In re Heritage Organization, L.L.C.
| Decision Date | 31 August 2007 |
| Docket Number | No. 04-35574-BJH-11.,04-35574-BJH-11. |
| Parties | In re The HERITAGE ORGANIZATION, L.L.C., Debtor. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas |
David William Parham, Laurie Dahl Babich, Baker & McKenzie, LLP, Dallas, TX, for Debtor.
E. Lee Morris, Deborah M. Perry, Munsch Hardt Kopf & Harr, P.C., Dallas, TX, for trustee.
John P. Melko, James G. Munisteri, Gardere Wynne Sewell LLP, Houston, TX, for Jenkins Claimants.
Michael J. Gearin, Holly A. Harris, Kirkpatrick & Lockhart Preston Gates Ellis LLP, Seattle, WA, for Skinner Claimants.
Robin E. Phelan, Scott W. Everett, Haynes & Boone, LLP, Dallas, TX, John C. Bjorkman, Kirkpatrick & Lockhart Preston Gates Ellis LLP, Seattle, WA, for Sandwith Claimants and Mikron Industries, Inc.,
Lawrence R. Elleman, Dinsmore & Shohl LLP, Cincinnati, OH, for Luther Ross Love, Jr.
Jay A. Brandt, Jay A. Brandt, P.C., Dallas, TX, for Rainwater, Fluharty, Troutt, Powell, Woodruff and Patterson Claimants.
John P. Lewis, Jr., Dallas, TX, for W. Ralph Canada, Jr.
Frank A. Merola, Narhan A. Schultz, Stutman, Treister & Glatt, P.C., Los Angeles, CA, Jeffrey M. Tillotson, John D. Volney, Lynn Tillotson & Pinker, LLP, Dallas, TX, for Gary M. Kornman, Michael M. Kornman and GMK Family Holdings, LLC.
Before the Court is confirmation of the Second Amended Joint Plan of Liquidation (the "Second Amended Plan") filed by Dennis Faulkner, as Chapter 11 trustee of The Heritage Organization, L.L.C. (the "Trustee") and the Client Claimants (as defined hereinafter) (collectively, the "Plan Proponents"). Gary M. Kornman ("Kornman") and GMK Family Holdings, LLC ("GMK") (collectively, the "Kornman Parties") object to confirmation of the Second Amended Plan.1 The Court has core jurisdiction over the confirmation hearing, which was commenced on June 11-15, 2007 (the "Original Hearing")2 and concluded on July 31, 2007 (the "Supplemental Hearing"),3 in accordance with 28 U.S.C. §§ 1334 and 157. This Memorandum Opinion contains the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.4
The Heritage Organization, L.L.C. ("Heritage") is a Delaware limited liability company that was formed in 1994. Heritage filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 17, 2004, which was assigned Case No. 04-35574 (the "Case"). Prior to Heritage's bankruptcy filing, Heritage provided various estate and tax planning, strategies to extremely high net-worth individuals for a fee. Those individuals included the "Client Tax Claimants" and the "Sandwith Claimants."5
In the Second Amended Plan, the Trustee seeks to (i) settle the pending objections to all of the Client Tax Claimants' claims in the Case by allowing each of those claimants an allowed unsecured claim in the amount of 65% of the fees they paid to Heritage for the tax and/or estate planning strategies, (ii) settle the adversary proceedings pending against three of the Client Tax Claimants — i.e., the Skinner Children's Trust, the Skinner Trust No. 2 (collectively, the "Skinner Trusts"), and Love — by forgiving the notes payable to Heritage from those claimants, (iii) settle the adversary proceeding pending against Mikron in connection with the estate planning strategies provided to the Sandwith Claimants by accepting $2,750,000 in cash in satisfaction of the note payable to Heritage by Mikron, (iv) allow the Sandwith Claimants an unsecured claim of $3,250,000, and (v) cap the Heritage estate's liability at $2,340,000 with respect to certain litigation in which damages of approximately $50,000,000 are sought. In short, as it relates to the Client Tax Claimants, the Sandwith Claimants (collectively, the "Client Claimants"), and Mikron, the Second Amended Plan presents a comprehensive, integrated settlement of (i) the Heritage bankruptcy estate's claims against all of the Client Claimants and Mikron and (ii) all of the Client Claimants' and Mikron's claims against the Heritage bankruptcy estate. Because the Second Amended Plan contains a comprehensive, integrated settlement, the Court cannot approve the settlement terms as they may relate to individual Client Claimants and/or Mikron; rather, the Court must consider the proposed settlement with the Client Claimants and Mikron as a whole.
