In re Idearc Inc. Et Al.

• Decision Date: 14 December 2010
• Docket Number: No. 09–31828–BJH–11.,09–31828–BJH–11.
• Citation: 442 B.R. 513
• Parties: In re IDEARC INC. et al., Debtors.
• Court: U.S. District Court — Northern District of Texas

442 B.R. 513

In re IDEARC INC. et al., Debtors.

No. 09–31828–BJH–11.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Dec. 14, 2010.

Arthur G. Telegen, Seyfarth Shaw LLP, Boston, MA, Berry D. Spears, Kristian W. Gluck, Fulbright & Jaworski L.L.P., Austin, TX, Kyung S. Lee, Diamond, McCarthy, Taylor and Finley, Houston, TX, Micheal Wayne Bishop, Looper, Reed & McGraw, P.C., Ryan E. Manns, Toby L. Gerber, Fulbright and Jaworski L.L.P., Aimee Cook Oleson, Gardere Wynne Sewell LLP, Dallas, TX, for Debtors.George McElreath, Office of the United States Trustee, Dallas, TX, for U.S. Trustee.

MEMORANDUM OPINION

BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court is the Debtors' Objection to Proof of Claim Number 1372, 1376, and 1464 filed by Sabrina Levy “and all similarly situated class members of Levy v. Verizon Information Services, Inc., et al, 06–CV–1583 (collectively, the “Levy Claimants”), which civil action number referred to an action pending in the Eastern District of New York (the “EDNY Litigation”) prior to the Debtors' bankruptcy filings here. The Levy Claimants have responded (the “Response”) to the Debtors' claim objection (the “Claim Objection”), and briefs have also been filed. The Court has core jurisdiction over the parties and the issues raised in the Claim Objection and the Response in accordance with 28 U.S.C. §§ 1334 and 157(b). This Memorandum Opinion contains the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

I. FACTUAL AND PROCEDURAL BACKGROUND

While the relevant facts do not appear to be in substantial dispute here, a brief recitation of those facts will be helpful to an understanding of the Court's subsequent legal analysis.

On April 4, 2006, Sabrina Levy (“Levy”) and nine other named plaintiffs (the “Named Plaintiffs”) commenced the EDNY Litigation against, as relevant here, the Debtors. In the EDNY Litigation, the Named Plaintiffs sought to recover alleged unpaid “off the clock” overtime compensation and other wages for themselves and other similarly situated individuals under state and federal employment statutes (the “Unpaid Wages”). On June 13, 2007, the judge presiding over the EDNY Litigation conditionally certified the Named Plaintiffs' Fair Labor Standards Act claims as a collective action under 29 U.S.C. § 216(b). Approximately 171 individuals (the “Opt–In Plaintiffs”) joined the Named Plaintiffs (collectively, the “Plaintiffs”) in the action. The claims framed in the complaint in the EDNY Litigation were brought as putative Rule 23 class actions, but no motion for certification of those claims had been made before the Debtors filed for bankruptcy protection here.

In June 2008, the Debtors and the Plaintiffs began discussing a possible settlement of the EDNY Litigation. In early March 2009, the parties reached a tentative settlement and proceeded to draft a formal settlement agreement. On March 30, 2009, Debtors' counsel emailed Plaintiffs' counsel the final execution copy of the proposed settlement agreement (the “Settlement Agreement”) for signature. The same day, counsel for the Levy Claimants “executed the Settlement Agreement ‘on behalf of each of the Counsel for Plaintiffs and their firms, each Named Plaintiff and Opt–Ins Individually and Collectively’ and returned it via email.” Pls.' Mem. in Opp'n to Reorganized Debtors' Objection to the Levy Claims (“Levy Claimants' Brief”) at 4. However, the Named Plaintiff themselves never signed the Settlement Agreement, and neither did the Debtors. On March 31, 2009 (the “Petition Date”), one day after circulating the Settlement Agreement, the Debtors filed their voluntary petitions under chapter 11 in this Court.

As relevant here, the Settlement Agreement split a total of $2.6 million between two groups: (1) the Plaintiffs, who would receive $1.8 million as wage compensation ($1.7 million for overtime and $100,000 for wage deductions), and (2) the yet-to-be identified putative class members of the uncertified state law Rule 23 classes who would receive $700,000 for their overtime claims and $100,000 for their dismissed wage deduction claims. Levy Claimants' Brief at 3–4. The Settlement Agreement proposed a formula for apportioning the funds to the Plaintiffs that did not reflect when wages were actually deducted or unpaid. Id. at 4.

II. CONTENTIONS OF THE PARTIES

By letter dated November 16, 2010, the parties asked the Court to resolve two threshold questions with respect to the Claim Objection. First, is the Settlement Agreement enforceable against the Debtors? Second, if the Settlement Agreement is enforceable against the Debtors, are the Plaintiffs' claims to $1.8 million under the Settlement Agreement entitled to § 507(a)(4) wage priority under the Bankruptcy Code? Although the Court may have to address other issues to finally decide the Claim Objection, the parties have asked that only these two issues be addressed at this time. The Court will proceed as the parties have requested.

