with the litigation's probable costs and probable benefits, the central inquiry in determining whether a proposed settlement is in an estate's best interests, the bankruptcy judge must necessarily examine the relative priorities of the contested claim and the estate's other claims. Claims with different priorities will have different settlement values. For example, administrative expenses have priority over general, unsecured claims; therefore, all else being equal, an administrative expense claim will have a higher settlement value than a general unsecured claim. Properly viewed then, the "fair and equitable" analysis--that is, comparing claims' relative priorities--is just one factor for the bankruptcy judge to consider in determining whether a settlement is in the estate's best interest.

Because the bankruptcy judge is "uniquely positioned to consider the equities and reasonableness of a particular compromise," we will not reverse that determination unless the bankruptcy judge abused his discretion. In re Patel, 43 B.R. at 505; see also In re Emerald Oil Co., 807 F.2d 1234, 1239 (5th Cir.1987); In re Walsh Construction Inc., 669 F.2d 1325, 1328 (9th Cir.1982). As we have recognized in other contexts (see, e.g., United States v. Beasley, 809 F.2d 1273, 1278-79 (7th Cir.1987) which discusses abuse of discretion in admitting other acts evidence under Fed.R.Evid. 403) the abuse of discretion standard recognizes that because of the bankruptcy judge's unique position, second-guessing by appellate courts...