In re Erickson
| Decision Date | 28 December 1987 |
| Docket Number | 3-86-2765,Bankruptcy No. 3-86-2764,Civ. No. 4-87-930,4-87-931. |
| Parties | In re Norman ERICKSON, Debtor. In re Dean MORLOCK, Debtor. TCF BANKING AND SAVINGS, Creditor/Appellant, v. Brian F. LEONARD, Trustee, Norman Erickson, Debtor, Appellees. TCF BANKING AND SAVINGS, Creditor/Appellant, v. Brian F. LEONARD, Trustee, Dean Morlock, Debtor, Appellees. |
| Court | U.S. District Court — District of Minnesota |
Thomas J. Lallier, Mackall, Crounse & Moore, Minneapolis, Minn., for creditor/appellant.
Brian Leonard, O'Neill, Burke, O'Neill, Leonard & O'Brien, St. Paul, Minn., for debtor/appellee Leonard.
Sheridan J. Buckley, St. Paul, Minn., for debtors/appellees Morlock and Erickson.
This matter is before the Court on appeal from the bankruptcy court's order dated August 17, 1987. The Court will affirm the order of the bankruptcy court.
On October 15, 1986 Norman Erickson and Dean Morlock (debtors) filed voluntary chapter 7 bankruptcy petitions. Prior to filing their bankruptcy petitions, debtors liquidated several nonexempt assets and purchased fraternal benefit annuities and IRA's from Lutheran Brotherhood. At the commencement of the case Erickson's investments with the Lutheran Brotherhood were valued at $84,005 while Morlock's holdings had a value of $72,822. Upon filing their petitions, each debtor elected the exemptions available under Minnesota law. Therefore, pursuant to Minn.Stat. §§ 64B.18 and 550.37, subd. 11, the debtors' annuities were exempt assets. Each debtor's right to receive future payments under the annuities was similarly exempt to the extent reasonably necessary for the support of the debtors and their dependents.
Appellant TCF Savings (TCF) filed its proof of claims in each of the bankruptcy cases. TCF's claims, amounting to $164,898.26 arise from a state court judgment obtained against the debtors on September 26, 1986. TCF's claims against the estates are among the largest in both cases. Brian Leonard (trustee) is the trustee for the bankruptcy estates of the debtors. On December 11, 1986 the trustee filed a notice and objection to the IRA and annuity exemptions claimed by the debtors. The terms of the notice and objection provided for a February 17, 1987 hearing on the objection before the bankruptcy court. When the case came before the bankruptcy court, however, both the trustee and the debtors requested that the hearing be continued to facilitate settlement negotiations between the parties. At the time of the settlement negotiations the Minnesota Supreme Court, pursuant to a certified question from a federal bankruptcy court, was considering a state constitutional challenge to Minn.Stat. §§ 64B.18 and 550.37, subd. 11 which were the very statutes under which the debtors had claimed exemptions for their Lutheran Brotherhood IRAs and annuities.
On March 27, 1987 the Minnesota Supreme Court struck down the provisions of those sections as violative of the Minnesota State Constitution. See In re Tveten, 402 N.W.2d 551, 560 (Minn.1987). Several days before the Tveten decision was announced the debtors and the trustee in the instant case entered into an oral settlement agreement whereby the debtors would be permitted to retain eighty percent of the net value of the annuities or $125,501.60 with the bankruptcy estates receiving the remaining twenty percent. The appellees allege, and appellant does not deny, that in entering into the settlement agreement the parties were cognizant of the fact that the Tveten case was pending before the Minnesota Supreme Court. Nonetheless the trustee entered into the settlement reasoning that the Minnesota exemption statutes in question had been in force for eighty years and that there was therefore little chance the Minnesota Supreme Court would hold them unconstitutional.
Pursuant to bankruptcy rule 9019 the bankruptcy court was required to hold a hearing on the proposed settlement to determine if it was in the best interests of the creditors.1 The hearing was held on August 12, 1987 five months after the decision in Tveten. TCF did not receive any notice of the settlement agreement until after May 21, 1987 well after the date of the Tveten decision. Significantly, TCF concedes that at the time the settlement was entered into, i.e., prior to the Tveten ruling, it was reasonable. See Transcript of Court Opinion Before the Honorable Dennis D. O'Brien at 14. However, because TCF received notice of the settlement after the Tveten decision it asked the bankruptcy court to invalidate the settlement on the grounds that the settlement was clearly no longer in the interests of the creditors of the estate.
