In re Soderstrom

• Decision Date: 08 August 2012
• Docket Number: No. 6:11–bk–16036–KSJ.,6:11–bk–16036–KSJ.
• Citation: 56 Bankr.Ct.Dec. 263,23 Fla. L. Weekly Fed. B 451,477 B.R. 249
• Parties: In re Roger W. SODERSTROM and Tansey M. Soderstrom, Debtors.
• Court: U.S. Bankruptcy Court — Middle District of Florida

477 B.R. 249

56 Bankr.Ct.Dec. 263

23 Fla. L. Weekly Fed. B 451

In re Roger W. SODERSTROM and Tansey M. Soderstrom, Debtors.

No. 6:11–bk–16036–KSJ.

United States Bankruptcy Court, M.D. Florida.

Aug. 8, 2012.

Jonathan B. Alper, Heathrow, FL, for Debtors.

MEMORANDUM OPINION APPROVING TRUSTEE'S COMPROMISE OF CONTROVERSY

KAREN S. JENNEMANN, Chief Judge.

At the time debtors filed bankruptcy, they were the sole owners of Stirling International Realty, Inc. (“Stirling”), a real estate brokerage franchise with Sotheby's International Realty, Inc.¹ Debtors also wholly own related entities Data and Document Storage, LLC; World Wilde Auction Services, LLC; Stirling International Properties, Inc.; and First Global Title, LLC (the “Related Entities”) used to operate the Stirling business. Since 2005 Stirling's income has declined steadily as a result of the national economic downturn.² After debtors filed this personal Chapter 7 bankruptcy case, Stirling filed a Chapter 11 reorganization case. ³ The Chapter 7 trustee, Richard B. Webber III, now seeks the Court's approval of a settlement agreement (the “Settlement”) in which he proposes to sell Stirling and the Related Entities back to debtors.⁴ The Court has considered the Settlement and the creditors' objections ⁵ and approves the Settlement as reasonable and in the best interest of creditors.

The Trustee's Motion to Settle is Granted

Bankruptcy Rule 9019 authorizes a bankruptcy court to approve a settlement agreement between interested parties. Although a settlement agreement must, at a minimum, be fair and “not fall below the lowest point in the range of reasonableness,” ⁶ the ultimate decision to approve a settlement lies within the sound discretion of the bankruptcy court.⁷ A bankruptcy must “apprise itself of all necessary facts to make an intelligent evaluation and to make an independent judgment as to whether the settlement presented is fair and equitable.” ⁸ The Eleventh Circuit in In re Justice Oaks, II, Ltd. established the following factors to determine the fairness and reasonableness of a proposed settlement:

(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.⁹

A trustee must make a comprehensive examination of the underlying facts and prove a settlement agreement is reasonably beneficial to an estate.¹⁰ A court is not required to decide the merits of each claim or hold a “mini trial” of the underlying litigation but must have enough information to evaluate the reasonableness of a trustee's proposed settlement.¹¹ When the potential augmentation of a bankruptcy estate “involves protracted investigation or potentially costly litigation, with no guarantee as to the outcome, the trustee must tread cautiously, and an inquiring court must accord him wide latitude in deciding whether to [settle].” ¹²

As part of the Settlement, the trustee proposes to sell back to debtors any interest the trustee acquired in Stirling or the Related Entities. ¹³ Debtors have agreed to pay $10,000 for all the stock and interests in these interrelated companies and waive the exemptions they have asserted as to some of their other business entities.¹⁴

In exchange, the trustee will withdraw certain motions he has pending in debtors' and Stirling's bankruptcies,¹⁵ including his motion to revoke Stirling's Chapter 11 Plan Confirmation because debtors, as sole owners of Stirling, proceeded as debtors-in-possession in Stirling's Chapter 11 bankruptcy after they filed for Chapter 7.¹⁶ The trustee's motion argues that because all debtors' assets individually became property of their Chapter 7 estate upon filing,¹⁷ including their ownership interest in Stirling, debtors acted without authority when they proceeded to confirm a plan in the Stirling bankruptcy without the trustee's involvement.

