In re Anderson

• Decision Date: 07 November 2007
• Docket Number: No. 06-8105.,06-8105.
• Citation: 377 B.R. 865
• Parties: In re Gregory ANDERSON and Rose Anderson, Debtors. Colleen M. Olson, Trustee, Plaintiff-Appellant, v. David A. Anderson and David Allen Anderson, Defendants-Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

377 B.R. 865

In re Gregory ANDERSON and Rose Anderson, Debtors Colleen M. Olson, Trustee, Plaintiff-Appellant, v. David A. Anderson and David Allen Anderson, Defendants-Appellees.

No. 06-8105.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Submitted: August 1, 2007.

Decided and Filed: November 7, 2007.

Steven L. Rayrnan, Steven M. Ellis, Rayman & Stone, on Brief, Kalamazoo, MI, for Appellant.

Before: LATTA, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.

OPINION

JOSEPH M. SCOTT, JR., Bankruptcy Judge.

Appellant Colleen M. Olson (the "Trustee") appeals the bankruptcy court's order disapproving the settlement agreement entered into by the. Trustee and Defendants David Allen Anderson and David A Anderson (the "Defendants"). For the reasons that follow, the panel concludes that although the bankruptcy court abused its discretion by applying an erroneous legal standard, the court's decision should be affirmed.

I. ISSUES ON APPEAL

The overarching issue on appeal is whether the bankruptcy court abused its discretion in disapproving the settlement agreement entered into between the Trustee and the Defendants by applying an erroneous legal standard. Nevertheless, under the particular facts of this case, resolution of this issue is not determinative. The underlying issue is whether the Trustee's failure to object to the Debtors' claimed exemption within the deadline imposed by Federal Rule of Bankruptcy Procedure 4003(b) removed the property in its entirety from the bankruptcy estate.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit (the "BAP') has jurisdiction to hear and decide this appeal. 28 U.S.C. § 158(b)(1). The United States District Court for the Western District of Michigan has authorized appeals to the BAP, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). An order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). Ordinarily, an order disapproving a settlement is not considered final for purposes of appeal by right under 28 U.S.C. § 158(a)(1). However, in the present case, the orders on appeal entirely dispose of the Trustee's claims against the Defendants. "[A]n order that concludes a particular adversarial matter within the larger case should be deemed final and reviewable in a bankruptcy setting." Geberegeorgis v. Gammarino (In re Geberegeorgis), 310 B.R. 61, 63 (6th Cir. BAP 2004) (citations omitted).

A bankruptcy court's decision to approve or disapprove a settlement rests in the sound discretion of the bankruptcy judge. A reviewing court will not disturb or set aside the decision unless it achieves such an unjust result as to amount to an abuse of discretion. Machinery Terminals, Inc. v. Woodward (In re Albert-Harris, Inc.), 313 F.2d 447, 449 (6th Cir. 1963) (citations omitted). Generally, a court "abuses its discretion only when it relies upon clearly erroneous findings of fact or when it improperly applies the law or uses an erroneous legal standard." Fleischut v. Nixon Detroit Diesel, Inc., 859 F.2d 26, 30 (6th Cir.1988). Whether the bankruptcy court's discretionary decision is based upon an erroneous interpretation of the law is a legal question that is reviewed de novo. Slutsky v. Am. Express Travel Related Servs. Co. (In re William Cargile Contractor, Inc.), 209 B.R. 435, 436 (6th Cir. BAP 1997). Regardless, the decision of the bankruptcy court can be affirmed "if it is correct for any reason, including a reason not considered by that court." Gibson v. Gibson (In re Gibson), 219 B.R. 195, 200 (6th Cir. BAP 1998) (quoting McDowell v. Krawchison, 125 F.3d 954, 957 (6th Cir.1997)).

III. FACTS

On May 24, 2004, Gregory Anderson and Rose Anderson (the "Debtors") filed their chapter 7 petition and accompanying schedules, and Colleen M. Olson (the "Trustee") was appointed chapter 7 trustee. On October 4, 2004, the Debtors amended Schedules A and C to include a previously undisclosed interest in real property located in the Township of Crystal Falls, County of Iron, Michigan (the "Cabin property"). According to those Schedules, the Debtors possessed an undivided one-half interest in the Cabin property as tenants by the entirety, with the remaining one-half interest held in joint tenancy by the Defendants. Amended Schedule C listed the property as follows:

½ interest in old cabin. The debtors own a ½ interest in an old cabin that may have a total value of about $30,000. The debtors' interest would be $15,000.

