In re Frascella Enterprises, Inc., Bankruptcy No. 06-10322DWS (Bankr. E.D. Pa. 5/8/2008)
| Decision Date | 08 May 2008 |
| Docket Number | Bankruptcy No. 06-10322DWS.,Adversary No. 06-0101. |
| Parties | In re FRASCELLA ENTERPRISES, INC., d/b/a CashToday, Chapter 11, Debtor. LAWRENCE TURNER, LINDA DAVIS and DEMRYI HILL, on behalf of themselves and all others similarly situated, Plaintiffs, v. FRASCELLA ENTERPRISES, INC., d/b/a CashToday, LARRY D. FRASCELLA, DAVID W. FRASCELLA, JR., and THERESA FRASCELLA, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Before the Court is the Plaintiffs' Motion to Enforce Settlement (the "Motion"). The facts giving rise to the Motion are contained in the record of this Court's proceedings and in certain documents that comprise the evidentiary record. Counsel for Lawrence Turner, Linda Davis and Demryi Hill on behalf of themselves and all others similarly situated (the "Plaintiffs" or the "Class") rely on the foregoing record and do not seek an evidentiary hearing.1 For the following reasons, I grant the Motion in part. While the writings that memorialize the modifications do not constitute a binding agreement because they have not been signed by all counsel as contractually required, the failure to reach a resolution on the post-hearing issues does not negate the enforceability of the agreement reached on August 17, 2007 to which the parties are presently contractually bound.
On January 30, 2006 ("Petition Date") Frascella Enterprises, Inc. d/b/a CashToday ("Debtor"), filed for protection under Chapter 11 of the Bankruptcy Code.2 Since that date its reorganization proceedings have been animated by claims of a consumer class against it and its principals David and Larry Frascella (the "Brothers") (together Debtor and Brothers, the "Defendants"). A class action complaint (the "Turner Action") alleging violations of various usury and other consumer protection laws in connection with Debtor's payday lending business pending on the Petition Date in state court was removed to this Court on February 3, 2006. A jurisdictional battle then ensued with the Debtor and Brothers arguing that the arbitration provision in the consumer contracts must be given effect and the Plaintiffs opposing that consequence as it would deny them a class action vehicle for asserting their claims. Notably at the time this dispute raged, the federal and state courts diverged in their views of the enforceability of arbitration clauses. In particular, it was not clear whether the Third Circuit Court of Appeals would embrace decisions of the Pennsylvania lower courts that held that arbitration clauses that foreclose the use of class actions were unenforceable as unconscionable adhesion contracts. Indeed that precise issue was teed up for resolution here3 in the first instance when the parties announced a settlement of the Turner Action.4
The settlement is memorialized in a document executed by all parties to the litigation entitled Agreement to Settle Class Adversary Proceeding dated August 17, 2007 (the "Settlement Agreement").5 Exhibit 5 to Affidavit of Aris J. Karalis ("Karalis Aff."). The material terms of the Settlement Agreement are:
(1) The establishment of a settlement fund totaling $1.2 million comprised of (a) four quarterly installments of $150,000 to be paid by the Brothers commencing the later of October 1, 2007, the 10th day after the Order approving the Amended Disclosure Statement or the 10th day after the order certifying the class and preliminarily approving the Settlement and (b) $150,000 to be paid by the Debtor and $450,000 to be paid by the Brothers within ten days of the Trigger Date (i.e., the later of (a) entry of a final order (i) confirming the Plan, (ii) certifying the class and (iii) giving final approval to the Settlement Agreement and (b) the occurrence of the Effective Date of the Plan). Until all payments are made, the installment payments made shall be held in escrow and the Amended Plan will not go "effective."6 If there is a default of the payment obligations, the escrowed payments will be returned to the party who made them and "the Court shall determine what further orders should be entered in the main bankruptcy case and the [Turner Action]." However, in such case, the remaining balance will be accelerated and will be immediately due with interest accruing thereon.
(2) Until the $1.2 million is paid, no principal payments shall be made to any of the noteholders who have loaned money for use in Defendants' lending activities.
(3) In return for the $1.2 million, the Defendants and all other Frascella-controlled entities and certain others will be released by the Class.
(4) The Debtor and two related entities shall forgive and discharge any amounts owed by any member of the Class on any loan that was in default as of December 23, 2005.
