Boyer v. Trs. of Ind. Univ. (In re Fort Wayne Telsat, Inc.)

• Decision Date: 25 April 2010
• Docket Number: Bankruptcy No. 05–12177.,Adversary No. 07–1287.
• Citation: 489 B.R. 773
• Parties: In re FORT WAYNE TELSAT, INC., Debtor. R. David Boyer, Plaintiff, v. The Trustees of Indiana University and Indiana Higher Education Telecommunication System, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

489 B.R. 773

In re FORT WAYNE TELSAT, INC., Debtor.R. David Boyer, Plaintiff,

v.The Trustees of Indiana University and Indiana Higher Education Telecommunication System, Defendants.

Bankruptcy No. 05–12177.

Adversary No. 07–1287.

United States Bankruptcy Court,

N.D. Indiana,

Hammond Division.

April 25, 2010.

R. David Boyer II, Fort Wayne, IN, for Plaintiff.

Jeremy N. Gayed, Patrick G. Murphy, Thomas P. Yoder, Barrett & McNagny LLP, Fort Wayne, IN, for Defendants.

MEMORANDUM OF DECISION CONCERNING OBJECTION TO TRUSTEE'S/PLAINTIFF'S PROPOSED COMPROMISE OF ADVERSARY PROCEEDING

J. PHILIP KLINGEBERGER, Bankruptcy Judge.

This adversary proceeding was commenced by a complaint filed on October 3, 2007 by the plaintiff, R. David Boyer, as Trustee of the Chapter 7 estate of Fort Wayne Telsat, Inc. (“Trustee”) against The Trustees of Indiana University (“IU”) and Indiana Higher Education Telecommunication System (“IHETS”) as defendants. Due to the recusal of the Honorable Robert E. Grant, by order entered on October 24, 2007 this adversary proceeding and all matters related to it were reassigned to the undersigned. On March 18, 2008, the Trustee, and IU and IHETS, filed their Amended Joint Motion to Approve Settlement,¹ to which was attached as exhibit “A” the parties' Settlement Agreement and Release. Putting aside the abundant legalese customarily included in settlement agreements, the principal provisions of the settlement were that in exchange for $100,000.00 paid to the Trustee by IU and IHETS, the Trustee would disclaim “any right, title or interest in (FCC license for an educational broadband service Station WLX 236)”; the Trustee, and IU and IHETS would mutually release all claims of any nature whatsoever against the opposing party/parties; and that upon the court's approval of the compromise, the parties would dismiss this adversary proceeding with prejudice. This proposed compromise was noticed to all creditors and parties-in-interest in accordance with the provisions of applicable law. On April 7, 2008, JAS Family Limited Partnership (“JAS”) filed a timely objection to the compromise. This objection gave rise to a contested matter pursuant to Fed.R.Bankr.P. 9014.

The court has jurisdiction over the adversary proceeding and the contested matter pursuant to 28 U.S.C. § 1334(a) and (b); 28 U.S.C. § 157(a); and N.D.Ind.L.R. 200.1. The adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E); the contested matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E) and (O).

JAS' objection asserts that the compromise proposed by the Trustee is not in the best interest of the bankruptcy estate because in the exercise of his business judgment with respect to matters relating to the compromise, the Trustee failed to undertake an adequate investigation of circumstances regarding the subject matter of litigation and entered into a compromise which is not the reasonable equivalent of the value of the estate's claims surrendered by the settlement.

The record applicable to determination of the contested matter was made by means of a trial which was held on December 4, 2008 and was then concluded on March 5, 2009. Following the trial, the parties submitted legal memoranda in support of their positions.

To avoid unnecessary suspense as to the outcome of this decision—akin to that encountered in an Easter egg hunt until someone exuberantly exclaims that he/she has found the golden egg—the court determines that the Amended Joint Motion will be granted, and that the compromise effected thereby will be approved.

The standards for reviewing whether or not a contested compromise by a trustee will be approved have been expansively addressed by the United States Supreme Court, by the United States Court of Appeals for the Seventh Circuit, and by United States Bankruptcy Courts in the Seventh Circuit.