(Appellant's App. at 42.) The schedule also identified 11 U.S.C. § 522(d)(5) as the statutory basis for the exemption and listed the value of the claimed exemption as well as the current market value of the Debtors' interest in the Cabin property as $15,000. At no point did the Trustee object to the claimed exemption.

Almost a year later, on September 19, 2005, the Trustee obtained a drive-by appraisal of the Cabin property. Although the Debtors had indicated that the property "may have a total value of about $30,000," the Trustee's appraisal gave an estimated value of $60,000. As a result of this newfound equity, the Trustee filed an adversary proceeding against the Defendants, the co-owners of the Cabin property, seeking authority under 11 U.S.C. § 363(h) to sell both the estate's and the Defendants' interests in the property.¹

On April 7, 2006, the Trustee filed a motion to approve her settlement of the adversary proceeding with the Defendants pursuant to Federal Rule of Bankruptcy Procedure 9019. Among other terms, the proposed settlement agreement provided that the Trustee would accept $13,560 from the Defendants in exchange for the estate's interest in the Cabin property, taking into account the Debtors' claimed exemption of $15,000.²

On April 12, 2006, the Debtors filed an objection to the motion premised on their belief that the settlement would preclude recovery of their claimed exemption of $15,000. Upon learning that the settlement agreement contemplated their retention of the claimed $15,000 interest in the Cabin property, the Debtors withdrew their objection.

On April 25, 2006, the bankruptcy court conducted a hearing on the motion for approval of the settlement. At the hearing, the Debtors' counsel confirmed that his clients had withdrawn their objection to the settlement and that all parties present at the hearing were in agreement with its terms. The bankruptcy court then sua sponte raised the issue of whether the bankruptcy estate had an interest in the Cabin property to convey to the Defendants, given the absence of an objection to the Debtors' claimed exemption. Responding to the court's comments, the Debtors reinstated their original objection and additionally objected on the basis that the Cabin property had been properly exempted and was no longer property of the estate subject to sale by the Trustee.

On October 20, 2006, the bankruptcy court issued its opinion and entered an order denying the Trustee's motion for approval of her settlement with the Defendants because the bankruptcy estate no longer had an interest in the Cabin property, as a result of the Debtors' unchallenged exemption. On October 30, 2006, the Trustee filed a motion to reconsider, requesting that the court reverse its October 20 decision because, in part, it was in direct conflict with the holding in In re Heflin, 215 B.R. 530 (Bankr.W.D.Mich. 1997), a decision by a different bankruptcy judge in the same district. On November 28, 2006, the bankruptcy court denied the Trustee's motion to reconsider.

On December 8, 2006, the Trustee timely filed her appeal of both orders.

IV. DISCUSSION

A. Standard for approval or disapproval of a settlement agreement

Rule 9019 of the Federal Rules of Bankruptcy Procedure provides: "On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." The rule offers no guidance as to the criteria to be used in evaluating whether a settlement should be approved, but courts uniformly have drawn from the language of the Supreme Court's decision in TMT Trailer Ferry in establishing a "fair and equitable"³ threshold for settlement approval. See Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1 (1968). Although the TMT Trailer Ferry case was decided under the Bankruptcy Act, "its principles have been broadly held applicable to settlements under the Bankruptcy Code." 2 Norton Bankr.L. & Prac.2d § 41:10 (2007). Many Rule 9019 opinions have relied on TMT Trailer Ferry "both for the substantive requirement that settlement represent a fair compromise of disputed issues, and for the requirement that such settlement be preceded by adequate inquiry." Id.

The Sixth Circuit Court of Appeals has held that "the bankruptcy court is charged with an affirmative obligation to apprise itself of the underlying facts and to make an independent judgment as to whether the compromise is fair and equitable." Reynolds v. Comm'r, 861 F.2d 469, 473 (6th Cir.1988) (emphasis added). The court must weigh the conflicting interests of all relevant parties, "considering such factors as the probability of success on the merits, the complexity and expense of litigation and the reasonable views of creditors." Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir.1988) (citation omitted). "A bankruptcy judge need not conduct a mini-trial or write an extensive opinion every time he approves or disapproves a settlement. The judge need only be apprised of the relevant facts and law so that he can make an informed and intelligent decision and set out the reasons...