In re Doctors Hosp. of Hyde Park, Inc.
| Decision Date | 12 January 2007 |
| Docket Number | No. 05-3502.,05-3502. |
| Citation | 474 F.3d 421 |
| Parties | In re DOCTORS HOSPITAL OF HYDE PARK, INC., Debtor-Appellee. Appeal of Lasalle Bank National Association, as Trustee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Howard L. Adelman (argued), Adelman, Gettleman & Merens, Chicago, IL, for Trustee.
John E. Frey (argued), Wildman, Harrold, Allen & Dixon, Norman N. Reid, Mayer, Brown, Rowe & Maw, Chicago, IL, for Debtor-Appellee.
Before BAUER, WOOD, and SYKES, Circuit Judges.
LaSalle Bank National Association ("LaSalle") appeals a district court order affirming the bankruptcy court's approval of a settlement of adversary litigation in the bankruptcy of Doctors Hospital of Hyde Park ("Doctors Hospital" or "the Hospital"). The settlement releases Dr. James Desnick ("Desnick") from adversary claims the Hospital brought against him, provides over $6 million in cash to the Hospital's bankruptcy estate, releases the Hospital from millions of dollars in claims against it, and ends a complex litigation. The Hospital, the bankruptcy trustee, Desnick, and the creditors' committee all agreed the settlement was in the best interest of the estate. LaSalle disagreed and objected. Following a lengthy hearing, the bankruptcy court held the settlement was in the best interest of the estate and approved it. The district court affirmed, and LaSalle has appealed. We affirm.
Desnick was the owner and sole shareholder of Doctors Hospital and a number of other entities. One of his other companies, HPCH LLC ("HPCH"), owned the land on which the Hospital sat and collected monthly rent from it. Another of his companies, Medical Management of America, Inc. ("MMA"), managed the Hospital and received fees for these services. Desnick treated his companies like personal bank accounts, sometimes withdrawing money for himself, other times depositing money when his companies' coffers ran low.
Doctors Hospital guaranteed two loans that figure prominently in this litigation, though it enjoyed the proceeds of only one. In March 1997 MMA Funding (99% owned by Doctors Hospital) borrowed roughly $25 million from Daiwa Healthco (the "Daiwa loan"). Because the loan was, in practical effect, a loan to the Hospital, the Hospital secured the loan by pledging its receivables. In addition, Desnick personally guaranteed the loan. In August 1997 Nomura Asset Capital Corporation loaned HPCH $50 million (the "Nomura loan"). Although the Nomura loan went ostensibly to HPCH, it was secured by the Hospital's equipment and (like the Daiwa loan) by the Hospital's accounts receivable. The Hospital also executed a guaranty and suretyship agreement in favor of Nomura. The Nomura loan proceeds did not go to the Hospital, however. Instead, the proceeds — some $48.5 million after administrative fees — were deposited into an account bearing the name of Desnick and his wife. Over time LaSalle Bank came to control the Nomura loan.1
The Hospital filed for Chapter 11 bankruptcy protection in April 2000. Daiwa filed a claim against the Hospital to collect the outstanding portion of its loan, and Desnick personally paid the debt of about $9 million. The Hospital filed an adversary complaint against Desnick and numerous other defendants. Twelve of the other defendants were Desnick-controlled entities2 and four were former corporate officers or directors3 of the Hospital whom Desnick had effectively agreed to indemnify for their losses.4 The gist of the complaint was that Desnick and the other officers and directors caused the Hospital's bankruptcy through mismanagement and a series of fraudulent transactions — to the tune of about $34 million — which benefitted Desnick, his other companies, and Hospital management.5 The complaint asserted twenty-eight counts, including breach of fiduciary duties, conversion, violation of the Illinois Uniform Fraudulent Transfer Act, fraudulent transfers under the Bankruptcy Code, improper distributions to the shareholder, and equitable subordination of Desnick's claims against the Hospital (Desnick claimed the Hospital owed him roughly $16 million). The complaint also named LaSalle and sought to void the guaranty on the Nomura loan.
After two years of litigation, the Hospital moved the bankruptcy court for approval of a settlement agreement that had been reached by the parties (except LaSalle). Under the terms of the settlement, Desnick agreed to pay the Hospital roughly $6.1 million and also agreed to forfeit any subrogation rights he had to seek recovery of the $9 million he personally paid to Daiwa on behalf of the Hospital. He also agreed to withdraw any other claims he filed against the Hospital. Moreover, Desnick promised to use his best efforts to obtain dismissal or withdrawal of a $13 million claim against the Hospital filed by the Department of Health and Human Services ("DHHS") for Medicare/Medicaid reimbursements DHHS claimed were improperly paid to the Hospital. If he could not secure dismissal of the entire DHHS claim, Desnick agreed to pay 15% of the claim, up to $1.5 million. Finally, Desnick agreed to cooperate with the Hospital in its remaining claims against other defendants, including LaSalle, by (among other things) allowing the Hospital access to his expert. In exchange, the Hospital agreed to release from all claims Desnick, his companies, and the four individuals he agreed to indemnify.
LaSalle objected, and the bankruptcy court conducted a three-day evidentiary hearing on the Hospital's motion. The Hospital, Desnick, the bankruptcy trustee, and the creditors' committee all recommended that the settlement would be the best way to avoid protracted, expensive, complex, and uncertain litigation. The bankruptcy court concluded that the best-case scenario for the Hospital would be a $34 million victory and the worst case a $1.8 million victory. (LaSalle had argued that the high end was in excess of $80 million and the low end near $34 million; the bankruptcy judge thought that was unrealistic.) The court agreed with the Hospital and Desnick that the high-end $34 million victory was the least likely result because audited financials tended to support Desnick's position regarding the date of insolvency, which was critical to the bulk of the Hospital's claims. Given the range of litigation possibilities, the bankruptcy court concluded the settlement was reasonable because it would spare scarce resources, which might be wasted on protracted litigation that would likely yield mediocre results. LaSalle appealed to the district court, which affirmed.
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, "including the 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).
LaSalle complains of several errors, most having to do with the value of the settlement to the estate and whether it falls within the reasonable range of litigation outcomes. First, LaSalle maintains the bankruptcy court clearly erred in determining the value of the settlement to the estate. LaSalle argues that some of the claims Desnick gave up are worthless and that the settlement achieves practically nothing for unsecured creditors. Second, LaSalle contends the bankruptcy court miscalculated the range of litigation outcomes. According to LaSalle, both the low and high ends of possible outcomes are much higher than the bankruptcy judge thought, and the settlement does not fall within the range of LaSalle's higher projected outcomes. Finally, LaSalle argues the bankruptcy court did not make an independent evaluation of the settlement, but instead rubber-stamped the misguided recommendations of the trustee and the creditors' committee.
The bankruptcy court held that the settlement...
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