In re Golden Mane Acquisitions, Inc.

• Decision Date: 19 December 1997
• Docket Number: Bankruptcy No. 96-08754-BGC-11.
• Citation: 221 BR 963
• Parties: In re GOLDEN MANE ACQUISITIONS, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

221 B.R. 963 (1997)

In re GOLDEN MANE ACQUISITIONS, INC., Debtor.

Bankruptcy No. 96-08754-BGC-11.

United States Bankruptcy Court, N.D. Alabama, Southern Division.

December 19, 1997.

Eric J. Breithaupt, Birmingham, AL, for Debtor.

Jesse S. Vogtle, Jr., Birmingham, AL, for Alabama Power Company.

W. Dennis Schilling, Birmingham, AL, for Jeffrey Hersh.

Marvin Franklin, Birmingham, AL, for Glenn Mazer.

Edward F. Danowitz, Jr., Atlanta, GA, for Robert Postell.

Order Approving the Compromise with, and the Payment of Monies to, Glenn I. Mazer

BENJAMIN COHEN, Bankruptcy Judge.

I. Findings of Fact and Conclusions of Law

A. Background

On September 3, 1996, the claimant, Glenn I. Mazer, obtained a judgment of approximately $250,000.00 against the debtor; Jeffrey L. Hersh, the sole owner of the debtor; and J. Randle Jackson, the president of the debtor. On October 25, 1996, the claimant recorded that judgment in the Probate Court of Jefferson County, Alabama. The resulting lien attached to an office building owned by the debtor in Birmingham, Alabama.

On December 4, 1996, the debtor filed the pending Chapter 11 bankruptcy petition and on May 23, 1997, filed a first amended disclosure statement and plan of reorganization that classified the recorded judgment as an unsecured claim.¹ The debtor based its classification of the claim on the theory that the secured nature of the claim would be avoided as an 11 U.S.C. § 547 preferential transfer.

On June 18, 1997, the claimant objected to the proposed plan and claim classification, contending that no preference had occurred and that the claim was secured by the recorded judgment. In settlement of their differences, the debtor and the claimant filed a Joint Motion to Approve Compromise and Payment of Monies to Secured Creditor on June 27, 1997. That compromise, the compromise at issue before the Court, provided that the claimant would be allowed a secured claim for $268,000.00, (a reduction of the interest enhanced amount of approximately $281,000.00 as of July 1997) and that the claimant would not seek to enforce his right to any further interest, an amount that the parties calculate would accrue at approximately $2,500.00 per month.

On July 8, 1997 the debtor filed a second amended disclosure statement and plan of reorganization that embodied the terms of the compromise.

On July 14, 1997, Alabama Power Company (the "Company"), a creditor of the debtor, filed an Objection to Joint Motion to Approve Compromise and Payment of Monies to Secured Creditor and the Second Amended Plan of Reorganization and Liquidation.² In that motion, the Company contended that the claimant's judgment perfection did constitute a preferential transfer that should be avoided and thus, the pending claim should be treated as an unsecured claim. On July 28, 1997, Robert Postell, another creditor of the debtor, filed an Objection to Claim of Glenn I. Mazer in which he contends substantially the same as the Company. On July 29, 1997, the Company file an Objection to Claim based on the same grounds.³ All of these pleadings, including the motion for approval of the compromise, are before the Court.⁴

B. Contentions

The opponents of the compromise and settlement contend that the status of the contested claim should be decided only through prosecution of a preference action pursuant to 11 U.S.C. § 547, and if it were, that the recording of the claimant's judgment would be avoided resulting in an unsecured claim.⁵ The proponents of the pending compromise and settlement seek to establish the amount of the claim without litigating the preference issue.

C. Standard of Review

The principal matter before the Court is the settlement proponents' Joint Motion to Approve Compromise and Payment of Monies to Secured Creditor. The Court reviews that motion under the directives of the Court of Appeals for the Eleventh Circuit contained in Wallis v. Justice Oaks II, Ltd., (In re Justice Oaks II, Ltd.), 898 F.2d 1544 (11th Cir.1990), cert. denied sub nom. Wallis v. Justice Oaks II, Ltd., 498 U.S. 959, 111 S.Ct. 387, 112 L.Ed.2d 398 (1990).⁶ In Justice Oaks II, Chief Judge Gerald B. Tjoflat explained the process for reviewing a settlement proposal. He wrote:

When a bankruptcy court decides whether to approve or disapprove a proposed settlement, it must consider:

(a) The probability of success in the litigation;

(b) the difficulties, if any, to be encountered in the matter of collection;

(c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it;

(d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.

Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir.) (quoting In re Flight Transp. Corp. Sec. Litig., 730 F.2d 1128, 1135 (8th Cir.1984), cert. denied, 469 U.S. 1207, 105 S.Ct. 1169, 84 L.Ed.2d 320 (1985)), cert. denied, 479 U.S. 854, 107 S.Ct. 189, 93 L.Ed.2d 122 (1986).

When the bankruptcy court below approved the settlement agreement between Justice Oaks, Justice, South Florida, and Allegheny, the court was required to determine only the probability of success should South Florida\'s and Allegheny\'s claims be litigated, the difficulty of collecting on those claims, the expense of litigation, and the other creditors\' interests. In making these determinations, the court had to consider many factors other than the merits of South Florida\'s and Allegheny\'s claims. The court, moreover, never had to decide the merits of those claims — only the probability of succeeding on those claims. Such a determination is much like that required of a court before it may grant a preliminary injunction. See Dallas Cowboys Cheerleaders, Inc. v. Scoreboard Posters, Inc., 600 F.2d 1184, 1188 (5th Cir.1979).

Id. at 1549.⁷

D. Justice Oaks II Factors

1. Probability of Success in the Preference Litigation

To approve the proposed compromise, this Court need not find that the debtor in possession would not be successful in recovering in a preference action against Mr. Mazer, or even that the debtor in possession would recover more money in a preference action against Mr. Mazer than is being conceded by Mr. Mazer in consideration of the proposed compromise. "Obviously it would not be a settlement if to obtain approval the debtor in possession would have to demonstrate that he could not succeed had the preference claim been pressed. All that he must do is establish to the reasonable satisfaction of the bankruptcy judge that, all things considered, it is prudent to eliminate the risks of litigation to achieve specific certainty though admittedly it might be considerably less (or more) than were the case fought to the bitter end." Florida Trailer and Equip. Co. v. Deal, 284 F.2d 567, 573 (5th Cir.1960) (citations omitted) (parentheticals added).

a. Elements of a Preference

Five subsections of section 547 of the Bankruptcy Code must be satisfied before a property transfer may be considered a preference. In this case, the parties agree that four of the five have been met. These include subsections 547(b)(1), (b)(2), (b)(4) and (b)(5), that is the parties agree that the recording of the judgment claim was to or for the benefit of Mr. Mazer; was for Mr. Mazer's antecedent judgment debt; occurred on or within 90 days before the date of the filing of the debtor's bankruptcy petition; and, enabled Mr. Mazer to receive more than he would receive if the case were a case under chapter 7.⁸

The parties do not agree that a fifth element, subsection 547(b)(3), has been met, that is the parties do not agree that at the time Mr. Mazer recorded his judgment, the debtor was insolvent.⁹ For the transfer to be set aside, the debtor would have to have been insolvent. The proponents, of course, contend for solvency. The opponents for insolvency. As a practical matter, if at the time of the judgment recording, the amount of the debtor's liabilities exceeded the value of its assets, the debtor was insolvent. If not, then the debtor was solvent.

b. Presumption

For purposes of section 547, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the filing of the petition. 11 U.S.C. § 547(f). If this presumption is appropriate for current consideration, the opponents' probability of success certainly would be enhanced; however, in the pending case, the debtor presented sufficient evidence, as discussed herein, to rebut the presumption. Consequently, the presumption is of no benefit to the opponents.

c. Evidence

Most courts agree that for purposes of section 547(b)(3), the solvency of a transferee is to be determined as of the time of the transfer.¹⁰ In this case, that transfer is the recording of Mr. Mazer's judgment on October 25, 1996. The parties agree that at that time, the debtor's liabilities were approximately $1,400,000.00. To determine whether the debtor was solvent at that time, this Court must first determine the value of the debtor's assets as of the same time. Once that value is determined, determination of solvency is a simple mathematical calculation, as defined by section 101(32) of the Bankruptcy Code as a "financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, . . ." 11 U.S.C. § 101(32) (emphasis added).

(1) Valuation

"Fair valuation" in determining questions of insolvency under 11 U.S.C. § 547 has been described as:

In effect, it defines it to be a condition of permanent, as opposed to temporary, inability to pay debts. It declares one insolvent when his ability to pay his debts is not temporary through want of ready funds, but permanent through want of convertible assets. Statutory as well as commercial insolvency arises out of, and consists in, inability to pay debts. One is insolvent under the statute when his assets, if converted into case, at a fair not forced sale will not pay them.

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