In re Kerner

Decision Date10 May 2019
Docket NumberCase No. 17-13514 (MG)
Citation599 B.R. 751
Parties IN RE: Scott KERNER, Debtor.
CourtU.S. Bankruptcy Court — Southern District of New York

Pick & Zabicki LLP, Attorney for the Debtor, 369 Lexington Avenue, 12th Floor, New York, New York 10017, By: Douglas J. Pick, Esq.

The Law Firm of Tese & Milner, Attorney for the Chapter 7 Trustee, 735 Wickham Avenue, P.O. Box 35, Mattituck, New York 11952, By: Angela G. Tese-Milner, Esq.

MEMORANDUM OPINION AND ORDER GRANTING TRUSTEE'S MOTION FOR APPROVAL OF STIPULATION TO REDUCE THE CLAIM OF URBAN COMPASS AND DENYING DEBTOR'S MOTION TO EXPUNGE THE SAME CLAIM

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is Angele G. Tese-Milner's ("Trustee") motion to approve a stipulation with Urban Compass, a creditor of the debtor's chapter 7 estate. ("9019 Motion," ECF Doc. # 162.) The stipulation reduces Urban Compass' claim from $ 57,540 to $ 40,000 and allows it in that amount. ("Stipulation," ECF Doc. # 167.) Scott Kerner ("Kerner" or "Debtor") moved to expunge Urban Compass' entire claim. ("Debtor's Motion," ECF Doc. # 149-1.) In effect, the Debtor's Motion amounts to an objection to the Stipulation. Urban Compass ("Compass") opposes the Debtor's Motion. ("Opposition," ECF Doc. # 157.) The Trustee filed a statement concerning the Debtor's Motion. (ECF Doc. # 158.) The Debtor filed a response. (ECF Doc. # 160.) For the reasons explained below, the Court GRANTS the 9019 Motion and DENIES the Debtor's Motion.

I. BACKGROUND

Prior to filing his petition on December 7, 2017, Kerner retained Compass, a real estate brokerage firm, to sell his condominium unit (the "Condominium Unit"). (Opposition ¶ 2.) Kerner and Compass executed a brokerage agreement. ("Brokerage Agreement," ECF Doc. # 149-2, at 5–11.) The Brokerage Agreement (i) granted Compass an exclusive right to sell the Condominium Unit until February 22, 2018 (the "Term"); and (ii) provided that if the Condominium Unit was sold during the Term, Compass was entitled to a commission equal to 4% of the total sale price. (See id. )

During the Term, Compass introduced Jennifer Robinson-Khagan and Payam Khagan (collectively, the "Khagans") to Kerner as possible purchasers of the Condominium Unit. (Opposition ¶ 3.) On or about September 30, 2017, Kerner entered into a contract ("Khagan Contract," ECF Doc. # 157-1) to sell the Condominium Unit for $ 1,918,000 to the Khagans. (Opposition ¶ 3.) Compass agreed to reduce its commission to 3% of the total sale price only if the Condominium Unit was sold to the Khagans. (Id. ) The Khagans satisfied the mortgage contingency in the Khagan Contract, and the closing of the sale of the Condominium Unit was scheduled for December 22, 2017. (Id. ) The email scheduling the closing states, "To Julie [Newdow] and Mark [Landisman] [Compass Brokers]: Please send us your invoice as soon as possible." (Id. )

On December 7, 2017, Kerner filed a chapter 11 bankruptcy petition. The Debtor neither assumed nor rejected the Khagan Contract but instead filed a motion seeking authority to conduct an auction sale of the Condominium Unit using the Khagan Contract as a stalking horse bid. ("Debtor's Motion to Approve Bidding Procedures in Connection with the Sale of the Condominium Unit," ECF Doc. # 18.) The Debtor falsely represented that the Khagans consented to the use of the Khagan Contract as a stalking horse bid. (Id. at 2.)

When the Khagans became aware of Debtor's attempt to auction the Condominium Unit and use the Khagan Contract as a stalking horse bid, the Khagans filed an objection to the proposed auction. ("Opposition to Auction Sale," ECF Doc. # 157-2.) The Khagans stated that they never consented to subject the Khagan Contract to higher or better bids at a bankruptcy auction. (Opposition to Auction Sale ¶ 4.) In addition, the Khagans demanded the termination of the Khagan Contract and the return of their $ 191,800 down payment because the Debtor breached the Khagan Contract by failing to close the sale of the Condominium Unit by December 22, 2017. (Id. ¶¶ 4–6.) The Court sustained the Khagans' objection and determined that: (i) the Debtor had no right to use the Khagan Contract as a stalking horse bid without Khagans' consent; (ii) the Debtor breached the Khagan Contract by failing to close on December 22, 2017; and (iii) the Debtor was to return the $ 191,800 down payment to the Khagans. (See "February 6, 2018 Order," ECF Doc. # 43.) The February 6, 2018 Order terminated the Khagan Contract. (Id. )

On March 2, 2018, the Debtor filed a motion to dismiss his bankruptcy case. ("Debtor's Motion to Dismiss," ECF Doc. # 54.) On March 8, 2018, Compass filed a motion to convert the Debtor's chapter 11 case to a case under chapter 7. ("Compass' Motion to Convert," ECF Doc. # 58.) On March 28, 2018, the Court granted Compass' motion and the Debtor's chapter 11 case was converted to case under chapter 7. (See "March 28, 2018 Order," ECF Doc. # 63.)