On September 24, 2007 Plaintiffs filed a Motion Seeking Preliminary Approval ("Approval Motion") of the Settlement Agreement accompanied by a proposed order of approval and a class notice. Adv. Doc. No. 65. Shortly thereafter Debtor filed an Amended Chapter 11 Plan and Amended Disclosure Statement setting forth, inter alia, the terms of the Settlement Agreement and providing for its implementation as part of the proposed plan. Doc. Nos. 277 and 278.
On November 5, 2007 the parties appeared in connection with the Approval Motion,7 and explained to the Court what was envisioned at that point. Pursuant to Fed.R.Civ. P. 23, I was requested to provide preliminary approval of the Settlement Agreement, i.e., to provisionally certify the class, the class representatives and their counsel for settlement purposes and preliminarily approve the Settlement Agreement as sufficient for transmission to the Class. As part of that process, a date was requested for the fairness hearing at which the Court would finally determine whether the criteria for class certification were met and whether the Settlement Agreement was fair, and a schedule was proposed for notification of the Class (through mailed notice and publication), the filing of a motion for final approval of the Settlement Agreement and the filing of objections thereto. While the Approval Motion was styled as Plaintiffs' motion, the parties made clear at the hearing that it was a mutual request that I confer preliminary approval of the Settlement Agreement and the negotiated class notice.
While my response began by sincerely congratulating counsel on achieving the settlement, I nonetheless noted that there were aspects of the settlement that I either did not understand or that I found to be cumbersome as part of Chapter 11 reorganization plan. Transcript of November 5, 2007 hearing (Tr.) at 6 ( .8 My primary focus was a provision that upon payment default by the Brothers, the escrowed payments would be returned to them, and the parties would return to their litigation positions.9 I expressed my concern that this provision could be fatal to the confirmed plan which due to the deferral of the effective date until all payments are made, might never be consummated. As I stated, "I'm trying to determine, Mr. Karalis, what I have by way of a confirmed plan." Id. at 14. While noting that "I don't want to be a fly in the ointment, id. at 17, I stated that "I'm trying to understand what happens if it [the settlement] unravels."10
To these concerns, Brothers' counsel Marc Zucker ("Zucker") opined that the money and the plan function as the "carrot and the stick." The Brothers' desire for the consummated reorganization would motivate them to make the payments. I still maintained that creditors would be hard pressed to vote for a plan "when they don't have the foggiest notion of whether it will ever go effective?" Id. at 21. In short, I expressed my discomfort with the payment timetable because of the resulting uncertainty to the reorganization. Id. at 27.
After hearing my questions and concerns, the parties agreed to return to the table to attempt to address these issues consistent with their overall agreement. Debtor's counsel said they "require us to sit down with Mr. Ackelsberg and try to see if there is some mechanism by which we can address the concerns you are raising."11 After asking for a return court date, he concluded "[w]ell clearly, your Honor, we're going to need to obviously sit down and work through these issues." Id. at 51-52.
Brothers' counsel and David Frascella were present during this colloquy about the next step and did not demur. Significantly, I concluded as follows: "And I say, good work. I think we're going to get there and I think... sometimes more work in the beginning is helpful in the end to which Brothers' counsel replied, "Thank you for the benefit of your thoughts." Id. at 54.
Consistent with the parties' assurances to the Court as we adjourned on November 5 and as is apparent from the various written documents exchanged by the parties after the hearing, there was a significant effort "to sit down and work through" the issues I raised. An initial e-mail dated November 14, 2007 from Ackelsberg to Karalis and Zucker detailed Ackelsberg's view of the issues to be addressed and proposed modifications to the Settlement Agreement that accomplished that end in furtherance of a conference call scheduled for the next day. Exhibit 1 to Affidavit of Irv Ackelsberg, Esquire ("Ackelsberg Aff."). As of December 4, 2007, as reflected in a Karalis e-mail of that date, there were apparently drafts of a modified agreement prepared by both Ackelsberg and Zucker which were reviewed by Karalis against his hearing notes. He then prepared his own version working off the original settlement agreement (as opposed to the Ackelsberg or Zucker drafts). He stated:
As you all know, we devoted much time and energy to achieve the settlement agreement that is on file with the Court....
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