The general parameters of review, and of the court's involvement in the review process, were stated by the Supreme Court in Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1 (1968), as follows: ²

Compromises are ‘a normal part of the process of reorganization.’ Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 130, 60 S.Ct. 1, 14, 84 L.Ed. 110 (1939). In administering reorganization proceedings in an economical and practical manner it will often be wise to arrange the settlement of claims as to which there are substantial and reasonable doubts. At the same time, however, it is essential that every important determination in reorganization proceedings receive the ‘informed, independent judgment’ of the bankruptcy court. National Surety Co. v. Coriell, 289 U.S. 426, 436, 53 S.Ct. 678, 682, 77 L.Ed. 1300 (1933). The requirements of ss 174 and 221(2) of Chapter X, 52 Stat. 891, 897, 11 U.S.C. ss 574, 621(2), that plans of reorganization be both ‘fair and equitable,’ apply to compromises just as to other aspects of reorganizations. Ashbach v. Kirtley, 289 F.2d 159 (C.A.8th Cir.1961); Conway v. Silesian–American Corp., 186 F.2d 201 (C.A.2d Cir.1950). The fact that courts do not ordinarily scrutinize the merits of compromises involved in suits between individual litigants cannot affect the duty of a bankruptcy court to determine that a proposed compromise forming part of a reorganization plan is fair and equitable. In re Chicago Rapid Transit Co., 196 F.2d 484 (C.A.7th Cir.1952). There can be no informed and independent judgment as to whether a proposed compromise is fair and equitable until the bankruptcy judge has apprised himself of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated. Further, the judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Basic to this process in every instance, of course, is the need to compare the terms of the compromise with the likely rewards of litigation.

The basic standards for review of compromise of an adversary proceeding were stated in In re Doctors Hospital of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir.2007), as follows:

Bankruptcy courts may approve adversary litigation settlements that are in the best interests of the estate. In re Energy Co–op., Inc., 886 F.2d 921, 927–29 (7th Cir.1989); In re Am. Reserve Corp., 841 F.2d 159, 161 (7th Cir.1987). The linchpin of the “best interests of the estate” test is a comparison of the value of the settlement with the probable costs and benefits of litigating. In re Energy Coop., 886 F.2d at 927. Among the factors the court considers are the litigation's probability of success, complexity, expense, inconvenience, and delay, “includingthe possibility that disapproving the settlement will cause wasting of assets.” In re Am. Reserve, 841 F.2d at 161. As part of this test, the value of the settlement must be reasonably equivalent to the value of the claims surrendered. This reasonable equivalence standard is met if the settlement falls within the reasonable range of possible litigation outcomes. In re Energy Co–op., 886 F.2d at 929;In re N.Y., New Haven & Hartford R. Co., 632 F.2d 955, 960 (2d Cir.1980); see also Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424–25, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968); Depoister v. Mary M. Holloway Found., 36 F.3d 582, 586 (7th Cir.1994). Because litigation outcomes cannot be predicted with mathematical precision, only if a settlement falls below the low end of possible litigation outcomes will it fail the reasonable equivalence standard. In re Energy Co–op., 886 F.2d at 929.

The bankruptcy court's approval of the settlement is reviewed deferentially, for abuse of discretion. Depoister, 36 F.3d at 586. The bankruptcy court must independently evaluate the settlement, not simply accept the recommendation of the trustee. TMT Trailer Ferry, 390 U.S. at 424, 88 S.Ct. 1157;Depoister, 36 F.3d at 586–87;In re Am. Reserve, 841 F.2d at 162. If the decision demonstrates a command of the case, we will not engage in second-guessing; the bankruptcy court is in a better position “to consider the equities and reasonableness of a particular compromise.” In re Am. Reserve, 841 F.2d at 162. Factual findings are reviewed for clear error; legal conclusions are reviewed de novo. Fed. R. Bankr.P. 8013; In re Crosswhite, 148 F.3d 879, 881 (7th Cir.1998).

The foregoing was essentially a distillation of the standards stated in LaSalle National Bank v. Holland, 841 F.2d 159, 161–162 (7th Cir.1987):

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, 479 U.S. 854, 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...