The trustee submits this compromise is fair, equitable, and in the best interest of the estate because the companies debtors are purchasing are largely valueless, and the estate will receive $10,000 without having to expend the time and money to pursue more unproductive litigation.¹⁸ The trustee further argues that even if he were able to recover and sell the stock of these companies, he would not gain anything of value for debtors' estate because taking over Stirling would trigger a default under its franchise agreement with Sotheby's, destroy the Chapter 11 reorganization, and effectively close the business.¹⁹

Creditors Horizons a Far (“Horizons”), Joan Thompson, and J. Thompson Investments (“Creditors”) object to the Settlement for multiple reasons. First, Creditors argue the Settlement is not based on the trustee's informed decision because the trustee has not provided any information to support his contention that the properties are largely worthless. He has not submitted a valuation of any of the Related Entities, nor has he attempted to auction them to determine their market value.²⁰ Pointing to debtors' initial willingness to contribute $25,000 to purchase Stirling from Stirling's bankruptcy estate,²¹ Creditors argue $10,000 is not a fair price to pay for all five companies because they are worth at least $25,000 to the debtors and taking less reduces the claims debtors' estate will be able to distribute to creditors.

In response to the trustee's claims that the entities are largely worthless, Creditors point to the income that some of the Related Entities generate as an indication of the companies' positive market values. Creditors also claim First Global Title, LLC and World Wide Auction, LLC must have positive values because both pay annual filing dues and both submit an annual report to the State of Florida, and no company would pay these amounts if it were valueless. Finally, Creditors argue the Settlement should be denied because they have not had an opportunity to conduct their own discovery that would test the validity of the trustee's assertions that none of these entities have value.²²

Horizons also claims the trustee's withdrawal of claims against debtors or Stirling is unreasonable because waiving these claims is not in the best interest of creditors.²³ Specifically, Horizons objects to the trustee's withdrawal of his motion to revoke the Court's Order Confirming Stirling's Fourth Amended Plan and Disclosure Statement ²⁴ because pursing this claim against Stirling “may add potential assets to debtors' estate.” Horizons also argues debtors' waiver of their exemptions is a trivial conciliation because most of the property debtors claim as exempt is already owned by someone other than the debtors (including the trustee) or has no value.²⁵

This Court agrees with the general policy of encouraging settlements and favoring compromises to reduce the costs of litigation.²⁶ As with most settlements, it may be possible to achieve a more favorable outcome for creditors through additional litigation. But, when the administration of an estate is burdened with costly litigation and drawn out to a pointless end, the trustee is encouraged to find alternative solutions.²⁷ Litigation costs are particularly burdensome on bankruptcy estates given the financial instability of a debtor.²⁸

Here, the Court respects the trustee's business judgment that the risks of litigation and ultimately obtaining no value for the estate justify his decision to settle.²⁹ In this case, even if the trustee were to administer all the assets of debtors' estate without selling Stirling or the Related Entities back to debtors, the difficulties in recovering any value strengthen the trustee's arguments in favor of settlement. Stirling, hampered by debts far exceeding its assets, is valueless to anyone other than debtors. ³⁰ In the March 15, 2012 valuation hearing, the Court found the corporate value of the stock was likely less than zero,³¹ but acknowledged the unique intrinsicvalue of the Stirling stock to debtors. The Court found the value of Stirling to debtors is not $0 because “debtors value this stock greatly and hope to realize a return on investment in the future.” ³² The Court left unanswered the question of just how much intrinsic value the debtors should place on the stock. Regardless of whether Stirling is worth $10,000 or $25,000 to debtors, without debtors at the helm, Sotheby's has stated it would likely revoke debtors' franchise agreement with Stirling.³³ If this were to occur, Stirling would almost certainly cease to exist.³⁴

Recovery of any value from the Related Entities is also unlikely. Debtors, Stirling, and the trustee have all stated that the Related Entities operate solely in support of Stirling's real estate brokerage business and that, without Stirling, the Related Entities are worthless.³⁵ Their only “value” comes from what debtors would be willing to pay for them. Even though, as Creditors point out, the Related Entities may generate some income through the Stirling business, income alone is not an indication of value. Creditors argue they might be able to find value if they had more time for discovery, ³⁶ but Creditors have had the opportunity to discover additional financial information about the Related Entities by examining debtors at either the March 15 or July 25, 2012 hearings, yet they failed to do so or even ask a single question. Creditors simply have failed to establish a plausible theory of recovery against any of the Related Entities that would dispute the trustee's claim that these entities are valueless.³⁷

Facing this possibility that debtors would walk away without contributing anything for the companies, the trustee reasonably has agreed to a value of $10,000 to recover something for the estate. The trustee need not spend the considerable time it would take to auction the...