In re Bowman, Bankruptcy No. 91-5-2533-SD.

• Citation: 181 BR 836
• Decision Date: 05 May 1995
• Docket Number: Bankruptcy No. 91-5-2533-SD.
• Parties: In re Anna Wade BOWMAN, Debtor.
• Court: U.S. Bankruptcy Court — District of Maryland

181 B.R. 836 (1995)

In re Anna Wade BOWMAN, Debtor.

Bankruptcy No. 91-5-2533-SD.

United States Bankruptcy Court, D. Maryland.

May 5, 1995.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Nelson C. Cohen, Barbara L. Ward, Zuckerman, Spaeder, Goldstein, Taylor & Kolker, Washington, DC, for debtor.

Steven D. Gordon, William J. Dempster, Holland & Knight, Washington, DC, Special Counsel for trustee.

David W. Tonnessen, Chapter 7 Trustee, Baltimore, MD.

Edmund A. Goldberg, Office of the U.S. Trustee, Baltimore, MD, for U.S. Trustee.

Jerald J. Oppel, Ober, Kaler, Grimes & Shriver, Baltimore, MD, for Geren Sales, Inc.

MEMORANDUM OPINION

E. STEPHEN DERBY, Bankruptcy Judge.

The controlling issue before the court is what are the duties of a debtor-in-possession whose only asset is a lawsuit and who is faced with an offer of judgment that is enough to pay creditors, but which the Debtor considers to be inadequate.

PROCEDURAL HISTORY

Anna Wade Bowman, Debtor, filed her voluntary Chapter 7 petition on April 23, 1991. Debtor was discharged after the Chapter 7 Trustee filed a report of no distribution, and a final decree was entered on October 11, 1991. On the same day as the final decree, Debtor amended her schedules to reflect the existence of an additional asset of the estate, namely, a $400,000 claim against Geren Sales, Inc., t/a GBS, Inc. and Giant Food, Inc.¹

Asserting that the claim would pay all her creditors in full, Debtor moved to dismiss her bankruptcy case. Rather than dismissing the case, this court, sua sponte, vacated the final decree on October 22, 1991 and directed the Chapter 7 Trustee to investigate whether to pursue the claim on behalf of the bankruptcy estate. On January 30, 1992 this court approved the Trustee's employment of special counsel who had previously represented Debtor to prosecute her claims against Geren Sales, Giant Food, et al. The approval provided that "all negotiations, settlement and fee arrangements" would be subject to the consent of the Trustee. This order was later amended on September 16, 1994 to replace original counsel with a successor firm, due to a merger with special counsel's law firm.

The claim was embodied in an adversary complaint filed on behalf of the Debtor, her company, and the Chapter 7 Trustee on February 24, 1992 against Geren Sales, Inc., t/a GBS, Inc., Giant Food, Inc. and several individuals. Adv. No. 92-5081-SD. On Plaintiffs' motion, the United States District Court for the District of Maryland withdrew reference of the adversary proceeding. The civil action is currently pending as David W. Tonnessen, Trustee, et al. v. Geren Sales, Inc., t/a GBS, Inc., et al., Civil No. PJM-92-849, and it is scheduled for a jury trial during the week of June 6, 1995. Both compensatory and punitive damages are requested.

The individual defendants have been dismissed. Three counts remain: breach of contract against Geren Sales; tortious interference with contractual relationship against Giant Food; and civil conspiracy against both. Defendants have made an offer of judgment in the amount of $500,000, plus costs. FRCP 68; Bankr.Rule 7068. Defendants' counsel have assured the court that the offer of judgment remains open. The Trustee has assumed this offer would be sufficient to pay creditors who have filed timely claims in full, with interest, and to provide a small surplus distribution to the Debtor.

The court agrees that the offer is sufficient to cover the nondischargeable claims of the Internal Revenue Service and the Maryland Comptroller of the Treasury. The Internal Revenue Service is Debtor's largest unsecured creditor, although Debtor denied the existence of tax claims on her schedules and stated on her statement of financial affairs that all tax returns had been filed. However, from evidence produced at a hearing on Debtor's objections to the offer of judgment and from the court's examination of claims that have been filed, it is doubtful that the $500,000 offer of judgment will be sufficient to provide a distribution to Debtor, in part because the tax claims appear to have increased. Further, the tax impact of this offer of judgment has not yet been considered or determined.

The Chapter 7 Trustee determined to reject the offer because he concluded that it would not maximize realization on the claim for the estate and that it was far less than the case was worth. The Trustee countered with a settlement offer of $1,400,000. The Trustee provided notice of his position, and the only two creditors that responded were in support. The IRS did not respond.