From the Debtors' perspective, the Settlement Agreement is not enforceable because: (i) neither they nor the Named Plaintiffs signed it; (ii) the conditions precedent to its effectiveness were not fulfilled; (iii) it is ineffective as an oral agreements contract; and (iv) precedent from New York's highest civil court precludes its enforcement.¹ Alternatively, if the Court concludes that the Settlement Agreement is enforceable, the Debtors' deny that the Plaintiffs' claims to $1.8 million are entitled to wage priority under § 507(a)(4) because those wages were not “earned” within 180 days of the Petition Date as the statute requires. See 11 U.S.C. § 507(a)(4).

In contrast, the Levy Claimants contend that the Settlement Agreement is effective and enforceable against the Debtors because (i) both parties intended to be bound by it, and (ii) fulfillment of the Settlement Agreement's conditions precedent is superfluous. They also contend that their claim to $1.8 million under the Settlement Agreement is entitled to wage priority under § 507(a)(4) of the Bankruptcy Code because a settlement payment is “earned” on the date of the Settlement Agreement, which was within the 180–day period provided in the Bankruptcy Code for such priority.

III. LEGAL ANALYSISA. Is the Settlement Agreement Enforceable against the Debtors?

The Court agrees with the Levy Claimants that to answer this question “[the] Court [ ] must determine, under New York law, whether a contract was formed, and if so, whether [it] is enforceable.” ² Levy Claimants' Brief at 9. Stating the issue in this way is helpful because it highlights the distinction between contract formation and enforcement—a distinction that, despite the above-quoted language, the Levy Claimants' arguments largely overlook. Of course, it is elemental that a contract is formed only if the parties mutually assent to it— i.e., have a “meeting of the minds.” Yet, parties frequently agree to enter into contracts that cannot be enforced for one reason or another—infancy, duress, and mutual mistake to name a few. While those defects typically arise at contract formation, others can appear later on so that even a properly formed contract may be rendered unenforceable.

Such is the fate of the Settlement Agreement here. It is undisputed that the parties agreed to the terms of a settlement and that the Settlement Agreement contains the agreed upon terms; indeed, the Debtors have admitted as much. See Levy Claimants' Brief at 11 & n. 49. But, because the Settlement Agreement was not executed by the parties, it runs afoul of Rule 2104 of the New York Civil Practice Law and Rules (“CPLR 2104”) and is unenforceable against the Debtors.³

CPLR 2104 provides that “[a]n agreement between parties or their attorneys relating to any matter in an action, other than one made between counsel in open court, is not binding upon a party unless it is in a writing subscribed by him or his attorney or reduced to the form of an order and entered.” N.Y. C.P.L.R. 2104 (McKinney 2003) (emphasis added). In Bonnette v. Long Island College Hospital, 3 N.Y.3d 281, 785 N.Y.S.2d 738, 819 N.E.2d 206 (N.Y.2004), New York's highest civil court held “that to be enforceable under CPLR 2104 an out-of-court settlement must be adequately described in a signed writing.” Id. at 286, 785 N.Y.S.2d 738, 819 N.E.2d 206 (emphasis added); see In re Amendola v. Kendzia, 850 N.Y. S.2d 777, 778, 48 A.D.3d 1173 (N.Y.App.Div.2008) (“It is well settled that, if the parties to an agreement do not intend it to be binding upon them until it is reduced to writing and signed by ... them, they are not bound and may not be held liable until it has been written out and signed.”); Silas v. City of New York, 536 F.Supp.2d 353, 362 (S.D.N.Y.2008) (refusing to enforce an alleged oral settlement based, in part, on Bonnette ); State Farm Mut. Auto. Ins. Co. v. Mamadou, 17 Misc.3d 600, 844 N.Y.S.2d 680, 683 (N.Y.Sup.Ct.2007) (calling the Bonnette holding a “strong statement that the formalities of CPLR § 2104 must be met as a prerequisite to judicial enforcement of out-of-court stipulations of settlement”). Because the Debtors did not execute the Settlement Agreement,⁴ and because this Court cannot locate any post- Bonnette case in which a New York court made an exception to Bonnette's strict adherence requirement, the Court concludes that the Settlement Agreement cannot be enforced against the Debtors.

Incoming to its conclusion, the Court has carefully considered the Levy Claimants' arguments that CPLR 2104 is not the “exclusive means by which settlement agreements are examined” and that “ ‘[t]he only essential prerequisite for a valid settlement agreement is that the parties assent to the terms and conditions of the settlement, and, where there is an oral settlement agreement, that the parties intend to be bound by it.’ ” Levy Claimants' Brief at 7–8 (citing Delyanis v. Dyna–Empire, Inc., 465...