In re Comdisco, Inc., 081406 ILNDC, 06 C 1535

Docket Nº06 C 1535, 01 B 24795
Opinion JudgeJAMES MORAN, Senior District Judge.
Party NameIN RE: COMDISCO, INC., et al., Debtors. v. CERTAIN SIP CLAIMANTS, Appellees. NICHOLAS K. PONTIKES, Appellant,
Case DateAugust 14, 2006
CourtUnited States District Courts, 7th Circuit, United States District Court (Northern District of Illinois)

IN RE: COMDISCO, INC., et al., Debtors.




Nos. 06 C 1535, 01 B 24795

United States District Court, N.D. Illinois, Eastern Division.

August 14, 2006


JAMES MORAN, Senior District Judge.

Appellant Nicholas Pontikes (Pontikes) seeks reversal of the bankruptcy court's order requiring production of a confidential settlement agreement that he previously entered into, together with John W. Costello, the Comdisco Litigation Trustee (Trustee).1 By ordering production of the agreement, Pontikes claims that the bankruptcy court failed to follow authority favoring the protection of confidential settlement agreements, and that it erred in applying the discovery rules from the Bankruptcy Code to an agreement from an Illinois state court action. Appellees, who successfully sought production of the settlement agreement, contend that the application of the Code's discovery rules was correct and that the bankruptcy court properly exercised its equitable powers to safeguard the integrity of proceedings. For the following reasons, we reverse the bankruptcy court's order to produce the settlement agreement.


Appellees are former employees of Comdisco, Inc., who, together with other Comdisco employees, purchased Comdisco stock under a shared investment plan (SIP) in January and February 1998. Pursuant to the SIP, appellees used personal loans provided by JP Morgan Chase Bank (Bank) to purchase the stock. Comdisco guaranteed the loans and each SIP participant executed a promissory note in favor of the Bank. Comdisco entered Chapter 11 proceedings on July 16, 2001. Approximately one year later the bankruptcy court confirmed Comdisco's plan for reorganization, under which Comdisco was reorganized into Comdisco Holding; a Litigation Trust was established and the Trustee was appointed. The Bank accelerated the notes and in the bankruptcy action it sought to collect the amounts due under the guaranty. That guaranty claim was settled in December 2004, and the Bank's interest in and rights to the notes were assigned to the Trustee.

The Litigation Trust was created to liquidate claims against the SIP participants by collecting notes held by those participants, and to transfer the proceeds for distribution to the beneficiaries of the Trust. The Trust Agreement vests the Trustee with broad authority to "take such steps as it deems necessary to investigate, pursue, collect, litigate, settle and/or compromise" the SIP claims; to reduce those claims to cash proceeds and to distribute those proceeds provided that the Trustee maximizes the value of the SIP claims ( see Trust Agreement, sec. 4.1(a), sec. 6.3(b)). Section 7.4 states that the determination of whether to file judicial proceedings to compromise an SIP claim is in the "sole discretion" of the Trustee.

The Trustee also has discretion to involve the bankruptcy court in the disposition of SIP claims. Authorization for the sale, disposition, transfer or settlement of an SIP claim is made by the Trust Advisory Board or Board of Directors of Comdisco Holding. It is only after those entities fail to authorize a proposed disposition of an SIP claim that the Trustee "may file a motion requesting such authorization from the Bankruptcy Court, and the Bankruptcy Court shall retain jurisdiction over such issue" ( id. at 4.1(b)). Section 6.11 specifies that the Trustee "may, in his discretion, " seek an order from the bankruptcy court if he "believes" such an order is necessary to protect the Trust beneficiaries, or for the approval of a course of action or proposed settlement.

As authorized by the Trust Agreement, the Trustee brought separate actions against 65 SIP participants in February 2004. These actions were filed in state and federal court, depending on the residency of each defendant. The action against Pontikes was brought in an Illinois state court (Costello v. Pontikes, 05 L 1385), and was settled on October 14, 2005. This settlement agreement contained an express confidentiality provision. Pontikes was the former President and Chief Executive Officer of Comdisco and remained on the Board of Directors until the reorganization plan was confirmed. Prior to settling with the Trustee, Pontikes had the largest SIP liability, totaling over $15 million, which, according to appellees, amounted to over 10 per cent of the total trust assets. In November 2005, the Trustee disclosed that it had settled with Pontikes, but, pursuant to the confidentiality provision, it did not produce the details of the settlement.

On January 17, 2006, appellees filed a motion for a FED. R. BANKR. P. 2004 (Rule 2004) examination of the Trustee in order to discover the terms of the Pontikes settlement agreement. This motion was argued before the bankruptcy court on March 2, 2006. The main thrust of appellees' argument for production was that the terms of the Pontikes settlement agreement with the Trustee "are relevant to the Certain SIP Claimants' claims that Comdisco violated, and continues to violate, its fiduciary duty and the implied covenant of good faith and fair dealing with respect to the SIP agreement by refusing to treat all SIP participants in the same manner" (appellee brf. at 7; SIP Rule 2004 mot. at ¶ 8). In granting appellees' motion for the Rule 2004 examination, the bankruptcy court made the following findings and conclusions, which were stated in an order dated March 9, 2006:

1) The amount and terms of the Pontikes settlement are relevant to the SIP Claimants' claims as the concept of relevance relates and applies at the discovery stage.

2) Any privacy rights that Mr. Pontikes might have are outweighed by the public policy in favor of full disclosure of matters in bankruptcy court.

3) The appropriate administration of the assets of the former debtor does require that this settlement agreement be produced, not necessarily filed.

4) As the debtor's former CEO and allegedly an architect of the Plan, the settlement that Mr. Pontikes reached with the Trustee must be produced to guard the overall integrity of the bankruptcy process.

5) Federal Rule of Evidence 408 does not...

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