Compass filed its claim for brokerage commission in the amount of $ 83,960. Because Compass agreed to reduce its commission to 3% of the sale price, the actual amount of Compass' claim is $ 57,540 ("Claim"). The Trustee's negotiation with Compass resulted in the Stipulation whereby Compass agreed to further reduce the Claim from $ 57,540 to $ 40,000. (See Stipulation.)

II. LEGAL STANDARD

Settlements and compromises are favored in bankruptcy as they minimize costly litigation and further parties' interests in expediting the administration of the bankruptcy estate. Myers v. Martin (In re Martin) , 91 F.3d 389, 393 (3d Cir. 1996). Under Bankruptcy Rule 9019, the court has the authority to "approve a compromise or settlement." FED. R. BANKR. P. 9019(a). A court must determine that a settlement under Bankruptcy Rule 9019 is fair, equitable, and in the best interests of the estate before it may approve a settlement.

In re Drexel Burnham Lambert Grp., Inc. , 134 B.R. 493, 496 (Bankr. S.D.N.Y. 1991) (citing Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson , 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968) ); see also Topwater Exclusive Fund III, LLC v. SageCrest II, LLC (In re SageCrest II) , Nos. 3:10cv978 (SRU), 3:10cv979 (SRU), 2011 WL 134893, at *8–9 (D. Conn. Jan. 14, 2011) ; Cousins v. Pereira (In re Cousins) , No. 09 Civ. 1190(RJS), 2010 WL 5298172, at *3 (S.D.N.Y. Dec. 22, 2010) ; In re Chemtura Corp. , 439 B.R. 561, 593–94 (Bankr. S.D.N.Y. 2010) ; In re Lehman Bros. Holdings , 435 B.R. 122, 134 (S.D.N.Y. 2010).

A court's responsibility is to "canvass the issues and see whether the settlement falls below the lowest point in the range of reasonableness." Chemtura , 439 B.R. at 594 (quoting In re W.T. Grant, Co. , 699 F.2d 599, 608 (2d Cir.1983) ). However, the court is not required to conduct a trial on the terms to approve a settlement. Id. Before making a determination, however, the court must inform itself of "all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated." O'Connell v. Packles (In re Hilsen) , 404 B.R. 58, 70 (Bankr. E.D.N.Y. 2009) (quoting TMT Trailer Ferry , 390 U.S. at 424, 88 S.Ct. 1157 ). In addition, courts may give weight to the opinion of bankruptcy counsel supporting the settlement. Id. ("In [approving the settlement agreement], the court is permitted to rely upon opinions of the trustee, the parties, and their attorneys.’ "); Chemtura , 439 B.R. at 594.

Courts have developed standards to evaluate if a settlement is fair and equitable and identified factors for approval of settlements based on the original framework announced in TMT Trailer Ferry, Inc. , 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). The Second Circuit outlined the test for consideration of settlements under the Bankruptcy Rules in Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating LLC) , 478 F.3d 452, 462 (2d Cir. 2007). The factors to be considered are interrelated and require the court to evaluate:

(1) the balance between the litigation's possibility of success and the settlement's future benefits; (2) the likelihood of complex and protracted litigation, "with its attendant expense, inconvenience, and delay," including the difficulty in collecting on the judgment; (3) "the paramount interests of the creditors," including each affected class's relative benefits "and the degree to which creditors either do not object to or affirmatively support the proposed settlement;" (4) whether other parties in interest support the settlement; (5) the "competency and experience of counsel" supporting, and "[t]he experience and knowledge of the bankruptcy court judge" reviewing, the settlement; (6) "the nature and breadth of releases to be obtained by officers and directors;" and (7) "the extent to which the settlement is the product of arm's length bargaining."

Id. (internal citations omitted).

The burden is on the settlement proponent to persuade the court that the settlement is in the best interests of the estate. See 8 NORTON BANKRUPTCY LAW AND PRACTICE 3D § 167:2 (3d ed. 2011).

III. DISCUSSION
A. Business Judgment Standard Applies to the Trustee's Action

The Court may consider the informed judgments of the Trustee and Trustee's counsel. In In re Drexel Burnham Lambert Group, Inc. , the court observed:

Further, the court need not conduct a wholly independent investigation in formulating its opinion as to the reasonableness of a settlement. We may give weight to the informed judgments of the trustee or debtor-in-possession and their counsel that a compromise is fair and equitable, see , In re Carla Leather. Inc. , 44 B.R. 457 (Bankr. S.D.N.Y. 1984), aff'd , 50 B.R. 764 (S.D.N.Y. 1985), and consider the competency and experience of counsel who support the compromise. See , In re Texaco , 84 B.R. 893 (Bankr. S.D.N.Y 1988) ; In re International Distribution Centers. Inc. , 103 B.R. 420 (S.D.N.Y. 1989). And indeed, a court may approve a
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