Because the district court was "... concerned about the authority of the Trustee to reject a settlement offer which not only would liquidate the claims of all creditors in the underlying bankrupt estate, but would leave a substantial surplus for the debtor," it referred the matter to the bankruptcy court for an appropriate report and recommendation. The two specific issues that the district court requested the bankruptcy court to address were, first, the propriety of the Trustee rejecting the $500,000 offer of judgment and, second, the propriety of counsel for the Trustee continuing as counsel for the Debtor. In responding to the second issue, special counsel wrote a letter filed December 13, 1994 to this court explaining that it "... does not continue to represent the debtor" and has not represented the Debtor since the Debtor was dismissed as a party plaintiff. The Trustee took the place of Debtor because all of Debtor's claims arose before her bankruptcy petition was filed.

To address these issues, the bankruptcy court set a schedule for the Trustee to renotice all creditors of his proposed action, with his reasons supporting such action, and for parties in interest to respond. Unexpectedly, the Trustee altered his earlier position and filed a notice that he proposed to accept the settlement offer. The Trustee explained, inter alia:

The trustee realizes his fiduciary responsibility to all respective parties and is cognizant of differing interests among the various parties in interest and has determined that in this particular case the settlement offer is accepted. The possible risk to the creditors of this estate would outweigh the potential increase in the debtor\'s distribution.

Notice of Trustee's Proposed Acceptance of Settlement Offer of Claims in Litigation, Dkt. 20, p. 2.

Debtor objected to the proposed acceptance as inadequate, and she moved to convert her Chapter 7 case to a Chapter 11 reorganization case. In Debtor's objection she stated that when her case is converted to a Chapter 11, "... it is the intent of the Debtor, as Debtor-in-Possession, to proceed with the litigation, through trial." The IRS opposed conversion, and, alternatively, moved to reconvert to Chapter 7. It urged acceptance of the offer of judgment. The U.S. Trustee and the State of Maryland supported the IRS' position. The two unsecured creditors who had previously supported the Trustee's position to reject the offer did not respond. The litigation Defendants, who lack standing in the bankruptcy estate, provided the bankruptcy court with supplemental memoranda urging acceptance of the $500,000 offer of judgment.

At the bankruptcy court hearing on these issues, special litigation counsel for the Trustee, Steven D. Gordon, Esquire, testified that in his opinion, after factoring in the risks of this litigation, a fair settlement value of the case is $1.4 to $1.6 million. Counsel for Defendant Giant Food, Mark Scott London, Esquire, who was called as a witness by the IRS testified that there were several areas of weakness in Plaintiffs' case. For example, he noted the difficulty of proving an entitlement to punitive damages and emotional distress damages under Maryland law; heavy reliance on one witness, the Debtor, to establish her claims; and errors in computing compensatory damages. He testified that the Plaintiffs' damage computation failed to include the alleged downward impact of offsets for the costs of doing business, alternative employment mitigation, a diminishing impact on reputation over time, and taxes; and it did include a speculative recovery for bonuses.

The Chapter 7 Trustee, David W. Tonnessen, Esquire, testified that he found his special litigation counsel to be competent. It is evident that the Trustee relied on the evaluation of special litigation counsel in first rejecting the $500,000 offer of judgment. The Trustee continues to be of the opinion that the offer of settlement is low from a litigation perspective, i.e. in his opinion the odds favor a higher recovery.

However, upon reflection, as impacted by the passage of several months, the Trustee has concluded that the $500,000 offer of judgment is fair to the Chapter 7 bankruptcy estate. The settlement is enough to pay the administrative costs to the estate; the Trustee believes it should be enough to pay all creditors; and the interests of the Debtor are appropriately balanced because she will have sizeable, nondischargeable tax claims paid by the bankruptcy estate. The settlement provides prompt and certain realization of $500,000; and it avoids the risks of loss, of a lesser recovery, of delay in fixing liability that could result from a further postponement of trial or from an appeal, and of collection; and it permits expeditious distribution to creditors. Minimizing delay benefits creditors specifically because it saves the time cost of money.

The only asset of the bankruptcy estate is this claim, and Debtor has acknowledged that she intends to file a plan of liquidation for the sole purpose of realizing on the claim by pursuing the litigation.

DISCUSSION

1. Debtor's Right to Convert to Chapter 11

The Debtor satisfies the Bankruptcy Code's statutory conditions for conversion to Chapter 11. Pursuant to 11 U.S.C. § 706(a):

(a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at

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