At the hearing all parties conceded that the settlement was reasonable when made. Accordingly, the sole issue before the bankruptcy court was whether it should evaluate the reasonableness of the settlement at the time it was entered into or rather on the basis of developments subsequent to the agreement, i.e., the Tveten decision. The bankruptcy court concluded that absent material mistake or other unusual circumstances, the decision of whether to approve the settlement had to be based on the facts and circumstances as they existed at the time of settlement, and not in hindsight based on later developments. Tr. at 17. The court succinctly stated its rationale for so deciding.
Transcript at 18. Accordingly, the bankruptcy court overruled TCF's objection by order dated August 17, 1987. TCF now appeals the bankruptcy court's order. Jurisdiction is proper under 28 U.S.C. §§ 1334(a) and 158.
It is axiomatic that the decision whether to approve a proposed settlement pursuant to Bankruptcy rule 9019 lies within the sound discretion of the bankruptcy court and will not be disturbed on appeal absent a clear abuse of discretion. In re Patel, 43 B.R. 500, 504-05 (N.D.Ill.1984); In re Bell & Beckwith, 77 B.R. 606, 611 (Bankr.N.D.Ohio 1987); In re Lakeland Development Corp., 48 B.R. 85, 89 (Bankr. D.Minn.1985). In exercising its discretion the bankruptcy court is to weigh four factors bearing on the reasonableness of the settlement: (1) likelihood of success in the litigation; (2) the difficulties, if any, in the matter of the collection; (3) the complexity of the litigation and the attendant inconvenience, expense, and delay; and (4) the paramount views of the creditors and the proper deference to their reasonable views. See, e.g., In re A & C Properties, 784 F.2d 1377, 1381 (9th Cir.1986); In re Flight Transportation Corp. Securities Litigation, 730 F.2d 1128, 1135 (8th Cir. 1984), cert. denied sub nom. Reavis & McGrath v. Antinore, 469 U.S. 1207, 105 S.Ct. 1169, 84 L.Ed.2d 320 (1985); In re Jackson Brewing Co., 624 F.2d 605, 607 (5th Cir.1980).
In this case the crucial issue is what time frame the bankruptcy court should have used in applying these factors. It is readily apparent that if the bankruptcy court should have weighed those factors in light of the Tveten decision the settlement should clearly have been rejected because the debtors would no longer have any basis for sheltering the assets in question. In contrast, if the settlement should be evaluated with reference solely to the facts as they existed prior to Tveten then as all the parties have acknowledged the settlement was indeed reasonable. This is an issue of law and hence the bankruptcy court's decision will be reviewed de novo. In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1252 (5th Cir.1986); In re New England Fish Co., 749 F.2d 1277, 1280 (9th Cir. 1984).
Appellant's position is premised on the view that creditors have an important role to play in the approval of compromises between a trustee and a debtor in a bankruptcy. Certainly, this position is reflected in the bankruptcy rules themselves, which mandate notice to creditors and an opportunity for a hearing. See Bankruptcy Rules 2002 and 9019. Because the bankruptcy rules provide for creditor input after a settlement is reached, both debtor and trustee must bear the risk that creditors will object to settlements based on subsequent facts, lest creditors be denied a meaningful right to participate in the settlement process, appellant argues. Appellant further contends that requiring courts to confine their review of settlements to facts known by the parties at the time of the agreement creates difficult problems of inquiry into the subjective states of minds of each of the parties.
Although appellant's arguments are not without merit the Court finds that in this case they are outweighed by the fundamental policy that the law favors compromise. A & C Properties, 784 F.2d at 1391; In re Heissinger Resources, Ltd., 67 B.R. 378, 383 (C.D.Ill.1986). The undisputed facts of this case are that both the trustee and the debtor viewed their agreement as binding even after the publication of the Tveten decision.2 Hence, only the third-party creditors such as TCF were in a position to raise objections to the settlement based on the outcome of the Tveten decision. However, it is clear...
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