In re Central Valley Processing, Inc., Case No. 03-11610-B-7 (Bankr. E.D. Cal. 3/16/2007)
| Decision Date | 16 March 2007 |
| Docket Number | Adversary Proc. No. 05-1089.,Case No. 03-11610-B-7.,DC No. KDG-44. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of California |
| Parties | In re Central Valley Processing, Inc., Debtor. Central Valley Processing, Inc. and Michael McGranahan, Chapter 7 Trustee, Plaintiff, v. Robert W. Christian, et al., Defendants. |
T. Scott Belden, Esq., of Klein, DeNatale, Goldner, Cooper, Rosenlieb & Kimball, LLP, appeared on behalf of the chapter 7 trustee, Michael D. McGranahan (the "Trustee").
Riley C. Walter, Esq., of the Walter Law Group, appeared on behalf of the Growers' Committee (the "Growers' Committee").
Michael T. Hertz, Esq., of Lang, Richert & Patch, appeared for George Crafton, Andrew Pursley, Karen Torrano, and Arla Dill.
This Memorandum Decision is not approved for publication and may not be cited except when relevant under the doctrine of law of the case or the rules of res judicata and claim preclusion.
Before the court is the Trustee's Motion for Order Approving Compromise of Claims Against Former Insiders of Debtor (the "Compromise Motion," the "Trustee's Motion," or the "Motion"). The Growers' Committee opposes the Trustee's Motion. The Growers' Committee also objects to and moves to strike much of the Trustee's supporting evidence (the "Evidentiary Objections"). For the reasons set forth below, the Trustee's Motion will be granted. The Evidentiary Objections will be sustained in part and overruled in part.
The court has jurisdiction over these matters under 28 U.S.C. § 1334 and 11 U.S.C. §§ 105(a), 547, 548, 550,1 and General Orders 182 and 330 of the U.S. District Court for the Eastern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). This memorandum decision contains findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052, made applicable to this contested matter by Federal Rule of Civil Procedure 52.
The Dispute.
This bankruptcy case commenced with a voluntary petition under chapter 11 on February 21, 2003. Central Valley Processing, Inc. (the "Debtor") was in the business of processing and selling almonds which the Debtor purchased from numerous entities. At commencement of this case, the Debtor owed money to approximately 64 persons and entities who had grown and delivered almonds to the Debtor in the 2002 crop year (the "Growers"). The case was ultimately converted to chapter 7. The background of the case and the reasons for the appointment of the Growers' Committee are set forth in greater detail below.
In February 2005, the Trustee filed this adversary proceeding (the "Adversary Proceeding"). Defendants George Crafton, Andrew Pursley, Karen Torrano, Arla Dill, and Robert Christian (the "Defendants") are former directors and officers of the Debtor. They also filed substantial disputed claims against the Debtor for, inter alia, indemnity for guaranteed debt and the payment of almonds grown by the Defendants (the "Defendants' Claims.") In essence, the complaint alleges that, in the months leading up to bankruptcy, the Defendants engaged in financial transactions that were self-interested, fraudulent, and detrimental to the Debtor and its creditors. The complaint listed sixteen claims for relief for, inter alia, breach of fiduciary duty, collection of monies due and recovery of preferential or fraudulent transfers. The Trustee subsequently filed a supplemental complaint adding a seventeenth claim for relief to disallow the Defendants' claims filed in the main case. The Defendants filed responsive pleadings denying all liability, demanding a jury trial, and raising numerous affirmative defenses. The Trustee now asks this court to approve a global settlement of that Adversary Proceeding (the "Settlement").
The Trustee states in support of the Compromise Motion that he has performed extensive discovery and aggressively prosecuted the Adversary Proceeding. The Trustee and his counsel reviewed and evaluated documents produced in response to discovery in this Adversary Proceeding. The Trustee obtained and reviewed copies of depositions and documents produced in several related state court lawsuits which arose out of events leading up to this bankruptcy case. The Trustee reviewed and evaluated the books and records of the Debtor, testimony given by the Debtor's principals at the section 341(a) creditor meetings, numerous examinations taken pursuant to Fed.R.Bankr.P. 2004, and the documents produced in such examinations.