To put Heritage's client relationships with the Client Claimants in perspective, a brief background of Heritage and its "typical" relationships with its clients will be helpful.6 In a typical Heritage client scenario, Heritage cold-called the prospective client. The Heritage employees who made these cold-calls were referred to as "Initiators."7 If the prospective client was interested in learning more about Heritage's tax and estate planning strategies, another Heritage employee, referred to as a "Contractor," would meet with the prospective client, either in person or over the telephone. If the prospective client continued to express interest in learning more about Heritage's tax savings strategies, a "Principal" would then make the sales pitch to the prospect and try to close the deal.
Heritage's sales process had several common themes. First, Heritage provided a training manual to its employees, which contained scripts to be used in making cold-calls and other contacts with prospective clients. These scripts were to be used by employees when responding to difficult questions posed by prospective clients, and many of the scripts taught employees to use a diverting answer which sounded good, but which was truly unresponsive to the prospective client's question.8
Second, the agreement which was ultimately executed between Heritage and its clients was very one-sided in Heritage's favor. It was, for all practical purposes, a form contract that Heritage had developed over the years, and it was presented to the prospective clients on a take-it-or-leave-it basis. While some prospective clients were able to negotiate modifications to the agreement, most were not.
Third, a key component of the Heritage sales strategy was to separate the prospective client from his/her traditional legal and/or financial advisors, as is evident from the training manual itself.9 Once a "Principal" of Heritage was involved in the discussions, prospective clients were told that they would have to maintain strict, confidentiality of Heritage's tax and/or estate planning strategies if an agreement was signed and the strategies were revealed to the client.10 Under the terms of the client agreements, only "Authorized Advisors" or "Authorized Persons" could seethe "Strategies," without the client becoming obligated to pay Heritage an additional fee of at least $2 million. To become an "Authorized Advisor" or an "Authorized Person," a separate agreement had to be signed with Heritage pursuant to which the "advisor" or "person" would agree to keep the "Strategies" confidential and would itself agree to pay Heritage a substantial fee for any breach of that agreement.11 The term "Strategies" was defined very broadly in the client agreements and typically included "the securities, contracts, Persons identified, facts, data, knowledge, documentation, opinions, combinations of concepts, ideas, techniques, methods, transactions, combinations, sequences of events, timing, financial models, diagrams, illustrations and procedures divulged, described, communicated, detailed, arranged or identified by [Heritage], and all variations, modifications, sequences, rearrangements and recombinations thereof." See, e.g., Ex. P 68-3 at APP 157 (¶ 10.18). The combined effect of these provisions was to discourage traditional advisors from getting involved in their client's relationship with Heritage.12
Because the client's receipt of a legal opinion from an independent advisor was a component of the implementation process for any of Heritage's estate planning or tax strategies,13 Heritage would recommend certain "Authorized Advisors" to the prospective clients.14 Heritage told clients that these recommended lawyers were experienced, knowledgeable estate planning and/or tax specialists, who could give the independent advice about the validity of Heritage's strategies that the clients desired. However, neither Heritage nor the law firms serving as "Authorized Advisors" disclosed the extent of the prior and ongoing relationships between them.15
Once the client agreement was signed, the client typically owed Heritage $22,500, which served to reimburse Heritage for its travel expenses in connection with meetings with the client. The client agreement did not obligate the client to use the Heritage strategies, but if the client, elected to use the Heritage strategies, it owed a substantial fee to Heritage. Although the client agreement contained a' detailed formula for calculating Heritage's fee, an oversimplified statement is that the client would owe Heritage 25% of the anticipated tax savings. Because of the size of the anticipated tax savings, Heritage's fee was usually several million dollars.16 Under the client agreement, a portion of the fee, usually one-half, was due when (or shortly after) the client orally advised Heritage that it intended to implement the strategies, with the balance of the fee due ten business days after the client implemented the strategies. However, it was not uncommon for Heritage to agree to accept a portion of the fee in cash and to accept a note, with varying terms, for the balance of the fee.
Returning to the specific Heritage clients at issue in the Second Amended Plan, in this Memorandum Opinion the Court...
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