In re Munford, Inc.
| Citation | 172 BR 404 |
| Decision Date | 21 December 1993 |
| Docket Number | Bankruptcy No. A90-00078-SWC. |
| Parties | In re MUNFORD, INC., d/b/a Majik Market, Debtor. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia |
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Susan A. Cahoon, Neal S. Berinhout, Jeffrey J. Toney, Kilpatrick & Cody, Atlanta, GA, for debtor.
David E. Bennett, Vedder, Price, Kaufman & Kammholz, Chicago, IL, Kenneth L. Millwood, Nelson, Mullins, Riley & Scarborough, Atlanta, GA, for Provident Nat. Bank, Boston Safe Deposit and Trust Co. and DFA Investment Dimensions Group, Inc.
R. Matthew Martin, George Wilcox, Jones, Day, Reavis & Pogue, Atlanta, GA, for Shearson Lehman Bros. Inc.
Stephen T. Jacobs, Kathy Donius, Reinhart, Boerner, Van Deuren, Norris & Riesselbach, S.C., Milwaukee, WI, Charles Kidd, Gwen Dorb Holland, David N. Schaeffer, Kidd & Vaughan, Atlanta, GA, for Valuation Research Corp.
G. Edward Cassady, III, Bradley, Arant, Rose & White, Birmingham, AL, for William M. Blount.
C. Murray Saylor, Peyton S. Hawes, Jr., Atlanta, GA, for Russell C. Fellows, James M. Carroll, Joseph W. Hardin and Jay E. Rubel.
Joseph J. Burton, Sr., Burton & Anderson, Atlanta, GA, for Dillard Munford.
Laura F. Nix, Long, Aldridge & Norman, Atlanta, GA, for Creditors Committee.
Edward H. Wasmuth, Jr., Smith, Gambrell & Russell, Atlanta, GA, for Outside Directors which include Winton M. Blount, Herbert J. Dickson, James L. Ferguson, Robert M. Gardiner, Richard K. LeBlond, II, Andrall E. Pearson and S.B. Rymer, Jr.
Allan M. Pepper, Donald M. Levinson, Kaye, Scholer, Fierman, Hays & Handler, New York City, for James L. Ferguson and Andrall E. Pearson.
Before the court is the motion of Munford, Inc. ("debtor") for approval of compromise and settlement with Valuation Research Corporation ("VRC") pursuant to Federal Rule of Bankruptcy Procedure 9019(a). This settlement arises in connection with claims asserted in Adversary Proceeding No. 91-6417, styled Munford, Inc. v. Dillard Munford, et al., in which VRC is a co-defendant. Nonsettling defendants Dillard Munford, Russell C. Fellows, Winton M. Blount, Herbert J. Dickson, James L. Ferguson, Robert M. Gardiner, Richard K. LeBlond, II, Andrall E. Pearson, S.B. Rymer, Jr., James M. Carroll, Joseph W. Hardin, Jay E. Rubel, DFA Investment Dimensions Group, Inc., State Street Bank and Trust Co., Provident National Bank, and Shearson Lehman Brothers, Inc. have objected to the proposed compromise and settlement. Although the underlying suit involves core and non-core matters and defendants have demanded a jury trial, the compromise and settlement of claims of the estate is a core proceeding. 28 U.S.C. § 157(b)(2). After hearing on the motion and objections, and upon consideration of the arguments and briefs of the parties, the court concludes that the motion should be granted.
In its complaint, debtor seeks to avoid transfers of certain property, disallow claims, and recover money damages in excess of $68 million as a result of a leveraged buyout ("LBO") of debtor in 1988. Defendants include debtor's former officers and directors, certain former shareholders and former employees who received monetary benefits from the LBO, and certain financial advisors and consultants who provided services in connection with the LBO.
VRC is a valuation and consulting firm which provided a solvency opinion in connection with the LBO. Debtor contends, among other things, that VRC failed to exercise reasonable care in the issuance of its opinion and that the $75,000 fee paid by debtor constitutes a fraudulent conveyance under O.C.G.A. § 18-2-22(3). VRC denies liability and argues that it owed no duty of care to debtor because its solvency opinion was intended to be relied upon only by the LBO lender. Debtor and VRC have agreed, subject to court approval, to compromise and settle all claims against VRC upon its payment of $350,000 to debtor.
In considering whether to settle with VRC, debtor's counsel reviewed the liability insurance policy and financial statements of VRC. Based on formal and informal discovery, counsel for debtor concluded that it would be difficult, at best, for VRC to respond to any judgment entered against it. This information was then reviewed with the unsecured creditors' committee and debtor's major secured creditor, Citicorp. Further, counsel for VRC confirmed in the hearing that VRC is a service business with 32 employees and virtually no assets, other than its liability insurance policy.