The Proposed Settlement.
In July 2006, the Trustee and the Defendants participated in a mediation which lasted approximately 12 hours. At the conclusion of the mediation, the Trustee and the Defendants negotiated the Settlement which the Trustee now seeks authorization to consummate. The Settlement contemplates that the Defendants will collectively pay the estate $175,000 in cash or letters of credit to secure future payments. In addition, the Defendants' unsecured claims will be fixed in an amount certain and will be subordinated to the extent they would have received collectively $300,000 from the estate. In exchange, the Trustee agrees to dismiss this Adversary Proceeding and release the Defendants from any further claims held by the estate.
The Trustee's Motion is supported by a declaration from Michael D. McGranahan (the "Trustee's Declaration"), which addresses each of the factors this court must consider in deciding whether to grant the Motion as set forth in Martin v. Robinson (In re A & C Properties), 784 F.2d 1377 (9th Cir. 1986), cert. denied Martin v. Robinson, 479 U.S. 854, 107 S.Ct. 189, 93 L.Ed.2d 122 (1986). The Trustee's testimony with regard to each of the A & C Properties factors is summarized as follows:
Probability of Success on the Merits.
Addressing the likelihood of success on the merits, the Trustee states, "[E]vidence was adduced and positions were taken that demonstrated that success on the claims was not a foregone conclusion and that there were substantial issues raised by the defendants that impacted the likelihood of prevailing at trial." In this Adversary Proceeding the Trustee seeks damages for alleged breaches of fiduciary duty. Such claims are fact intensive and would require an extensive inquiry into the circumstances of each alleged transaction. The uncertainty with respect to whether some or all of such claims could be proven negatively impacts the probability of success on the merits. This factor alone substantially supports the Settlement.
Complexity of the Litigation, Expense and Delay.
Addressing the complexity and cost of litigation issue, the Trustee declared, "The cost of completing discovery, experts, and trial, would likely exceed $300,000.00, with no certainty that the result would be better than the settlement achieved." The court has no reason to discount the Trustee's estimation of the litigation cost. The high cost of prosecuting this Adversary Proceeding further supports the reasonableness of the proposed Settlement.
Difficulty of Collection.
With regard to collection issues, the Trustee stated that some of the Defendants did not appear to be well positioned to satisfy a money judgment. Again, the court has no contrary evidence to suggest that this statement is erroneous. The court notes that the Settlement itself is structured in payments, presumably because the Defendants do not all have the financial resources to pay it at once.
Best Interest of Creditors.
With regard to the best interest of the creditors, the Trustee declared, This statement by the Trustee speaks for itself.
Applicable Law.
The standard for approving a compromise of controversy in the Ninth Circuit is set forth in In re A & C Properties, 784 F.2d 1377 as follows:
The purpose of a compromise agreement is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims. The law favors compromise and not litigation for its own sake, and as long as the bankruptcy court amply considered the various factors that determined the reasonableness of the compromise, the court's decision must be affirmed. Thus, on review, we must determine whether the settlement entered into by the trustee was reasonable, given the particular circumstances of the case.
Id. at 1380-81 (citations omitted).
The Ninth Circuit elaborated on the standard in Woodson v. Fireman's Fund Insurance Company (In re Woodson), 839 F.2d 610, 620 (9th Cir. 1988): (citations omitted).
The Trustee's judgment in proposing a settlement must be informed. Port O'Call Investment Co. v. Blair (In re Blair), 538 F.2d 849, 851 (9th Cir. 1976). The trustee and the court must weigh the probable costs and benefits. Id. The court should give weight to the opinions of the trustee, the parties and their attorneys. Id. "Consideration should also be given to the principle that the law favors compromise and not litigation for its own sake." Id. The policy favoring settlement is particularly acute in the context of bankruptcy:
The duties of the trustee are prescribed by the bankruptcy act, and he must institute litigations whenever it is necessary for the purpose of collecting or reducing to money the assets of the bankrupt estate. By this obligation it is not meant that he should burden the assets of the...
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