The settlement is conditioned upon the court's entry of an order protecting VRC by permanently barring joint tortfeasors from pursuing contribution or indemnification claims against VRC. See Settlement Agreement, Exhibit "A." Debtor contends that authorization for such a protective measure is provided in Federal Rule of Civil Procedure 16(a) and (c) to facilitate settlement. See Wald v. Wolfson (In re U.S. Oil and Gas Litigation), 967 F.2d 489, 493-94 (11th Cir. 1992). Debtor contends that the settlement is in the best interests of the estate and its creditors in that the settlement amount constitutes the full amount of VRC's remaining liability insurance coverage with the exception of $50,000 which is reserved for attorney's fees and costs. The committee of unsecured creditors and debtor's major secured creditor support the settlement.
Debtor proposes that the nonsettling defendants be protected by a pro tanto or dollar-for-dollar reduction of the settlement amount from any judgment that may be awarded hereafter against them in the LBO litigation. These nonsettling defendants, however, object to the settlement on grounds that it is not fair, adequate, or reasonable and argue that it should not be approved under Fed.R.Bankr.P. 9019. See generally United States v. City of Miami, 614 F.2d 1322, 1330 (5th Cir.1980). They contend that the proposed bar order and judgment reduction provision is inequitable and unfair because it fails to account for VRC's relative degree of fault. Further, it eliminates any cross claims they have against VRC for contribution or indemnity under O.C.G.A. § 51-12-32(a), leaving them without recourse.
Defendants contend that the proposed settlement fails to reasonably reflect VRC's relative fault in connection with debtor's claims. They assert that VRC was specifically retained for the purpose of issuing an opinion as to the solvency of the post-acquisition debtor. Although defendants acknowledge that they never saw or reviewed the VRC opinion, it allegedly was a key factor in the decision to move forward with the LBO's consummation. Therefore, they contend that approval of the proposed settlement would subject the other defendants to a disproportionate share of any damages award while allowing VRC to avoid an adverse judgment for a fraction of the amount for which it would otherwise be potentially liable based on comparative fault. Further, it would allegedly place the risks of settlement solely upon the nonsettling defendants in the event that VRC's degree of fault is determined at trial to have been greater than that for which it was allowed to settle. Because of the pivotal role VRC is alleged to have played in connection with the LBO, they contend that VRC should not be released from the LBO litigation for the relatively minor sum proposed.
Defendants also oppose the pro tanto or dollar-for-dollar judgment reduction method as the means of protecting them. Any finding of liability against nonsettling defendants will be dependent on a finding that debtor was insolvent or rendered insolvent by the LBO. Such a finding, however, would allegedly establish VRC's failure to exercise proper care in performing its solvency evaluation. This determination would in turn allegedly support their claims for contribution against VRC but for the proposed bar order. They contend the insufficiency of the dollar-fordollar reduction mechanism is clearly demonstrated by the relatively minimal effect of reducing a potential $68 million judgment by the mere sum of $350,000.
To adequately protect their interests, defendants urge that at a minimum, the settlement should provide that any judgment which debtor obtains against them should be reduced by VRC's pro rata share of the damages. Further, if grounds for indemnification are proven, the full amount of such recovery should be reduced from such judgment. Therefore, each co-defendant's share of any damage award should be fixed in reference to the relative fault of that particular defendant, including VRC, as determined at trial.
Defendants also assert that the reduction in damages should be the greater of the settlement amount (dollar-for-dollar) paid by VRC or an amount commensurate with VRC's proportionate degree of liability. Additionally, defendants insist that VRC should be obligated to withdraw with prejudice its pending cross claims and be barred from asserting any claims against them. See e.g. O.C.G.A. § 51-12-32. VRC agreed through counsel at the August 2 hearing to relinquish its claims for contribution or indemnity. This was later confirmed in writing by letter from VRC counsel to the court dated October 18, 1993.
In reviewing a settlement between a plaintiff and fewer than all co-defendants, the court must carefully consider its fairness to the nonsettling parties as it affects their substantive rights. See Cullen v. Riley (In re Masters Mates & Pilots Pension Plan and IRAP Litigation), 957 F.2d 1020, 1025-26 (2d Cir.1992) (ERISA class action). A court should not approve a settlement bar provision "unless it is narrowly tailored and preceded by a judicial determination that the settlement has been entered into in good faith and that no one has been set apart for unfair treatment." Id. at 1031.
The Eleventh Circuit Court of Appeals has upheld the use of settlement bar orders in class action securities litigation. It has not, however, issued a definitive opinion on the...
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